Public Offering Registration - K12 INC - 7-27-2007

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Public Offering Registration - K12 INC - 7-27-2007 Powered By Docstoc
					As filed with the Securities and Exchange Commission on July 26, 2007 Registration No. 333-

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

K12 INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or Other Jurisdiction of Incorporation or Organization)

8211
(Primary Standard Industrial Classification Number)

95-4774688
(IRS Employer Identification No.)

K12 Inc. 2300 Corporate Park Drive Herndon, VA 20171 (703) 483-7000
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Ronald J. Packard Chief Executive Officer K12 Inc. 2300 Corporate Park Drive Herndon, VA 20171 (703) 483-7000
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to: William P. O’Neill, Esq. Latham & Watkins LLP 555 Eleventh Street, N.W Washington, D.C. 20004 (202) 637-2200 Howard D. Polsky, Esq. Senior Vice President, General Counsel and Secretary K12 Inc. 2300 Corporate Park Drive Herndon, VA 20171 (703) 483-7000 Richard D. Truesdell, Jr., Esq. Davis Polk & Wardwell 450 Lexington Avenue New York, NY 10017 (212) 450-4674

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered

Proposed Maximum Aggregate Offering Price(a)(b)

Amount of Registration Fee

Common stock, $0.0001 par value

$172,500,000

$5,296

(a) (b)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) promulgated under the Securities Act of 1933. Including shares of common stock which may be purchased by the underwriters to cover overallotments, if any.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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

PROSPECTUS (Subject to Completion)

Issued July 26, 2007

Shares

K12 INC. Common Stock

K12 Inc. is offering shares of its common stock and the selling stockholders are offering shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price will be between $ and $ per share.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 10 to read about factors you should consider before buying shares of our common stock.

We intend to apply to list our common stock on the New York Stock Exchange under the symbol “LRN.”

Price to Public

Underwriting Discounts and Commissions

Proceeds to K12 Inc.

Proceeds to Selling Stockholders

Per Share Total

$ $

$ $

$ $

$ $

The underwriters may also purchase up to an additional shares of common stock from the selling stockholders at the public offering price, less the underwriting discount within 30 days from the date of this prospectus to cover over allotments, if any.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. The underwriters expect to deliver the shares of common stock to purchasers on or about , 2007.

Morgan Stanley
, 2007

Credit Suisse

[INSIDE FRONT COVER]

TABLE OF CONTENTS

Page Prospectus Summary Risk Factors Cautionary Notice Regarding Forward-Looking Statements Use of Proceeds Dividend Policy Capitalization Dilution Selected Consolidated Financial Data Management‟s Discussion and Analysis of Financial Condition and Results of Operations Business Regulation Management Compensation Discussion and Analysis Certain Relationships and Related-Party Transactions Principal and Selling Stockholders Description of Capital Stock Certain United States Federal Income Tax Considerations to Non-U.S. Holders Shares Eligible for Future Sale Underwriting Notice to Canadian Residents Sales Outside the United States Other Than Canada Legal Matters Experts Where You Can Find More Information Index to Consolidated Financial Statements 1 10 24 25 25 26 27 29 31 49 65 69 75 85 87 89 92 95 97 100 101 104 104 104 F-1

You should rely only on the information contained in this prospectus. We and the underwriters have not authorized anyone to provide you with different or additional information. This prospectus is not an offer to sell or a solicitation of an offer to buy our common stock in any jurisdiction where it is unlawful to do so. The information contained in this prospectus is accurate only as of its date, regardless of the date of delivery of this prospectus or of any sale of our common stock. Until and including , 2007, 25 days after the commencement of this offering, all dealers that affect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

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PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read the following summary together with the more detailed information regarding us and our common stock being sold in the offering, including the risks of investing in our common stock discussed under “Risk Factors” beginning on page 10 and our consolidated financial statements and the related notes appearing elsewhere in this prospectus, before making an investment decision. For convenience in this prospectus, “the Company,” “K12,” “K 12 ,” “we,” “us,” and “our” refer to K12 Inc. and its subsidiaries, taken as a whole. References to fiscal years refer to the fiscal year ended June 30 of the year indicated.

K12 Inc. Our Company We are a technology-based education company. We offer proprietary curriculum, software and educational services created for online delivery to students in kindergarten through 12th grade, or K-12. Our mission is to maximize a child‟s potential by providing access to an engaging and effective education, regardless of geographic location or socio-economic background. Since our inception, we have invested more than $95 million to develop curriculum and an online learning platform that promotes mastery of core concepts and skills for students of all abilities. This learning system combines a cognitive research-based curriculum with an individualized learning approach well-suited for a virtual school and other educational applications. From fiscal year 2004 to fiscal year 2007, we increased average enrollments in the virtual public schools we serve from approximately 11,000 students to 27,000 students, representing a compound annual growth rate of approximately 35%. From fiscal year 2004 to fiscal year 2006, we increased revenues from $71.4 million to $116.9 million, representing a compound annual growth rate of approximately 28%. We believe we are unique in the education industry because of our direct involvement in every component of the educational development and delivery process. Most educational content, software and service providers typically concentrate on only a portion of that process, such as publishing textbooks, managing schools or providing testing and assessment services. This traditional segmented approach has resulted in an uncoordinated and unsatisfactory education for many students. Unburdened by legacy, we have taken a holistic approach to the design of our learning system. We have developed an engaging curriculum which includes online lessons delivered over our proprietary school platform. We combine this with a rigorous system to test and assess students and processes to manage school performance and compliance. In addition, our professional development programs enable teachers to better utilize technology for instruction. Our end-to-end learning system is designed to optimize the performance of the schools we serve and enhance student academic achievement. As evidence of the benefit of our holistic approach, the virtual public schools we serve generally test near or above state averages on standardized achievement tests. These results have been achieved despite the enrollment of a significant number of new students each school year who have had limited exposure to our learning system prior to taking these required state tests. Students using our learning system for at least three years usually perform better on standardized tests relative to state averages than students using it for one year or less. The efficacy of our learning system has also helped us achieve high levels of customer satisfaction. According to a 2006 internal survey of parents of students enrolled in virtual public schools we serve, approximately 97% of respondents stated that they were either satisfied or very satisfied with our curriculum and 95% of respondents stated that they would recommend our curriculum to other families. We deliver our learning system to students primarily through virtual public schools. As with any public school, these schools must meet state educational standards, administer proctored exams and are subject to fiscal oversight. The fundamental difference is that students attend virtual public schools primarily over the Internet instead of traveling to a physical classroom. In their online learning environment, students receive assignments, complete lessons, and obtain instruction from certified teachers with whom they interact online, telephonically, and face-to-face. Many states have embraced virtual public schools as a means to provide families with a publicly funded alternative to a traditional classroom-based education. For parents who believe their child is not thriving and for

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whom relocating or private school is not an option, virtual public schools can provide a compelling choice. This widespread availability makes them the “most public” of schools. From an education policy standpoint, virtual public schools often represent a savings to the taxpayers when compared with traditional public schools because they are generally funded at a lower per pupil level than the per pupil state average reported by the U.S. Department of Education. Finally, because parents are not required to pay tuition, virtual public schools make our learning system available to the broadest range of students. We offer virtual schools our proprietary curriculum, online learning platform and varying levels of academic and management services, which can range from targeted programs to complete turnkey solutions, under long-term contracts. These contracts provide the basis for a recurring revenue stream as students progress through successive grades. Additionally, without the requirement of a physical classroom, virtual schools can be scaled quickly to accommodate a large dispersed student population, and allow more capital resources to be allocated towards teaching, curriculum and technology rather than towards a physical infrastructure. Our proprietary curriculum is currently used by public school students in 16 states and the District of Columbia. Parents can also purchase our curriculum and online learning platform directly to facilitate or supplement their children‟s education. Additionally, we have piloted our curriculum in brick and mortar classrooms with promising academic results. We also believe there is additional widespread applicability for our learning system internationally. Families that choose our learning system for their children come from a broad range of social, economic and academic backgrounds. They share, however, the desire for an individualized learning program to maximize their children‟s potential. Examples include, but are not limited to, families with: (i) students seeking to learn faster or slower than they could in a “one size fits all” traditional classroom; (ii) safety concerns about their local school; (iii) students with disabilities for which traditional classrooms are problematic; (iv) students with geographic or travel constraints; and (v) student athletes and performers who are not able to attend regularly scheduled classes. Our individualized learning approach allows students to optimize their individual academic performance and, therefore, their chances of achieving their goals. Our Market The U.S. market for K-12 education is large and growing. For example: • According to the National Center for Education Statistics (NCES), a division of the U.S. Department of Education, there were more than 47 million students in K-12 public schools during the 2005-06 school year. In addition, according to National Home Education Research, approximately two million students are home schooled and, according to a March 2006 NCES report, approximately five million students are enrolled in private schools. • According to the NCES, the public school system alone encompassed more than 97,000 schools and 17,000 school districts during the 2005-06 school year. • According to the NCES, total spending in the public K-12 market was $536 billion for the 2004-05 school year. Parents and lawmakers are demanding increased standards and accountability in an effort to improve academic performance in U.S. public schools. As a result, each state is now required to establish performance standards and to regularly assess student progress relative to these standards. We expect continued focus on academic standards, assessments and accountability in the near future. Many parents and educators are also seeking alternatives to traditional classroom-based education that can help improve academic achievement. Demand for these alternatives is evident in the growing number of choices available to parents and students. For example, charter schools emerged in 1988 to provide an alternative to traditional public schools. Currently, 40 states and the District of Columbia have passed charter school legislation and there are approximately 4,000 charter schools in the U.S. with an estimated enrollment of over 1.1 million students according to the Center for Education Reform. Similarly, acceptance of online education as an effective, alternative form of education is growing. As of September 2006, 38 states had authorized some form of online

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education, and Michigan recently became the first state to pass legislation mandating that high school students take part in an “online learning experience” in order to graduate. Virtual public schools represent another approach to online education that is gaining acceptance. According to the Center for Education Reform, as of January 2007 there were 173 virtual schools with total enrollment exceeding 92,000 students, operating in 18 states. Virtual schools can offer a comprehensive curriculum and flexible delivery model; therefore, we believe that a growing number of families will pursue virtual public schools as an attractive public school alternative. Given these statistics and the nascence of this market, we believe there is a significant opportunity for a high-quality, trusted, national education provider to serve virtual public schools. Our Competitive Strengths We believe the following to be our key competitive strengths: Proprietary Curriculum Specifically Designed for a Technology-Enabled Environment. We specifically designed our curriculum for online learning, in contrast to other online curriculum providers who often just digitize classroom textbooks for transmission over the Internet. Our lessons utilize a combination of innovative technologies, including flash animations, online interactivity and real-time individualized feedback, which we combine with textbooks and other offline course materials to create an engaging and highly effective curriculum. Our curriculum contains more than 11,000 discrete lessons, each of which addresses specific learning objectives and can be utilized in the manner most appropriate for each student. We continuously measure student performance and use this information to improve our curriculum and drive greater, more consistent academic achievement, a valuable competitive advantage we enjoy by virtue of our integration into all aspects of the educational development and delivery process. We believe our curriculum is the most advanced cognitive research-based curriculum in K-12 education. Flexible, Integrated Online Learning Platform. Our online learning platform provides a highly flexible and effective means for delivering educational content to students. Our platform offers assessment capabilities to identify the current and targeted academic level of achievement for each individual student, and then incorporates this information into a detailed lesson plan. As students progress through their studies, our learning platform measures mastery of each learning objective to ensure that students grasp each concept prior to proceeding to the next lesson. Additionally, our learning platform updates each student‟s lesson plan for completed lessons and enables us to track the effectiveness of each lesson with each student on a real-time basis. Finally, the fact that our learning system is Internet-based allows us to update our proprietary content and incorporate user feedback on a real-time basis. For example, our content for the 2006-07 school year reflected the fact that Pluto is no longer considered a planet, which was announced in August 2006. Expertise in Opening Channels for Virtual Schooling. Our education policy experts and established relationships with key educational authorities have allowed us to participate effectively in advocating for virtual public schools. Specifically, we have demonstrated our expertise in helping individual educational policymakers understand the benefits of virtual schools and in managing the regulatory requirements once new virtual schools are opened. Since our inception, we have partnered with individual state governing bodies to establish highly effective, publicly funded education alternatives for parents and their children. Our experience in opening up these new channels gives us a valuable first-mover advantage over potential competitors. Track Record of Student Achievement and Customer Satisfaction. The virtual public schools we serve generally test near or above state averages on standardized achievement tests. These results have been achieved despite the enrollment of a significant number of new students each school year who have had limited exposure to our learning system prior to taking these required state tests. Students using our learning system for at least three years usually perform better on standardized tests relative to state averages than students using it for one year or less. A comprehensive analysis of individual student progression conducted during the 2006-07 school year in Ohio, the first state to conduct such an analysis, concluded that a virtual public school using our learning system outperformed 97% and 60% of participating public schools in reading and mathematics, respectively. Additionally, in California, the only state to adjust standardized test scores for student demographics, the virtual public schools we serve performed in the 70th to 90th percentile of all public schools in the state during the 2005-06 school year. Among statewide virtual public schools, those using the K 12 learning system outperform other providers in terms of

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academic performance. The efficacy of our learning system has also helped us achieve high levels of customer satisfaction. According to a 2006 internal survey of parents of students enrolled in virtual public schools we serve, approximately 97% of respondents stated that they were either satisfied or very satisfied with our curriculum and 95% of respondents stated that they would recommend our curriculum to other families. This high degree of customer satisfaction has been a strong contributor to our growth, helps drive new student referrals and leads to re-enrollments. Highly Scalable Model. We have built our educational model, systems and management team to successfully and efficiently serve the academic needs of a large dispersed student population. We generate high levels of recurring revenue as a result of our long-term contracts with schools (typically five years in length), the extended duration over which an individual student can utilize our learning system (kindergarten through 12th grade) and our high level of customer satisfaction. Since our inception, we have invested over $95 million to develop our learning system, incurring significant losses. Our ability to leverage this historical investment in our learning system and our ability to deliver our offering over the Internet enables us to successfully serve a greater number of students at a reduced level of capital investment. Our Growth Strategy We intend to pursue the following strategies to drive our future growth: Generate Enrollment Growth at Existing Virtual Public Schools. From fiscal year 2004 to fiscal year 2007, we increased average enrollments in the virtual public schools we serve from more than 11,000 students to more than 27,000 students. In the 2007-08 school year, we will serve virtual public schools in 16 states and the District of Columbia. We intend to continue to drive increased enrollments at the virtual public schools we serve through targeted marketing and recruiting efforts as well as through referrals. Our marketing and recruiting efforts utilize both traditional and online media as well as community events to communicate the effectiveness of our solution to parents who are evaluating educational alternatives for their children. Historically, we have also enrolled a significant number of new students each year through referrals from families who have had a positive experience with our learning system and recommended K 12 to their friends and family members. Enhance Curriculum to Include a Complete High School Offering. We believe the high school market represents a significant growth opportunity for online education delivery given the increased independence of high school students and the wide variance in academic achievement levels and objectives of students who are entering high school. America’s Digital Schools 2006 , a survey conducted by Discovery Education and Pearson Education, projects that the percentage of U.S. high school students enrolled in online courses will increase from 3.8% in 2006 to 15.6% in 2011. We believe that our market-leading position in the K-8 virtual public schools positions us well for growth in the high school market. In the 2005-06 and 2006-07 school years, we began enrolling 9th and 10th grade students, respectively, and with the planned launch of our 11th and 12th grades in the 2007-08 school year, we will be able to provide a complete high school offering. We are developing our high school curriculum to satisfy the broad range of high school student interests with a broad variety of required and elective courses, supplemented by selected courses from other content providers. Expand Virtual Public School Presence into Additional States. We work closely with state policymakers and school districts to assist them in considering virtual public schools as an effective educational choice for parents and students. A virtual public school program can help state administrations or school districts quickly establish and offer an alternative to traditional classroom-based education, expanding the range of choices available to parents and students. The flexibility and comprehensiveness of our learning system allows us to efficiently adapt our curriculum to meet the individual educational standards of any state with minimal capital investment. We intend to continue to seek opportunities to assist states in establishing virtual public schools and to contract with them to provide our curriculum, online learning platform and related services. Strengthen Awareness and Recognition of the K 12 Brand. Within the virtual public school community, we enjoy strong brand recognition among parents and students as a leading provider of virtual education. Outside of this community, however, the K 12 brand is not as well recognized. We have developed a comprehensive brand strategy and intend to invest in further developing awareness of both the K 12 brand and the core philosophy behind our learning system. The recent launch of our “Unleash the x Potential” campaign is a strong first step towards this

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goal of creating broader brand awareness. We believe that a strong and recognized brand will result in an increased presence among virtual public schools, attract more student applications and facilitate our entry into adjacent markets. Pursue International Opportunities to Offer Our Learning System. We believe there is strong worldwide demand for high-quality, flexible education alternatives. In many countries, students seek a U.S. accredited education to gain access to higher education and improved employment opportunities. Given the highly flexible design and technology-based nature of our platform, it can be adapted to other languages and cultures efficiently and with modest capital investment. Additionally, our ability to operate virtually is not constrained by the need for a physical classroom or local teachers, which makes our learning system ideal for use internationally. Develop Additional Channels Through Which to Deliver our Learning System. We believe there are many additional channels through which the K 12 learning system can be offered. These include direct classroom instruction, hybrid models, and as a supplemental educational offering. For example, in an urban public school in Philadelphia, we piloted our K-5 curriculum in traditional classrooms and were able to generate meaningful improvements in academic performance. Additionally, we have recently implemented a hybrid offering in Chicago that combines face-to-face time in the classroom with online instruction. Outside the public school channels, the flexibility of our learning system enables us to package lessons to be sold as individual products directly to parents and students. We intend to regularly evaluate additional delivery channels and to pursue opportunities where we believe there is likely to be significant demand for our offering. Certain Risk Factors Investing in our common stock involves substantial risk. You should carefully consider all the information in this prospectus prior to investing in our common stock and review the section entitled “Risk Factors” immediately following this prospectus summary. These risks and uncertainties include, but are not limited to, the following: • Most of our revenues depend on adequate funding of the virtual public schools we serve. If our revenues from virtual public schools are reduced, restricted or delayed, our business, financial condition, results of operations and cash flows will be adversely affected. • The poor performance or misconduct of other virtual public school operators could tarnish the reputation of all virtual public school operators, which could have a negative influence on our business. • Opponents of virtual public schools have sought to challenge the establishment and expansion of such schools through the judicial process. If their interests prevail, it could damage our ability to sustain or grow our current business in certain jurisdictions. • We have a limited operating history, and sustained losses of approximately $90 million before only recently achieving profitability. If we fail to remain profitable or achieve further marketplace acceptance for our products and services, our business, financial condition and results of operations will be adversely affected. • Highly qualified teachers are critical to the success of our learning system. If we are not able to continue to recruit, train and retain quality certified teachers, our lessons might not be effectively delivered to students, compromising their academic performance and our reputation with the virtual public schools we serve. As a result, our brand, business and operating results may be adversely affected. Our Corporate Information We were incorporated in Delaware in December 1999. Our principal executive offices are located at 2300 Corporate Park Drive, Herndon, VA 20171. Our telephone number is (703) 483-7000. Our website address is www.K12.com . These are textual references only. We do not incorporate the information on, or accessible through, any of our websites into this prospectus, and you should not consider any information on, or that can be accessed through, our websites as part of this prospectus.

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The Offering Common Stock offered by us Common Stock offered by selling stockholders Total Common Stock outstanding after the offering Overallotment option Proposed New York Stock Exchange symbol Use of proceeds from this offering shares shares shares shares shares

“LRN” We estimate that our net proceeds from this offering will be approximately $ million, based on an assumed initial public offering price of $ per share (which is the midpoint of the range on the cover page of this prospectus). We intend to use the net proceeds from this offering for general corporate purposes, including working capital, capital expenditures and the development of new courses and product offerings as well as to repay approximately $6.5 million indebtedness under our revolving credit facility. We will receive no proceeds from the sale of common stock by the selling stockholders. See “Use of Proceeds.”

The number of shares of common stock outstanding after this offering is based on 111,589,989 shares outstanding as of March 31, 2007 and: • gives effect to the automatic conversion of all of the outstanding shares of our preferred stock into 101,386,536 shares of our common stock immediately prior to the completion of this offering; and • excludes 18,450,344 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2007 at a weighted average exercise price of $1.41 per share, 2,328,358 shares of preferred stock (or upon the consummation of the offering an equivalent amount of common stock) that may be issued upon the exercise of warrants outstanding as of March 31, 2007, all of which are currently exercisable at a purchase price of $1.34 per share, and 108,649 shares of common stock that may be issued upon the exercise of warrants outstanding as of March 31, 2007, all of which are exercisable at a purchase price of $1.60 per share. Except as otherwise indicated, all information contained in this prospectus assumes: • a for stock split of our common stock to be effected prior to completion of this offering; per share (which is the midpoint of the range on the cover page of this

• an initial offering price of $ prospectus); and

• the underwriters‟ option to purchase up to

additional shares of common stock is not exercised.

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SUMMARY CONSOLIDATED FINANCIAL DATA We derived the summary consolidated financial data presented below as of June 30, 2005 and 2006 and for each of the three years ended June 30, 2004, 2005 and 2006, from our audited consolidated financial statements included elsewhere in this prospectus. We have derived our summary consolidated balance sheet data as of June 30, 2004 from our audited consolidated financial statements that are not included this prospectus. We have derived our consolidated statement of operations data for the nine months ended March 31, 2006 and 2007 and consolidated balance sheet data as of March 31, 2007 from our unaudited consolidated financial statements. Our historical results are not necessarily indicative of future operating results. You should read the information set forth below in conjunction with “Selected Consolidated Financial and Operating Data,” “Management‟s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and their related notes included elsewhere in this prospectus. Nine Months Ended Year Ended June 30, March 31, 2005 2006 2006 2007 (dollars in thousands, except per share data)

2004

Consolidated Statement of Operations Data: Revenues $ Cost and expenses: Instructional costs and services Selling, administrative, and other operating expenses Product development expenses Total costs and expenses Income (loss) from operations Interest expense, net Net income (loss) before income taxes Income tax expense Net income (loss) Dividends on preferred stock Preferred stock accretion Net loss attributable to common stockholders Net loss attributable to common stockholders per share: Basic and diluted Basic and diluted (pro forma) (1) Weighted average shares used in computing per share amounts: Basic and diluted Basic (pro forma) (1) Diluted (pro forma) (1) $

71,434

$

85,310

$

116,902

$

90,088

$

104,930

39,943

49,130

64,828

48,473

55,103

25,656 12,750 78,349 (6,915 ) (516 ) (7,431 ) — (7,431 ) (2,667 ) (15,768 ) (25,866 ) $

30,031 9,410 88,571 (3,261 ) (279 ) (3,540 ) — (3,540 ) (5,261 ) (15,947 ) (24,748 ) $

41,660 8,568 115,056 1,846 (488 ) 1,358 — 1,358 (5,851 ) (18,697 ) (23,190 ) $

28,403 5,587 82,463 7,625 (394 ) 7,231 — 7,231 (4,333 ) (13,880 ) (10,982 ) $

35,059 5,855 96,017 8,913 (474 ) 8,439 (227 ) 8,212 (4,707 ) (16,544 ) (13,039 )

$

(2.58 ) n/a

$

(2.46 ) n/a

$ $

(2.30 ) 0.01

$

(1.09 ) n/a

$ $

(1.28 ) 0.07

10,017,162 n/a n/a

10,062,587 n/a n/a

10,083,721 106,937,388 107,055,314

10,081,180 n/a n/a

10,195,440 111,581,976 111,621,446

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2004

Year Ended June 30, 2005 2006 (dollars in thousands)

Nine Months Ended March 31, 2006 2007

Other Data: Net cash provided by (used in) operating activities Depreciation and amortization Capital expenditures (2) EBITDA (3) Average enrollments (4)

$ $ $ $

(8,020 ) 4,922 4,643 (1,993 ) 11,158

$ $ $ $

9,697 5,509 5,133 2,248 15,097

$ $ $ $

3,625 4,986 10,842 6,832 20,220

$ $ $ $

1,137 3,574 6,509 11,199 20,183

$ $ $ $

7,324 4,618 10,350 13,531 27,297

2004

As of June 30, 2005 2006 (dollars in thousands)

As of March 31, 2007

Consolidated Balance Sheet Data: Cash and cash equivalents Total assets Total short-term debt Total long-term obligations Convertible redeemable preferred stock Total stockholders‟ deficit Working capital

$

15,881 42,714 — 3,432 155,069 (125,621 ) 24,130

$

19,953 41,968 — 4,466 176,277 (150,299 ) 22,953

$

9,475 48,485 — 4,025 200,825 (173,451 ) 15,421

$

5,147 64,001 1,500 6,112 222,076 (186,390 ) 14,617

(1)

(2) (3)

Pro forma net income per common share gives effect to the automatic conversion of all of our outstanding shares of preferred stock into common stock immediately prior to the completion to this offering. Assuming the completion of this offering on March 31, 2007 and June 30, 2006, all of our outstanding shares of preferred stock would convert into 101,386,536 and 96,853,667 shares of common stock respectively. Capital expenditures consist of the purchase of property and equipment and new capital lease obligations. EBITDA consists of net income (loss) minus interest income, plus interest expense, plus income tax expense and plus depreciation and amortization. Interest income consists primarily of interest earned on short-term investments or cash deposits. Interest expense primarily consists of interest expense for capital leases, long-term and short-term borrowings. We use EBITDA as a measure of operating performance. However, EBITDA is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP, and when analyzing our operating performance, investors should use EBITDA in addition to, and not as an alternative for, net income (loss) as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA is not intended to be a measure of free cash flow for our management‟s discretionary use, as it does not consider certain cash requirements such as tax payments. We believe EBITDA is useful to an investor in evaluating our operating performance because it is widely used to measure a company‟s operating performance without regard to items such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of corporate performance exclusive of our capital structure and the method by which assets were acquired. Our management uses EBITDA: • as a measurement of operating performance, because it assists us in comparing our performance on a consistent basis, as it removes depreciation, amortization, interest and taxes; and

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• in presentations to the members of our board of directors to enable our board to have the same measurement basis of operating performance as is used by management to compare our current operating results with corresponding prior periods and with the results of other companies in our industry. The following table provides a reconciliation of net income (loss) to EBITDA:

Year Ended June 30, 2004 2005 2006 (dollars in thousands) Net income (loss) Interest expense, net Income tax expense Depreciation and amortization EBITDA $ (7,431 ) 516 — 4,922 (1,993 ) $ (3,540 ) 279 — 5,509 2,248 $ 1,358 488 — 4,986 $ 6,832 $

Nine Months Ended March 31, 2006 2007

7,231 394 — 3,574

$

8,212 474 227 4,618

$

$

$ 11,199

$ 13,531

(4)

To ensure that all schools are reflected in our measure of enrollments, we consider our enrollments as of the end of September to be our opening enrollment level, and the number of students enrolled at the end of May to be our ending enrollment level. To provide comparability, we do not consider enrollment levels for June, July and August as all schools are not open during these months. For each period, average enrollments represent the average of the month end enrollment levels for each month that has transpired between September and the end of the period, up to and including the month of May.

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RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus, including our consolidated financial statements and the related notes, before investing in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition or results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment. Risks Related to Government Funding and Regulation of Public Education Most of our revenues depend on adequate funding of the virtual public schools we serve. If these schools do not receive adequate funding, our revenues could be reduced, restricted or delayed and our business, financial condition, results of operations and cash flows would be adversely affected. The public schools we contract with are financed with government funding from federal, state and local taxpayers. Our business is primarily dependent upon those funds. Budget appropriations for education at all levels of government are determined through the political process and, as a result, funding for virtual public schools may fluctuate. This political process creates a number of risks that could have an adverse affect on our business including the following: • legislative proposals could result in budget cuts for the virtual public schools we serve, and therefore reduce or eliminate the products and services those schools purchase from us, causing our revenues to decline. From time to time, proposals are introduced in state legislatures that single out virtual public schools for disparate treatment. For example, in its FY 2007-09 education budget appropriation, the Indiana legislature decided not to fund any virtual public school if it provided for the online delivery of more than 50 percent of its instruction to students. Other examples include laws that decrease per pupil funding for virtual public schools or alter eligibility and attendance criteria or other funding conditions that could decrease our revenues and limit our ability to grow; • as a public company, we will be required to file periodic financial and other disclosure reports with the Securities and Exchange Commission, or the SEC. This information may be referenced in the legislative process, including budgetary considerations, related to the funding of alternative public school options, including virtual public schools. The disclosure of this information by a for-profit education company, regardless of parent satisfaction and student academic achievement, may nonetheless be used by opponents of virtual public schools to propose funding reductions; and • from time to time, government funding to schools is not provided when due, which sometimes causes the affected schools to delay or cease payments to us for our products and services. These payment delays have occurred in the past and can deprive us of significant working capital until the matter is resolved, which could hinder our ability to implement our growth strategies and conduct our business. The poor performance or misconduct of other virtual public school operators could tarnish the reputation of all virtual public school operators, which could have a negative impact on our business. As a relatively new form of public education, virtual school operators will be subject to scrutiny, perhaps even greater than that applied to traditional public schools or charter schools. Not all virtual public school operators will have successful academic programs or operate efficiently, and new entrants may not perform well either. Such underperforming operators could create the impression that virtual schooling is not an effective way to educate students, whether or not our learning system achieves solid performance. Moreover, some virtual school operators have been subject to governmental investigations alleging the misuse of public funds or financial irregularities. These allegations have attracted significant adverse media coverage and have prompted legislative hearings and regulatory responses. Although these investigations have focused on specific companies and individuals, they may negatively impact public perceptions of virtual public school providers generally, including us. If these few situations cause all virtual public school providers to be viewed by the public and/or policymakers unfavorably, we

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may find it difficult to enter into or renew contracts to operate virtual schools. In addition, this perception could serve as the impetus for more restrictive legislation, which could limit our future business opportunities. Opponents of virtual public schools have sought to challenge the establishment and expansion of such schools through the judicial process. If these interests prevail, it could damage our ability to sustain or grow our current business or expand in certain jurisdictions. We have been, and will likely continue to be, subject to lawsuits filed against virtual public schools by those who do not share our belief in the value of this form of public education. Legal claims have involved challenges to the constitutionality of authorizing statutes, methods of instructional delivery, funding provisions and the respective roles of parents and teachers. We currently face two such lawsuits pertaining to the Wisconsin Virtual Academy and the Chicago Virtual Charter School. See “Business — Legal Proceedings”. An adverse judgment in these cases could serve as a negative precedent in other jurisdictions where we do business, and new lawsuits could result in unexpected liabilities and limit our ability to grow. The failure of the virtual public schools we serve to comply with applicable government regulations could result in a loss of funding and an obligation to repay funds previously received, which could adversely affect our business, financial condition and results of operations. Once authorized by law, virtual public schools are generally subject to extensive regulation. These regulations cover specific program standards and financial requirements including, but not limited to: (i) student eligibility standards; (ii) numeric and geographic limitations on enrollments; (iii) prescribed teacher funding allocations from per pupil revenue; (iv) state-specific curriculum requirements; and (v) restrictions on open-enrollment policies by and among districts. State and federal funding authorities conduct regular program and financial audits of virtual public schools, including the virtual public schools we serve, to ensure compliance with applicable regulations. Two virtual public schools we serve are currently undergoing such audits. If a virtual public school we serve is found to be noncompliant, it can be barred from receiving additional funds and could be required to repay funds received during the period of non-compliance, which could impair that school‟s ability to pay us for services in a timely manner, if at all. Additionally, the indemnity provisions in our standard service agreements with virtual public schools may require us to return any contested funds on behalf of the school. For a more detailed discussion of the regulations affecting our business, see “Regulation.” Virtual public schools are relatively new, and enabling legislation therefore is often ambiguous and subject to discrepancies in interpretation by regulatory authorities, which may lead to disputes over our ability to invoice and receive payments for services rendered. Statutory language providing for virtual public schools is sometimes interpreted by regulatory authorities in ways that may vary from year to year, making compliance subject to uncertainty. For example, in Colorado, the regulators‟ approach to determining the eligibility of virtual school students for funding purposes, which is based on a student‟s substantial completion of a semester in a public school, has undergone varying interpretations. These regulatory uncertainties may lead to disputes over our ability to invoice and receive payments for services rendered, which could adversely affect our business, financial condition and results of operations. The operation of virtual public schools depends on the maintenance of the authorizing charter and compliance with applicable laws. If these charters are not renewed, our contracts with these schools would be terminated. In some cases, virtual public schools operate under a charter that is granted by a state or local authority to the charter holder, such as a community group or an established not-for-profit corporation, which typically is required by state law to qualify for student funding. The service agreement for these schools is with the charter holder or the charter board. For example, non-profit charter schools qualifying for exemption from federal taxation under Internal Revenue Code Section 501(c)(3) as charitable organizations must also operate in accordance with Internal Revenue Service rules and policies to maintain that status and their funding eligibility. In addition, all state charter school statutes require periodic reauthorization. If a virtual public school fails to maintain its tax-exempt status and funding eligibility, or if its charter is revoked for non-performance or other reasons that may be due to actions of the independent charter board completely outside of our control, our contract with that school would be terminated.

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Actual or alleged misconduct by our senior management and directors would make it more difficult for us to enter into new contracts or renew existing contracts. If any of our directors, officers or key employees are accused or found to be guilty of serious crimes, including the mismanagement of public funds, the schools we serve could be barred from entering into or renewing service agreements with us or otherwise discouraged from contracting with us and, as a result, our business and revenues would be adversely affected. Risks Related to Our Business and Our Industry We have a limited operating history, and sustained losses of approximately $90 million before only recently achieving profitability. If we fail to remain profitable or achieve further marketplace acceptance for our products and services, our business, financial condition and results of operations will be adversely affected. The virtual public schools we serve began enrolling students in the 2002-03 school year. As a result, we have only a limited operating history upon which you can evaluate our business and prospects. Since our inception, we have recorded net losses totaling approximately $90 million until we recently achieved profitability. We recorded our first profit in the fiscal year ended June 30, 2006. There can be no assurance that we will remain profitable, or that our products and services will achieve further marketplace acceptance. Our marketing efforts may not generate a sufficient number of student enrollments to sustain our business plan; our capital and operating costs may exceed planned levels; and we may be unable to develop and enhance our service offerings to meet the demands of virtual public schools and students to the extent that such demands and preferences change. If we are not successful in managing our business and operations, our financial condition and results of operations will be adversely affected. Highly qualified teachers are critical to the success of our learning system. If we are not able to continue to recruit, train and retain quality certified teachers, our curriculum might not be effectively delivered to students, compromising their academic performance and our reputation with the virtual public schools we serve. As a result, our brand, business and operating results may be adversely affected. Effective teachers are critical to maintaining the quality of our learning system and assisting students with their daily lessons. Teachers in virtual public schools must be state certified and have strong interpersonal communications skills to be able to effectively instruct students in a virtual school setting. They must also possess the technical skills to use our technology-based learning system. There is a limited pool of teachers with these specialized attributes and the virtual public schools we serve must provide competitive compensation packages to attract and retain such qualified teachers. The teachers in most virtual public schools we serve are not our employees and the ultimate authority relating to those teachers resides with the governing body overseeing the schools. However, under many of our service agreements with virtual public schools, we have responsibility to recruit, train and manage these teachers. We must also provide continuous training to virtual public school teachers so that they can stay abreast of changes in student demands, academic standards and other key trends necessary to teach online effectively. We may not be able to recruit, train and retain enough qualified teachers to keep pace with our growth while maintaining consistent teaching quality in the various virtual public schools we serve. Shortages of qualified teachers or decreases in the quality of our instruction, whether actual or perceived, would have an adverse effect on our business. The schools we contract with and serve are governed by independent governing bodies who may shift their priorities or change objectives in ways adverse to us. We contract with and provide a majority of our products and services to virtual public schools governed by independent boards or similar governing bodies. While we typically share a common objective at the outset of our business relationship, over time our interests could diverge. If these independent boards of the schools we serve subsequently shift their priorities or change objectives, and as a result reduce the scope or terminate their relationship with us, our ability to generate revenues would be adversely affected.

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Our contracts with the virtual public schools we serve are subject to periodic renewal, and each year several of these agreements are set to expire. If we are unable to renew several such contracts or if a single significant contract expires during a given year, our business, financial condition, results of operations and cash flow could be adversely affected. For the 2007-08 school year, we have contracts to provide our full range of products and services to virtual public schools in 16 states and the District of Columbia. Several of these contracts are scheduled to expire in any given year. For example, five such contracts are scheduled to expire in 2008, and we usually begin to engage in renewal negotiations during the final year of these contracts. In order to renew these contracts, we have to enter into negotiations with the independent boards of these virtual public schools. If we are unable to renew several such contracts or one significant contract expiring during a given year, our business, financial condition, results of operations and cash flow could be adversely affected. We generate significant revenues from four virtual public schools, and the termination, revocation, expiration or modification of our contracts with these virtual public schools could adversely affect our business, financial condition and results of operation. During the nine months ended March 31, 2007, sales of our products and services to four virtual public schools accounted for approximately 17%, 12%, 11% and 10% of our revenues. If our contracts with any of these virtual public schools are terminated, the charters to operate any of these schools are not renewed or are revoked, enrollments decline substantially, funding is reduced, or more restrictive legislation is enacted, our business, financial condition and results of operations could be adversely affected. We may not be able to effectively address the execution risks associated with our expansion into the virtual high school market. Our failure to do so could substantially harm our growth strategy. The virtual high school market presents us with a number of challenges, including timely deployment of new courses in the 2007-08 school year, and the planned launch of 11th and 12th grade offerings. We are currently using third-party platforms and some third-party curriculum in our high school offering. If the quality of the third-party curriculum or platforms is unsatisfactory, student enrollments could decline. Furthermore, the subject matter expertise and skills necessary to teach in high school are fundamentally different than those necessary to teach kindergarten through 8th grade. If the high school instructional experience does not meet the expectations of students previously enrolled in our kindergarten through 8th grade programs, or new enrollees experience performance issues with our high school program delivery, the virtual public schools we serve may decline to offer our high school program and our business, financial condition and results of operations may be adversely affected. Our growth strategy anticipates that we will create new products and distribution channels and expand existing distribution channels. If we are unable to effectively manage these initiatives, our business, financial condition, results of operations and cash flows would be adversely affected. As we create new products and distribution channels and expand our existing distribution channels, we expect to face challenges distinct from those we currently encounter, including: • our development of public hybrid schools, which will produce different operational challenges than those we currently encounter. In addition to the online component, hybrid schools require us to lease facilities for classrooms, staff classrooms with teachers, provide meals, adhere to local safety and fire codes, purchase additional insurance and fulfill many other responsibilities; • our expansion into international markets may require us to conduct our business differently than we do in the United States. For example, we may attempt to open a tuition-based private school or establish a traditional brick and mortar school. Additionally, we may have difficulty training and retaining qualified teachers or generating sufficient demand for our products and services in international markets. International opportunities will also produce different operational challenges than those we currently encounter; and • our use of our curriculum in classrooms will produce challenges with respect to adapting our curriculum for effective use in a traditional classroom setting.

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Our failure to manage these new distribution channels, or any new distribution channels we pursue, may have an adverse effect on our business, financial condition, results of operations and cash flows. Increasing competition in the market segments that we serve could lead to pricing pressures, reduced operating margins, loss of market share and increased capital expenditures. We face varying degrees of competition from several discrete education providers because our learning system integrates all the elements of the education development and delivery process, including curriculum development, textbook publishing, teacher training and support, lesson planning, testing and assessment, and school performance and compliance management. We compete most directly with companies that provide online curriculum and support services to K-12 virtual public schools. Additionally, we expect increased competition from for-profit post-secondary and supplementary education providers that have begun to offer virtual high school curriculum and services. In certain jurisdictions and states where we currently serve virtual public schools, we expect intense competition from existing providers and new entrants. Our competitors may adopt similar curriculum delivery, school support and marketing approaches, with different pricing and service packages that may have greater appeal in the market. If we are unable to successfully compete for new business, win and renew contracts or maintain current levels of academic achievement, our revenue growth and operating margins may decline. Price competition from our current and future competitors could also result in reduced revenues, reduced margins or the failure of our product and service offerings to achieve or maintain more widespread market acceptance. We may also face direct competition from publishers of traditional educational materials that are substantially larger than we are and have significantly greater financial, technical and marketing resources. As a result, they may be able to devote more resources to develop products and services that are superior to our platform and technologies. We may not have the resources necessary to acquire or compete with technologies being developed by our competitors, which may render our online delivery format less competitive or obsolete. Our future success will depend in large part on our ability to maintain a competitive position with our curriculum and our technology, as well as our ability to increase capital expenditures to sustain the competitive position of our product. We cannot assure you that we will have the financial resources, technical expertise, marketing, distribution or support capabilities to compete effectively. If demand for increased options in public schooling does not continue or if additional jurisdictions do not authorize or adequately fund virtual public schools, our business, financial condition and results of operations could be adversely affected. According to the Center for Education Reform, as of January 2007 there were 173 virtual schools with total enrollments exceeding 92,000 students, operating in 18 states. However, if the demand for virtual public schools does not increase, if additional jurisdictions do not authorize new virtual schools or if the funding of such schools is inadequate, our business, financial condition and results of operations could be adversely affected. Our business is subject to seasonal fluctuations, which may cause our operating results to fluctuate from quarter-to-quarter and adversely impact the market price of our common stock. Our revenues and operating results normally fluctuate as a result of seasonal variations in our business, principally due to the number of months in a fiscal quarter that our virtual public schools are fully operational and serving students. In the typical academic year, our first and fourth fiscal quarters may have fewer than three full months of operations, whereas our second and third fiscal quarters will have three complete months of operations. We ship offline learning kits to students in the beginning of the school year, our first fiscal quarter, generally resulting in higher offline learning kit revenues and margins in the first fiscal quarter relative to the other quarters. In aggregate, the seasonality of our revenues has generally produced higher revenues in the first fiscal quarter and lower revenues in the fourth fiscal quarter. Our operating expenses are also seasonal. Instructional costs and services increase in the first fiscal quarter primarily due to the costs incurred to ship offline learning kits at the beginning of the school year. These instructional costs may increase significantly quarter-to-quarter as school operating expenses increase. The majority of our selling and marketing expenses are incurred in the first and fourth fiscal quarters, as our primary enrollment season is July through September.

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We expect quarterly fluctuations in our revenues and operating results to continue. These fluctuations could result in volatility and adversely affect our cash flow. As our business grows, these seasonal fluctuations may become more pronounced. As a result, we believe that quarterly comparisons of our financial results may not be reliable as an indication of future performance. Our revenues for a fiscal year are based in part on our estimate of the total funds each school will receive in a particular school year and our estimate of the full year deficits to be incurred by each school. As a result, differences between our estimates and the actual funds received and deficits incurred could have an adverse impact on our results of operations and cash flows. We recognize revenues from certain of our fees ratably over the course of our fiscal year. To determine the amount of revenues to recognize, we estimate the total funds each school will receive in a particular school year. Additionally, we take responsibility for any operating deficits at most of the virtual schools we serve. Because these operating deficits may impair our ability to collect the full amount invoiced in a period and collection cannot reasonably be assured, we reduce revenues by the estimated amount of these deficits. We review our estimates of total funds and operating deficits periodically, and we revise as necessary, amortizing any adjustments over the remaining portion of the fiscal year. Actual funding received and operating deficits incurred may vary from our estimates or revisions and could adversely impact our results of operation and cash flows. The continued development of our brand identity is important to our business. If we are not able to maintain and enhance our brand, our business and operating results may suffer. Expanding brand awareness is critical to attracting and retaining students, and for serving additional virtual public schools. In order to expand brand awareness, we intend to spend significant resources on a brand-enhancement strategy, which includes sales and marketing efforts directed to targeted locations as well as the national marketplace, the educational community at large, key political groups, image-makers and the media. We believe that the quality of our curriculum and management services has contributed significantly to the success of our brand. As we continue to increase enrollments and extend our geographic reach, maintaining quality and consistency across all of our services and products may become more difficult to achieve, and any significant and well-publicized failure to maintain this quality and consistency will have a detrimental effect on our brand. We cannot provide assurances that our new sales and marketing efforts will be successful in further promoting our brand in a competitive and cost effective manner. If we are unable to further enhance our brand recognition and increase awareness of our products and services, or if we incur excessive sales and marketing expenses, our business and results of operations could be adversely affected. Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand. Our patent, trademarks, trade secrets, copyrights and other intellectual property rights are important assets for us. Various events outside of our control pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available in every country in which our products and services are distributed or made available through the Internet. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Also, protecting our intellectual property rights is costly and time consuming. Any unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results. Although we seek to obtain patent protection for our innovations, it is possible that we may not be able to protect some of these innovations. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important. Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or that an issued patent may be deemed invalid or unenforceable. We also seek to maintain certain intellectual property as trade secrets. This secrecy could be compromised by outside parties, or by our employees intentionally or accidentally, which would cause us to lose the competitive advantage resulting from these trade secrets.

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We must monitor and protect our Internet domain names to preserve their value. We own the domain names K12 (.com and .org) and K-12 (.com, .net, and .org) as well as the service mark K 12 . Third parties may acquire substantially similar domain names that decrease the value of our domain names and trademarks and other proprietary rights which may hurt our business. The regulation of domain names in the United States and foreign countries is subject to change. Governing bodies could appoint additional domain name registrars or modify the requirements for holding domain names. Governing bodies could also establish additional “top-level” domains, which are the portion of the Web address that appears to the right of the “dot,” such as “com,” “gov,” or “org.” As a result, we may not maintain exclusive rights to all potentially relevant domain names in the United States or in other countries in which we conduct business. We may be sued for infringing the intellectual property rights of others and such actions would be costly to defend, could require us to pay damages and could limit our ability or increase our costs to use certain technologies in the future. Companies in the Internet, technology, education, curriculum and media industries own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. As we grow, the likelihood that we may be subject to such claims also increases. Regardless of the merits, intellectual property claims are often time-consuming and expensive to litigate or settle. In addition, to the extent claims against us are successful, we may have to pay substantial monetary damages or discontinue any of our products, services or practices that are found to be in violation of another party‟s rights. We also may have to seek a license and make royalty payments to continue offering our products and services or following such practices, which may significantly increase our operating expenses. We may be subject to legal liability resulting from the actions of third parties, including independent contractors and teachers, which could cause us to incur substantial costs and damage our reputation. We may be subject, directly or indirectly, to legal claims associated with the actions of our independent contractors and teachers. In the event of accidents or injuries or other harm to students, we could face claims alleging that we were negligent, provided inadequate supervision or were otherwise liable for their injuries. Additionally, we could face claims alleging that our independent curriculum contractors or teachers infringed the intellectual property rights of third parties. A liability claim against us or any of our independent contractors or teachers could adversely affect our reputation, enrollment and revenues. Even if unsuccessful, such a claim could create unfavorable publicity, cause us to incur substantial expenses and divert the time and attention of management. Unauthorized disclosure or manipulation of student, teacher and other sensitive data, whether through breach of our network security or otherwise, could expose us to costly litigation or could jeopardize our contracts with virtual public schools. Maintaining our network security is of critical importance because our Student Administration Management System (SAMS) stores proprietary and confidential student and teacher information, such as names, addresses, and other personal information. Individuals and groups may develop and deploy viruses, worms and other malicious software programs that attack or attempt to infiltrate SAMS. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, third parties may be able to access student records and we could be subject to liability or our business could be interrupted. Penetration of our network security could have a negative impact on our reputation and could lead virtual public schools and parents to choose competitive offerings. As a result, we may be required to expend significant resources to provide additional protection from the threat of these security breaches or to alleviate problems caused by these breaches.

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We rely on the Internet to enroll students and to deliver our products and services to children, which exposes us to a growing number of legal risks and increasing regulation. We collect information regarding students during the online enrollment process, and a significant amount of our curriculum content is delivered over the Internet. As a result, specific federal and state laws that could have an impact on our business include the following: • the Children‟s Online Privacy Protection Act, which restricts the distribution of certain materials deemed harmful to children and imposes additional restrictions on the ability of online companies to collect personal information from children under the age of 13; and • the Family Educational Rights and Privacy Act, which imposes parental or student consent requirements for specified disclosures of student information, including online information. In addition, the laws applicable to the Internet are still developing. These laws impact pricing, advertising, taxation, consumer protection, quality of products and services, and are in a state of change. New laws may also be enacted, which could increase the costs of regulatory compliance for us or force us to change our business practices. As a result, we may be exposed to substantial liability, including significant expenses necessary to comply with such laws and regulations. System disruptions and vulnerability from security risks to our online computer networks could impact our ability to generate revenues and damage our reputation, limiting our ability to attract and retain students. The performance and reliability of our technology infrastructure is critical to our reputation and ability to attract and retain virtual public schools, parents and students. Any sustained system error or failure, or a sudden and significant increase in bandwidth usage, could limit access to our learning system, and therefore, damage our ability to generate revenues. Our technology infrastructure could be vulnerable to interruption or malfunction due to events beyond our control, including natural disasters, terrorist activities and telecommunications failures. Substantially all of the inventory for our offline learning kits is located in one warehouse facility. Any damage or disruption at this facility would have an adverse effect on our business, financial condition and results of operations. Substantially all of the inventory for our offline learning kits is located in one warehouse facility operated by a third-party. A natural disaster, fire, power interruption, work stoppage or other unanticipated catastrophic event, especially during the period from May through September when we have received most of the curriculum materials for the school year and have not yet shipped such materials to students, could significantly disrupt our ability to deliver our products and operate our business. If any of our material inventory were to experience any significant damage, we would be unable to meet our contractual obligations and our business would suffer. Any significant interruption in the operations of our data center could cause a loss of data and disrupt our ability to manage our network hardware and software and technological infrastructure. We host our products and serve all of our students from a third-party data center facility. While we are developing a risk mitigation plan, such a plan may not be able to prevent a significant interruption in the operation of this facility or the loss of school and operational data due to a natural disaster, fire, power interruption, act of terrorism or other unanticipated catastrophic event. Any significant interruption in the operation of this facility, including an interruption caused by our failure to successfully expand or upgrade our systems or manage our transition to utilizing the expansions or upgrades, could reduce our ability to manage our network and technological infrastructure, which could result in lost sales, enrollment terminations and impact our brand reputation. Additionally, we do not control the operation of this facility and must rely on a third-party to provide the physical security, facilities management and communications infrastructure services related to our data center. Although we believe we would be able to enter into a similar relationship with another third-party should this relationship fail or terminate for any reason, our reliance on a third-party vendor exposes us to risks outside of our control. If this third-party vendor encounters financial difficulty such as bankruptcy or other events beyond our control that causes it to fail to secure adequately and maintain its hosting facilities or provide the required data

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communications capacity, students of the virtual public schools we serve may experience interruptions in our service or the loss or theft of important customer data. Any significant interruption in the operations of our call center could disrupt our ability to respond to service requests and process orders and to deliver our products in a timely manner. Our call center is housed in a single facility. We do not currently have a fully functional back-up system in place for this facility. While we are developing a risk mitigation plan, such a plan may not be able to prevent a significant interruption in the operation of this facility due to natural disasters, accidents, failures of the inventory locator or automated packing and shipping systems we use or other events. Any significant interruption in the operation of this facility, including an interruption caused by our failure to successfully expand or upgrade our systems or to manage these expansions or upgrades, could reduce our ability to respond to service requests, receive and process orders and provide products and services, which could result in lost and cancelled sales, and damage to our brand reputation. Capacity limits on some of our technology, transaction processing systems and network hardware and software may be difficult to project and we may not be able to expand and upgrade our systems in a timely manner to meet significant unexpected increased demand. As the number of virtual public schools we serve increases and our student base grows, the traffic on our transaction processing systems and network hardware and software will rise. We may be unable to accurately project the rate of increase in the use of our transaction processing systems and network hardware and software. In addition, we may not be able to expand and upgrade our systems and network hardware and software capabilities to accommodate significant unexpected increased use. If we are unable to appropriately upgrade our systems and network hardware and software in a timely manner, our operations and processes may be temporarily disrupted. We may be unable to manage and adapt to changes in technology. We will need to respond to technological advances and emerging industry standards in a cost-effective and timely manner in order to remain competitive. The need to respond to technological changes may require us to make substantial, unanticipated expenditures. There can be no assurance that we will be able to respond successfully to technological change. We may be unable to attract and retain skilled employees. Our success depends in large part on continued employment of senior management and key personnel who can effectively operate our business. If any of these employees leave us and we fail to effectively manage a transition to new personnel, or if we fail to attract and retain qualified and experienced professionals on acceptable terms, our business, financial conditions and results of operations could be adversely affected. Our success also depends on our having highly trained financial, technical, recruiting, sales and marketing personnel. We will need to continue to hire additional personnel as our business grows. A shortage in the number of people with these skills or our failure to attract them to our Company could impede our ability to increase revenues from our existing products and services and to launch new product offerings, and would have an adverse effect on our business and financial results. We may not be able to effectively manage our growth, which could impair our ability to operate profitably. We have experienced significant expansion since our inception, which has sometimes strained our managerial, operational, financial and other resources. A substantial increase in our enrollment or the addition of new schools in a short period of time could strain our current resources and increase capital expenditures, without an immediate increase in revenues. Our failure to successfully manage our growth in a cost efficient manner and add and retain personnel to adequately support our growth could disrupt our business and decrease profitability. We may need additional capital in the future, but there is no assurance that funds will be available on acceptable terms. We may need to raise additional funds in order to achieve growth or fund other business initiatives. This financing may not be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing

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stockholders. Additionally, any securities issued to raise funds may have rights, preferences or privileges senior to those of existing stockholders. If adequate funds are not available or are not available on acceptable terms, our ability to expand, develop or enhance services or products, or respond to competitive pressures will be limited. Our curriculum and approach to instruction may not achieve widespread acceptance, which would limit our growth and profitability. Our curriculum and approach to instruction are based on the structured delivery, clarification, verification and practice of lesson subject matter. The goal of this approach is to make students proficient at the fundamentals and to instill confidence in a subject prior to confronting new and complex concepts. This approach, however, is not accepted by all academics and educators, who may favor less formalistic methods. Accordingly, some academics and educators are opposed to the principles and methodologies associated with our approach to learning, and have the ability to negatively influence the market for our products and services. If student performance falls or parent and student satisfaction declines, a significant number of students may not remain enrolled in a virtual public school that we serve, and our business, financial condition and results of operations will be adversely affected. The success of our business depends on a family‟s decision to have their child continue his or her education in a virtual public school that we serve. This decision is based on many factors, including student achievement and parent and student satisfaction. Students may perform significantly below state averages or the virtual school may fail to meet the standards of the No Child Left Behind Act. For instance, in the 2005-06 school year, an increase in certain enrollments in two of the virtual schools we served created the need to monitor two subgroups that did not meet Adequate Yearly Progress requirements of NCLB, causing those schools not to meet the Adequate Yearly Progress requirements for that year. We expect that, as our enrollments increase and the portion of students that have not used our learning system for multiple years increases, the average performance of all students using our learning system may decrease, even if the individual performance of other students improves over time. Additionally, parent and student satisfaction may decline as not all parents and students are able to devote the substantial time and energy necessary to complete our curriculum. A student‟s satisfaction may also suffer if his or her relationship with the virtual school teacher does not meet expectations. If a student‟s performance or satisfaction declines, students may decide not to remain enrolled in a virtual public school that we serve and our business, financial condition and results of operations will be adversely affected. Although we do not currently transact business in a foreign country, we intend to expand into international markets, which will subject us to additional economic, operational and political risks that could increase our costs and make it difficult for us to continue to operate profitably. One of our growth strategies is to pursue international opportunities that leverage our current product and service offerings. The addition of international operations may require significant expenditure of financial and management resources and result in increased administrative and compliance costs. As a result of such expansion, we will be increasingly subject to the risks inherent in conducting business internationally, including: • foreign currency fluctuations, which could result in reduced revenues and increased operating expenses; • potentially longer payment and sales cycles; • difficulty in collecting accounts receivable; • the effect of applicable foreign tax structures, including tax rates that may be higher than tax rates in the United States or taxes that may be duplicative of those imposed in the United States; • tariffs and trade barriers; • general economic and political conditions in each country; • inadequate intellectual property protection in foreign countries; • uncertainty regarding liability for information retrieved and replicated in foreign countries;

19

• the difficulties and increased expenses in complying with a variety of U.S. and foreign laws, regulations and trade standards, including the Foreign Corrupt Practices Act; and • unexpected changes in regulatory requirements. Risks Related to this Offering The price of our common stock may be subject to wide fluctuations and may trade below the initial public offering price. Before this offering, there has not been a public market for our common stock. The initial public offering price of our common stock will be determined by negotiations between us and representatives of the underwriters based on numerous factors, including those that we discuss under “Underwriting.” This price may not be indicative of the market price of our common stock after this offering. We cannot assure you that an active public market for our common stock will develop or be sustained after this offering. The market price of our common stock also could be subject to significant fluctuations. As a result, you may not be able to sell your shares of our common stock quickly or at prices equal to or greater than the price you paid in this offering. Among the factors that could affect our common stock price are the risks described in this section and other factors, including: • quarterly variations in our operating results compared to market expectations; • changes in expectations as to our future financial performance, including financial estimates or reports by securities analysts; • changes in market valuations of similar companies; • liquidity and activity in the market for our common stock; • sales of our common stock by our stockholders; • strategic moves by us or our competitors, such as acquisitions or restructurings; • general market conditions; and • domestic and international economic, legal and regulatory factors unrelated to our performance. Stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our common stock, regardless of our operating performance. Sales of substantial amounts of our common stock in the public markets, or the perception that they might occur, could reduce the price of our common stock and may dilute your voting power and your ownership interest in us. After the completion of this offering, we will have shares of common stock outstanding ( shares of common stock outstanding if the underwriters exercise their overallotment option in full). This number is comprised of all the shares of our common stock that we and the selling stockholders are selling in this offering (including shares that we expect to be issued upon exercise of stock options by certain of the selling stockholders and resold in this offering), which may be resold immediately in the public market. Subject to certain exceptions described under the caption “Underwriting,” we and all of our directors and executive officers and all of our stockholders and optionholders have agreed not to offer, sell or agree to sell, directly or indirectly, any shares of common stock without the permission of the underwriters for a period of 180 days from the date of this prospectus. When this period expires we and our locked-up stockholders will be able to sell our shares in the public market. Sales of a substantial number of such shares upon expiration, or early release, of the lock-up (or the perception that such sales may occur) could cause our share price to fall.

We cannot predict what effect, if any, future sales of our common stock, or the availability of common stock for future sale, will have on the market price of our common stock. Sales of substantial amounts of our common stock in the public market following our initial public offering, including a secondary offering by the Company, or the perception that such sales could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate.

20

We also may issue our shares of common stock from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of shares that we may issue may in turn be significant. In addition, we may also grant registration rights covering those shares in connection with any such acquisitions and investments. Upon completion of this offering, of our shares of common stock will be restricted or control securities within the meaning of Rule 144 under the Securities Act of 1933, as amended, ( shares of common stock if the underwriters‟ overallotment option is exercised in full). The rules affecting the sale of these securities are summarized under “Shares Eligible for Future Sale.” Our principal stockholders hold (and following completion of this offering will continue to hold) shares of our common stock in which they have a large unrealized gain, and these stockholders may wish, to the extent they may permissibly do so, to realize some or all of that gain relatively quickly by selling some or all of their shares. Investors purchasing common stock in this offering will experience immediate and substantial dilution. The assumed initial public offering price of our common stock is substantially higher than the net tangible book value per outstanding share of our common stock immediately after this offering. As a result, you will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities. Purchasers of our common stock in this offering will incur immediate and substantial dilution of $ per share in the net tangible book value of our common stock from the assumed initial public offering price of $ per share, which is the mid-point of the estimated range set forth on the cover of this prospectus. If the underwriters exercise their over-allotment option in full, there will be an additional dilution of $ per share in the net tangible book value of our common stock, assuming the same public offering price. See “Dilution.” In addition, if outstanding options to purchase shares of common stock are exercised, there could be substantial additional dilution. Antitakeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management. Provisions in our amended and restated certificate of incorporation and amended and restated bylaws to be effective upon the consummation of this offering may delay or prevent an acquisition of us or a change in our management. These provisions will include a classified board of directors, prohibition on actions by written consent of our stockholders, and the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting and will be subject to other requirements that will be burdensome and costly. We may not timely complete our analysis of our internal control over financial reporting, or these internal controls may not be determined to be effective, which could adversely affect investor confidence in our company and, as a result, the value of our common stock. We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our auditors will issue an attestation report on our internal control over financial reporting. We are just beginning the costly and challenging process of compiling the system and processing documentation before we perform the evaluation needed to comply with Section 404. We may not be able to complete our

21

evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to issue an unqualified opinion that we maintained, in all material respects, effective internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock. Failure to comply with the new rules might make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage and/or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors, or as executive officers. In addition, as a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, and our administrative staff will be required to perform additional tasks. For example, in anticipation of becoming a public company, we will need to create or revise the roles and duties of our board committees, adopt disclosure controls and procedures, retain a transfer agent, adopt an insider trading policy and bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under federal securities laws. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, and related regulations implemented by the SEC and the New York Stock Exchange, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management‟s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. Our largest stockholders will continue to have significant control over us after this offering, and they may make decisions with which you disagree. Following the offering, assuming no exercise of the underwriters‟ overallotment option, our current stockholders will beneficially own approximately % of the outstanding shares of common stock (or approximately % of the shares of common stock on a fully diluted basis, after giving effect to the exercise of all outstanding options and other rights to acquire common stock). As a result, such current stockholders may have the ability to control the election of our directors and the outcome of corporate actions requiring stockholder approval. This concentration of ownership could have the effect of discouraging potential take-over attempts and may make attempts by stockholders to change our management more difficult. We have not paid and do not expect to pay dividends, and any return on your investment will likely be limited to the appreciation of our common stock. We have never paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. If, however, we decide to pay dividends on our common stock in the future, the payment of dividends will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. In addition, our credit facility with PNC Bank, N.A. (PNC Bank) contains covenants prohibiting the payment of cash dividends without their consent. Accordingly, for the foreseeable future, any return on your investment will be related to the appreciation of our stock price. We have broad discretion in the use of the net proceeds from this offering and may not use them effectively. We cannot specify with certainty the particular uses of the net proceeds we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in “Use of Proceeds.” The failure by our management to apply these funds effectively could harm our

22

business. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline. The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. The price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

23

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS The Securities and Exchange Commission, or SEC, encourages companies to disclose forward-looking information so that investors can better understand a company‟s future prospects and make informed investment decisions. This prospectus contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this prospectus, including our disclosure and analysis concerning our operations, cash flows and financial position, business strategy and plans and objectives, including, in particular, the likelihood of our success developing and expanding our business, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. All forward-looking statements are management‟s present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks include, but are not limited to, the risks and uncertainties set forth in “Risk Factors,” beginning on page 10 of this prospectus. In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this prospectus might not occur. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this prospectus. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. This prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data. These data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this prospectus and, accordingly, we cannot guarantee their accuracy or completeness. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors,” “Management‟s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

24

USE OF PROCEEDS Assuming an initial public offering price of $ per share, we estimate that we will receive net proceeds from this offering of approximately $ million, after deducting underwriting discounts and commissions and other estimated expenses of $ million payable by us. If the underwriters exercise their overallotment option in full, we estimate that our net proceeds from this offering will be approximately $ million. We will not receive any of the proceeds from the sale of shares by the selling stockholders. A $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, capital expenditures and the development of new courses and product offerings. In addition, we intend to repay approximately $6.5 million of borrowings under our revolving credit facility, which bears interest at rates of approximately 6.6%, with various maturity dates on or before October 1, 2007 that may be renewed at the then current interest rate. Management will have broad discretion in the allocation of the net proceeds of this offering. Depending upon future events, we may determine at a later time to use the net proceeds for different purposes. Pending their use, we plan to invest the net proceeds in short-term, investment grade, interest-bearing securities.

DIVIDEND POLICY We have never paid or declared a dividend on our common stock, and we intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth. We do not anticipate paying any dividends for the indefinite future, and our credit facility with PNC Bank, N.A. limits our ability to pay dividends or other distributions on our common stock. The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition and requirements, business conditions, and covenants under any applicable contractual arrangements.

25

CAPITALIZATION The following table sets forth our capitalization as of March 31, 2007: • on an actual basis; • on a pro forma basis, giving effect to the automatic conversion of all of the outstanding shares of our preferred stock into 101,386,536 shares of our common stock immediately prior to the completion of this offering; and • on a pro forma basis as discussed in the prior bullet point, as adjusted to give effect to our receipt of the estimated net proceeds from the sale of shares of common stock offered by us in this offering, assuming an initial public offering price of $ , the midpoint of the estimated price range shown on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and our use of proceeds from this offering to repay approximately $4.5 million of outstanding indebtedness under our revolving credit facility. You should read this table in conjunction with the consolidated financial statements and the related notes, “Management‟s Discussion and Analysis of Financial Condition and Results of Operations” and “Use of Proceeds” included elsewhere in this prospectus. As of March 31, 2007 Pro forma as adjusted Actual Pro forma (dollars in thousands) $ 5,147 7,612 $
(1)

Cash and cash equivalents Total debt Redeemable Convertible Preferred Stock Redeemable Convertible Series C Preferred Stock, par value $0.0001 per share; 55,000,000 shares authorized, 49,861,562 issued and outstanding, actual; no shares issued and outstanding pro forma and pro forma as adjusted Redeemable Convertible Series B Preferred Stock, par value $0.0001 per share; 76,000,000 shares authorized; 51,524,974 issued and outstanding, actual; no shares issued and outstanding pro forma and pro forma as adjusted Stockholders’ deficit: Common stock, par value $0.0001 per share; 170,000,000 shares authorized, 10,203,453 issued and outstanding, actual; 111,589,989 issued and outstanding, pro forma; shares authorized, issued and outstanding pro forma as adjusted Additional paid-in capital Accumulated deficit Total stockholders‟ (deficit) equity Total capitalization

$

5,147 7,612

87,097

—

134,979

—

1 — (186,391 ) (185,390 ) $ 43,298 $

11 222,066 (186,391 ) 35,686 43,298 $

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the range on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders‟ equity and total capitalization by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

26

DILUTION Dilution is the amount by which the offering price paid by the purchasers of the common stock to be sold in the offering exceeds the net tangible book value per share of common stock after the offering. Net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date. Our pro forma net tangible book value as of March 31, 2007 was $35.7 million, or $0.32 per share after giving effect to the automatic conversion of all of our preferred stock into shares of common stock in accordance with their terms immediately prior to the consummation of the offering. After giving effect to our receipt of the estimated net proceeds from the sale of shares of common stock offered by us in this offering, assuming an initial public offering price of $ , the midpoint of the estimated price range shown on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2007 would have been approximately $ million, or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing shares of common stock in the offering. The following table illustrates this substantial and immediate per share dilution to new investors: Per Share Assumed initial public offering price per share Pro forma net tangible book value before the offering Increase per share attributable to our investors in the offering Pro forma net tangible book value after the offering Dilution per share to new investors $ $ $ 0.32

A $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease), the as adjusted pro forma net tangible book value per share after this offering by $ and the dilution per share to new investors in this offering by $ , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The following table summarizes on a pro forma as adjusted basis as of March 31, 2007, giving effect to the automatic conversion of all of our shares of preferred stock into shares of common stock in connection with the offering and for a for stock split which will occur prior to the completion of this offering: • the total number of shares of common stock purchased from us by our existing stockholders and by new investors purchasing shares in this offering; • the total consideration paid to us by our existing stockholders and by new investors purchasing shares in this offering, assuming an initial public offering price of $ per share (before deducting the estimated underwriting discount and commissions and offering expenses payable by us in connection with this offering); and • the average price per share paid by existing stockholders and by new investors purchasing shares in this offering: Average Price Per Share % % 100 % $ $ 1.34

Shares Purchased Number Percent Existing stockholders Investors in the offering Total 111,589,989 % % 100 % $ $

Total Consideration Amount Percent 149,521,516

27

The tables and calculations above assume no exercise of: • stock options outstanding as of March 31, 2007 to purchase 18,450,344 shares of common stock at a weighted average exercise price of $1.80 per share; • 2,328,358 shares of preferred stock (or upon the consummation of the offering an equivalent amount of common stock) that may be issued upon the exercise of warrants outstanding as of March 31, 2007, all of which are currently exercisable at a purchase price of $1.34 per share, and 108,649 shares of common stock that may be issued upon the exercise of warrants outstanding as of March 31, 2007, all of which are exercisable at a purchase price of $1.60 per share; or • the underwriters‟ overallotment option. To the extent any of these options are exercised, there will be further dilution to new investors.

28

SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth our selected consolidated statement of operations, balance sheet and other data for the periods indicated. We have derived our selected consolidated statement of operations data for the years ended June 30, 2004, 2005 and 2006 and our balance sheet data as of June 30, 2005 and 2006, from our audited consolidated financial statements that are included elsewhere in this prospectus. We have derived our selected consolidated statement of operations data for the years ended June 30, 2002 and 2003, and our balance sheet data as of June 30, 2002, 2003 and 2004, from our audited consolidated financial statements that are not included in this prospectus. We have derived our selected consolidated statement of operations data for the nine months ended March 31, 2006 and 2007 and consolidated balance sheet data as of March 31, 2007 from our unaudited consolidated financial statements. Our historical results are not necessarily indicative of future operating results. You should read the information set forth below in conjunction with “Selected Consolidated Financial and Operating Data,” “Management‟s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and their related notes included elsewhere in this prospectus.
Nine Months Ended March 31, 2006 2007

2002

2003

Year Ended June 30, 2004 2005 2006 (dollars in thousands, except per share data)

Consolidated Statement of Operations Data: Revenues $ Cost and expenses Instructional costs and services Selling, administrative, and other operating expenses Product development expenses Total costs and expenses Income (loss) from operations Interest expense, net Net income (loss) before taxes Income tax expense Net income (loss) Dividends on preferred stock Preferred stock accretion Net loss attributable to common stockholders Net loss attributable to common stockholders per share: Basic and diluted Basic and diluted (pro forma) (1) Weighted average shares used in computing per share amounts: Basic and diluted Basic (pro forma) (1) Diluted (pro forma) (1)

6,693

$

30,930

$

71,434

$

85,310

$

116,902

$

90,088

$

104,930

5,818

25,580

39,943

49,130

64,828

48,473

55,103

11,661 19,621 37,100

20,903 12,416 58,899

25,656 12,750 78,349

30,031 9,410 88,571

41,660 8,568 115,056

28,403 5,587 82,463

35,059 5,855 96,017

(30,407 ) (11 )

(27,969 ) (388 )

(6,915 ) (516 )

(3,261 ) (279 )

1,846 (488 )

7,625 (394 )

8,913 (474 )

(30,418 ) — (30,418 ) — (6,628 )

(28,357 ) — (28,357 ) — (11,912 )

(7,431 ) — (7,431 ) (2,667 ) (15,768 )

(3,540 ) — (3,540 ) (5,261 ) (15,947 )

1,358 — 1,358 (5,851 ) (18,697 )

7,231 — 7,231 (4,333 ) (13,880 )

8,439 (227 ) 8,212 (4,707 ) (16,544 )

$

(37,046 )

$

(40,269 )

$

(25,866 )

$

(24,748 )

$

(23,190 )

$

(10,982 )

$

(13,039 )

$

(3.70 ) n/a

$

(4.02 ) n/a

$

(2.58 ) n/a

$

(2.46 ) n/a

$ $

(2.30 ) 0.01

$

(1.09 ) n/a

$ $

(1.28 ) 0.07

10,000,000 n/a n/a

10,009,906 n/a n/a

10,017,162 n/a n/a

10,062,587 n/a n/a

10,083,721 106,937,388 107,055,314

10,081,180 n/a n/a

10,195,440 111,581,976 111,621,446

2002

Year Ended June 30, 2003 2004 2005 (dollars in thousands)

2006

Nine Months Ended March 31, 2006 2007

Other Data: Net cash provided by (used in) operating activities Depreciation and amortization Capital expenditures (2) EBITDA (3) Average enrollments (4)

$ $ $ $

(35,016 ) 1,770 2,547 (28,637 ) 906

$ $ $ $

(15,990 ) 4,005 4,677 (23,964 ) 5,872

$ $ $ $

(8,020 ) 4,922 4,643 (1,993 ) 11,158

$ $ $ $

9,697 5,509 5,133 2,248 15,097

$ 3,625 $ 4,986 $ 10,842 $ 6,832 20,220

$ 1,137 $ 3,574 $ 6,509 $ 11,199 20,183

$ 7,324 $ 4,618 $ 10,350 $ 13,531 27,297

29

As of June 30, 2002 2003 2004 2005 (dollars in thousands) 2006

As of March 31, 2007

Consolidated Balance Sheet Data: Cash and cash equivalents $ Total assets Total short-term debt Total long-term obligations Convertible redeemable preferred stock Total stockholders‟ deficit Working capital

6,008 15,755 — 270 70,566 (59,502 ) 6,240

$

7,727 21,331 — 1,697 111,634 (99,762 ) 6,823

$

15,881 42,714 — 3,432 155,069 (125,621 ) 24,130

$

19,953 41,968 — 4,466 176,277 (150,299 ) 22,953

$

9,475 48,485 — 4,025 200,825 (173,451 ) 15,421

$

5,147 64,001 1,500 6,112 222,076 (186,390 ) 14,617

(1)

(2) (3)

Pro forma net income per common share gives effect to the automatic conversion of all of our outstanding shares of preferred stock into common stock immediately prior to the completion to this offering. Assuming the completion of this offering on March 31, 2007 and June 30, 2006, all of our outstanding shares of preferred stock would convert into 101,386,536 and 96,853,667 shares of common stock respectively. Capital expenditures consist of the purchase of property and equipment and new capital lease obligations. EBITDA consists of net income (loss) minus interest income, plus interest expense, plus income tax expense and plus depreciation and amortization. Interest income consists primarily of interest earned on short-term investments or cash deposits. Interest expense primarily consists of interest expense for capital leases, long-term and short-term borrowings. We use EBITDA as a measure of operating performance. However, EBITDA is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP, and when analyzing our operating performance, investors should use EBITDA in addition to, and not as an alternative for, net income (loss) as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA is not intended to be a measure of free cash flow for our management‟s discretionary use, as it does not consider certain cash requirements such as tax payments. We believe EBITDA is useful to an investor in evaluating our operating performance because it is widely used to measure a company‟s operating performance without regard to items such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of corporate performance exclusive of our capital structure and the method by which assets were acquired. Our management uses EBITDA: • as a measurement of operating performance, because it assists us in comparing our performance on a consistent basis, as it removes depreciation, amortization, interest and taxes; and • in presentations to the members of our board of directors to enable our board to have the same measurement basis of operating performance as is used by management to compare our current operating results with corresponding prior periods and with the results of other companies in our industry. The following table provides a reconciliation of net income (loss) to EBITDA:

2002

Year Ended June 30, 2003 2004 2005 (dollars in thousands) $ (28,357 ) 388 — 4,005 (23,964 ) $ (7,431 ) 516 — 4,922 (1,993 ) $ (3,540 ) 279 — 5,509 2,248

2006

Nine Months Ended March 31, 2006 2007

Net income (loss) Interest expense, net Income tax expense Depreciation and amortization EBITDA

$

(30,418 ) 11 — 1,770 (28,637 )

$ 1,358 488 — 4,986 $ 6,832

$

7,231 394 — 3,574

$

8,212 474 227 4,618

$

$

$

$

$ 11,199

$ 13,531

(4)

To ensure that all schools are reflected in our measure of enrollments, we consider our enrollments as of the end of September to be our opening enrollment level, and the number of students enrolled at the end of May to be our ending enrollment level. To provide comparability, we do not consider enrollment levels for June, July and August as all schools are not open during these months. For each period, average enrollments represent the average of the month end enrollment levels for each month that has transpired between September and the end of the period, up to and including the month of May.

30

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of the factors we describe under “Risk Factors” and elsewhere in this prospectus. Our Company We are a technology-based education company. We offer proprietary curriculum, software and educational services created for online delivery to students in kindergarten through 12th grade, or K-12. Our mission is to maximize a child‟s potential by providing access to an engaging and effective education, regardless of geographic location or socio-economic background. Since our inception, we have invested more than $95 million to develop curriculum and an online learning platform that promotes mastery of core concepts and skills for students of all abilities. This learning system combines a cognitive research-based curriculum with an individualized learning approach well-suited for a virtual school and other educational applications. From fiscal year 2004 to fiscal year 2007, we increased average enrollments in the virtual public schools we serve from approximately 11,000 students to 27,000 students, representing a compound annual growth rate of approximately 35%. From fiscal year 2004 to fiscal year 2006, we increased revenues from $71.4 million to $116.9 million, representing a compound annual growth rate of approximately 28%. We deliver our learning system to students primarily through virtual public schools. Many states have embraced virtual public schools as a means to provide families with a publicly funded alternative to a traditional classroom-based education. We offer virtual schools our proprietary curriculum, online learning platform and varying levels of academic and management services, which can range from targeted programs to complete turnkey solutions, under long-term contracts. These contracts provide the basis for a recurring revenue stream as students progress through successive grades. Additionally, without the requirement of a physical classroom, virtual schools can be scaled quickly to accommodate a large dispersed student population, and allow more capital resources to be allocated towards teaching, curriculum and technology rather than towards a physical infrastructure. Our proprietary curriculum is currently used by public school students in 16 states and the District of Columbia. Parents can also purchase our curriculum and online learning platform directly to facilitate or supplement their children‟s education. Additionally, we have piloted our curriculum in brick and mortar classrooms with promising academic results. We also believe there is additional widespread applicability for our learning system internationally. Our History We were founded in 2000 to utilize the advances in technology to provide children access to a high-quality public school education regardless of their geographic location or socio-economic background. Given the geographic flexibility of technology-based education, we believed that the pursuit of this mission could help address the growing concerns regarding the regionalized disparity in the quality of public school education, both in the United States and abroad. These concerns were reflected in the passage of the No Child Left Behind (NCLB) Act in 2000, which implemented new standards and accountability requirements for public K-12 education. The convergence of these concerns and rapid advances in Internet technology created the opportunity to make a significant impact by deploying a high quality learning system on a flexible, online platform. In September 2001, after 18 months of research and development on our curriculum, we launched our kindergarten through 2nd grade offering. We initially launched our learning system in virtual public schools in Pennsylvania and Colorado, serving approximately 900 students in the two states combined. During the 2002-03 school year, we added our 3rd through 5th grade offering and entered into contracts to operate virtual public schools in California, Idaho, Ohio, Minnesota and Arkansas, increasing our average enrollment to approximately 5,900 students during the 2002-03 school year. During the 2003-04 and 2004-05 school years, we added 7th and 8th grades, respectively, and added contracts with virtual public schools in Wisconsin, Arizona and Florida. By the end of the 2004-05 school year, we had increased enrollment to approximately 15,100 students. In the 2005-06

31

school year, we added contracts to operate virtual public schools in Washington, Illinois and Texas. Additionally during the 2006-07 school year, we implemented a hybrid school offering in Chicago that combines face-to-face time in the classroom with online instruction. We recently entered the virtual high school market, enrolling 9th and 10th grade students at the start of the 2005-06 and 2006-07 school years, respectively, and we plan to offer 11th and 12th grades at the start of the 2007-08 school year. We believe we have significant growth potential. Therefore over the last three years, we have put a great deal of effort into developing the infrastructure necessary to scale our business. We further developed our logistics and technological infrastructure and implemented sophisticated financial systems to allow us to more effectively operate a large and growing company. Key Aspects and Trends of Our Operations Revenues We generate a significant portion of our revenues from enrollments in virtual public schools. Revenues consist principally of product and service revenues derived through our contracts with these schools. These contracts provide the channels through which we can enroll students into the school, and we execute marketing and recruiting programs designed to create awareness and generate enrollments for these schools. We generate our revenues by providing each student with access to our online lessons and offline learning kits, including a personal computer. In addition, we provide a variety of management and academic support services to virtual public schools, ranging from turnkey end-to-end management solutions to a single service to meet a school‟s specific needs. We also generate revenues from sales of our curriculum and offline learning kits through other channels, including directly to consumers and pilots in a traditional classroom environment. Factors affecting our revenues include: (i) the number of enrollments; (ii) the nature and extent of the management services provided to the schools and school districts; (iii) state or district per student funding levels; and (iv) prices for our products and services. We define an enrollment as a full-time student using our provided courses as their primary curriculum. We consider full-time students to be those utilizing our curriculum regardless of the nature and extent of the management services we provide to the virtual public school. Generally, a full-time student will take five or six courses, except for kindergarten students who participate in half-day programs. We count each half-day kindergarten student as an enrollment. School sessions generally begin in August or September and end in May or June. We consider the duration of a school year to be 10 months. To ensure that all schools are reflected in our measure of enrollments, we consider the number of students on the last day of September to be our opening enrollment level, and the number of students enrolled on the last day of May to be our ending enrollment level. To provide comparability, we do not consider enrollment levels for June, July and August as most schools are not open during these months. For each period, average enrollments represent the average of the month-end enrollment levels for each month that has transpired between September and the end of the period, up to and including the month of May. We continually evaluate our enrollment levels by state, by school and by grade. We track new student enrollments and withdrawals throughout the year. We believe that the number of enrollments depends upon the following: • the number of states and school districts in which we operate; • the appeal of our curriculum to students and families; • the effectiveness of our program in delivering favorable academic outcomes; • the quality of the teachers working in the virtual public schools we serve; and • the effectiveness of our marketing and recruiting programs. We continually evaluate our trends in revenues by monitoring the number of enrollments in total, by state, by school and by grade, assessing the impact of changes in funding levels and our product pricing. We track

32

enrollments throughout the year, as students enroll and withdraw. We also provide our courses for use in a traditional classroom setting and we sell our courses directly to consumers. Our classroom course revenues are generally for single courses. Consumers typically purchase from one to six courses in a year, however, we do not monitor the progress of these students. Therefore, we do not include classroom or consumer students in our enrollment totals. We closely monitor the financial performance of the virtual public schools to which we provide turnkey management services. Under the contracts with these schools, we take responsibility for any operating deficits that they may incur in a given school year. These operating deficits may result from a combination of cost increases or funding reductions attributable to the following: 1) costs associated with new schools including the initial hiring of teachers and the establishment of school infrastructure; 2) school requirements to establish contingency reserves; 3) one-time costs such as a legal claim; 4) funding reductions due to the inability to qualify specific students for funding; and 5) regulatory or academic performance thresholds which may initially restrict the ability of a school to fund all expenses. In these cases, because a deficit may impair our ability to collect our invoices in full, we reduce revenues by the sum of these deficits. Over the past three years, these deficits and the related reduction to revenues have grown substantially faster than overall revenue growth reflecting a significant number of new school start-ups, the time required to meet performance thresholds in certain states and funding adjustments in two states related to the disqualification of certain past enrollments. We expect these deficits to continue to grow faster than overall revenue growth as we expand into new states, continue investment in educational programs, and incur the higher costs associated with our high school offering. Our annual growth in revenues may be materially affected by changes in the level of management services we provide to certain schools. Currently a significant portion of our enrollments are associated with virtual public schools to which we provide turnkey management services. We are responsible for the complete management of these schools and therefore, we recognize as revenues the funds received by the schools, up to the level of costs incurred. These costs are substantial, as they include the cost of teacher compensation and other ancillary school expenses. Accordingly, enrollments in these schools generate substantially more revenues than enrollments in other schools where we provide limited or no management services. In these situations, our revenues are limited to direct invoices and are independent of the total funds received by the school from a state or district. As a result, changes in the number of enrollments associated with schools operating under turnkey arrangements relative to total enrollments may have a disproportionate impact on growth in revenues relative to the growth in enrollments. Our annual growth in revenues will also be impacted by changes in state or district per enrollment funding levels. These funding levels are typically established on an annual basis and generally increase at modest levels from year to year. We expect this trend to continue. Finally, we may generate modest growth in revenues from increases in the prices of our products. We evaluate our product pricing annually against market benchmarks and conditions and raise them as we deem appropriate. We do not expect our price increases to have a significant incremental impact as they are encompassed within increases in per enrollment funding levels. Instructional Costs and Services Expenses Instructional costs and services expenses include expenses directly attributable to the educational products and services we provide. The virtual public schools we manage are the primary drivers of these costs, including teacher and administrator salaries and benefits and expenses of related support services. Instructional costs also include fulfillment costs of student textbooks and materials, and the cost of any third-party online courses. In addition, we include in instructional costs the amortization of capitalized curriculum and related systems. We measure, track and manage instructional costs and services as a percentage of revenues and on a per enrollment basis as these are key indicators of performance and operating efficiency. As a percentage of revenues, instructional costs and services expenses decreased slightly for the nine months ended March 31, 2007, as compared to the nine months ended March 31, 2006 primarily due to lower costs associated with a renewed virtual school contract that no longer includes turnkey management services. This was partially offset by higher school operating costs and the start-up costs of new schools. We expect instructional costs and services expenses as a percentage of revenues to increase as we expand our high school enrollments, develop new delivery models, and incur start-up costs for new schools. Over time, we expect high school enrollments to grow as a percentage of total enrollments. Our high school offering requires increased instructional costs as a percentage of revenues compared to our kindergarten to 8th grade

33

offering. This is due to the following: (i) demand for numerous electives which requires licensing of third-party courses to augment our proprietary curriculum; (ii) generally lower student-to-teacher ratios; (iii) higher compensation costs for teachers due to the need for subject-matter expertise; and (iv) ancillary costs for required student support services including college placement, SAT preparation and guidance counseling. We are developing new delivery models, such as the hybrid model, where students receive both face-to-face and online instruction. Development costs may include instructional research and curriculum development. These models necessitate additional costs including facilities related costs and additional administrative support, which are generally not required to operate typical virtual public schools. As a result, instructional costs as a percentage of revenues may be higher than our typical offering. In addition, we are pursuing expansion into new states. If we are successful, we will incur start-up costs and other expenses associated with the initial launch of a virtual public school, which may result in increased instructional costs as a percentage of revenues. Selling, Administrative and Other Operating Expenses Selling, administrative and other operating expenses include the salaries, benefits and related costs of employees engaged in business development, sales and marketing, and administrative functions. We measure and track selling, administrative and other operating expenses as a percentage of revenues to track performance and efficiency of these areas. In addition, we track measures of sales and marketing efficiency including the number of new enrollment prospects for virtual public schools and our ability to convert these prospects into enrollments. We also track various operating, call center and information technology statistics as indicators of operating efficiency and customer service. We expect these expenses, as a percentage of revenues, to decline over time, reflecting the scalability of our corporate infrastructure, partially offset by increased levels of spending on marketing and business development activities. Product Development Expenses Product development expenses include research and development costs and overhead costs associated with the management of projects to develop curriculum and internal systems. In addition, product development expenses include the amortization and internal systems and any impairment charges. We measure and track our product development expenditures on a per course or project basis to measure and assess our development efficiency. In addition, we monitor employee utilization to evaluate our workforce efficiency. We plan to invest in additional curriculum development and related software in the future, primarily to produce additional high school courses, new releases of existing courses and to upgrade our content management system and our Online School (OLS). We capitalize most of the costs incurred to develop our curriculum and software, beginning with application development, through production and testing. We account for impairment of capitalized curriculum development costs in accordance with Statement of Financial Accounting Standard No. 144 (SFAS No. 144,) Accounting for the Impairment or Disposal of Long-Lived Assets . See “Critical Accounting Policies and Estimates”. We did not record any impairment charge in the nine months ended March 31, 2007. Impairment charges recorded were $0.4 million and $3.3 million for the years ended June 30, 2006 and 2005, respectively. In fiscal year 2006, we recognized impairment of capitalized curriculum as the potential to earn revenues from the use of our curriculum in a traditional classroom was uncertain. In 2005, we recognized impairment as we generated a net loss in that year and development costs exceeded future cash flows. Other Factors That May Affect Comparability Public Company Expenses. Upon consummation of our initial public offering, we will become a public company, and our shares of common stock will be publicly traded on the New York Stock Exchange. As a result, we will need to comply with new laws, regulations and requirements that we did not need to comply with as a private company, including certain provisions of the Sarbanes-Oxley Act of 2002, other applicable SEC regulations and the requirements of the New York Stock Exchange. Compliance with the requirements of being a public company will require us to increase our general and administrative expenses in order to pay our employees, legal counsel and independent registered public accountants to assist us in, among other things, instituting and monitoring a more comprehensive compliance and board governance function, establishing and maintaining internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and preparing and

34

distributing periodic public reports in compliance with our obligations under the federal securities laws. In addition, as a public company, it will make it more expensive for us to obtain directors and officers liability insurance. Stock Option Expense. The adoption of Statement of Financial Accounting Standard No. 123R, “Share Based Payments” (SFAS No. 123R), requires that we recognize an expense for stock options granted beginning July 1, 2006. We incurred approximately $0.1 million in stock compensation expense for the nine months ended March 31, 2007. We expect stock option expense to increase in the future as we grant additional stock options. Income Tax Benefits Resulting from Decrease of Valuation Allowance. In the period from our inception through fiscal year 2005, we incurred significant operating losses that resulted in a net operating loss carryforward for tax purposes and net deferred tax assets. Through March 31, 2007, we provided a 100% valuation allowance for all net deferred tax assets based on our limited history of generating taxable income. Our provision for income taxes for the nine months ended March 31, 2007 was $0.2 million, compared to no provision for the nine months ended March 31, 2006. Our tax expense for the nine months ended March 31, 2007 is primarily related to alternative minimum tax liabilities. Effectively, no tax expense was recorded in the nine months ending March 31, 2006 as we were able to utilize net operating loss carryforwards that were fully reserved for in prior periods. We do not expect to record any income tax expense in the next few years other than alternative minimum tax, unless we decrease the valuation allowance on net deferred tax assets of $28.5 million as of March 31, 2007. Public Funding and Regulation. Our public school customers are financed with federal, state and local government funding. Budget appropriations for education at all levels of government are determined through a political process and, as a result, our revenues may be affected by changes in appropriations. Decreases in funding could result in an adverse affect on our financial condition, results of operations and cash flows. Competition. The market for providing online education for grades K-12 is becoming increasingly competitive and attracting significant new entrants. If we are unable to successfully compete for new business and contract renewals, our growth in revenues and operating margins may decline. With the introduction of new technologies and market entrants, we expect this competition to intensify. Critical Accounting Policies and Estimates The discussion of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. In the preparation of our consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements. Our critical accounting policies have been discussed with the audit committee of our board of directors. We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements: Revenue Recognition In accordance with SEC Staff Accounting Bulletin No. 104 (SAB No. 104), we recognize revenues when each of the following conditions is met: (1) persuasive evidence of an arrangement exists; (2) delivery of physical goods or rendering of services is complete; (3) the seller‟s price to the buyer is fixed or determinable; and (4) collection is reasonably assured. Once these conditions are satisfied, the amount of revenues we record is determined in accordance with Emerging Issues Task Force (EITF 99-19), “ Reporting Revenue Gross as a Principal versus Net as an Agent .” We generate almost all of our revenues through long-term contracts with virtual public schools. These schools are generally funded by state or local governments on a per student basis. Under these contracts, we are responsible for providing each enrolled student with access to our OLS, our online lessons, offline learning kits and student

35

support services required for their complete education. In most cases, we are also responsible for providing complete management and technology services required for the operation of the school. The revenues derived from these long-term agreements is primarily dependent upon the number of students enrolled, the extent of the management services contracted for by the school, and the level of funding provided to the school for each student. We invoice virtual public schools in accordance with the established contractual terms. Generally, this means that we invoice each school for the following items: (1) access to our online school and online lessons; (2) offline learning kits; (3) student personal computers; and (4) management and technology services. We apply SAB No. 104 to each of these items as follows: • Access to the K 12 Online School and Online Lessons. Our OLS revenues come primarily from contracts with charter schools and school districts. Students are provided access to the OLS and online lessons at the start of the school year for which they have enrolled. On a per student basis, we invoice schools an upfront fee at the beginning of the school year or at the time a student enrolls and a monthly fee for each month during the school year in which the student is enrolled. A school year generally consists of 10 months. The upfront fee is initially recorded as deferred revenue and is recognized as revenues ratably over the remaining months of the current school year. If a student withdraws prior to the end of a school year, any remaining deferred revenue related to the upfront fee is recognized because service delivery is complete. The monthly fees are recognized in the month in which they are earned. The majority of our enrollments occur at the beginning of the school year in August or September, depending upon the state. Because upfront fees are generally charged at the beginning of the school year, the balance in our deferred revenue account tends to be at its highest point at the end of the first quarter. Generally, the balance will decline over the course of the year and all deferred revenue related to virtual public schools will be fully recognized by the end of our fiscal year on June 30. • Offline Learning Kits. Our offline learning kit revenues come primarily from contracts with virtual public schools and our curriculum blends which online and offline content. The lessons in our online school are meant to be used in conjunction with selected printed materials, workbooks, laboratory materials and other manipulative items which we provide to students. We generally ship all offline learning kits to a student when their enrollment is approved and invoice the schools in full for the materials at that time. Once materials have been shipped, our efforts are substantially complete. Therefore, we recognize revenues upon shipment. Because offline learning kits revenues are recognized near the time of enrollment in its entirety, we generate a majority of these revenues in our first fiscal quarter which coincides with the start of the school year. • Student Personal Computers. In most of our contracts with virtual public schools, we are responsible for ensuring that each enrolled student has the ability to access our online school. To accomplish this, we generally provide each enrolled student with a personal computer, complete technical support through our call center, and reclamation services when a student withdraws or a computer needs to be exchanged. Schools are invoiced on a per student basis for each enrolled student to whom we have provided a personal computer. This may include an upfront fee at the beginning of the school year or at the time a student enrolls and a monthly fee for each month during the school year in which the student is enrolled. A school year generally consists of 10 months. The upfront fee is initially recorded as deferred revenue and is recognized as revenues ratably over the remaining months of the current school year. If a student withdraws prior to the end of a school year, any remaining deferred revenue related to the upfront fee are recognized because service delivery is complete. All deferred revenue will be recognized by the end of our fiscal year, June 30. The monthly fees are recognized in the month in which they are earned. • Management and Technology Services. Under most of our school contracts, we provide the boards of the virtual public schools we serve with turnkey management and technology services. We take responsibility for all academic and fiscal outcomes. This includes responsibility for all aspects of the management of the schools, including monitoring academic achievement, teacher recruitment and training, compensation of school personnel, financial management, enrollment processing and procurement of curriculum, equipment and required services. Management and technology fees are generally determined based upon a percentage

36

of the funding received by the virtual public school. We generally invoice schools for management and technology services in the month in which they receive such funding. We recognize the revenues from turnkey management and technology fees ratably over the course of our fiscal year. We use 12 months as a basis for recognition because administrative offices of the school remain open for the entire year. To determine the amount of revenues to recognize in our fiscal year, we estimate the total funds that each school will receive in a particular school year, and our related fees associated with the estimated funding. We review our estimates of funding periodically, and revise as necessary, amortizing any adjustments over the remaining portion of the fiscal year. Actual school funding may vary from these estimates or revisions, and the impact of these differences could have a material impact on our results of operations. Under most contracts, we provide the virtual schools we manage with turnkey management services and take responsibility for any operating deficits that the schools may incur in a given school year. Such deficits may arise from school start-up costs, from funding shortfalls, from temporary or long-term incremental cost requirements for a particular school, or due to specific one-time expenses that a school may incur. These operating deficits may impair our ability to collect the full amount invoiced in a period. In these cases, since collection cannot be reasonably assured, we reduce revenues by the amount of these deficits. We recognize the impact of these operating deficits by estimating the full year revenues and full year deficits of schools at the beginning of the fiscal year. We amortize the estimated deficits against recognized revenues based upon the percentage of actual revenues in the period to total estimated revenues for the fiscal year. We periodically review our estimates of full year school revenues and full year operating deficits and amortize the impact of any changes to these estimates over the remainder of our fiscal year. Actual school operating deficits may vary from these estimates or revisions, and the impact of these differences could have a material impact on our results of operations. The amount of revenues we record is determined in accordance with Emerging Issues Task Force Reporting Revenue Gross as a Principal versus Net as an Agent, EITF 99-19. For these schools, we have determined that we are the primary obligor for substantially all expenses of the school. Accordingly, we report revenues on a gross basis by recording the associated per student revenues received by the school from its funding state or school district up to the expenses incurred by the school. Revenues are recognized when the underlying expenses are incurred by the school. For the small percentage of contracts where we provide individually selected services for the school, we invoice on a per student or per service basis and recognize revenues in accordance with SAB No. 104. Under these contracts, where we do not assume responsibility for operating deficits, we record revenues on a net basis. We also generate a small percentage of our revenues through the sale of our online courses and offline learning kits directly to consumers. Online course sales are generally subscriptions for periods of 12 to 24 months and customers have the option of paying a discounted amount in full upfront or paying in monthly installments. Payments are generally made with charge cards. For those customers electing to pay these subscription fees in their entirety upfront, we record the payment as deferred revenue and amortize the revenues over the life of the subscription. For customers paying monthly, we recognize these payments as revenues in the month earned. Revenues for offline learning kits are recognized when shipped. Within 30 days of enrollment, customers can receive a full refund, however customers terminating after 30 days will receive a pro rata refund for the unused portion of their subscription less a termination fee. Historically, the impact of refunds has been immaterial. Capitalized Curriculum Development Costs Our curriculum is primarily developed by our employees and to a lesser extent, by independent contractors. Generally, our courses cover traditional subjects and utilize examples and references designed to remain relevant for long periods of time. The online nature of our curriculum allows us to incorporate user feedback rapidly and make ongoing corrections and improvements. For these reasons, we believe that our courses, once developed, have an extended useful life, similar to computer software. We capitalize curriculum development costs incurred during the application development stage in accordance with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance for the treatment of costs associated with computer software

37

development and defines those costs to be capitalized and those to be expensed. Costs that qualify for capitalization are external direct costs, payroll, payroll-related costs, and interest costs. Costs related to general and administrative functions are not capitalizable and are expensed as incurred. We capitalize curriculum development costs when the projects under development reach technological feasibility. Many of our new courses leverage off of proven delivery platforms and are primarily content, which has no technological hurdles. As a result, a significant portion of our courseware development costs qualify for capitalization due to the concentration of our development efforts on the content of the courseware. Technological feasibility is established when we have completed all planning, designing, coding, and testing activities necessary to establish that a course can be produced to meet its design specifications. Capitalization ends when a course is available for general release to our customers, at which time amortization of the capitalized costs begins. The period of time over which these development costs will be amortized is generally five years. This is consistent with the capitalization period used by others in our industry and corresponds with our product development lifecycle. Software Developed or Obtained for Internal Use We develop our own proprietary computer software programs to provide specific functionality to support both our unique education offering and the student and school management services. These programs enable us to develop courses, process student enrollments, meet state documentation requirements, track student academic progress, deliver online courses to students, coordinate and track the delivery of course-specific materials to students and provide teacher support and training. These applications are integral to our learning system and we continue to enhance existing applications and create new applications. We capitalize software development costs incurred during the development stage of these applications in accordance with SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use . These development costs are generally amortized over three years. Impairment of Long-lived Assets Long-lived assets include property, equipment, capitalized curriculum and software developed or obtained for internal use. In accordance with Statement of Financial Accounting Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets , we review our recorded long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. We determine the extent to which an asset may be impaired based upon our expectation of the asset‟s future usability as well as on a reasonable assurance that the future cash flows associated with the asset will be in excess of its carrying amount. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. Accounting for Stock-based Compensation Prior to July 1, 2006, we accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees , or APB No. 25 and related interpretations. Accordingly, compensation cost for stock options generally was measured as the excess, if any, of the estimated fair value of our common stock over the amount an employee must pay to acquire the common stock on the date that both the exercise price and the number of shares to be acquired pursuant to the option are fixed. We had adopted the disclosure-only provisions of SFAS No. 123 which was released in May 1995, and used the minimum value method of valuing stock options as allowed for non-public companies. In December 2004, SFAS No. 123R revised SFAS No. 123 and superseded APB No. 25. SFAS No. 123R requires the measurement of the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the measurement date of grant, with the cost being recognized over the applicable requisite service period. In addition, SFAS No. 123R requires an entity to provide certain disclosures in order to assist in understanding the nature of share-based payment transactions and the effects of those transactions on the financial statements. The provisions of SFAS No. 123R are required to be applied as of the beginning of the first interim or annual reporting period of the entity‟s first fiscal year that begins after December 15, 2005.

38

Effective July 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R using the prospective transition method, which requires the Company to apply the provisions of SFAS No. 123R only to awards granted, modified, repurchased or cancelled after the effective date. Under this transition method, stock- based compensation expense recognized beginning July 1, 2006 is based on the fair value of stock awards as of the grant date. As the Company had used the minimum value method for valuing its stock options under the disclosure requirements of SFAS No. 123, all options granted prior to July 1, 2006 continue to be accounted for under APB No. 25. The Company accounts for equity instruments issued to nonemployees in accordance with the provisions of SFAS No. 123 and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services . Deferred Tax Asset Valuation Allowance We account for income taxes as prescribed by Statement of Financial Accounting Standards No. 109 (SFAS No. 109), Accounting for Income Taxes . SFAS No. 109 prescribes the use of the asset and liability method to compute the differences between the tax bases of assets and liabilities and the related financial amounts, using currently enacted tax laws. If necessary, a valuation allowance is established to reduce deferred tax assets to the amount that is more likely than not to be realized. Realization of the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of projected future taxable income offset by deferred tax liabilities. We exercise significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to examination by tax authorities in the ordinary course of business. We periodically assess the likelihood of adverse outcomes resulting from these examinations to determine the impact on our deferred taxes and income tax liabilities and the adequacy of our provision for income taxes. Changes in income tax legislation, statutory income tax rates, or future taxable income levels, among other things, could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods. As of March 31, 2007, we had net operating loss carry-forwards of $57.5 million that expire between 2020 and 2027 if unused. We recorded a full valuation allowance against net deferred tax assets, including deferred tax assets generated by net operating loss carry-forwards. The valuation allowance on net deferred tax assets was $29.0 million as of March 31, 2007.

39

Results of Operations The following table presents our selected consolidated statement of operations data expressed as a percentage of our total revenues for the periods indicated: Nine Months Ended March 31, 2006 2007

2004 Consolidated Statement of Operations Data: Revenues Cost and expenses Instructional costs and services Selling, administrative, and other operating expenses Product development expenses Total costs and expenses Income (loss) from operations Interest expense, net Income (loss) from operations before income taxes Income tax benefit (expense) Net income (loss)

Year Ended June 30, 2005

2006

100 % 56 36 18 110 (10 ) — (10 ) — ) (10 %

100 % 58 35 11 104 (4 ) — (4 ) — ) (4 %

100 % 55 36 7 98 2 (1 ) 1 — 1%

100 % 54 32 6 92 8 — 8 — 8%

100 % 53 33 6 92 8 — 8 — 8%

Comparison of Nine Months Ended March 31, 2007 to Nine Months Ended March 31, 2006 Revenues. Our revenues for the nine months ended March 31, 2007 were $104.9 million, representing an increase of $14.8 million, or 16.4%, as compared to revenues of $90.1 million for the nine months ended March 31, 2006. Average enrollments increased 35.3% to 27,297 for the nine months ended March 31, 2007 from 20,183 average enrollments for the nine months ended March 31, 2006. Primarily offsetting the increased revenues related to enrollment growth, was a decline in management services revenues resulting from the impact of a substantial reduction in the percentage of enrollments associated with schools to which we provide turnkey management services. For the nine months ended June 30, 2007, 76.2% of our enrollments were associated with these schools, down from 91.7% for the corresponding period in 2006. The increase in average enrollments was primarily attributable to new school openings in Washington, California, and Chicago, where we opened our first hybrid school. In addition, we launched 10th grade in August 2006 attracting new students as well as prior year 9th grade students. Price increases of approximately 2% also generated additional revenues. Finally, increased operating deficits at certain schools partially offset the growth in revenues. These deficits were attributable to greater school operating expenses to support increased enrollment and high school services as well as school funding adjustments stemming from enrollment audits in California and Colorado. Instructional Costs and Services Expenses. Instructional costs and services for the nine months ended March 31, 2007 were $55.1 million, representing an increase of $6.6 million, or 13.6%, as compared to instructional costs and services of $48.5 million for the nine months ended March 31, 2006. This increase was primarily attributable to increased costs to supply books and materials as well as increased school operating expenses, both primarily a result of the increase in enrollments. As a percentage of revenues, instructional costs and services decreased by 1.3% to 52.5% for the nine months ended March 31, 2007, as compared to 53.8% for the nine months ended March 31, 2006. The decrease in instructional costs and services expenses as a percentage of revenues is primarily due to lower costs associated with a renegotiated management and services agreement, partially offset by a shift in mix of enrollments to schools with higher operating costs and the start-up costs of new schools. Selling, Administrative, and Other Operating Expenses. Selling, administrative, and other operating expenses for the nine months ended March 31, 2007 were $35.1 million, representing an increase of $6.7 million, or 23.4%, as compared to selling, administrative and other operating expenses of $28.4 million for the nine months ended March 31, 2006. This increase is primarily attributable to increases in marketing staff as well as increased spending on advertising and other

marketing tactics. In addition, expenses increased in finance, legal and school services as the Company increased its capabilities in these areas. As a percentage of revenues, selling,

40

administrative, and other operating expenses increased to 33.4% for the nine months ended March 31, 2007 compared to 31.5% for the nine months ended March 31, 2006. Product Development Expenses. Product development expenses for the nine months ended March 31, 2007 were $5.9 million, representing an increase of $0.3 million, or 5.4%, as compared to product development expenses of $5.6 million for the nine months ended March 31, 2006. Contributing to this increase are increases in employee headcount and contract labor offset by greater utilization of these resources for capitalized curriculum. As a percentage of revenues, product development expenses were relatively stable at 5.6% for the nine months ended March 31, 2007 compared to 6.2% for the nine months ended March 31, 2006. Net Interest Expense. Net interest expense for the nine months ended March 31, 2007 was $0.5 million, an increase of $0.1 million, or 25.0%, from $0.4 million for the nine months ended March 31, 2006. The increase in net interest expense is primarily due to interest charges on increased capital lease obligations. Income Taxes. Our provision for income taxes for the nine months ended March 31, 2007 was $0.2 million, compared to no provision for the nine months ended March 31, 2006. Our tax expense for the nine months ended March 31, 2007 is primarily related to alternative minimum tax liabilities. Effectively no tax expense was recorded in the nine months ending March 31, 2006 as we were able to utilize net operating loss carry-forwards that were fully reserved for in prior periods. Net Income. Net income for the nine months ended March 31, 2007 was $8.2 million, representing an increase of $1.0 million, or 13.9%, as compared to net income of $7.2 million for the nine months ended March 31, 2006. Net income as a percentage of revenues was relatively stable at to 7.8% for the nine months ended March 31, 2007, as compared to 8.0% for the nine months ended March 31, 2006, as a result of the factors discussed above. Comparison of Years Ended June 30, 2006 and 2005 Revenues. Our revenues for the year ended June 30, 2006 were $116.9 million, representing an increase of $31.6 million, or 37.0%, as compared to revenues of $85.3 million for the year ended June 30, 2005. Average enrollments increased 33.9% to 20,220 for the year ended June 30, 2006 from 15,097 average enrollments for the year ended June 30, 2005. Our enrollment growth was driven by the addition of the 9th grade which attracted new students in addition to students enrolled in 8th grade in the prior year. Also, average price increases of approximately 4% were implemented in July 2005. Partially offsetting growth in revenues as compared to enrollment growth was growth in the percentage of enrollments attributable to schools where we earn limited or no services revenues. Enrollments associated with schools to which we provide turnkey management services declined from 92.3% for the year ended June 30, 2006 from 94.3% for the corresponding period in 2005. Finally, increased operating deficits at certain schools partially offset the growth in revenues. These deficits were primarily attributable to greater school operating expenses to support increased enrollment and high school services. Instructional Costs and Services Expenses. Instructional costs and services expenses for the year ended June 30, 2006 were $64.8 million, representing an increase of $15.7 million, or 31.9%, as compared to instructional costs and services of $49.1 million for the year ended June 30, 2005. This increase was primarily attributable to increased costs to supply books, educational materials and computers to students and school operating expenses as a result of the increase in enrollments. As a percentage of revenues, instructional costs and services decreased to 55.5% for the year ended June 30, 2006, as compared to 57.6% for the year ended June 30, 2005. The decrease in instructional costs and services as a percentage of revenues is primarily due to economies in scale in the operation of the virtual public schools partially offset by higher costs for books and materials. Selling, Administrative, and Other Operating Expenses. Selling, administrative, and other operating expenses for the year ended June 30, 2006 were $41.7 million, representing an increase of $11.7 million, or 38.7%, as compared to selling, administrative and other operating expenses of $30.0 million for the year ended June 30, 2005. This increase is primarily attributable to increases in employee headcount in sales and marketing staff as well as increased spending on advertising and other marketing tactics. In addition, contract labor increased in information technology and employee headcount increased in finance and human resources as the company increased its capabilities in these areas. As a percentage of revenues, selling, administrative, and other operating expenses remained relatively stable at 35.6% for the year ended June 30, 2006 compared to 35.2% for the year ended June 30, 2005.

41

Product Development Expenses. Product development expenses for the year ended June 30, 2006 were $8.6 million, representing a decrease of $0.8 million, or 8.9%, as compared to product development expenses of $9.4 million for the year ended June 30, 2005. This decrease is primarily attributable to a year over year decrease of $2.9 million in impairment charges. Offsetting this decrease is an increase in personnel and contract labor. As a percentage of revenues, product development expenses decreased to 7.3% for the year ended June 30, 2006 compared to 11.0% for the year ended June 30, 2005. This decrease is primarily attributable to the factors described above and our ability to leverage these costs over an increasing number of enrollments. Net Interest Expense. Net interest expense for the year ended June 30, 2006 was $0.5 million, an increase of $0.2 million, or 66.7%, from $0.3 million for the year ended June 30, 2005. The increase in interest expense is primarily due to debt of $4.0 million borrowed in June 2005. Income Taxes. Our provision for income taxes for the year ended June 30, 2006 was zero as we were able to utilize net operating loss carry-forwards that were fully reserved for in prior periods. We also recorded no income tax expense for the year ended June 30, 2005 as the Company had a net loss. Net Income (Loss). Net income for the year ended June 30, 2006 was $1.4 million, representing an increase of $4.9 million as compared to a net loss of $3.5 million for the year ended June 30, 2005. Net income as a percentage of revenues was 1.2% for the year ended June 30, 2006, as compared to a net loss of 4.1% for the year ended June 30, 2005, as a result of the factors discussed above. Comparison of Years Ended June 30, 2005 and 2004 Revenues. Our revenues for the year ended June 30, 2005 were $85.3 million, representing an increase of $13.9 million, or 19.4%, as compared to revenues of $71.4 million for the year ended June 30, 2004. Average enrollments increased 35.3% to 15,097 for the year ended June 30, 2006 from 11,158 average enrollments for the year ended June 30, 2004. Partially offsetting growth in revenues as compared to growth in enrollments was growth in enrollments at schools where we earn limited or no services revenues. In 2004, all of our enrollments were associated with schools where we provided complete turnkey services. In 2005, we began to offer schools the opportunity to use our curriculum without purchasing any services. In fiscal year 2005, 5.7% of enrollments were associated with schools to which we provided limited or no management services. Fiscal year 2005 was the first year in which we offered limited services. Our enrollment growth benefited from the addition of the 8th grade in September 2004 which attracted new students in addition to students enrolled in 7th grade in the prior year. Average price increases of 7% were implemented in July 2004. In addition, increased operating deficits partially offset the growth in revenues. These increased deficits were primarily attributable to a higher percentage of enrollments associated with schools in the early stages of development. Instructional Costs and Services Expenses. Instructional costs and services expenses for the year ended June 30, 2005 were $49.1 million, representing an increase of $9.2 million, or 23.0%, as compared to instructional costs and services expenses of $39.9 million for the year ended June 30, 2004. This increase was primarily attributable to increased expenses incurred to operate the schools. Also contributing to the increase were increased costs to supply computers to students as a result of the increase in enrollments. As a percentage of revenues, instructional costs and services expenses increased to 57.6% for the year ended June 30, 2005, as compared to 55.9% for the year ended June 30, 2004. The increase in instruction costs and services expenses as a percentage of revenues is primarily due to increased costs to provide computers to students partially offset by a reduction in fulfillment costs for materials to students. Selling, Administrative, and Other Operating Expenses. Selling, administrative, and other operating expenses for the year ended June 30, 2005 were $30.0 million, representing an increase of $4.3 million, or 17.1%, as compared to selling, administrative and other operating expenses of $25.7 million for the year ended June 30, 2004. This increase is primarily attributable to increases in employee headcount in operations and marketing as well as increased spending on advertising and other marketing tactics. These increases are partially offset by a decrease in information technology operating expenses. As a percentage of revenues, selling, administrative, and other operating expenses remained relatively stable at 35.2% for the year ended June 30, 2005 compared to 35.9% for the year ended June 30, 2004.

42

Product Development Expenses. Product development expenses for the year ended June 30, 2005 were $9.4 million, representing a decrease of $3.4 million, or 26.6%, as compared to product development expenses of $12.8 million for the year ended June 30, 2004. The decrease is primarily attributable to a year over year decrease of $1.7 million in impairment charges, a decrease in employee headcount and an increase in the utilization of labor for capitalized curriculum. As a percentage of revenues, product development expenses decreased to 11.0% for the year ended June 30, 2005 compared to 17.8% for the year ended June 30, 2004. This decrease is primarily attributable to the factors described above and our ability to leverage these costs over an increasing number of enrollments. Net Interest Expense. Net interest expense for the year ended June 30, 2005 was $0.3 million, a decrease of $0.2 million, or 40.0%, from $0.5 million for the year ended June 30, 2004. The decrease is primarily attributable to lower interest charges from lower outstanding balances of capital lease obligations. Income Taxes. We also recorded no income tax expense for the years ended June 30, 2005 and 2004 as the company had a net loss. Net Loss. Net loss for the year ended June 30, 2005 was $3.5 million as compared to a net loss of $7.4 million for the year ended June 30, 2004. Net loss as a percentage of revenues was 4.1% for the year ended June 30, 2005, as compared to 10.4% for the year ended June 30, 2004, as a result of the factors discussed above. Quarterly Results of Operations The following tables set forth selected unaudited quarterly consolidated statement of operations data for the seven most recent quarters, as well as each line item expressed as a percentage of total revenues. The information for each of these quarters has been prepared on the same basis as the audited consolidated financial statements included in this prospectus and, in the opinion of management, includes all adjustments necessary for the fair presentation of the results of operations for such periods. This data should be read in conjunction with the audited consolidated financial statements and the related notes included in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period
Three Months Ended Mar 31, Jun 30, 2006 2006

Sep 30, 2005

Dec 31, 2005

Sep 30, 2006

Dec 31, 2006

Mar 31, 2007

Revenues Cost and expenses Instructional costs and services Selling, administrative, and other Product development expenses Total costs and expenses Income (loss) from operations Interest expense, net Income (loss) before income taxes Income tax expense Net income (loss)

$

31,176 17,416 8,742 1,864 28,022 3,154 (135 ) 3,019 —

$

28,245 15,696 8,402 1,862 25,960 2,285 (127 ) 2,158 —

$

30,667 15,361 11,259 1,861 28,481 2,186 (132 ) 2,054 —

$

26,814 16,355 13,257 2,981 32,593 (5,779 ) (94 ) (5,873 ) —

$

37,743 19,177 11,385 2,206 32,768 4,975 (94 ) 4,881 (146 )

$

32,356 18,022 11,030 1,566 30,618 1,738 (263 ) 1,475 (30 )

$

34,831 17,904 12,644 2,083 32,631 2,200 (117 ) 2,083 (51 )

$

3,019

$

2,158

$

2,054

$

(5,873 )

$

4,735

$

1,445

$

2,032

43

The following table sets forth statements of operations data as a percentage of revenues for each of the periods indicated:
Three Months Ended Mar 31, Jun 30, 2006 2006

Sep 30, 2005

Dec 31, 2005

Sep 30, 2006

Dec 31, 2006

Mar 31, 2007

Revenues Cost and expenses Instructional costs and services Selling, administrative, and other Product development expenses Total costs and expenses Income (loss) from operations Interest expense, net Income (loss) before income taxes Income tax expense, net

100 % 56 28 6 90 10 — 10 —

100 % 56 30 6 92 8 — 8 —

100 % 50 37 6 93 7 — 7 —

100 % 61 50 11 122 (22 ) — (22 ) — ) (22 %

100 % 51 30 6 87 13 — 13 —

100 % 56 34 5 95 5 (1 ) 4 —

100 % 52 36 6 94 6 — 6 —

Net income (loss)

10 %

8%

7%

13 %

4%

6%

Discussion of Quarterly Results of Operations Our revenues and operating results normally fluctuate as a result of seasonal variations in our business, principally due to the number of months that our virtual public school are fully operational and serving students in a fiscal quarter. While school administrative offices are generally open year round, a school typically serves students during a 10 month academic year. A school‟s academic year will typically start in August or September, our first fiscal quarter, and finish in May or June, our fourth fiscal quarter. Consequently, our first and fourth fiscal quarters may have fewer than three months of full operations when compared to the second and third fiscal quarters. In the first and fourth fiscal quarters, online curriculum and computer revenues are generally lower as these revenues are primarily earned during the school academic year which may provide for only one or two months of these revenues in these quarters versus the second and third fiscal quarters. In addition, we ship materials to students in the beginning of the school year, our first fiscal quarter, generally resulting in higher materials revenues and margin in the first fiscal quarter versus other quarters. The overall impact of these factors is partially offset by students enrolling after the start of the academic year. The seasonality of our business produces higher revenues in the first fiscal quarter. Operating expenses are also seasonal. Instruction costs and services expenses will increase in the first fiscal quarter primarily due to the costs incurred to ship student materials at the beginning of the school year. Instructional costs may increase significantly quarter-to-quarter as school operating expenses increase. For example, enrollment growth will require additional teaching staff, thereby increasing salary and benefits expense. School events may be seasonal, (e.g. professional development and community events,) impacting the quarterly change in instructional costs. The majority of our marketing and selling expenses are incurred in the first and fourth fiscal quarters, as our primary enrollment season is July through September. Financial Condition There are several factors that create seasonal variations in our balance sheet. In the first fiscal quarter, we ship materials to students from inventory, generally reducing inventory over this period. In addition, we invoice for products and services in the first fiscal quarter, coinciding with the start of the school year. This creates a significant increase in our accounts receivable and deferred revenue balances for the quarter. The virtual schools generally receive their funding over the course of the school year and we receive payments from them accordingly. Finally, we increase our inventory for the fall enrollments beginning in the fourth fiscal quarter. Liquidity and Capital Resources

As of March 31, 2007 and June 30, 2006, we had cash and cash equivalents of $5.1 million and $9.5 million, respectively. Net cash provided by operating activities during the nine months ended March 31, 2007, was

44

$7.3 million, primarily due to net income of $8.2 million, depreciation and amortization of $4.6 million, an increase in deferred revenues of $5.9 million and a decrease in inventory of $4.4 million. This was primarily offset by an increase in accounts receivable of $12.4 million, a change in accounts receivable allowance of $1.0 million, and a decrease in accounts payable and accrued liabilities of $1.7 million. We financed our operating activities and capital expenditures during the nine months ended March 31, 2007 through cash provided by operating activities, capital lease financing and short-term debt. During the years ended June 30, 2006 and 2005, we financed our operating activities and capital expenditures through a combination of cash provided by operating activities, long-term debt and capital lease financing. Prior to 2005, we financed our operating activities and capital expenditures primarily with sales of equity to private investors. From the Company‟s founding in 2001 through December 2003, we raised over $115 million from the sale of equity. In December 2006, we entered into a $15 million revolving credit agreement with PNC Bank (the Credit Agreement). Pursuant to the terms of the Credit Agreement, we agreed that the proceeds of the term loan facility were to be used primarily for working capital requirements and other general business or corporate purposes. Because of the seasonality of our business and timing of funds received, the school expenditures are higher in relation to funds received in certain periods during the year. The Credit Agreement provides the ability to fund these periods until cash is received from the schools; therefore, borrowings against the Credit Agreement are primarily going to be short-term. Borrowings under the Credit Agreement bear interest based upon the term of the borrowings. Interest is charged, at our option, either at: (i) the higher of (a) the rate of interest announced by PNC Bank from time to time as its “prime rate” and (b) the federal funds rate plus 0.5%; or (ii) the applicable London interbank offered rate (LIBOR) divided by a number equal to 1.00 minus the maximum aggregate reserve requirement which is imposed on member banks of the Federal Reserve System against “eurocurrency liabilities” plus the applicable margin for such loans, which ranges between 1.250% and 1.750%, based on the leverage ratio (as defined in the Credit Agreement). We pay a quarterly commitment fee which varies between 0.150% and 0.250% on the unused portion of the credit agreement (depending on the leverage ratio). The working capital line includes a $5.0 million letter of credit facility. Issuances of letters of credit reduce the availability of permitted borrowings under the Credit Agreement. The Credit Agreement contains a number of financial and other covenants that, among other things, restrict our and our subsidiaries‟ abilities to incur additional indebtedness, grant liens or other security interests, make certain investments, become liable for contingent liabilities, make specified restricted payments including dividends, dispose of assets or stock, including the stock of its subsidiaries, or make capital expenditures above specified limits and engage in other matters customarily restricted in senior secured credit facilities. We must also maintain a minimum net worth (as defined in the credit agreement) and maximum debt leverage ratios. These covenants are subject to certain qualifications and exceptions. Through March 31, 2007, we were in compliance with these covenants. As of March 31, 2007, $1.5 million of borrowings were outstanding on the working capital line of credit and approximately $2.3 million outstanding for letters of credit. In July 2007, we borrowed an additional $3.0 million. One of our subsidiaries has an equipment lease line of credit for new purchases with Hewlett-Packard Financial Services Company that expires on July 31, 2007 for new purchases on the line of credit. We expect to renew this facility. The interest rate on new borrowings under the equipment lease line is set quarterly. For the nine months ended March 31, 2007, we borrowed $6.6 million to finance the purchase of student computers and related equipment at interest rates ranging from 8.5% to 8.8%. These leases include a 36-month payment term with a bargain purchase option at the end of the term. Accordingly, we include this equipment in property and equipment and the related liability in capital lease obligations. In addition, we have pledged the assets financed with the equipment lease line to secure the amounts outstanding. A substantial portion of our revenues are generated through our contractual arrangements with virtual public schools. The virtual public schools are generally funded on a per student basis by their state and local governments and the timing of funding varies by state. Funding receipts by an individual school may vary over the year and may be in arrears. Because our receivables represent obligations indirectly due from governments, we have not historically had an issue with non-payment and believe the risk of non-payment is minimal although we cannot guarantee this will continue.

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Our operating requirements consist primarily of day-to-day operating expenses, capital expenditures and contractual obligations with respect to facility leases, capital equipment leases and other operating leases. Capital expenditures are expected to increase in the next several years as we invest in additional courses, new releases of existing courses and purchase computers to support increases in virtual school enrollments. We expect our capital expenditures in the next 12 months will be approximately $17 million to $25 million for curriculum development and related systems as well as computers for students. We expect to be able to fund these capital expenditures with cash generated from operations, short-term debt and capital lease financing. We lease all of our office facilities. We expect to make future payments on existing leases from cash generated from operations. We believe that our existing cash balances and continued cash generated from operations, our revolving credit facility, and in-part, the net proceeds from this offering, will provide sufficient resources to meet our projected operating requirements, start-up costs to open new schools, and planned capital expenditures for at least the next 12 months. Operating Activities Net cash provided by operating activities during the nine months ended March 31, 2007, was $7.3 million. Net cash provided by operating activities in fiscal year 2006 and 2005 was $3.6 million and $9.7 million, respectively, as compared to net cash used in operating activities in fiscal year 2004 of $8.0 million. The cash provided by operations in the nine months ended March 31, 2007 was primarily due to net income of $8.2 million, depreciation and amortization of $4.6 million, an increase in deferred revenues of $5.9 million and a decrease in inventory of $4.4 million. This was primarily offset by an increase in accounts receivable of $12.4 million, a change in accounts receivable allowance of $1.0 million, and a decrease in accounts payable and accrued liabilities of $1.7 million. The cash provided by operations in fiscal year 2006 was primarily due to net income of $1.4 million, depreciation and amortization of $5.0 million, an increase in accounts payable of $1.6 million, an increase of accrued compensation and benefits of $1.8 million, and an increase in deferred rent of $1.6 million. This was primarily offset by an increase in inventory of $5.4 million and an increase of accounts receivable of $2.7 million. The cash provided by operations in fiscal year 2005 was primarily due to depreciation and amortization of $5.5 million, a decrease in accounts receivable of $3.4 million, impairment charges of $3.3 million, an increase in accrued liabilities of $1.2 million, and an increase in accrued compensation and benefits of $1.0 million. This was primarily offset by a net loss of $3.5 million and an increase in inventories, prepaid and other assets of $1.5 million. The cash used in operations in fiscal year 2004 was primarily due to a net loss of $7.4 million, an increase in accounts receivable of $10.6 million, and an increase in inventory and other assets of $2.2 million. This was primarily offset by depreciation and amortization of $4.9 million, impairment charges of $5.0 million, an increase in accrued compensation and benefits of $1.3 million, and an increase in accrued liabilities of $0.7 million. Investing Activities Net cash used in investing activities for the nine months ended March 31, 2007 was $10.8 million. Net cash used in investing activities for the fiscal year 2006, 2005 and 2004 was $11.5 million, $8.5 million and $5.4 million, respectively. Net cash used in investing activities for the nine months ended March 31, 2007 was due to capitalized curriculum of $7.0 million and purchases of property and equipment of $3.8 million. This does not include $6.6 million of student computers financed with capital leases. Purchases of property and equipment for the fiscal year ended 2006, 2005 and 2004 were $10.8 million, $4.7 million, and $0.5 million, respectively. In fiscal year 2005 and 2004, we also financed with capital leases, purchases of student computers in the amount of $0.4 million and $4.1 million, respectively. Capitalized curriculum the fiscal year ended 2006, 2005 and 2004 were $0.7 million, $3.8 million, and $4.9 million, respectively. Financing Activities Net cash used in financing activities for the nine months ended March 31, 2007 was $0.9 million. This was primarily due to a payment on a related party note payable of $4.0 million and repayments for capital lease obligations of $0.7 million. This was partially offset by the release of cash from a restricted escrow account of

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$2.3 million and net borrowings from our revolving credit facility of $1.5 million. Net cash used in financing activities for fiscal year 2006 was $2.6 million primarily attributable to cash invested in a restricted escrow account of $2.2 million and repayments for capital lease obligations of $0.4 million. Net cash provided by financing activities for the fiscal year 2005 was $2.9 million primarily due to proceeds from a related party note payable of $4.0 million and the release of cash from a restricted escrow account of $2.2 million. This was partially offset by repayments of capital lease obligations of $3.4 million. Net cash provided by financing activities for fiscal year 2004 was $21.6 million primarily due to proceeds from the sale of redeemable convertible preferred stock of $25.0 million. This was partially offset by repayments of capital lease obligations of $2.4 million and cash invested in a restricted escrow account of $1.0 million. Contractual Obligations Our contractual obligations consist primarily of leases for office space, capital leases for equipment and other operating leases. The following summarizes our long-term contractual obligations as of March 31, 2007:
For the Twelve Months Ending March 31, 2008 2009 2010 2011 2012 (dollars in thousands)

Total

Thereafter

Contractual Obligations at March 31, 2007 Capital leases (1) Operating leases Line of credit (2) Long-term obligations Other commitments (3) Total

$

6,583 18,221 1,500 245 120

$ 2,476 2,174 1,500 153 120 $ 6,423

$ 2,475 2,106 92 — $ 4,673

$ 1,632 2,147

$

— 1,451

$

— 1,372

$

— 8,971

— $ 3,779

— $ 1,451

— $ 1,372 $

— 8,971

$ 26,669

(1) (2) (3)

Includes interest expense. Pertains to revolving line of credit and excludes interest expense due to short-term repayment period. For employment agreement.

Under most contracts, we provide the virtual schools we manage with turnkey management services and take responsibility for any operating deficits that the school may incur. These deficits are recorded as a reduction in revenues, and therefore are not included as a commitment or obligation in the above table. In connection with our service agreement with the Northern Ozaukee School District (and the Wisconsin Virtual Academy), there is an indemnification provision which arguably could be asserted by the school district for certain expenses in the event the plaintiff prevails and the Court enjoins open enrollment payments to the district that otherwise would cover those expenses. We have assessed the likelihood of a claim as remote, and therefore it has not been included as a commitment or obligation in the table above. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Impact of Inflation We believe that inflation has not had a material impact on our results of operations for any of the years in the three year period ended June 30, 2006 or the nine months ending March 31, 2007. We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk

We had unrestricted cash and cash equivalents totaling $5.1 million and $9.5 million as of March 31, 2007 and June 30, 2006, respectively. Unrestricted cash and cash equivalents are maintained primarily in non-interest bearing

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accounts and are used for working capital purposes. Because we currently do not have balances in interest bearing accounts, fluctuations in interest rates would not have a material impact on our investment income. Our interest rate exposure is related to short-term debt obligations under our revolving credit facility. A significant portion of our interest expense is based upon changes in the LIBOR benchmark interest rate. Due to the short-term nature of our outstanding debt subject to variable interest rates as of March 31, 2007 of $1.5 million, fluctuations in the LIBOR rate would not have a material impact on our interest expense. Foreign Currency Exchange Risk We currently do not operate in a foreign country or transact business in a foreign currency and therefore we are not subject to fluctuations due to changes in foreign currency exchange rates. However, we intend to pursue opportunities in international markets in the future. If we enter into any material transactions in a foreign currency or establish or acquire any subsidiaries that measure and record their financial condition and results of operation in a foreign currency, we will be exposed to currency transaction risk and/or currency translation risk. Exchange rates between U.S. dollars and many foreign currencies have fluctuated significantly over the last few years and may continue to do so in the future. Accordingly, we may decide in the future to undertake hedging strategies to minimize the effect of currency fluctuations on our financial condition and results of operations. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123R, which revised SFAS No. 123, and supersedes APB Opinion No. 25. The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25 and requires that the compensation costs relating to such transactions be recognized in the statements of operations. We adopted SFAS No. 123R for the fiscal year ended June 30, 2007. In February 2006, FASB issued Statement of Financial Accounting Standard No. 155 (SFAS No. 155), Accounting for Certain Hybrid Financial Instruments — An Amendment of FASB Statements No. 133 and 140 . This Statement is effective for all financial instruments acquired or issued after the beginning of an entity‟s first fiscal year that begins after September 15, 2006. At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative effect adjustment to beginning retained earnings. We do not believe that the adoption of SFAS No. 155 will have a material impact on our consolidated financial statements. In June 2006, the FASB issued FASB Interpretation (FIN) 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 . FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise‟s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes . This interpretation defines the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the effect that the adoption of FIN 48 will have on our financial position and results of operations. In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157 (SFAS No. 157), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the impact of this statement on our consolidated financial statements. In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159 (SFAS No. 159), The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits companies and not-for-profit organizations to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under GAAP. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted if the decision to adopt the standard is made after the issuance of this statement but within 120 days after the first day of the fiscal year of adoption, provided no financial statements have yet been issued for any interim period and provided the requirements of SFAS No. 157, Fair Value Measurements, are adopted concurrently with SFAS No. 159. The Company does not believe that it will adopt the provisions of this statement.

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BUSINESS Our Company We are a technology-based education company. We offer proprietary curriculum, software and educational services created for online delivery to students in kindergarten through 12th grade, or K-12. Our mission is to maximize a child‟s potential by providing access to an engaging and effective education, regardless of geographic location or socio-economic background. Since our inception, we have invested more than $95 million to develop curriculum and an online learning platform that promotes mastery of core concepts and skills for students of all abilities. This learning system combines a cognitive research-based curriculum with an individualized learning approach well-suited for a virtual school and other educational applications. From fiscal year 2004 to fiscal year 2007, we increased average enrollments in the virtual public schools we serve from approximately 11,000 students to 27,000 students, representing a compound annual growth rate of approximately 35%. From fiscal year 2004 to fiscal year 2006, we increased revenues from $71.4 million to $116.9 million, representing a compound annual growth rate of approximately 28%. We believe we are unique in the education industry because of our direct involvement in every component of the educational development and delivery process. Most educational content, software and service providers typically concentrate on only a portion of that process, such as publishing textbooks, managing schools or providing testing and assessment services. This traditional segmented approach has resulted in an uncoordinated and unsatisfactory education for many students. Unburdened by legacy, we have taken a holistic approach to the design of our learning system. We have developed an engaging curriculum which includes online lessons delivered over our proprietary school platform. We combine this with a rigorous system to test and assess students and processes to manage school performance and compliance. In addition, our professional development programs enable teachers to better utilize technology for instruction. Our end-to-end learning system is designed to maximize the performance of the schools we serve and enhance student academic achievement. As evidence of the benefit of our holistic approach, the virtual public schools we serve generally test near or above state averages on standardized achievement tests. These results have been achieved despite the enrollment of a significant number of new students each school year who have had limited exposure to our learning system prior to taking these required state tests. Students using our learning system for at least three years usually perform better on standardized tests relative to state averages than students using it for one year or less. The efficacy of our learning system has also helped us achieve high levels of customer satisfaction. According to a 2006 internal survey of parents of students enrolled in virtual public schools we serve, approximately 97% of respondents stated that they were either satisfied or very satisfied with our curriculum and 95% of respondents stated that they would recommend our curriculum to other families. We deliver our learning system to students primarily through virtual public schools. As with any public school, these schools must meet state educational standards, administer proctored exams and are subject to fiscal oversight. The fundamental difference is that students attend virtual public schools primarily over the Internet instead of traveling to a physical classroom. In their online learning environment, students receive assignments, complete lessons, and obtain instruction from certified teachers with whom they interact online, telephonically, and face-to-face. Many states have embraced virtual public schools as a means to provide families with a publicly funded alternative to a traditional classroom-based education. For parents who believe their child is not thriving and for whom relocating or private school is not an option, virtual public schools can provide a compelling choice. This widespread availability makes them the “most public” of schools. From an education policy standpoint, virtual public schools often represent a savings to the taxpayers when compared with traditional public schools because they are generally funded at a lower per pupil level than the per pupil state average reported by the U.S. Department of Education. Finally, because parents are not required to pay tuition, virtual public schools make our learning system available to the broadest range of students. We offer virtual schools our proprietary curriculum, online learning platform and varying levels of academic and management services, which can range from targeted programs to complete turnkey solutions, under long-term contracts. These contracts provide the basis for a recurring revenue stream as students progress through successive grades. Additionally, without the requirement of a physical classroom, virtual schools can be scaled quickly to accommodate a large dispersed student population, and allow more capital resources to be allocated towards teaching, curriculum and technology rather than towards a physical infrastructure.

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Our proprietary curriculum is currently used by public school students in 16 states and the District of Columbia. Parents can also purchase our curriculum and online learning platform directly to facilitate or supplement their children‟s education. Additionally, we have piloted our curriculum in brick and mortar classrooms with promising academic results. We also believe there is additional widespread applicability for our learning system internationally. Families that choose our learning system for their children come from a broad range of social, economic and academic backgrounds. They share, however, the desire for an individualized learning program to maximize their children‟s potential. Examples include, but are not limited to, families with: (i) students seeking to learn faster or slower than they could in a “one size fits all” traditional classroom; (ii) safety concerns about their local school; (iii) students with disabilities for which traditional classrooms are problematic; (iv) students with geographic or travel constraints; and (v) student athletes and performers who are not able to attend regularly scheduled classes. Our individualized learning approach allows students to optimize their individual academic performance and, therefore, their chances of achieving their goals. Our History We were founded in 2000 to utilize the advances in technology to provide children access to a high-quality public school education regardless of their geographic location or socio-economic background. Given the geographic flexibility of technology-based education, we believed that the pursuit of this mission could help address the growing concerns regarding the regionalized disparity in the quality of public school education, both in the United States and abroad. These concerns were reflected in the passage of the No Child Left Behind (NCLB) Act in 2000, which implemented new standards and accountability requirements for public K-12 education. The convergence of these concerns and rapid advances in Internet technology created the opportunity to make a significant impact by deploying a high quality learning system on a flexible, online platform. In September 2001, after 18 months of research and development on our curriculum, we launched our kindergarten through 2nd grade offering. We initially launched our learning system in virtual public schools in Pennsylvania and Colorado, serving approximately 900 students in the two states combined. During the 2002-03 school year, we added our 3rd through 5th grade offering and entered into contracts to operate virtual public schools in California, Idaho, Ohio, Minnesota and Arkansas, increasing our average enrollment to approximately 5,900 students during the 2002-03 school year. During the 2003-04 and 2004-05 school years, we added 7th and 8th grades, respectively, and added contracts with virtual public schools in Wisconsin, Arizona and Florida. By the end of the 2004-05 school year, we had increased enrollment to approximately 15,100 students. In the 2005-06 school year, we added contracts to operate virtual public schools in Washington, Illinois and Texas. Additionally during the 2006-07 school year, we implemented a hybrid school offering in Chicago that combines face-to-face time in the classroom with online instruction. We recently entered the virtual high school market, enrolling 9th and 10th grade students at the start of the 2005-06 and 2006-07 school years, respectively, and we plan to offer 11th and 12th grades at the start of the 2007-08 school year. We believe we have significant growth potential. Therefore over the last three years, we have put a great deal of effort into developing the infrastructure necessary to scale our business. We further developed our logistics and technological infrastructure and implemented sophisticated financial systems to allow us to more effectively operate a large and growing company. Our Market The U.S. market for K-12 education is large and growing. For example: • According to the National Center for Education Statistics (NCES), a division of the U.S. Department of Education, there were more than 47 million students in K-12 public schools during the 2005-06 school year. In addition, according to National Home Education Research, approximately two million students are home schooled and, according to a March 2006 NCES report, approximately five million students are enrolled in private schools. • According to the NCES, the public school system alone encompassed more than 97,000 schools and 17,000 districts during the 2005-06 school year.

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• According to the NCES, total spending in the public K-12 market was $536 billion for the 2004-05 school year. Parents and lawmakers are demanding increased standards and accountability in an effort to improve academic performance in U.S. public schools. As a result, each state is now required to establish performance standards and to regularly assess student progress relative to these standards. We expect continued focus on academic standards, assessments and accountability in the near future. Many parents and educators are also seeking alternatives to traditional classroom-based education that can help improve academic achievement. Demand for these alternatives is evident in the growing number of choices available to parents and students. For example, charter schools emerged in 1988 to provide an alternative to traditional public schools. Currently, 40 states and the District of Columbia have passed charter school legislation and there are approximately 4,000 charter schools in the U.S. with an estimated enrollment of over 1.1 million students according to the Center for Education Reform. Similarly, acceptance of online education as an effective, alternative form of education is growing. As of September 2006, 38 states had authorized some form of online education, and Michigan recently became the first state to pass legislation mandating that high school students take part in an “online learning experience” in order to graduate. Virtual public schools represent another approach to online education that is gaining acceptance. According to the Center for Education Reform, as of January 2007 there were 173 virtual schools with total enrollment exceeding 92,000 students, operating in 18 states. Virtual schools can offer a comprehensive curriculum and flexible delivery model; therefore, we believe that a growing number of families will pursue virtual public schools as an attractive public school alternative. Given these statistics and the nascence of this market, we believe there is a significant opportunity for a high-quality, trusted, national education provider to serve virtual public schools. Our Competitive Strengths We believe the following to be our key competitive strengths: Proprietary Curriculum Specifically Designed for a Technology-Enabled Environment. We specifically designed our curriculum for online learning, in contrast to other online curriculum providers who often just digitize classroom textbooks for transmission over the Internet. Our lessons utilize a combination of innovative technologies, including flash animations, online interactivity and real-time individualized feedback, which we combine with textbooks and other offline course materials to create an engaging and highly effective curriculum. Our curriculum contains more than 11,000 discrete lessons, each of which addresses specific learning objectives and can be utilized in the manner most appropriate for each student. We continuously measure student performance and use this information to improve our curriculum and drive greater, more consistent academic achievement, a valuable competitive advantage we enjoy by virtue of our integration into all aspects of the educational development and delivery process. We believe our curriculum is the most advanced cognitive research-based curriculum in K-12 education. Flexible, Integrated Online Learning Platform. Our online learning platform provides a highly flexible and effective means for delivering educational content to students. Our platform offers assessment capabilities to identify the current and targeted academic level of achievement for each individual student, and then incorporates this information into a detailed lesson plan. As students progress through their studies, our learning platform measures mastery of each learning objective to ensure that students grasp each concept prior to proceeding to the next lesson. Additionally, our learning platform updates each student‟s lesson plan for completed lessons and enables us to track the effectiveness of each lesson with each student on a real-time basis. Finally, the fact that our learning system is Internet-based allows us to update our proprietary content and incorporate user feedback on a real-time basis. For example, our content for the 2006-07 school year reflected the fact that Pluto is no longer considered a planet, which was announced in August 2006. Expertise in Opening Channels for Virtual Schooling. Our education policy experts and established relationships with key educational authorities have allowed us to participate effectively in advocating for virtual public schools. Specifically, we have demonstrated our expertise in helping individual educational policymakers understand the benefits of virtual schools and in managing the regulatory requirements once new virtual schools are

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opened. Since our inception, we have partnered with individual state governing bodies to establish highly effective, publicly funded education alternatives for parents and their children. Our experience in opening up these new channels gives us a valuable first-mover advantage over potential competitors. Track Record of Student Achievement and Customer Satisfaction. The virtual public schools we serve generally test near or above state averages on standardized achievement tests. These results have been achieved despite the enrollment of a significant number of new students each school year who have had limited exposure to our learning system prior to taking these required state tests. Students using our learning system for at least three years usually perform better on standardized tests relative to state averages than students using it for one year or less. A comprehensive analysis of individual student progression conducted during the 2006-07 school year in Ohio, the first state to conduct such an analysis, concluded that a virtual public school using our learning system outperformed 97% and 60% of participating public schools in reading and mathematics, respectively. Additionally, in California, the only state to adjust standardized test scores for student demographics, the virtual public schools we serve performed in the 70th to 90th percentile of all public schools in the state during the 2005-06 school year. Among statewide virtual public schools, those using the K 12 learning system outperform other providers in terms of academic performance. The efficacy of our learning system has also helped us achieve high levels of customer satisfaction. According to a 2006 internal survey of parents of students enrolled in virtual public schools we serve, approximately 97% of respondents stated that they were either satisfied or very satisfied with our curriculum and 95% of respondents stated that they would recommend our curriculum to other families. This high degree of customer satisfaction has been a strong contributor to our growth, helps drive new student referrals and leads to re-enrollments. Highly Scalable Model. We have built our educational model systems and management team to successfully and efficiently serve the academic needs of a large dispersed student population. We generate high levels of recurring revenue as a result of our long-term contracts with schools (typically five years in length), the extended duration over which an individual student can utilize our learning system (kindergarten through 12th grade) and our high level of customer satisfaction. Since our inception, we have invested over $95 million to develop our learning system, incurring significant losses. Our ability to leverage this historical investment in our learning system and our ability to deliver our offering over the Internet enables us to successfully serve a greater number of students at a reduced level of capital investment. Our Growth Strategy We intend to pursue the following strategies to drive our future growth: Generate Enrollment Growth at Existing Virtual Public Schools. From fiscal year 2004 to fiscal year 2007, we increased average enrollments in the virtual public schools we serve from more than 11,000 students to more than 27,000 students. In the 2007-08 school year, we will serve virtual public schools in 16 states and the District of Columbia. We intend to continue to drive increased enrollments at the virtual public schools we serve through targeted marketing and recruiting efforts as well as through referrals. Our marketing and recruiting efforts utilize both traditional and online media as well as community events to communicate the effectiveness of our solution to parents who are evaluating educational alternatives for their children. Historically, we have also enrolled a significant number of new students each year through referrals from families who have had a positive experience with our learning system and recommended K 12 to their friends and family members. Enhance Curriculum to Include a Complete High School Offering. We believe the high school market represents a significant growth opportunity for online education delivery given the increased independence of high school students and the wide variance in academic achievement levels and objectives of students who are entering high school. America’s Digital Schools 2006 , a survey conducted by Discovery Education and Pearson Education, projects that the percentage of U.S. high school students enrolled in online courses will increase from 3.8% in 2006 to 15.6% in 2011. We believe that our market-leading position in the K-8 virtual public schools positions us well for growth in the high school market. In the 2005-06 and 2006-07 school years, we began enrolling 9th and 10th grade students, respectively, and with the planned launch of our 11th and 12th grades in the 2007-08 school year, we will be able to provide a complete high school offering. We are developing our high school curriculum to satisfy the

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broad range of high school student interests with a broad variety of required and elective courses, supplemented by selected courses from other content providers. Expand Virtual Public School Presence into Additional States. We work closely with state policymakers and school districts to assist them in considering virtual public schools as an effective educational choice for parents and students. A virtual public school program can help state administrations or school districts quickly establish and offer an alternative to traditional classroom-based education, expanding the range of choices available to parents and students. The flexibility and comprehensiveness of our learning system allows us to efficiently adapt our curriculum to meet the individual educational standards of any state with minimal capital investment. We intend to continue to seek opportunities to assist states in establishing virtual public schools and to contract with them to provide our curriculum, online learning platform and related services. Strengthen Awareness and Recognition of the K 12 Brand. Within the virtual public school community, we enjoy strong brand recognition among parents and students as a leading provider of virtual education. Outside of this community, however, the K 12 brand is not as well recognized. We have developed a comprehensive brand strategy and intend to invest in further developing awareness of both the K 12 brand and the core philosophy behind our learning system. The recent launch of our “Unleash the x Potential” campaign is a strong first step towards this goal of creating broader brand awareness. We believe that a strong and recognized brand will result in an increased presence among virtual public schools, attract more student applications and facilitate our entry into adjacent markets. Pursue International Opportunities to Offer Our Learning System. We believe there is strong worldwide demand for high-quality, flexible education alternatives. In many countries, students seek a U.S. accredited education to gain access to higher education and improved employment opportunities. Given the highly flexible design and technology-based nature of our platform, it can be adapted to other languages and cultures efficiently and with modest capital investment. Additionally, our ability to operate virtually is not constrained by the need for a physical classroom or local teachers, which makes our learning system ideal for use internationally. Develop Additional Channels Through Which to Deliver our Learning System. We believe there are many additional channels through which the K 12 learning system can be offered. These include direct classroom instruction, hybrid models, and as a supplemental educational offering. For example, in an urban public school in Philadelphia, we piloted our K-5 curriculum in traditional classrooms and were able to generate meaningful improvements in academic performance. Additionally, we have recently implemented a hybrid offering in Chicago that combines face-to-face time in the classroom with online instruction. Outside the public school channels, the flexibility of our learning system enables us to package lessons to be sold as individual products directly to parents and students. We intend to regularly evaluate additional delivery channels and to pursue opportunities where we believe there is likely to be significant demand for our offering. Educational Philosophy The design, development and delivery of our learning system is based on the following set of guiding principles: • Apply “Tried and True” Educational Approaches for Instruction. Our learning system is designed to utilize both “tried” and “true” methods to drive academic success. “True” methodologies are based on cognitive research regarding the way in which individuals learn. We also supplement our learning system with teaching tools and methodologies that have been tested, or “tried,” and proven to be effective. This “tried and true” philosophy allows us to benefit from both decades of research about learning, and effective methods of teaching. • Employ Technology Appropriately for Learning. While all of our courses are delivered primarily through an online platform and generally include a significant amount of online content, we employ technology only where we feel it is appropriate and can enhance the learning process. In addition to online content, our curriculum includes a rich mix of offline course materials, including engaging textbooks and hands-on materials such as phonics kits and musical instruments. We believe our balanced use of technology and offline materials helps to maximize the effectiveness of our learning system.

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• Base Learning Objectives on Rich Content and “Big Ideas.” We refer to “big ideas” as the key, subconscious frameworks that serve as the foundation to a student‟s future understanding of a subject matter. For example, an understanding of waves is fundamental to a physicist‟s understanding of quantum mechanics; therefore, we teach 1st graders the fundamentals of waves. We use these “big ideas” to organize and provide the master objectives of every course we develop. We then utilize rich, engaging content to best communicate these concepts to students to promote mastery of the topics. • Assess Every Objective to Ensure Mastery. Ongoing assessments are the most effective way to evaluate a student‟s mastery of a lesson or concept. To facilitate effective assessment, our curriculum establishes clear objectives for each lesson. Throughout a course, each student‟s progress is assessed and evaluated by a teacher at a point when each objective is expected to be mastered, providing direction for appropriate pacing. These periodic and well-timed assessments reinforce learning and promote mastery of a topic before a student moves to the next lesson or course. • Facilitate Flexibility as the Level, Pace and Hours Spent on Each Objective Vary by Child. We believe that each student should be challenged appropriately. Generally, adequate progress for most students is to complete one academic year‟s curriculum within a nine-month school year. Each individual student may take greater or fewer instructional hours and more or less effort than the average student to achieve this progress. Our learning system is designed to facilitate this flexibility in order to ensure that the appropriate amount of time and effort is allocated to each lesson. • Prioritize Important, Complex Objectives. We have developed a clear understanding of those subjects and concepts that are difficult for students. Greater instructional effort is focused on the most important and difficult concepts and skills. We use existing research, feedback from parents and students and experienced teacher judgments to determine these priorities, and to modify our learning system to guide the allocation of each student‟s time and effort. Products and Services Our Products K 12 Curriculum Our curriculum consists of the K 12 online lessons, offline learning kits and teachers‟ guides. We have developed an extensive catalogue of proprietary courses, consisting of more than 11,000 lessons, designed to teach concepts to students from kindergarten through 10th grade. Each lesson is designed to last approximately 45 to 60 minutes, although students are able to work at their own pace. A single course generally consists of 120 to 180 individual lessons. Online Lessons. Our online lessons are accessed through our Online School (OLS) platform. Each online lesson provides the roadmap for the entire lesson including direction to specific online and offline materials, online lesson content and a summary of the major objectives for the lesson. Lessons utilize a combination of innovative technologies including flash animations and online interactivity, coordinated textbooks and hands-on materials and individualized feedback to create an engaging, responsive and highly effective curriculum. Each lesson also contains an online assessment to ensure that students have mastered the material and are ready to proceed to the next lesson, allowing them to work at their own pace. Pronunciation guides for key words and references to suggested additional resources, specific to each lesson and each student‟s assessment, are also included. Offline Learning Kits. All of our courses utilize a series of offline learning kits in conjunction with the online lessons to help maximize the effectiveness of our learning system. In addition to receiving access to our online lessons through the Internet, each student receives a shipment of offline materials, including textbooks, art supplies, laboratory supplies (e.g. microscopes and scales) and other reference materials which are incorporated throughout our curriculum. This approach is consistent with our guiding principle to utilize technology where appropriate in our learning system. Most of the textbooks we use are proprietary textbooks that are written in a way that is designed to be engaging to students and to compliment the online experience. We believe that our ability to combine online lessons and offline materials so effectively is a competitive advantage.

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Teachers’ Guides. All of our courses are paired with a teacher‟s guide. Each guide outlines the course objectives, refers back to all of the course content that is contained in the online and offline course materials, includes answers and explanations to the exercises that the students complete and contains suggestions for explaining difficult concepts to students. Courses Offered The following table provides a list of our proprietary courses and selected third-party courses that we expect to offer during 2007-08 school year. We also expect to offer an additional 33 third-party courses at the high school level.
English and Language Arts
Kindergarten Language Arts Kindergarten Phonics 1st Grade Language Arts 1st Grade Phonics 2nd Grade Language Arts 3rd Grade Language Skills 3rd Grade Spelling 3rd Grade Literature 4th Grade Language Skills 4th Grade Spelling 4th Grade Literature 5th Grade Language Skills 5th Grade Spelling 5th Grade Literature Intermediate Language Skills A Intermediate Language Skills B Intermediate Literature A Intermediate Literature B Literary Analysis and Composition Literary Analysis and Composition I Foundations Literary Analysis and Composition I Literary Analysis and Composition II American Literature AP English Literature and Composition World Literature and Language History Kindergarten History 1st Grade History 2nd Grade History 3rd Grade History 4th Grade History American History Before 1865

Mathematics
Kindergarten Math 1st Grade Math 2nd Grade Math 3rd Grade Math 4th Grade Math 5th Grade Math

Science
Kindergarten Science 1st Grade Science 2nd Grade Science 3rd Grade Science 4th Grade Science 5th Grade Science Kindergarten Science (classroom) 1st Grade Science (classroom) 2nd Grade Science (classroom) 3rd Grade Science (classroom)

Elementary School

Pre-Algebra A Pre-Algebra B Algebra I

Earth Science Life Science Physical Science

Middle School

High School

Pre-Algebra Algebra Foundations Algebra I Algebra II Geometry

Earth Science Foundations Physical Science Foundations Biology Foundations Earth Science Physical Science Biology Music/Other Preparatory Music Beginning 1 Music Beginning 2 Music Introduction to Music Intermediate 1 Music Intermediate 2 Music Intermediate 3 Music Exploring Music Music Concepts A Music Concepts B

Elementary School

Art Kindergarten Art 1st Grade Art 2nd Grade Art 3rd Grade Art 4th Grade Art Intermediate Art: American A

American History Since 1865 Intermediate World History A Intermediate World History B Middle School Modern World Studies World History U.S. History High School AP U.S. History American Government and Economics Macroeconomics Courses that appear in italics are licensed from third-parties.

Intermediate Art: American B Intermediate Art: World A Intermediate Art: World B

Art History Fine Art and Art Appreciation

Learning Online Spanish I, II, III, AP French I, II, III, AP German I, II Latin I, II Chinese I

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K-8 Courses. From kindergarten through 8th grade, our courses are categorized into six major subject areas: English and Language Arts, Mathematics, Science, History, Art and Music. Our proprietary curriculum includes all of the courses that students need to complete their core kindergarten through 8th grade education. These courses focus on developing fundamental skills and teaching the key knowledge building blocks or schemas that each student will need to master the major subject areas, meet state standards and complete more advanced coursework. Unlike a traditional classroom education, our learning system offers the flexibility for each student to take courses at different grade levels in a single academic year, providing flexibility for students to progress at their own level and pace within each subject area. In addition, the flexibility of our learning system allows us to tailor our curriculum to state specific requirements. For example, we have developed eight courses specifically for use in Texas public schools. High School Courses. The curriculum sought by students in each of the high school grades is much broader and varies from student to student, largely as a result of the increased flexibility in course selection required for high school students. In order to offer a full suite of courses, including the many elective courses required to meet the needs of high school students, we offer a combination of proprietary courses and selected rigorously tested courses licensed from third-parties. We have six proprietary high school courses and are currently developing 10 additional high school courses for the 2007-08 school year. We expect the high school students we serve using our proprietary courses to account for approximately 60% of the total course enrollment of our high school students in the 2007-08 school year. Online School Platform Our Online School (OLS) platform is an intuitive, web-based software platform that provides access to our online lessons as well as our lesson planning and scheduling tools and our progress tracking tool, both of which serve a key role in assisting parents and teachers in managing each student‟s progress. Because the OLS is a web-based platform, students, parents and teachers can access our online tools and lessons through the OLS from anywhere with an Internet connection at any time of the day or night. • Lesson Planning and Scheduling Tools. In a school year, a typical student will complete between 800 and 1,200 lessons across six or more subject areas. Our lesson planning and scheduling tools enable teachers and parents to establish a master plan for completing these lessons. These tools are designed to dynamically update the lesson plan as a student progresses through each lesson and course, allowing flexibility to increase or decrease the pace at which the student moves through the curriculum while ensuring that the student progresses towards completion in the desired time frame. For example, the schedule can easily be adapted to accommodate a student who desires to attend school six days a week, a student who is interested in studying during the winter holidays to take time off during the spring, or a student who chooses to take two math classes a day for the first month of the school year and delay art classes until the second month of the school year. Moreover, changes can be made to the schedule at any point during the school year and the remainder of the student‟s schedule will automatically adjust in the OLS. • Progress Tracking Tools. Once a master schedule has been established, the OLS delivers lessons based upon the specified parameters. Each day, a student is initially directed to a screen listing the syllabus for that particular day and begins the school day by selecting one of the listed lessons. As each lesson is completed, the student returns to the day‟s syllabus to proceed to the next subject. If a student does not complete a lesson during the session, the lesson will be rescheduled to the next day and will resume at the point where the student left off. Our progress tracking tool allows students, parents and teachers to monitor student progress. In addition, information collected by our progress tracking tool regarding student performance, attendance and other data is transferred to our proprietary management system for use in providing administrative support services. Student Administration Management System Our Student Administration Management System (SAMS) organizes, updates and reports information that is automatically collected through interfaces with our OLS and related management systems. SAMS collects and provides us with all of the information required to manage student enrollment and monitor student performance.

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SAMS is also central to collecting and managing all administrative data required to operate a virtual public school. In addition, the information provided by SAMS feeds our our proprietary Order Management System (OMS) that generates orders for offline learning kits and computers to be delivered to students. Student Community Tools We place a strong emphasis on the importance of building a sense of community in the schools we manage. Accordingly, we offer a combination of tools that foster communication and interaction among virtual public school students and parents. Our K 12 Community Chest website for virtual public school students includes discussion boards, blogs, games, competitions and other functions. Additionally, our K 12 Family Directory web-based tool enables parents of virtual public school students to organize online and offline social activities for their children. Parents can run searches based on criteria such as their child‟s location, age or interests (such as hobbies or sports) to locate and contact other parents of children with similar interests to facilitate student interaction. Our Services We provide a wide array of services to students and their families as well as directly to virtual public schools. Our services can be categorized broadly into academic support services and management and technology services. Academic Support Services Teachers and Related Services. Teachers are critical to the educational success of students in virtual public schools. Teachers in the virtual public schools that we serve are generally employed by the school, with the ultimate authority over these teachers residing with the school‟s governing body. Under our service agreements, we recruit, train and provide management support for these teachers. Historically, we have seen significant demand for teaching positions in the virtual public schools that we serve. For example, for the virtual public schools we serve in California, we recently received approximately six applications for each teaching position filled for the 2006-07 school year. We use a rigorous evaluation program for making hiring recommendations to the virtual public schools we serve. We hire teachers who, at a minimum, are state certified and meet the federal requirements for designation as a “Highly Qualified Teacher,” and generally have at least three years of teaching experience. We also seek to recruit teachers who have the skill set necessary to be successful in a virtual public school environment. Teaching in a virtual public school is characterized by heightened one-on-one student-teacher and parent-teacher interaction, so virtual public school teachers must have strong interpersonal communications skills. Additionally, a virtual public school teacher must be creative in finding ways to effectively connect with their students and integrate themselves into the daily lives of the students‟ families. New virtual public school teachers attend our comprehensive training program during which, among other things, they are introduced to our educational philosophy, our curriculum and our OLS and other technology applications, and are provided strategies for communicating and connecting with students and their families in a virtual public school environment. We also provide ongoing training opportunities for teachers so that they may stay abreast of changing educational standards and key learning trends, which we believe enhances their teaching abilities and effectiveness. Gifted and Special Education Services. We believe that our individualized learning system is able to effectively address the educational needs of gifted and special education students because it is self-paced and employs flexible teaching methods. For students requiring special attention, we employ a national director who is an expert on the delivery of special education services in a virtual public school environment and who oversees and directs the special education programs at the virtual public schools we serve. We direct and facilitate the development and implementation of “individualized education plans” for students with special needs. Our special education program is compliant with the federal Individuals with Disabilities Education Act and all state special education requirements. Each special needs student is assigned a certified special education teacher who arranges for any required ancillary services, including speech and occupational therapy, and any required assistive technologies, such as special computer displays or speech recognition software.

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Student Support Services. We provide students attending virtual public schools that we serve and their families with a variety of support services to ensure that we effectively meet their educational needs and goals. Each student is assigned a guidance counselor to assist them with academic achievement planning. Additionally, we provide tutors as necessary to help students with courses that they find difficult. We also plan and coordinate social events to offer students opportunities to meet and socialize with their virtual public school peers. Finally, we offer our “K 12 HUG” (Help, Understanding and Guidance) program to address any other questions or concerns that students and their parents have during the course of their matriculation. Management Services Under many of our contracts, we provide virtual public schools with turnkey management services. In these circumstances, we take responsibility for all aspects of the management of the schools, including monitoring academic achievement, teacher hiring and training, compensation of school personnel, financial management, enrollment processing and procurement of curriculum, equipment and required services. In 2007, the Commission on International and Trans-regional Accreditation (CITA), a leading worldwide education accreditation agency, thoroughly evaluated our school management services and we ultimately received the prestigious CITA accreditation. Compliance and Tracking Services. Operating a virtual public school entails most of the compliance and regulatory requirements of a traditional public school. We have developed management systems and processes designed to ensure that schools we serve are in compliance with all applicable requirements, including tracking appropriate student information and meeting various state reporting requirements. For example, we collect enrollment related information, monitor attendance and administer proctored state tests. As we have expanded into 16 states and the District of Columbia, our processes have grown increasingly robust, and we believe our compliance and tracking processes provide us with a distinct competitive advantage. Financial Support Services. We provide each school we serve with a dedicated business manager who oversees the preparation of the annual budget and coordinates with the school‟s directors to determine their annual objectives. In addition, we implement an internal control framework, develop policies and procedures, provide accounting services and payroll administration, oversee all federal entitlement programs and arrange for external audits. Facility, Operations and Technology Support Services. We operate administrative offices and all other facilities on behalf of the virtual public schools we serve. We provide these schools with a complete technology infrastructure. In addition, we provide a comprehensive student help desk solution. Human Resources Support Services. We are actively involved in hiring virtual public school administrators, teachers and staff, through a thorough interview and orientation process. To better facilitate the hiring process, we review and analyze the profiles of teachers that have been highly effective in our learning system to identify the attributes desired in future new hires. We also negotiate and secure employment benefits for teachers on behalf of virtual public schools and administer employee benefit plans for virtual public school employees. Additionally, we assist the virtual schools we serve in drafting and implementing administrative policies and procedures. Product Development We develop our products and related service offerings through a highly collaborative process that blends cognitive research with an innovative development approach by utilizing best practices from the education industry and other industries. Our approach provides for effective content and rapid time to market. Unlike many traditional content companies that may take several years to develop a new course, our course development process usually takes between six and 12 months, depending upon grade and subject. Our development team includes professionals from the following disciplines: • Cognitive Scientists, Evaluation and Research Specialists — conduct and review cognitive research to determine how students master the key ideas in a subject area, the common misconceptions that present obstacles to mastery and available techniques that can effectively address common misconceptions.

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• Curriculum and Teaching Specialists — bring deep subject matter knowledge and experience with a variety of pedagogical approaches to our course design process. • Writers and Editors — script out the text of the lessons, ensuring that the information is accurate, meaningful and suitable for the age group we are trying to reach. • Instructional Designers — weave together all elements of a lesson and determine the extent to which online, multi-media components, textbooks and other offline materials, and activities can be integrated to achieve the desired learning outcomes. • Graphic Artists/Media Specialists/Flash Designers — ensure overall visual integrity of each lesson and build creative and interactive content. • Print Designers — design and publish our proprietary textbooks and printed learning materials. • User Experience Specialists — work closely with our design teams to ensure that lessons are easy for students to navigate and understand. • Training Specialists — concurrent with the development of the courses, develop training materials and programs to support the effective delivery of our curriculum by teachers. • Project Managers — coordinate all of the activities, including the work of the above-listed resources to develop the product as designed, on time, and on budget. Using these highly skilled resources, we follow a six-stage product development process beginning with idea-generation and carrying through to post-production evaluation. Our ability to continually modify our products based upon student, parent and teacher feedback and assessment data is one of the significant advantages of our online curriculum. All of our lessons contain a user feedback button that allows us to identify learning issues on a real-time basis. In a given week, we receive hundreds of feedback items from students, parents and teachers. The related descriptions below illustrate each stage in our product development process. Blueprint Stage. During this stage of development, we gather the key requirements for a new product, which may be a new course or a group of related courses. We conduct a thorough review to identify all of the cognitive research related to learning of the subject and gain an understanding of the stages a student will go through in mastering the subject material. We also look at how experts perform in the subject. Expert-novice research has shown that an experts‟ knowledge of a domain is contained in a subconscious framework, the components of which can help guide the development of a course. During this stage, we also analyze state standards to confirm that we are encompassing the elements of the nation‟s highest state standards and that we are building courses which meet or surpass all state standards. Design Stage. We begin the design stage by developing the learning environment in which the product will be used. This includes understanding the types of students that will be using the product, how the course will be taught, the learning objectives within the course and what online and offline materials can be utilized. We then produce a design document and our creative teams develop a work plan for every aspect of the product, including the look and feel of the product, level of functionality and length of the course. We produce, test and refine prototypes with focus groups of students, teachers and parents. Pre-production Stage. With the work plan complete, a pre-production team is assembled to develop the scope and sequence of the course. The scope and sequence is an ordered collection of learning objectives based on cognitive research and state standards. These learning objectives, once organized, guide the production team in the creation of the individual course lessons. The pre-production team also creates the list of materials that will be required and provides this list to our logistics group for sourcing. Production Stage. During this stage, the product is built in accordance with the work plan. First, manuscripts, storyboards and lesson design specifications are created. Online screens, offline materials such as textbooks, simulations, photographs, and other reference materials are then created, reviewed and refined. Rights for licensed materials are cleared at this point, if needed. Each lesson then goes through a rigorous quality review before being released.

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Support Stage. The goal during this stage is to support the initial launch and ongoing utilization of our lessons and to enhance the products during the course of their useful life. We break this stage down into three components: (i) content development, where we design and develop teacher and student training packages; (ii) alignment and standards analysis, where we examine performance on state tests to determine the extent to which we should refine or adjust the standard alignments initially developed during the blueprint stage; and (iii) long-term maintenance, where we maintain and update the online and offline materials on an ongoing basis based upon feedback from teachers, parents and students. Evaluation Stage. The final stage of the product development cycle is the evaluation stage. During this phase, we evaluate the overall performance of our product against the original design specifications. We obtain measurement feedback from a number of sources, including: • User Feedback — we receive a substantial amount of feedback from teachers, parents and students. Some feedback is directly incorporated into course modifications. In addition, we observe students in our usability labs and visit students and parents to better understand how our products are being used; • Progress Reports — through our OLS, we are able to monitor each student‟s progress through a course. This data helps us identify portions of a course that may be especially difficult for students, and may require revision or enhancements; and • State Test Scores — students in the virtual public schools we serve participate in proctored state exams. These tests provide an impartial assessment of how these students are performing against established benchmarks and within their state. Using these sources of feedback, we can revise our courses as necessary to achieve the desired learning objectives. We believe that this ability to proactively respond to feedback and other data in an efficient manner is a key competitive advantage within the educational industry. Channel Development K 12 receives numerous inquiries from school districts, legislators, community leaders, educators and parents who express the desire to offer a virtual public school alternative. Our school development and public affairs groups work together with these interested parties to identify and pursue opportunities to expand the use of our products and services through new channels and in new jurisdictions. Where interested parties seek to offer a virtual public school alternative in their state, our public affairs group works with them to establish the legal framework, advocate for appropriate legislation and explain the educational and fiscal benefits of our learning system. Our public affairs group also seeks to increase public awareness and ensure transparency in virtual schooling by supporting accountability standards for virtual public schools. Once there is legal and regulatory authorization for, as well as sufficient interest in, a virtual public school, our school development group engages state and school district officials, legislators, community leaders, educators and parent groups seeking to open a virtual public school, and initiates a dialog with these interested parties to explain the steps necessary to pursue this public school alternative in their jurisdiction. Our school development group works with these officials and parent groups in planning, developing and launching the virtual school. We also offer assistance to independent school boards with charter application and authorization processes. After virtual public schools are approved and established, our school development group engages school administrators and maintains relationships with school officials in order to ensure that they are aware of our product and services offerings and that we understand their specific needs and goals. Distribution Channels We distribute our products and services primarily to virtual public schools and directly to consumers. We derive revenues from virtual public schools by providing access to our OLS, offline learning kits, student computers and a variety of management and academic support services, ranging from turnkey end-to-end management solutions to a single service to meet a school‟s specific needs.

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In fiscal year 2005, we had contracts with five schools that constituted approximately 32%, 17%, 11%, 10% and 6% of our revenues. In fiscal year 2006, these same schools constituted approximately 28%, 16%, 10%, 8%, and 7% of our revenues, respectively. During the nine months ended March 31, 2007, these same schools constituted approximately 12%, 17%, 11%, 7% and 10% of our revenues, respectively. Our direct-to-consumer product is purchased through our customer call center or online by parents, who are looking either to educate their children outside the public school system or as a supplement to their child‟s existing public school curriculum. The flexibility of our curriculum combined with the assessment capabilities of our online delivery platform enables us to modularize and repackage lesson modules that can be sold as individual products. For example, if a child has particular difficulties with fractions, the parent could purchase our fractions module. The ability to rebundle individual lessons is highly scalable and we believe this opportunity is significant. In addition to these primary distribution channels, we are continuously pursuing additional channels through which to offer our learning system, including direct classroom instruction and hybrid models. For example, we have piloted select grades and subjects of our curriculum in classrooms in 11 states. Although our in-class offering business is at a nascent stage, we believe that this distribution channel offers significant potential. Additionally, we have recently implemented a hybrid offering in Chicago that combines some face-to-face time for students and teachers in a traditional classroom setting along with online instruction. In addition to expanding our offering to additional jurisdictions within the United States, we intend to pursue international opportunities where we believe there is significant demand for a quality online education. Student Recruitment and Marketing Our student recruitment and marketing team consisted of 38 employees as of March 31, 2007, and is responsible for promoting our corporate brand, generating new student enrollments and enhancing the experience of students and families enrolled in the virtual public schools we serve. This team employs a variety of strategies designed to better understand and address the requirements of our target markets. First, this team is responsible for defining our brand image and associating our brand with the many positive attributes of our learning system. We believe that a strong brand provides the basis for our expansion into new states and other markets. Second, our student recruitment and marketing team generates new enrollments in the virtual public schools we serve through targeted recruiting programs, which utilize coordinated direct mailings, email marketing, print and radio advertising and search engine marketing. In addition, our marketing team conducts information sessions and workshops that provide teachers and parents with the opportunity to learn about K 12 and the products and services that we offer. We conducted more than 2,500 such events during fiscal year 2007. We have found that effectively communicating the details and benefits of our learning system is an important first step towards building a core group of interested parties. Additionally, we believe that our consistently high customer satisfaction rates serve as the foundation for word-of-mouth referrals which supplement our other recruiting efforts. Finally, this team is responsible for enhancing our relationship with students enrolled in the virtual public schools that we serve to complement the relationship that these students have with their teachers and school. In order to maintain a sense of community, we host the K 12 Community Chest website for students to interact online with our Chief Learning Officer and with each other. We also send welcome packages, conduct art contests, survey parents and provide support to students through assigned support counselors under our K 12 HUG program. Technology As of March 31, 2007, we employed 46 employees in our technology department. Our learning system, along with our back office systems supporting order management, logistics and e-commerce, are built on our proprietary Service Oriented Architecture, or SOA, to ensure high availability and redundancy and allow flexibility and security to be core principles of our systems‟ foundation. Service Oriented Architecture. All of our systems leverage our SOA built on top of Enterprise Java that separates an implemented capability from a request flow that utilizes those capabilities. This leverage provides us with the ability to deliver different presentations against a single request workflow. Additionally, this flexibility allows iterative solutions to be developed expeditiously to meet both present and future market needs. Our high

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availability and scalability are also facilitated by this architecture. The SOA also enables seamless integration with third-party solutions in our platform with ease and efficiency. Availability and Redundancy. Our SOA allows for a hardware topology where primary and secondary equipment can be utilized at all network and application tiers. Each application layer is load balanced across multiple servers, which, along with our sophisticated state management capabilities, allows for additional hardware to be inserted into our network providing us with impressive scalability and availability as evidenced by our greater than 99.9999% uptime with our ever growing user base. We regularly backup critical data and store this backup data at an offsite location. Security. Our security measures and policies include dividing application layers into multiple zones controlled by firewall technology. Sensitive communications are encrypted between client and server and our server-to-server accessibility is strictly controlled and monitored. Physical Infrastructure. We utilize the best of breed hardware from industry leading vendors including Cisco, F5, Oracle, Sun, Microsoft, Dell, Intel, and NetApp to provide a foundation for our SOA. Our systems are housed offsite in a state of the art data center that provides robust, redundant network backbone and power. We vigilantly monitor our physical infrastructure for security, availability, and performance. Competition We face varying degrees of competition from a variety of education companies because our learning system encompasses many components of the educational development and delivery process. We compete primarily with companies that provide online curriculum and school support services to K-12 virtual public schools. These companies include Connections Academy, LLC, White Hat Management, LLC and National Network of Digital Schools. We also face competition from curriculum developers, including traditional textbook publishers such as the McGraw-Hill Companies, Harcourt, Inc., Pearson plc and Houghton Mifflin Riverdeep Group plc. Additionally, we expect increased competition from post-secondary and supplementary education providers that have begun to establish a presence in the K-12 virtual school sector, including Apollo Group, Pearson plc and Kaplan, Inc. We believe that the primary factors on which we compete are: • track record of academic results and customer satisfaction; • quality of curriculum and online delivery platform; • qualifications and experience of teachers; • comprehensiveness of school management and student support services; and • cost of the solution. Intellectual Property Since our inception, we have invested more than $95 million to develop our proprietary curriculum and OLS. We continue to invest in our intellectual property as we develop more courses for new grades and expand into adjacent education markets, both in the U.S. and overseas. These intellectual property assets are critical to our success and we avail ourselves of the full protections provided under the patent, copyright, trademark and trade secrets laws. We also routinely utilize confidentiality and licensing agreements with our employees, students, the virtual public schools that we serve, direct-to-consumer customers, independent contractors and other businesses and persons with which we have commercial relationships. On May 1, 2007, the United States Patent and Trademark Office (USPTO) granted us the patent for our “System and Method of Virtual Schooling” (Patent No. 7,210,938), which provides us with a period of exclusive use until January 26, 2024. In general terms, this patent covers the hardware and network infrastructure of our online school, including the system components for creating and administering assessment tests, the planner, lesson progress tracker and instructional sequencer. We also have four additional international and five additional U.S. patents pending, and several pending provisional U.S. patent applications.

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We own the copyright in over 11,000 lessons contained in 87 courses that make up our proprietary curriculum, including our online lessons and offline learning kits, and we register this growing lesson portfolio with the U.S. Copyright Office as each new course is completed or updated. We own and use the domain names K12 (.com, .org) and K-12 (.com, .net, .org) as well as the trademark and service mark, K 12 . In addition, we have applied to the USPTO to register the trademark “Unleash the x Potential.” Students who enroll in the virtual public schools we serve are granted a license to use our software in order to access our learning system. Similarly, virtual public schools are granted a license to use our learning system in order to access SAMS and our other systems. These licenses are intended to protect our ownership and the confidentiality of the embedded information and technology contained in our software and systems. We also own the trademarks and service marks that we use as part of the student recruitment and branding services we provide to virtual public schools. Those marks are licensed to the schools for use during the term of the products and services agreements. Our employees, contractors and other parties with access to our confidential information sign agreements that prohibit the unauthorized use or disclosure of our proprietary rights, information and technology. Operations An essential component of the K 12 courses are the offline learning kits that accompany our online lessons. A student enrolling in one of our courses receives multiple textbooks, art supplies, laboratory supplies (e.g. microscopes and scales) and other reference materials designed to enhance the learning experience. We package these books and materials into course-specific learning kits. Because each student‟s curriculum is customized, the combination of kits for each student must also be customized. In fiscal year 2007, we assembled approximately 2.5 million items into more than 200,000 kits. Over our six years of operation, we believe that we have gained significant experience in the fulfillment of offline materials and that this experience provides us with an advantage over many of our current and potential future competitors. We have developed strong relationships with partners allowing us to source goods at favorable price, quality and service levels. Through our fulfillment partner located in Harrisonburg, Virginia, we store our inventory, build our learning kits and ship the kits to students throughout the United States. We have invested in systems including our Order Management System (OMS), to automatically translate the curriculum selected by each enrolled student into an order to build the corresponding learning kit. In 2008, we plan to establish a second logistics and fulfillment center in the western portion of the United States to support our growth and to mitigate single-location fulfillment risk. For many of our virtual public school customers, we attempt to reclaim any materials that are not consumed during the course of the school year. These items, once returned to our fulfillment center, are refurbished and included in future learning kits. This reclamation process allows us to maintain lower materials costs. In order to ensure that students in virtual public schools have access to our OLS, we often provide students with a computer and all necessary support. We source computers and ship them to students when they enroll and reclaim the computers at the end of a school year or upon termination of their enrollment or withdrawal from the virtual public school in which they are enrolled. As of March 31, 2007, we had approximately 17,800 personal computers deployed for use by students. Our fulfillment activities are highly seasonal, and are centered around the start of school in August or September. Accordingly, approximately 70% of our annual materials receiving occurs between March and May, approximately 75% of our annual offline learning kit assembly is accomplished between May and July, and approximately 75% of customer item fulfillment and shipping occurs between July and October. Properties The Company‟s headquarters are located in approximately 70,000 square feet of office space in Herndon, Virginia under a lease that expires in April 2013 and a sublease that expires in September 2009.

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Employees As of March 31, 2007, we had 558 employees. In addition, there are more than 650 teachers who are employed by virtual schools we serve, but who we manage under turnkey solution contracts with those schools. No K 12 employees are union employees; however, certain virtual public schools we serve employ unionized teachers. We believe that our employee relations are good. We have an agreement with a professional employer organization (PEO), to manage all payroll processing, workers‟ compensation, health insurance, and other employment-related benefits for our employees. The PEO is a co-employer of our employees along with us. Although the PEO processes our payroll and pays our workers‟ compensation, health insurance and other employment-related benefits, we are ultimately responsible for such payments and are responsible for complying with state and federal employment regulations. We pay the PEO a fee based on the number of employees we have. Legal Proceedings In the ordinary conduct of our business, we are subject to lawsuits and other legal proceedings from time to time. There are currently two pending lawsuits in which we are involved, Johnson v. Burmaster and Illinois v. Chicago Virtual Charter School that, in each case, have been brought by teachers‟ unions seeking the closure of the virtual public schools we serve in Wisconsin and Illinois, respectively. While we prevailed on summary judgment at the circuit court level in Johnson v. Burmaster , and recently won a preliminary motion in Illinois v. Chicago Virtual Charter School , it is not possible to predict the final outcome of these matters with any degree of certainty. Even so, we do not believe at this time that a loss in either case would have a material adverse financial impact on our business. Depending on the legal theory advanced by the plaintiffs, however, there is a risk that a loss in these cases could have a negative precedential effect if like claims were to be advanced and succeed under similar laws in other states where we operate. The cumulative effect under those circumstances could be material. Johnson v. Burmaster In 2003, the Northern Ozaukee School District (NOSD) in the State of Wisconsin established a virtual public school, the Wisconsin Virtual Academy (WIVA), and entered into a service agreement with us for online curriculum and school management services. On January 6, 2004, Stan Johnson, et al., and the Wisconsin Education Association Council (WEAC) filed suit in the Circuit Court of Ozaukee County against the Superintendent of the Department of Public Instruction (DPI), Elizabeth Burmaster, the NOSD and K12 Inc. The plaintiffs alleged that the NOSD violated the state charter school, open enrollment and teacher-licensure statutes when it authorized WIVA. On March 16, 2006, the Circuit Court issued a Decision and Order upholding on Summary Judgment that WIVA complies with applicable law (No. 04-CV-12 ). WEAC and DPI filed an appeal in the Wisconsin Court of Appeals, District II (No. 2006-AP/01380). On July 3, 2007, the Court of Appeals certified the case to the Wisconsin Supreme Court for its review because the questions involved in the case are of first impression and will have a significant statewide impact on education finance and policy. Should the plaintiff prevail and state funding of open enrollment payments to the NOSD are enjoined, a claim could be made that the Company must indemnify the NOSD for expenses approximating $2.5 million. Illinois v. Chicago Virtual Charter School On October 4, 2006, the Chicago Teachers Union (CTU) filed a citizen taxpayers lawsuit in the Circuit Court of Cook County challenging the decision of the Illinois State Board of Education to certify the Chicago Virtual Charter School (CVCS) and to enjoin the disbursement of state funds to the Chicago Board of Education under its contract with the CVCS. Specifically, the CTU alleges that the Illinois charter school law prohibits any “home-based” charter schools and that CVCS does not provide sufficient “direct instruction” by certified teachers of at least five clock hours per day to qualify for funding. K12 Inc. and K12 Illinois LLC were also named as defendants. On May 16, 2007, the Court dismissed K12 Inc. and K12 Illinois LLC from the case and on June 15, 2007, the plaintiffs filed a second amended complaint. We continue to participate in the defense of CVCS under an indemnity obligation in our service agreement with that school.

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REGULATION The authority to operate a virtual public school is dependent on the laws and regulations of each state. Laws and regulations vary significantly from one state to the next and are constantly evolving. In states that have implemented specific legislation to support virtual public schools, the schools are able to operate under these statutes. Other states provide for virtual public schools under existing charter school legislation or provide that school districts and/or state education agencies may authorize them. Some states do not currently have legislation that provides for virtual public schools or have requirements that effectively prohibit virtual public schools and, as a result, may require new legislation before virtual public schools can open in the state. Virtual public schools are typically funded by state or local governments on a per student basis. To the extent a virtual school obtains federal funds, such as through a grant program or financial support dedicated for the education of low-income families, these schools then become subject to additional federal regulation. State Laws and Regulations Applicable to Virtual Public Schools. Virtual public schools that purchase our curriculum and management services are often governed and overseen by a non-profit or local or state education agency, such as an independent charter school board, local school district or state education authority. We generally receive funds for products and services rendered to operate virtual schools under detailed service agreements with that governing authority. A virtual school that fails to comply with the state laws and regulations applicable to it may be required to repay these funds and could become ineligible for receipt of future state funds. To be eligible for state funding, some states require that virtual schools be organized under not-for-profit charters exempt from taxation under Section 501(c)(3) of the Internal Revenue Code. The schools must then be operated exclusively for charitable educational purposes, and not for the benefit of private, for-profit management companies. The board or governing authority of the not-for-profit virtual school must retain ultimate accountability for the school‟s operations to retain its tax-exempt status. It may not delegate its responsibility and accountability for the school‟s operations. Our service agreements with these virtual schools are therefore structured to ensure the full independence of the not-for-profit board and preserve its ability to exercise its fiduciary obligations to operate a virtual public school. Laws and regulations affect many aspects of operating a virtual public school. They can dictate the content and sequence of the curriculum, the requirements to earn a diploma, use of approved textbooks, the length of the school year and the school day, the assessment of student performance, and any accountability requirements. In addition, a virtual public school may be obligated to comply with state requirements to offer programs for specific populations, such as students at risk of dropping out of school, gifted and talented students, non-English speaking students, pre-kindergarten students, and students with disabilities. Tutoring services and the use of technology may also be regulated. Other state laws and regulations may affect the school‟s compulsory attendance requirements, treatment of absences and make-up work, and access by parents to student records and teaching and testing materials. Additionally, states have various requirements concerning the reporting of extensive student data that may apply to the school. A virtual public school may have to comply with state requirements that school campuses report various types of data as performance indicators of the success of the program. States have laws and regulations concerning certification, training, experience and continued professional development of teachers and staff with which a virtual public school may be required to comply. There are also numerous laws pertaining to employee salaries and benefits, statewide teacher retirement systems, workers‟ compensation, unemployment benefits, and matters related to employment agreements and procedures for termination of school employees. A virtual public school must also comply with requirements for performing criminal background checks on school staff, reporting criminal activity by school staff and reporting suspected child abuse. As with any public school, virtual public schools must comply with state laws and regulations applicable to governmental entities, such as open meetings laws, which may require the board of trustees of a virtual public school to hold its meetings open to the public unless an exception in the law allows an executive session. Failure to comply with these requirements may lead to personal civil and/or criminal penalties for board members or officers. Virtual public schools must also comply with public information or open records laws, which require them to make school records available for public inspection, review and copying unless a specific exemption in the law applies.

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Additionally laws pertaining to records privacy and retention and to standards for maintenance of records apply to virtual public schools. Other types of regulation applicable to virtual public schools include restrictions on the use of public funds, the types of investments made with public funds, the collection of and use of student fees, and controlling accounting and financial management practices. There remains uncertainty about the extent to which we may be required to comply with state laws and regulations applicable to traditional public schools because the concept of virtual public schools is relatively new. Although we receive state funds indirectly, according to the terms of each service agreement with the local public school entity, our receipt of state funds subjects us to extensive state regulation and scrutiny. Several states have commenced audits, some of which are still pending, to verify enrollment, attendance, fiscal accountability, special education services, and other regulatory issues. While we may believe that a virtual public school we serve is compliant with state law, an agency‟s different interpretation of law in a particular state could result in non-compliance, potentially affecting funding. Regulations Restricting Virtual Public School Growth and Funding. As a new public schooling alternative, some state and regulatory authorities have elected to proceed cautiously with virtual public schools while providing opportunities for taxpayer families seeking this alternative. Regulations that control the growth of virtual public schools range from prescribing the number of schools in a state to limiting the percentage of time students may receive instruction online. Funding regulations can also have this effect. Regulations that hinder our ability to serve certain jurisdictions include: restrictions on student eligibility (such as mandating attendance at a traditional public school prior to enrolling in a virtual public school or course completion); caps on the total number of students in a virtual school; geographic limitations on enrollments; fixing the percentage of per pupil funding that must be paid to teachers; state-specific curriculum requirements; and limits on the number of charters that can be granted in a state. Funding regulations for virtual schools can take a variety of forms. These regulations include: (i) attendance — some state daily attendance rules were designed for traditional classroom procedures and applying them to track daily attendance and truancy in an online setting can cause disputes to arise over interpretation and funding; (ii) enrollment eligibility— some states place restrictions on the students seeking to enroll in virtual schools, resulting in lower aggregate funding levels; and (iii) teacher contact time — some states have regulations that specify minimum levels of teacher-student face-to-face time, which can create logistical challenges for statewide virtual schools, reduce funding and eliminate some of the economic, academic and technological advantages of virtual learning. Federal and State Grants. We have worked with certain entities to secure public and grant funding that flows to virtual public schools that we serve. These grants are awarded to the not-for-profit entity that holds the charter of the virtual public school on a competitive basis in some instances and on an entitlement basis in other instances. Grants awarded to public schools and programs — whether by a federal or state agency or nongovernmental organization — often include reporting requirements, procedures, and obligations. Federal Laws and Regulations Applicable to Education Programs. Some of the virtual public schools we serve may receive federal funds under Title I (funding for education of children from low-income families), Title II (funding for the professional development of teachers), Title III (funding for technology programs), Title VII (funding for bilingual education programs) and Title X (start-up funding for charter schools) of the Elementary and Secondary Education Act. The schools must comply with applicable federal laws and regulations to remain eligible for receipt of federal funds. The schools we manage could lose all or part of these funds if they fail to comply with the applicable statutes or regulations, if the federal authorities reduce the funding for the programs or if the schools are determined to be ineligible to receive funds under such programs. Under the terms of our service agreements, we assist virtual public schools in fulfilling these reporting requirements.

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Four primary federal laws are directly applicable to the day-to-day provision of educational services we provide to virtual public schools: • No Child Left Behind (NCLB) Act. Through the funding of the Title I programs for disadvantaged students under NCLB, the federal government requires public schools to develop a state accountability system based on academic standards and assessments developed by the state, which are applicable to all public school students. Each state must determine a proficiency level of academic achievement based on the state assessments, and must determine what constitutes adequate yearly progress (AYP) toward that goal. NCLB has a timeline to ensure that no later than the 2013-14 school year, all students, including those in all identified subgroups (such as economically disadvantaged, limited English proficient and minority students,), will meet or exceed the state proficient level of academic achievement on state assessments. The progress of each school is reviewed annually to determine whether the school is making adequate yearly progress. If a Title I school does not make adequate yearly progress as defined in the state‟s plan, the local education agency (LEA) is required to identify the school as needing school improvement , and to provide all students enrolled in the school with the option to transfer to another public school served by the LEA, which may include a virtual public school. The LEA must develop a school improvement plan for each school identified as needing improvement in consultation with parents, staff and outside experts and this plan must be implemented not later than the beginning of the next full school year. If the school does not make adequate yearly progress in subsequent years, the school transfer option remains open to students and other corrective action must be taken ranging from providing supplemental education services to the students who remain in the school to taking corrective action including, but not limited to, replacing school staff, implementing a new curriculum, appointing outside experts to advise the school, extending the school year or the school day, reopening the school as a public charter school with a private management company or turning over the operation of the school to the state educational agency. Another provision of NCLB requires public school programs to ensure that all teachers are highly qualified. A highly qualified teacher means one who has: (1) obtained full state certification or licensure as a teacher and who has not had certification or licensure requirements waived on an emergency, temporary or provisional basis; (2) obtained a bachelor‟s degree; and (3) demonstrated competence in the academic subject the teacher teaches. All teacher aides working in a school supported with Title I funds must be highly qualified which means the person must have a high school diploma or its equivalent and one of the following: completed at least two years of study in an institution of higher education, obtained an associate‟s or higher degree, or met a rigorous standard of quality demonstrated through a formal state or local assessment. Virtual public schools using our products and services may be required to meet these requirements for any persons who perform instructional services. Virtual schools that receive Title I funding and use our products and services may be required to provide parents of Title I students with a variety of notices regarding the teachers and teachers aides that teach their children. In addition, if these schools serve limited English proficient (LEP) children, they may be required to provide a variety of notices to the parents regarding the identification of the student as LEP and certain information about the instruction to be provided to the student, as well as the right to remove or refuse to enroll the student in the LEP program. Finally, these schools may also be required annually to develop, with input from parents of Title I students, and implement a written policy on parental involvement in the education of their children, to hold annual meetings with these parents and to provide these parents with assistance in various areas to help the parents to work with their children to improve student achievement. Under NCLB, even schools that do not receive Title I funding must provide certain notices to parents. For example, schools may be required to provide a school report card and identify whether any school has been identified as needing improvement and for how long. Parents also must be provided data that will be used to determine adequate yearly progress. Virtual public schools may be contacted by military recruiters who have the right to access the names, addresses and telephone numbers of secondary school students for military recruiting purposes. Additionally, virtual public schools may be required to notify parents that they have the option to request that this information not be released to military recruiters or to institutions of higher education.

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• Individuals with Disabilities Education Act (IDEA). The IDEA is implemented through regulations governing every aspect of the special education of a child with one or more of the specific disabilities listed in the act. The IDEA created a responsibility on the part of a school to identify students who may qualify under the IDEA and to perform periodic assessments to determine the students‟ needs for services. A student who qualifies for services under the IDEA must have in place an individual education plan, which must be updated at least annually, created by a team consisting of school personnel, the student, and the parent. This plan must be implemented in a setting where the child with a disability is educated with non-disabled peers to the maximum extent appropriate. The act provides the student and parents with numerous procedural rights relating to the student‟s program and education, including the right to seek mediation of disputes and make complaints to the state education agency. The schools we manage are responsible for ensuring the requirements of this act are met. The virtual schools could be required to comply with requirements in the act concerning teacher certification and training. We or the virtual public school could be required to provide additional staff, related services and supplemental aids and services at our own cost to comply with the requirement to provide a free appropriate public education to each child covered under the IDEA. If we fail to meet this requirement, we or the virtual public school could lose federal funding and could be liable for compensatory educational services, reimbursement to the parent for educational service the parent provided, and payment of the parent‟s attorney‟s fees. • Section 504 of the Rehabilitation Act of 1973. A virtual public school receiving federal funds is subject to Section 504 of the Rehabilitation Act of 1973 (Section 504) insofar as the regulations implementing the act govern the education of students with disabilities as well as personnel and parents. Section 504 prohibits discrimination against a person on the basis of disability in any program receiving federal financial assistance if the person is otherwise qualified to participate in or receive benefit from the program. Students with disabilities not specifically listed in the IDEA may be entitled to specialized instruction or related services pursuant to Section 504 if their disability substantially limits a major life activity. There are many similarities between the regulatory requirements of Section 504 and the IDEA; however this is a separate law which may require a virtual public school to provide a qualified student with a plan to accommodate his or her disability in the educational setting. If a school fails to comply with the requirements and the procedural safeguards of Section 504, it may lose federal funds even though these funds flow indirectly to the school through a local board. In the case of bad faith or intentional wrongdoing, some courts have awarded monetary damages to prevailing parties in Section 504 lawsuits. • Family Educational Rights and Privacy Act. Virtual public schools are subject to the Family Educational Rights and Privacy Act which protects the privacy of a student‟s educational records and generally prohibits a school from disclosing a student‟s records to a third-party without the parent‟s prior consent. The law also gives parents certain procedural rights with respect to their minor children‟s education records. A school‟s failure to comply with this law may result in termination of its eligibility to receive federal education funds. If we fail to comply with other federal laws, including federal civil rights laws not specific to education programs, we could be determined ineligible to receive funds from federal programs or face criminal or civil penalties.

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MANAGEMENT Directors, Executive Officers and Other Key Employees The following table sets forth information concerning our directors, executive officers and other key members of our management team as of July 12, 2007: Nam e Executive Officers Ronald J. Packard John F. Baule Bruce J. Davis Bror V. H. Saxberg Key Employees Bryan W. Flood Nancy Hauge Howard D. Polsky Peter G. Stewart Celia M. Stokes Maria A. Szalay Ray Williams Nonemployee Directors Andrew H. Tisch Liza A. Boyd Guillermo Bron Steven B. Fink Thomas J. Wilford Executive Officers Ronald J. Packard, Chief Executive Officer, Founder and Director Ronald J. Packard started K 12 in 2000 and has served as Chief Executive Officer since May 2007 after having served as Chairman of the Board of Directors. Previously, Mr. Packard served as Vice President of Knowledge Universe from 1997 to 2000, and he served as Chief Executive Officer of Knowledge Schools, a provider of early childhood education and after school companies, from 1998 to 2002. Mr. Packard has also held positions at McKinsey & Company from 1989 to 1993 and Goldman Sachs in mergers and acquisitions from 1986 to 1988. Additionally, Mr. Packard has served on the Advisory Board of the Department of Defense Schools since 2002, and from 2004 to 2006 served as a director of Academy 123. Mr. Packard holds B.A. degrees in Economics and Mechanical Engineering from the University of California at Berkeley, an M.B.A. from the University of Chicago, and he was a Chartered Financial Analyst. John F. Baule, Chief Operating Officer and Chief Financial Officer John F. Baule joined us in March 2005, and serves as Chief Operating Officer and Chief Financial Officer. Previously, Mr. Baule spent five years at Headstrong, a global consultancy services firm, first serving as Senior Vice President of Finance from 1999 until 2001 and later as Chief Financial Officer from 2001 to 2004. Prior to Headstrong, Mr. Baule worked for Bristol-Myers Squibb (BMS) from 1990 to 1999, initially joining their corporate internal audit division. He then spent six years with BMS based in the Asia Pacific region, first as the Director of Finance for BMS Philippines, and then as the Regional Finance Director for BMS Asia-Pacific. He later served as

Age

Position

43 43 42 47 41 53 55 38 43 41 45 57 32 55 55 64

Chief Executive Officer, Founder and Director Chief Operating Officer and Chief Financial Officer Executive Vice President, School Services Chief Learning Officer Senior Vice President, Public Affairs Senior Vice President, Human Resources Senior Vice President, General Counsel and Secretary Senior Vice President, School Development Chief Marketing Officer Senior Vice President, Product Development Senior Vice President, Systems and Technology Chairman Director Director Director Director

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Director of International Finance for the BMS Nutritional Division. Mr. Baule began his career working in the audit services practice at KPMG from 1986 to 1990. Mr. Baule holds a B.B.A. in Accounting from the College of William and Mary and he is a Certified Public Accountant. Bruce J. Davis, Executive Vice President, School Services Bruce J. Davis joined us January 2007, and serves as Executive Vice President, School Services. From 2002 until joining us, Mr. Davis ran his own strategy consultancy where his clients included Laureate Education, Discovery Communications, Pearson Publishing, Sylvan Learning Systems, Educate Inc., AICPA, and USAID. Mr. Davis previously held the position of Chief Executive Officer at Medasorb Technologies, a biotechnology company, from 2001 to 2002 and at Mindsurf Networks, a wireless educational system provider, from 1999 to 2000. He also served as Chief Operating Officer of Prometric, a computer test administration company, from 1994 to 1999. Prior to Prometric, he was a senior consultant with Deloitte and Touche from 1985 to 1991 in the Information Systems Strategy group where he managed their IT practice in Egypt. Mr. Davis holds a B.S. in Computer Science from Loyola College and an M.B.A. from Columbia University. Bror V. H. Saxberg, Chief Learning Officer Bror V.H. Saxberg joined us in February 2000, and serves as Chief Learning Officer. From 1998 to 2000, Dr. Saxberg served as Vice President of Operations at Knowledge Testing Enterprises, a developer of web-based assessments for IT skills owned by Knowledge Universe; he was a Vice President at Knowledge Universe from 1997 through 2000 as well. Prior to Knowledge Universe, Dr. Saxberg held the position of Publisher and General Manager at DK Multimedia, the North American subsidiary of educational and reference publisher Dorling Kindersley, from 1995 to 1997. Previously, Dr. Saxberg also worked as a consultant at McKinsey & Company from 1990 to 1995. Dr. Saxberg holds B.S. degrees in Electrical Engineering and Mathematics from the University of Washington, an M.A. in Mathematics from Oxford University, an M.A. and Ph.D. in Electrical Engineering and Computer Science from Massachusetts Institute of Technology, and an M.D. from Harvard University. Key Employees Bryan W. Flood, Senior Vice President, Public Affairs Bryan W. Flood joined us in June 2002, and serves as Senior Vice President, Public Affairs. From 1996 to 2001, Mr. Flood served as Vice President of the MPGH Agency, a public affairs consulting firm. Mr. Flood previously served as National Spokesman for the Lamar Alexander for President campaign from 1995 to 1996. Prior to that, Mr. Flood served as spokesman for the reelection campaign for Gov. John Engler (MI) in 1994. Additionally, Mr. Flood held the positions of Director of Communications for the Michigan Republicans State Committee from 1991 to 1993 and as Spokesman for Rinfret for Governor (NY). Mr. Flood started his career as a Legislative Aide for the Town of Brookhaven, New York. Mr. Flood holds a B.A. in Public Policy from New College of Florida. Nancy Hauge, Senior Vice President, Human Resources Nancy H. Hauge joined us in February 2006, and serves as Senior Vice President, Human Resources. From 2004 to 2006, Ms. Hauge served as Chief Customer Advocate and Senior Vice President of Human Resources for Ruckus Network, a digital media company. Prior to Ruckus, she founded and operated 54th Street Partners, an international management consulting company, from 1999 to 2004. Ms. Hauge has also held the position of Vice President of Human Resources at Ridge Technologies, Crag Technologies, Noah‟s New York Bagels, and Gymboree Corporation. Previously, Ms. Hauge held multiple senior management positions in human resources, strategic planning and quality at Sun Microsystems from 1984 to 1994. Howard D. Polsky, Senior Vice President, General Counsel and Secretary Howard D. Polsky joined us in June 2004, and serves as Senior Vice President, General Counsel and Secretary. Mr. Polsky previously held the position of Vice President and General Counsel of Lockheed Martin Global Telecommunications from 2000 to 2002. Prior to Lockheed Martin, Mr. Polsky worked at COMSAT Corporation from 1992 to 2000, initially serving as Vice President and General Counsel of COMSAT‟s largest operating

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division, and subsequently serving on the executive management team as Vice President of Federal Policy and Regulation. From 1983 to 1992, Mr. Polsky was a partner at Wiley, Rein & Fielding after having worked at Kirkland & Ellis. Mr. Polsky began his legal career at the Federal Communications Commission. Mr. Polsky received a B.A. in Government from Lehigh University, and a J.D. from Indiana University. Peter G. Stewart, Senior Vice President, School Development Peter G. Stewart joined us in September 2000, and serves as Senior Vice President, School Development. From 1990 to 2000, Mr. Stewart worked at urban, rural, and international schools in various roles including teacher, school principal, head of school and curriculum director. Mr. Stewart holds a B.A. in English from Williams College and a M.A. from Columbia University Teachers College. Celia M. Stokes, Chief Marketing Officer Celia M. Stokes joined us in March 2006, and serves as Chief Marketing Officer. Before joining K 12 , Ms. Stokes served as Vice President of Marketing at Independence Air from 2003 to 2006. Previously, Ms. Stokes ran her own marketing firm providing consulting services to organizations such as Fox TV, PBS, the National Gallery of Art, JWalter Thompson, and ADP. From 1993 to 1998, Ms. Stokes served in successive roles leading to Vice President of Marketing at Bell Atlantic and at a joint venture of Bell Atlantic and two other Regional Bell Operating Companies. From 1990 to 1993, Ms. Stokes was Manager of Marketing at Software AG, and from 1988 to 1990, was Client Group Manager at Targeted Communications, an Ogilvy & Mather Direct company. Ms. Stokes holds a B.A. in Economics from the University of Virginia. Maria A. Szalay, Vice President, Product Development Maria A. Szalay joined us in March 2001, and serves as Vice President, Product Development. From 1999 to 2001, Ms. Szalay served as Practice Director at Operon Partners, an e-business consulting firm. Prior to that, Ms. Szalay worked at Telecom New Zealand from 1994 to 1999 and served as a management consultant at KPMG from 1990 to 1994. Previously, Ms. Szalay served as a Client Portfolio Analyst at Shearson Lehman from 1988 to 1990. Ms. Szalay holds a B.S. in Finance and a B.A. in German Literature from Virginia Polytechnic Institute & State University and an M.B.A. from American University. Ray Williams, Senior Vice President, Systems and Technology Ray Williams joined us in August 2006, and serves as Senior Vice President, Systems and Technology. From 2005 to 2006, Mr. Williams served as Senior Vice President of Product Development and Operations for Ruckus Network, a digital media company. From 1993 to 2004, Mr. Williams held in multiple technology positions at America Online leading up to Senior Technical Director. Mr. Williams previously served as a software developer at Software A.G., a software infrastructure solutions company from 1988 to 1993. Mr. Williams holds a B.S. in Computer Science from Rochester Institute of Technology. Nonemployee Directors Andrew H. Tisch, Chairman Andrew H. Tisch joined us as director in August 2001, and has served as Chairman of the Board of Directors since May 2007. Since 1985, Mr. Tisch has been a director of Loews Corporation, and is Co-Chairman of its Board, Chairman of its Executive Committee and, since 1999, has been a member of its Office of the President. In addition, Mr. Tisch has served as past Chairman of the board of directors of Bulova Corporation and a director since 1979. Mr. Tisch has also served as director on the board of directors of CNA Financial Corporation since 2006, at Texas Gas Transmission, LLC and Boardwalk Pipelines, LLC since 2005 and Lord & Taylor, Inc. since 2006. Mr. Tisch holds a B.S. in Hotel Administration from Cornell University and an M.B.A. from Harvard University.

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Liza A. Boyd, Director Liza A. Boyd joined us as director in April 2006. Ms. Boyd has been employed with Constellation Ventures, a venture capital fund affiliated with The Bear Stearns Companies, Inc. investing in early to mid-stage companies, since 2000, and has been a Managing Director since 2006. At Constellation Ventures, Ms. Boyd focuses on investments in software and services and online media technologies. Ms. Boyd has served as a director on the board of directors of Widevine Technologies since 2004, Fathom Online since August 2005, Siperian since 2006, Avolent since 2006 and Orchestria since 2006. Ms Boyd holds a B.A. in Mathematical Economics from Colgate University. Guillermo Bron, Director Guillermo Bron joined us as a director in July 2007. Mr. Bron has served as Chairman of the Board and a director of United Pan Am Financial Corp. (UPFC) since April 1994, and as a director of Pan American Bank, FSB (Pan American), a federally chartered savings association and former wholly owned subsidiary of UPFC, from 1994 until its dissolution in February 2005. Mr. Bron is a Managing Director of Acon Funds Management LLC, a private equity firm, and the Managing Member of PAFGP, LLC, the sole general partner of Pan American Financial, L.P. From 2000 to 2002, Mr. Bron was a director of Telemundo Group, Inc. Mr. Bron founded UPFC and organized a Hispanic investor group that acquired certain assets and assumed certain liabilities of Pan American‟s predecessor from the Resolution Trust Corporation in April 1994. From 1994 to 2003, Mr. Bron was an officer, director and principal stockholder of a general partner of Bastion Capital Fund, L.P., a private equity investment fund primarily focused on the Hispanic Market. Previously, Mr. Bron was a Managing Director of Corporate Finance and Mergers and Acquisitions at Drexel Burnham Lambert. Mr. Bron holds a B.S. in Electrical Engineering and Management from Massachusetts Institute of Technology and an M.B.A. from Harvard University. Steven B. Fink, Director Steven B. Fink joined us as director in October 2003. Since 2000, Mr. Fink has been the Chief Executive Officer of Lawrence Investments, LLC, a technology and biotechnology private equity investment firm, and since 1996, Mr. Fink has served as a Vice Chairman of Knowledge Universe (now Mounte LLC), a private company focused on building leading companies in areas relating to education, technology and career management. Since 1995, Mr. Fink has also served as Chairman and Vice Chairman of Heron International, a European real estate development company. Mr. Fink has served as non-executive Chairman of Spring Group PLC, an information technology services company in the United Kingdom affiliated with Knowledge Universe, from 1997 to 2000 and again from 2002 to the present, and has served as a director of Leapfrog, Inc. since 1999 and as Chairman of the board since 2004. Mr. Fink has also served as a director of Nextera Enterprises, Inc. since 1997. Mr. Fink holds a B.S. in Psychology from the University of California, Los Angeles and a J.D. and an L.L.M. from New York University. Thomas J. Wilford, Director Thomas J. Wilford joined us as director in November 2002. Since 1993, Mr. Wilford has served as director of Alscott, Inc., privately held a real estate investment company, and since 1997 has served as President. Since 2003, Mr. Wilford has served as Chief Executive Officer of the J.A. and Kathryn Albertson Foundation, a foundation focused on education within Idaho. Mr. Wilford has served as director on the board of directors of Idacorp, Inc. since 2004, and has served on its Audit Committee since 2005. Previously, Mr. Wilford served as an Office Managing Partner of Ernst & Young LLP from 1979 to 1993. Mr. Wilford holds a B.S., and a M.S. in Business from the University of Minnesota and he is a Certified Public Accountant. Board of Directors and Director Independence Our board of directors is authorized to have nine members and is currently composed of five nonemployee members and our Chief Executive Officer, Ronald J. Packard. Our executive officers and key employees serve at the discretion of our board of directors.

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Upon completion of this offering, we expect that our amended and restated certificate of incorporation will provide for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, a portion of our board of directors will be elected each year. To implement the classified structure, prior to the consummation of this offering, each of the nominees to the board will be either appointed to one, two or three-year terms. We expect that the additional independent directors that we will add in the year following completion of this offering will replace existing members of our audit, compensation, and nominating and corporate governance committees to the extent necessary to comply with the applicable rules of the New York Stock Exchange and applicable law. Additionally, our stockholders will have the ability to remove directors with or without cause by the affirmative vote of a majority of the common stock. Board Committees Our board directs the management of our business and affairs as provided by Delaware law and conducts its business through meetings of the board of directors, an audit committee and a compensation committee. Additionally, upon completion of this offering, we will establish a nominating and governance committee. Further, from time to time, other committees may be established under the direction of the board when necessary to address specific issues. The composition of the board committees will comply, when required, with the applicable rules of the New York Stock Exchange and applicable law. Audit Committee. Our audit committee is responsible for, among other things, making recommendations concerning the engagement of our independent public accountants, reviewing with the independent public accountants the plans and results of the audit engagement, approving professional services provided by the independent public accountants, reviewing the independence of the independent public accountants, considering the range of audit and non-audit fees, and reviewing the adequacy of our internal accounting controls. Our audit committee comprises Steven B. Fink, Liza A. Boyd and Thomas J. Wilford, each of whom is a nonemployee member of our board of directors. Steven B. Fink is the chairman of the audit committee. Nominating and Governance Committee. Upon completion of this offering, we will establish a nominating and governance committee, which will be responsible for assisting the board of directors in selecting new directors, evaluating the overall effectiveness of the board of directors, and reviewing developments in corporate governance compliance. Compensation Committee. The compensation committee is responsible for determining compensation for our executive officers and administering our amended and restated stock option plans and other compensation programs. The compensation committee is also charged with establishing, periodically re-evaluating and, where appropriate, adjusting and administering policies concerning compensation of management personnel, including the Chief Executive Officer and all of our other executive officers. Our compensation committee currently comprises Andrew H. Tisch and Liza A. Boyd, each of whom is a nonemployee member of our board of directors. Andrew H. Tisch is the chairman of the compensation committee. Compensation Committee Interlocks and Insider Participation None of the members of our compensation committee at any time has been one of our executive officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee. Our entire board of directors made all compensation decisions prior to the creation of our compensation committee. Limitation of Liability and Indemnification of Officers and Directors As permitted by Section 102 of the Delaware General Corporation Law, upon consummation of this offering, we expect that our amended and restated certificate of incorporation and amended and restated bylaws will limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as directors. The duty of care generally requires that when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be

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personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for: • any breach of the director‟s duty of loyalty to us or our stockholders; • any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; • any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or • any transaction from which the director derived an improper personal benefit. These limitations of liability do not alter liability under the federal securities laws and do not affect the availability of equitable remedies such as injunction or rescission. As permitted by Section 145 of the Delaware General Corporation Law, upon consummation of this offering, we expect that our amended and restated certificate of incorporation and amended and restated bylaws will authorize us to indemnify or officers, directors and other agents to the fullest extent permitted under Delaware law and provide that: • we may indemnify our directors, officers and employees to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; • we may advance expenses to our directors, officers and employees in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and • the rights provided in our amended and restated bylaws are not exclusive. Contemporaneously with the completion of this offering, we intend to enter into indemnification agreements with each of our executive officers and directors which will be in addition to and may be broader than the indemnification provided for in our charter documents. These agreements will provide that we will indemnify each of our directors to the fullest extent permitted by law and advance expenses to each indemnitee in connection with any proceeding in which indemnification is available. We also maintain general liability insurance that covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers and intend to obtain a policy of directors and officers liability insurance that will be effective upon completion of this offering which will also cover certain liabilities arising under the Securities Act of 1933, as amended. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder‟s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that these provisions, the indemnification agreements and the insurance are necessary to attract and retain talented and experienced directors and officers. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which any of them is seeking indemnification from us, nor are we aware of any threatened litigation or proceeding that may result in a claim for indemnification.

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COMPENSATION DISCUSSION AND ANALYSIS Objectives and Philosophy of Executive Compensation The Compensation Committee, composed entirely of independent directors, administers our executive compensation programs. The Compensation Committee‟s role as described in its charter is to discharge the board‟s responsibilities relating to compensation of our executives, including the named executive officers, and to oversee and advise the board on the adoption of policies that govern our compensation and benefit programs. Our executive compensation programs are designed to: • Attract and retain individuals of superior ability and managerial talent; • Ensure senior executive compensation is aligned with our corporate strategies, business objectives and the long-term interests of our stockholders; • Provide an incentive to achieve key strategic and financial performance measures by linking incentive award opportunities to the achievement of performance goals in these areas; and • Enhance the executives‟ incentive to increase our stock price and maximize stockholder value, as well as promote retention of key people, by providing a portion of total compensation opportunities for senior management in the form of direct ownership in our stock through stock options. To achieve these objectives, the Compensation Committee has implemented and maintains compensation plans that tie a substantial portion of the executives‟ overall compensation to key strategic financial and operational goals such as our annual revenues and operating earnings. The Compensation Committee also evaluates individual executive performance with the goal of setting compensation at levels the Compensation Committee believes are comparable with executives in other companies of similar size and stage of development that operate in the major education and high-technology industries, taking into account our relative performance and our strategic goals. Determination of Compensation Awards The Compensation Committee has the authority to determine and recommend the compensation awards available to our named executive officers. Historically, we have set base salaries and annual incentive targets based on both individual performance and position. Base salaries and annual incentive targets for the named executive officers are determined as of the date of hire. Base salaries and annual incentive targets are reviewed annually by the Compensation Committee and may be adjusted to reflect individual performance and any changes in position within the Company to both reward the executives for superior performance and to further our goals of attracting and retaining managerial talent. To aid the Compensation Committee in making its determination, the CEO and COO/CFO provide recommendations annually to the Compensation Committee regarding the compensation of all executive officers, excluding themselves. Each named executive officer other than our CEO and COO/CFO, in turn, participates in an annual performance review with either the CEO or the COO/CFO to provide input regarding the named executive officer‟s contributions to our success for the period being assessed. The performance of our CEO and COO/CFO is reviewed annually by the Compensation Committee. In 2007, the Compensation Committee retained an independent compensation consultant, Radford Surveys + Consulting, to assist the Compensation Committee with determining the key elements of our compensation programs for fiscal year 2008 and future fiscal years. Radford Surveys + Consulting is an independent consultant specializing in compensation matters in both the technology and education industries. The compensation consultant provides advice to the Compensation Committee with respect to competitive practices and the amounts and nature of compensation paid to the named executive officers. The compensation consultant also advises us on, among other things, structuring our various compensation programs and determining the appropriate levels of salary, bonus and other incentive awards payable to our named executive officers. Based upon the compensation consultant‟s recommendations, our executive compensation package continues to consist of a fixed base salary and variable cash and option-based incentive awards, with a significant portion weighted towards the variable components to ensure that total compensation reflects our overall success or failure and to motivate executive officers to meet appropriate performance measures, thereby maximizing total return to stockholders. Within our performance-based compensation program, we aim to compensate the named executive officers in a manner that is tax effective for us.

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Compensation Benchmarking and Peer Group For the fiscal year ending in 2008, we set base salary structures and annual incentive targets at slightly above the median of a peer group of major education and high-technology companies. An important component of setting and structuring compensation for our named executive officers is determining the compensation packages offered by leading education and high-technology companies in order for us to offer competitive compensation within that group of companies. With the assistance of the compensation consultant, we surveyed the compensation practices of a peer group of companies in the United States to assess our competitiveness. The peer group generally consists of 15 leading education companies. This “Peer Group” of companies for our fiscal year ending in 2008 includes: Audible, Inc; Blackboard Inc; Capella Education Company; CNET Networks, Inc; Corinthian Colleges, Inc.; Courier Corporation; DeVry Inc.; eCollege.com; Educate, Inc.; IHS Inc.; ITT Educational Services, Inc.; Learning Tree International, Inc.; PLATO Learning, Inc.; Renaissance Learning, Inc.; and Strayer Education. Overall, our independent compensation consultant determined that our compensation programs, as structured, achieve our market philosophy relative to our Peer Group. Elements of Compensation Base Salary Base salaries for our named executive officers are generally established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions, and recognizing cost of living considerations. Base salaries are reviewed at least annually, and are adjusted from time to time based on performance and inflation and to realign salaries with market levels. Salaries were adjusted in the first quarter of fiscal year 2007 after review of fiscal year 2006 performance by the Compensation Committee. For our fiscal year ending in 2008, the base salaries of our named executive officers generally fall around the median of the Peer Group. Annual Performance Bonus We maintain an annual cash performance bonus program, the Executive Bonus Plan, that is intended to reward executive officers based on our performance and the individual named executive officer‟s contribution to that performance. In determining the performance-based compensation awarded to each named executive officer, the Compensation Committee may generally evaluate our performance and the executive‟s performance in a number of areas, which could include revenues, operating earnings, student retention, efficiency in product and systems development, marketing investment efficacy, new enrollment and developing company leaders. For our fiscal year ending in 2007, the amounts payable under our annual cash performance bonus program were primarily determined based upon actual performance measured against our achievement of revenues and earnings targets. For our fiscal year ending in 2007, Mr. Packard‟s target bonus was 100% of base salary, Mr. Baule‟s target bonus was 50% of base salary, Mr. Davis‟ target bonus was 40% of base salary and Mr. Saxberg‟s target bonus was 30% of base salary. The Compensation Committee believes that the performance bonus program provides incentives necessary to retain executives and reward them for our short-term performance. The performance goals for the fiscal year ending in 2007 were difficult to achieve and the results of performance are set forth in the section entitled “Summary Compensation Table” below. Stock Options The Company‟s named executive officers, along with a large portion of our employees, are eligible to participate in our stock option plan, pursuant to which we grant awards of stock options. We have also granted stock options to some of our named executive officers pursuant to stand-alone agreements. Initial stock option grants are typically made as of the date of hire and then additional stock options may be granted to realign the recipient‟s stock option holdings with the stock option holdings of similarly situated employees. Participants, including the named executive officers, become eligible for stock option grants based on individual performance, as determined by the Compensation Committee; however, historically the amount of stock options granted to each participant has generally been determined using a procedure approved by the Compensation Committee based upon several factors, including our performance (based on achievement of revenues and earnings targets), the value of the stock option at

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the time of grant and the recipient‟s contributions to the Company. As a result, additional grants may be made following a significant change in job responsibility or in recognition of a significant achievement. In addition, since we hired an independent compensation consultant, we have begun to review external factors such as market data and equity award policies of comparable companies when determining the grants of stock options to participants, including the named executive officers. Providing long-term incentive awards through the grant of stock options enhances our goal of aligning executive compensation with the long-term interests of our stockholders by linking compensation to our stock price and maximizing stockholder value. Stock options granted under our Amended and Restated Stock Option Plan generally have a four-year vesting schedule in order to provide an incentive for continued employment. The exercise price of options granted under the stock plan is equal to or greater than 100% of the fair market value of the underlying stock on the date of grant. During the fiscal year ending in 2007, Messrs. Packard and Davis received stock option grants pursuant to stand-alone agreements. Mr. Davis‟ option grant is subject to a time-based vesting schedule. However, to align Mr. Packard‟s equity compensation with our success, certain of Mr. Packard‟s stock options vest based upon the Company‟s achievement of performance metrics or upon the fair market value of our common stock reaching a certain price. In addition, certain options for common stock granted to Mr. Packard and Mr. Davis have exercise prices in excess of the fair market value of the underlying stock on the date of grant. For the fiscal year ending in 2007, we granted 4,850,000 stock options to Mr. Packard, and 500,000 stock options to Mr. Davis as part of their respective employment arrangements. Messrs. Baule and Saxberg did not receive option grants during our fiscal year ending in 2007. Deferred Compensation Plan While we do not currently maintain a deferred compensation plan, effective January 2008, members of our senior executive management team (including our named executive officers) and all vice presidents will be eligible to defer up to 100% of any cash component of the annual incentive bonus earned. The amounts may be deferred up to a maximum of 10 years and are expected to earn a fixed interest rate. Defined Contribution Plan We maintain a Section 401(k) Savings/Retirement Plan (the 401(k) Plan), which covers our eligible employees, including our named executive officers. The 401(k) Plan allows participants to defer up to 50% of their annual compensation, subject to certain limitations imposed by the Internal Revenue Code. The employees‟ elective deferrals are immediately vested and nonforfeitable upon contribution to the 401(k) Plan. We currently provide matching contributions equal to $0.25 for each dollar of participant contributions, up to a maximum of 4% of the participant‟s annual salary and subject to certain other limits. Our matching contributions are subject to a four-year vesting schedule. Employment, Severance and Change in Control Arrangements We currently have employment agreements in place with each of our named executive officers that provide for severance payments in connection with certain terminations of employment. During our fiscal year ending in 2007, Mr. Packard had an employment agreement with us that provided for salary continuation for 450 days following a termination of his employment without cause by us or due to constructive termination. On July 12, 2007, our board of directors approved an amended and restated employment agreement for Mr. Packard, which is discussed below. In addition, each of the other named executive officers have employment agreements with us that provide for employment on an “at will” basis and provide for severance payments ranging from six months to 12 months (plus benefit continuation in certain cases) generally in connection with terminations of employment without cause by us or for good reason by the executive. While the named executive officers are generally not entitled to receive payments solely as a result of a change in control of the Company, upon certain corporate transactions (including a sale of all or substantially all of the assets, certain mergers or consolidations and certain sales of our outstanding stock) all outstanding options will become fully vested and exercisable.

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We believe that providing the named executive officers with severance payments upon certain terminations of employment and accelerated vesting of stock options upon a change in control are key retention tools that assist us with remaining competitive with the companies in our Peer Group and further our goal of attracting and retaining key executives with superior ability and managerial talent. These employment agreements, including the revised terms of Mr. Packard‟s agreement approved by the board of directors and change in control arrangements are further described below under the section entitled “Potential Payments Upon Termination or Change in Control.” Summary Compensation Table for 2007 The following table provides information regarding the compensation that we paid to our named executive officers during the fiscal year ended June 30, 2007.

Option Name and Principal Position Ronald J. Packard Chief Executive Officer John F. Baule Chief Operating Officer and Chief Financial Officer Bruce J. Davis Executive Vice President of School Services
(4)

Nonequity Incentive Plan Compensation

All Other Compensation
(3)

Year 2007

Salary $ 410,000 $

Bonus —

Awards (1) $ 116,436 $

(2)

Total 2,050 $ 733,486

205,000

$

2007

300,000

—

—

150,000

1,646

451,646

2007

144,423

120,000 (5)

4,791

—

—

269,214

Bror Saxberg Chief Learning Officer

2007

310,000

—

—

85,000

2,713

397,713

(1)

(2)

(3) (4) (5)

This column represents the dollar amount recognized by us for financial statement reporting purposes of the fair value of stock options granted in fiscal year ended June 30, 2007, and prior years in accordance with FAS 123R, assuming no forfeitures. For additional information, including information regarding the assumptions used when valuing the stock options, refer to note 7 of our condensed consolidated financial statements filed herewith. The amounts set forth in this column reflect our accounting expense for these awards and do not correspond to the actual value that may be realized by the named executive officer receiving the awards. See the Grants of Plan-Based Awards Table for additional information on stock options granted during fiscal year ended June 30, 2007. This column represents cash awards to the named executive officers for performance with respect to fiscal year ended June 30, 2007, under our Executive Bonus Program. These awards are expected to be paid in September 2007. See “Grants of Plan-Based Awards Table” for additional information regarding these cash awards earned during fiscal year ended June 30, 2007. The amounts in this column consist of 401(k) matching contributions paid by us. Mr. Davis commenced his employment with us on January 8, 2007. Amounts included in the table reflect Mr. Davis‟ compensation from his date of hire through the end of the fiscal year ended on June 30, 2007. Pursuant to the terms of his employment agreement, Mr. Davis is entitled to a guaranteed bonus of $120,000 for fiscal year 2007 paid on July 8, 2007.

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Grants of Plan-Based Awards During 2007 The following table provides information regarding grants of plan-based awards to our named executive officers during the fiscal year ended June 30, 2007. The awards described in the following table were granted under our Executive Bonus Plan and stand-alone stock option agreements. The performance metrics considered when the awards were granted, if any, are described in previous subsections of the Compensation Discussion and Analysis above. No awards were granted to any named executive officer under our Amended and Restated Stock Option Plan during the fiscal year ended June 30, 2007.

Estimated Possible Payouts Under Nonequity Incentive Plan Awards (1) Grant Name and Principal Position Ronald J. Packard Chief Executive Officer Target

Estimated Future Payouts Under Equity Incentive Plan Awards (2) Maximu Threshold Target m

All Other Option Awards: Number of Securities Underlying Options (3)

Exercise or Base Price of Option

Closing Market Price on Date of

Grant Date Fair Value of Option Awards

Date

($)

(#)

(#)

(#)

(#)

Awards

Grant

($/Sh)

$ 7/27/2006 7/27/2006 7/27/2006 7/27/2006 7/27/2006 7/27/2006 7/27/2006 7/27/2006 7/27/2006

410,000

— — — — — — — 150,000 75,000 — —

— 350,000 600,000 150,000 200,000 200,000 50,000 1,200,000 600,000 1,500,000 —

— — — — — — — — — — —

— — — — — — — — — — — $

— 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 6.00 — $

— 0.58 0.58 0.58 0.58 0.58 0.58 0.58 0.58 0.58 — $

— 17,255 53,589 7,213 12,033 14,775 3,694 105,061 52,531 26,002 —

John F. Baule Chief Operating Officer and Chief Financial Officer Bruce J. Davis Executive Vice President of School Services Bror Saxberg Chief Learning Officer

150,000

2/1/2007

—

—

—

—

500,000

1.80

0.58

45,992

93,000

—

—

—

—

—

—

—

(1)

(2)

(3)

This column shows the target payout for 2007 performance under our Executive Bonus Program as described in the section titled “Annual Performance Bonus” in the Compensation Discussion and Analysis. There were no threshold or maximum amounts for these performance bonuses. The bonuses were earned for fiscal year ended June 30, 2007, and expected to be paid in September 2007. For each named executive officer other than Mr. Davis, the performance bonuses were based on such named executive officer‟s target bonus amount set forth in the named executive officer‟s employment agreement, and achievement of performance metrics as described above in the Compensation Discussion and Analysis. These bonus amounts are set forth in the column titled “Nonequity Incentive Plan Compensation” in the Summary Compensation Table. Mr. Davis‟ employment with us commenced on January 8, 2007, and pursuant to the terms of his employment agreement, Mr. Davis will receive a guaranteed bonus of $120,000 for the period January 8, 2007 through the end of the fiscal year ended June 30, 2007. Mr. Davis will be entitled to a performance-based annual bonus similar to the other named executive officers commencing in our fiscal year ending June 30, 2008. Stock options were granted pursuant to stand-alone stock option agreements with exercise prices in excess of the fair market value of a share of our common stock subject to such option on the date of grant, expire on December 31, 2012, and are subject to performance vesting schedules, as further described in the footnotes to the Outstanding Equity Awards at Fiscal Year End Table. The stock options with performance vesting schedules do not have maximum payout amounts. Stock options were granted pursuant to stand-alone stock option agreements with exercise prices in excess of the fair market value of a share of our

common stock subject to such option on the date of grant, expire on December 31, 2014 and are subject to a four year time-based vesting schedule.

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Outstanding Equity Awards at Fiscal Year End for 2007 The following table provides information regarding outstanding equity awards held by our named executive officers as of June 30, 2007. All such equity awards consist of stock options granted pursuant to our Amended and Restated Stock Option Plan or stand-alone stock option agreements, and no restricted stock awards have been granted to any of the named executive officers. The section titled “Stock Options” in this Compensation Discussion and Analysis section provides additional information regarding the outstanding equity awards set forth in this table.

Name and Principal Position Ronald J. Packard Chief Executive Officer (1)

Number of Securities Underlying Unexercised Options Exercisable 350,000 600,000 150,000 — — — — 300,000 — 675,000 900,000 100,000 450,000 —

Option Awards Equity Incentive Plan Awards: Number Number of of Securities Securities Underlying Underlying Unexercised Unexercised Options Unearned Unexercisable Options — — — — — — — — — — — 300,000 350,000 500,000 — — — 200,000 200,000 50,000 1,200,000 300,000 1,500,000 — — — — —

Option Exercise Price $ 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 6.00 1.34 1.34 1.50 1.34 1.80

Option Expiration Date 7/27/2014 7/27/2014 7/27/2014 7/27/2014 7/27/2014 7/27/2014 7/27/2014 7/27/2014 7/27/2014 7/1/2011 7/23/2010 6/1/2014 3/24/2013 2/1/2015

John F. Baule Chief Operating Officer and Chief Financial Officer (2) Bruce J. Davis Executive Vice President of School Services (3) Bror Saxberg Chief Learning Officer (4)

75,000 50,625

225,000 39,375

— —

1.34 1.34

4/26/2014 3/1/2013

(1)

(2)

(3) (4)

Mr. Packard‟s outstanding unvested options are subject to performance-based vesting. 200,000 options with exercise prices of $1.50 per share will vest in each of fiscal year ending June 30, 2008 and 2009 contingent upon our attaining revenues and EBITDA goals during each of the respective preceeding fiscal years. 50,000 options with exercise prices of $1.50 per share will vest in fiscal year ending June 30, 2009 contingent upon Mr. Packard attaining leadership goals during the preceeding fiscal year. 150,000 options with exercise prices of $1.50 per share will vest contingent upon jurisdictional expansion and related EBITDA goals. 300,000 options with vesting schedules contingent upon jurisdictional expansion and enrollment targets and with exercise prices of $1.50 per share have fully vested as of June 30, 2007. 1,500,000 options with exercise prices of $6.00 per share will vest upon the fair market value of a share of our common stock equaling $6.00. Mr. Baule‟s outstanding unvested options are subject to time-based vesting. 25,000 options with exercise prices of $1.50 per share will vest every three months beginning on September 1, 2007 through June 1, 2010. 50,000 options with exercise prices of $1.34 per share will vest every three months beginning on September 24, 2007 through March 24, 2009. Mr. Davis‟s outstanding unvested options are subject to time-based vesting. 125,000 options will vest on February 1, 2008 and 31,250 options will vest every three months thereafter beginning on May 1, 2008 through February 1, 2011. Mr. Saxberg‟s outstanding unvested options are subject to time-based vesting. 18,750 options will vest every three months beginning on July 27, 2007 through April 27, 2010, and 5,625 will vest every three months beginning on September 24, 2007 through March 24, 2009.

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Option Exercises and Stock Vested The following table provides information for the named executive officers regarding the stock options each named executive officer exercised, and the value realized, if any, during fiscal year ended June 30, 2007.

Name and Principal Position Ronald J. Packard Chief Executive Officer John F. Baule Chief Operating Officer and Chief Financial Officer Bruce J. Davis Executive Vice President of School Services Bror Saxberg Chief Learning Officer

Option Awards Number of Shares Acquired Value Realized on Exercise on Exercise (1) — — — 300,000 $ — — — 0 (2)

(1) (2)

None of the named executive officers other than Mr. Saxberg exercised any stock options during fiscal year ended June 30, 2007. The exercise price of each of the stock options exercised by Mr. Saxberg was higher than the fair market value of a share of K 12 ‟s common stock subject to each stock option on the date of exercise.

Potential Payments Upon Termination or Change in Control The Company has employment agreements with each of our named executive officers that provide for severance payments and, in some cases, other benefits upon certain terminations of employment. Employment Agreements Mr. Packard‟s employment agreement, effective as of January 1, 2006, provides for a term of employment through January 1, 2009, unless terminated earlier pursuant to the terms of the agreement. Upon a termination of Mr. Packard‟s employment by us without cause or due to a “constructive termination” (generally, a material reduction in Mr. Packard‟s duties, responsibilities or title), Mr. Packard is entitled to salary continuation for 450 days following termination and he may exercise his outstanding vested stock options until the earlier of 90 days following the expiration of any lock-up period applicable to our initial underwritten public offering, or the expiration of the option term. Upon termination of Mr. Packard‟s employment due to his death, his estate will receive salary continuation payments for 180 days following his death. The agreement also provides that Mr. Packard is subject to restrictive covenants during the term of the agreement and for certain periods following termination of employment, including confidentiality restrictive covenants during the term and for three years following termination, intellectual property restrictive covenants during the term, and nonsolicitation and noncompetition restrictive covenants during the period that Mr. Packard receives any compensation from us (including severance) and one year thereafter. On July 12, 2007, our board of directors approved an amended and restated employment agreement for Mr. Packard. This amended and restated agreement extends the term of Mr. Packard‟s employment until January 1, 2011, and provides for (i) an annual base salary of $425,000, (ii) an annual cash bonus to be awarded by the board of directors in its discretion with a target amount of 100% of base salary, (iii) additional stock option grants subject to both time-based and performance-based vesting, (iv) full vesting of all outstanding stock options upon a change in control of the Company, and (v) severance upon a termination of Mr. Packard‟s employment without cause by us equal to 18 months of base salary and the extension of the exercise date for Mr. Packard‟s outstanding stock options to the earlier of 90 days following expiration of any lock-up period in connection with the Company‟s initial public offering and the expiration of the term of the stock options.

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Mr. Baule‟s employment agreement, dated March 4, 2005, provides for his employment with us on an “at-will” basis. Upon a termination of Mr. Baule‟s employment for “good reason” (generally, a material reduction in Mr. Baule‟s compensation, assignment of a materially different title and responsibilities effectively resulting in a demotion, relocation of Mr. Baule‟s place of work more than 50 miles from our headquarters, or we otherwise materially breach the employment agreement), or by us for any reason other than cause, death or disability, Mr. Baule is entitled to severance equal to 365 days of his then-current salary, paid in six monthly installments following termination, and medical and dental benefit continuation for 365 days, or if earlier, until eligible for benefits elsewhere (or reimbursement of COBRA costs to the extent our employee benefit plans do not allow post-termination participation by Mr. Baule). The agreement also provides that Mr. Baule will be subject to the terms of the Company‟s Confidentiality, Proprietary Rights and Non-Solicitation Agreement, which generally prohibits the unauthorized disclosure of our confidential information during and after the period of employment, ensures our right of ownership of any intellectual property developed during the period of employment, prohibits the solicitation of employees for one year following termination of employment and requires that any disputes regarding employment or termination of employment be subject to binding arbitration. Mr. Davis‟ employment agreement, effective as of January 3, 2007, provides for his employment with us on an “at-will” basis. Upon a termination of Mr. Davis‟ employment for “good reason” (generally, a material breach of the employment agreement by us that is not cured within 60 days, a reduction in base salary, a diminution or adverse change to title or the person to whom Mr. Davis reports prior to a change in control of the Company, a material diminution in authority, responsibilities or duties, a relocation of place of employment more than 25 miles from our headquarters, a material reduction in Mr. Davis‟ compensation, assignment of a materially different title and responsibilities effectively demoting Mr. Davis, or if the employment agreement is not assumed by the successor within 90 days following a change in control of the Company), or by us without cause, Mr. Davis is entitled to 180 days of salary continuation if the termination occurs prior to January 1, 2008, and 365 days of salary continuation if the termination occurs after January 1, 2008. The agreement also provides that Mr. Davis will be subject to the terms of our Confidentiality, Proprietary Rights and Non-Solicitation Agreement which generally prohibits the unauthorized disclosure of our confidential information during and after the period of employment, ensures our right of ownership of any intellectual property developed during the period of employment, prohibits the solicitation of employees for one year following termination of employment and requires that any disputes regarding employment or termination of employment be subject to binding arbitration. Mr. Saxberg‟s employment agreement, dated June 1, 2006, provides for his employment with us on an “at-will” basis. Upon a termination of Mr. Saxberg‟s employment for “good reason” (Mr. Saxberg‟s resignation within 40 days after his discovery of a material breach of the agreement by us which is not cured within 30 days after written notice from Mr. Saxberg), or by us without “cause,” Mr. Saxberg is entitled to 180 days of salary continuation, reduced by any compensation resulting from new employment. The agreement also provides that Mr. Saxberg will be subject to the terms of our Confidentiality, Proprietary Rights and Non-Solicitation Agreement which generally prohibits the unauthorized disclosure of our confidential information during and after the period of employment, ensures our right of ownership of any intellectual property developed during the period of employment, prohibits the solicitation of employees for one year following termination of employment and requires that any disputes regarding employment or termination of employment be subject to binding arbitration. Change in Control Arrangements Except for certain stock options granted to Mr. Packard and Mr. Baule during our fiscal year ending in 2007, the stock option agreements for outstanding stock options generally provide for accelerated and full vesting of unvested stock options upon certain corporate events. As described above, on July 12, 2007, our board of directors approved an amended and restated employment agreement for Mr. Packard, which provides that all of his outstanding options will become fully vested upon a change in control of the Company. Additionally, on July 12, 2007, our board of directors also approved the terms of a new option agreement for Mr. Baule, which provides that all of his outstanding options will become fully vested upon a change in control of the Company. Those events include a sale of all or substantially all of our assets, a merger or consolidation which results in the Company‟s stockholders immediately prior to the transaction owning less than 50% of our voting stock immediately after the transaction, and a sale of our outstanding securities (other than in connection with an initial public offering) which

82

results in our stockholders immediately prior to the transaction owning less than 50% of our voting stock immediately after the transaction. In addition, as described above, Mr. Davis is entitled to voluntarily terminate his employment and receive the severance payments described above if his employment agreement is not assumed by the successor entity within 90 days following a change in control of the Company. Other than the foregoing, none of the named executive officers is entitled to any additional payments upon a change in control of the Company. Potential Value of Termination and Change in Control Benefits The following table provides the dollar value of potential payments and benefits that each named executive officer would be entitled to receive upon certain terminations of employment and upon a change in control of the Company, assuming that the termination or change in control occurred on June 30, 2007, and the price per share of our common stock subject to the stock options equaled $1.82, the value of a share on June 30, 2007. Without Nam e Ronald J. Packard Payment Salary continuation Benefit continuation Option vesting Salary continuation Benefit continuation Option vesting Salary continuation Benefit continuation Option vesting Salary continuation Benefit continuation Option vesting Death $ 202,192 — — — — — — — — — — — Cause $ 505,479 — — 300,000 16,734 — 147,945 — — 152,877 — — Good Reason $ 505,479 — — 300,000 16,734 — 147,945 — — 152,877 — — $ Change in Control — — 756,000 — — 264,000 — — 10,000 — — 90,900

John F. Baule

Bruce J. Davis

Bror Saxberg

Director Compensation For fiscal year ended June 30, 2007, and prior fiscal years, we compensated our nonemployee directors solely through grants of stock options. Directors who are also our employees receive no additional compensation for serving on the board or its committees. Option Awards
(1)

Nam e Andrew H. Tisch Arthur H. Bilger Chester E. Finn Jr. Liza A. Boyd Lowell J. Milken Steven B. Fink Thomas J. Wilford

Total
(1)

$

708 (2) 354 (3) 354 (4) 708 (5) 708 (6) 708 (7) 354 (8)

$

708 354 354 708 708 708 354

(1)

This column represents the dollar amount recognized by us for financial statement reporting purposes of the fair value of stock options granted in fiscal year ended June 30, 2007, and prior years under our Amended and Restated Stock Option Plan in accordance with FAS 123R, assuming no

forfeitures. For additional information, including information regarding the assumptions used when valuing the

83

(2)

(3)

(4)

(5)

(6)

(7)

(8)

stock options, refer to note 7 of our financial condensed consolidated statements filed herewith. The amounts set forth in this column reflect our accounting expense for these awards and do not correspond to the actual value that may be realized by the directors receiving the awards. During fiscal year ended June 30, 2007, Mr. Tisch was granted 50,000 options on May 17, 2007 with a fair value of $33,975. As of June 30, 2007, Mr. Tisch held options to purchase 275,000 shares of common stock:, consisting of 50,000 granted on May 17, 2007; 50,000 granted on April 27, 2006; 50,000 granted on March 24, 2005; 50,000 granted on March 31, 2004; 50,000 granted on February 10, 2003; and 25,000 granted on July 23, 2002. During fiscal year ended June 30, 2007, Mr. Bilger was granted 25,000 options on May 17, 2007 with a fair value of $16,988. As of June 30, 2007, Mr. Bilger held options to purchase 150,000 shares of common stock:, consisting of 25,000 granted on May 17, 2007; 25,000 granted on April 27, 2006; 25,000 granted on March 24, 2005; 25,000 granted on March 31, 2004; 25,000 granted on February 10, 2003; and 25,000 granted on July 23, 2002. Mr. Bilger resigned from the board of directors on June 29, 2007. During fiscal year ended June 30, 2007, Mr. Finn was granted 25,000 options on May 17, 2007 with a fair value of $16,988. As of June 30, 2007, Mr. Finn held options to purchase 210,000 shares of common stock:, consisting of 25,000 granted on May 17, 2007; 25,000 granted on April 27, 2006; 25,000 granted on March 24, 2005; 25,000 granted on March 31, 2004; 25,000 granted on February 10, 2003; 25,000 granted on July 23, 2002; and 60,000 granted on August 31, 2000. Mr. Finn resigned from the board of directors on July 19, 2007. Ms. Boyd serves as a director on behalf of the Constellation Funds (as defined in footnote (11) to the Principal and Selling Stockholders table). During fiscal year ended June 30, 2007, Ms. Boyd was granted 50,000 options on May 17, 2007 with a fair value of $33,975, which have been assigned to the Constellation Funds. The options granted to the director serving on behalf of the Constellation Funds in prior years have also been assigned to the Constellation Funds. As of June 30, 2007, the Constellation Funds held options to purchase 237,500 shares of common stock:, consisting of 50,000 granted on May 17, 2007; 50,000 granted on April 27, 2006; 50,000 granted on March 24, 2005; 50,000 granted on March 31, 2004; and 37,500 granted on February 10, 2003. During fiscal year ended June 30, 2007, Mr. Milken was granted 50,000 options on May 17, 2007 with a fair value of $33,975. As of June 30, 2007, Mr. Milken held options to purchase 275,000 shares of common stock:, consisting of 50,000 granted on May 17, 2007; 50,000 granted on April 27, 2006; 50,000 granted on March 24, 2005; 50,000 granted on March 31, 2004; 50,000 granted on February 10, 2003; and 25,000 granted on July 23, 2002. Mr. Milken resigned from the board of directors on July 11, 2007. During fiscal year ended June 30, 2007, Mr. Fink was granted 50,000 options on May 17, 2007 with a fair value of $33,975. As of June 30, 2007, Mr. Fink held options to purchase 205,685 shares of common stock:, consisting of 50,000 granted on May 17, 2007; 50,000 granted on April 27, 2006; 50,000 granted on March 24, 2005; 50,000 granted on March 31, 2004; 959 granted on December 18, 2003; and 4,726 granted on October 24, 2003. During fiscal year ended June 30, 2007, Mr. Wilford was granted 25,000 options on May 17, 2007 with a fair value of $16,988. As of June 30, 2007, Mr. Wilford held options to purchase 125,000 shares of common stock:, consisting of 25,000 granted on May 17, 2007; 25,000 granted on April 27, 2006; 25,000 granted on March 24, 2005; 25,000 granted on March 31, 2004; and 25,000 granted on February 10, 2003.

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CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS The following is a summary of transactions since July 1, 2004 to which we have been a party in which the amount involved exceeded $120,000 and in which any of our executive officers, directors or beneficial holders of more than 5% of our capital stock had or will have a direct or indirect material interest, other than compensation arrangements that are described under the section of this prospectus entitled “Compensation Discussion and Analysis.” Policies and Procedures for Related-Party Transactions All of the transactions set forth below were approved by a majority of the board of directors, including a majority of the independent and disinterested members of the board of directors. We believe that we have executed all of the transactions set forth below on terms no less favorable to us than we could have obtained from unaffiliated third parties. It is our intention to ensure that all future transactions between us and our officers, directors and principal stockholders and their affiliates, are approved by a majority of the board of directors, including a majority of the independent and disinterested members of the board of directors, and are on terms no less favorable to us than those that we could obtain from unaffiliated third parties. Loan From Director Stockholders On June 28, 2005, the Company entered into a loan commitment with certain of its director stockholders and their affiliates. The loan, which was made to supplement our working capital, entitled us to borrow up to $8.050 million in two installments. In June 2005, we borrowed $4.025 million. The loan was secured by our accounts receivable and certain other assets and was to mature on December 31, 2006. However, we paid the loan in full, including $1.0 million in interest, on December 21, 2006 and all obligations relating to the loan have since been released. Stockholders Agreement We entered into a Second Amended and Restated Stockholders Agreement, dated December 19, 2003, with the holders of our common stock and the holders of our Series B and Series C preferred stock. We refer to this agreement below as the stockholders agreement. The stockholders agreement contains certain transfer restrictions, preemptive rights and drag-along rights, each of which will terminate upon completion of this offering. Pursuant to the stockholders agreement, holders of shares of our common stock and preferred stock have the registration rights described below. These registration rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares included in such registration and our right to postpone a requested registration for a period of no more than 120 days if our board determines such registration would be detrimental to us. The holders of at least one-third of the shares of our common stock issued or issuable to our preferred stockholders upon conversion of their preferred stock, subject to certain exceptions, may require us to file a registration statement under the Securities Act at our expense with respect to such shares of common stock. We are not obligated to take any action to effect any registration demanded pursuant to the stockholders agreement during the period starting 60 days prior to and ending six months following the effective date of any registration statement pertaining to any of our securities. The stockholders agreement grants three such demand registration rights. Beginning six months after this offering, if we propose to register any shares of our common stock, persons owning or having the right to acquire shares of our common stock are entitled to notice of such registration and are entitled to include shares of their common stock therein. We are obligated to pay all registration expenses, other than underwriting commissions, brokerage fees or transfer taxes related to any demand or piggyback registration. Each holder agrees not to undertake any public sale or distribution of shares of our common stock during the 180-day period following the closing of an initial public offering of our common stock. The stockholders agreement contains customary indemnification provisions.

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Individual Stockholder Agreements We entered into a Stockholder Agreement with our Chief Executive Officer, Ronald J. Packard, and Knowledge Universe Learning, Inc. (KULI) dated April 26, 2000. Pursuant to that agreement, Mr. Packard granted to KULI an irrevocable proxy to vote and/or give written consents with respect to any and all shares of the Company owned by Mr. Packard and/or standing in the name of Mr. Packard on the books and records of the Company or with respect to which Mr. Packard otherwise may be entitled to vote at any and all annual or special meetings of the stockholders of the Company or by written consent. Upon the completion of this offering, this agreement shall automatically terminate. We entered into a Stockholder Agreement with William J. Bennett and KULI on February 20, 2000. Dr. Bennett resigned as a director and our Chairman in October 2005, at which time certain terms of this agreement were amended in connection with his resignation. Upon the closing of the offering, any antidilution rights that remain in the agreement will terminate. The agreement initially prohibited sales by Dr. Bennett of the 1,500,000 shares he was issued in 2000, and now limits him to sales of no more than 20% of such shares per year. Employment Agreements We have entered into employment with certain of our executive officers. For more information regarding these agreements. See “Compensation Discussion and Analysis — Employment Agreements.”

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PRINCIPAL AND SELLING STOCKHOLDERS The following table provides certain information regarding the beneficial ownership of our outstanding capital stock as of June 30, 2007, after giving effect to a for stock split, for: • each person or group who beneficially owns more than 5% of our capital stock on a fully diluted basis; • each of the executive officers named in the Summary Compensation Table; • each of our directors; • each of the selling stockholders; and • all of our directors and executive officers as a group. Unless otherwise noted, the address for each director and executive officer is c/o K12 Inc., 2300 Corporate Park Drive, Herndon, VA 20171. Shares Beneficially Owned Prior to This Offering (1) Name of Beneficial Owner Named Executive Officers Ronald J. Packard (2) John F. Baule (3) Bror Saxberg (4) Bruce J. Davis Directors Andrew H. Tisch (5) Thomas J. Wilford (6) Guillermo Bron (7) Steven B. Fink (8) Liza A. Boyd (9) All Directors and Executive Officers as a Group (9 persons) Beneficial Owners of 5% or More of Our Outstanding Common Stock Learning Group LLC (10) CV II Entities (11) Mollusk Holdings, LLC (12)

Shares to be Sold in This

Shares Beneficially Owned After This Offering (1)

Number

Percent

Offering

Number

Percent

4,681,369 550,000 444,375 — 5,532,243 4,206,345 432,738 105,269 — 15,952,339

4.07 % * * — 4.94 % 3.76 % * * — 13.75 %

27,521,360 17,573,842 13,002,086

24.48 % 15.70 % 11.51 %

* (1)

Less than 1% beneficial ownership. Beneficial ownership of shares is determined in accordance with the rules of the Securities and Exchange Commission and generally includes any shares over which a person exercises sole or shared voting or investment power. Except as indicated by footnote, and subject to applicable community property laws, to our knowledge, each stockholder identified in the table possesses sole voting and investment power with respect to all shares of common stock shown as beneficially owned by the stockholder. The number of shares beneficially owned by a person includes shares of common stock subject to options and warrants held by that person that are currently exercisable or exercisable within 60 days of June 30, 2007 and not subject to repurchase as of that date. Shares issuable pursuant to options and warrants are deemed outstanding for calculating the percentage ownership of the person holding the options and warrants but are not deemed outstanding for the purposes of calculating the percentage ownership of any other person. For purposes of this table, the number of shares of common stock outstanding as of June 30, 2007 is deemed to be 111,798,550, after giving effect to the conversion of our outstanding preferred stock into

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101,386,536 shares of common stock immediately prior to the closing of this offering. For purposes of calculating the percentage beneficially owned by any person, shares of common stock issuable to such person upon the exercise of any options or warrants exercisable within 60 days of June 30, 2007 are also assumed to be outstanding. (2) Includes options for 3,175,000 shares of common stock, warrants to purchase 6,369 shares of common stock and 1,500,000 shares of common stock. These totals include both shares and options held individually and in the 2006 Packard Investment Partnership, L.P. Includes options for 550,000 shares of common stock. Includes 300,000 shares of common stock and options for 144,375 shares of common stock. Includes options for 175,000 shares of common stock and warrants to purchase 12,739 shares of common stock. Also includes 1,248,900 shares of common stock issuable upon conversion of preferred stock held Andrew H. Tisch 1991 Trust #2, 182,130 shares of common stock issuable upon conversion of preferred stock held by KAL Family Partnership and 182,129 shares of common stock issuable upon conversion of preferred stock held by KSC Family Partnership. Mr. Tisch has voting and investment control with respect to the shares held by these entities. The address of these stockholders is c/o Loews Corporation, 667 Madison Avenue, 7th Floor, New York, New York 10021. Also includes 3,731,345 shares of common stock issuable upon conversion of preferred stock held by Continental Casualty Company. Mr. Tisch is on the board of directors of CNA Financial Corporation, which is affiliated with Continental Casualty Company. Mr. Tisch disclaims beneficial ownership of the shares held by Continental Casualty Company. The address for Continental Casualty Company is c/o CNA Financial Corporation, CNA Center, Chicago, Illinois 60685. Includes options for 75,000 shares of common stock. Also includes 4,131,345 shares of common stock held by Alscott Investments, LLC. Mr. Wilford has voting and investment power with respect to shares held by this stockholder. The address of Alscott Investments, LLC is 501 Baybrook Court, Boise, Idaho 83706. Mr. Wilford disclaims beneficial ownership of the shares held by Alscott Investment, LLC. Includes 432,738 shares of common stock issuable upon conversion of preferred stock held by The Bron Trust, dated July 27, 1998. Mr. Bron is not the trustee of The Bron Trust, however, he is the beneficiary of The Bron Trust and, therefore, is deemed to beneficially own such shares. Mr. Bron disclaims beneficial ownership of the shares held by The Bron Trust except to the extent of his pecuniary interest, if any, therein. Includes options for 105,269 shares of common stock. Does not include the shares of preferred stock or options to acquire common stock held by Constellation Venture Capital II, L.P., Constellation Venture Capital Offshore II, L.P., The BSC Employee Fund IV, L.P. and CVC II Partners, LLC (See Note (11)). Ms. Boyd is a Managing Director of Constellation Ventures. Ms. Boyd does not have voting power nor investment power with respect to the common stock beneficially owned by such funds. Includes 23,791,931 shares of common stock issuable upon conversion of preferred stock, 3,106,714 shares of common stock, warrants to purchase 40,625 shares of common stock and warrants to purchase 582,090 shares of preferred stock convertible into an equivalent amount of shares of common stock upon consummation of this offering. The address of this stockholder is 1250 4th Street, Santa Monica, California 90401. The CV II Entities consist of (i) Constellation Venture Capital II, L.P. (CVC II), (ii) Constellation Venture Capital Offshore II, L.P. (Offshore), (iii) The BSC Employee Fund IV, L.P. (BSC) and (iv) CVC II Partners, LLC (CVC II Partners, and together with CVC II, Offshore and BSC, the Constellation Funds). Constellation Ventures Management II LLC is the sole general partner of CVC II, the sole general partner of Offshore and the sole managing general partner of BSC. Bear Stearns Asset Management Inc. is the managing member of CVC II Partners and the investment adviser to each Constellation Fund. Clifford Friedman is a member of Constellation Ventures Management II, LLC and a senior managing director of Bear Stearns Asset Management Inc. The Bear Stearns Companies Inc., a registered broker-dealer, is the sole managing member of Constellation Ventures Management II, LLC and the parent corporation of Bear Stearns Asset Management Inc. Constellation Ventures Management II, LLC, Bear Stearns Asset Management Inc. and Mr. Friedman share investment and voting control of shares beneficially owned by CVC II, Offshore and BSC. Bear Stearns Asset Management Inc. exercises sole investment and voting control of the shares beneficially owned by CVC II Partners. The address for each such entity and person is 237 Park Avenue, New York, New York 10017. The holdings of the CV II Entities include: (i) 9,220,061 shares of common stock issuable upon conversion of preferred stock held by CVC II and options for 72,710 shares of common stock assigned to CVC II by Ms. Boyd or a former director appointed by the Constellation Funds; (ii) 4,358,964 shares of common stock issuable upon conversion of preferred stock held by Offshore and options for 34,375 shares of common stock assigned to Offshore by Ms. Boyd or a former director appointed by the Constellation Funds; (iii) 3,652,763 shares of common stock issuable upon conversion of preferred stock held by BSC and options for 28,806 shares of common stock assigned to BSC by Ms. Boyd or a former director appointed by the Constellation Funds; and (iv) 204,554 shares of common stock issuable upon conversion of preferred stock held by CVC II Partners and options for 1,609 shares of common stock assigned to CVC II Partners by Ms. Boyd or a former director appointed by the Constellation Funds. Ms. Boyd is affiliated with the Constellation Funds but disclaims beneficial ownership of the shares held by them. (12) Includes 7,962,395 shares of common stock issuable upon conversion of preferred stock held, 3,875,512 shares of common stock and warrants to purchase 1,164,179 shares of preferred stock convertible into an equivalent amount of shares of common stock upon consummation of this offering. The address of this stockholder is 101 Ygnacio Valley Road, Suite 310, Walnut Creek, California 94596.

(3) (4) (5)

(6)

(7)

(8) (9)

(10)

(11)

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DESCRIPTION OF CAPITAL STOCK The following description of our capital stock is only a summary, and is qualified in its entirety by reference to the actual terms and provisions of the capital stock contained in our Amended and Restated Certificate of Incorporation, as amended, Bylaws, as amended, and other agreements to which we and our stockholders are parties. As of June 30, 2007, there were 10,412,014 shares of common stock outstanding, held of record by 35 stockholders, and there were 51,524,974 shares of Series B preferred stock and 49,861,562 shares of Series C preferred stock outstanding, held of record by 62 and 39 stockholders, respectively. Immediately prior to the completion of this offering, all outstanding shares of our preferred stock will be converted into shares of our common stock pursuant to the terms thereof without any further action required by us or the holders of the preferred stock. Upon completion of this offering, our authorized capital stock will consist of shares of common stock, par value $0.0001 per share, and shares of preferred stock, par value $0.0001 per share, all of which shares of preferred stock will be undesignated. Common Stock The holders of our common stock are entitled to the following rights: Voting Rights Each share of our common stock entitles its holder to one vote per share on all matters to be voted upon by the stockholders. There is no cumulative voting, which means that a holder or group of holders of more than 50% of the shares of our common stock can elect all of our directors. Dividend Rights The holders of our common stock are entitled to receive dividends when and as declared by our board of directors from legally available sources, subject to any restrictions in our Amended and Restated Certificate of Incorporation, as amended, or prior rights of the holders of our preferred stock. See “Dividend Policy.” Liquidation Rights In the event of our liquidation or dissolution, the holders of our common stock are entitled to share ratably in the assets available for distribution after the payment of all of our debts and other liabilities, subject to the prior rights of the holders of our preferred stock. Other Matters The holders of our common stock have no subscription, redemption or conversion privileges. Our common stock does not entitle its holders to preemptive rights. All of the outstanding shares of our common stock are fully paid and nonassessable. The rights, preferences and privileges of the holders of our common stock are subject to the rights of the holders of shares of any series of preferred stock which we may issue in the future. Preferred Stock Our board of directors has the authority to issue preferred stock in one or more classes or series and to fix the designations, powers, preferences, and rights, and the qualifications, limitations or restrictions thereof including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class or series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring, or preventing a change in control of our company without further action by the stockholders and may adversely affect the voting and other rights of the holders of our common stock. As of June 30, 2007, there was 51,524,974 shares of Series B preferred stock and 49,861,562 of Series C preferred stock issued and outstanding.

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Governing Documents and Delaware Law that May Have an Antitakeover Effect The provisions of (1) Delaware law, (2) our amended and restated certificate of incorporation to be effective upon completion of this offering, and (3) our amended and restated bylaws to be effective upon completion of this offering, which are discussed below, could discourage or make it more difficult to accomplish a proxy contest or other change in our management or the acquisition of control by a holder of a substantial amount of our voting stock. Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws Upon consummation of the offering, we expect that our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that could have the effect of discouraging potential acquisition proposals or tender offers or delaying or preventing a change of control of the Company. In particular, we expect that our amended and restated certificate of incorporation and amended and restated bylaws, as applicable, among other things, will: • provide that special meetings of the stockholders may be called only by our Chairman of the Board, Chief Executive Officer or the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors of our board of directors; • establish procedures with respect to stockholder proposals and stockholder nominations, including requiring advance written notice of a stockholder proposal or director nomination; • divide our board of directors into three classes. The directors in each class will serve for a three-year term, one class being elected each year by our stockholders. This system of electing and removing directors may tend to discourage a third-party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of the directors; • not include a provision for cumulative voting in the election of directors. Under cumulative voting, a minority stockholder holding a sufficient number of shares may be able to ensure the election of one or more directors. The absence of cumulative voting may have the effect of limiting the ability of minority stockholders to effect changes in the board of directors and, as a result, may have the effect of deterring a hostile takeover or delaying or preventing changes in control or management of our company; • provide that vacancies on our board of directors may be filled by a majority of directors in office, although less than a quorum, and not by the stockholders; • require that the vote of holders of 66 2 / 3 % of the voting power of the outstanding shares entitled to vote generally in the election of directors is required to amend various provisions of our amended and restated certificate of incorporation and amended and restated bylaws; and • provide that the board of directors has the power to alter, amend or repeal the bylaws without stockholder approval. Following the completion of this offering, our amended and restated certificate of incorporation will authorize our board of directors, without further vote or action by the stockholders, to issue up to shares of preferred stock, par value $0.0001 per share, in one or more classes or series, and to fix or alter: • the number of shares constituting any class or series; • the designations, powers and preferences of each class or series; • the relative, participating, optional and other special rights of each class or series; and • any qualifications, limitations or restrictions on each class or series. The above provisions are intended to promote continuity and stability in the composition of our board of directors and in the policies formulated by the board, and to discourage certain types of transactions that may involve an actual or threatened change of control. These provisions are expected to reduce our vulnerability to unsolicited acquisition attempts as well as discourage certain tactics that may be used in proxy fights. Such provisions, however, could discourage others from making tender offers for our shares and, as a consequence, may

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also inhibit fluctuations in the market price of our common stock that could result from actual or rumored takeover attempts. These provisions could also operate to prevent changes in our management. Delaware Takeover Statute We are subject to the provisions of Section 203 of the Delaware General Corporation Law, or the DGCL. Subject to certain exceptions, Section 203 prohibits a Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the time that the stockholder became an interested stockholder, unless: • prior to the date of the business combination, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; • on consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock of the interested stockholder) those shares owned: • by persons who are directors and also officers, and • by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or • at or subsequent to such time, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2 / 3 % of the outstanding voting stock that is not owned by the interested stockholder. A “business combination” includes: • any merger or consolidation involving the corporation and the interested stockholder; • any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; • subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; • any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or • the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. Subject to various exceptions, an “interested stockholder” is an entity or person who, together with affiliates and associates, owns (or within three years from the date of determination, did own) 15% or more of the corporation‟s outstanding voting stock. This statute could delay, defer or prohibit a merger or other takeover or a change of control of the Company. New York Stock Exchange We will apply to list our common stock on the New York Stock Exchange under the symbol LRN. Transfer Agent and Registrar The transfer agent and registrar for our common stock is .

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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS TO NON-U.S. HOLDERS The following is a summary of the material U.S. federal income tax consequences to non-U.S. holders of the ownership and disposition of our common stock, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Code, U.S. Department of the Treasury regulations promulgated thereunder, administrative rulings and judicial decisions, all as of the date hereof. These authorities may be changed, possibly retroactively, so as to result in U.S. federal income tax consequences different from those set forth below. This summary is applicable only to non-U.S. holders who hold our common stock as a capital asset (generally, an asset held for investment purposes). We have not sought any ruling from the Internal Revenue Service, or the IRS, with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS will agree with such statements and conclusions. This summary also does not address the tax considerations arising under the laws of any foreign, state or local jurisdiction. In addition, this discussion does not address tax considerations applicable to an investor‟s particular circumstances or to investors that may be subject to special tax rules, including, without limitation: • banks, insurance companies, or other financial institutions; • persons subject to the alternative minimum tax; • tax-exempt organizations; • dealers in securities or currencies; • traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; • entities treated as partnerships for U.S. federal income tax purposes or investors in such entities; • “controlled foreign corporations,” “passive foreign corporations” and corporations that accumulate earnings to avoid U.S. federal income tax; • U.S. expatriates or former long-term residents of the United States; • persons who hold our common stock as a position in a hedging transaction, “straddle,” “conversion transaction” or other risk reduction transaction; or • persons deemed to sell our common stock under the constructive sale provisions of the Code. In addition, if a partnership or other entity treated as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner generally will depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships which hold our common stock and partners in such partnerships should consult their tax advisors. This discussion is for general information only and is not tax advice. You are urged to consult your tax advisor with respect to the application of the U.S. federal income tax laws to your particular situation, as well as any tax consequences of the purchase, ownership and disposition of our common stock arising under the U.S. federal estate or gift tax rules or under the laws of any state, local, foreign or other taxing jurisdiction or under any applicable tax treaty. Non-U.S. Holder Defined For purposes of this discussion, you are a non-U.S. holder if you are a holder that, for U.S. federal income tax purposes, is not a U.S. person. For purposes of this discussion, you are a U.S. person if you are: • an individual who is a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or who meets the “substantial presence” test under Section 7701(b) of the

Code;

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• a corporation, or other entity taxable as a corporation for U.S. tax purposes, created or organized in the United States or under the laws of the United States or of any state therein or the District of Columbia; • an estate whose income is subject to U.S. federal income tax regardless of its source; or • a trust (1) whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust or (2) which has made an election to be treated as a U.S. person. Distributions As discussed under “Dividend Policy” above, we do not currently expect to pay dividends or other distributions on our common stock. If distributions are made on shares of our common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed both our current and our accumulated earnings and profits, they will constitute a return of capital and will first reduce your basis in our common stock, but not below zero, and then will be treated as gain from the sale of stock. Any dividend paid to you generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable tax treaty. In order to receive a reduced treaty rate, you must provide the appropriate withholding agent with an IRS Form W-8BEN or other appropriate version of IRS Form W-8 certifying qualification for the reduced rate. Dividends received by you that are effectively connected with your conduct of a U.S. trade or business (and, where a tax treaty applies, are attributable to a U.S. permanent establishment maintained by you) are exempt from such withholding tax. In order to obtain this exemption, you must provide the appropriate withholding agent with an IRS Form W-8ECI properly certifying such exemption. Such effectively connected dividends, although not subject to withholding tax, are taxed at the same graduated rates applicable to U.S. persons, net of any allowable deductions and credits. In addition, if you are a corporate non-U.S. holder, dividends you receive that are effectively connected with your conduct of a U.S. trade or business may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty. If you are eligible for a reduced rate of withholding tax pursuant to a tax treaty, you may obtain a refund of any excess amounts currently withheld if you file an appropriate claim for refund with the IRS in a timely manner. Gain on Disposition of Common Stock You generally will not be required to pay U.S. federal income tax on any gain realized upon the sale or other disposition of our common stock unless: • the gain is effectively connected with your conduct of a U.S. trade or business (and, where a tax treaty applies, is attributable to a U.S. permanent establishment maintained by you); • you are an individual who is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which the sale or disposition occurs and certain other conditions are met; or • our common stock constitutes a U.S. real property interest by reason of our status as a “United States real property holding corporation” (a USRPHC) for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or your holding period for our common stock. We believe that we are not currently and will not become a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become USRPHC, however, as long as our common stock is regularly traded on an established securities market, such common stock will be treated as U.S. real property interests only if you actually or constructively hold more than 5% of our common stock.

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If you are a non-U.S. holder described in the first bullet above, you will be required to pay tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates, and corporate non-U.S. holders described in the first bullet above may be subject to the branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. If you are an individual non-U.S. holder described in the second bullet above you will be required to pay a flat 30% tax on the gain derived from the sale, which tax may be offset by U.S. source capital losses. You should consult any applicable income tax treaties that may provide for different rules. Backup Withholding and Information Reporting Generally, we must report annually to the IRS the amount of dividends paid to you, your name and address, and the amount of tax withheld, if any. A similar report will be sent to you. These information reporting requirements apply even if withholding is not required. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in your country of residence. Payments of dividends made to you will not be subject to backup withholding if you establish an exemption, for example, by properly certifying your non-U.S. status on a Form W-8BEN or another appropriate version of Form W-8. Notwithstanding the foregoing, backup withholding at a current rate of 28%, may apply if either we or our paying agent has actual knowledge, or reason to know, that you are a U.S. person. Payments of the proceeds from a disposition of our common stock effected outside the United States by a non-U.S. holder made by or through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, information reporting (but not backup withholding) will apply to such a payment if the broker is a U.S. person, a controlled foreign corporation for U.S. federal income tax purposes, a foreign person 50% or more of whose gross income is effectively connected with a U.S. trade or business for a specified three-year period, or a foreign partnership with certain connections with the United States, unless the broker has documentary evidence in its records that the beneficial owner is a non-U.S. holder and specified conditions are met or an exemption is otherwise established. Payments of the proceeds from a disposition of our common stock by a non-U.S. holder made by or through the U.S. office of a broker is generally subject to information reporting and backup withholding unless the non-U.S. holder certifies as to its non-U.S. holder status under penalties of perjury or otherwise establishes an exemption from information reporting and backup withholding. Backup withholding is not an additional tax. Rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may be obtained, provided that the required information is furnished to the IRS in a timely manner.

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SHARES ELIGIBLE FOR FUTURE SALE If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options or warrants, in the public market following the offering, the market price of our common stock could decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Upon completion of the offering, we will have outstanding an aggregate of shares of our common stock, assuming no exercise of the underwriters‟ overallotment option and no exercise of outstanding options. Of these shares, all of the shares sold in the offering will be freely tradable without restriction or further registration under the Securities Act, unless the shares are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act. This leaves shares eligible for sale in the public market as follows: Number of Shares

Date After days from the date of this prospectus (subject, in some cases, to volume limitations). At various times after 180 days from the date of this prospectus as described below under “Lock-up” Agreements.

Rule 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: • 1% of the number of shares of our common stock then outstanding, which will equal approximately immediately after the offering; or shares

• the average weekly trading volume of our common stock on the New York Stock Exchange during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. The Securities and Exchange Commission has a proposal pending to shorten the one-year holding period to six months. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. The Securities and Exchange Commission has a proposal pending to shorten the two-year holding period to six months. Lock-Up Agreements All of our officers and directors and certain of our stockholders have entered into lock-up agreements under which they agreed not to transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock, except for shares sold in this offering by the selling stockholders, for a period of 180 days after the date of this prospectus without the prior written consent of Morgan Stanley & Co. Incorporated and Credit Suisse Securities (USA) LLC on behalf of the underwriters. Rule 701

In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchase shares of our common stock from us in connection with a compensatory stock or option plan

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or other written agreement is eligible to resell those shares 90 days after the effective date of the offering in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144. The Securities and Exchange Commission has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than “affiliates,” as defined in Rule 144, subject only to the manner of sale provisions of Rule 144 and by “affiliates” under Rule 144 without compliance with its one-year minimum holding period requirement. Following the offering, we intend to file a registration statement on Form S-8 under the Securities Act covering approximately shares of common stock issued or issuable upon the exercise of stock options, subject to outstanding options or reserved for issuance under our employee and director stock benefit plans. Accordingly, shares registered under the registration statement will, subject to Rule 144 provisions applicable to affiliates, be available for sale in the open market, except to the extent that the shares are subject to vesting restrictions or the contractual restrictions described above. See “Compensation Discussion and Analysis — Elements of Compensation — Stock Options.”

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UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated and Credit Suisse Securities (USA) LLC are acting as representatives, have severally agreed to purchase, and we have agreed to sell to them, severally, the number of shares indicated below: Number of Shares

Underwriters Morgan Stanley & Co. Incorporated Credit Suisse Securities (USA) LLC Subtotal Total

The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters‟ overallotment option described below. The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other underwriters or to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives. The selling stockholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering overallotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. They may exercise this option during the 30-day period from the date of this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the additional shares of common stock as the number listed next to the underwriter‟s name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table. If the underwriters‟ option is exercised in full, the total price to the public would be $ , the total underwriters‟ discounts and commissions would be $ , total proceeds to us would be $ and total proceeds to the selling stockholders would be $ . The underwriters have informed us that they do not intend sales to discretionary accounts to exceed 5% of the total number of shares of common stock offered by them. We intend to apply to have the common stock approved for listing on the New York Stock Exchange under the symbol “LRN”. The following table shows the per share and total underwriting discounts that we and the selling stockholders will pay to the underwriters: Paid by Us Without With Overallotment Overallotment Per Share Total $ $ $ $ $ $ Paid by Selling Stockholders Without With Overallotment Overallotment $ $

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In addition, we estimate that the expenses of this offering other than underwriting discounts and commissions payable by us will be $ . We, our directors, our executive officers and certain of our stockholders have agreed that subject to certain exceptions, without the prior written consent of Morgan Stanley & Co. Incorporated and Credit Suisse Securities (USA) LLC on behalf of the underwriters, we and they will not, during the period ending 180 days after the date of this prospectus: • offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; • file any registration statement with the Securities and Exchange Commission relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or • enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock; whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. The restrictions described in this paragraph do not apply to: • the sale of shares to the underwriters; • the issuance by us of shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus of which the underwriters have been advised in writing; • any shares of common stock issued upon the exercise of options granted under existing employee option plans, grants of employee stock options or restricted stock in accordance with the terms in effect on the date hereof and the filing by the Company of any registration statement with the SEC on Form S-8 relating to the offering of securities pursuant to the terms of a plan in effect on the date hereof; • the issuance by us of shares of common stock or any security convertible into shares of common stock in connection with a bona fide merger or acquisition transaction; provided, however, that the aggregate number of shares issued in these transactions shall not exceed 5% of the total shares offered in this offering and that any recipient of these shares executes a copy of the lock-up agreement; • transactions relating to shares of common stock or other securities acquired in open market transactions after completion of this offering, provided, however, that no filing under the Securities Exchange Act of 1934, as amended (Exchange Act), shall be required or shall be voluntarily made in connection with such transaction (other than a filing on Form 4 after the expiration of the lock-up period or on a Form 5 made when required) • the transfer of shares of common stock (i) pursuant to a will, other testamentary document or applicable laws of descent, (ii) as a bona fide gift or (iii) to a family member or trust, provided that, in each case, the transferee agrees to be bound in writing by the terms of the lock-up agreement prior to such transfer and no filing by any party (donor, donee, transferor or transferee) under the Exchange Act shall be required or shall be voluntarily made in connection with such transfer (other than a filing on a Form 5 made when required) and such transfer does not involve a disposition for value The 180-day restricted period described above is subject to extension such that, in the event that either (1) during the last 17 days of the restricted period, we issue an earnings release or material news or a material event relating to us occurs or (2) prior to the expiration of the restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the applicable restricted period, the “lock-up” restrictions described above will, subject to limited exceptions, continue to apply until the expiration of the 18-day period beginning on the earnings release or the occurrence of the material news or material event. In order to facilitate the offering of the common stock, the underwriters may engage in stabilizing transactions, overallotment transactions, syndicate covering transactions, penalty bids.

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• Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. • Overallotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the overallotment option. In a naked short position, the number of shares involved is greater than the number of shares in the overallotment option. The underwriters may close out any covered short position by either exercising their overallotment option and/or purchasing shares in the open market. • Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the overallotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. • Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. The underwriters are not required to engage in these activities, and may end any of these activities at any time. We and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. Directed Share Program At our request, Morgan Stanley & Co. Incorporated has reserved for sale, at the initial public offering price, up to 10% of the shares offered in this prospectus for our directors, officers, employees, business associates and related persons. The number of shares of common stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not so purchased will be offered by Morgan Stanley & Co. Incorporated to the general public on the same basis as the other shares offered in this prospectus. Pricing of the Offering Prior to this offering, there has been no public market for the shares of common stock. The initial public offering price will be determined by negotiations among us and the representatives. Among the factors to be considered in determining the initial public offering price will be the future prospects of us and our industry in general and our sales, earnings and certain other financial operating information in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to us. The estimated initial public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors.

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NOTICE TO CANADIAN RESIDENTS Resale Restrictions The distribution of the shares in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of the shares are made. Any resale of the shares in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the shares. Representations of Purchasers By purchasing shares in Canada and accepting a purchase confirmation, a purchaser is representing to us and the dealer from whom the purchase confirmation is received that: • the purchaser is entitled under applicable provincial securities laws to purchase the shares without the benefit of a prospectus qualified under those securities laws, • where required by law, that the purchaser is purchasing as principal and not as agent, • the purchaser has reviewed the text above under Resale Restrictions, and • the purchaser acknowledges and consents to the provision of specified information concerning its purchase of the shares to the regulatory authority that by law is entitled to collect the information. Further details concerning the legal authority for this information is available on request. Rights of Action — Ontario Purchasers Only Under Ontario securities legislation, certain purchasers who purchase a security offered by this prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the shares, for rescission against us in the event that this prospectus contains a misrepresentation without regard to whether the purchaser relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the shares. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the shares. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us. In no case will the amount recoverable in any action exceed the price at which the shares were offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we will have no liability. In the case of an action for damages, we will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the shares as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions. Enforcement of Legal Rights All of our directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada. Taxation and Eligibility for Investment

Canadian purchasers of the shares should consult their own legal and tax advisors with respect to the tax consequences of an investment in the shares in their particular circumstances and about the eligibility of the shares for investment by the purchaser under relevant Canadian legislation.

100

SALES OUTSIDE THE UNITED STATES OTHER THAN CANADA No common stock has been offered to the public or will be offered to the public in the United Kingdom prior to the publication of a prospectus in relation to the common stock and the approval of the offer by the Financial Services Authority (FSA) or, where appropriate, approval in another Member State and notification to the FSA, all in accordance with the Prospectus Directive, except that an offer of the stock may be made to persons who fall within the definition of “qualified investor” as that term is defined in Section 86(1) of the Financial Services and Markets Act 2000 (FSMA) or otherwise in circumstances which do not result in an offer of transferable securities to the public in the United Kingdom within the meaning of the FSMA; Each underwriter has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of any stock in circumstances in which Section 21(1) of the FSMA does not apply to us or to persons who have professional experience in matters relating to investments falling within Article 19(5) of the FSMA; and Each underwriter has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the stock in, from or otherwise involving the United Kingdom. No prospectus (including any amendment, supplement or replacement thereto) has been prepared in connection with the offering of the shares of our common stock that has been approved by France‟s Autorité des marchés financiers or by the competent authority of another state that is a contracting party to the Agreement on the European Economic Area and notified to the Autorité des marchés financiers; no shares of our common stock have been offered or sold and will be offered or sold, directly or indirectly, to the public in France except to permitted investors (Permitted Investors) consisting of persons licensed to provide the investment service of portfolio management for the account of third parties, qualified investors (investisseurs qualifiés) acting for their own account and/or investors belonging to a limited circle of investors (cercle restraint d‟investisseurs) acting for their own account, with “qualified investors” and “limited circle of investors” having the meaning ascribed to them in Articles L. 411-2, D. 411-1, D. 411-2, D. 411-4, D. 734-1, D. 744-1, D. 754-1 and D. 764-1 of the French Code Monétaire et Financier and applicable regulations thereunder; none of this prospectus or any other materials related to the offering or information contained therein relating to the shares of our common stock has been released, issued or distributed to the public in France except to Permitted Investors; and the direct or indirect resale to the public in France of any Securities acquired by any Permitted Investors may be made only as provided by Articles L. 411-1, L. 411-2, L. 412-l and L. 621-8 to L. 621-8-3 of the French Code Monétaire et Financier and applicable regulations thereunder. The offering of shares of our common stock has not been cleared by the Italian Securities Exchange Commission (Commissione Nazionale per le Società e la Borsa, the CONSOB) pursuant to Italian securities legislation and, accordingly, each underwriter acknowledges and agrees that the shares of our common stock may not and will not be offered, sold or delivered, nor may or will copies of this prospectus or any other documents relating to the shares of our common stock be distributed in Italy, except (i) to professional investors (operatori qualificati), as defined in Article 31, second paragraph, of CONSOB Regulation No. 11522 of July 1, 1998, as amended (the Regulation No. 11522), or (ii) in other circumstances which are exempted from the rules on solicitation of investments pursuant to Article 100 of Legislative Degree No. 58 of February 24, 1998 (the Financial Service Act) and Article 33, first paragraph, of CONSOB Regulation No. 11971 of May 14, 1999, as amended. Any offer, sale or delivery of shares of our common stock or distribution of copies of this prospectus or any other document relating to the shares of our common stock in Italy may and will be effected in accordance with all Italian securities, tax, exchange control and other applicable laws and regulations, and, in particular, will be: (1) made by an investment firm, bank or financial intermediary permitted to conduct such activities in Italy in accordance with the Financial Services Act, Legislative Decree No. 385 of September 1, 1993, as amended (the Italian Banking Law), Regulation No. 11522 and any other applicable laws and regulations; (2) in compliance with Article 129 of the Italian Banking Law and the implementing guidelines of the Bank of Italy; and (3) in compliance with any other applicable notification requirement or limitation which may be imposed by CONSOB or the Bank of Italy.

101

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), and effective as of the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date), no common stock have been offered to the public in that Relevant Member State prior to the publication of a prospectus in relation to the common stock which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and brought to the attention of the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive. Notwithstanding the foregoing, an offer of common stock may be made effective as of the Relevant Implementation Date to the public in that Relevant Member State at any time: (1) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; (2) to any legal entity which has two or more of (a) an average of at least 250 employees during the last financial year; (b) a total balance sheet of more than €43,000,000 and (c) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or (3) in any other circumstances which do not require the publication by the issuer of a prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes of this paragraph, the expression an “offer of common stock to the public” in relation to any common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the common stock to be offered so as to enable an investor to decide to purchase or subscribe for the common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State. This prospectus does not constitute a public offer to sell any common stock to any member of the public in the Cayman Islands. The common stock may not be offered or sold in Hong Kong, by means of any document, other than to persons whose ordinary business is to buy or sell stock or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong. No advertisement, invitation or document relating to the common stock, whether in Hong Kong or elsewhere, may be issued, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to common stock which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made thereunder. The common stock have not been and will not be registered under the Securities and Exchange Law of Japan (Law No. 235 of 1948 as amended) (the Securities Exchange Law) and disclosure under the Securities Exchange Law has not been and will not be made with respect to the common stock. Accordingly, the common stock may not be, directly or indirectly, offered or sold in Japan or to, or for the benefit of, any resident of Japan or to others for re-offering or re-sale, directly or indirectly in Japan or to, or for the benefit of, any resident of Japan except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Securities Exchange Law and other relevant laws, regulations and ministerial guidelines of Japan. As used in this paragraph, “resident of Japan” means any person residing in Japan, including any corporation or other entity organized under the laws of Japan. This prospectus has not been and will not be registered as a prospectus with the Monetary Authority of Singapore under the Securities and Futures Act (Cap. 289) of Singapore, or the Securities and Futures Act. Accordingly, the common stock may not be offered or sold or made the subject of an invitation for subscription or purchase nor may this prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase of such common stock be circulated or distributed, whether directly or indirectly, to the public or any members of the public in Singapore other than: (1) to an institutional investor or other person falling within Section 274 of the Securities and Futures Act, (2) to a sophisticated investor, and in accordance

102

with the conditions specified in Section 275 of the Securities and Futures Act or (3) pursuant to, and in accordance with the conditions of any other applicable provision of the Securities and Futures Act. The common stock have not been registered under the South Korean Securities and Exchange Law. The common stock has not been offered, sold or delivered and will not be offered, sold or delivered, directly or indirectly, in South Korea or to, or for the account or benefit of, any resident of South Korea, except as otherwise permitted by applicable South Korean laws and regulations; and any securities dealer to whom any Underwriter sells common stock will agree that it will not offer any common stock, directly or indirectly, in South Korea or to any resident of South Korea, except as permitted by applicable South Korean laws and regulations, or to any other dealer who does not so represent and agree. The underwriters will not circulate or distribute this prospectus in the People‟s Republic of China (PRC) and have not offered or sold, and will not offer or sell to any person for re-offering or resale directly or indirectly, any securities to any resident of the PRC except pursuant to applicable laws and regulations of the PRC. No action may be taken in any jurisdiction other than the United States that would permit a public offering of the common stock or the possession, circulation or distribution of this prospectus in any jurisdiction where action for that purpose is required. Accordingly, the common stock may not be offered or sold, directly or indirectly, and neither the prospectus nor any other offering material or advertisements in connection with the common stock may be distributed or published in or from any country or jurisdiction except under circumstances that will result in compliance with any applicable rules and regulations of any such country or jurisdiction.

103

LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by our counsel, Latham & Watkins LLP, Washington, DC. Various legal matters relating to this offering will be passed upon for the underwriters by Davis Polk &Wardwell, New York, New York.

EXPERTS The consolidated financial statements and schedules included in this Prospectus and in the Registration Statement have been audited by BDO Seidman, LLP, an independent registered public accounting firm, to the extent and for the periods set forth in their report appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933, as amended with respect to the shares of our common stock offered by this prospectus. This prospectus, filed as a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules thereto as permitted by the rules and regulations of the SEC. For further information about us and our common stock, you should refer to the registration statement. This prospectus summarizes provisions that we consider material of certain contracts and other documents to which we refer you. Because the summaries may not contain all of the information that you may find important, you should review the full text of those documents. We have included copies of those documents as exhibits to the registration statement. The registration statement and the exhibits thereto filed with the SEC may be inspected, without charge, and copies may be obtained at prescribed rates, at the public reference facility maintained by the SEC at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The registration statement and other information filed by us with the SEC are also available at the SECs website at www.sec.gov . As a result of the offering, we and our stockholders will become subject to the proxy solicitation rules, annual and periodic reporting requirements, restrictions of stock purchases and sales by affiliates and other requirements of the Securities Exchange Act of 1934. We will furnish our stockholders with annual reports containing audited consolidated financial statements by an independent registered accounting firm and quarterly reports containing unaudited financial statements for the first three quarters of each fiscal year.

104

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Audited Financial Statements: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of June 30, 2006 and 2005 Consolidated Statements of Operations for the years ended June 30, 2006, 2005 and 2004 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders‟ Deficit for the years ended June 30, 2006, 2005 and 2004 Consolidated Statements of Cash Flows for the years ended June 30, 2006, 2005 and 2004 Notes to Consolidated Financial Statements Unaudited Interim Financial Statements: Condensed Consolidated Balance Sheets as of March 31, 2007 and June 30, 2006 Condensed Consolidated Statements of Operations for the nine months ended March 31, 2007 and 2006 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders‟ Deficit for the nine months ended March 31, 2007 Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2007 and 2006 Notes to Condensed Consolidated Financial Statements Schedule II — Valuation and Qualifying Accounts F-1

F-2 F-3 F-4 F-5 F-6 F-7

F-21 F-22 F-23 F-24 F-25 F-33

Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders K12 Inc. Herndon, Virginia We have audited the accompanying consolidated balance sheets of K12 Inc. and subsidiaries (the Company) as of June 30, 2006 and 2005 and the related consolidated statements of operations, redeemable convertible preferred stock and stockholders‟ deficit, and cash flows for each of the three years in the period ended June 30, 2006. We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company‟s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company‟s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of K12 Inc. and subsidiaries at June 30, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedules present fairly, in all material respects, the information set forth therein.

/s/ BDO Seidman, LLP Bethesda, Maryland July 26, 2007

F-2

K12 INC. CONSOLIDATED BALANCE SHEETS

June 30, 2006 2005 (in thousands, except share and per share data) ASSETS Current assets Cash and cash equivalents Restricted cash Accounts receivable, net of allowance of $1,440 and $1,716 at June 30, 2006 and June 30, 2005, respectively Inventories, net Prepaid expenses and other current assets Total current assets Property and equipment, net Capitalized curriculum development costs, net Other assets, net Deposits and other assets Total assets $

$

9,475 2,332 11,449 11,110 568 34,934 10,388 1,470 1,054 639 48,485

$

19,953 129 8,456 5,712 668 34,918 4,355 1,399 925 371

$

41,968

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT Current liabilities Accounts payable Accrued liabilities Accrued compensation and benefits Deferred revenue Current portion of capital lease obligations Notes payable — related party Total current liabilities Deferred rent, net of current portion Notes payable — related party Total liabilities Commitments and contingencies Redeemable convertible preferred stock Redeemable Convertible Series C Preferred stock, par value $0.0001; 45,328,693 shares authorized; 45,328,693 and 41,207,903 shares issued and outstanding at 2006 and 2005, respectively; liquidation value of $121,481 and $110,437 at 2006 and 2005, respectively Redeemable Convertible Series B Preferred stock, par value $0.0001; 76,000,000 shares authorized; 51,524,974 shares issued and outstanding at 2006 and 2005, respectively; liquidation value of $138,087 at 2006 and 2005 Stockholders’ deficit Common stock, par value $0.0001; 152,315,000 shares authorized; 10,194,414 and 10,079,226 shares issued and outstanding at 2006 and 2005, respectively Accumulated deficit $ 6,349 2,643 5,100 1,396 — 4,025 19,513 1,598 — 21,111 $ 4,790 2,521 3,318 895 441 — 11,965 — 4,025 15,990

76,211

64,293

124,614

111,984

1 (173,452 )

1 (150,300 )

Total stockholders’ deficit Total liabilities, redeemable convertible preferred stock and stockholders’ deficit $

(173,451 ) 48,485 $

(150,299 ) 41,968

See accompanying summary of accounting policies and notes to consolidated financial statements.

F-3

K12 INC. CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended June 30, 2006 2005 2004 (in thousands, except per share data) Revenues Cost and expenses Instructional costs and services Selling, administrative, and other operating expenses Product development expenses Total costs and expenses Income (loss) from operations Interest expense, net Income (loss) before income taxes Income tax expense Net income (loss) Dividends on preferred stock Preferred stock accretion Net loss attributable to common stockholders Net loss attributable to common stockholders per share: Basic and diluted Weighted average shares used in computing per share amounts: Basic and diluted $ $ 116,902 64,828 41,660 8,568 115,056 1,846 (488 ) 1,358 — 1,358 (5,851 ) (18,697 ) (23,190 ) $ $ 85,310 49,130 30,031 9,410 88,571 (3,261 ) (279 ) (3,540 ) — (3,540 ) (5,261 ) (15,947 ) (24,748 ) $ $ 71,434 39,943 25,656 12,750 78,349 (6,915 ) (516 ) (7,431 ) — (7,431 ) (2,667 ) (15,768 ) (25,866 )

$

(2.30 )

$

(2.46 )

$

(2.58 )

10,083,721

10,062,587

10,017,162

See accompanying summary of accounting policies and notes to consolidated financial statements.

F-4

K12 INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

Redeemable Convertible Series C Preferred Stock Shares Amount

Redeemable Convertible Series B Preferred Stock Shares

Stockholders’ Deficit Additional Common Stock Paid-in Accumulated Amoun Amount Shares t Capital Deficit (dollars in thousands)

Total

Balance, June 30, 2003 Issuance of Redeemable Convertible Series C Preferred Stock Conversion of Bridge Loans to Shares of Series C Preferred Stock Exchange of Series B to Series C Preferred Stock Employee exercised options Accretion of Preferred Stock Series C 10% Stock Dividend Net loss Balance, June 30, 2004 Employee exercised options Accretion of Preferred Stock Series C 10% Stock Dividend Net loss Balance, June 30, 2005 Employee exercised options Accretion of Preferred Stock Series C 10% Stock Dividend Net income Balance, June 30, 2006

—

$

—

70,180,574

$ 111,634

10,014,982

$

1

$

—

$

(99,762 )

$

(99,761 )

18,447,573

24,720

—

—

—

—

—

—

209,143

280

—

—

—

—

—

—

18,655,600 — — 149,414 —

24,999 — 1,963 2,667 —

(18,655,600 ) — — — —

(24,999 ) — 13,805 — —

— 4,250 — — —

— — — — —

— 6 (6 ) — —

— — (15,762 ) (2,667 ) (7,431 )

— 6 (15,768 ) (2,667 ) (7,431 )

37,461,730 — — 3,746,173 —

54,629 — 4,403 5,261 —

51,524,974 — — — —

100,440 — 11,544 — —

10,019,232 59,994 — — —

1 — — — —

— 70 (70 ) — —

(125,622 ) — (15,877 ) (5,261 ) (3,540 )

(125,621 ) 70 (15,947 ) (5,261 ) (3,540 )

41,207,903 — — 4,120,790 —

64,293 — 6,067 5,851 —

51,524,974 — — — —

111,984 — 12,630 — —

10,079,226 115,188 — — —

1 — — — —

— 38 (38 ) — —

(150,300 ) — (18,659 ) (5,851 ) 1,358

(150,299 ) 38 (18,697 ) (5,851 ) 1,358

45,328,693

$ 76,211

51,524,974

$ 124,614

10,194,414

$

1

$

—

$

(173,452 )

$

(173,451 )

See accompanying summary of accounting policies and notes to consolidated financial statements.

F-5

K12 INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

2006

Year Ended June 30, 2005 (in thousands)

2004

Cash Flows from Operating Activities Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization expense Provision for doubtful accounts Provision for inventory obsolescence Provision for student computer shrinkage and obsolescence Impairment of curriculum development costs Impairment of software development costs Changes in assets and liabilities: Accounts receivable Inventories Prepaid and other current assets Other assets Deposits Accounts payable Accrued liabilities Accrued compensation and benefits Deferred revenue Deferred rent Net cash provided by (used in) operating activities Cash flows from investing activities Purchase of property and equipment Capitalized curriculum development costs Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of Redeemable Convertible Series C Preferred stock Proceeds from notes payable — related party Repayments for capital lease obligations Proceeds from exercise of stock options Cash invested in restricted escrow account Net cash (used in) provided by financing activities Net change in cash and cash equivalents Cash and cash equivalents , beginning of year Cash and cash equivalents , end of year

$

1,358

$ (3,540 )

$

(7,431 )

4,986 (275 ) (39 ) 174 362 — (2,718 ) (5,359 ) 100 (258 ) (268 ) 1,559 122 1,782 501 1,598 3,625 (10,842 ) (655 ) (11,497 )

5,509 1,113 (50 ) (256 ) 2,118 1,188 3,434 (555 ) (431 ) (468 ) (56 ) (163 ) 1,208 994 (348 ) — 9,697 (4,692 ) (3,787 ) (8,479 )

4,922 (68 ) 71 307 5,001 — (10,641 ) (1,314 ) (24 ) (844 ) (72 ) (47 ) 707 1,277 136 — (8,020 ) (536 ) (4,898 ) (5,434 )

— — (441 ) 38 (2,203 ) (2,606 ) (10,478 ) 19,953 $ 9,475

— 4,025 (3,432 ) 70 2,191 2,854 4,072 15,881 $ 19,953 $

25,000 — (2,372 ) 6 (1,026 ) 21,608 8,154 7,727 15,881

See accompanying summary of accounting policies and notes to consolidated financial statements.

F-6

K12 Inc. Notes to Consolidated Financial Statements 1. Description of the Business

K12 Inc. and its subsidiaries (K12 or the Company) sell on-line curriculum and educational books and materials designed for students in grades K-12 and provide management and technology services to virtual public schools. The K12 proprietary curriculum is research based and combines content with innovative technology to allow students to receive an outstanding education regardless of geographic location. The Company provides complete management and technology services to virtual public schools. The Company typically provides the students in these schools with access to the K12 on-line curriculum, offline learning kits, and a computer. In addition, the company sells access to its on-line curriculum and offline learning kits directly to individual consumers. For the year ended June 30, 2006, the Company served schools in 16 states and the District of Columbia, providing curriculum for grades kindergarten through ninth. Basis of Presentation The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions affecting the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition and Concentration of Revenues Revenues are principally earned from long-term contractual agreements to provide on-line curriculum, books, materials, computers and management services to public charter schools and school districts. In addition to providing the curriculum, books and materials, under most contracts, the Company is responsible to the virtual public schools for all aspects of the management of schools, including monitoring academic achievement, teacher hiring and training, compensation of school personnel, financial management, enrollment processing and procurement of curriculum, equipment and required services. The schools receive funding on a per student basis from the state in which the public school or school district is located. Where the Company has determined that they are the primary obligor for substantially all expenses under these contracts, the Company records the associated per student revenue received by the school from its state funding school district up to the expenses incurred in accordance with Emerging Issues Task Force (EITF) 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent. As a result, amounts recorded as revenues and instructional costs and services for the years ended June 30, 2006, 2005 and 2004 were $35.6 million, $29.6 million and $25.4 million, respectively. For contracts in which the Company is not the primary obligor, the Company records revenue based on its net fees earned per the contractual agreement. The Company has generally agreed to absorb any operating losses of the schools in a given school year. To reflect this, for the years ended June 30, 2006, 2005 and 2004, the Company has reduced revenues by $7.0 million, $5.5 million and $2.3 million, respectively. The Company recognizes revenues for all services under the contracts pro rata over the period it performs the service.

Other revenues are generated from individual customers who prepay and have access for 12 or 24 months to curriculum via the Company‟s Web site. The Company recognizes these revenues pro rata over the maximum term of the customer contract, which is either 12 or 24 months. Revenues from associated offline learning kits are recognized upon shipment.

F-7

K12 Inc. Notes to Consolidated Financial Statements

During the years ended June 30, 2006, 2005 and 2004, approximately 94%, 96% and 96%, respectively, of the Company‟s revenues were recognized from virtual public schools. In fiscal year 2006, we had contracts with three schools that individually represented 28%, 16% and 10% of revenues. In fiscal year 2005, we had contracts with four schools that individually represented 32%, 17%, 11% and 10% of revenues. In fiscal year 2004, we had contracts with two schools that individually represented 18% and 11% of revenues. Research and Development Costs All research and development costs are expensed as incurred in accordance with Statement of Financial Accounting Standards (SFAS) No. 2, Accounting for Research and Development Costs. Cash and Cash Equivalents Cash and cash equivalents generally consist of cash on hand and cash held in money market and demand deposit accounts. For purposes of the statements of cash flows, the Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company maintains funds in accounts in excess of FDIC insurance limits; however, management believes it minimizes risk by maintaining deposits in well-capitalized financial institutions. Restricted Cash Restricted cash consists primarily of cash held in escrow related to the lease on our primary office facility. Fair Value of Financial Instruments The carrying values reflected in our consolidated balance sheets for cash and cash equivalents, receivables, inventory and short and long term debt approximate their fair values. Allowance for Doubtful Accounts The Company maintains an allowance for uncollectible accounts primarily for estimated losses resulting from the inability, failure or refusal of individual customers to make required payments. These losses have been within management‟s expectations. The Company analyzes accounts receivable, historical percentages of uncollectible accounts and changes in payment history when evaluating the adequacy of the allowance for uncollectible accounts. Management believes that an allowance for doubtful accounts of $1.4 million and $1.7 million as of June 30, 2006 and 2005, respectively, is adequate. However, actual write-offs might exceed the recorded allowance. Inventory Inventory consists primarily of schoolbooks and curriculum materials, a majority of which are leased to virtual schools and utilized directly by students. Inventory represents items that are purchased and held for sale and are recorded at the lower of cost (first-in, first-out method) or market value. Other Assets Other assets consist primarily of schoolbooks and curriculum materials which have been returned to the Company upon the completion of the school year. These assets are amortized over a period of two years which is included in instructional costs and services on the accompanying consolidated statement operations. Materials not returned are expensed as part of instructional costs and services.

F-8

K12 Inc. Notes to Consolidated Financial Statements

Property and Equipment Property and equipment, which includes capitalized software development, are stated at cost less accumulated depreciation and amortization. Depreciation expense is calculated using the straight-line method over the estimated useful life of the asset (or the lesser of the term of the lease and the estimated useful life of the asset for fixed assets under capital leases). Amortization of assets capitalized under capital lease arrangements is included in depreciation expense. Property and equipment are depreciated over the following lives: Useful Life Computer hardware Computer software and capitalized software development costs Office equipment Furniture and fixtures Leasehold Improvements 3 years 3 years 5-6 years 5-6 years 3-12 years

Leasehold improvements are amortized over the lesser of the lease term or the estimated useful life of the asset. The Company determines the lease term in accordance with Statement of Financial Accounting Standards No. 13 (FAS 13), Accounting for Leases , as the fixed non-cancelable term of the lease plus all periods for which failure to renew the lease imposes a penalty on the lessee in an amount such that renewal appears, at the inception of the lease, to be reasonably assured. Accordingly, the Company has determined the lease term as defined herein to be twelve years. Software Developed or Obtained for Internal Use The Company develops software for internal use. Software development costs incurred during the application development stage are capitalized in accordance with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use . The Company amortizes these costs over the estimated useful life of the software which is generally three years. Software development costs incurred totaled $1.4 million in each of the years ended June 30, 2006 and 2005 and $.5 million for the year ended June 30, 2004. These amounts are recorded on the balance sheet as part of property and equipment, net of amortization and impairment charges. Capitalized Curriculum Development Costs The Company internally develops its curriculum, which is provided as web content and accessed via the Internet. We capitalize curriculum development costs incurred during the application development stage in accordance with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance for the treatment of costs associated with computer software development and defines those costs to be capitalized and those to be expensed. Costs that qualify for capitalization are external direct costs, payroll, payroll-related costs, and interest costs. Costs related to general and administrative functions are not capitalizable and are expensed as incurred. We capitalize curriculum development costs when the projects under development reach technological feasibility. Many of our new courses leverage off of proven delivery platforms and are primarily content, which has no technological hurdles. As a result, a significant portion of our courseware development costs qualify for capitalization due to the concentration of our development efforts on the content of the courseware. Technological feasibility is established when we have completed all planning, designing, coding, and testing activities necessary to establish that a course can be produced to meet its design specifications. Capitalization ends when a course is available for general release to our customers, at which time amortization of the capitalized costs begins. The period of time over which these development costs will be

F-9

K12 Inc. Notes to Consolidated Financial Statements

amortized is generally five years. This is consistent with the capitalization period used by others in our industry and corresponds with our product development lifecycle. Total capitalized curriculum development costs incurred were $0.7 million, $3.8 million and $4.9 million for the years ended June 30, 2006, 2005 and 2004, respectively. These amounts are recorded on the accompanying consolidated balance sheet, net of amortization and impairment charges. Amortization and impairment charges are recorded in product development expenses on the accompanying consolidated statement of operations. Web Site Development Costs The Company accounts for web site development costs in accordance with Emerging Issues Task Force Issue No. 00-2 , Accounting for Web Site Development Costs (EITF 00-2). For the years ended June 30, 2006, 2005 and 2004 all web site development costs occurred in the operating stage and were expensed as incurred. Impairment of Long-Lived Assets Long-lived assets include property, equipment, capitalized curriculum and software developed or obtained for internal use. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , the Company reviews its recorded long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. Impairment charges recorded were $0.4 million, $3.3 million and $5.0 million for the years ended June 30, 2006, 2005 and 2004, respectively. Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are computed based on the difference between the financial reporting and income tax bases of assets and liabilities using the enacted marginal tax rate. SFAS No. 109 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized. Stock-Based Compensation The Company accounts for its employee stock-based compensation plans in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees and FASB Interpretation (FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. Accordingly, no compensation cost is recognized for any of the Company‟s fixed stock options granted to employees when the exercise price of the option equals or exceeds the fair market value of the underlying common stock as of the grant date for each stock option. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services . The Company uses the Black-Scholes option-pricing model to value options granted to non-employees at the date of grant, or over the period of performance, as appropriate. The Company estimates the fair value of each option grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 4.9% (2006), 4.1% (2005) and 3.7% (2004), a weighted-average expected life of the options of 8 years (2006, 2005 and 2004), assumed dividend yield of 0% (2006, 2005 and 2004), and average volatility of 0% (2006, 2005 and 2004).

F-10

K12 Inc. Notes to Consolidated Financial Statements

Had compensation cost for the employee options been recorded in accordance with SFAS No. 123, the net income (loss) would have been as follows: Year Ended June 30, 2006 2005 Net income (loss), as reported Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of related tax effect Net income (loss), pro forma $ 1,358 (1,164 ) $ 194 $ (3,540 ) (915 ) $ (4,455 )

2004 $ (7,431 ) (703 ) $ (8,134 )

Advertising and Marketing Expenses Advertising and marketing costs consist primarily of print media and brochures and are expensed when incurred. The advertising and marketing expenses recorded were $2.9 million, $2.1 million and $2.0 million during the years ended June 30, 2006, 2005 and 2004, respectively. Net Loss Per Common Share The Company calculates net income (loss) per share in accordance with SFAS No. 128, Earnings Per Share . Under SFAS No. 128, basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted net income (loss) per common share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The potentially dilutive securities consist of convertible preferred stock, stock options and warrants. As of June 30, 2006, 2005 and 2004, the shares of common stock issuable in connection with convertible preferred stock, stock options, and warrants of 107,638,157, 100,579,529 and 88,218,106, respectively, were not included in the diluted loss per common share calculation since their effect was anti-dilutive. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment, which revised SFAS No. 123, Accounting for Stock-Based Compensation . This statement supersedes APB Opinion No. 25. The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25 and requires that the compensation costs relating to such transactions be recognized in the statements of operations. SFAS No. 123R will be effective for fiscal years beginning after December 15, 2005. The Company adopted SFAS No. 123R for the fiscal year ending June 30, 2007 and recorded stock compensation expense of $0.1 for the nine months ended March 31, 2007. In February 2006, FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments — An Amendment of FASB Statements No. 133 and 140 . This Statement is effective for all financial instruments acquired or issued after the beginning of an entity‟s first fiscal year that begins after September 15, 2006. At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative effect adjustment to beginning retained earnings. The Company does not believe that the adoption of SFAS No. 155 will have a material impact on its consolidated financial statements. In June 2006, the FASB issued FASB Interpretation (FIN) 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 . FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an

enterprise‟s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes . This interpretation defines the minimum recognition threshold a tax position is required to meet before being

F-11

K12 Inc. Notes to Consolidated Financial Statements

recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect that the adoption of FIN 48 will have on its financial position and results of operations. In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157 (SFAS No. 157), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact of this statement on the consolidated financial statements. In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159 (SFAS No. 159), The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits companies and not-for-profit organizations to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under GAAP. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted if the decision to adopt the standard is made after the issuance of the Statement but within 120 days after the first day of the fiscal year of adoption, provided no financial statements have yet been issued for any interim period and provided the requirements of SFAS No. 157, Fair Value Measurements, are adopted concurrently with SFAS No. 159. The Company does not believe that it will adopt the provisions of this Statement. 3. Property and Equipment Property and equipment consists of the following at: June 30, 2006 Computer hardware Student computers Computer software Capitalized software development costs Leasehold improvements Office equipment Furniture and fixtures Less accumulated depreciation and amortization $ $ 6,615 12,617 4,127 1,717 2,130 1,083 752 29,041 (18,653 ) 10,388 $ $ 2005 5,401 8,650 3,087 327 50 753 106 18,374 (14,019 ) 4,355

The Company recorded depreciation expense related to property and equipment reflected in selling, administrative and other operating expenses of $1.1 million, $0.8 million and $2.0 million during the years ended June 30, 2006, 2005 and 2004, respectively. Depreciation expense of $3.5 million, $3.9 million and $2.0 million related primarily to computers leased to students reflected in instructional costs and services was recorded during the years ended June 30, 2006, 2005 and 2004, respectively. Amortization expense of $0.1 million, $0.2 million and $0.1 million related to capitalized software development reflected in product development expenses was recorded during the years ended June 30, 2006, 2005 and 2004, respectively. In the course of its normal operations, the Company incurs maintenance and repair expenses. Those are expensed as incurred and amounted to $0.2 million, $0.1 million and $0.2 million for the years ended June 30, 2006, 2005 and 2004, respectively.

F-12

K12 Inc. Notes to Consolidated Financial Statements

4.

Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company‟s net deferred income taxes consists of the following: June 30, 2006 Deferred tax assets: Net operating loss carryforwards Intangible assets Reserves Property and equipment Accrued expenses Charitable contributions carryforward Total deferred tax assets Deferred tax liabilities: Capitalized development costs Other assets Total deferred tax liabilities Deferred tax asset Valuation allowance Net deferred tax asset $ 2005

$

25,445 5,247 935 857 671 130 33,285 (522 ) (236 ) (758 ) 32,527 (32,527 ) —

$

25,023 6,057 991 803 1,174 50 34,098 — (232 ) (232 ) 33,866 (33,866 )

$

—

The Company requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The utilization of recorded net operating loss carryforwards and other deferred tax assets is subject to the Company‟s ability to generate future taxable income. As the Company has historically generated tax losses and therefore has no tax earnings history, the net deferred tax assets have been fully reserved. At June 30, 2006, the Company has available net operating loss carryforwards of $63.6 million that expire between 2020 and 2026 if unused. When the Company begins to generate taxable income, a change in the Company‟s ownership of outstanding classes of stock as defined in Internal Revenue Code Section 382 could prohibit or limit the Company‟s ability to utilize its net operating losses. The provision for income taxes can be reconciled to the income tax that would result from applying the statutory rate to the net income (loss) before income taxes as follows: Year Ended June 30, 2005 $ (1,239 ) 715 (75 ) 599 $ —

2006 Tax expense (benefit) at statutory rates Permanent items State tax benefit Change in valuation allowance Provision for income taxes $

2004 $ (2,601 ) 35 (367 ) 2,933 $ —

452 720 167 (1,339 ) —

$

F-13

K12 Inc. Notes to Consolidated Financial Statements

5.

Lease Commitments

As of June 30, 2006, all capital leases for computer equipment and software have expired. As of June 30, 2005, computer equipment and software under capital leases are recorded at a cost of $0.4 million and accumulated depreciation of $0.1 million. In March 2005, the Company made a lump sum payment of $2.4 million to pay off certain capital leases with one of its vendors. As a result, restricted cash held in escrow for the guarantee of lease payments was released. The Company has fixed non-cancelable operating leases expiring in 2013. Office leases generally contain renewal options and certain leases provide for scheduled rate increases over the lease terms. Rent expense was $1.8 million, $1.4 million and $1.3 million for the years ended June 30, 2006, 2005 and 2004, respectively. In December 2005, the Company entered into an operating lease for non-owned facilities commencing in May 2006. The term of the lease is seven years with the option to extend the lease for two five year periods. In accordance with the lease terms, the Company delivered to the landlord an unconditional and irrevocable letter of credit in the amount of $2.1 million for a term ending 90 days after the expiration of the lease. The letter of credit can be reduced up to 25% on the first day of each of the fourth, fifth and sixth years if certain covenants are met. Additionally, in December 2005, the Company entered into an operating sublease for non-owned facilities commencing in January 2006. The term of the sublease is through September 2009. In accordance with the lease terms, the Company delivered to the sublandlord an unconditional and irrevocable letter of credit in the amount of $0.2 million for a term ending 60 days after the expiration of the lease. Future minimum lease payments under noncancelable operating leases with initial terms of one year or more as follows: Year Ending June 30, 2007 2008 2009 2010 2011 Total future minimum lease payments $ 1,857 1,875 1,897 1,346 1,143 8,118

$

6.

Debt and Warrants

All of the warrants for Series B Preferred Stock and common stock are still outstanding at June 30, 2006. These consisted of (i) 2,328,358 warrants to purchase an equivalent number of Series B Preferred Stock at a price of $1.34 per share that expire in April 2008 and (ii) 108,649 warrants to purchase an equivalent number of common stock at a price of $1.60 per share that expire in March 2010. For the years ended June 30, 2006, 2005 and 2004 there were no warrants issued or exercised. In June 2005, the Company closed on an $8.1 million loan from certain shareholders, $4.0 million of which was funded at closing and the remainder to be funded, at the Company‟s option, within 120 days of the closing date. The outstanding loan amount has a term of thirteen months and an interest rate of 15%. During the 120 day period during which funds are committed but not yet provided, the commitment carries an interest rate of 2% on an annual basis. The Company has chosen not to call upon the remaining portion of the loan. The loan is secured by assets of the Company and there are no penalties for prepayment. In July 2006, the term for repayment of the outstanding loan amount was extended to December 31, 2006.

F-14

K12 Inc. Notes to Consolidated Financial Statements

7.

Equity Common Stock

On July 27, 2001, all holders of Class A Common stock (1,500,000 shares outstanding) and Class B Common stock (8,500,000 shares outstanding) converted these shares into 10,000,000 shares of common stock. The Company has reserved sufficient shares of common stock for potential issuance from exercise of stock options and warrants and conversion of Redeemable Convertible Series B and Series C Preferred stock. Redeemable Convertible Series B Preferred Stock During the years ended June 30, 2003 and 2002, K12 issued approximately 21.6 million and 40.1 million shares of Redeemable Convertible Series B Preferred stock (Series B Preferred), respectively. The Series B Preferred shares are convertible into common stock at a conversion rate equal to the original amount invested divided by $1.34. The Series B Preferred shares convert automatically upon certain events, including a qualified initial public offering by the Company. These shares have a liquidation preference over common stock shares equal to the greater of (i) two times the invested amount per share and (ii) the amount the Series B shareholders would have received had they converted their Series B shares into common stock immediately prior to the Liquidation. The Series B Preferred shares have voting rights equal to the number of common stock shares into which the Series B Preferred shares are convertible. The Series B Preferred shares are entitled to dividends when and if declared by the board of directors and are not cumulative. In the event the Board declares a dividend on the common stock, the Series B Preferred shareholders will receive dividends equal to the amount of such dividend had the shares been converted into common stock. The Series B Preferred shares are redeemable at the option of the holder on December 31, 2006 at a price of two times the amount invested to the extent the Series B Preferred shares have not been previously converted into common shares. It is classified as temporary equity on the balance sheet based upon guidance in EITF Topic D-98, Classification and Measurement of Redeemable Securities . The Company accounts for the difference between the invested amount and the redemption value by increasing the book value under the effective interest method, charging the accretion to accumulated deficit each period. As discussed below, the redemption date for the Series B Preferred shares was extended to December 2008. Redeemable Convertible Series C Preferred Stock The Series C Preferred shares are convertible into common stock at a conversion rate equal to the original amount invested divided by $1.34. The Series C Preferred shares convert automatically upon certain events, including a qualified initial public offering by the Company. These shares have a liquidation preference over common stock shares equal to the greater of (i) two times the invested amount per share and (ii) the amount the Series C shareholders would have received had they converted their Series C shares into common stock immediately prior to the Liquidation. The Series C shares have voting rights equal to the number of common stock shares into which the Series C shares are convertible. The Series C shares are entitled to dividends, which accrue at the rate of 10% per annum, compounded annually and shall be paid on January 2 of each year in additional Series C shares or, at the option of the Company, in cash. No dividends are paid to any other classes of capital stock unless any and all accrued but unpaid dividends on the Series C shares have been declared and paid in full. For any other dividends or similar distributions, the Series C shares participate with Common Stock on an as-if-converted basis. The Series C shares are redeemable at the option of the holder on December 31, 2008 at a price of two times the amount invested, to the extent the Series C shares had not previously been converted into common stock. It is classified as temporary equity on the balance sheet based upon guidance in EITF Topic D-98, Classification and Measurement of Redeemable Securities . The Company accounts for the difference between the invested amount and

F-15

K12 Inc. Notes to Consolidated Financial Statements

the redemption value by increasing the book value using the effective interest method, charging the accretion to accumulated deficit each period. In accordance with the Series C placement, the redemption date for the Series B shares was extended to December 31, 2008. 8. Stock Option Plan

The Company adopted a Stock Option Plan (the Plan) in May 2000. Under the Plan, employees, outside directors and independent contractors are able to participate in the Company‟s future performance through the awards of nonqualified stock options to purchase common stock. In December 2003, the Board increased the total number of common stock shares reserved and available for grant and issuance pursuant to the Plan to 13,000,000 shares. Each stock option is exercisable pursuant to the vesting schedule set forth in the stock option agreement granting such stock option, generally over four years. Unless a shorter period is provided by the Board or a stock option agreement, each stock option may be exercisable until December 31, 2009, the term of the Plan. No stock option shall be exercisable after the expiration of its option term. The Company also grants stock options to executive officers under stand-alone agreements outside the Plan. These options totaled 2,000,000 as of June 30, 2006. A summary of the Company‟s stock option activity including stand-alone agreements is as follows: WeightedAverage Exercise Price $ 1.32 1.37 1.17 1.34 1.34 1.47 0.32 1.38 $ 1.38

Shares Outstanding, June 30, 2004 Granted Exercised Canceled Outstanding, June 30, 2005 Granted Exercised Canceled Outstanding, June 30, 2006 8,152,987 3,846,615 (59,994 ) (1,481,991 ) 10,457,617 3,121,000 (114,959 ) (647,140 ) 12,816,518

The following table summarizes information about stock options outstanding, including those related to stand-alone agreements, as of June 30, 2006: WeightedAverage Remaining Contractual Life 5.8 years

Range of Exercise Prices $.20 - $1.50

Number Outstanding 12,816,518

WeightedAverage Exercise Price $ 1.38

Number Exercisable 7,879,390

WeightedAverage Exercise Price $ 1.35

9.

Commitments and Contingencies

Litigation In the ordinary conduct of our business, we are subject to lawsuits and other legal proceedings from time to time. There are currently two pending lawsuits in which we are involved, Johnson v. Burmaster and Illinois v.

F-16

K12 Inc. Notes to Consolidated Financial Statements

Chicago Virtual Charter School that, in each case, have been brought by teachers‟ unions seeking the closure of the virtual public schools we serve in Wisconsin and Illinois, respectively. While we prevailed on summary judgment at the circuit court level in Johnson v. Burmaster , and recently won a preliminary motion in Illinois v. Chicago Virtual Charter School , it is not possible to predict the final outcome of these matters with any degree of certainty. Even so, we do not believe at this time that a loss in either case would have a material adverse financial impact on our business. Depending on the legal theory advanced by the plaintiffs, however, there is a risk that a loss in these cases could have a negative precedential effect if like claims were to be advanced and succeed under similar laws in other states where we operate. The cumulative effect under those circumstances could be material. Johnson v. Burmaster In 2003, the Northern Ozaukee School District (NOSD) in the State of Wisconsin established a virtual public school, the Wisconsin Virtual Academy (WIVA), and entered into a service agreement with us for online curriculum and school management services. On January 6, 2004, Stan Johnson, et al., and the Wisconsin Education Association Council (WEAC) filed suit in the Circuit Court of Ozaukee County against the Superintendent of the Department of Public Instruction (DPI), Elizabeth Burmaster, the NOSD and K12 Inc. The plaintiffs alleged that the NOSD violated the state charter school, open enrollment and teacher-licensure statutes when it authorized WIVA. On March 16, 2006, the Circuit Court issued a Decision and Order upholding on Summary Judgment that WIVA complies with applicable law (No. 04-CV-12 ). WEAC and DPI filed an appeal in the Wisconsin Court of Appeals, District II (No. 2006-AP/01380). On July 3, 2007, the Court of Appeals certified the case to the Wisconsin Supreme Court for its review because the questions involved in the case are of first impression and will have a significant statewide impact on education finance and policy. Should the plaintiff prevail, and state funding of open enrollment payments to the NOSD are enjoined, a claim could be made that the Company must indemnify the NOSD for expenses approximating $2.5 million. Illinois v. Chicago Virtual Charter School On October 4, 2006, the Chicago Teachers Union (CTU) filed a citizen taxpayers lawsuit in the Circuit Court of Cook County challenging the decision of the Illinois State Board of Education to certify the Chicago Virtual Charter School (CVCS) and to enjoin the disbursement of state funds to the Chicago Board of Education under its contract with the CVCS. Specifically, the CTU alleges that the Illinois charter school law prohibits any “home-based” charter schools and that CVCS does not provide sufficient “direct instruction” by certified teachers of at least five clock hours per day to qualify for funding. K12 Inc. and K12 Illinois LLC were also named as defendants. On May 16, 2007, the Court dismissed K12 Inc. and K12 Illinois LLC from the case and on June 15, 2007, the plaintiffs filed a second amended complaint. We continue to participate in the defense of CVCS under an indemnity obligation in our service agreement with that school. The Company expenses legal costs as incurred in connection with a loss contingency. Employment Agreements The Company has entered into employment agreements with certain executive officers that provide for severance payments and, in some cases other benefits, upon certain terminations of employment. Except for one agreement that has a three year term, all other agreements provide for employment on an “at-will” basis. If the employee is terminated for “good reason” or without cause, the employee is entitled to salary continuation, and in some cases benefit continuation, for varying periods depending on the agreement. On July 12, 2007, our board of directors approved an amended and restated employment agreement for an executive officer. The amended and restated agreement extends the term of employment until January 1, 2011 and amended certain elements of compensation including salary, stock options and severance. Additionally, on July 12,

F-17

K12 Inc. Notes to Consolidated Financial Statements

2007, our board of directors also approved the terms of a new option agreement for an executive officer which provides that all outstanding options will become fully vested upon a change in control of Company. The Company maintains an annual cash performance bonus program that is intended to reward executive officers based on our performance and the individual named executive officer‟s contribution to that performance. In determining the performance-based compensation awarded to each named executive officer, the Company may generally evaluate the Company‟s and the executive‟s performance in a number of areas, which could include revenues, operating earnings, student retention, efficiency in product and systems development, marketing investment efficacy, new enrollment and developing company leaders. 10. Related Party Transactions

Affiliates of the Company, controlled by a major investor, rendered $0.1 million, $0.1 million and $0.2 million of professional services to the Company during the years ended June 30, 2006, 2005 and 2004, respectively. These costs include administrative operations, consulting and curriculum development services, and other operating charges. In June 2005, the Company closed on an $8.1 million loan from certain shareholders, $4.0 million of which was funded at closing and the remainder to be funded, at the Company‟s option, within 120 days of the closing date. (See Note 6). The Company has chosen not to call upon the remaining portion of the loan. In July 2006, the term for repayment of the outstanding loan amount was extended to December 31, 2006. 11. Employee Benefits

The Company is party to a Section 401(k) Salary Deferral Plan (the 401(k) Plan). Under the 401(k) Plan, employees at least 18 years of age having been employed for at least 30 days may voluntarily contribute up to 15% of their compensation. The 401(k) Plan provides for a matching Company contribution of 25% of the first 4% of each participant‟s compensation, which begins following six months of service and vests after three years of service. Under the 401(k) Plan, the Company expensed $0.1 million during each of the years ended June 30, 2006, 2005 and 2004. 12. Supplemental Disclosure of Cash Flow Information Year Ended June 30, 2006 2005 2004 Cash paid for interest Supplemental disclosure of non cash investing and financing activities: New capital lease obligations $ 33 $ 446 $ 596

$ —

$ 441

$ 4,107

13.

Subsequent Events

Corporate In July 2006, the Company amended its Certificate of Incorporation to effect an increase in the authorized number of shares of Series C Convertible Preferred Stock to 55,000,000 as well as a corresponding increase in the authorized number of shares of Preferred Stock and Common Stock into which such shares are convertible (the Certificate of Amendment). Financing

In October 2006, the Company entered into an equipment lease line of credit with Hewlett-Packard Financial Services Company that expires on July 31, 2007 for new purchases on this line of credit. We expect to renew this

F-18

K12 Inc. Notes to Consolidated Financial Statements

facility. The interest rate on new advances under the equipment lease line is set quarterly. Interest rates typically range from 8.5% to 8.8%. Borrowings include a 36-month payment term with a $1 purchase option at the end of the term. The Company has pledged assets financed with the equipment lease line to secure the amounts outstanding. The Company entered into a guaranty agreement with Hewlett-Packard Financial Services Company to guarantee the obligations under this equipment lease and financing agreement. In December 2006, the Company entered into a $15 million revolving credit agreement with PNC Bank (Credit Agreement). Included under the Credit Agreement is a provision allowing for the issuance of letters of credit up to $5 million. Issuances of letters of credit reduce the availability of permitted borrowings under the Credit Agreement. Pursuant to the terms of the Credit Agreement, the proceeds of the term loan facility were to be used primarily for working capital requirements and other general business or corporate purposes. The Credit Agreement limits the Company‟s ability to pay dividends or other distributions on its common stock. Because of the seasonality of our business and timing of funds received from the state, expenditures are higher in relation to funds received in certain periods during the year. The Credit Agreement provides the ability to fund these periods until cash is received from the schools; therefore, borrowings against the Credit Agreement are primarily going to be short term. In March 2007, restricted cash held as collateral for certain letters of credit in the amount of $2.3 million in connection with an operating lease commenced in May 2006 and an operating lease commenced in January 2006 was released. The letters of credit were reissued under our revolving credit facility. As of June 30, 2007, $1.5 million was outstanding on the working capital line of credit including approximately $2.3 million under the letter of credit facility. In July 2007, the Company borrowed additional funds of $5.0 million under the Credit Agreement. As of July 6, 2007, $6.5 million was outstanding on the working capital line of credit. In December 2006, the Company repaid a $4.0 million loan outstanding including accrued interest from certain shareholders (see Note 6). Vendor Payment Commitments In April 2007, the Company entered into a master services and license agreement with a third party that provides for the Company to license their proprietary computer system. The agreement is effective through July 2010. In exchange for the license of the computer system, the Company agrees to pay a service fee per enrollment. In the event the fees paid over the term of the contract do not exceed $1 million (the minimum commitment fee), the Company agrees to pay the difference between the actual fees paid and the minimum commitment fee. Letter of Intent On July 3, 2007, the Company entered into a non-binding letter of intent (LOI) with Socratic Network L.P., Socratic Learning, Inc. and Tutors Worldwide (India) Private Ltd. (individually and collectively referred to as Socratic) to acquire all, substantially all or a selected set of assets (as determined in the Company‟s sole discretion) of Socratic, or all the equity interest in Socratic or any of its affiliates or subsidiaries, for the aggregate purchase price of $2.2 million plus 300,000 shares of the common stock of the Company. Socratic is an education company whose primary asset is its India based tutoring and development center.

F-19

K12 Inc. Notes to Consolidated Financial Statements

Initial Public Offering On July 12, 2007, the Company‟s Board of Directors authorized management to file a Form S-1 “ Registration Statement Under the Securities Act of 1933 ” in order to pursue a public offering of the Company‟s common stock. Immediately prior to the completion of this offering, all outstanding shares of Redeemable Convertible Series B and Series C preferred stock will be converted into shares of our common stock without any further action required by us or the holders of the preferred stock. Stock Options On July 3, 2007, the Board approved the grant of 3,287,965 stock options with an exercise price of $2.68 per share subject to amendment of the Stock Option Plan. On July 12, 2007, the Board authorized the Company to seek shareholder approval to amend the Stock Option Plan by increasing the number of shares reserved for issuance from 13 million to 20 million.

F-20

K12 INC. CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, June 30, 2007 2006 (unaudited) (in thousands, except share and per share data) ASSETS Current assets Cash and cash equivalents Restricted cash Accounts receivable, net of allowance of $485 and $1,440 at March 31, 2007 and June 30, 2006, respectively Inventories, net Prepaid expenses and other current assets Total current assets Property and equipment, net Capitalized curriculum development costs, net Other assets, net Deposits and other assets Total assets $

$

5,147 — 24,803 6,444 968 37,362 16,547 8,198 1,477 417 64,001

$

9,475 2,332 11,449 11,110 568 34,934 10,388 1,470 1,054 639

$

48,485

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT Current liabilities Line of credit $ 1,500 $ Accounts payable 5,521 Accrued liabilities 1,817 Accrued compensation and benefits 4,439 Deferred revenue 7,262 Current portion of capital lease obligations 2,053 Notes payable 153 Notes payable — related party — Total current liabilities Deferred rent Capital lease obligations Notes payable Total liabilities Commitments and contingencies Redeemable convertible preferred stock Redeemable Convertible Series C Preferred stock, par value $0.0001; 55,000,000 shares authorized; 49,861,562 and 45,328,693 shares issued and outstanding at March 31, 2007 and June 30, 2006, respectively; liquidation value of $133,629 and $121,481 at March 31, 2007 and June 30, 2006, respectively Redeemable Convertible Series B Preferred stock, par value $0.0001; 76,000,000 shares authorized; 51,524,974 shares issued and outstanding at March 31, 2007 and June 30, 2006, respectively; liquidation value of $138,087 at March 31, 2007 and June 30, 2006, respectively Stockholders’ deficit Common stock, par value $0.0001; 170,000,000 shares authorized; 10,203,453 and 10,194,414 shares issued and outstanding at March 31, 2007 and June 30, 2006, respectively Accumulated deficit 22,745 1,664 3,814 92 28,315

— 6,349 2,643 5,100 1,396 — — 4,025 19,513 1,598 — — 21,111

87,097

76,211

134,979

124,614

1 (186,391 )

1 (173,452 )

Total stockholders’ deficit Total liabilities, redeemable convertible preferred stock and stockholders’ deficit $

(186,390 ) 64,001 $

(173,451 ) 48,485

See notes to unaudited condensed consolidated financial statements.

F-21

K12 INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

Nine Months Ended March 31, 2007 2006 (in thousands, except per share data) Revenues Cost and expenses Instructional costs and services Selling, administrative, and other operating expenses Product development expenses Total costs and expenses Income from operations Interest expense, net Net income before income tax expense Income tax expense Net income Dividends on preferred stock Preferred stock accretion Net loss attributable to common stockholders Net loss attributable to common stockholders per share: Basic and diluted Weighted average shares used in computing per share amounts: Basic and diluted $ $ 104,930 55,103 35,059 5,855 96,017 8,913 (474 ) 8,439 (227 ) 8,212 (4,707 ) (16,544 ) (13,039 ) $ $ 90,088 48,473 28,403 5,587 82,463 7,625 (394 ) 7,231 — 7,231 (4,333 ) (13,880 ) (10,982 )

$

(1.28 )

$

(1.09 )

10,195,440

10,081,180

See notes to unaudited condensed consolidated financial statements.

F-22

K12 INC. CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (UNAUDITED)

Redeemable Convertible Series C Preferred Stock Shares Amount

Redeemable Convertible Series B Preferred Stock

Stockholders’ Deficit Additional Common Stock Paid-in Accumulated Amoun Shares Amount Shares t Capital Deficit (dollars in thousands, except share amounts)

Total

Balance, June 30, 2006 Employee exercised options Accretion of Preferred Stock Series C 10% Stock Dividend Stock compensation expense Net income Balance, March 31, 2007

45,328,693 — — 4,532,869

$ 76,211 — 6,179 4,707

51,524,974 — — —

$ 124,614 — 10,365 —

10,194,414 9,039 — —

$ — — —

1

$

— 12 (100 ) — 88

$

(173,452 ) — (16,444 ) (4,707 )

$

(173,451 ) 12 (16,544 ) (4,707 ) 88 8,212

—

—

—

—

—

—

—

8,212

49,861,562

$ 87,097

51,524,974

$ 134,979

10,203,453

$

1

$

—

$

(186,391 )

$

(186,390 )

See notes to unaudited condensed consolidated financial statements.

F-23

K12 INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended March 31, 2007 2006 (in thousands) Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense Stock based compensation expense Provision for doubtful accounts Provision for inventory obsolescence Provision for student computer shrinkage and obsolescence Changes in assets and liabilities: Accounts receivable Inventories Prepaid and other current assets Other assets Deposits and other assets Accounts payable Accrued liabilities Accrued compensation and benefits Deferred revenue Deferred rent Net cash provided by operating activities Cash flows from investing activities Purchase of property and equipment Capitalized curriculum development costs Net cash used in investing activities Cash flows from financing activities Payment on notes payable — related party Payments on notes payable Net borrowings from revolving credit facility Repayments for capital lease obligations Proceeds from exercise of stock options Release of cash from restricted escrow account Cash invested in restricted escrow account Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents , beginning of period Cash and cash equivalents , end of period $

$

8,212 4,618 88 (956 ) 285 (90 ) (12,398 ) 4,381 (400 ) (255 ) 221 (827 ) (826 ) (661 ) 5,866 66 7,324 (3,807 ) (6,957 ) (10,764 ) (4,025 ) (31 ) 1,500 (676 ) 12 2,332 — (888 ) (4,328 ) 9,475 5,147

$

7,231 3,574 — 230 (131 ) — (13,264 ) (844 ) (234 ) (258 ) (637 ) 587 92 731 4,060 — 1,137 (6,509 ) (382 ) (6,891 ) (27 ) — — (441 ) 12 — (2,871 ) (3,327 ) (9,081 ) 19,953

$

10,872

See notes to unaudited condensed consolidated financial statements.

F-24

K12 Inc. Notes to Condensed Consolidated Financial Statements (unaudited) 1. Basis of Presentation

The accompanying condensed consolidated balance sheet as of March 31, 2007, the condensed consolidated statements of operations and cash flows for the nine months ended March 31, 2007 and 2006 and the condensed consolidated statement of shareholders‟ equity for the nine months ended March 31, 2007 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements, and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company‟s financial position and results of operations and cash flows for the nine months ended March 31, 2007 and 2006. The financial data and other information disclosed in these notes to the financial statements related to the nine month periods are unaudited. The results of the nine months ended March 31, 2007 are not necessarily indicative of the results to be expected for the year ending June 30, 2007 or for any other interim period or for any other future year. The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. 2. Summary of Significant Accounting Policies Stock-Based Compensation The Company adopted SFAS No. 123(R), Share-Based Payment (Revised 2004) , as of July 1, 2006, which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees . The Company adopted SFAS 123(R) using the prospective application method. SFAS No. 123(R) eliminates the intrinsic value method that was previously used by the Company as an alternative method of accounting for stock-based compensation. SFAS No. 123(R) requires an entity to recognize the grant date fair value of stock options and other equity-based compensation issued to employees in the consolidated statement of operations. The Company applied SFAS 123(R) to all new awards granted after July 1, 2006. Net Loss Per Common Share The Company calculates net income (loss) per share in accordance with SFAS No. 128, Earnings Per Share . Under SFAS No. 128, basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted net income (loss) per common share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The potentially dilutive securities consist of convertible preferred stock, stock options and warrants. As of March 31, 2007 and June 30, 2006, the shares of common stock issuable in connection with convertible preferred stock, stock options, and warrants of 117,517,682 and 107,638,157, respectively, were not included in the diluted loss per common share calculation since their effect was anti-dilutive. Recent Accounting Pronouncements In June 2006, the FASB issued FASB Interpretation (FIN) 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 . FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise‟s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes . This interpretation defines the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect that the adoption of FIN 48 will have on its financial position and results of operations.

F-25

K12 Inc. Notes to Condensed Consolidated Financial Statements (unaudited)

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact of this statement on the consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits companies and not-for-profit organizations to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under GAAP. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted if the decision to adopt the standard is made after the issuance of the statement but within 120 days after the first day of the fiscal year of adoption, provided no financial statements have yet been issued for any interim period and provided the requirements of statement 157, Fair Value Measurements, are adopted concurrently with SFAS 159. The Company does not believe that it will adopt the provisions of this statement. 3. Line of Credit

In December 2006, the Company entered into a $15 million revolving credit agreement with PNC Bank (Credit Agreement). Pursuant to the terms of the Credit Agreement, the proceeds of the term loan facility were to be used primarily for working capital requirements and other general business or corporate purposes. Because of the seasonality of our business and timing of funds received from the state, expenditures are higher in relation to funds received in certain periods during the year. The Credit Agreement provides the ability to fund these periods until cash is received from the schools; therefore, borrowings against the Credit Agreement are primarily going to be short term. Borrowings under the Credit Agreement bear interest based upon the term of the borrowings. Interest is charged, at either: (i) the higher of (a) the rate of interest announced by PNC Bank from time to time as its “prime rate” and (b) the federal funds rate plus 0.5% or (ii) the applicable London interbank offered rate divided by a number equal to 1.00 minus the maximum aggregate reserve requirement which is imposed on member banks of the Federal Reserve System against “eurocurrency liabilities” as defined in Regulation D as promulgated by the Board of Governors of the Federal Reserve System, plus the applicable margin for such loans, which ranges between 1.250% and 1.750%, based on the leverage ratio (as defined in the credit agreement). The Company pays a commitment fee on the unused portion of the credit agreement, quarterly in arrears, during the term of the credit agreement which varies between 0.150% and 0.250% depending on the leverage ratio. The commitment fees incurred for the nine months ended March 31, 2007 were minimal. We are also required to pay certain letter of credit and audit fees. The working capital line includes a $5.0 million letter of credit facility. Issuances of letters of credit reduce the availability of permitted borrowings under the credit agreement. The credit agreement contains a number of financial and other covenants that, among other things, restrict our and our subsidiaries‟ abilities to incur additional indebtedness, grant liens or other security interests, make certain investments, become liable for contingent liabilities, make specified restricted payments including dividends, dispose of assets or stock, including the stock of its subsidiaries, or make capital expenditures above specified limits and engage in other matters customarily restricted in senior secured credit facilities. We must also maintain a minimum net worth (as defined in the credit agreement) and maximum debt leverage ratios. These covenants are subject to certain qualifications and exceptions. In March 2007, certain letters of credit in the amount of $2.3 million in connection with an operating lease commenced in May 2006 and an operating sublease that commenced in January 2006 were released and incorporated into our revolving credit facility. As of March 31, 2007, $1.5 million was outstanding on the working capital line of credit at an interest rate of 8.25% and approximately $2.3 million under the letter of credit facility with an interest rate of 1.25%.

F-26

K12 Inc. Notes to Condensed Consolidated Financial Statements (unaudited)

In July 2007, the Company borrowed additional funds of $5.0 million under the Credit Agreement at an interest rate of 6.6%. As of July 23, 2007, $6.5 million was outstanding on the working capital line of credit and $2.3 million was outstanding related to letters of credit. 4. Debts

At June 30, 2006, we had a loan outstanding of $4.0 million from certain shareholders. The loan had an original term of thirteen months and an interest rate of 15%. In July 2006, the term for repayment of the loan amount was extended to December 31, 2006. In December 2006, the Company repaid the loan and all accrued interest. 5. Equity

In July 2006, the Company amended its Certificate of Incorporation, to effect an increase in the authorized number of shares of Series C Convertible Preferred Stock to 55,000,000 as well as a corresponding increase in the authorized number of shares of Preferred Stock and Common Stock into which such shares are convertible. 6. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company‟s net deferred income taxes consists of the following: March 31, 2007 Deferred tax assets: Net operating loss carryforwards Intangible assets Accrued expenses Reserves Property and equipment Charitable contributions carryforward Alternative minimum tax credit Stock compensation expense Total deferred tax assets Deferred tax liabilities: Capitalized development costs Other assets Total deferred tax liabilities Deferred tax asset Valuation allowance Net deferred tax asset $ June 30, 2006

$

22,994 3,720 1,720 631 866 131 116 35 30,213 (1,372 ) (380 ) (1,752 ) 28,461 (28,461 ) —

$

25,445 5,247 671 935 857 130 — — 33,285 (522 ) (236 ) (758 ) 32,527 (32,527 )

$

—

The Company requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The utilization of

recorded net operating loss carryforwards and other deferred tax assets is subject to the Company‟s ability to generate future taxable income. As the Company has historically generated tax losses and therefore has no tax earnings history, the net deferred tax assets have been fully reserved. At March 31, 2007, the Company has

F-27

K12 Inc. Notes to Condensed Consolidated Financial Statements (unaudited)

available net operating loss carryforwards of approximately $57.5 million that expire between 2020 and 2027 if unused. When the Company begins to generate taxable income, a change in the Company‟s ownership of outstanding classes of stock as defined in Internal Revenue Code Section 382 could prohibit or limit the Company‟s ability to utilize its net operating losses. The provision for income taxes can be reconciled to the income tax that would result from applying the statutory rate to the net loss before income taxes as follows: Nine Months Ended March 31, 2007 Tax benefit at statutory rates Permanent items State tax benefit Change in valuation allowance Provision for income taxes $ 2,953 688 652 (4,066 ) 227

$

7.

Stock Option Plan

Effective July 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “ Share-Based Payment ” (SFAS 123R), using the prospective transition method which requires the Company to apply the provisions of SFAS No. 123R only to awards granted, modified, repurchased or cancelled after the effective date. Equity-based compensation expense for all equity-based compensation awards granted after July 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs on a straight-line basis over the requisite service period, which is generally the vesting period of the award. The Company uses the Black-Scholes-Merton method to calculate the fair value of stock options. The use of option valuation models requires the input of highly subjective assumptions, including the expected stock price volatility and the expected term of the option. In March 2005, the Securities and Exchange Commission (SEC) issued SAB No. 107 (SAB 107) regarding the SEC‟s interpretation of SFAS 123R and the valuation of share-based payments for public companies. For options issued subsequent to July 1, 2006, the Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. Under SAB 107, the Company has estimated the expected term of granted options to be the weighted average mid-point between the vesting date and the end of the contractual term. The Company estimates the volatility rate based on historical closing stock prices. The following weighted-average assumptions were used for options granted in the year ended December 31, 2006 and 2005 and a discussion of the Company‟s methodology for developing each of the assumptions used in the valuation model follows:
Nine Months Ended March 31, 2007

Dividend yield Expected volatility Risk-free interest rate

0.0% 42% 4.53% to 5.01%

Expected life of the option term (in years) Forfeiture rate

3.25 — 6.40 20% to 30%

F-28

K12 Inc. Notes to Condensed Consolidated Financial Statements (unaudited) Dividend yield — The Company has never declared or paid dividends on its common stock and has no plans to do so in the foreseeable future. Expected volatility — Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. Since the Company ‟s common shares are not publicly traded, the basis for the standard option volatility calculation is derived from known publicly traded comparable companies. The annual volatility for these companies is derived from their most recent public filings. Risk-free interest rate — The assumed risk free rate used is a zero coupon U.S. Treasury security with a maturity that approximates the expected term of the option. Expected life of the option term — This is the period of time that the options granted are expected to remain unexercised. Options granted during the quarter have a maximum term of eight years. The Company estimates the expected life of the option term based on an average life between the dates that options become fully vested and the maximum life of options granted in the nine months ended March 31, 2007. Forfeiture rate — This is the estimated percentage of options granted that are expected to be forfeited or canceled on an annual basis before becoming fully vested. The Company uses a forfeiture rate that is based on historical at various classification levels with the Company. SFAS 123(R) requires management to make assumptions regarding the expected life of the options, the expected liability of the options and other items in determining estimated fair value. Changes to the underlying assumptions may have significant impact on the underlying value of the stock options, which could have a material impact on our financial statements. The Company also grants stock options to executive officers under stand-alone agreements outside the plan. These options totaled 7,350,000 as of March 31, 2007. Stock option activity including stand-alone agreements during the nine months ended March 31, 2007 was as follows: WeightedAverage Exercise Price $ 1.38 2.65 1.34 1.39 1.80

Shares Outstanding, June 30, 2006 Granted Exercised Canceled Outstanding, March 31, 2007 12,816,518 6,097,185 (9,268 ) (454,091 ) 18,450,344

$

F-29

K12 Inc. Notes to Condensed Consolidated Financial Statements (unaudited)

A summary of the Company‟s unvested stock options, including those related to stand-alone agreements, as of June 30, 2006 and changes during the nine months ended March 31, 2007 are presented below: Weighted Average Grant Date Fair Value $ 1.42 2.65 1.45 1.39 2.29

Unvested Options Unvested options outstanding, June 30, 2006 Granted Vested Canceled Unvested options outstanding, March 31, 2007 4,937,128 6,097,185 (1,971,489 ) (454,091 ) 8,608,733

Amount $ 7,021 16,184 (2,851 ) (630 )

$

$ 19,724

The following table summarizes information about stock options outstanding, including those related to stand-alone agreements, as of March 31, 2007: WeightedAverage Remaining Contractual Life 5.4 years 5.8 years

Range of Exercise Prices $.20 - $1.80 $6.00

Number Outstanding 16,950,344 1,500,000

WeightedAverage Exercise Price $ $ 1.43 6.00

Number Exercisable 9,841,611 —

WeightedAverage Exercise Price $ 1.37 —

As of March 31, 2007, there was $0.3 million of total unrecognized compensation expense related to unvested stock options granted under the Plan. The cost is expected to be recognized over weighted average period of 2.8 years. The total fair value of shares vested during the nine months ended March 31, 2007 was $2.8 million. During the nine months ended March 31, 2007, the Company recognized $0.1 million of stock based compensation. The stock option agreements for outstanding stock options generally provide for accelerated and full vesting of unvested stock options upon certain corporate events. Those events include a sale of all or substantially all of our assets of us, a merger or consolidation which results in the Company‟s stockholders immediately prior to the transaction owning less than 50% of our voting stock immediately after the transaction, and a sale of our outstanding securities of us (other than in connection with an initial public offering) which results in our stockholders immediately prior to the transaction owning less than 50% of our voting stock immediately after the transaction. 8. Lease Commitments

As of March 31, 2007, computer equipment and software under capital leases are recorded at a cost of $6.6 million and accumulated depreciation of $1.0 million. The Company has an equipment lease line of credit with Hewlett-Packard Financial Services Company that expires on July 31, 2007 for new purchases on the line of credit. We expect to renew this facility. The interest rate on new advances under the equipment lease line is set quarterly. Prior borrowings under the equipment lease line had interest rates ranging from 8.5% to 8.8%. The prior borrowings include a 36-month payment term with a $1 purchase option at the end of the term. The Company has pledged the assets financed with the equipment lease line

to secure the amounts outstanding. The Company entered into a guaranty agreement with Hewlett-Packard Financial Services Company to guarantee the obligations under this equipment lease and financing agreement.

F-30

K12 Inc. Notes to Condensed Consolidated Financial Statements (unaudited)

The following is a summary as of March 31, 2007 of the present value of the net minimum lease payments on capital leases under the Company‟s commitments:
Capital Marc h 31, Leases

2008 2009 2010 Total minimum lease payments Less amount representing interest (imputed interest rate of 8.6%) Net minimum lease payments Less current portion Present value of net minimum payments, less current portion

$

2,476 2,475 1,632 6,583 (716 ) 5,867 (2,053 )

$

3,814

9.

Commitments and Contingencies

In the ordinary conduct of our business, we are subject to lawsuits and other legal proceedings from time to time. There are currently two pending lawsuits in which we are involved, Johnson v. Burmaster and Illinois v. Chicago Virtual Charter School that, in each case, have been brought by teachers‟ unions seeking the closure of the virtual public schools we serve in Wisconsin and Illinois, respectively. While we prevailed on summary judgment at the circuit court level in Johnson v. Burmaster , and recently won a preliminary motion in Illinois v. Chicago Virtual Charter School , it is not possible to predict the final outcome of these matters with any degree of certainty. Even so, we do not believe at this time that a loss in either case would have a material adverse financial impact on our business. Depending on the legal theory advanced by the plaintiffs, however, there is a risk that a loss in these cases could have a negative precedential effect if like claims were to be advanced and succeed under similar laws in other states where we operate. The cumulative effect under those circumstances could be material. Johnson v. Burmaster In 2003, the Northern Ozaukee School District (NOSD) in the State of Wisconsin established a virtual public school, the Wisconsin Virtual Academy (WIVA), and entered into a service agreement with us for online curriculum and school management services. On January 6, 2004, Stan Johnson, et al., and the Wisconsin Education Association Council (WEAC) filed suit in the Circuit Court of Ozaukee County against the Superintendent of the Department of Public Instruction (DPI), Elizabeth Burmaster, the NOSD and K12 Inc. The plaintiffs alleged that the NOSD violated the state charter school, open enrollment and teacher-licensure statutes when it authorized WIVA. On March 16, 2006, the Circuit Court issued a Decision and Order upholding on Summary Judgment that WIVA complies with applicable law (No. 04-CV-12 ). WEAC and DPI filed an appeal in the Wisconsin Court of Appeals, District II (No. 2006-AP/01380). On July 3, 2007, the Court of Appeals certified the case to the Wisconsin Supreme Court for its review because the questions involved in the case are of first impression and will have a significant statewide impact on education finance and policy. Should the plaintiff prevail and state funding of open enrollment payments to the NOSD are enjoined, a claim could be made that the Company must indemnify the NOSD for expenses approximating $2.5 million. Illinois v. Chicago Virtual Charter School

On October 4, 2006, the Chicago Teachers Union (CTU) filed a citizen taxpayers lawsuit in the Circuit Court of Cook County challenging the decision of the Illinois State Board of Education to certify the Chicago Virtual

F-31

K12 Inc. Notes to Condensed Consolidated Financial Statements (unaudited)

Charter School (CVCS) and to enjoin the disbursement of state funds to the Chicago Board of Education under its contract with the CVCS. Specifically, the CTU alleges that the Illinois charter school law prohibits any “home-based” charter schools and that CVCS does not provide sufficient “direct instruction” by certified teachers of at least five clock hours per day to qualify for funding. K12 Inc. and K12 Illinois LLC were also named as defendants. On May 16, 2007, the Court dismissed K12 Inc. and K12 Illinois LLC from the case and on June 15, 2007, the plaintiffs filed a second amended complaint. We continue to participate in the defense of CVCS under an indemnity obligation in our service agreement with that school. 10. Supplemental Disclosure of Cash Flow Information Nine Months Period Ended March 31, 2007 2006 Cash paid for interest Supplemental disclosure of non cash investing and financing activities: New capital lease obligations $ 1,175 $ 33

$ 6,574

$ —

11.

Subsequent Events

Vendor Payment Commitments In April 2007, the Company entered into a master services and license agreement with a third party that provides for the Company to license their proprietary computer system. The agreement is effective through July 2010. In exchange for the license of the computer system, the Company agrees to pay a service fee per enrollment. In the event the fees paid over the term of the contract do not exceed $1 million (the minimum commitment fee), the Company agrees to pay the difference between the actual fees paid and the minimum commitment fee. Letter of Intent On July 3, 2007, the Company entered into a non-binding letter of intent with Socratic Network L.P., Socratic Learning, Inc. and Tutors Worldwide (India) Private Ltd. (individually and collectively referred to as Socratic) to acquire all, substantially all or a selected set of assets (as determined in the Company‟s sole discretion) of Socratic, or all the equity interest in Socratic or any of its affiliates or subsidiaries, for the aggregate purchase price of $2.2 million plus 300,000 shares of the common stock of the Company. Socratic is an education company whose primary asset is its India based tutoring and development center. Initial Public Offering On July 12, 2007, the Company‟s Board of Directors authorized management to file a Form S-1 “ Registration Statement Under the Securities Act of 1933 ” in order to pursue a public offering of the Company‟s common stock. Immediately prior to the completion of this offering, all outstanding shares of Redeemable Convertible Series B and Series C preferred stock will be converted into shares of our common stock without any further action required by us or the holders of the preferred stock. Stock Options

On July 3, 2007, the Board approved the grant of 3,287,965 stock options with an exercise price of $2.68 per share subject to amendment of the Stock Option Plan. On July 12, 2007, the Board authorized the Company to seek shareholder approval to amend the Stock Option Plan by increasing the number of shares reserved for issuance from 13 million to 20 million.

F-32

SCHEDULE II

K12 INC VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 2006, 2005 AND 2004 ALLOWANCE FOR DOUBTFUL ACCOUNTS Additions Charged to Cost and Expenses 174,895 1,407,143 —

Balance at Beginning of Period June 30, 2006 June 30, 2005 June 30, 2004 INVENTORY RESERVE $ $ $ 1,715,781 602,919 670,675

Deductions from Allowance 450,177 294,281 67,756

Balance at End of Period $ $ $ 1,440,499 1,715,781 602,919

Balance at Beginning of Period June 30, 2006 June 30, 2005 June 30, 2004 COMPUTER RESERVE (1) $ $ $ 270,611 320,809 250,000

Additions Charged to Cost and Expenses — 19,572 161,370

Deductions Shrinkage and Obsolescence 38,556 69,770 90,561

Balance at End of Period $ $ $ 232,055 270,611 320,809

Balance at Beginning of Period June 30, 2006 June 30, 2005 June 30, 2004 $ $ $ 490,533 746,294 439,351

Additions (Deductions) Charged to Cost and Expenses 173,653 (255,761 ) 306,943

Deductions Shrinkage and Obsolescence — — — $ $ $ Balance at End of Period 664,186 490,533 746,294

(1) A reserve account is maintained against potential shrinkage and obsolescence for those computers provided to our students. The reserve is calculated based upon several factors including historical percentages, the net book value and remaining useful life. INCOME TAX VALUATION ALLOWANCE Balance at Beginning of Period Changes in Net Deferred Tax Assets Income Tax Benefit Realized Balance at End of Period

June 30, 2006 June 30, 2005 June 30, 2004

$ $ $

33,866 33,267 30,334

(1,339 ) 599 2,933

— — —

$ $ $

32,527 33,866 33,267

F-33

PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS Item 13. Other Expenses of Issuance and Distribution

Set forth below is a table of the registration fee for the Securities and Exchange Commission, the filing fee for the National Association of Securities Dealers, Inc., the listing fee for the New York Stock Exchange and estimates of all other expenses to be incurred in connection with the issuance and distribution of the securities described in the registration statement, other than underwriting discounts and commissions: SEC registration fee NYSE listing fee NASD fee Printing and engraving expenses Legal fees and expenses Accounting fees and expenses Transfer agent and registrar fees Miscellaneous Total $ 5,296 * 17,750 * * * * * *

$

*

To be completed by amendment.

Item 14.

Indemnification of Directors and Officers

K12 Inc. is incorporated under the laws of the State of Delaware. Reference is made to Section 102(b)(7) of the Delaware General Corporation Law, or DGCL, which enables a corporation in its original certificate of incorporation or an amendment thereto to eliminate or limit the personal liability of a director for violations of the director‟s fiduciary duty, except (1) for any breach of the director‟s duty of loyalty to the corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) pursuant to Section 174 of the DGCL, which provides for liability of directors for unlawful payments of dividends of unlawful stock purchase or redemptions or (4) for any transaction from which a director derived an improper personal benefit. Reference is also made to Section 145 of the DGCL, which provides that a corporation may indemnify any person, including an officer or director, who is, or is threatened to be made, party to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of such corporation, by reason of the fact that such person was an officer, director, employee or agent of such corporation or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys‟ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such officer, director, employee or agent acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the corporation‟s best interest and, for criminal proceedings, had no reasonable cause to believe that his conduct was unlawful. A Delaware corporation may indemnify any officer or director in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses that such officer or director actually and reasonably incurred. Our Amended and Restated Certificate of Incorporation provides for, and upon consummation of this offering, our amended and restated bylaws will provide for indemnification of the officers and directors to the full extent permitted by applicable law. The Underwriting Agreement provides for indemnification by the underwriters of the registrant and its officers and directors for certain liabilities arising under the Securities Act of 1933, as amended, or otherwise.

II-1

Item 15.

Recent Sales of Unregistered Securities

Set forth in chronological order is information regarding all securities sold and employee stock options granted from June 2004 to date by the Company. Also included is the consideration, if any, received for such securities, and information relating to the section of the Securities Act and the rules of the Securities and Exchange Commission pursuant to which the following issuances were exempt from registration. None of these securities were registered under the Securities Act. No award of options involved any sale under the Securities Act. No sale of securities involved the use of an underwriter and no commissions were paid in connection with the sales of any securities. 1. At various times during the period from July 2004 through July 2007, we granted options to purchase an aggregate of 11,677,765 shares of common stock to current and prior employees and directors at a weighted average exercise price of exercise prices of $2.06 per share, of which 3,836,278 are subject to shareholder approval. 2. In addition to the foregoing option grants, at various times during the period from July 2004 through July 2007, we granted options to purchase 7,350,000 shares of our common stock to current and prior employees and directors at a weighted average exercise price of $2.42 per share. 3. In December 2003, we issued and sold an aggregate of 18,656,158 shares of Series C Preferred Stock. Pursuant to the payment in kind dividend feature of Series C Preferred Stock, we have issued an aggregate of 12,399,833 additional shares of Series C Preferred Stock through a series of stock dividends to existing Series C Preferred stockholders from January 2005 through January 2007. The issuances of the securities described in paragraph 1 were exempt from registration under the Securities Act under Rule 701, as transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of such options and common stock were related to compensation. Appropriate legends were affixed to any share certificates issued in such transactions. All recipients either received adequate information from us or had adequate access, through their employment with us or otherwise, to information about us. The issuances of the securities described in paragraphs 2 and 3 were exempt from registration under the Securities Act in reliance on Section 4(2) because the issuance of securities to recipients did not involve a public offering. The recipient of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to resale or distribution thereof, and appropriate legends were affixed to share certificates and warrants issued in such transactions. Each of the recipients of securities in the transactions described in paragraphs 2 and 3 were accredited or sophisticated investors and had adequate access, through employment, business or other relationships, to information about us. All of the shares of Series C Preferred Stock described in paragraph 3 will automatically convert into shares of common stock prior to completion of this offering. Item 16. Exhibits and Financial Statement Schedule (a) Exhibits Exhibit No. 1 .1* 3 .1 3 .2 3 .3* 3 .4* 4 .1* 4 .2 4 .3 4 .4 Description of Exhibit Form of Underwriting Agreement Amended and Restated Certificate of Incorporation Bylaws (as amended) Form of Amended and Restated Certificate of Incorporation to be effective upon completion of this offering Form of Amended and Restated Bylaws to be effective upon completion of this offering Form of stock certificate of common stock Amended and Restated Stock Option Plan and Amendment thereto Form of Stock Option Contract — Employee Form of Stock Option Contract — Director

II-2

Exhibit No. 4 .5 4 .6 4 .7 5 .1* 10 .1 10 .2 10 .3 10 .4 10 .5* 10 .6 10 .7 10 .8 10 .9* 10 .10* 10 .11* 10 .12* 21 .1 23 .1 23 .2* 24 .1
*

Description of Exhibit Form of Second Amended and Restated Stockholders Agreement Form of Common Stock Warrant Agreement Form of Series B Convertible Preferred Stock Warrant Agreement Opinion of Latham & Watkins LLP Revolving Credit Agreement and Certain Other Loan Documents by and among K12 Inc., School Leasing Corporation, American School Supply Corporation and PNC Bank, N.A. Stockholders Agreement dated as of April 26, 2000 (as amended) by and among Premierschool.com, Inc., Knowledge Universe Learning, Inc. and Ronald J. Packard Stockholders Agreement dated as of February 20, 2000 (as amended) by and among Premierschool.com, Inc., Knowledge Universe Learning, Inc. and William J. Bennett Series B Convertible Preferred Stock Warrant Agreement of Mollusk Holdings LLC Stock Option Agreement of Ronald J. Packard Stock Option Agreement of Bruce J. Davis Stock Option Agreement of John Baule Stock Option Agreement of Bror Saxberg Employment Agreement of Ronald J. Packard Employment Agreement of John F. Baule Employment Agreement of Bruce J. Davis Employment Agreement of Bror V. H. Saxberg Subsidiaries of K12 Inc. Consent of BDO Seidman, LLP Consent of Latham & Watkins LLP (included in Exhibit 5.1) Power of Attorney (included in signature pages)

To be filed by amendment.

(b) Financial Statement Schedules: See Schedule II — “Valuation and Qualifying Accounts” contained on page F-33. All other schedules are omitted as the information is not required or is included in the Registrant‟s financial statements and related notes. Item 17. Undertakings

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issues. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a II-3

form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement, certificates in such denomination and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

II-4

Signatures Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Herndon, Commonwealth of Virginia on July 26, 2007.

K12 INC.

By: /s/ RONALD J. PACKARD Name: Ronald J. Packard Title: Chief Executive Officer

Power of Attorney Each person whose signature appears below authorizes Ronald J. Packard and Howard D. Polsky, or any of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to execute in his name and on his behalf, in any and all capacities, this Registrant‟s registration statement on Form S-1 relating to the common stock and any amendments thereto (and any additional registration statement related thereto permitted by Rule 462(b) promulgated under the Securities Act of 1933 (and all further amendments, including post-effective amendments thereto)), necessary or advisable to enable the Registrant to comply with the Securities Act of 1933, and any rules, regulations and requirements of the Securities and Exchange Commission, in respect thereof, in connection with the registration of the securities which are the subject of such registration statement, which amendments may make such changes in such registration statement as such attorney may deem appropriate, and with full power and authority to perform and do any and all acts and things whatsoever which any such attorney or substitute may deem necessary or advisable to be performed or done in connection with any or all of the above-described matters, as fully as each of the undersigned could do if personally present and acting, hereby ratifying and approving all acts of any such attorney or substitute. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date

/s/ RONALD J. PACKARD Ronald J. Packard /s/ JOHN F. BAULE John F. Baule

Chief Executive Officer (Principal Executive Officer) Chief Operating Officer and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Chairman of the Board and Director

July 26, 2007

July 26, 2007

/s/ ANDREW H. TISCH Andrew H. Tisch /s/ GUILLERMO BRON Guillermo Bron /s/ LIZA A. BOYD Liza A. Boyd

July 26, 2007

Director

July 26, 2007

Director

July 26, 2007

II-5

Signature

Title

Date

/s/ STEVEN B. FINK Steven B. Fink /s/ THOMAS J. WILFORD Thomas J. Wilford

Director

July 26, 2007

Director

July 26, 2007

II-6

AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF K12 INC. A Delaware Corporation K12 INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the “ Corporation ”). DOES HEREBY CERTIFY: FIRST: The Corporation was originally incorporated under the name PremierSchool.com, Inc. The original Certificate of Incorporation of the Corporation (the “ Original Certificate ” was filed with the Secretary of State of the State of Delaware on December 28, 1999. The Original Certificate was amended effective April 25, 2000 (the “ Amended Certificate ”). The Amended Certificate was amended and restated effective July 27, 2001 (the “ First Amended and Restated Certificate ”). The First Amended and Restated Certificate was amended effective September 13, 2001, June 13, 2002, March 31, 2003, October 10, 2003 and December 16, 2003 (the “ Amended First Amended and Restated Certificate ”). SECOND: This Amended and Restated Certificate of Incorporation of K12 Inc., has been duly adopted in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware by the directors and stockholders of the Corporation, and prompt written notice was duly given pursuant to Section 228 of the General Corporation Law of the State of Delaware to those stockholders who did not approve the Amended and Restated Certificate of Incorporation by written consent. THIRD: The Amended First Amended and Restated Certificate as heretofore amended or supplemented and so adopted is hereby amended and restated now to read in full as follows: ARTICLE I The name of the corporation (the “ Corporation ” is: K12 INC. ARTICLE II The address of the Corporation‟s registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of the Corporation‟s registered agent at such address is The Corporation Trust Company. State of Delaware Secretary of State Division of Corporations Delivered 03:51 PM 12/19/2003 FILED 03:38 PM 12/19/2003 SRV 030823181 - 3150167 FILE

ARTICLE III The nature of the business or purpose to be conducted or promoted is to be engaged in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV The Corporation is to have perpetual existence. ARTICLE V The Board of Directors is authorized to make, alter or repeal the By-Laws of the Corporation. ARTICLE VI The Corporation shall indemnify, in the manner and to the full extent permitted by law, any person (or the estate of any person) who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether or not by or in the right or the Corporation, and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. Where required by law, the indemnification provided for herein shall be made only as authorized in the specific case upon a determination in the manner provided by law that indemnification of the director, officer, employee or agent is proper under the circumstances. The Corporation may, to the full extent permitted by law, purchase and maintain insurance on behalf of any such person against any liability which may be asserted against him/her. To the full extent permitted by law, the indemnification provided herein shall include expenses (including attorneys‟ fees) in any action, suit or proceeding, or in connection with any appeal therein, judgments, fines and amounts paid in settlement, and in the manner provided by law any such expenses may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding. The indemnification provided herein shall not be deemed to limit the right of the Corporation to indemnify any other person for any such expense to the full extent permitted by law, nor shall it be deemed exclusive of any other rights to which any person seeking indemnification from the Corporation may be entitled under any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his/her official capacity and as to action in another capacity while holding such office. To the extent permitted by law, no director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director‟s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. 2

ARTICLE VII 1. The total number of shares of stock which the Corporation is authorized to issue is Two Hundred Sixty One Million (261,000,000) shares consisting of: (i) One Hundred Fifty Million (150,000,000) shares of Common Stock (the “Common Stock” ). $0.0001 par value per share, and (ii) One Hundred Eleven Million (111,000,000) shares of Preferred Stock (the “Preferred Stock” , $0.0001 par value per share, of which Seventy Six Million (76,000,000) shares are designated as Series B Convertible Preferred Stock (the “Series B Preferred Stock ”) and Thirty Five Million (35,000,000) shares are designated as Series C Convertible Preferred Stock (the “Series C Preferred Stock” ). 2. The number of shares of any or all classes of stock which the Corporation is authorized to issue may be increased or decreased (but not below the number of shares thereof then outstanding) and, in connection therewith, the total number of shares of stock which the Corporation is authorized to issue may be increased or decreased by the same amount, by a majority of the votes that could be cast by the outstanding shares of Common Stock, the Series B Preferred Stock and the Series C Preferred Stock voting together as a single class. ARTICLE VIII 1. The powers, privileges and rights of the Common Stock are as follows: (a) Dividends . Subject to the rights of the holders of shares of Preferred Stock, the holders of the Common Stock shall be entitled to the payment of dividends when and as declared by the Board of Directors out of funds legally available therefor. When and as dividends or other distributions are declared by the Board of Directors on shares of any class of Common Stock, such dividends or other distributions shall be paid in equal amounts per share on all shares of Common Stock. Dividends may be in the form of cash, property or Common Stock. (b) Liquidation, Dissolution or Winding Up . In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and liabilities of the Corporation and subject to the rights of holders of shares of Preferred Stock, the holders of shares of Common Stock shall be entitled, on a pari passu basis, to all remaining assets of the Corporation available for distribution to its stockholders. (c) Voting Rights and Powers . (i) Except as otherwise required by law or specifically provided by this Certificate of Incorporation and subject to the rights of holders of shares of Preferred Stock, the holders of Common Stock shall, together with the holders of the Preferred Stock, have the sole right and power to vote on all matters on which a vote of stockholders is to be taken. With respect to all matters upon which stockholders arc entitled to vote, each holder of Common Stock shall be entitled to one (1) vote in person or by proxy for each share of Common Stock standing in such holder‟s name on the transfer books of the Corporation. 3

(ii) The holders of Common Stock, voting as a separate class, shall be entitled to elect certain members of the Corporation‟s board of directors in accordance with Section 2(c)(ii) of this Article VIII (such directors elected by the holders of the Common Stock are the “Common Stock Directors”). (iii) Any Common Stock Director may be removed, with or without cause, by the affirmative vote (or written consent) of a majority of the votes that could be cast by the outstanding shares of Common Stock voting separately as a class. Any vacancy in the office of a Common Stock Director may be filled by a majority of the Common Stock Directors then in office, although less than a quorum, or by a sole remaining Common Stock Director. In the absence of an election by the remaining Common Stock Directors, any vacancy in the office of a Common Stock Director may be filled by a vote of the holders of Common Stock voting separately as a class. Any director filling a vacancy shall serve until the next annual meeting of stockholders and until his or her successor has been elected and has qualified or, if earlier, until his or her death, resignation or removal. If the number of directors of the Board of Directors is increased in accordance with the By-Laws and applicable provisions of law, any vacancy so created may be filled by the Board of Directors, subject to the rights of the holders of shares of Preferred Stock set forth in Section 2(c)(ii) of this Article VIII. (iv) The presence in person or by proxy (or the written consent) of the holders of shares representing a majority of the votes that could be cast by the outstanding shares of Common Stock shall constitute a quorum of the Common Stock for the election of the Common Stock Directors. The presence in person or by proxy (or the written consent) of the holders of shares representing a majority of the votes that could be cast by the outstanding shares of Common Stock and Preferred Stock shall constitute a quorum of the Common Stock and Preferred Stock, for all other matters, other than the election of directors or where a separate vote by class or series is required. Where a separate vote by class or series is required, the presence in person or by proxy (or the written consent) of the holders of a majority of the outstanding shares of the class or series (as applicable) shall constitute a quorum. (v) In this Certificate of Incorporation, all references to “vote” or “voting” by the stockholders include all actions which stockholders may take by voting at an annual or special stockholder meeting or adjournment thereof and all actions which stockholders may take by written consent without a stockholder meeting pursuant to the Delaware General Corporation Law, this Certificate of Incorporation or the By-Laws of the Corporation. 2. The powers, privileges and rights of the Preferred Stock are as follows: Unless the context otherwise requires, the following terms as used in this Section 2 shall have the meanings as defined below: “Additional Shares of Common Stock ” shall have the meaning provided in Section 2(e)(v) of this Article VIII. “Affiliate ” shall mean as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, “control” means the possession, directly or indirectly, of the power to 4

direct the management and policies of a Person, whether through the ownership of stock, by contract, or otherwise; provided , however , that, in any event: (a) any Person which owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed to control such Person, (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person, and (c) each partnership or joint venture in which a Person is a partner or joint venturer shall be deemed to be an Affiliate of such Person. “Board of Directors ” shall mean the board of directors of the Corporation. “Common Stock Equivalents” shall mean rights, shares, evidence of indebtedness or other securities which are, directly or indirectly, convertible into, exchangeable for, or otherwise entitle the holder to receive, shares of Common Stock. “Conversion Price” shall have the meaning provided in Section 2(d)(i)(A) of this Article VIII. “ Conversion Rate ” shall have the meaning provided in Section 2(d)(i)(A) of this Article VIII. “ Invested Amount ” per share of Preferred Stock shall mean $1.34 (as adjusted for changes in the Preferred Stock by stock split, stock dividend (excluding Series C PIK Dividends (as hereinafter defined)) or the like occurring after the Original Issue Date). “ Liquidation ” shall have the meaning provided in Section 2(b)(i) of this Article VIII. “ Organic Change ” shall have the meaning provided in Section 2(f)(iv) of this Article VIII. “Original Issue Date ” shall mean the date on which shares of Series C Preferred Stock were first actually issued by the Corporation. “ Person” shall mean natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, insurance companies, or other organizations. “Qualified Public Offering ” shall mean the underwritten offer and sale of Common Stock to the public pursuant to an effective registration statement under the Securities Act that provides aggregate gross proceeds to the Corporation of not less than $40,000,000 at a price per share to the public of not less than $2.68 (subject to adjustments for stock dividends (excluding Series C PIK Dividends), splits, reverse splits, combinations, recapitalizations and the like occurring after the Original Issue Date). “ Securities Act ” shall mean the federal Securities Act of 1933, as amended. “ Series C Purchase Agreement ” shall mean, collectively, one or more certain Series C Preferred Stock Purchase Agreements among the Corporation and the Investors listed therein, 5

pursuant to which the issuance of shares of Series C Preferred Stock may occur on or after the Original Issue Date. (a) Dividends . (i) Subject to the rights of the holders of shares of Series C Preferred Stock set forth in Section 2(a)(ii) below, the holders of the Series B Preferred Stock shall be entitled to the payment of dividends when and as declared by the Board of Directors out of funds legally available therefor. Such dividends shall not be cumulative, and no right shall accrue to holders of Series B Preferred Stock by reason of the fact that dividends on said shares are not declared in any preceding period. Notwithstanding the foregoing, in the event that the Board of Directors declares a dividend on the Common Stock, then the Board of Directors shall declare and pay dividends on all shares of Series B Preferred Stock concurrently with such dividends on the Common Stock (subject to Section 2(a)(ii) below), with the amount of such dividend for each share of Series B Preferred Stock equal to the amount of such dividend for one share of Common Stock multiplied by the number of shares of Common Stock into which such share of Series B Preferred Stock is convertible as of the record date fixed for such dividend. (ii) Dividends on the Series C Preferred Stock shall accrue cumulatively, whether or not declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends, at a rate per share equal to ten percent (10%) per annum, compounded annually, of the Invested Amount from and including the issue date (prorated based on the number of calendar days for any partial period). The date on which the Corporation initially issues any share of Series C Preferred Stock shall be deemed its “issue date” for purposes of the accrual of dividends regardless of the number of times such share is transferred on the stock records of the Corporation or the number of certificates that may be issued to evidence such share. Accrued dividends on the Series C Preferred Stock shall be paid in the form of additional shares of Series C Preferred Stock ( “Series C PIK Dividends” ) with each additional share valued for this purpose at the Invested Amount, or in the sole discretion of the Board of Directors, accrued dividends may be paid in the form of cash. Accrued dividends shall be paid on January 2 of each year (each a “ Dividend Payment Date ”). If January 2 is not a business day, then accrued dividends will be paid on the first business day thereafter. Accrued Series C PIK Dividends shall be paid on the Dividend Payment Date by book entry and each holder of Series C Preferred Stock shall be deemed to be the holder of the shares representing the accrued Series C PIK Dividends on its shares of Series C Preferred Stock as of each Dividend Payment Date regardless of whether or not the Corporation issues stock certificates evidencing such Series C PIK Dividends. In the event that the Board of Directors declares a dividend on the Common Stock, then the Board of Directors shall declare and pay dividends on all shares of Series C Preferred Stock concurrently with such dividends on the Common Stock, with the amount of such dividend for each share of Series C Preferred Stock equal to the amount of such dividend for one share of Common Stock multiplied by the number of shares of Common Stock into which such share of Series C Preferred Stock is convertible as of the record date fixed for such dividend. In the event that the Board of Directors declares a dividend on the Series B Preferred Stock, then the Board of Directors shall declare and pay dividends on all shares of Series C Preferred Stock concurrently with such dividends on the Series B Preferred Stock, with the amount of such dividend for each share of Series C Preferred Stock equal to the amount of such dividend for one share of Series B Preferred Stock. 6

Notwithstanding any provision of this Amended and Restated Certificate to the contrary, no dividends shall be payable to the holders of Common Stock or Series B Preferred Stock unless and until the Corporation shall have paid all accrued and unpaid dividends on the Series C Preferred Stock. (b) Liquidation Rights . (i) In the event of the liquidation, dissolution or winding up of the Corporation, either voluntarily or involuntarily (a “ Liquidation ”), the holders of the outstanding shares of the Series C Preferred Stock shall be entitled to receive, prior and in preference to the holders of the Series B Preferred Stock, the Common Stock and any other class or series of capital stock of the Corporation which is junior to the Series C Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, from any funds legally available for distribution to stockholders an amount per share equal to the greater of (i) two times the Invested Amount per share of Series C Preferred Stock (including all shares of Series C Preferred Stock issued as Series C PIK Dividends), and (ii) the amount they would have received in such Liquidation had they converted into Common Stock immediately before the Liquidation. All the preferential amounts to be paid to the holders of the Series C Preferred Stock under this Section 2(b) of this Article VIII shall be paid or set apart for payment before the payment or setting apart for payment of any amount for, or the distribution of any assets of the Corporation to, the holders of the Series B Preferred Stock, the Common Stock or other junior capital stock in connection with a Liquidation as to which this Section 2(b) of this Article VIII applies. If the assets or surplus funds to be distributed to the holders of the Series C Preferred Stock are insufficient to permit the payment to such holders of the full amounts payable to such holders, the assets and surplus fluids legally available for distribution shall be distributed ratably among the holders of the Series C Preferred Stock in proportion to the full amount each such holder otherwise would be entitled to receive. Upon payment in full of all amounts owed to the holders of the Series C Preferred Stock in accordance with the provisions of this Section 2(b) of this Article VIII the holders of the outstanding shares of the Series B Preferred Stock shall be entitled to receive, prior and in preference to the holders of the Common Stock and any other class or series of capital stock of the Corporation which is junior to the Series B Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, from any funds legally available for distribution to stockholders an amount per share equal to the greater of (i) two times the Invested Amount per share of Series B Preferred Stock, and (ii) the amount they would have received in such Liquidation had they converted into Common Stock immediately before the Liquidation. All the preferential amounts to be paid to the holders of the Series B Preferred Stock under this Section 2(b) of this Article VIII shall be paid or set apart for payment before the payment or setting apart for payment of any amount for, or the distribution of any assets of the Corporation to, the holders of the Common Stock or other junior capital stock in connection with a Liquidation as to which this Section 2(b) of this Article VIII applies. If the assets or surplus funds to be distributed to the holders of the Series B Preferred Stock are insufficient to permit the payment to such holders of the full amounts payable to such holders, the assets and surplus funds legally available for distribution shall be distributed ratably among the holders of the Series B Preferred Stock in proportion to the full amount each such holder otherwise would be entitled to receive. 7

(ii) The merger or consolidation of the Corporation into or with another corporation which results in the Corporation‟s stockholders immediately prior to such transaction owning less than 50% of the Corporation‟s voting power immediately after such transaction, or the sale or license of all or substantially all of the assets of the Corporation, shall be deemed to be a Liquidation for purposes of this Section 2(b) of this Article VIII. The amount deemed distributed to the holders of Preferred Stock upon any such merger, consolidation, sale or license shall be the cash or the value of the property, rights or securities distributed to such holders by the acquiring person, firm or other entity. The value of the property, rights or securities to be distributed to the stockholders of the Corporation shall be determined in good faith by the Board of Directors of the Corporation. (c) Voting Rights . (i) Except as set forth specifically below, the holder of each share of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Preferred Stock would be convertible under the circumstances described in Sections 2(d), (e) and (f) of this Article VIII on the record date for the vote or consent of stockholders, and shall otherwise have voting rights and powers equal to the voting rights and powers of the Common Stock. Each holder of a share of Preferred Stock shall be entitled to receive the same prior notice of any stockholders‟ meeting as provided to the holders of Common Stock in accordance with the By-laws of the Corporation, as well as prior notice of all stockholder actions to be taken by legally available means in lieu of a meeting, and shall vote with holders of the Common Stock upon any matter submitted to a vote of stockholders, except those matters required by law, or by the terms hereof, to be submitted to a class or series vote of the holders of Series C Preferred Stock, the holders of Series B Preferred Stock or the holders of Common Stock. Fractional votes shall not, however, be permitted, and any fractions shall be disregarded in computing voting rights. (ii) Election of Directors . For so long as at least 75% of the sum of (i) the shares of the Series C Preferred Stock issued on the Original Issue Date and (ii) the shares of Series C Preferred Stock issued pursuant to the Series C Purchase Agreement following the Original Issue Date remain outstanding (as adjusted for recapitalizations, stock combinations, stock dividends (excluding Series C PIK Dividends), stock splits and the like), the holders of the Series C Preferred Stock, voting as a separate class, shall be entitled to elect that number of members of the Corporation‟s board of directors equal to fifty one percent (51%) of the total number of members of the Corporation‟s board of directors, rounded up to the nearest whole number; provided , however , so long as Constellation Venture Capital II, L.P. and its Affiliates (together, “ Constellation Ventures ”) continue to hold at least 75% of the shares of Series C Preferred Stock it originally purchased, Constellation Ventures will have the right to elect one such director (the “ CV Director ”). For so long as at least 75% of shares of Series B Preferred Stock that are outstanding on the Original Issue Date (after giving effect to the issuance of all shares of Series C Preferred Stock that are issued on the Original Issue Date) remain outstanding (as adjusted for recapitalizations, stock combinations, stock dividends (excluding Series C PIK Dividends), stock splits and the like), the holders of the Series B Preferred Stock, voting as a separate class, shall be entitled to elect that number of members of the Corporation‟s board of directors equal to twenty nine percent (29%) of the total number of members of the Corporation‟s board of directors, rounded down to the nearest whole number (unless by rounding 8

down there would be a vacancy on the board of directors in which case the amount shall be rounded up to the nearest whole number). The holders of Common Stock, voting as a separate class (without the holders of the Preferred Stock voting in such election), shall be entitled to elect that number of members of the Corporation‟s board of directors equal to twenty percent (20%) of the total number of members of the Corporation‟s board of directors, rounded down to the nearest whole number. In the case of any vacancy in the office of a director elected by a series of Preferred Stock or by the Common Stock, a successor shall be elected to hold office for the unexpired term of such director by the affirmative vote of a majority of the shares of that series of Preferred Stock or the Common Stock, as applicable, given at a special meeting of such stockholders duly called or by an action by written consent for that purpose. Any director who shall have been elected by holders of a series of Preferred Stock or by the Common Stock may be removed during the aforesaid term of office, either for or without cause, by, and only by, the affirmative vote of the holders of a majority of the shares of that series of Preferred Stock or the Common Stock, as applicable, given at a special meeting of such stockholders duly called or by an action by written consent for that purpose and any such vacancy thereby created may be filled by the vote of the holders of a majority of the shares of that series of Preferred Stock or the Common Stock, as applicable, represented at such meeting or in such consent. In the case of any vacancy in the office of the CV Director, Constellation Ventures shall be entitled to elect a replacement to hold office for the unexpired term of the CV Director. The CV Director may be removed during the aforesaid term of office, either for or without cause, by, and only by, Constellation Ventures and any such vacancy thereby created may be filled only by Constellation Ventures. The provisions of this Section 2(c)(ii) of this Article VIII shall terminate upon an underwritten public offering of the Corporation‟s Common Stock pursuant to an effective registration statement under the Securities Act. (d) Conversion . (i) Conversion Rights . The holders of the Preferred Stock shall have conversion rights as follows: (A) Conversion Rate . The shares of Preferred Stock shall be convertible, at the times and under the conditions described in this Section 2(d) of this Article VIII and Sections 2(e) and (f) of this Article VIII, into shares of Common Stock at the rate (the “ Conversion Rate ”) of one share of Preferred Stock to the number of shares of Common Stock that equals the quotient obtained by dividing the Invested Amount per share of Preferred Stock by the Conversion Price (defined hereinafter). Thus, the number of shares of Common Stock to which a holder of Preferred Stock shall be entitled upon any conversion provided for in Sections 2(d), (e) and (f) of this Article VIII shall be the product obtained by multiplying the Conversion Rate by the number of shares of Preferred Stock being converted. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of the surrender of the shares of Preferred Stock to be converted in accordance with the procedures described in Section 2(d)(ii) of this Article VIII. The “Conversion Price” shall be equal to $1.34, except as otherwise adjusted as provided hereafter in Sections 2(d), (e) and (f) of this Article VIII. (B) Optional Conversion . Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance at the 9

office of the Corporation or any transfer agent for the Preferred Stock, into Common Stock at the then effective Conversion Rate. (C) Automatic Conversion (1) Should the holders of at least sixty percent (60%) of the then outstanding shares of Preferred Stock so elect, by delivery of written notice or notices to the Corporation, each and every outstanding share of Preferred Stock held by all holders of Preferred Stock (whether or not so electing) shall automatically be converted into Common Stock at the then effective Conversion Rate. (2) Upon the closing of, but effective immediately prior to, the closing of a Qualified Public Offering, each and every share of outstanding Preferred Stock held by all holders of Preferred Stock shall automatically be converted into Common Stock at the then effective Conversion Rate. (3) In the event that, subsequent to an initial public offering which is not a Qualified Public Offering, (i) the Common Stock‟s average closing price for any thirty (30) consecutive trading days is equal to at least $2.68 (subject to adjustments for stock dividends (excluding Series C PIK Dividends), splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof) and (ii) the aggregate market value of all outstanding shares of Common Stock (including all shares of Preferred Stock on an as-converted basis) is at least $300,000,000. each and every share of outstanding Preferred Stock held by all holders of Preferred Stock shall automatically be converted into Common Stock at the then effective Conversion Rate. (4) Conversion of Preferred Stock pursuant to Sections 2(d)(i)(C)(l), (2) and (3) of this Article VIII shall be automatic, without need for any further action by the holders of shares of such Preferred Stock and regardless of whether the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided , however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of Preferred Stock so converted are surrendered to the Corporation in accordance with the procedures described in Section 2(d)(ii) of this Article VIII. Upon the conversion of Preferred Stock pursuant to Section 2(d)(i)(C)(l), (d)(i)(C)(2) or (d)(i)(C)(3) of this Article VIII, the Corporation shall promptly send written notice thereof, by registered or certified mail, return receipt requested and postage prepaid, by hand delivery or by overnight delivery, to each holder of record of shares of Preferred Stock that are converted at his or its address then shown on the records of the Corporation, which notice shall state that certificates evidencing shares of Preferred Stock that are converted must be surrendered at the office of the Corporation (or of its transfer agent for the Common Stock, if applicable) in the manner described in Section 2(d)(ii) of this Article VIII. (5) No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock, and any shares of Preferred Stock surrendered for conversion that would otherwise result in a fractional share of Common Stock shall be 10

redeemed for cash at the then effective Conversion Price per share, payable as promptly as possible when funds are legally available therefor, after aggregating all fractional shares that otherwise would be payable for each holder of any shares of Preferred Stock. (ii) Mechanics of Conversion . Before any holder of Preferred Stock shall be entitled to receive certificates representing the shares of Common Stock into which shares of Preferred Stock are converted in accordance with Section 2(d)(i) of this Article VIII, such holder shall surrender the certificate or certificates for such shares of Preferred Stock, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the Corporation at such office of the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued, if different from the name shown on the books and records of the Corporation. The Corporation shall, as soon as practicable thereafter and in no event later than thirty (30) days after the delivery of said certificates, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder as provided in such notice, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. The person or persons entitled to receive the shares of Common Stock issuable upon a conversion pursuant to Section 2(d)(i) of this Article VIII shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of the effective date of conversion. (e) Adjustments Relating to Conversion . (i) Adjustment for Subdivisions or Combinations of Common Stock . In the event the Corporation at any time or from time to time after the Original Issue Date effects a subdivision or combination of the outstanding Common Stock into a greater or lesser number of shares without a proportionate and corresponding subdivision or combination of the outstanding Preferred Stock, then and in each such event the Conversion Price immediately prior to such subdivision or combination shall be decreased proportionately in the case of a subdivision and increased proportionately in the case of a combination, effective at the close of business on the date immediately preceding the date of each such subdivision or combination. (ii) Adjustments for Capital Reorganizations . In the event the Corporation at any time or from time to time after the Original Issue Date effects a capital reorganization (other than in connection with a merger or other reorganization in which the Corporation is not the continuing or surviving entity) or any reclassification of the Common Stock of the Corporation, then and in each such event the Preferred Stock shall be convertible into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of the shares of Preferred Stock immediately prior to each such reorganization or recapitalization would have been entitled upon such reorganization or reclassification, effective as of the close of business on the date immediately preceding the date of each such reorganization or recapitalization. (iii) Adjustments for Certain Dividends and Distributions . In the event the Corporation at any time, or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Conversion Price then in effect shall be decreased as of the time of such issuance, 11

or in the event such a record date shall have been fixed, as of the close of business on such record date by multiplying the Conversion Price then in effect by a fraction: (1) The numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and (2) The denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution. Provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions. (iv) Adjustments for Other Dividends and Distributions . In the event that the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had the Preferred Stock been converted into Common Stock on the date of such event and had the holders of the Preferred Stock thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period giving application to all adjustments called for during such period under this paragraph with respect to the rights of the holders of the Preferred Stock. (v) Adjustment of Conversion Rate for Diluting Issues . Except as otherwise provided in this Section 2(e)(v) of this Article VIII, in the event, and each time as, following the Original Issue Date the Corporation sells or issues any Common Stock or Common Stock Equivalents that constitute Additional Shares of Common Stock (but excluding any Common Stock or Common Stock Equivalents issued pursuant to Section 2(e)(ii) of this Article VIII or pursuant to which the Conversion Price is adjusted under Section 2(e)(iii) of this Article VIII), at a per share consideration (as defined below) less than the Conversion Price then in effect, then the Conversion Price shall be adjusted as provided in this Section 2(e)(v) of this Article VIII. As used herein, “Additional Shares of Common Stock” shall mean either shares of Common Stock issued subsequent to the Original Issue Date, or, with respect to the issuance of Common Stock Equivalents, the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for subsequent adjustment of such number) of Common Stock issuable in exchange for, upon conversion of, or upon exercise of such Common Stock Equivalents. 12

For purposes of the foregoing, the “per share consideration” with respect to the sale or issuance of any Common Stock or any Common Stock Equivalents shall be the price per share received by the Corporation. With respect to the sale or issuance of Common Stock Equivalents that are convertible into or exchangeable for Common Stock without further consideration, the per share consideration shall be determined by dividing the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for subsequent adjustment of such number) of Common Stock issuable with respect to such Common Stock Equivalents into the aggregate consideration received by the Corporation upon the sale or issuance of such Common Stock Equivalents. With respect to the issuance of other Common Stock Equivalents, the per share consideration shall be determined by dividing the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for subsequent adjustment of such number) of Common Stock issuable with respect to such Common Stock Equivalents into the aggregate consideration received by the Corporation upon the sale or issuance of such Common Stock Equivalents plus the minimum total consideration receivable by the Corporation upon the conversion or exercise of such Common Stock Equivalents. The issuance of Common Stock or Common Stock Equivalents for no consideration shall be deemed to be an issuance at a per share consideration of $.01. In connection with the sale or issuance of Common Stock and/or Common Stock Equivalents, in whole or in part, for non-cash consideration, the amount of non-cash consideration shall be determined by the Board of Directors of the Corporation in good faith. (A) Upon each issuance of any Common Stock or Common Stock Equivalents for a per share consideration less than the Conversion Price as in effect on the date of such issuance, the Conversion Price as in effect on such date shall be adjusted by multiplying it by a fraction: (1) the numerator of which shall be the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to the issuance of such Additional Shares of Common Stock plus the number of shares of Common Stock that the aggregate net consideration received by the Corporation for the total number of such Additional Shares of Common Stock so issued would purchase at the Conversion Price then in effect; and (2) the denominator of which shall be the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to the issuance of such Additional Shares of Common Stock plus the number of Additional Shares of Common Stock so issued. For the purposes of this Section 2(e)(v)(A) of this Article VIII, the number of shares of Common Stock deemed to be outstanding as of a given date shall be the sum of (i) the number of shares of Common Stock actually outstanding, (ii) the number of shares of Common Stock into which the then outstanding shares of Preferred Stock could be converted if fully converted on the day immediately preceding the given date, and (iii) the number of shares of Common Stock that could be obtained through the exercise or conversion of all other rights, options and convertible securities outstanding on the day immediately preceding the given date. 13

(B) Upon each issuance of Common Stock Equivalents that are exchangeable into Common Stock without farther consideration, where the issuance of such Common Stock Equivalents is made for a per share consideration less than the Conversion Price as in effect on the date of such issuance, the Conversion Price shall be adjusted as provided in paragraph (A) of this Section 2(e)(v) of this Article VIII on the basis that the Additional Shares of Common Stock are to be treated as having been issued on the date of issuance of the Common Stock Equivalents, and the aggregate consideration received by the Corporation for such Common Stock Equivalents shall be deemed to have been received for such Additional Shares of Common Stock. (C) Upon each issuance of Common Stock Equivalents other than those described in paragraph (B) of this Section 2(e)(v) of this Article VIII for a per share consideration less than the Conversion Price as in effect on the date of such issuance, the Conversion Price shall be adjusted as provided in paragraph (A) of mis Section 2(e)(v) of this Article VIII on the basis that the Additional Shares of Common Stock are to be treated as having been issued on the date of issuance of such Common Stock Equivalents, and the aggregate consideration received and receivable by the Corporation on conversion or exercise of such Common Stock Equivalents shall be deemed to have been received for such Additional Shares of Common Stock. (D) Once any Additional Shares of Common Stock have been treated as having been issued for the purpose of this Section 2(e)(v) of this Article VIII, they shall be treated as issued and outstanding shares of Common Stock whenever any subsequent calculations must be made pursuant hereto; provided that on the expiration of any options, warrants or rights to purchase Additional Shares of Common Stock, the termination of any rights to convert or exchange for Additional Shares of Common Stock, or the expiration of any options or rights related to such convertible or exchangeable securities on account of which an adjustment in the Conversion Price has been made previously pursuant to this Section 2(e)(v) of this Article VIII, such Conversion Price shall forthwith be readjusted to the Conversion Price as would have obtained had the adjustment made upon the issuance of such options, warrants, rights, securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options, warrants or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities; provided , however, that no such adjustment of the Conversion Price pursuant to this Section 2(e)(v)(D) of this Article VIII shall affect shares of Common Stock previously issued upon conversion of any shares of Preferred Stock. (E) The foregoing notwithstanding, “Additional Shares of Common Stock” shall not include, and no adjustment of the Conversion Price shall be made pursuant to this Section 2(e)(v) of this Article VIII as a result of the issuance of: (1) any shares of Common Stock upon the conversion of any Preferred Stock; 14

(2) any shares of Common Stock upon the exercise or conversion of options, warrants or convertible securities which are outstanding on the Original Issue Date; (3) any shares of Common Stock or options to purchase Common Stock (including any shares of Common Stock issued upon exercise of any such options) pursuant to any stock option plan, restricted stock plan or other benefit plan, the terms of which are customary in the marketplace as determined and approved by the Board of Directors of the Corporation in good faith; (4) any securities pursuant to bona fide acquisitions, mergers or similar transactions, the terms of which are approved by the Board of Directors of the Corporation in good faith; (5) any securities in connection with loan transactions and/or equipment leases, the terms of which are approved by the Board of Directors of the Corporation in good faith and, in the case of any such transaction between the Corporation and any Affiliate of the Corporation, the terms of which are also approved by either (A) the vote or written consent of at least a majority of the members of the Board of Directors who were elected solely by the holders of the Preferred Stock, or (B) the vote or written consent of holders of at least sixty percent (60%) of the outstanding shares of Preferred Stock voting as a separate class; and (6) any securities pursuant to any transactions primarily for the purpose of (a) joint ventures or strategic alliances, (b) development, production or distribution of the Corporation‟s products or services, (c) purchase or licensing of technology, or (d) any other transactions that are primarily for purposes other than raising capital, provided that the terms of any such transaction are approved by the Board of Directors of the Corporation in good faith and, in the case of any such transaction between the Corporation and any Affiliate of the Corporation the terms are also approved by either (A) the vote or written consent of at least a majority of the members of the Board of Directors who were elected solely by the holders of the Preferred Stock, or (B) the vote or written consent of holders of at least sixty percent (60%) of the outstanding shares of Preferred Stock voting as a separate class. (vi) De Minimis Adjustments . No adjustment to the Conversion Price shall be made if such adjustment would result in a change in the Conversion Price of less than $.01. Any adjustment of less than $.01 that is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment that, on a cumulative basis, amounts to an adjustment of $.01 or more in the Conversion Price. (vii) Certificate as to Adjustments . Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 2(e) of this Article VIII, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate signed by the Chief Financial Officer and setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is 15

based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustments and readjustments, (B) the Conversion Price and the Conversion Rate at that time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property that at that time would be received upon the conversion of Preferred Stock. (f) Other Matters Relating to Conversion . (i) No Impairment . The Corporation shall not, by amendment of this Certificate of Incorporation or By-laws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but shall at all times in good faith assist in the carrying out of all the provisions of Sections 2(d), (e) and (f) of this Article VIII and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Preferred Stock set forth herein against impairment. (ii) Reservation of Stock Issuable Upon Conversion . The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock and if at any time the number of authorized but unissued shares of Common Stock shall be insufficient to effect the conversion of all then outstanding shares of Preferred Stock, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. (iii) Taxes . The Corporation shall pay any and all issue and other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of Preferred Stock pursuant to Sections 2(d), (e) and (f) of this Article VIII. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Preferred Stock so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation, that such tax has been paid or adequately provided for. (iv) Organic Change . Any recapitalization, reorganization, reclassification, consolidation, merger, sale or license or other conveyance of all or substantially all of the Corporation‟s assets to another person or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock (other than a transaction subject to Section 2(b)(ii) of this Article VIII) is referred to herein as an “Organic Change.” Prior to the consummation of any Organic Change, the Corporation shall make appropriate provision to provide that each of the holders of the Preferred Stock shall have upon consummation thereof the right to acquire and receive upon the conversion of such holder‟s Preferred Stock such shares of stock, securities or assets as may be issued or payable with 16

respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon conversion of such holder‟s Preferred Stock had such Organic Change not taken place. (v) Integrated Transactions . In case any Common Stock Equivalent is issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction in which no specific consideration is allocated to such Common Stock Equivalent by the parties thereto, the Common Stock Equivalent shall be deemed to have been issued without consideration. (vi) Treasury Shares . The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Corporation, and the disposition of any shares so owned or held shall be considered an issuance or sale of Common Stock. (vii) Status Upon Issuance . All shares of Common Stock which may be issued upon conversion of the shares of Preferred Stock will upon issuance by the Corporation be validly issued, fully paid and non-assessable and free from all taxes, liens and charges created by the Corporation with respect to the issuance thereof. (viii) Registration or Listing . If any shares of Common Stock to be reserved for the purpose of conversion of shares of Preferred Stock require registration or listing with, or approval of, any governmental authority, stock exchange or other regulatory body under any federal or state law or regulation or otherwise, before such shares may be validly issued or delivered upon conversion, the Corporation will in good faith and as expeditiously as possible endeavor to secure such registration, listing or approval, as the case may be. (g) Protective Provisions . Until the closing of a Qualified Public Offering and so long as at least fifteen percent (15%) of the sum of (i) the shares of Preferred Stock that are outstanding on the Original Issue Date and (ii) the shares of Series C Preferred Stock issued pursuant to the Series C Purchase Agreement following the Original Issue Date remain outstanding (subject to adjustments for stock dividends (excluding Series C PIK Dividends), splits, reverse splits, combinations, recapitalizations and the like occurring after the Original Issue Date), without first obtaining the affirmative vote or written consent of the holders of at least sixty percent (60%) of the total number of shares of Preferred Stock outstanding, voting as a separate class, the Corporation shall not: (A) pay or declare any dividends or distributions with respect to the Common Stock; (B) authorize, create or issue any new class or series of stock unless the same ranks junior to the Series B Preferred Stock and the Series C Preferred Stock, as to dividends and distribution of assets on the liquidation, dissolution or winding up of the Corporation or with respect to redemption rights, or create or authorize any obligation or security convertible into shares of any Preferred Stock or into shares of any other class or series of stock unless the same ranks junior to the Series B Preferred Stock and the Series C Preferred Stock, as to dividends and distribution of assets on the liquidation, dissolution or winding up of the 17

Corporation or with respect to redemption rights, whether any such authorization, creation or issuance shall be by means of amendment to this Amended and Restated Certificate of Incorporation or by merger, consolidation or otherwise; (C) amend, alter or repeal this Amended and Restated Certificate of Incorporation (including by way of merger, consolidation or otherwise) or the Corporation‟s By-laws, if such amendment, alteration or repeal would adversely affect the powers, preferences and special rights of the Series B Preferred Stock or the Series C Preferred Stock; provided that any amendment for purposes of authorizing, creating or issuing any new class or series of stock that does not have a liquidation or redemption preference or priority superior to or on a parity with the Series B Preferred Stock or the Series C Preferred Stock shall not be deemed to adversely affect the powers, preferences and special rights of the Series B Preferred Stock or the Series C Preferred Stock; (D) redeem, repurchase or otherwise acquire any shares of capital stock of the Corporation, except for (i) shares repurchased from employees, independent contractors or directors of the Corporation upon termination of their employment or services or pursuant to agreements providing for such repurchases between the Corporation and such persons where such repurchase price either does not exceed the original issue price paid by such person to the Corporation for such shares or is approved by the vote or written consent of at least a majority of the Board of Directors who were elected by the holders of Preferred Stock, (ii) pursuant to Article V of that certain Stockholders Agreement dated February 20, 2000 by and among the Company, William J. Bennett and the other signatory thereto, and (iii) redemptions pursuant to Section 2(h) of this Article VIII; (E) make any loans or advances to employees, except in the ordinary course of business as part of travel advances or salary or promissory notes for purchase of capital stock of the Corporation, unless unanimously approved by the Board of Directors and, if relevant, after conducting an analysis of any such transaction in light of the Public Company Accounting Reform and Investor Act of 2002; (F) take any action which results in (x) the merger or consolidation of the Corporation into or with another corporation which results in the Corporation‟s stockholders immediately prior to such transaction owning less than 50% of the Corporation‟s voting power immediately after such transaction, or (y) the sale, lease, license, assignment, transfer, abandonment or other conveyance of all or substantially all the assets of the Corporation; (G) make any guarantees of indebtedness of any other person, except in the ordinary course of business, unless unanimously approved by the Board of Directors; (H) amend the provisions of this Section 2(g) of this Article VIII; (I) after March 31, 2003, incur incremental indebtedness in respect of borrowed money in excess of $10,000,000; provided , however , that financing 18

provided by vendors or suppliers (including, without limitation, equipment lessors) in connection with the provision of goods or services shall not be deemed to be “indebtedness in respect of borrowed money” for purposes hereof; or (J) increase the size of the Board of Directors to greater than fifteen (15) members. (h) Redemption . (i) At the individual option of each holder of shares of Preferred Stock, the Corporation shall redeem, on December 31, 2008 (the “ Redemption Date ”), the number of shares of Preferred Stock held by such holder that is specified in a written request for redemption (specifying the name and address of such holder and the number of shares of Preferred Stock to be redeemed) delivered to this Corporation by the holder at least thirty (30) days but no more than ninety (90) days prior to the Redemption Date, by paying in cash therefor, an amount equal to 200% (two hundred percent) of the Invested Amount per share of Preferred Stock (including in the case of the Series C Preferred Stock, all shares of Series C Preferred Stock issued as Series C PIK Dividends) (the “ Redemption Price ”); provided , however , that the provisions of this Section 2(h) of this Article VIII shall terminate and not be applicable to any shares of Preferred Stock that have been converted into Common Stock pursuant to Section 2(d) of this Article VIII. (ii) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of a holder of shares of Preferred Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates), shall cease with respect to the shares of Preferred Stock subject to redemption, and such shares shall not thereafter be transferred on the books of this Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Preferred Stock on the Redemption Date are insufficient to redeem the total number of shares of Preferred Stock to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares in the following order of priority (A) first, ratably among the holders of shares of Series C Preferred Stock to be redeemed based upon the number of such shares to be redeemed from each such holder, until the Redemption Price has been paid in full for all such shares to be redeemed, and (B) second, ratably among the holders of shares of Series B Preferred Stock to be redeemed based upon the number of such shares to be redeemed from each such holder. The shares of Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Corporation arc legally available for the redemption of shares of Preferred Stock, such funds will promptly be used in the above order of priority to redeem the balance of the shares which the Corporation has become obliged to redeem on the Redemption Date but which it has not redeemed. (i) No Reissuance of Preferred Stock . No share or shares of Preferred Stock, acquired by the Corporation by reason of purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares that the Corporation shall be authorized to issue. 19

ARTICLE IX The Corporation reserves the right to amend, alter, change, or repeal any provisions contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and, except as expressly provided herein, all rights conferred upon the stockholders herein are granted subject to this right. FOURTH: The foregoing Amendment and Restatement of the Certificate of Incorporation has been duly approved by the Board of Directors. FIFTH: The stockholders of the Corporation have approved this Amendment and Restatement of the Certificate of Incorporation by written consent in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. The number of shares consenting to the foregoing amendment equaled or exceeded the vote required. IN WITNESS WHEREOF, KI2 INC. has caused this Certificate to be signed by David S. Kyman, its Secretary, on December 19, 2003. K12 INC., a Delaware corporation By /s/ David S. Kyman David S. Kyman, Secretary 20

Secretary of State Division of Corporations Delivered 06:47 PM 12/22/2003 FILED 06:47 PM 12/22/2003 SRV 030828761 — 3150167 FILE Certificate of Correction Filed To Correct An Error in the Amended and Restated Certificate of Incorporation of K12 INC. Filed in the Office of the Secretary of State of Delaware on December 19,2003 K12 INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY THAT: 1. The name of the corporation is K12 INC. 2 . An Amended and Restated Certificate of Incorporation of Kl2 INC. was filed with the Secretary of State of Delaware on December 19, 2003 and said Amended and Restated Certificate of Incorporation requires correction as permitted by Section 103 of the General Corporation Law of the State of Delaware, 3. The inaccuracy or defect in said, Amended and Restated Certificate of Incorporation is that Section 1 of Article VIII of said Amended and Restated Certificate of Incorporation incorrectly set forth the authorized number of shares of the Corporation. 4. Section 1 of Article VII of said Amended and Restated Certificate of Incorporation is corrected to read in full as follows: “ 1. The total number of shares of stock which the Corporation is authorized to issue is Two Hundred Sixty Five Million Six Hundred Thirty Thousand (265,630,000) shares consisting of (i) One Hundred Fifty Two Million Three Hundred Fifteen Thousand (152,315,000) shares of Common Stock (the “ Common Stock ”) $0.0001 par value per share, and (ii) One Hundred Thirteen Million Three Hundred Fifteen Thousand (113,315,000) shares of Preferred Stock (the “ Preferred Stocks ”), $0.0001 par value per share, of which Seventy Six Million (76,000,000) shares are designated as Series B Convertible Preferred Stock (the “ Series B Preferred Stock ”) and Thirty Seven Million Three Hundred Fifteen Thousand (37,315,000) shares are designated as Series C Convertible Preferred Stock (the “Series C Preferred Stock ”).” IN WITNESS WHEREOF, K12 INC. has caused this Certificate of Correction to be signed by David S. Kyman, its Secretary, this 22 nd day of December, 2003. K12 INC. By /s/ David S. Kyman David S. Kyman, Secretary

State of Delaware Secretary of State Division of Corporations Delivered 04:05 PM 10/11/2006 FILED 03:38 PM 10/11/2006 SRV 060933974 — 3150167 FILE CERTIFICATE OF AMENDMENT OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF K12 INC. It is hereby certified that: 1. The name of the corporation (hereinafter the “Corporation”) is: K12 Inc. 2. Section 1 of Article VII of the Amended and Restated Certificate of Incorporation of the Corporation is amended and restated to read in full as follows: “1. The total number of shares of stock which the Corporation is authorized to issue is Three Hundred and One Million (301,000,000) shares consisting of: (i) One Hundred Seventy Million (170,000,000) shares of Common Stock (the “ Common Stock ”), $0.0001 par value per share, and (ii) One Hundred Thirty One Million (131,000,000) shares of Preferred Stock (the “ Preferred Stock ”), $0.0001 par value per share, of which Seventy Six Million (76,000,000) shares are designated as Series B Convertible Preferred Stock (the “ Series B Preferred Stock ”) and Fifty Five Million (55,000,000) shares are designated as Series C Convertible Preferred Stock (the “ Series C Preferred Stock ”).” 3. This amendment of the Amended and Restated Certificate of Incorporation herein certified has been duly adopted and approved by the Board of Directors of the Corporation and by written consent of the stockholders of the Corporation in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware. Dated: October 11, 2006.

/s/ David S. Kyman David S. Kyman, Secretary

Exhibit 3.2 CERTIFICATE OF SECRETARY REGARDING AMENDMENT OF BYLAWS OF K12 INC. a Delaware corporation The undersigned, David S. Kyman, hereby certifies that: 1. He is the duly elected and acting Secretary of K12 Inc., a Delaware corporation. 2. At a meeting of the Board of Directors of this Corporation held on March 30, 2003, Article III, Section 3.1 of the By-Laws of this Corporation was amended to read in its entirety as follows: Section 3.1 NUMBER, ELECTION AND TENURE . The authorized number of directors which shall constitute the Board shall not be less than seven (7) nor more than fourteen (14). The exact number shall be determined from time to time by resolution of the Board. Until otherwise determined by such resolution, the Board shall consist of fourteen (14) persons. Directors shall be elected at the annual meeting of stockholders, in the manner provided in the Certificate of Incorporation of the corporation, and each director shall serve until such person‟s successor is elected and qualified or until such person‟s death, retirement, resignation or removal.” IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the 30 th day of March, 2003. /s/ DAVID S. KYMAN DAVID S. KYMAN, Secretary

CERTIFICATE OF SECRETARY REGARDING AMENDMENT OF BYLAWS OF K12 INC. a Delaware corporation The undersigned, David S. Kyman, hereby certifies that: 1. He is the duly elected and acting Secretary of K12 Inc., a Delaware corporation. 2. At a meeting of the Board of Directors of this Corporation held on February 10, 2003, Article III, Section 3.1 of the By-Laws of this Corporation was amended to read in its entirety as follows: “Section 3.1 NUMBER, ELECTION AND TENURE . The authorized number of directors which shall constitute the Board shall not be less than seven (7) nor more than thirteen (13). The exact number shall be determined from time to time by resolution of the Board. Until otherwise determined by such resolution, the Board shall consist of thirteen (13) persons. Directors shall be elected at the annual meeting of stockholders, in the manner provided in the Certificate of Incorporation of the corporation, and each director shall serve until such person‟s successor is elected and qualified or until such person‟s death, retirement, resignation or removal.” IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the 10 th day of February, 2003. /s/ DAVID S. KYMAN DAVID S. KYMAN, Secretary

CERTIFICATE OF SECRETARY REGARDING AMENDMENT OF BYLAWS OF K12 INC. a Delaware corporation The undersigned, David S. Kyman, hereby certifies that: 1. He is the duly elected and acting Secretary of K12 Inc., a Delaware corporation. 2. Through Unanimous Written Consent of the Board of Directors of this Corporation, dated February 28, 2001, Article III, Section 3.1 of the By-Laws of this Corporation was amended to read in its entirety as follows: “Section 3.1 NUMBER, ELECTION AND TENURE . The authorized number of directors which shall constitute the Board shall not be less than seven (7) nor more than twelve (12). The exact number shall be determined from time to time by resolution of the Board. Until otherwise determined by such resolution, the Board shall consist of eight (8) persons. Directors shall be elected at the annual meeting of stockholders, in the manner provided in the Certificate of Incorporation of the corporation, and each director shall serve until such person‟s successor is elected and qualified or until such person‟s death, retirement, resignation or removal.” IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the 28 th day of February, 2001. /s/ DAVID S. KYMAN DAN/lD S. KYMAN, Secretary

BYLAWS OF PREMIERSCHOOL.COM, INC., a Delaware corporation

TABLE OF CONTENTS
Page

ARTICLE I — OFFICES Section 1.1 Section 1.2 Registered Office Other Offices

1 1 1 1 1 1 1 2 2 2 2 3 3 3 3 3 4 4 4 4 4 4 4 5 5 5 6 6 6 6 6 6 -i-

ARTICLE II — MEETINGS OF STOCKHOLDERS Section 2.1 Section 2.2 Section 2.3 Section 2.4 Section 2.5 Section 2.6 Section 2.7 Section 2.8 Section 2.9 Place of Meetings Annual Meeting of Stockholders Quorum; Adjourned Meetings and Notice Thereof Voting Proxies Special Meetings Notice of Stockholder‟s Meetings Maintenance and Inspection of Stockholder List Stockholder Action by Written Consent Without a Meeting

ARTICLE III — DIRECTORS Section 3.1 Section 3.2 Section 3.3 Section 3.4 Section 3.5 Section 3.6 Section 3.7 Section 3.8 Section 3.9 Section 3.10 Section 3.11 Section 3.12 Number, Election and Tenure Vacancies Powers Directors‟ Meetings Regular Meetings Special Meetings Quorum Action Without Meeting Telephonic Meetings Committees of Directors Minutes of Committee Meetings Compensation of Directors

ARTICLE IV — OFFICERS Section 4.1 Section 4.2 Section 4.3 Section 4.4 Section 4.5 Officers Election of Officers Subordinate Officers Compensation of Officers Term of Office; Removal and Vacancies

TABLE OF CONTENTS (Cont‟d)
Page

Section 4.6 Section 4.7 Section 4.8 Section 4.9 Section 4.10 Section 4.11 Section 4.12

Chairman of the Board President Vice President Secretary Assistant Secretaries Treasurer Assistant Treasurer

6 6 7 7 7 7 8 8 8 8 8 9 9 9 9 10 10 10 10 10 10 10 10 11 11 -ii-

ARTICLE V — CERTIFICATES OF STOCK Section 5.1 Section 5.2 Section 5.3 Section 5.4 Section 5.5 Section 5.6 Section 5.7 Certificates Signatures on Certificates Statement of Stock Rights, Preferences, Privileges Lost Certificates Transfers of Stock Fixing Record Date Registered Stockholders

ARTICLE VI — GENERAL PROVISIONS Section 6.1 Section 6.2 Section 6.3 Section 6.4 Section 6.5 Section 6.6 Section 6.7 Dividends Payment of Dividends Checks Fiscal Year Corporate Seal Manner of Giving Notice Waiver of Notice

ARTICLE VII — AMENDMENTS Section 7.1 Amendment by Directors or Stockholders

BYLAWS OF PREMIERSCHOOL.COM, INC., a Delaware corporation ARTICLE I OFFICES Section 1.1 Registered Office . The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 1.2 Other Offices . The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 2.1 Place of Meetings . Meetings of stockholders shall be held at any place within or without the State of Delaware designated by the Board of Directors. In the absence of any such designation, stockholders‟ meetings shall be held at the principal executive office of the corporation. Section 2.2 Annual Meeting of Stockholders . The annual meeting of stockholders shall be held each year on a date and a time designated by the Board of Directors. At each annual meeting directors shall be elected and any other proper business may be transacted. Section 2.3 Quorum; Adjourned Meetings and Notice Thereof . Shares of issued and outstanding stock of the corporation having a majority of the voting power and entitled to vote at any meeting of stockholders, the holders of which are present in person or represented by proxy, shall constitute a quorum for the transaction of business, except as otherwise required by statute, by the Certificate of Incorporation (as amended and restated from time to time, the “Certificate of Incorporation”), or by these Bylaws. A quorum, once established, shall not be broken by the 1

withdrawal of enough votes to leave less than a quorum and the votes present may continue to transact business until adjournment. If, however, such quorum shall not be present or represented at any meeting of the stockholders, stock having a majority of the voting power represented at the meeting in person or by proxy may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat. Section 2.4 Voting . When a quorum is present at any meeting, the vote of the holders of stock having a majority of the voting power represented at the meeting in person or by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of statute, or the Certificate of Incorporation, or these Bylaws, a different vote is required in which case such express provision shall govern and control the decision of such question. Section 2.5 Proxies . At each meeting of the stockholders, each stockholder having the right to vote may vote in person or may authorize another person or persons to act for him by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to said meeting, unless said instrument provides for a longer period. All proxies must be filed with the Secretary of the corporation at the beginning of each meeting in order to be counted in any vote at the meeting. All elections shall be had and all questions decided by a plurality vote. Section 2.6 Special Meetings . Special meetings of the stockholders of the Corporation, for any purpose, or purposes, unless otherwise prescribed by statute, may be called by the Board of Directors, the Chairman of the Board of Directors or the President of the Corporation and shall be held at such place, on such date and at such time as shall be fixed by the person or persons calling the meeting. Special meetings of the stockholders of the Corporation may not be called by any other person or persons. Section 2.7 Notice of Stockholder‟s Meetings . Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which notice shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. The written notice of any meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. 2

Section 2.8 Maintenance and Inspection of Stockholder List . The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.9 Stockholder Action by Written Consent Without a Meeting . Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS Section 3.1 Number, Election and Tenure . The authorized number of directors which shall constitute the Board shall not be less than three (3) nor more than seven (7). The exact number shall be determined from time to time by resolution of the Board. Until otherwise determined by such resolution, the Board shall consist of three (3) persons. Directors shall be elected at the annual meeting of stockholders, in the manner provided in the Certificate of Incorporation of the Corporation, and each director shall serve until such person‟s successor is elected and qualified or until such person‟s death, retirement, resignation or removal. Section 3.2 Vacancies . Vacancies on the Board of Directors by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, and newly created directorships resulting from any increase in the authorized number of directors shall be filled in the manner provided in the Certificate of Incorporation of the Corporation. The directors so chosen shall hold office until the next annual election of directors and until their successors are duly elected and 3

shall qualify, unless sooner displaced. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 3.3 Powers . The property and business of the corporation shall be managed by or under the direction of its Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. Section 3.4 Directors‟ Meetings . The directors may hold their meetings and have one or more offices, and keep the books of the corporation outside of the State of Delaware. Section 3.5 Regular Meetings . Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board. Section 3.6 Special Meetings . Special meetings of the Board of Directors may be called by the President on forty-eight hours‟ notice to each director, either personally or by mail, by facsimile or by telegram; special meetings shall be called by the President or the Secretary in like manner and on like notice on the written request of two directors unless the Board consists of only one director; in which case special meetings shall be called by the President or Secretary in like manner or on like notice on the written request of the sole director. Section 3.7 Quorum . At all meetings of the Board of Directors a majority of the authorized number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the vote of a majority of the directors present at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. If only one director is authorized, such sole director shall constitute a quorum. Section 3.8 Action Without Meeting . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 3.9 Telephonic Meetings . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, 4

by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. Section 3.10 Committees of Directors . The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each such committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the General Corporation Law of the State of Delaware to be submitted to stockholders for approval, or (ii) adopting, amending or repealing any bylaw of the corporation. Section 3.11 Minutes of Committee Meetings . Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Section 3.12 Compensation of Directors . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 5

ARTICLE IV OFFICERS Section 4.1 Officers . The officers of this corporation shall be chosen by the Board of Directors and shall include a President, a Secretary and a Treasurer. The corporation may also have at the discretion of the Board of Directors such other officers as are desired, including a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries and Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 4.3 hereof. In the event there are two or more Vice Presidents, then one or more may be designated as Executive Vice President, Senior Vice President, or other similar or dissimilar title. At the time of the election of officers, the directors may by resolution determine the order of their rank. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide. Section 4.2 Election of Officers . The Board of Directors, at its first meeting after each annual meeting of stockholders, shall choose the officers of the corporation. Section 4.3 Subordinate Officers . The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 4.4 Compensation of Officers . The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 4.5 Term of Office; Removal and Vacancies . The officers of the corporation shall hold office until their successors are chosen and qualify in their stead. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. If the office of any officer or officers becomes vacant for any reason, the vacancy shall be filled by the Board of Directors. Section 4.6 Chairman of the Board . The Chairman of the Board, if such an officer be elected, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these Bylaws. If there is no President, the Chairman of the Board shall in addition be the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in Section 4.7 of this Article IV. Section 4.7 President . Subject to such supervisory powers, if any, as maybe given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President 6

shall be the Chief Executive Officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall be an ex-officio member of all committees and shall have the general powers and duties of management usually vested in the office of President and Chief Executive Officer of corporations, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. Section 4.8 Vice President . In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall have such other duties as from time to time may be prescribed for them, respectively, by the Board of Directors. Section 4.9 Secretary . The Secretary shall attend all sessions of the Board of Directors and all meetings of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose; and shall perform like duties for the standing committees when required by the Board of Directors. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or these Bylaws. He shall keep in safe custody the seal of the corporation, and when authorized by the Board, affix the same to any instrument requiring it, and when so affixed it shall be attested by his signature or by the signature of an Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section4.10 Assistant Secretaries . The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors, or if there be no such determination, the Assistant Secretary designated by the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 4.11 Treasurer . The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys, and other valuable effects in the name and to the credit of the corporation, in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer 7

and of the financial condition of the corporation. If required by the Board of Directors, he shall give the corporation a bond, in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors, for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 4.12 Assistant Treasurer . The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors, or if there be no such determination, the Assistant Treasurer designated by the Board of Directors, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE V CERTIFICATES OF STOCK Section 5.1 Certificates . Every holder of stock of the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer of the corporation, certifying the number of shares represented by the certificate owned by such stockholder in the corporation. Section 5.2 Signatures on Certificates . Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 5.3 Statement of Stock Rights, Preferences, Privileges . If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without 8

charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 5.4 Lost Certificates . The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 5.5 Transfers of Stock . Upon surrender to the corporation, or the transfer agent of the corporation, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 5.6 Fixing Record Date . In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders, or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 5.7 Registered Stockholders . The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by the laws of the State of Delaware. 9

ARTICLE VI GENERAL PROVISIONS Section 6.1 Dividends . Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 6.2 Payment of Dividends . Before payment of any dividend there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interests of the corporation, and the directors may abolish any such reserve. Section 6.3 Checks . All checks or demands for money and notes of the corporation shall be signed by such officer or officers as the Board of Directors may from time to time designate. Section 6.4 Fiscal Year . The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. Section 6.5 Corporate Seal . The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words “Corporate Seal, Delaware”. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Section 6.6 Manner of Giving Notice . Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by facsimile or telegram. Section 6.7 Waiver of Notice . Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed to be equivalent. Attendance of a person at a meeting shall 10

constitute a waiver of notice of such meeting, except when a person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. ARTICLE VII AMENDMENTS Section 7.1 Amendment by Directors or Stockholders . The Board of Directors is expressly empowered to adopt, amend or repeal these Bylaws. The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation. 11

CERTIFICATE OF SECRETARY OF PREMIERSCHOOL.COM, INC., a Delaware corporation I, the undersigned, do hereby certify: (1) That I am the duly elected and acting Secretary of PremierSchool.com, Inc., a Delaware corporation; and (2) That the foregoing bylaws, comprising eleven (11) pages, constitute the bylaws of said corporation as duly adopted by Unanimous Written Consent of the Board of Directors of said corporation as of December 28, 1999. IN WITNESS WHEREOF, I have hereunto subscribed my name this 28 th day of December, 1999.

David S. Kyman, Secretary

12

Exhibit 4.2 K12 INC. AMENDED AND RESTATED STOCK OPTION PLAN ARTICLE I GENERAL 1.1 Purpose. The purposes of this Stock Option Plan (the “Plan”) are to: (1) closely associate the interests of the directors, officers, employees and independent contractors of K12 Inc. (the “Company”) and Affiliates of the Company with the shareholders of the Company by reinforcing the relationship between participants‟ rewards and shareholder gains; (2) provide to certain of such individuals the opportunity to acquire equity ownership in the Company commensurate with Company performance, as reflected in increased shareholder value; (3) maintain competitive compensation levels; and (4) provide an incentive for continuous employment with the Company. 1.2 Administration. (a) The Plan shall be administered by the Board of Directors of the Company or, at the option of the Board of Directors, a compensation committee of the Board of Directors (the Board of Directors or such compensation committee being hereafter referred to as the “Board”). (b) The Board shall have the authority, in its sole discretion and from time to time to: (i) designate the directors, officers, employees and independent contractors and classes of such individuals eligible to participate in the Plan; grant awards provided in the Plan in such form and amount as the Board shall determine; impose such limitations, restrictions and conditions upon any such award as the Board shall deem appropriate; and interpret the Plan, adopt, amend, and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan.

(ii) (iii) (iv)

(c) Decisions and determinations of the Board on all matters relating to the Plan shall be in its reasonable discretion and shall be conclusive. No member of the Board shall be liable for any action taken or decision made in good faith relating to the Plan or any award thereunder. 1.3 Eligibility for Participation. Participants in the Plan shall be selected by the Board from the directors, officers, employees and independent contractors of the Company and/or its Affiliates who have the capability of making a substantial contribution to the success of the Company and/or its Affiliates. In making this selection and in determining the form and amount of awards, the Board shall consider any factors deemed relevant, including the individual‟s functions, responsibilities, value of services to the Company and/or its Affiliates, and past and potential contributions to the profitability and sound growth of the Company and/or its Affiliates. 1.4 Aggregate Limitation on Awards. Shares of stock which may be issued under the Plan shall be authorized and unissued or treasury shares of Common Stock of the Company (the “Common Stock”). The maximum number of shares which may be issued under the Plan shall be Eight Million (8,000,000). If any Stock Option shall for any reason expire or otherwise terminate in whole or in part, without having been exercised in full, the Common Stock not purchased under such Stock Option shall revert to and again become available for issuance under the Plan. 1.5 Effective Date and Term of Plan. (a) The Plan shall become effective on the date approved by the shareholders and the Board of the Company. (b) No awards shall be made under the Plan after December 31, 2009; provided , however , that the Plan and all awards made under the Plan prior to such date shall remain in effect until such awards have been satisfied or terminated in accordance with the Plan and the terms of such awards. ARTICLE II STOCK OPTIONS 2.1 Award of Stock Options. The Board may from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Board may prescribe, grant to any participant in the Plan one or more options to purchase for cash the number of shares of Common Stock allotted by the Board (“Stock Options”). The date a Stock Option is granted shall mean

the date selected by the Board as of which the Board allots a specific number of shares to a participant pursuant to the Plan. The Stock Options are not intended to qualify as incentive stock options under the provisions of Section 422 of the Internal Revenue Code of 1986 as amended. 2.2 Stock Option Agreements. The grant of a Stock Option shall be evidenced by a written Stock Option Agreement, executed by the Company and the holder of a Stock Option (the “optionee”), stating the number of shares of Common Stock subject to the Stock Option evidenced thereby, and in such form as the Board may from time to time determine. 2.3 Stock Option Price. The option price per share of Common Stock deliverable upon the exercise of a Stock Option shall be not less than 100% of the fair market value of a share of Common Stock on the date the Stock Option is granted, unless otherwise determined by the Board or pursuant to an employment or engagement agreement. 2.4 Term and Exercise. Each Stock Option shall be exercisable pursuant to the vesting schedule set forth in the Stock Option Agreement granting such Stock Option. Unless a shorter period is provided by the Board, by another Section of this Plan, or a Stock Option Agreement, each Stock Option may be exercised until the tenth anniversary of the date of grant (the “Option Term”). No Stock Option shall be exercisable after the expiration of its option term. 2.5 Payment. Each Stock Option Agreement shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any shares of Common Stock subject thereto, the optionee shall pay to the Company, in full, the option price for such shares in cash. 2.6 Issuance of Shares. As soon as reasonably practicable after receipt of payment, the Company shall deliver to the optionee a certificate or certificates for such shares of Common Stock. The optionee shall become a shareholder of the Company with respect to Common Stock represented by share certificates so issued and as such shall be fully entitled to all rights of a shareholder holding Common Stock, subject to any restrictions contained in the optionee‟s Stock Option Agreement.

2.7 Death of Optionee. Except as provided in a Stock Option Agreement or an applicable employment or engagement agreement, upon the death of the optionee, any Stock Options held by optionee and exercisable on the date of death may be exercised by the optionee‟s estate, or by a person who acquires the right to exercise such Stock Option by bequest or inheritance or by reason of the death of the optionee, provided that such exercise occurs within both the remaining Option Term of the Stock Option and six months after the optionee‟s death. Except as provided in a Stock Option Agreement or an applicable employment or engagement agreement, any Stock Options which were exercisable on the date of optionee‟s death shall terminate at the end of the Option Term or six months after optionee‟s death, whichever is earlier. Any Stock Options held by optionee which are not exercisable on the date of optionee‟s death shall terminate upon optionee‟s death. 2.8 Disability of Optionee. Except as provided in a Stock Option Agreement or an applicable employment or engagement agreement, upon termination of the optionee‟s employment or engagement by reason of permanent disability (as determined by the Board, or if such optionee has an employment or engagement agreement with the Company, then as determined pursuant to the applicable provisions of said agreement if any), any Stock Options held by optionee and exercisable on the date of such termination may be exercised by optionee, provided that such exercise occurs within both the remaining Option Term of the Stock Option and within six months from the date of termination. Except as provided in a Stock Option Agreement or an applicable employment or engagement agreement, any Stock Options held by optionee which were exercisable on the date of optionee‟s termination shall terminate at the end of the Option Term or six months after optionee‟s termination, whichever is earlier. Any Stock Options held by optionee which are not exercisable on the date of optionee‟s termination shall terminate on the date of optionee‟s termination. 2.9 Resignation; Termination for Cause. Except as provided in a Stock Option Agreement or an applicable employment or engagement agreement, all Stock Options granted to an optionee shall terminate upon the termination of the optionee‟s employment or engagement with the Company by resignation or for “cause,” as that term is defined herein. 2.10 Termination for Other Reasons. Except as provided in Sections 2.7, 2.8, and 2.9 or except as otherwise determined by the Board or as provided in a Stock Option Agreement or an applicable employment or engagement agreement, upon termination of the optionee‟s employment or engagement: Any Stock Options held by optionee and exercisable on the date of such termination may be exercised by optionee, provided that such exercise occurs within both

the remaining Option Term of the Stock Option and within three months from the date of termination. Any Stock Options held by optionee which are not exercisable on the date of optionee‟s termination shall terminate on the date of optionee‟s termination. Any Stock Options held by optionee which were exercisable on the date of optionee‟s termination shall terminate at the end of the Option Term or three months after optionee‟s termination, whichever is earlier. Notwithstanding the foregoing, if the exercise of a Stock Option following termination of the optionee‟s employment or engagement would result in liability under Section 16(b) of the Securities Exchange Act of 1934, then, unless a longer period for exercise is already provided above, the period for exercise shall be extended to the tenth day after the last date on which such exercise would result in such liability under Section 16(b) of the Securities Exchange Act of 1934 but in no event later than the end of the Option Term of the Stock Option. In addition, if the exercise of a Stock Option following termination of optionee‟s employment or engagement would be prohibited solely because the issuance of shares would violate the registration requirements under the Securities Act of 1933, then, unless a longer period for exercise is already provided above, the period for exercise shall be extended to the tenth day after the day on which such registration requirements would no longer be violated by the issuance of such shares but in no event later than the end of the Option Term of the Stock Option. ARTICLE III MISCELLANEOUS 3.1 General Restriction. Each award under the Plan shall be subject to the requirement that, if at any time the Board shall determine that the listing, registration, or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or Federal law, or the consent or approval of any government regulatory body, is necessary as a condition of, or in connection with, the granting of such award or the issue or purchase of shares of Common Stock thereunder, such award may not be consummated in whole or in part unless such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Board. 3.2 Non-Assignability. No award under the Plan shall be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution. During the life of the recipient, such award shall be exercisable only by such person or by such person‟s guardian or legal representative.

3.3 Withholding Taxes. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the issuee/transferee to remit to the Company an amount sufficient to satisfy any Federal, state, and/or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Alternatively, the Company may issue or transfer such shares of Common Stock net of the number of shares sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the shares of Common Stock shall be valued on the date the withholding obligation is incurred. 3.4 Right to Terminate Employment/Engagement. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in the employment or engagement of the Company of any Affiliate of the Company or effect any right which the Company or any Affiliate of the Company may have to terminate the employment or engagement of such participant. 3.5 Non-Uniform Determinations. The Board‟s determinations under the Plan (including without limitation determinations of the persons to receive awards, the form, amount, and timing of such awards, the terms and provisions of such awards, and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 3.6 Rights as a Shareholder. The recipient of any award under the Plan shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued to the recipient. 3.7 No Obligation to Exercise Stock Option. The granting of a Stock Option shall impose no obligation upon the participant to exercise such Stock Option. 3.8 Definitions. In this Plan the following definitions shall apply: (a) “Affiliate” means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code.

(b) “Cause” shall have the meaning assigned to it in any relevant employment or engagement agreement between the Company (or an Affiliate of the Company) and the optionee, otherwise a termination shall be for “cause” if the optionee shall: (i) commit an act of fraud, dishonesty, embezzlement or misappropriation, (ii) be convicted of, or enter a plea of guilty or no contest to, any crime involving moral turpitude or dishonesty, (iii) breach optionee‟s employment or engagement agreement, (iv) commit an act which amounts to willful misconduct, wanton misconduct, or gross negligence, (v) willfully fail or habitually neglect to perform optionee‟s employment or engagement responsibilities, or (vi) engage in any illegal or unprofessional conduct which may adversely affect the reputation of the Company and/or its relationship with its employees, customers, or suppliers. (c) “Code” means the Internal Revenue Code of 1986, as amended. (d) “Fair market value” as of any date and in respect of any share of Common Stock means (i) the average closing price of a share of Common Stock on the principal exchange on which such shares are then trading, if any (or as reported on any composite index which includes such principal exchange), on the ten most recent trading days immediately prior to such date, or (ii) if such shares are not traded on an exchange but are quoted on NASDAQ or a successor quotation system, the average mean between the closing representative bid and asked prices for such shares on the ten most recent trading days immediately prior to such date as reported by NASDAQ or such successor quotation system; or (iii) in the event that clauses (i) and (ii) above are inapplicable, the “fair market value” shall be determined in good faith by the Board. (e) “Option price” means the purchase price per share of Common Stock deliverable upon the exercise of a Stock Option. (f) “Participant” means a person to whom a Stock Option is granted under the Plan. 3.9 Leaves of Absence. The Board shall be entitled to make such rules, regulations, and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any award. Without limiting the generality of the foregoing, the Board shall be entitled to determine (i) whether or not any such leave of absence shall constitute a termination of employment or engagement within the meaning of the Plan, and (ii) the impact, if any, of any such leave of absence on awards under the Plan theretofore made to any recipient who takes such leave of absence. 3.10 Adjustments. In any event of any change in the outstanding shares of Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares, or the like, the Board shall in its discretion

appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Stock Options theretofore granted under the Plan, the option price of Stock Options theretofore granted under the Plan, and any and all other matters deemed appropriate by the Board. 3.11 Termination of Stock Options. In the event of: (i) a sale of all or substantially all of the assets of the Company, (ii) a merger or consolidation in which the Company is not the surviving corporation, or (iii) a reverse merger in which the Company is the surviving corporation but the shares of the Company‟s Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise, then, if the surviving corporation does not assume the Stock Options outstanding under the Plan or substitute similar options for those outstanding under the Plan, all outstanding Stock Options which are not exercised prior to such event shall be terminated unless otherwise provided in an optionee‟s Stock Option Agreement. In the event of a dissolution or liquidation of the Company, all outstanding Stock Options shall terminate if not exercised prior to such dissolution or liquidation unless otherwise provided in an optionee‟s Stock Option Agreement. 3.12 Amendment of the Plan. (a) The Board may, without further action by the shareholders and without receiving further consideration from the participants, amend this Plan or condition or modify awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with stock exchange rules or requirements. (b) The Board may at any time and from time to time terminate or modify or amend the Plan in any respect, except that without shareholder approval the Board may not (i) increase the maximum number of shares of Common Stock which may be issued under the Plan (other than increases pursuant to Section 3.10), (ii) extend the period during which any award may be granted or exercised, or (iii) extend the term of the Plan. The termination or any modification or amendment of the Plan, except as provided in subsection (a), shall not without the consent of a participant, affect his or her rights under an award previously granted to him or her or under an employment or engagement agreement. 3.13 Termination Or Suspension Of The Plan. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on December 31, 2009. No Stock Options may be granted under the Plan while the Plan is suspended or after it is terminated.

(b) Rights and obligations under any Stock Option granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the written consent of the person to whom the Stock Option was granted. 3.14 Effective Date Of Plan. The Plan shall become effective upon adoption by the Board and approval by the stockholders of the Company.

K12 INC. AMENDMENT NO. 1 TO AMENDED AND RESTATED STOCK OPTION PLAN Pursuant to Resolution of the Board of Directors of K12 Inc. on December 18, 2003 and a Written Consent of the Stockholders of K12 Inc., effective as of February 13, 2004, the second sentence of Section 1.4 , Article I of the Kl2 Inc. Amended and Restated Stock Option Plan is amended and restated to read in full as follows: “The maximum number of shares which may be issued under the Plan shall be Thirteen Million (13,000,000).”

Exhibit 4.3 STOCK OPTION AGREEMENT Pursuant To K12 INC. STOCK OPTION PLAN THIS STOCK OPTION AGREEMENT (“Agreement”), is entered into as of Grant Date by and between K12 INC. , a Delaware corporation (the “Company”), and FULL NAME (the “Optionee”). RECITALS WHEREAS, the Company has adopted, with stockholder approval, the K12 Inc. Stock Option Plan (as amended from time to time, the “Plan”); and WHEREAS, the Plan provides for the granting of Stock Options by the Board to directors, officers, employees and independent contractors of the Company to purchase shares of Common Stock of the Company (the “Stock”) in accordance with the terms and provisions thereof; and WHEREAS, the Board considers the Optionee to be a person who is eligible for a grant of Stock Options under the Plan, and has determined that it would be in the best interests of the Company to grant the Stock Options documented herein. NOW THEREFORE, the parties agree as follows: 1. Grant of Stock Options. Subject to the terms and conditions hereinafter set forth, the Company, with the approval and at the direction of the Board, hereby grants to the Optionee, as of the date hereof, an option to purchase up to Written Shares (Number of Shares) shares of Stock at an option exercise price of Written Grant Price (Grant Price) per share (the “Options”). The shares of Stock purchasable upon exercise of the Options are hereinafter sometimes collectively referred to as the “Option Shares.” The Options are not intended to be, and shall not be treated as, incentive stock options (as such term is defined under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)). 2. Vesting Schedule. Subject to the provisions of Section 3 below, the Options shall vest and become exercisable over four (4) years in installments as provided below. The Optionee shall have the right hereunder to purchase from the Company the following number of Option Shares upon exercise of the Options, on and after the following dates, in cumulative fashion: 1

(a) One-Fourth (1/4 th ) of Option Shares on Start Date + 1 Year, the “First Vesting Date” (which is the first anniversary of the start date of Optionee‟s employment with the Company); and (b) An additional One-Sixteenth (1/16 th ) of the Option Shares every three (3) months following the First Vesting Date for the remainder of the Vesting Schedule. (For example, if the first vesting date is January 15 then 1/16 th will vest on April 15, July 15, Oct 15, etc. If the first vesting date is the last day of a month, then 1/16 th will vest the last day of each three month period. For example if the first vesting date is November 30, then 1/16 th will vest on February 28, May 31, August 31, etc). Notwithstanding the foregoing, upon the occurrence of a Vesting Acceleration Event all unvested Options shall automatically accelerate and become immediately vested as of the date of the Vesting Acceleration Event. As used herein, a “Vesting Acceleration Event” means the occurrence of any of the following events while Optionee is employed with the Company: (i) a sale of all or substantially all of the assets of the Company, or (ii) a merger or consolidation of the Company into or with another corporation which results in the Company‟s stockholders immediately prior to such transaction owning less than fifty percent (50%) of the Company‟s voting power immediately after such transaction, or (iii) a sale of outstanding securities of the Company by stockholders of the Company (but excluding any sale in connection with an initial public offering) which results in the Company‟s stockholders immediately prior to such transaction owning less than fifty percent (50%) of the Company‟s voting power immediately after such transaction. 3. Termination of Options. (a) Subject to earlier termination as provided in the other provisions of this Agreement, the Options and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void on Start Date + 8 Years (the “Option Term”). (b) Upon the death of Optionee, the Options may be exercised, but only to the extent that the Options were outstanding and exercisable on the date of death, by Optionee‟s estate, provided that such exercise occurs within both the remaining Option Term and six months after Optionee‟s death. The Options held by Optionee to the extent exercisable on the date of Optionee‟s death shall terminate at the end of the Option Term or six months after Optionee‟s death, whichever is earlier. The Options held by Optionee to the extent not exercisable on the date of Optionee‟s death shall terminate upon Optionee‟s death. (c) Upon termination of Optionee‟s employment or engagement with the Company by reason of permanent disability (as determined by the Board, or if Optionee has an employment or engagement agreement with the Company, then as determined pursuant to the applicable provisions of said agreement, if any), the Options may be exercised by Optionee, but only to the extent that the Options were outstanding 2

and exercisable on the date of Optionee‟s termination, provided that such exercise occurs within both the remaining Option Term and within six months from the date of Optionee‟s termination. The Options held by Optionee to the extent exercisable on the date of Optionee‟s termination shall terminate at the end of the Option Term or six months after Optionee‟s termination, whichever is earlier. The Options held by Optionee to the extent not exercisable on the date of Optionee‟s termination shall terminate on the date of Optionee‟s termination. (d) Upon Optionee‟s termination of employment or engagement with the Company by resignation or upon termination of Optionee‟s employment or engagement with the Company for cause (as that term is defined in the Plan), all Options granted to Optionee shall terminate on the date of termination of employment or engagement. (e) If Optionee‟s employment or engagement with the Company terminates for any reason other than as described in paragraphs (b), (c) or (d) of this Section 3, then the Options held by Optionee to the extent not exercisable on the date of Optionee‟s termination shall terminate on the date of Optionee‟s termination. The Options, to the extent exercisable on the date of Optionee‟s termination, may be exercised by Optionee, provided that such exercise occurs within both the remaining Option Term and within three months from the date of Optionee‟s termination. The Options held by Optionee to the extent exercisable on the date of Optionee‟s termination shall terminate at the end of the Option Term or three months after Optionee‟s termination, whichever is earlier. 4. Exercise of Options. (a) The Optionee may exercise the Options with respect to all or any part of the number of Option Shares then exercisable hereunder by giving the Chief Financial Officer of the Company written notice of exercise. The notice of exercise shall specify the number of Option Shares as to which the Options are to be exercised and the date of exercise thereof, which date shall be at least five days (but not more than fifteen days) after the giving of such notice unless an earlier time shall have been mutually agreed upon by Optionee and the Company. (b) Full payment of the option price for the Option Shares being purchased by the Optionee shall be made by the Optionee in cash (in U.S. dollars) prior to the date of exercise specified in the notice of exercise. (c) The Company shall cause to be delivered to the Optionee a certificate or certificates for the Option Shares then being purchased (out of theretofore unissued Stock or reacquired Stock, as the Company may elect) as soon as is reasonably practicable after the full payment for such Option Shares and satisfaction of all other conditions to exercise set forth in this Agreement. 3

(d) If the Optionee fails to pay for any of the Option Shares specified in a notice of exercise or fails to accept delivery thereof, the Optionee‟s right to purchase such Option Shares shall terminate. (e) Notwithstanding any other provision of this Agreement, the Optionee‟s right to exercise Options and be issued Option Shares is subject to the conditions set forth in this Section 4(e) in addition to any other conditions set forth elsewhere in this Agreement. The Optionee may not exercise any Options in whole or in part or be issued any Option Shares unless (i) the transaction is in compliance with all applicable state and Federal securities laws, (ii) the transaction is exempt from the qualification and registration requirements of applicable state and Federal securities laws, and (iii) the Company and the Optionee comply with any requirements applicable to the transaction, if any, that are contained in any credit or loan agreement to which the Company is a party. In addition, the obligation of the Company to deliver Stock shall be subject to the condition that if at any time the Company shall determine that the listing, registration, or qualification of the Options or the Option Shares upon any securities exchange or under any state or Federal law, or the consent or approval of any governmental regulatory body, is necessary as a condition of, or in connection with, the Options or the issuance or purchase of Stock thereunder, the Options may not be exercised in whole or in part unless such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Board. 5. Adjustment of and Changes in Stock of the Company. In the event of any change in the outstanding shares of Stock by reason of a stock dividend, recapitalization, merger, consolidation, split-up, combination, exchange of shares, or the like, the Board shall appropriately adjust the number and kind of shares of Stock subject to the Options and the option price. 6. No Rights of Stockholders. Neither the Optionee nor any personal representative shall be, or shall have any of the rights and privileges of, a stockholder of the Company with respect to any shares of Stock purchasable or issuable upon the exercise of the Options, in whole or in part, prior to the date certificates for shares of Stock are issued to the Optionee. 7. Non-Transferability of Options. During the Optionee‟s lifetime, the Options hereunder shall be exercisable only by the Optionee or any guardian or legal representative of the Optionee, and the Options shall not be transferable except, in case of the death of the Optionee, by will or the laws of descent and distribution, nor shall the Options be subject to attachment, execution, or other similar process. In the event of (a) any attempt by the Optionee to alienate, assign, pledge, hypothecate, or otherwise dispose of the Options, except as provided for herein, or (b) the levy of any attachment, execution, or similar process upon the rights or interest hereby conferred, the Company may terminate the Options by notice to the Optionee and they shall thereupon become null and void. 4

8. Employment/Engagement Not Affected. Neither the granting of the Options nor exercise thereof shall be construed as granting to the Optionee any right with respect to continuance of employment or engagement with the Company or affect any right which the Company may have to terminate the employment or engagement of Optionee. 9. Amendment of Options. The Options may be amended by the Board at any time (i) if the Board determines, in its reasonable discretion, that amendment is necessary or advisable in the light of any addition to or change in the Internal Revenue Code of 1986, as amended, or in the regulations issued thereunder, or any federal or state securities law or other law or regulation, which change occurs after the date of grant of an Option and by its terms applies to the Option; or (ii) other than in the circumstances described in clause (i), with the consent of the Optionee. 10. Sale, Merger, Consolidation and Liquidation of the Company. In the event of a sale of the Company (whether by merger, consolidation, sale of assets, sale of stock or otherwise), if the surviving or acquiring entity or purchaser does not expressly agree to assume the Options issued hereunder, all Options issued hereunder which are unvested shall terminate and all Options issued hereunder which are vested (including all Options that become vested as a result of a Vesting Acceleration Event) but not exercised prior to or as of the closing of such event shall terminate. In the event of a dissolution or liquidation of the Company, all Options issued hereunder which are unvested shall terminate and all Options issued hereunder which are vested but not exercised prior to such dissolution or liquidation shall terminate. 11. Restrictions on Transfer of Option Shares and Related Provisions. (a) Except as otherwise expressly set forth in this Section 11, Optionee shall not, voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise, sell, transfer, assign, hypothecate, pledge or in any way alienate any Option Shares now or hereafter owned by the Optionee or any right or interest therein (hereinafter, a “Transfer”) without the prior written consent of the Board, which the Board may withhold in its sole discretion. Any attempt to consummate a Transfer in violation of this Agreement shall be null and void. (b) Notwithstanding the restrictions contained in Section 11(a) above, (i) Optionee may Transfer Optionee‟s Option Shares to the Company or a designee of the Company, or (ii) Optionee may contribute Optionee‟s Option Shares to a trust formed solely for the benefit of Optionee and/or Optionee‟s immediate family, or (iii) upon the death of Optionee, Optionee‟s Option Shares may be transferred to Optionee‟s estate, personal representative or heirs by will or the laws of descent and distribution; provided , however , that as a condition to any transfer under clause (i), (ii) or (iii) above, the tranferee(s) shall hold the Option Shares subject to the terms and conditions of this Agreement and the tranferee(s) shall execute and deliver to the Company an agreement in form and substance satisfactory to the Company agreeing to be bound by the terms and conditions of this Agreement. 5

(c) The Company shall have the option (the “Repurchase Option”) exercisable at any time after six (6) months and one (1) day after the date of termination of Optionee‟s employment or engagement with the Company for any reason, including, but not limited to, termination with or without cause, death, permanent disability or voluntary termination, to repurchase all or any portion of the Option Shares held by Optionee (or by a permitted transferee or Optionee‟s estate or legal representative, if applicable). If the Company elects to exercise the Repurchase Option in whole or in part, it shall give written notice of such election (the “Repurchase Notice”) to Optionee (or permitted transferee or Optionee‟s estate or legal representative, if applicable). The Company shall pay to Optionee (or permitted transferee or Optionee‟s estate or legal representative, if applicable) in cash the fair market value of the Option Shares being purchased within thirty (30) days after the later of: (i) the date of the Repurchase Notice, or (ii) the final determination of fair market value. For purposes hereof, fair market value of the Option Shares shall be determined as of the last day of the Company‟s fiscal quarter ended immediately preceding the date of the Repurchase Notice. Fair market value of the Option Shares shall be determined as provided in the Plan. Optionee agrees to execute (and directs Optionee‟s permitted transferee or estate or legal representative to execute, if applicable) such documents and instruments as are reasonably necessary to effectuate such purchase. The Company may exercise the Repurchase Option as many times as the Company may decide. (d) Anything contained in this Agreement to the contrary notwithstanding, the Option Shares with respect to which the Company‟s Repurchase Option has been exercised shall be deemed to have been repurchased by the Company effective as of the date of exercise of such option and such Option Shares shall be deemed to be canceled, retired and no longer issued or outstanding effective as of such date without further act of the parties. (e) All Option Shares now or hereafter owned by Optionee shall be subject to all of the terms and conditions of this Agreement. All certificates representing such Option Shares shall contain legends to the following effect: ANY SALE, TRANSFER, PLEDGE, ASSIGNMENT OR ENCUMBRANCE OF THIS SECURITY IS SUBJECT TO THE PROVISIONS OF A STOCK OPTION AGREEMENT BETWEEN THE CORPORATION AND THE STOCKHOLDER, DATED AS OF GRANT DATE, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE CORPORATION. THE OFFER AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN QUALIFIED OR REGISTERED UNDER ANY STATE OR FEDERAL SECURITIES LAWS. SUCH SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF EITHER QUALIFICATION AND REGISTRATION UNDER STATE 6

AND FEDERAL SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH QUALIFICATION AND REGISTRATION IS NOT REQUIRED. (f) The provisions of Sections 11(a) through 11(d) shall terminate effective upon the consummation an underwritten public offering of shares of Stock by the Company that results in such shares being listed for trading on a national securities exchange or being authorized for trading on the NASDAQ National Market System. 12. Representations. (a) By executing this Stock Option Agreement, Optionee represents and warrants to the Company that Optionee is acquiring the Options for Optionee‟s own account, for investment purposes only and not with the intent of distributing, transferring or selling all or any part of the Options. (b) In connection with the exercise of any portion of the Options, Optionee represents and warrants to the Company as of the date of such exercise as follows: (i) Optionee is acquiring the Stock for Optionee‟s own account, for investment purposes only and not with the intent of distributing, transferring or selling all or any part thereof in violation of applicable securities laws. (ii) Optionee acknowledges that the Stock has not been registered under any Federal or state securities laws and is being issued pursuant to one or more exemptions from the registration and qualification requirements of such securities laws. (iii) Optionee acknowledges that the Company is under no obligation to register or qualify the Stock and that the Stock may not be sold unless it is so registered and qualified or an exemption from registration and qualification is available. 13. Lock Up In Connection with Public Offering. (a) In order to induce the underwriters that may participate in a public offering of the Company‟s equity securities to continue their efforts in connection with such a public offering, the Optionee, during the period commencing 30 days prior to and ending 180 days after the effective date of any underwritten public offering of the Company‟s equity securities (except as part of such underwritten registration): (i) agrees not to (x) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any Stock or any securities convertible into or exercisable or exchangeable for Stock 7

(including, without limitation, Stock or securities convertible into or exercisable or exchangeable for Stock which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission) or (y) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Stock (regardless of whether any of the transactions described in clause (x) or (y) is to be settled by the delivery of Stock, or such other securities, in cash or otherwise), without prior written consent of the lead managing underwriter of such public offering; (ii) agrees not to make any demand for, or exercise any right with respect to, the registration of any Stock or any securities convertible into or exercisable or exchangeable for Stock, without the prior written consent of the lead underwriter; and (iii) authorizes the Company to cause the transfer agent to decline to transfer and/or to note stop transfer restrictions on the transfer books and records of the Company with respect to any Stock and any securities convertible into or exercisable or exchangeable for Stock for which the Optionee is the record holder and, in the case of any such shares or securities for which the Optionee is the beneficial but not the record holder, agrees to cause the record holder to cause the transfer agent to decline to transfer and/or to note stop transfer restrictions on such books and records with respect to such shares or securities. Upon the Company‟s request, the Optionee agrees to execute any additional documents necessary or desirable to confirm Optionee‟s obligations set forth above and/or in connection with the enforcement of the foregoing provisions. The foregoing provisions shall survive the death or incapacity of the Option and any obligations of the Optionee set forth above shall be binding upon the heirs, personal representatives, successors and assigns of the Optionee. 14. Notice. Any notice to the Company provided for in this instrument shall be addressed as follows: K12 Inc. 2300 Corporate Park Drive, Suite 200 Herndon, Virginia 20171 Attention: Chief Financial Officer With a copy to: Maron & Sandler 1250 Fourth Street, Suite 550 Santa Monica, CA 90401 Attention: David S. Kyman, Esq. 8

And any notice to the Optionee shall be addressed to the Optionee at the current address shown on the records of the Company. Any notice shall be deemed to be duly given if and when properly addressed and posted by registered or certified mail, postage prepaid. 15. Incorporation of Plan by Reference. The Options are granted pursuant to the terms of the Plan, the terms of which are incorporated herein by reference, and the Options shall in all respects be interpreted in accordance with the Plan. Unless the context otherwise requires, any terms used herein without definition shall have the meanings as defined in the Plan. The Board shall interpret and construe the Plan and this instrument, and its interpretations and determinations shall be conclusive and binding on the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. 16. Income Tax Consequences. Optionee acknowledges, represents, and warrants that the Company has made no representations whatsoever to Optionee concerning the specific Federal and/or state income tax and alternative minimum tax consequences to Optionee of the Options granted hereunder or the exercise thereof, and Optionee shall be responsible for consulting with Optionee‟s personal tax advisor regarding such matters. Without limiting the generality of the foregoing, Optionee acknowledges that pursuant to Code Section 409A, an option that is granted with a per share exercise price that is determined by the Internal Revenue Service (the “IRS”) to be less than the fair market value of a share of Stock on the date of grant (a “discount option”) may be considered “deferred compensation.” An option that is a “discount option” may result in (i) income recognition by the Optionee prior to the exercise of the option, (ii) an additional twenty percent (20%) tax payable by Optionee, and (iii) potential penalty and interest charges payable by Optionee. Optionee acknowledges that the Company cannot and has not guaranteed that in the event of an examination the IRS will agree that the per share exercise price of the Stock that is subject to this Option equals or exceeds the fair market value of a share of Stock on the date of grant. Optionee agrees that if the IRS determines that the Option was granted with a per share exercise price that was less than the fair market value of a share of Stock on the date of grant, Optionee will be solely responsible for all consequences to Optionee related to such a determination. 17. Withholding Taxes. Whenever the Company issues or transfers shares of Stock hereunder, the Company shall have the right to require the Optionee to remit to the Company an amount sufficient to satisfy any Federal, state, and/or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Alternatively, the Company may (but shall not be obligated to) issue or transfer such shares of Stock net of the number of shares sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the shares of Stock shall be valued on the date the withholding obligation is incurred. 9

18. Governing Law. The validity, construction, interpretation, and effect of this Agreement shall exclusively be governed by and determined in accordance with the laws of the State of Delaware (without regard to conflicts of law principles), except to the extent preempted by Federal law, which shall to such extent govern. IN WITNESS WHEREOF, the Company and Optionee have executed this Agreement effective as of the date first set forth above. “Company” K12 INC. a Delaware corporation By: /s/ John Baule John Baule Executive Vice President and CFO

“Optionee”

Full Name 10

Exhibit 4.4 STOCK OPTION AGREEMENT Pursuant To K12 INC. STOCK OPTION PLAN THIS STOCK OPTION AGREEMENT (“Agreement”) is entered into effective as of Delaware corporation (the “Company”), and «BOARD_MEMBER» (the “Optionee”). RECITALS WHEREAS, the Company has adopted, with stockholder approval, the K12 Inc. Stock Option Plan (as amended from time to time, the “Plan”); and WHEREAS, the Plan provides for the granting of Stock Options by the Company to directors, officers, employees and independent contractors of the Company to purchase shares of Common Stock of the Company (the “Stock”) in accordance with the terms and provisions thereof; and WHEREAS, the Board of Directors of the Company considers the Optionee to be a person who is eligible for a grant of Stock Options under the Plan, and has determined that it would be in the best interests of the Company to grant the Stock Options documented herein. NOW THEREFORE, the parties agree as follows: 1. Grant of Stock Options. Subject to the terms and conditions hereinafter set forth, the Company hereby grants to the Optionee, as of the date hereof, an option to purchase up to ( ) shares of Stock at an option exercise price of ($___) per share (the “Options”). The shares of Stock purchasable upon exercise of the Options are hereinafter sometimes collectively referred to as the “Option Shares.” The Options are not intended to be, and shall not be treated as, incentive stock options (as such term is defined under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)). 2. Vesting Schedule. Subject to the provisions of Section 3 below, the Options shall vest and become exercisable over four (4) years in sixteen (16) quarterly installments. The Optionee shall have the right hereunder to purchase from the Company the following number of Option Shares upon exercise of the Options, on and after the following dates, in cumulative fashion: 1 by and between K12 INC. , a

(a) (b) An additional September 30, ___; and (c) An additional

( ( (

) Option Shares on March 31, ___; ) Option Shares on the last day of each calendar quarter after March 31, ___through ) Option Shares on December 31,___.

Notwithstanding the foregoing, upon the occurrence of a Vesting Acceleration Event all unvested Options shall automatically accelerate and become immediately vested as of the date of the Vesting Acceleration Event. As used herein, a “Vesting Acceleration Event” means the occurrence of any of the following events while Optionee is serving as a director of the Company: (i) a sale of all or substantially all of the assets of the Company, or (ii) a merger or consolidation of the Company into or with another corporation which results in the Company‟s stockholders immediately prior to such transaction owning less than fifty percent (50%) of the Company‟s voting power immediately after such transaction, or (iii) a sale of outstanding securities of the Company by stockholders of the Company which results in the Company‟s stockholders immediately prior to such transaction owning less than fifty percent (50%) of the Company‟s voting power immediately after such transaction. 3. Termination of Options. (a) Subject to earlier termination as provided in the other provisions of this Agreement, the Options and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void on December 31, ___(the “Option Term”). (b) Upon termination of Optionee‟s service as a director of the Company by reason of Optionee‟s death, the Options held by Optionee to the extent not exercisable on the date of Optionee‟s death shall terminate on the date of Optionee‟s death. The Options, to the extent exercisable on the date of Optionee‟s death, may be exercised by Optionee‟s estate, provided that such exercise occurs prior to the earlier of: (i) ninety (90) days after the expiration of any “lock-up” period applicable to the Company‟s initial underwritten public offering of Common Stock, or (ii) the expiration of the Option Term. The Options held by Optionee to the extent exercisable on the date of Optionee‟s death shall terminate at the end of the earliest of the periods specified in clauses (i) and (ii) of the immediately preceding sentence. (c) Upon termination of Optionee‟s service as a director of the Company by reason of “permanent disability” (as determined by the Board), the Options held by Optionee to the extent not exercisable on the date of Optionee‟s termination shall terminate on the date of Optionee‟s termination. The Options, to the extent exercisable on the date of Optionee‟s termination, may be exercised by the Optionee (or the 2

Optionee‟s guardian or legal representative), provided that such exercise occurs prior to the earlier of: (i) ninety (90) days after the expiration of any “lock-up” period applicable to the Company‟s initial underwritten public offering of Common Stock, or (ii) the expiration of the Option Term. The Options held by Optionee to the extent exercisable on the date of Optionee‟s termination shall terminate at the end of the earliest of the periods specified in clauses (i) and (ii) of the immediately preceding sentence. (d) Upon Optionee‟s termination of service as a director of the Company by resignation or upon removal of Optionee as a director of the Company for cause, the Options may be exercised by Optionee, but only to the extent that the Options were outstanding and exercisable on the date of Optionee‟s termination, provided that such exercise occurs within both the remaining Option Term and within ninety (90) days from the date of Optionee‟s termination. The Options held by Optionee to the extent exercisable on the date of Optionee‟s termination shall terminate at the end of the Option Term or ninety (90) days after Optionee‟s termination, whichever is earlier. The Options held by Optionee to the extent not exercisable on the date of Optionee‟s termination shall terminate on the date of Optionee‟s termination. (e) Upon termination of Optionee‟s service as a director of the Company for any reason other than as provided in paragraphs (b) through (d) above, the Options held by Optionee to the extent not exercisable on the date of Optionee‟s termination shall terminate on the date of Optionee‟s termination. The Options, to the extent exercisable on the date of Optionee‟s termination, may be exercised by Optionee, provided that such exercise occurs prior to the earlier of: (i) ninety (90) days after the expiration of any “lock-up” period applicable to the Company‟s initial underwritten public offering of Common Stock, or (ii) the expiration of the Option Term. The Options held by Optionee to the extent exercisable on the date of Optionee‟s termination shall terminate at the end of the earliest of the periods specified in clauses (i) and (ii) of the immediately preceding sentence. 4. Exercise of Options. (a) The Optionee may exercise the Options with respect to all or any part of the number of Option Shares then exercisable hereunder by giving the Chief Financial Officer of the Company written notice of exercise. The notice of exercise shall specify the number of Option Shares as to which the Options are to be exercised and the date of exercise thereof, which date shall be at least five days (but not more than fifteen days) after the giving of such notice unless an earlier time shall have been mutually agreed upon by Optionee and the Company. (b) Full payment of the option price for the Option Shares being purchased by the Optionee shall be made by the Optionee in cash (in U.S. dollars) prior to the date of exercise specified in the notice of exercise. (c) The Company shall cause to be delivered to the Optionee a certificate or certificates for the Option Shares then being purchased (out of theretofore 3

unissued Stock or reacquired Stock, as the Company may elect) as soon as is reasonably practicable after the full payment for such Option Shares and satisfaction of all other conditions to exercise set forth in this Agreement. (d) If the Optionee fails to pay for any of the Option Shares specified in a notice of exercise or fails to accept delivery thereof, the Optionee‟s right to purchase such Option Shares shall terminate. The date specified in the Optionee‟s notice as the date of exercise shall be deemed the date of exercise of the Options, provided that payment in full for the Option Shares to be purchased upon such exercise shall have been received by such date and all other conditions to exercise set forth in this Agreement shall have been satisfied. (e) Notwithstanding any other provision of this Agreement, the Optionee‟s right to exercise Options and be issued Option Shares is subject to the conditions set forth in this Section 4(e) in addition to any other conditions set forth elsewhere in this Agreement. The Optionee may not exercise any Options in whole or in part or be issued any Option Shares unless (i) the transaction is in compliance with all applicable state and Federal securities laws, (ii) the transaction is exempt from the qualification and registration requirements of applicable state and Federal securities laws, and (iii) the Company and the Optionee comply with any requirements applicable to the transaction, if any, that are contained in any credit or loan agreement to which the Company is a party. In addition, the obligation of the Company to deliver Stock shall be subject to the condition that if at any time the Company shall determine that the listing, registration, or qualification of the Options or the Option Shares upon any securities exchange or under any state or Federal law, or the consent or approval of any governmental regulatory body, is necessary as a condition of, or in connection with, the Options or the issuance or purchase of Stock thereunder, the Options may not be exercised in whole or in part unless such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Board. 5. Adjustment of and Changes in Stock of the Company. In the event of any change in the outstanding shares of Stock by reason of a stock dividend, recapitalization, merger, consolidation, split-up, combination, exchange of shares, or the like, the Compensation Committee shall appropriately adjust the number and kind of shares of Stock subject to the Options and the option price. 6. No Rights of Stockholders. Neither the Optionee nor any personal representative shall be, or shall have any of the rights and privileges of, a stockholder of the Company with respect to any shares of Stock purchasable or issuable upon the exercise of the Options, in whole or in part, prior to the date certificates for shares of Stock are issued to the Optionee. 7. Non-Transferability of Options. During the Optionee‟s lifetime, the Options hereunder shall be exercisable only by the Optionee or any guardian or legal representative of the Optionee, and the Options shall not be transferable except, in case of 4

the death of the Optionee, by will or the laws of descent and distribution, nor shall the Options be subject to attachment, execution, or other similar process. In the event of (a) any attempt by the Optionee to alienate, assign, pledge, hypothecate, or otherwise dispose of the Options, except as provided for herein, or (b) the levy of any attachment, execution, or similar process upon the rights or interest hereby conferred, the Company may terminate the Options by notice to the Optionee and they shall thereupon become null and void. 8. Service Not Affected. Neither the granting of the Options nor exercise thereof shall be construed as granting to the Optionee any right with respect to continuance of service as a member of the Board of Directors of the Company or affect any right which the Company, its stockholders or Board of Directors may have to terminate such service. 9. Amendment of Options. The Board shall have the right in its sole and absolute discretion to accelerate the vesting of any and all of the Options at any time or from time to time. In addition, the Options may be amended by the Compensation Committee at any time (i) if the Compensation Committee determines, in its reasonable discretion, that amendment is necessary or advisable in the light of any addition to or change in the Internal Revenue Code of 1986, as amended, or in the regulations issued thereunder, or any federal or state securities law or other law or regulation, which change occurs after the date of grant of an Option and by its terms applies to the Option, or (ii) other than in the circumstances described in clause (i), with the consent of the Optionee. 10. Sale, Merger, Consolidation and Liquidation of the Company. In the event of: (i) a sale of all or substantially all of the assets of the Company, or (ii) a sale of all of the outstanding shares of stock of the Company, or (iii) a merger or consolidation of the Company into or with another corporation which results in the Company‟s stockholders immediately prior to such transaction not owning stock of the surviving corporation, then, if the surviving entity or purchaser does not assume the Options issued hereunder, all Options issued hereunder which are unvested shall terminate and all Options issued hereunder which are vested (including all Options that are vested as a result of a Vesting Acceleration Event) but not exercised prior to such event shall terminate. In the event of a dissolution or liquidation of the Company, all Options issued hereunder which are unvested shall terminate and all Options issued hereunder which are vested but not exercised prior to such dissolution or liquidation shall terminate. The Company shall give Optionee reasonable prior written notice of any termination of Options pursuant to this Section 10. 11. Restrictions on Transfer of Option Shares and Related Provisions. (a) Except as otherwise expressly set forth in Section 11(b) below, Optionee shall not, voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise, sell, transfer, assign, hypothecate, pledge or in any way alienate any Option Shares now or hereafter owned by the Optionee or any right or interest therein (hereinafter, a “Transfer”) without the prior written consent of the Compensation 5

Committee, which the Compensation Committee may withhold in its sole discretion. Any attempt to consummate a Transfer in violation of this Agreement shall be null and void. (b) Notwithstanding the restrictions contained in Section 11(a) above, (i) Optionee may Transfer Optionee‟s Option Shares to the Company or a designee of the Company, or (ii) Optionee may contribute Optionee‟s Option Shares to a trust formed solely for the benefit of Optionee and/or Optionee‟s immediate family, or (iii) upon the death of Optionee, Optionee‟s Option Shares may be transferred to Optionee‟s estate, personal representative or heirs by will or the laws of descent and distribution; provided , however , that as a condition to any transfer under clause (i), (ii) or (iii) above, the tranferee(s) shall hold the Option Shares subject to the terms and conditions of this Agreement and the tranferee(s) shall execute and deliver to the Company an agreement in form and substance satisfactory to the Company agreeing to be bound by the terms and conditions of this Agreement. (c) All Option Shares now or hereafter owned by Optionee shall be subject to all of the terms and conditions of this Agreement. All certificates representing such Option Shares shall contain legends to the following effect: ANY SALE, TRANSFER, PLEDGE, ASSIGNMENT OR ENCUMBRANCE OF THIS SECURITY IS SUBJECT TO THE PROVISIONS OF A STOCK OPTION AGREEMENT BETWEEN THE CORPORATION AND THE STOCKHOLDER, DATED AS OF , ___, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE CORPORATION. THE OFFER AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN QUALIFIED OR REGISTERED UNDER ANY STATE OR FEDERAL SECURITIES LAWS. SUCH SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF EITHER QUALIFICATION AND REGISTRATION UNDER STATE AND FEDERAL SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH QUALIFICATION AND REGISTRATION IS NOT REQUIRED. (d) The provisions of Sections 11(a) and 11(b) shall terminate effective upon the consummation an underwritten public offering of shares of Stock by the Company that results in such shares being listed for trading on a national securities exchange or being authorized for trading on the NASDAQ National Market System. 6

12. Representations. (a) By executing this Stock Option Agreement, Optionee represents and warrants to the Company that Optionee is acquiring the Options for Optionee‟s own account, for investment purposes only and not with the intent of distributing, transferring or selling all or any part of the Options. (b) In connection with the exercise of any portion of the Options, Optionee represents and warrants to the Company as of the date of such exercise as follows: (i) Optionee is acquiring the Stock for Optionee‟s own account, for investment purposes only and not with the intent of distributing, transferring or selling all or any part thereof in violation of applicable securities laws. (ii) Optionee acknowledges that the Stock has not been registered under any Federal or state securities laws and is being issued pursuant to one or more exemptions from the registration and qualification requirements of such securities laws. (iii) Optionee acknowledges that the Company is under no obligation to register or qualify the Stock and that the Stock may not be sold unless it is so registered and qualified or an exemption from registration and qualification is available. 13. Lock Up In Connection with Public Offering. (a) In order to induce the underwriters that may participate in a public offering of the Company‟s equity securities to continue their efforts in connection with such a public offering, the Optionee, during the period commencing 30 days prior to and ending 180 days after the effective date of any underwritten public offering of the Company‟s equity securities (except as part of such underwritten registration): (i) agrees not to (x) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any Stock or any securities convertible into or exercisable or exchangeable for Stock (including, without limitation, Stock or securities convertible into or exercisable or exchangeable for Stock which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission) or (y) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Stock (regardless of whether any of the transactions described in clause (x) or (y) is to be settled by the delivery of Stock, or such other securities, in cash or otherwise), without prior written consent of the lead managing underwriter of such public offering; 7

(ii) agrees not to make any demand for, or exercise any right with respect to, the registration of any Stock or any securities convertible into or exercisable or exchangeable for Stock, without the prior written consent of the lead underwriter; and (iii) authorizes the Company to cause the transfer agent to decline to transfer and/or to note stop transfer restrictions on the transfer books and records of the Company with respect to any Stock and any securities convertible into or exercisable or exchangeable for Stock for which the Optionee is the record holder and, in the case of any such shares or securities for which the Optionee is the beneficial but not the record holder, agrees to cause the record holder to cause the transfer agent to decline to transfer and/or to note stop transfer restrictions on such books and records with respect to such shares or securities. Upon the Company‟s request, the Optionee agrees to execute any additional documents necessary or desirable to confirm Optionee‟s obligations set forth above and/or in connection with the enforcement of the foregoing provisions. The foregoing provisions shall survive the death or incapacity of the Option and any obligations of the Optionee set forth above shall be binding upon the heirs, personal representatives, successors and assigns of the Optionee. 14. Notice. Any notice to the Company provided for in this instrument shall be addressed as follows: K12 Inc. 2300 Corporate Park Drive, Suite 200 Herndon, Virginia 20171 Attention: Compensation Committee With a copy to: K12 Inc. 2300 Corporate Park Drive, Suite 200 Herndon, Virginia 20171 Attention: Office of General Counsel And any notice to the Optionee shall be addressed to the Optionee at the current address shown on the records of the Company. Any notice shall be deemed to be duly given if and when properly addressed and posted by registered or certified mail, postage prepaid. 15. Incorporation of Plan by Reference. The Options are granted pursuant to the terms of the Plan, the terms of which are incorporated herein by reference, and the Options shall in all respects be interpreted in accordance with the Plan. Unless the 8

context otherwise requires, any terms used herein without definition shall have the meanings as defined in the Plan. The Board shall interpret and construe the Plan and this instrument, and its interpretations and determinations shall be conclusive and binding on the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. 16. Income Tax Consequences. Optionee acknowledges, represents, and warrants that the Company has made no representations whatsoever to Optionee concerning the specific Federal and/or state income tax and alternative minimum tax consequences to Optionee of the Options granted hereunder or the exercise thereof, and Optionee shall be responsible for consulting with Optionee‟s personal tax advisor regarding such matters. Without limiting the generality of the foregoing, Optionee acknowledges that pursuant to Code Section 409A, an option that is granted with a per share exercise price that is determined by the Internal Revenue Service (the “IRS”) to be less than the fair market value of a share of Stock on the date of grant (a “discount option”) may be considered “deferred compensation.” An option that is a “discount option” may result in (i) income recognition by the Optionee prior to the exercise of the option, (ii) an additional twenty percent (20%) tax payable by Optionee, and (iii) potential penalty and interest charges payable by Optionee. Optionee acknowledges that the Company cannot and has not guaranteed that in the event of an examination the IRS will agree that the per share exercise price of the Stock that is subject to this Option equals or exceeds the fair market value of a share of Stock on the date of grant. Optionee agrees that if the IRS determines that the Option was granted with a per share exercise price that was less than the fair market value of a share of Stock on the date of grant, Optionee will be solely responsible for all consequences to Optionee related to such a determination. 17. Withholding Taxes. Whenever the Company issues or transfers shares of Stock hereunder, the Company shall have the right to require the Optionee to remit to the Company an amount sufficient to satisfy any Federal, state, and/or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Alternatively, the Company may (but shall not be obligated to) issue or transfer such shares of Stock net of the number of shares sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the shares of Stock shall be valued on the date the withholding obligation is incurred. 18. Governing Law. The validity, construction, interpretation, and effect of this Agreement shall exclusively be governed by and determined in accordance with the laws of the State of Delaware (without regard to conflicts of law principles), except to the extent preempted by Federal law, which shall to such extent govern. 9

IN WITNESS WHEREOF, the Company and Optionee have executed this Agreement effective as of the date first set forth above. “Company” K12 INC. a Delaware corporation By: John Baule Executive Vice President “Optionee” «BOARD_MEMBER» 10

Exhibit 4.5 SECOND AMENDED AND RESTATED STOCKHOLDERS AGREEMENT This SECOND AMENDED AND RESTATED STOCKHOLDERS AGREEMENT (this “ Agreement ”) is entered into as of December , 2003 by and among K12 Inc., a Delaware corporation (the “ Company ”), the persons listed on the Schedule of Stockholders attached hereto as Exhibit A (the “ Schedule of Stockholders ”) as Common Stockholders (the “Common Stockholders ”), the persons identified on the Schedule of Stockholders as Series B Preferred Stockholders (the “ Series B Stockholders ”), and the persons identified on the Schedule of Stockholders as Series C Preferred Stockholders (the “ Series C Stockholders ,” and together with the Series B Stockholders, the “ Preferred Stockholders ,” and the Preferred Stockholders together with the Common Stockholders, the “ Stockholders ”). RECITALS In connection with an investment in the Company by William J. Bennett (“ Dr. Bennett ”), the Company, Dr. Bennett and Knowledge Universe Learning Group LLC, a Delaware limited liability company (“KULG”) (as assignee of Knowledge Universe Learning, Inc., a Delaware corporation (“KULI”)) entered into that certain Stockholders Agreement dated as of February 20, 2000 (the “ Bennett Agreement ”). In connection with the purchase of shares of Common Stock by Ronald J. Packard (“ Packard ”) from KULI, the Company, Packard and KULG (as assignee of KULI) entered into that certain Stockholders Agreement dated as of April 26, 2000 (the “ Packard Agreement ”). In connection with the issuance and sale of shares of Series B Preferred Stock pursuant to a Series B Preferred Stock Purchase Agreement dated as of July 27, 2001 (the “2001 Series B Purchase Agreement ”), the Company and the Stockholders party thereto entered into a Stockholders Agreement dated as of July 27, 2001 (the “Stockholders Agreement”) which amended and superseded the Bennett Agreement and the Packard Agreement in certain respects as specified in Section 7.6 therein. In connection with the issuance and sale of shares of Series B Preferred Stock pursuant to a Series B Preferred Stock Purchase Agreement dated as of March 31, 2003 (the “2003 Series B Purchase Agreement ” and together with the 2001 Series B Purchase Agreement the “ Series B Purchase Agreement ”), the Company and the Stockholders amended and restated the Stockholders Agreement in its entirety (the “ First Amended and Restated Stockholders Agreement ”). In connection with the issuance and sale of shares of Series C Preferred Stock pursuant to a Series C Preferred Stock Purchase Agreement dated as of December ___, 2003 (the “ Series C Purchase Agreement ”), the Company and the Stockholders desire to amend and restate the First Amended and Restated Stockholders Agreement in its entirety as follows: AGREEMENT NOW THEREFORE, in consideration of the above recitals and the mutual covenants herein contained and for other good and valuable consideration, the parties hereto agree as follows:

ARTICLE 1. DEFINITIONS As used herein, the following terms shall have the following meanings: 1.1. “ Affiliate ” shall mean as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, “control” means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of stock, by contract, or otherwise; provided , however , that, in any event: (a) any Person which owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed to control such Person, (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person, and (c) each partnership or joint venture in which a Person is a partner or joint venturer shall be deemed to be an Affiliate of such Person. 1.2. “ Board ” shall mean the Board of Directors of the Company. 1.3. “ Commission ” shall mean the Securities and Exchange Commission. 1.4. “ Common Stock ” shall mean common stock of the Company, par value $0.0001 per share. 1.5. “ Demand Registration ” shall have the meaning provided in Section 4.1(a). 1.6. “ Demand Notice ” shall have the meaning provided in Section 4.1(a). 1.7. “ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended. 1.8. “ Fully-Diluted Common Stock ” shall mean all of the issued and outstanding shares of Common Stock of the Company, assuming conversion, exercise or exchange of all outstanding convertible, exercisable or exchangeable securities, options, warrants and similar instruments into or for shares of Common Stock (regardless of whether such convertible securities are at such time convertible, exercisable or exchangeable), but excluding (i) treasury stock and (ii) shares of outstanding Common Stock and shares of Common Stock issuable upon the conversion, exercise or exchange of options, warrants and other securities to the extent that the acquisition of such outstanding shares, options, warrants or other securities was financed by a loan from the Company which has not yet been repaid. As provided in Section 7.8, all such calculations shall be appropriately adjusted for stock dividends, splits, reverse splits, combinations, recapitalizations and the like as described therein. 1.9. “ Holder ” shall mean any person owning or having the right to acquire Registrable Securities. 1.10. “ Indemnified Holder ” shall have the meaning provided in Section 4.6(a). 2

1.11. “ Long-form Registration ” shall mean a Demand Registration under the Securities Act on Form S-l or any similar long-form registration statement. 1.12. “ Person ” shall mean natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, insurance companies, or other organizations. 1.13. “ Piggyback Registration ” shall have the meaning provided in Section 4.2(a). 1.14. “ Piggyback Notice ” shall have the meaning provided in Section 4.2(a). 1.15. “ Preferred Registrable Securities ” shall mean any Registrable Securities issued or issuable to Preferred Stockholders upon conversion of Preferred Stock. 1.16. “ Preferred Stock ” shall mean the Series B Preferred Stock and the Series C Preferred Stock. 1.17. “ Proposed Drag-Along Transfer ” shall have the meaning provided in Section 5.1. 1.18. “ Proposed Issuance ” shall have the meaning provided in Section 3.1. 1.19. “ Prospectus ” shall have the meaning provided in Section 4.3(a). 1.20. “ Qualified IPO ” shall mean the underwritten offer and sale of Common Stock to the public pursuant to an effective registration statement under the Securities Act that provides aggregate gross proceeds to the Corporation of not less than $40,000,000 at a price per share to the public of not less than $2.68 (subject to adjustments for stock dividends, splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof). 1.21. “ Qualified Stockholder ” shall mean a Stockholder who is an “accredited investor” for purposes of Rule 501 under the Securities Act (or such other comparable provision) and has a similar status under applicable Blue Sky laws that permit such Stockholder to be an offeree and purchaser in an offering exempt from registration and qualification under such laws. 1.22. “ Qualified Trading Date ” shall mean the first date subsequent to a public offering of the Common Stock which is not a Qualified IPO on which (i) the average closing price of the Common Stock for any thirty (30) consecutive trading days is equal to at least $2.68 per share (subject to adjustments for stock dividends, splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof) and (ii) the aggregate market value of all outstanding shares of Common Stock (including all shares of preferred stock on an as-converted basis) is at least $300,000,000. 1.23. “ Qualified Transfer ” shall mean (i) any transfer of Shares by a Stockholder to a trust created for the sole benefit of the Stockholder, the Stockholder‟s spouse, lineal descendants or siblings, (ii) any transfer of Shares by will or pursuant to the laws of descent and distribution to any spouse, lineal descendant or sibling of a Stockholder, (iii) any transfer to any Person that is an accredited investor for purposes of Rule 501 under the Securities Act (or such other comparable provision), or (iv) any transfer of Shares by any Stockholder with the consent of the 3

Board; provided that no such transfer shall constitute a “Qualified Transfer” unless (a) the transferee agrees in writing to be bound by this Agreement as if such transferee were the transferring Stockholder hereunder, and (b) the transfer is a transaction that is exempt from the registration and qualification requirements of Federal and state securities laws and the Company receives an opinion of counsel reasonably acceptable to the Company that such transfer is made in compliance with applicable Federal and state securities laws. 1.24. “ Registrable Securities ” shall mean shares of Common Stock (a) owned by any Stockholder as of the date hereof and (b) issued or issuable to Preferred Stockholders upon conversion of shares of Preferred Stock; provided , however , that a Registrable Security shall cease to be a Registrable Security at such time that (A) the Registrable Security has been effectively registered under the Securities Act and disposed of in accordance with the registration statement covering it, or (B) the Holder thereof is able to sell all Registrable Securities held or entitled to be held upon conversion of Preferred Stock by such Holder under Rule 144 (or any similar provision then in force) during any three-month period. 1.25. “ Registration ” shall have the meaning provided in Section 4.3. 1.26. “ Registration Statement ” shall have the meaning provided in Section 4.3(a). 1.27. “ Securities Act ” shall mean the Securities Act of 1933, as amended. 1.28. “ Series B Preferred Stock ” shall mean the Series B Convertible Preferred Stock of the Company, par value $0.0001 per share. 1.29. “ Series C Preferred Stock ” shall mean the Series C Convertible Preferred Stock of the Company, par value $0.0001 per share. 1.30. “ Shares ” shall mean shares of Common Stock of the Company, and securities convertible into, or exercisable or exchangeable for, shares of Common Stock of the Company. 1.31. “ Short-form Registration ” shall mean a Demand Registration under the Securities Act on Form S-3 or any successor form thereto. 1.32. “ Termination Date ” shall mean the earlier to occur of (a) the date of a Qualified IPO or (b) the Qualified Trading Date. 1.33. “ Threshold Number of Shares ” shall mean at least sixty percent (60%) of the then outstanding shares of Preferred Stock, including for purposes of the calculation shares of Common Stock issued and outstanding upon conversion of Preferred Stock. 1.34. “ Transferring Holders ” shall have the meaning provided in Section 5.1. 4

ARTICLE 2. TRANSFER RESTRICTION — PREFERRED STOCKHOLDERS 2.1. Prohibition on Transfer to Competitors . No Preferred Stockholder may, directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, transfer Shares or any interest therein to any Person that is a competitor of the Company, as determined by the Board in its reasonable discretion, without the prior approval of the Board, which approval may be withheld by the Board in its sole discretion. 2.2. Company Effecting Transfers . The Company agrees not to effect any transfer of Shares by a Preferred Stockholder until it has received evidence reasonably satisfactory to it that this Article 2 has been complied with. 2.3. Termination of Transfer Restriction . The transfer restriction provided under this Article 2 shall automatically terminate and be of no further force or effect upon the Termination Date. ARTICLE 3. RIGHT TO CO-INVEST 3.1. General . If the Company proposes to newly-issue for cash (a “ Proposed Issuance ”) any Shares, then the Company shall give written notice to the Preferred Stockholders of the Proposed Issuance. Such notice shall describe the Proposed Issuance and shall contain an offer to sell to each Preferred Stockholder who is a Qualified Stockholder such Qualified Stockholder‟s pro rata portion of the Shares (which shall be a percentage equal to the percentage of the Fully-Diluted Common Stock held by such Qualified Stockholder). If any such Qualified Stockholder fails to accept such offer by written notice to the Company within fifteen (15) days following the date the Company‟s notice is given in accordance with Section 7.5 below, the Proposed Issuance may be consummated, free of any right on the part of such Qualified Stockholder under this Section 3.1 in respect thereof. 3.2. Exemptions . The purchase right granted by Section 3.1 shall not apply to: (i) any issuance of Shares in connection with any Qualified IPO; (ii) any issuance of Shares in connection with a merger, consolidation, transfer of assets or other business combination involving the Company; (iii) any issuance of Shares pursuant to any stock option plan, restricted stock plan or other benefit plan, the terms of which are customary in the marketplace as determined and approved by the Board in good faith; (iv) any issuance of Shares upon conversion of Preferred Stock or the conversion or exercise of other securities outstanding on the date hereof; (v) any issuance of any Shares in connection with loan transactions and/or equipment leases, the terms of which are approved by the Board and in the case of any loan transaction and/or equipment lease between the Company and any Affiliate of the Company, the terms of which are also approved by either (A) the vote or written consent of at least a majority of the members of the Board who were elected solely by the holders of Preferred Stock, or (B) the vote or written consent of holders of at least sixty percent (60%) of the outstanding shares of Preferred Stock; (vi) any issuance of any Shares pursuant to any transactions, the terms of which are approved by the Board primarily for the purpose of (a) joint ventures or strategic alliances, 5

(b) development, production or distribution of the Company‟s products or services, (c) purchase or licensing of technology, or (d) any other transactions that are primarily for purposes other than raising capital, provided that the terms of any such transaction are approved by the Board and, in the case of any transaction between the Company and any Affiliate of the Company, the terms are also approved by either (A) the vote or written consent of at least a majority of the members of the Board who were elected solely by the holders of Preferred Stock, or (B) the vote or written consent of the holders of at least sixty percent (60%) of the outstanding shares of Preferred Stock; (vii) any additional issuance of Series C Preferred Stock under the Series C Purchase Agreement; or (viii) any issuance of Shares upon conversion or exercise of any Shares issued in compliance with Section 3.1 or issued in a transaction that is exempt from Section 3.1. 3.3. Termination of Co-Investment Right . The rights provided under this Article 3 shall automatically terminate and be of no further force or effect on the Termination Date. ARTICLE 4. REGISTRATION RIGHTS 4.1. Demand Registration Rights . (a) Right to Demand . If the Company shall receive from Holders of at least one-third (1/3) of the Preferred Registrable Securities a written request that the Company register with the Commission, under and in accordance with the provisions of the Securities Act, all or part of their Preferred Registrable Securities (a “ Demand Registration” ), the Company will, within twenty (20) days after receipt of the request for a Demand Registration, send written notice (a “ Demand Notice” ) of such registration request and its intention to comply therewith to each other Holder and, subject to Section 4.1(b) below, include in such registration all Registrable Securities of the Holders with respect to which the Company has received written requests for inclusion therein within twenty (20) business days after the effectiveness of the Demand Registration Notice. A Demand Registration may be either a Long-form Registration or, if the Company is then eligible to use Form S-3, a Short-form Registration. All Demand Registrations shall be Short-form Registrations whenever the Company is eligible to use any applicable short-form for registrations. All requests made pursuant to this Section 4.1(a) will specify the aggregate number of Registrable Securities requested to be registered and will also specify the intended methods of disposition thereof; provided , however , that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 4.1(a): (i) unless the Holders initiating such Demand Registration indicate a good faith intention to register Common Stock of the Company having a reasonably anticipated aggregate offering price, net of underwriting discounts and commissions, of at least $10 million; (ii) prior to the date which is six (6) months following the effective date of the first underwritten public offering of the Company‟s Common Stock under the Securities Act; (iii) during the period starting with the date sixty (60) days prior to the Company‟s estimated date of filing of, and ending on the date six (6) months immediately 6

following the effective date of any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; (iv) after the Company has effected three (3) such registrations pursuant to this Section 4.1(a); or (v) if the Company shall furnish to such Holders a certificate, signed by the President of the Company, stating that in the good faith judgment of the Board it would be detrimental to the Company or its stockholders for a Registration Statement to be filed at such time. In such event, the Company‟s obligation to use all reasonable efforts to register, qualify or comply under this Section 4.1(a) shall be deferred for a single period not to exceed one hundred twenty (120) days from the date of receipt of written request from the Holders initiating such Demand Registration, provided that the Company shall not exercise this deferral right more than twice in any eighteen month period. (b) Priority on Demand Registrations . If in any Demand Registration the managing underwriter or underwriters thereof advise the Company in writing that in its or their reasonable opinion (or in the case of a Demand Registration not being underwritten, the Company shall reasonably determine (and notify the selling Holders of such determination)) that the number of securities proposed to be sold in such Demand Registration is inconsistent with that which can be sold in such offering without having a material adverse effect on the success of the offering (including, without limitation, an impact on the selling price or the number of Registrable Securities that any participating Holder may sell), the Company will include in such registration only the number of securities that, in the reasonable opinion of such underwriter or underwriters (or the Company, as the case may be) can be sold without having a material adverse effect on the success of the offering, in the following order of priority: (i) first, the Preferred Registrable Securities requested to be included in such Demand Registration (pro rata on the basis of the number of Preferred Registrable Securities requested to be included), (ii) second, any other Registrable Securities requested to be included in such Demand Registration (pro rata on the basis of the number of Registrable Securities requested to be included), and (iii) third, any other securities of the Company requested to be included in such Demand Registration. (c) Withdrawal . A Demand Registration may be withdrawn by the Holders initiating such Demand Registration without the demand counting as a Demand Registration hereunder; provided that such Holders reimburse the Company for all expenses incurred by the Company in connection with the demand, except that no reimbursement shall be required if such withdrawal is based on material adverse information about the Company of which such Holders were not aware at the time of the request. (d) Selection of Underwriters . The selling Holders shall have the right to determine whether or not any Demand Registration shall be underwritten. If any Demand Registration is an underwritten offering, the selling Holders shall have the right to submit to the Company, and the Company shall consider, a list of preferred managing underwriters or underwriters to administer the offering; provided , however , that the Company shall have the sole and exclusive right to (i) make the final selection of a managing underwriter or underwriters, 7

which managing underwriter or underwriters shall be of nationally recognized standing, and (ii) determine the terms under which such underwriting shall take place (which terms shall be customary for registrations of that type as determined by the Company in good faith). 4.2. Piggyback Registration Rights . (a) Right to Piggyback . Commencing six months after the initial underwritten public offering of the Company‟s Common Stock under the Securities Act, whenever the Company proposes to register any shares of Common Stock (or securities convertible into or exchangeable for, or options to purchase, Common Stock) with the Commission under the Securities Act, other than (i) a registration relating solely to employee benefit plans, (ii) a registration relating solely to a Rule 145 transaction, or (iii) a registration in which the only equity security being registered is Common Stock issuable upon conversion of convertible debt securities which are also being registered, and the registration form to be used may be used for the registration of the Registrable Securities (a “ Piggyback Registration ”), the Company (A) will give written notice (the “ Piggyback Notice ”) to all Holders no later than the later of (1) forty-five (45) days prior to the anticipated filing date, or (2) promptly following its decision to file, of its intention to effect such a registration, which Piggyback Notice will specify the proposed offering price (or reasonable range thereof), the kind and number of securities proposed to be registered, the distribution arrangements and such other information that at the time would be appropriate to include in such notice, and (B) will, subject to Section 4.2(b) below, include in such Piggyback Registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within twenty (20) days after the date of the Piggyback Notice. (b) Priority on Piggyback Registrations . If the managing underwriter or underwriters in any Piggyback Registration, if any, advise the selling Holders in writing that in its or their reasonable opinion or, in the case of a Piggyback Registration not being underwritten, the Company shall reasonably determine (and notify the selling Holders of such determination) that the number or kind of securities proposed to be sold in such registration (including Registrable Securities to be included pursuant to Section 4.2(a) above) is inconsistent with that which can be sold in such registration without having a material adverse effect on the success of the offering (including, without limitation, an impact on the selling price or the number of securities that any participant may sell), the Company will include in such registration the number of securities, if any, which, in the opinion of such underwriter or underwriters, or the Company, as the case may be, can be sold, in the following order of priority: (i) first, the shares the Company proposes to sell, and (ii) second, the Registrable Securities requested to be included in such registration by Holders (pro rata based on the number of Registrable Securities that each such Holder shall have requested to include therein). (c) Withdrawal . A request for Piggyback Registration may be withdrawn by any Holder making such a request; provided that such Holder reimburse the Company for all incremental, additional expenses reasonably incurred by the Company relating solely to such request, except that no reimbursement shall be required if such withdrawal is based on material adverse information about the Company of which such Holder was not aware at the time of the request. 8

(d) Selection of Underwriters . If any Piggyback Registration is an underwritten offering, the Company will (i) select a managing underwriter or underwriters to administer the offering, which managing underwriter or underwriters will be of nationally recognized standing, and (ii) determine the terms under which such underwriting shall take place. 4.3. Registration Procedures . With respect to any registration of the Company‟s Common Stock pursuant to this Article 4 (generically, a “ Registration ”), the Company will, subject to Sections 4.1(b) and 4.2(b), as expeditiously as practicable: (a) prepare and file with the Commission, within one hundred twenty (120) days after mailing the applicable Notice, a registration statement or registration statements (the “ Registration Statement ”) relating to the applicable Registration on any appropriate form under the Securities Act, which form shall be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof, and use all commercially reasonable efforts to cause such Registration Statement to become effective; provided , however , that before filing a Registration Statement or prospectus related thereto (a “ Prospectus ”) or any amendments or supplements thereto, the Company will furnish to the Holders covered by such Registration Statement and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the reasonable review of such Holders and underwriters and their respective counsel, and the Company will not file any Registration Statement or amendment thereto or any Prospectus or any supplement thereto to which the holders of a majority of the Registrable Securities covered by such Registration Statement or the underwriters, if any, shall reasonably object; (b) prepare and file with the Commission such amendments and post-effective amendments to the Registration Statement as may be necessary to keep each Registration Statement effective for a period of not less than sixty (60) days (or such shorter period which will terminate when all Registrable Securities covered by such Registration Statement have been sold or withdrawn), or, if such Registration Statement relates to an underwritten offering, such longer period as in the opinion of counsel for the underwriters a Prospectus is required by law to be delivered in connection with sales of Registrable Securities by an underwriter or dealer; cause each Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (c) notify the selling Holders and the managing underwriters, if any, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (B) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (D) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for 9

sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, and (E) of the happening of any event which makes any statement made in the Registration Statement, the Prospectus or any document incorporated therein by reference untrue or which requires the making of any changes in the Registration Statement, the Prospectus or any document incorporated therein by reference in order to make the statements therein not misleading; (d) make reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (e) if reasonably requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an underwritten offering, incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority of the Registrable Securities being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten offering of the Registrable Securities to be sold in such offering; (f) deliver to each selling Holder and the underwriters, if any, a reasonable number of copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto; (g) prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling Holders, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or “Blue Sky” laws of such jurisdictions as the selling Holders and any underwriter reasonably requests in writing, considering the amount of Registrable Securities proposed to be sold in each such jurisdiction; provided , however , that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject; (h) cause all Registrable Securities covered by any Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed, or cause such Registrable Securities to be authorized for trading on the Nasdaq National Market System if any similar securities issued by the Company are then so authorized, if requested by the holders of a majority of such Registrable Securities or the managing underwriters, if any; (i) enter into such agreements (including an underwriting agreement in usual and customary form) and take all such other actions in connection therewith in order to facilitate the disposition of such Registrable Securities as shall be reasonably necessary; (j) permit Holders participating in such Registration to undertake such due diligence is as usual and customary under the circumstances; provided that such selling Holders 10

shall use their best efforts to coordinate such due diligence to avoid additional expense to the Company and delay of the offering; and (k) keep each selling Holder of Registrable Securities advised in writing as to the initiation and progress of any Registration hereunder. As a condition to participating in a Registration, each Holder of Registrable Securities as to which any Registration is being effected shall furnish to the Company in writing such information regarding the Holder and the proposed distribution of such securities as the Company may from time to time reasonably request in writing. Each Holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 4.3(c)(B),(C), (D), or (E), such Holder will forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement until such Holder‟s receipt of copies of the supplemented or amended Prospectus or until it is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus, and, if so directed by the Company, such Holder will deliver to the Company all copies, other than permanent file copies then in such Holder‟s possession, of the Prospectus covering such Registrable Securities. 4.4. Restrictions on Public Sale . To the extent not inconsistent with applicable law, (i) each Holder agrees not to effect any public sale or distribution of Shares, including a sale pursuant to Rule 144 (or any similar provision then in force) under the Securities Act, during the 180-day period (or such shorter period as may be agreed to by the managing underwriter or underwriters) following the closing of the initial public offering of the Company‟s Common Stock under the Securities Act, and (ii) each Holder whose Registrable Securities are included in a Registration Statement hereunder, if requested by the managing underwriter or underwriters for such Registration, agrees not to effect any public sale or distribution of Registrable Securities, including a sale pursuant to Rule 144 (or any similar provision then in force) under the Securities Act, during the fifteen (15) business days prior to, and during the 90-day period (or such shorter period as may be agreed to by such underwriter or underwriters) beginning on, the effective date of a Registration Statement pursuant to such Demand Registration or Piggyback Registration (except as part of such Demand Registration or Piggyback Registration); provided that all directors, officers and Holders of 1% or more of the then outstanding Shares of the Company have agreed to the same restrictions. 4.5. Registration Expenses . All expenses incident to the Company‟s performance of or compliance with this Article 4 will be borne by the Company; provided , however , the Company shall not bear the costs and expenses of underwriters‟ commissions, brokerage fees or transfer taxes for any selling Holder, or the fees and expenses of any attorneys, accountants or other representatives retained by any selling Holder (except that the Company shall pay the reasonable fees and disbursements of not more than one counsel selected by the selling Holders to represent such Holders in connection with the Demand Registrations, in an aggregate amount not to exceed $20,000). 11

4.6. Indemnification (a) Indemnification by the Company . The Company agrees to indemnify each Holder, its officers, directors and agents and each person who “controls‟ such Holder within the meaning of the Securities Act and the Exchange Act (each, an “Indemnified Holder ), against losses, claims, damages, including amounts incurred in settlement, liabilities and expenses arising out of, based upon or resulting from any untrue statement or alleged untrue statement of a material fact in the Registration Statement, Prospectus or preliminary Prospectus or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided , however , that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon any untrue statement or omission based upon information furnished in writing to the Company by such Indemnified Holder or its representative expressly for use therein. The Company also will indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each person who controls such persons (within the meaning of the Securities Act and the Exchange Act) to the same extent as provided above, if requested. (b) Indemnification by Holders of Registrable Securities . Each Holder participating in a Registration agrees to indemnify the Company, its directors, officers and agents and each person who “controls” the Company (within the meaning of the Securities Act and the Exchange Act) against losses, claims, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact in the Registration Statement, Prospectus or preliminary Prospectus or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, to the extent, and only to the extent, that any such loss, claim, damage, liability or expense arises out of, is based upon or results from any untrue statement (or alleged untrue statement) or omission (or alleged omission) based upon, in reliance on and in conformity in all material respects with, information furnished in writing to the Company by such Holder or its representative expressly for use therein. In no event shall the liability of any selling Holder hereunder or under any underwriting agreement be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such persons specifically for inclusion in any Registration Statement or Prospectus. (c) Conduct of Indemnification Proceedings . Any Person entitled to indemnification hereunder will: (i) give prompt written notice to the indemnifying party after the receipt by the indemnified party of a written notice of the commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which such indemnified party will claim indemnification or contribution pursuant to this Agreement; provided , however , that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding Section 4.6(a) or 4.6(b), as applicable, except to the extent that the indemnifying party is actually prejudiced by such failure to give 12

notice, and (ii) unless in such indemnified party‟s reasonable judgment a conflict of interest may exist between such indemnified and indemnifying parties with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. Whether or not such defense is assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnifying party will be required to consent to the entry of any judgment or to enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff of a release from all liability in respect of such claim or litigation. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel in any one jurisdiction for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels. (d) Contribution . If for any reason the indemnification provided for in Sections 4.6(a) or 4.6(b), as applicable, is unavailable to an indemnified party as contemplated by such Section, then the indemnifying party, in lieu of indemnification, shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage, liability or expense in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations. 4.7. Rule 144 . The Company agrees that at all times after it has filed a registration statement pursuant to the requirements of the Securities Act relating to any class of equity securities of the Company, it will use its best efforts to file in a timely manner all reports required to be filed by it pursuant to the Securities Act and the Exchange Act and will take such further action as any Holder may reasonably request in order that such Holder may effect sales of Registrable Securities pursuant to Rule 144. At any reasonable time and upon the reasonable request of a Holder, the Company will furnish such Holder with such information as may be necessary to enable the Holder to effect sales of Common Stock pursuant to Rule 144 under the Securities Act and will deliver to such Holder a written statement as to whether it has complied with such requirements. Notwithstanding the foregoing, the Company may deregister any class of its equity securities under Section 12 of the Exchange Act or suspend its duty to file reports with respect to any class of its securities pursuant to Section 15(d) of the Exchange Act if it is then permitted to do so pursuant to the Exchange Act and the rules and regulations thereunder. 4.8. Participation in Underwritten Registrations . No Holder may participate in any underwritten registration hereunder unless such Holder (i) agrees to sell its Registrable Securities on the basis provided in any underwriting arrangements approved by the Company, and (ii) accurately completes in a timely manner and executes all questionnaires, powers of attorney, underwriting agreements and other documents customarily required under the terms of such underwriting arrangements. ARTICLE 5. 13

DRAG-ALONG RIGHTS 5.1. With respect to any proposed transfer of the Threshold Number of Shares in an arm‟s length transaction to a proposed purchaser that is not an Affiliate of either the Company or any of the Stockholders (such proposed transfer being a “ Proposed Drag-Along Transfer ”) the holders of the Threshold Number of Shares (the “Transferring Holders”) shall have the right to require the Stockholders to sell their Shares in the Proposed Drag-Along Transfer to the proposed purchaser at the price being paid by the proposed purchaser in the Proposed Drag-Along Transfer, and, otherwise, upon the same terms and conditions as in the Proposed Drag-Along Transfer. Such Transferring Holders shall provide a notice to each Stockholder and the Company setting forth: (i) the name of the proposed purchaser and (ii) the proposed amount and form of consideration and terms and conditions of payment offered by the proposed purchaser. 5.2. At the closing of the transfer of Shares to the proposed purchaser on the terms described above, each Stockholder shall (i) execute any documents or instruments, including, without limitation, representations and warranties, reasonably requested by the proposed purchaser and (ii) deliver certificates for the Shares being sold, duly endorsed and accompanied by duly executed stock assignments separate from certificate, free and clear of all claims and encumbrances, against delivery to each Stockholder of the consideration for the Shares of such holder being sold pursuant to this Article 5. 5.3. The rights provided under this Article 5 (including the notice requirement set forth herein) shall automatically terminate and be of no further force or effect on and after the Termination Date. ARTICLE 6. OTHER COVENANTS 6.1. Financial Information; Inspection . (a) Financial Information . The Company shall deliver to each Preferred Stockholder: (i) as soon as practicable after the end of each fiscal year, and in any event within one hundred fifteen (115) days thereafter, but in no event later than the March 15 following the end of a fiscal year, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of such fiscal year, and a consolidated statement of income and a consolidated statement of changes in financial position of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles and setting forth in each case in comparative form the figures for the previous fiscal year and with an audit opinion thereon from independent public accountants of recognized national standing; (ii) as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within seventy five (75) days thereafter, (A) a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such quarterly period, and a consolidated statement of income and a consolidated statement of changes in financial position of the Company and its subsidiaries, if 14

any, for such period and for the current fiscal year to date and setting forth in comparative form the figures for the corresponding periods of the previous fiscal year, prepared in accordance with generally accepted accounting principles, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made and (B) a management‟s discussion and analysis describing material activities and events for such period and material variances from the Company‟s budget; (iii) as soon as practicable after the end of each month in each fiscal year of the Company, and in any event within thirty (30) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such monthly period, and a consolidated statement of income and a consolidated statement of changes in financial position of the Company and its subsidiaries, if any, for such period and for the current fiscal year to date and setting forth in comparative form the figures for the corresponding periods of the previous fiscal year, prepared in accordance with generally accepted accounting principles, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made; and (iv) no later than ninety (90) days after the beginning of each fiscal year of the Company, an annual budget for the Company for such fiscal year. (b) Inspection . Upon reasonable request the Company shall permit each Preferred Stockholder who holds at least 2,000,000 shares of Preferred Stock or his or its designee to visit and inspect the properties of the Company and examine its corporate and financial records (and make copies thereof or extracts therefrom) during normal business hours following reasonable notice. All costs incurred in connection with such inspection shall be borne by such Preferred Stockholder, unless the Company is then in material breach of this Agreement or the Series B Purchase Agreement or the Series C Purchase Agreement, in which case the reasonable costs of such inspection shall be borne by the Company. (c) Confidentiality . Each Stockholder agrees that, except with the prior written permission of the Company, it shall at all times keep confidential and not divulge, furnish or make accessible to anyone any confidential information, knowledge or data concerning or relating to the business or financial affairs of the Company; provided , however , that such Stockholder may disclose such matters (a) to its advisors or agents in connection with its review and negotiation of this Agreement, (b) to professional advisors, investment bankers, investors, lenders or rating agencies, but only to the extent reasonably required in order to render services to such Stockholder and all of whom shall be advised of the confidential nature of such information and shall be bound by the terms of this Section 6.1(c), (c) as required by law or in connection with the enforcement of this Agreement, (d) as requested by entities with regulatory or other authority over such Stockholder, including the National Association of Insurance Commissioners, the Commission or as otherwise required by generally accepted accounting principles, or (e) to prospective and permitted assigns of such Stockholder, all of whom shall be advised of the confidential nature of such information and shall be bound by the terms of this Section 6.1(c). The provisions of this Section 6.1(c) shall be in addition to, and not in substitution for, the provisions of any separate nondisclosure agreement executed by the parties hereto with respect to the transactions contemplated hereby. Notwithstanding anything herein to the contrary, each party to this Agreement (and each employee, representative, or other agent of 15

such party) may disclose to any and all Persons, without limitation of any kind, the tax treatment and tax structure of the transactions contemplated herein and all materials of any kind (including opinions or other tax analyses) that are provided to such party relating to such tax treatment and tax structure. (d) Termination of Information and Inspection Rights . The rights provided by Section 6.1(a) and (b) shall automatically terminate and be of no further force or effect upon the earlier to occur of (i) a public offering of any class of the Company‟s Common Stock under the Securities Act or (ii) the date upon which the Company becomes subject to the reporting provisions of the Securities Act; provided that (x) the rights provided in Section 6.1(a) shall terminate earlier with respect to any Preferred Stockholder on the date such Preferred Stockholder no longer holds at least 250,000 shares of Preferred Stock and (y) the rights provided in Section 6.1(b) shall terminate earlier with respect to any such Preferred Stockholder who no longer holds at least 1,000,000 shares of Preferred Stock. 6.2. Mergers or Sale of Assets . The Company shall not, without first obtaining the approval of holders of at least the Threshold Number of Shares and a majority of the outstanding shares of Common Stock, take any action which would result in (x) the merger or consolidation of the Company into or with another corporation where, upon consummation of such transaction, the holders of the Company‟s voting stock immediately prior to such transaction will hold less than 50% of the voting stock of the surviving corporation immediately after such transaction, or (y) the sale or license of all or substantially all of assets of the Company. 6.3. Other Covenants of the Company . (a) Board Committees . The Company shall use commercially reasonable efforts to cause one Board representative of the Series C Stockholders to be a member of the Board‟s Compensation Committee, Audit Committee and any other committee of the Board. In addition and not in limitation of the foregoing, the Company shall use its best efforts to cause the CV Director (as such term is defined in the Company‟s Amended and Restated Certificate of Incorporation, as amended) to be a member of the Board‟s Executive Committee, provided, however, that as a condition to such CV Director remaining as a member of the Board‟s Executive Committee such CV Director must regularly prepare for, attend and participate in the Board‟s Executive Committee meetings. (b) D&O Insurance . The Company shall use commercially reasonable efforts to maintain directors‟ and officers‟ liability insurance reasonably satisfactory to the Board and providing coverage in an amount of at least $10,000,000. (c) Board Meetings . The Company shall use commercially reasonable efforts to cause the Board to hold a board meeting at least once each calendar quarter. (d) Filing of Returns and Other Writings . The Company shall cause the preparation and timely filing of all Company tax returns and shall, on behalf of the Company, timely file all other writings required by any governmental authority having jurisdiction to require such filing. (e) Subsidiaries . In the event that the Company creates any subsidiary of the 16

Company to which the majority of the assets of the Company will be transferred or by which such assets will be held (a “ Material Subsidiary” ), the Company shall take all necessary action to ensure that the composition of the board of directors (or similar governing body) thereof shall be identical to that of the Board of Directors of the Company at all times. (f) Payment of Taxes . The Company shall pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income, profits or business, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a lien or charge upon any properties of the Company; provided, however, that the Company shall not be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by appropriate proceedings if the Company shall have set aside on its books sufficient reserves, if any, with respect thereto. (g) Maintenance of Insurance . The Company shall maintain insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as the Company reasonably believes is customarily carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Company operates. (h) Preservation of Corporate Existence . The Company shall preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is necessary or, in the determination of the Company, desirable in view of its business and operations or the ownership or lease of its properties. (i) Compliance with Laws . The Company shall comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, where noncompliance would have a material adverse effect on the business, financial condition, operations, results of operations and prospects of the Company. (j) Maintenance of Properties . The Company shall maintain and preserve all of its properties and assets, necessary for the proper conduct of its business, in good repair, working order and condition, ordinary wear and tear excepted. (k) Compliance with ERISA . The Company shall comply with all minimum funding requirements applicable to any pension, employee benefit plans or employee contribution plans which are subject to ERISA or to the Code or any similar foreign laws, and comply, and cause each subsidiary of the Company, if any, to comply, in all other material respects with the provisions of ERISA and the Code and any similar foreign laws, and the rules and regulations thereunder, which are applicable to any such plan. The Company shall not permit any event or condition to exist which could permit any such plan to be terminated under circumstances which would cause the lien provided for in Section 4068 of ERISA or any similar foreign laws to attach to the assets of the Company. (1) Financings . The Company shall instruct the officers of the Company to 17

inform the Board of Directors or the Board‟s Executive Committee of any material negotiations, offers or contracts relating to possible financings of a material nature for the Company, whether initiated by the Company or any other person. (m) Termination . The provisions of this Section 6.3 shall terminate and be of no further force or effect upon a public offering of any class of the Company‟s Common Stock under the Securities Act or the date upon which the Company becomes subject to the reporting provisions of the Exchange Act. ARTICLE 7. MISCELLANEOUS 7.1. Legend . In addition to any legends required by federal or state securities laws, the certificates representing the Shares shall bear the following legends: (a) “THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT) AND APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED UNLESS (X) THE SALE OR TRANSFER IS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (Y) THE SALE OR TRANSFER IS IN COMPLIANCE WITH RULE 144 UNDER THE ACT, OR (Z) THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY STATING THAT THE SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT AND APPLICABLE STATE SECURITIES LAWS.” “THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN AN AMENDED AND RESTATED STOCKHOLDERS AGREEMENT DATED AS OF DECEMBER , 2003. A COPY OF SUCH AGREEMENT MAY BE OBTAINED FROM THE COMPANY UPON REQUEST.”

(b)

The legend referred to in paragraph (a) above shall be removed when the securities evidenced by the Certificate have been registered under Federal and state securities laws. The legend referred to in paragraph (b) above shall be removed when the Company has consummated a Qualified IPO. Each of the parties hereto agrees that absent (i) an effective registration statement under the Securities Act and qualification under applicable state securities laws or (ii) compliance with Rule 144 under the Securities Act, such party will not sell, assign, transfer, pledge, hypothecate, distribute or otherwise dispose of any or all of the Shares issued in connection with the transactions contemplated hereby without first providing the Company with an opinion of counsel reasonably satisfactory to the Company stating that such disposition is exempt from the 18

registration and prospectus delivery requirements of the Securities Act and has been registered or qualified under (or is exempt from the registration and qualification requirements of) any applicable state securities laws. 7.2. Transferees; Additional Restrictions on Transfer . Each transferee of Shares or a subsequent transferee (including the transferee in a transfer from one holder to another holder) shall take such Shares subject to the same restrictions and obligations as existed in the hands of the transferor. No transferee of Shares or a subsequent transferee, other than a transferee receiving Shares in a Qualified Transfer, shall be entitled to the benefits provided to Stockholders hereunder, including, without limitation, the registration rights provided under Article 4 hereof. Shares sold to the public pursuant to an effective Registration Statement shall no longer be subject to any of the provisions of this Agreement. 7.3. Future Stockholders . Any person who acquires Shares of the Company may, at the option of the Company, become a party to this Agreement by execution and delivery to the Company of a counterpart of this Agreement. Upon delivery of such counterpart, (i) the signature pages hereto shall be amended to reflect the name of such new party, and (ii) such new party shall thereafter be deemed a “Stockholder” for purposes of this Agreement. 7.4. Specific Performance, Etc . The Company and each Stockholder, in addition to being entitled to exercise all rights provided herein, in the Company‟s Certificate of Incorporation, as amended, or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. Each party agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. 7.5. Notices . Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by telegram. or fax, or five (5) days after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, addressed to the party to be notified at such party‟s address as set forth on Exhibit A to the Series B Purchase Agreement or the Series C Purchase Agreement, as the case may be, or as subsequently modified by written notice, and if to the Company, 8000 Westpark Drive, Suite 675, McLean, Virginia 22102, Attention: Chief Executive Officer, with a copy to David S. Kyman, Maron & Sandler, 1250 Fourth Street, Suite 550, Santa Monica, California 90401. If notice is given in multiple fashions, the date of first effective notice shall control. 7.6. Entire Agreement: Amendments and Waivers . This Agreement constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties, including without limitation the First Amended and Restated Stockholders Agreement, Articles IV, VI and VII and Sections 8.2 and 8.3 of Article VIII of the Bennett Agreement and Articles III and IV of the Packard Agreement, all of which are expressly superseded by this Agreement and are of no further force or effect. Notwithstanding the foregoing, except as expressly provided above, the Bennett Agreement and the Packard Agreement shall remain in full force and effect in accordance with their terms. This Agreement may be amended, modified, 19

waived or supplemented only by a written instrument executed by the Company, the holders of at least the Threshold Number of Shares, and Common Stockholders holding a majority of the outstanding shares of Common Stock held by such Common Stockholders. No action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as waiver of any preceding or succeeding breach and no failure by any party to exercise any right or privilege hereunder shall be deemed a waiver of such party‟s rights or privileges hereunder or shall be deemed a waiver of such party‟s rights to exercise the same at any subsequent time or times hereunder. Notwithstanding any provision herein to the contrary, the addition of a party to this Agreement at any time in connection with such party becoming a Stockholder shall not constitute an amendment, modification or supplement of this Agreement and shall only require the agreement of the Company and the Stockholder being added as a party to this Agreement; all such persons shall be considered to be Stockholders from the date they become a signatory to this Agreement. 7.7. Termination . This Agreement shall terminate and cease to be of any further force or effect upon the earlier of (a) the Company‟s merger or consolidation with or into another corporation or other entity where, upon consummation of such transaction, the holders of the Company‟s voting stock immediately prior to such transaction will hold less than 50% of the voting stock of the surviving corporation immediately after such transaction, or (b) the Company‟s merger or consolidation with or into another corporation where in connection with such transaction, all of the Shares are exchanged exclusively for cash and/or shares of capital stock or other securities that are publicly traded on the New York Stock Exchange, American Stock Exchange or Nasdaq National Market. 7.8. Recapitalizations, Exchange, Etc. Affecting the Company‟s Stock . The provisions of this Agreement shall apply, to the full extent set forth herein with respect to the Shares, to any and all shares of capital stock or other securities that may be issued in respect of, in exchange for, or in substitution of the Shares and shall be appropriately adjusted for any stock dividends, splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof. 7.9. Arbitration; Governing Law . This Agreement has been made and executed under, and will be construed and interpreted in accordance with, the internal laws of the State of Delaware, without regard to principles of conflict of laws. Any dispute, controversy or claim arising out of this Agreement or the performance, breach or termination thereof shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The place of arbitration shall be Wilmington, Delaware. The arbitration shall be conducted by a neutral arbitrator appointed by the American Arbitration Association. The arbitrator shall be entitled to award any appropriate remedy including, but not limited to, monetary damages, specific performance, and all other forms of legal and equitable relief; provided , however , that the arbitrator shall not be entitled to award punitive damages. Judgment upon the award rendered may be entered in any court having jurisdiction. The arbitrator shall be entitled to award to the prevailing party all costs of arbitration including, but not limited to, attorney‟s fees. The arbitrator shall be charged with determining the prevailing party. To the extent practicable, all information resulting from or otherwise pertaining to any dispute shall be nonpublic and handled by the parties and their respective agents in such a way as 20

to prevent the public disclosure of such information. Notwithstanding the foregoing, either party shall have the right to seek and obtain court ordered specific performance, injunctive and other equitable remedies in connection with any actual or threatened breach of this Agreement. 7.10. Multiple Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.11. Headings . The headings of the Articles and Sections herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 7.12. Construction . Differences in language as between similar provisions covering similar matters may reflect differences in style rather than a different substantive intent and should be construed accordingly. 7.13. Expenses . Except as otherwise provided in Section 6.9 of the Series C Purchase Agreement, each party hereto shall pay its own legal, accounting, out-of-pocket and other expenses incident to this Agreement and to any action taken by such party in preparation for carrying this Agreement into effect. 7.14. Invalidity . In the event that any one or more of the provisions contained in this Agreement or in any other document or instrument referred to herein, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by law, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such document or instrument. 7.15. Cumulative Remedies . All rights and remedies of either party hereto are cumulative of each other and of every other right or remedy such party may otherwise have at law or in equity, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies. 7.16. Aggregation of Shares . All shares of Series B Preferred Stock held by Persons that are Affiliates shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. All shares of Series C Preferred Stock held by Persons that are Affiliates shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 7.17. Termination of First Amended and Restated Stockholders Agreement . By their execution of this Agreement, the Company and the undersigned Stockholders who were parties to the First Amended and Restated Stockholders Agreement and who hold at least the Threshold Number of Shares (as defined in the First Amended and Restated Stockholders Agreement) hereby terminate the First Amended and Restated Stockholders Agreement; and the Company, such undersigned Stockholders and the other Stockholders set forth on the Schedule of Stockholders attached hereto hereby enter into this Second Amended and Restated Stockholders Agreement. 21

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. K12 INC., a Delaware corporation By: Ronald J. Packard, Chief Executive Officer

WILLIAM J. BENNETT

RONALD J. PACKARD

COUNTERPART SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT (All joint owners to sign) COMMON STOCKHOLDER:

Print Name

Signature

COMMON STOCKHOLDER:

Print Name

Signature

COUNTERPART SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT (All joint owners to sign) SERIES B PREFERRED STOCKHOLDER:

Print Name

Signature

SERIES B PREFERRED STOCKHOLDER:

Print Name

Signature

COUNTERPART SIGNATURE PAGE TO STOCKHOLDERS AGREEMENT (All joint owners to sign) SERIES C PREFERRED STOCKHOLDER:

Print Name

Signature

SERIES C PREFERRED STOCKHOLDER:

Print Name

Signature

Exhibit 4.6 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), NOR UNDER ANY APPLICABLE STATE SECURITIES LAWS. NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL REASONABLY SATISFACTORY TO THE COMPANY STATING THAT THE SALE, TRANSFER, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS. WARRANT TO PURCHASE SHARES OF CAPITAL STOCK OF K12 INC. This certifies that (the “Holder”), for value received, is entitled, subject to the adjustments and to the other terms set forth below, to purchase from K12 INC., a Delaware corporation (the “Company”), at any time after the date hereof and until 5:00 P.M. (California time) on the Expiration Date, Warrant Shares. This Warrant is subject to the following terms and conditions: 1. Definitions . As used herein, the following terms shall have the meaning as defined below: “Exercise Price” means One Dollar Sixty Cents ($1.60) per share. The Exercise Price shall be equitably adjusted for any stock dividends, splits, reverse splits, recapitalizations and the like occurring after the date hereof. “Expiration Date” means the earlier of (a) March 24, 2010, or (b) two years after the Company consummates a Qualified Public Offering. “Qualified Public Offering” has the meaning as defined in the Company Certificate of Incorporation as of the date hereof.

“Warrant Shares” means shares of the Company‟s Common Stock. 2. Exercise; Issuance of Certificates; Payment for Shares . 2.1 This Warrant is exercisable at the option of Holder at any time and from time to time after the date hereof and until 5:00 P.M. (California time) on the Expiration Date for all or any portion of the Warrant Shares that may be acquired hereunder. 2.2 This Warrant shall be exercised upon surrender to the Company of this Warrant together with a completed and executed Subscription Agreement in the form attached hereto as Exhibit A, and upon payment of the Exercise Price for the number of Warrant Shares for which this Warrant is being exercised. Payment for Warrant Shares may be made in any one or a combination of the following forms at the option of Holder: (i) by cashier‟s check or wire transfer in the amount of the Exercise Price, (ii) by the surrender to the Company of securities of the Company and/or any subsidiary of the Company having a Fair Value equal to the Exercise Price, (iii) by forgiveness of any indebtedness owed by the Company and/or any subsidiary of the Company in the amount of the Exercise Price, and/or (iv) by the surrender to the Company of that portion of this Warrant having a Fair Value equal to the amount of the Exercise Price. For purposes of clause (iv) above, the Fair Value of this Warrant (or portion hereof) as of a given date shall mean such amount as determined by Holder and the Company using Black-Scholes valuation methodology. 2.3 In lieu of exercising this Warrant as provided is Section 2.2 above, Holder may from time to time at Holder‟s option convert this Warrant, in whole or in part, into a number of Warrant Shares determined by dividing (A) the aggregate Fair Value of such shares otherwise issuable upon exercise of this Warrant minus the aggregate Exercise Price of such shares by (B) the Fair Value of one such share. 2.4 For purposes of Sections 2.2(ii) and 2.3 above, the Fair Value of securities of as of a given date shall mean: (i) the average closing price of such securities on the principal exchange (or NASDAQ NMS) on which such securities are then trading, if any (or as reported on any composite index which includes such principal exchange), on the twenty most recent trading days immediately prior to such date; or (ii) if such securities are not traded on an exchange (or NASDAQ NMS) but are quoted on NASDAQ Small Cap or a successor quotation system, the average mean between the closing bid and asked prices for such securities, on the twenty most recent trading days immediately prior to such date as reported by NASDAQ Small Cap or such successor quotation system; or (iii) if such securities are not publicly traded on an exchange (or NASDAQ NMS) or quoted on NASDAQ Small Cap or a successor quotation system, the Fair Value shall mean such amount as mutually agreed upon by the Company and Holder. In the event that the Company and Holder cannot reach agreement on Fair Value under clause (iii) above, the Fair Value shall be determined by an investment banking firm mutually agreed upon by the Company and Holder with the Company paying all of the fees, costs and expenses of such investment banking firm and otherwise associated with determining the Fair Value. 2

2.5 The Company agrees that any Warrant Shares issued under this Warrant shall be deemed to be issued to Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered (subject to payment being made for such Warrant Shares as provided herein). Certificates for the Warrant Shares so purchased, together with any other securities or property to which Holder is entitled upon such exercise, shall be delivered to Holder by the Company or its transfer agent at the Company‟s expense within a reasonable time after the rights represented by this Warrant have been exercised and payment for the Warrants Shares has been made. Each certificate so delivered shall be in such denominations as may be requested by Holder and shall be registered in the name of Holder or such other name as shall be designated by Holder. If, upon exercise of this Warrant, fewer than all of the Warrant Shares subject to this Warrant are purchased prior to the Expiration Date of this Warrant, one or more new Warrants substantially in the form of, and on the terms in, this Warrant will be issued for the remaining number of Warrant Shares not purchased upon such exercise. 3. Shares to be Fully Paid; Reservation of Shares . The Company covenants and agrees that all Warrant Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. The Company covenants that it will reserve and keep available a sufficient number of its authorized but unissued shares for issuance upon exercise or conversion of this Warrant. The Company will take all action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation. 4. Adjustment of Exercise Price and Number of Warrant Shares . The Exercise Price and the number of Warrant Shares shall be subject to adjustment from time to time upon the occurrence of certain events described in this Section 4. 4.1 Subdivision or Combination of Shares and Stock Dividend . In the event that, after the date of this Warrant, the Company subdivides its outstanding shares into a greater number of shares or declares a dividend upon its shares payable solely in shares, the Exercise Price in effect immediately prior to such subdivision or declaration shall automatically be proportionately reduced and the number of Warrant Shares shall automatically be proportionately increased. Conversely, in case the outstanding shares of the Company shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased, and the number of Warrant Shares shall be proportionately reduced. 4.2 Notice of Adjustment . Promptly after any adjustment of the Exercise Price or any increase or decrease in the number of Warrant Shares, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company. The notice shall be signed by the Company‟s chief financial officer and shall state the effective date of the adjustment and the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of Warrant Shares, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 3

4.3 Other Notices . If at any time: (a) the Company shall declare any dividend upon its shares; (b) the Company shall offer for subscription pro rata to the holders of its shares any additional shares of stock of any class or other rights; (c) there shall be any capital reorganization or reclassification of the capital stock of the Company; or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation; (d) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; or (e) there shall be a public offering of Company securities; then, in any one or more of said cases, the Company shall give to the registered holder of this Warrant, by the means specified in Section 9 herein, (i) at least twenty (20) days‟ prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, and (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding-up or public offering, at least twenty (20) days‟ prior written notice of the date when the same shall take place. Any notice given in accordance with the foregoing clause (i) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on or after which the holders of shares shall be entitled thereto. Any notice given in accordance with the foregoing clause (ii) shall also specify the date on or after which the holders of shares shall be entitled to exchange their shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding-up, conversion or public offering, as the case may be. 4.4 Changes in Shares . In case at any time following the date of this Warrant, the Company shall be a party to any transaction (including, without limitation, a merger, consolidation, or sale of all or substantially all of the Company‟s assets or recapitalization of shares) in which the previously outstanding shares shall be changed into, converted or exchanged for other securities of the Company or stock or other securities of another corporation or interests in a non-corporate entity or other property (including cash) or any combination of any of the foregoing (each such transaction being herein called a “Transaction” and the date of consummation of a Transaction being herein called a “Consummation Date”), then, as a condition to the consummation of such Transaction, lawful and adequate provisions shall be made so that Holder, upon the exercise or conversion hereof at any time on or after the Consummation Date of such Transaction, shall be entitled to receive, and this Warrant shall thereafter represent the right to receive, in lieu of the shares issuable upon such exercise or conversion prior to such Consummation Date, the highest amount of securities or other property 4

to which Holder would actually have been entitled as a shareholder if Holder had exercised this Warrant immediately prior to the consummation of such Transaction. The provisions of this Section 5.4 shall similarly apply to successive Transactions. 5. Issue Tax . The issuance of certificates for Warrant Shares upon the exercise or conversion of the Warrant shall be made without charge to Holder for any issue tax in respect thereof. 6. No Voting or Dividend Rights; Limitation of Liability . Nothing contained in this Warrant shall be construed as conferring upon Holder hereof the right to vote or to consent or to receive notice as a shareholder in respect of meetings of shareholders for the election of directors of the Company or any other matters or any rights whatsoever as a shareholder of the Company, until, and only to the extent that, this Warrant shall have been exercised or converted. Except for the adjustment to the Exercise Price pursuant to Section 4.1 in the event of a dividend on the shares payable in shares, no dividends or interest shall be payable or accrued in respect of this Warrant or the Warrant Shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised or converted. No provisions hereof, in the absence of affirmative action by Holder to purchase Warrant Shares, and no mere enumeration herein of the rights or privileges of Holder hereof, shall give rise to any liability of such Holder for the Exercise Price or as a shareholder of the Company whether such liability is asserted by the Company or by its creditors. 7. Representations and Warranties by the Company . The Company hereby represents and warrants to Holder as follows: The Company has all necessary corporate power and authority, and has taken all corporate action necessary, to execute and delivery this Warrant and to perform its obligations hereunder. The execution and delivery of this Warrant by the Company has been duly approved by the Board of Directors of the Company. No other corporate proceedings on the part of the Company are necessary to authorize this Warrant. This Warrant has been duly executed and delivered by the Company and is a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to the effect of any applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors‟ rights generally and subject to the general principles of equity. 8. Investment Representations; Restrictions on Transferability of Securities . 8.1 Investment Representations . By accepting this Warrant Certificate, Holder represents that it is acquiring this Warrant (and will be acquiring any Warrant Shares purchased upon exercise or conversion of this Warrant) for its own account, not as nominee or agent, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof in violation of the Securities Act of 1933, as amended (the “Act”). 8.2 Restrictions on Transferability . This Warrant and the Warrant Shares have not been registered under the Act and shall not be transferable in the absence of registration under the Act, or an exemption therefrom under said Act. 5

8.3 Restrictive Legend . Each certificate representing the Warrant Shares or any other securities issued in respect of the Warrant Shares shall be stamped or otherwise imprinted with legends in substantially the following form (in addition to any legend required under applicable state securities laws): THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), NOR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL REASONABLY SATISFACTORY TO THE COMPANY STATING THAT THE SALE, TRANSFER, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS. 9. Modification and Waiver . This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 10. Notices . Any notice, request or other document required or permitted to be given or delivered to Holder or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to Holder at its address as shown on the books of the Company or if to the Company at the address indicated therefor in the first paragraph of this Warrant. If Holder‟s address is outside of the United States, Holder shall first be given notice by telecopy, in addition to being provided with notice as set forth in the preceding sentence. 11. Binding Effect on Successors . This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company‟s assets. All of the obligations of the Company relating to the shares issuable upon the exercise or conversion of this Warrant shall survive the exercise or conversion and termination of this Warrant. All of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. 12. Descriptive Headings and Governing Law . The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. 13. Lost Warrants or Ordinary Share Certificates . The Company represents and warrants to Holder that upon receipt of an affidavit reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate deliverable upon the exercise or conversion hereof and, in the case of any such loss, theft or destruction, upon receipt of an indemnity agreement reasonably satisfactory to the Company, or in the case of any 6

such mutilation, upon surrender and cancellation of this Warrant or such stock certificate, the Company at its expense will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 14. Fractional Shares . The Company shall not be required to issue fractional shares upon exercise or conversion of this Warrant. The Company may, in lieu of issuing any fractional share, pay Holder entitled to such fraction a sum in cash equal to the fair market value of any such fractional interest as it shall appear on the public market, or if there is no public market for such shares, then as shall be reasonably determined by the Company. 15. Arbitration . Any dispute, controversy or claim arising out of this Warrant Certificate or the performance, breach or termination thereof shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The place of arbitration shall be in Los Angeles, California. The arbitration shall be conducted by a neutral arbitrator appointed by the American Arbitration Association. The arbitrator shall be entitled to award any appropriate remedy including, but not limited to, monetary damages, specific performance, and all other forms of legal and equitable relief. Judgment upon the award rendered may be entered in any court having jurisdiction. The prevailing party shall be entitled to be awarded all costs of arbitration including, but not limited to, attorneys‟ fees. The arbitrator shall be charged with determining the prevailing party. To the extent practicable, all information resulting from or otherwise pertaining to any dispute shall be nonpublic and handled by the Company, Holder and their respective agents in such a way as to prevent the public disclosure of such information. Notwithstanding the foregoing, each of the Company and Holder shall have the right to seek and obtain court ordered specific performance, injunctive and other equitable remedies in connection with any actual or threatened breach of this Warrant Certificate. IN WITNESS WHEREOF , the Company has caused this Warrant to be executed by its duly authorized officer effective as of the above written date. K12 INC. By: /s/ Ronald J. Packard Ronald J. Packard, Chief Executive Officer

7

EXHIBIT A K12 INC. WARRANT FORM OF SUBSCRIPTION AGREEMENT (To be signed and delivered upon exercise or conversion of Warrant) K12 Inc. 8000 Westpark Drive, Suite 500 McLean, Virginia 22102 Attention: Chief Financial Officer The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to acquire thereunder, shares of stock (the “Stock”), of K12 INC. (the “Company”), and subject to the following paragraph, herewith makes payment of $ therefor in the form of:

to, is:

The undersigned requests that the certificates for such shares be issued in the name of , whose address .

, and delivered

If the exercise or conversion of this Warrant is not covered by a registration statement effective under the Securities Act of 1933, as amended (the “Act”), the undersigned represents that: (i) the undersigned is acquiring such Stock for investment and not with a view to the distribution thereof in violation of the Act; (ii) the undersigned has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the undersigned‟s investment in the Stock; (iii) the undersigned has received all of the information the undersigned has requested from the Company and considers necessary or appropriate for deciding whether to purchase the shares of Stock; (iv) the undersigned has the ability to bear the economic risks of his, her or its prospective investment; A-1

(v) the undersigned is able, without materially impairing its financial condition, to hold the shares of Stock for an indefinite period of time and to suffer complete loss on his, her or its investment; (vi) the undersigned understands and agrees that (A) the undersigned may be unable to readily liquidate his, her or its investment in the shares of Stock and that the shares must be held indefinitely unless a subsequent disposition thereof is registered or qualified under the Act and applicable state securities or Blue Sky laws or is exempt from such registration or qualification, and that the Company is not required to register the same or to take any action or make such an exemption available except to the extent provided in the within Warrant or other applicable agreement to which the Company and the undersigned are parties, and (B) the exemption from registration under the Act afforded by Rule 144 promulgated by the Securities and Exchange Commission (“Rule 144”) depends upon the satisfaction of various conditions by the undersigned and the Company and that, if applicable, Rule 144 affords the basis for sales under certain circumstances in limited amounts, and that if such exemption is utilized by the undersigned, such conditions must be fully complied with by the undersigned and the Company, as required by Rule 144; and (vii) the address set forth below is the true and correct address of the undersigned‟s residence.

(Name) (Address)

A-2

If said number of shares shall not be all the shares exchangeable or purchasable under the within Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of the shares purchasable thereunder. DATED:

(signature) (print name) (print title) A-3

Exhibit 4.7 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), NOR UNDER ANY APPLICABLE STATE SECURITIES LAWS. NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS. WARRANT TO PURCHASE SHARES OF CAPITAL STOCK OF K12 INC. This certifies that , (together with its successors and assigns, the “Holder”), for value received, is entitled, subject to the adjustments and to the other terms set forth below, to purchase from K12 INC. , a Delaware corporation (the “Company”), at any time after the date hereof and until 5:00 P.M. (California time) on the Expiration Date, shares of Series B Convertible Preferred Stock of the Company (the “Warrant Shares”) at One Dollar Thirty Four Cents ($1.34) per share (the “Exercise Price”). The Exercise Price shall be equitably adjusted for any stock dividends, splits, reverse splits, recapitalizations and the like occurring after the date hereof. This Warrant is issued to the Holder as a transferee of First Baystate LLC (the “Original Holder”) and supercedes and is in replacement of one-half of the rights represented by the Warrant dated April 9, 2001 issued by the Company in favor of the Original Holder. This Warrant is subject to the following terms and conditions: 1. Definitions . As used herein, the following terms shall have the meaning as defined below: “Expiration Date” means the earlier of (a) April 8, 2008, or (b) two years after the Company consummates a Qualified IPO. “Qualified IPO” means an underwritten initial public offering of shares of common stock by the Company that (a) is at a per share price to the public of at least 150% of the Exercise Price, (b) results in gross proceeds to the Company of at least $35 Million, and (c) results in such shares being listed for trading on a national securities exchange or being authorized for trading on the Nasdaq National Market System; provided , however , that if there is a “qualified initial

public offering” type of provision that is applicable to the Warrant Shares for purposes of triggering an automatic conversion of such shares and if such provision would result in a later Expiration Date if it was applicable to this Warrant, then such provision shall be deemed to be applicable to this Warrant and substituted for the definition of Qualified IPO in this Warrant. 2. Exercise; Issuance of Certificates; Payment for Shares . 2.1 This Warrant is exercisable at the option of Holder at any time and from time to time after the date hereof and until 5:00 P.M. (California time) on the Expiration Date for all or any portion of the Warrant Shares that may be acquired hereunder. 2.2 This Warrant shall be exercised upon surrender to the Company of this Warrant together with a completed and executed Subscription Agreement in the form attached hereto as Exhibit A, and upon payment of the Exercise Price for the number of Warrant Shares for which this Warrant is being exercised. Payment for Warrant Shares may be made in any one or a combination of the following forms at the option of Holder: (i) by cashier‟s check or wire transfer in the amount of the Exercise Price, (ii) by the surrender to the Company of securities of the Company and/or any subsidiary of the Company having a Fair Value equal to the Exercise Price, (iii) by forgiveness of any indebtedness owed by the Company and/or any subsidiary of the Company in the amount of the Exercise Price, and/or (iv) by the surrender to the Company of that portion of this Warrant having a Fair Value equal to the amount of the Exercise Price. For purposes of clause (iv) above, the Fair Value of this Warrant (or portion hereof) as of a given date shall mean such amount as determined by Holder using Black-Scholes valuation methodology. 2.3 In lieu of exercising this Warrant as provided is Section 2.2 above, Holder may from time to time at Holder‟s option convert this Warrant, in whole or in part, into a number of Warrant Shares determined by dividing (A) the aggregate Fair Value of such shares otherwise issuable upon exercise of this Warrant minus the aggregate Exercise Price of such shares by (B) the Fair Value of one such share. 2.4 For purposes of Sections 2.2(ii) and 2.3 above, the Fair Value of securities of as of a given date shall mean: (i) the average closing price of such securities on the principal exchange (or NASDAQ NMS) on which such securities are then trading, if any (or as reported on any composite index which includes such principal exchange), on the twenty most recent trading days immediately prior to such date; or (ii) if such securities are not traded on an exchange (or NASDAQ NMS) but are quoted on NASDAQ Small Cap or a successor quotation system, the average mean between the closing bid and asked prices for such securities, on the twenty most recent trading days immediately prior to such date as reported by NASDAQ Small Cap or such successor quotation system; or (iii) if such securities are not publicly traded on an exchange (or NASDAQ NMS) or quoted on NASDAQ Small Cap or a successor quotation system, the Fair Value shall mean such amount as mutually agreed upon by the Company and Holder. In the event that the Company and Holder cannot reach agreement on Fair Value under clause (iii) above, the Fair Value shall be determined by an investment banking firm mutually agreed upon by the Company and Holder with the Company paying all of the fees, costs and expenses of such investment banking firm and otherwise associated with determining the Fair 2

Value. 2.5 The Company agrees that any Warrant Shares issued under this Warrant shall be deemed to be issued to Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered (subject to payment being made for such Warrant Shares as provided herein). Certificates for the Warrant Shares so purchased, together with any other securities or property to which Holder is entitled upon such exercise, shall be delivered to Holder by the Company or its transfer agent at the Company‟s expense within a reasonable time after the rights represented by this Warrant have been exercised and payment for the Warrants Shares has been made. Each certificate so delivered shall be in such denominations as may be requested by Holder and shall be registered in the name of Holder or such other name as shall be designated by Holder. If, upon exercise of this Warrant, fewer than all of the Warrant Shares subject to this Warrant are purchased prior to the Expiration Date of this Warrant, one or more new Warrants substantially in the form of, and on the terms in, this Warrant will be issued for the remaining number of Warrant Shares not purchased upon such exercise. 3. Shares to be Fully Paid; Reservation of Shares . The Company covenants and agrees that all Warrant Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. The Company covenants that it will reserve and keep available a sufficient number of its authorized but unissued shares for issuance upon exercise or conversion of this Warrant. The Company will take all action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation. 4. Adjustment of Exercise Price and Number of Warrant Shares . The Exercise Price and the number of Warrant Shares shall be subject to adjustment from time to time upon the occurrence of certain events described in this Section 4. 4.1 Subdivision or Combination of Shares and Stock Dividend . In the event that, after the date of this Warrant, the Company subdivides its outstanding shares into a greater number of shares or declares a dividend upon its shares payable solely in shares, the Exercise Price in effect immediately prior to such subdivision or declaration shall automatically be proportionately reduced and the number of Warrant Shares shall automatically be proportionately increased. Conversely, in case the outstanding shares of the Company shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased, and the number of Warrant Shares shall be proportionately reduced. 4.2 Notice of Adjustment . Promptly after any adjustment of the Exercise Price or any increase or decrease in the number of Warrant Shares, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered holder of this Warrant at the address of such holder as shown on the books of the Company. The notice shall be signed by the Company‟s chief financial officer and shall state the effective date of the adjustment and the Exercise Price resulting from such adjustment and the increase or decrease, if 3

any, in the number of Warrant Shares, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 4.3 Other Notices . If at any time: (a) the Company shall declare any dividend upon its shares; (b) the Company shall offer for subscription pro rata to the holders of its shares any additional shares of stock of any class or other rights; (c) there shall be any capital reorganization or reclassification of the capital stock of the Company; or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation; (d) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; or (e) there shall be a public offering of Company securities; then, in any one or more of said cases, the Company shall give to the registered holder of this Warrant, by the means specified in Section 10 herein, (i) at least twenty (20) days‟ prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, and (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding-up or public offering, at least twenty (20) days‟ prior written notice of the date when the same shall take place. Any notice given in accordance with the foregoing clause (i) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on or after which the holders of shares shall be entitled thereto. Any notice given in accordance with the foregoing clause (ii) shall also specify the date on or after which the holders of shares shall be entitled to exchange their shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding-up, conversion or public offering, as the case may be. 4.4 Changes in Shares . In case at any time following the date of this Warrant, the Company shall be a party to any transaction (including, without limitation, a merger, consolidation, or sale of all or substantially all of the Company‟s assets or recapitalization of shares) in which the previously outstanding shares shall be changed into, converted or exchanged for other securities of the Company or stock or other securities of another corporation or interests in a non-corporate entity or other property (including cash) or any combination of any of the foregoing (each such transaction being herein called a “Transaction” and the date of consummation of a Transaction being herein called a “Consummation Date”), then, as a condition to the consummation of such Transaction, lawful and adequate provisions shall be made so that Holder, upon the exercise or conversion hereof at any time on or after the Consummation Date of such Transaction, shall be entitled to receive, and this Warrant shall 4

thereafter represent the right to receive, in lieu of the shares issuable upon such exercise or conversion prior to such Consummation Date, the highest amount of securities or other property to which Holder would actually have been entitled as a shareholder if Holder had exercised this Warrant immediately prior to the consummation of such Transaction. The provisions of this Section 4.4 shall similarly apply to successive Transactions. 5. Issue Tax . The issuance of certificates for Warrant Shares upon the exercise or conversion of the Warrant shall be made without charge to Holder for any issue tax in respect thereof. 6. No Voting or Dividend Rights; Limitation of Liability . Nothing contained in this Warrant shall be construed as conferring upon Holder hereof the right to vote or to consent or to receive notice as a shareholder in respect of meetings of shareholders for the election of directors of the Company or any other matters or any rights whatsoever as a shareholder of the Company, until, and only to the extent that, this Warrant shall have been exercised or converted. Except for the adjustment to the Exercise Price pursuant to Section 4.1 in the event of a dividend on the shares payable in shares, no dividends or interest shall be payable or accrued in respect of this Warrant or the Warrant Shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised or converted. No provisions hereof, in the absence of affirmative action by Holder to purchase Warrant Shares, and no mere enumeration herein of the rights or privileges of Holder hereof, shall give rise to any liability of such Holder for the Exercise Price or as a shareholder of the Company whether such liability is asserted by the Company or by its creditors. 7. Representations and Warranties by the Company . The Company hereby represents and warrants to Holder as follows: The Company has all necessary corporate power and authority, and has taken all corporate action necessary, to execute and delivery this Warrant and to perform its obligations hereunder. The execution and delivery of this Warrant by the Company has been duly approved by the Board of Directors of the Company. No other corporate proceedings on the part of the Company are necessary to authorize this Warrant. This Warrant has been duly executed and delivered by the Company and is a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to the effect of any applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors‟ rights generally and subject to the general principles of equity. 8. Investment Representations; Restrictions on Transferability of Securities . 8.1 Investment Representations . By accepting this Warrant Certificate, Holder represents that it is acquiring this Warrant (and will be acquiring any Warrant Shares purchased upon exercise or conversion of this Warrant) for its own account, not as nominee or agent, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof in violation of the Securities Act of 1933, as amended (the “Act”). 8.2 Restrictions on Transferability . This Warrant and the Warrant Shares have not been registered under the Act and shall not be transferable in the absence of registration under the Act, or an exemption therefrom under said Act. 5

8.3 Restrictive Legend . Each certificate representing the Warrant Shares or any other securities issued in respect of the Warrant Shares shall be stamped or otherwise imprinted with legends in substantially the following form (in addition to any legend required under applicable state securities laws): THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), NOR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS. 9. Modification and Waiver . This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 10. Notices . Any notice, request or other document required or permitted to be given or delivered to Holder or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to Holder at its address as shown on the books of the Company or if to the Company at the address indicated therefor in the first paragraph of this Warrant. If Holder‟s address is outside of the United States, Holder shall first be given notice by telecopy, in addition to being provided with notice as set forth in the preceding sentence. 11. Binding Effect on Successors . This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company‟s assets. All of the obligations of the Company relating to the shares issuable upon the exercise or conversion of this Warrant shall survive the exercise or conversion and termination of this Warrant. All of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. 12. Descriptive Headings and Governing Law . The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. 13. Lost Warrants or Ordinary Share Certificates . The Company represents and warrants to Holder that upon receipt of an affidavit reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate deliverable upon the exercise or conversion hereof and, in the case of any such loss, theft or destruction, upon receipt of an indemnity agreement reasonably satisfactory to the Company, or in the case of any such mutilation, upon surrender and cancellation of this Warrant or such stock certificate, the 6

Company at its expense will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 14. Fractional Shares . The Company shall not be required to issue fractional shares upon exercise or conversion of this Warrant. The Company may, in lieu of issuing any fractional share, pay Holder entitled to such fraction a sum in cash equal to the fair market value of any such fractional interest as it shall appear on the public market, or if there is no public market for such shares, then as shall be reasonably determined by the Company. 15. Arbitration . Any dispute, controversy or claim arising out of this Warrant Certificate or the performance, breach or termination thereof shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The place of arbitration shall be in Los Angeles, California. The arbitration shall be conducted by a neutral arbitrator appointed by the American Arbitration Association. The arbitrator shall be entitled to award any appropriate remedy including, but not limited to, monetary damages, specific performance, and all other forms of legal and equitable relief. Judgment upon the award rendered may be entered in any court having jurisdiction. The prevailing party shall be entitled to be awarded all costs of arbitration including, but not limited to, attorneys‟ fees. The arbitrator shall be charged with determining the prevailing party. To the extent practicable, all information resulting from or otherwise pertaining to any dispute shall be nonpublic and handled by the Company, Holder and their respective agents in such a way as to prevent the public disclosure of such information. Notwithstanding the foregoing, each of the Company and Holder shall have the right to seek and obtain court ordered specific performance, injunctive and other equitable remedies in connection with any actual or threatened breach of this Warrant Certificate. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officer effective as of the above written date. K12 INC. By: /s/ John Baule John Baule, Executive Vice President and Chief Financial Officer

7

EXHIBIT A K12 INC. WARRANT FORM OF SUBSCRIPTION AGREEMENT (To be signed and delivered upon exercise or conversion of Warrant) K12 Inc. 2300 Corporate Park Drive, Suite 200 Herndon, Virginia 20170 Attention: Chief Financial Officer The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to acquire thereunder, shares of stock (the “Stock”), of K12 INC. (the “Company”), and subject to the following paragraph, herewith makes payment of $ therefor in the form of:

The undersigned requests that the certificates for such shares be issued in the name of delivered to, , whose address is: .

, and

If the exercise or conversion of this Warrant is not covered by a registration statement effective under the Securities Act of 1933, as amended (the “Act”), the undersigned represents that: (i) the undersigned is acquiring such Stock for investment and not with a view to the distribution thereof in violation of the Act; (ii) the undersigned has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the undersigned‟s investment in the Stock; (iii) the undersigned has received all of the information the undersigned has requested from the Company and considers necessary or appropriate for deciding whether to purchase the shares of Stock; (iv) the undersigned has the ability to bear the economic risks of his, her or its prospective investment; A-1

(v) the undersigned is able, without materially impairing its financial condition, to hold the shares of Stock for an indefinite period of time and to suffer complete loss on his, her or its investment; (vi) the undersigned understands and agrees that (A) the undersigned may be unable to readily liquidate his, her or its investment in the shares of Stock and that the shares must be held indefinitely unless a subsequent disposition thereof is registered or qualified under the Act and applicable state securities or Blue Sky laws or is exempt from such registration or qualification, and that the Company is not required to register the same or to take any action or make such an exemption available except to the extent provided in the within Warrant or other applicable agreement to which the Company and the undersigned are parties, and (B) the exemption from registration under the Act afforded by Rule 144 promulgated by the Securities and Exchange Commission (“Rule 144”) depends upon the satisfaction of various conditions by the undersigned and the Company and that, if applicable, Rule 144 affords the basis for sales under certain circumstances in limited amounts, and that if such exemption is utilized by the undersigned, such conditions must be fully complied with by the undersigned and the Company, as required by Rule 144; and (vii) the address set forth below is the true and correct address of the undersigned‟s residence.

(Name)

(Address)

A-2

If said number of shares shall not be all the shares exchangeable or purchasable under the within Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of the shares purchasable thereunder. DATED:

(signature)

(print name)

(print title) A-3

Exhibit 10.1

REVOLVING CREDIT AGREEMENT AMONG K12 INC., SCHOOL LEASING CORPORATION, AND AMERICAN SCHOOL SUPPLY CORPORATION AND PNC BANK, NATIONAL ASSOCIATION AS LENDER AND L/C ISSUER

December 21, 2006

TABLE OF CONTENTS
Page

1.

2.

3.

4.

5.

Definitions; Interpretation 1.1 Definitions 1.2 Interpretation 1.3 Change in Accounting Principles The Credit Facilities 2.1 Commitment 2.2 Letters of Credit 2.3 Applicable Interest Rates 2.4 Manner of Borrowing Loans and Designating Applicable Interest Rates 2.5 Minimum Borrowing Amounts; Maximum Eurodollar Loans 2.6 Maturity of Loans 2.7 Prepayments 2.8 Place and Application of Payments 2.9 Voluntary Commitment Terminations 2.10 The Note 2.11 Fees Conditions Precedent 3.1 All Credit Events 3.2 Initial Credit Event The Collateral and Guaranties 4.1 Collateral 4.2 Guaranties 4.3 Further Assurances Representations and Warranties 5.1 Organization and Qualification 5.2 Authority and Enforceability 5.3 Financial Reports 5.4 No Material Adverse Change 5.5 Litigation and other Controversies 5.6 True and Complete Disclosure 5.7 Use of Proceeds; Margin Stock 5.8 Taxes -ii-

1 1 15 15 16 16 16 17 18 19 20 20 20 21 21 22 22 22 23 24 24 25 25 25 25 26 26 26 26 27 27 27

TABLE OF CONTENTS
Page

6.

5.9 ERISA 5.10 Subsidiaries 5.11 Compliance with Laws 5.12 Environmental Matters 5.13 Investment Company 5.14 Intellectual Property 5.15 Good Title 5.16 Labor Relations 5.17 Capitalization 5.18 Other Agreements 5.19 Governmental Authority and Licensing 5.20 Approvals 5.21 Affiliate Transactions 5.22 Solvency 5.23 OFAC 5.24 Patriot Act Covenants 6.1 Information Covenants 6.2 Inspections 6.3 Maintenance of Property, Insurance, etc 6.4 Preservation of Existence 6.5 Compliance with Laws 6.6 ERISA 6.7 Payment of Taxes 6.8 Contracts With Affiliates 6.9 No Changes in Fiscal Year 6.10 Change in the Nature of Business 6.11 Indebtedness 6.12 Liens 6.13 Consolidation, Merger, Sale of Assets, etc 6.14 Advances, Investments and Loans 6.15 Restricted Payments by Parent -iii-

27 27 27 28 28 28 28 28 29 29 29 29 29 29 29 29 30 30 32 32 32 32 32 33 33 33 33 33 34 35 36 36

TABLE OF CONTENTS
Page

7.

8.

9.

6.16 Limitation on Restrictions 6.17 Limitation on Issuances of New Equity by Subsidiaries 6.18 Limitation on the Creation of Subsidiaries 6.19 OFAC 6.20 Operating Accounts 6.21 Financial Covenants Events of Default and Remedies 7.1 Events of Default 7.2 Non-Bankruptcy Defaults 7.3 Bankruptcy Defaults 7.4 Collateral for Undrawn Letters of Credit 7.5 Expenses Change in Circumstances and Contingencies 8.1 Funding Indemnity 8.2 Illegality 8.3 Unavailability of Deposits or Inability to Ascertain, or Inadequacy of, LIBOR42 8.4 Yield Protection 8.5 Lending Offices 8.6 Discretion of Lender as to Manner of Funding 8.7 Hedging Liability and Funds Transfer and Deposit Account Liability Arrangements Miscellaneous 9.1 Withholding Taxes 9.2 No Waiver, Cumulative Remedies 9.3 Non-Business Days 9.4 Documentary Taxes 9.5 Survival of Representations 9.6 Survival of Indemnities 9.7 Notices 9.8 Counterparts 9.9 Successors and Assigns; Assignments and Participations -iv-

36 37 37 37 37 37 38 38 40 40 40 41 41 41 42 42 44 44 44 44 44 45 45 45 45 45 45 46 46

TABLE OF CONTENTS
Page

9.10 9.11 9.12 9.13 9.14 9.15 9.16 9.17 9.18 9.19 9.20

Amendments Headings Costs and Expenses; Indemnification Set-off Entire Agreement Governing Law Severability of Provisions Excess Interest Construction USA Patriot Act Submission to Jurisdiction; Waiver of Jury Trial -v-

48 48 48 49 49 49 49 49 50 50 50

EXHIBITS
Exhibit Description Section

A B C D

Form of Compliance Certificate Notice of Borrowing Notice of Continuation/Conversion Form of Promissory Note SCHEDULES

1.1 2.4 (a) 2.4 (a) 2.10 (a)

Schedule

Description

Section

6.11 5.4 5.5 5.10 5.17 5.21 6.12(i)

Existing Indebtedness No Material Adverse Change Litigation and Other Controversies Subsidiaries Capitalization Affiliate Transactions Liens Securing Existing Indebtedness -vi-

1.1 5.4 5.5 5.10 5.17 5.21 6.12 (i)

REVOLVING CREDIT AGREEMENT This Revolving Credit Agreement dated December 21, 2006, is among K12 INC. , a Delaware corporation (“Parent”), SCHOOL LEASING CORPORATION , a Delaware corporation, and AMERICAN SCHOOL SUPPLY CORPORATION , a Delaware corporation (together with Parent, collectively, and individually, each “Borrower”) and PNC BANK, NATIONAL ASSOCIATION , a national banking association as Lender and L/C Issuer. Borrower has requested, and Lender has agreed to extend, certain credit facilities on the terms and conditions of this Agreement. In consideration of the mutual agreements set forth in this Agreement, the parties to this Agreement agree as follows: 1. DEFINITIONS; INTERPRETATION . 1.1 Definitions . The following terms when used herein shall have the following meanings: “Accumulated Cash” means, at any measurement date, the total of (a) (1) with respect to the December 31, 2006 measurement date, $8,638,000 and (2) with respect to all other measurement dates, Accumulated Cash at the end of the Fiscal Quarter preceding the measurement date plus (b) EBITDA for the Fiscal Quarter ended on the measurement date minus (c) the sum of (1) 1.2 times Fixed Charges for the Fiscal Quarter ended on the measurement date and (2) Product Development Expenditures for the Fiscal Quarter ended on the measurement date and (3) Permitted Acquisition Cash Purchase Price for the Fiscal Quarter ended on the measurement date. Solely for purposes of determining Accumulated Cash, EBITDA for the Fiscal Quarter ended June 30, 2007 shall be increased by $3,000,000 (which amount shall remain in Accumulated Cash for all calculations made thereafter), and EBITDA for the Fiscal Quarter ended September 30, 2007 shall be reduced by $3,000,000 (which amount shall remain in Accumulated Cash for all calculations made thereafter). “Acquired Business” means the entity or assets acquired by any Borrower or a Subsidiary in an Acquisition, whether before or after the date hereof. “Acquisition” means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person (other than a Person that is a Subsidiary prior to such transaction or series of transactions), or of any business or division of a Person (other than a Person that is a Subsidiary prior to such transaction or series of transactions), (b) the acquisition of in excess of 50% of the capital stock, partnership interests, membership interests or equity of any Person (other than a Person that is a Subsidiary prior to such transaction or series of transactions), or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary prior to such transaction or series of transactions), provided that a Borrower or the Subsidiary is the surviving entity. “Adjusted LIBOR” means, for any Borrowing of Eurodollar Loans, a rate per annum equal to the quotient of (a) LIBOR, divided by (b) one minus the Reserve Percentage.

“Affiliate” means any Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, another Person. A Person shall be deemed to control another Person for the purposes of this definition if such Person possesses, directly or indirectly, the power to direct, or cause the direction of, the management and policies of the other Person, whether through the ownership of voting securities, common directors, trustees or officers, by contract or otherwise; provided that, in any event for purposes of this definition, any Person that owns, directly or indirectly, 40% or more of the securities having the ordinary voting power for the election of directors or governing body of a corporation or 40% or more of the partnership or other ownership interest of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. “Agreement” means this Revolving Credit Agreement, as the same may be amended, modified, restated or supplemented from time to time pursuant to the terms hereof. “Applicable Margin” means, with respect to Loans and letter of credit fees payable under Section 2.11, expressed in basis points:
Level I Borrower‟s Total Debt to EBITDA is less than or equal to1.0 to 1. Level II Borrower‟s Total Debt to EBITDA is greater than 1.0 to 1 but less than or equal to 2.0 to 1. Level III Borrower‟s Total Debt to EBITDA is greater than 2.0 to 1

Commitment Fee Eurodollar Loans Base Rate Loans

15.0 125.0 0.0

20.0 150.0 0.0

25.0 175.0 0.0

Changes to the Applicable Margin shall be effective with respect to Base Rate Loans and letter of credit fees on the first day of the month following the Lender‟s receipt of Parent‟s financial statements required by Section 6.1 for the applicable Fiscal Quarter and with respect to Eurodollar Loans for Interest Periods beginning after the first day of the month following Lender‟s receipt of Parent‟s financial statements required by Section 6.1 for the applicable Fiscal Quarter. If Borrower shall not have timely delivered the financial statement required by Section 6.1, Applicable Margins shall be at Level III until such failure is cured. “Application” is defined in Section 2.2(b). “Authorized Representative” means those persons shown on the list of officers provided by Parent, as agent for Borrower, pursuant to Section 3.2(i) or on any update of any such list provided by Parent to the Lender, or any further or different officers of Parent so named by any Authorized Representative of Parent in a written notice to the Lender. -2-

“Base Rate” means for any day the greater of: (i) the rate of interest announced by the Lender from time to time as its “prime rate” as in effect on such day, with any change in the Base Rate resulting from a change in said prime rate to be effective as of the date of the relevant change in said prime rate (it being acknowledged that such rate may not be the Lender‟s best or lowest rate) and (ii) the sum of (x) the Federal Funds Rate, plus (y) 1/2 of 1%. “Base Rate Loan” means a Loan bearing interest at a rate specified in Section 2.3(a). “Borrower” is defined in the introductory paragraph of this Agreement. “Borrowing” means the total of Loans of a single type advanced, continued for an additional Interest Period, or converted from a different type into such type by the Lender on a single date and, in the case of Eurodollar Loans, for a single Interest Period. A Borrowing is “advanced” on the day the Lender advances funds comprising such Borrowing to Borrower, is “continued” on the date a new Interest Period for the same type of Loans commences for such Borrowing, and is “converted” when such Borrowing is changed from one type of Loan to the other, all as requested by Borrower pursuant to Section 2.4(a). “Business Day” means any day (other than a Saturday or Sunday) on which banks are not authorized or required to close in Washington, D.C. and, if the applicable Business Day relates to the advance or continuation of, or conversion into, or payment of a Eurodollar Loan, on which banks are dealing in U.S. Dollar deposits in the interbank eurodollar market in London, England. “Capital Lease” means any lease of Property which in accordance with GAAP is required to be capitalized on the balance sheet of the lessee. “Capital Stock” means, of any Person, any and all shares, interests, participations, or other equivalents (however designated) of such Person‟s capital stock whether now issued or issued after the date of this Agreement. “Capitalized Lease Obligation” means, for any Person, the amount of the liability shown on the balance sheet of such Person in respect of a Capital Lease determined in accordance with GAAP. “Cash Equivalents” shall mean, as to any Person: (a) investments in direct obligations of the United States of America or of any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America, provided that any such obligations shall mature within one year of the date of issuance thereof; (b) investments in commercial paper rated at least P-1 by Moody‟s and at least A-1 by S&P maturing within one year of the date of issuance thereof; (c) investments in certificates of deposit issued by the Lender or by any United States commercial bank having capital and surplus of not less than $100,000,000 which have a maturity of one year or less; (d) investments in repurchase obligations with a term of not more than 7 days for underlying securities of the types described in clause (a) above entered into with any bank meeting the qualifications specified in clause (c) above, provided all such agreements require physical delivery of the securities securing such repurchase agreement, except those delivered through the Federal Reserve Book Entry System; (e) investments in money market funds that invest solely, and which are restricted by their -3-

respective charters to invest solely, in investments of the type described in the immediately preceding subsections (a), (b), (c), and (d) above. “CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. §§9601 et seq., and any future amendments. “Change of Control” means either of (a) the acquisition by any “person” or “group” (as such terms are used in sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) at any time of beneficial ownership of 51% or more of the outstanding equity interests of any Borrower or any Subsidiary on a fully-diluted basis, or (b) any “change of control” (or words of like import), as defined in any Material Agreement, shall occur. “Closing Date” means the date of this Agreement. “Code” means the Internal Revenue Code of 1986, as amended, and any successor statute thereto. “Collateral” means all properties, rights, interests, and privileges from time to time subject to the Liens granted to the Lender, or any security trustee therefor, by the Collateral Documents. “Collateral Account” is defined in Section 7.4(b). “Collateral Documents” means the Security Agreements, Pledge Agreements and all other mortgages, deeds of trust, security agreements, pledge agreements, assignments, financing statements and other documents as shall from time to time secure or relate to the Obligations, the Hedging Liability, and the Funds Transfer and Deposit Account Liability, or any part thereof. “Commitment” means, as to the Lender, the obligation to make Revolving Loans and to issue Letters of Credit for the account of Borrowers hereunder in an aggregate principal or face amount at any one time outstanding not to exceed $15,000,000, as the same may be reduced or modified at any time or from time to time pursuant to the terms hereof. “Contemplated Subordinated Debt” means Indebtedness of Parent in the maximum principal amount of $6,700,000 that Parent expects to constitute Subordinated Debt, the proceeds of which are used to fund the Specified Restricted Payment or the purchase price of a Permitted Acquisition. “Contingent Obligation” shall mean as to any Person, any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other obligations (“primary obligations”) of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any Property constituting direct or indirect security therefor, (b) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such -4-

primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. “Controlled Group” means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with Borrowers or Parent, are treated as a single employer under Section 414 of the Code. “Credit Event” means the advancing of any Loan, the continuation of or conversion into a Eurodollar Loan, or the issuance of, or extension of the expiration date or increase in the amount of, any Letter of Credit. “Damages” means all damages including, without limitation, punitive damages, liabilities, costs, expenses, losses, judgments, diminutions in value, fines, penalties, demands, claims, cost recovery actions, lawsuits, administrative proceedings, orders, response action, removal and remedial costs, compliance costs, investigation expenses, consultant fees, attorneys‟ and paralegals‟ fees and litigation expenses. “Default” means any event or condition the occurrence of which would, with the passage of time or the giving of notice, or both, constitute an Event of Default. “Dollars” and “$” each means the lawful currency of the United States of America. “EBITDA” means, with reference to any period, Net Income for such period plus the sum of all amounts deducted in arriving at such Net Income amount in respect of (a) Interest Expense for such period, (b) federal, state, and local income taxes for such period, (c) depreciation of fixed and other tangible assets for such period, (d) amortization of intangible assets and capitalized curriculum development costs for such period, and (e) non-cash impairment charges, non-cash stock option expenses and one-time, non-cash charges for such period, minus the sum of (x) all amounts added in arriving at such Net Income in respect of federal, state and local income tax refunds and other similar tax benefits for such period and (y) one-time, non-cash benefits for such period. “Environmental Claim” means any investigation, notice, violation, demand, allegation, action, suit, injunction, judgment, order, consent decree, penalty, fine, lien, proceeding or claim (whether administrative, judicial or private in nature) arising (a) pursuant to, or in connection with an actual or alleged violation of, any Environmental Law, (b) in connection with any Hazardous Material, (c) from any abatement, removal, remedial, corrective or response action in connection with a Hazardous Material, Environmental Law or order of a governmental authority or (d) from any actual or alleged damage, injury, threat or harm to health, safety, natural resources or the environment. -5-

“Environmental Law” means any current or future Legal Requirement pertaining to (a) the protection of health, safety and the indoor or outdoor environment, (b) the conservation, management, production, mining or use of natural resources and wildlife, (c) the protection or use of surface water or groundwater, (d) the management, manufacture, possession, presence, use, generation, transportation, treatment, storage, disposal, Release, threatened Release, abatement, removal, remediation or handling of, or exposure to, any Hazardous Material or (e) pollution (including any Release to air, land, surface water or groundwater), and any amendment, rule, regulation, order or directive issued thereunder. “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute thereto. “Eurodollar Loan” means a Loan bearing interest at the rate specified in Section 2.3(b). “Event of Default” means any event or condition identified as such in Section 7.1. “Existing Indebtedness” shall mean that Indebtedness described on Schedule 6.11 attached hereto. “Federal Funds Rate” means for any day the rate determined by the Lender to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the rates per annum quoted to the Lender at approximately 10:00 a.m. (Washington, D.C. time) (or as soon thereafter as is practicable) on such day (or, if such day is not a Business Day, on the immediately preceding Business Day) by two or more Federal funds brokers selected by the Lender for sale to the Lender at face value of Federal funds in the secondary market in an amount equal or comparable to the principal amount owed to the Lender for which such rate is being determined. “Fiscal Quarter” means any of the fiscal quarters during a fiscal year ending March 31, June 30, September 30 and December 31, respectively. “Fiscal Year” means the fiscal year of Parent beginning on July 1 of each calendar year and ending on June 30 of the next calendar year. “Fixed Charges” means, with reference to any period, the sum of (a) all payments of principal made during such period with respect to Indebtedness of Parent and its Subsidiaries other than (1) principal payments of the Loans and (2) principal payments made with respect to the Shareholder Loan, (b) Interest Expense paid in cash during such period (excluding interest paid with respect to the Shareholder Loan), (c) federal, state, and local income taxes paid in cash by Parent and its Subsidiaries during such period, (d) Restricted Payments other than any Specified Restricted Payment paid during such period, and (e) Maintenance Capital Expenditures with respect to such period. “Foreign Subsidiary” means each Subsidiary which (a) is organized under the laws of a jurisdiction other than the United States of America or any state thereof, (b) conducts substantially all of its business outside of the United States of America, and (c) has substantially all of its assets outside of the United States of America. -6-

“Funds Transfer and Deposit Account Liability” means the liability of Parent or any of its Subsidiaries owing to the Lender, or any Affiliates of the Lender, arising out of (a) the execution or processing of electronic transfers of funds by automatic clearing house transfer, wire transfer or otherwise to or from the deposit accounts of Parent, Borrower and/or any Subsidiary now or hereafter maintained with the Lender or its Affiliates, (b) the acceptance for deposit or the honoring for payment of any check, draft or other item with respect to any such deposit accounts, and (c) any other deposit, disbursement, and cash management services afforded to Parent, Borrower or any such Subsidiary by the Lender or its Affiliates. “GAAP” means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. “Guarantor” means any party to a Guaranty. “Guaranty” and “Guaranties” each is defined in Section 4.2 hereof. “Hazardous Material” means any substance, chemical, compound, product, solid, gas, liquid, waste, byproduct, pollutant, contaminant or material which is hazardous or toxic, and includes, without limitation, (a) asbestos, polychlorinated biphenyls and petroleum (including crude oil or any fraction thereof) and (b) any material classified or regulated as “hazardous” or “toxic” or words of like import pursuant to an Environmental Law. “Hedging Liability” means the liability of Parent, Borrower or any Subsidiary to the Lender, or any Affiliates of the Lender, in respect of any interest rate, currency or commodity swap agreements, cap agreements, collar agreements, floor agreements, exchange agreements, forward contracts, option contracts, or other similar interest rate or currency or commodity hedging arrangements as Parent, Borrower or such Subsidiary, as the case may be, may from time to time enter into with the Lender or its Affiliates. “Hostile Acquisition” means the acquisition of the capital stock or other equity interests of a Person through a tender offer or similar solicitation of the owners of such capital stock or other equity interests which has not been approved (prior to such acquisition) by resolutions of the Board of Directors of such Person or by similar action if such Person is not a corporation, and as to which such approval has not been withdrawn. “Indebtedness” means for any Person (without duplication) (a) all indebtedness of such Person for borrowed money, whether current or funded, or secured or unsecured, (b) all indebtedness for the deferred purchase price of Property or services (including, without limitation any payment of the purchase price of the TW Acquisition made after the closing date thereof), (c) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to Property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of a default are limited to repossession or sale of such Property), (d) all indebtedness secured by a purchase money -7-

mortgage or other Lien to secure all or part of the purchase price of Property subject to such mortgage or Lien, (e) all obligations under leases which shall have been or must be, in accordance with GAAP, recorded as Capital Leases in respect of which such Person is liable as lessee, (f) any liability in respect of banker‟s acceptances or letters of credit, (g) any indebtedness, whether or not assumed, secured by Liens on Property acquired by such Person at the time of acquisition thereof, (h) all obligations under any so-called “synthetic lease” transaction entered into by such Person, (i) all obligations under any so-called “asset securitization” transaction entered into by such Person, and (j) all Contingent Obligations, it being understood that the term “Indebtedness” shall not include trade payables, accrued expenses or other similar liabilities (including those incurred on the basis of recurring journal entries made from time to time) arising in the ordinary course of business. “Interest Expense” means, with reference to any period, the sum of all interest charges (including imputed interest charges with respect to Capitalized Lease Obligations and all amortization of debt discount and expense) of Parent and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP. “Interest Period” means the period commencing on the date a Borrowing of Loans is advanced, continued or created by conversion and ending: (a) in the case of Base Rate Loans, on the last day of the calendar month in which such Borrowing is advanced, continued or created by conversion (or on the last day of the following calendar month if such Loan is advanced, continued or created by conversion on the last day of a calendar month) and (b) in the case of a Eurodollar Loan, 1, 2, 3 or 6 months thereafter; provided, however, that: (1) any Interest Period for a Borrowing of Revolving Loans consisting of Base Rate Loans that otherwise would end after the Termination Date shall end on the Termination Date; (2) no Interest Period with respect to any Revolving Loan shall extend beyond the Termination Date; (3) whenever the last day of any Interest Period would otherwise be a day that is not a Business Day, the last day of such Interest Period shall be extended to the next succeeding Business Day, provided that, if such extension would cause the last day of an Interest Period for a Borrowing of Eurodollar Loans to occur in the following calendar month, the last day of such Interest Period shall be the immediately preceding Business Day; and (4) for purposes of determining an Interest Period for a Borrowing of Eurodollar Loans, a month means a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month; provided, however, that if there is no numerically corresponding day in the month in which such an Interest Period is to end or if such an Interest Period begins on the last Business Day of a calendar month, then such Interest Period shall end on the last Business Day of the calendar month in which such Interest Period is to end. -8-

“Inventory” means all finished goods held for sale and raw materials and work in process in which the relevant Borrower or the relevant Subsidiary now has or hereafter acquires title to. “L/C Issuer” means PNC Bank, National Association, a national banking association. “L/C Obligations” means the aggregate undrawn face amounts of all outstanding Letters of Credit and all unpaid Reimbursement Obligations. “L/C Sublimit” means the lesser of (a) $5,000,000 and (b) the Commitment, as reduced pursuant to the terms hereof. “Legal Requirement” means any treaty, convention, statute, law, regulation, ordinance, license, permit, governmental approval, injunction, judgment, order, consent decree or other requirement of any governmental authority, whether federal, state, or local. “Lender” means PNC Bank, National Association, a national banking association. “Lending Office” is defined in Section 8.5. “Letter of Credit” is defined in Section 2.2(a). “Leverage Ratio” means, at any time the same is to be determined, the ratio of Total Debt at such time to EBITDA for the four Fiscal Quarter period ended at such time. “LIBOR” means, for an Interest Period for a Borrowing of Eurodollar Loans, (a) the LIBOR Index Rate for such Interest Period, if such rate is available, and (b) if the LIBOR Index Rate cannot be determined, the arithmetic average of the rates of interest per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) at which deposits in Dollars in immediately available funds are offered to the Lender at 11:00 a.m. (London, England time) 2 Business Days before the beginning of such Interest Period by 3 or more major banks in the interbank eurodollar market selected by the Lender for delivery on the first day of and for a period equal to such Interest Period and in an amount equal or comparable to the principal amount of the Eurodollar Loan scheduled to be made by the Lender as part of such Borrowing. “LIBOR Index Rate” means, for any Interest Period, the rate per annum (rounded upwards, if necessary, to the next higher one hundred-thousandth of a percentage point) for deposits in Dollars for a period equal to such Interest Period, which appears on the Telerate Page 3750 as of 11:00 a.m. (London, England time) on the day 2 Business Days before the commencement of such Interest Period. “Lien” means any mortgage, lien, security interest, pledge, charge or encumbrance of any kind in respect of any Property, including the interests of a vendor or lessor under any conditional sale, Capital Lease or other title retention arrangement. “Loan” means any Revolving Loan, whether outstanding as a Base Rate Loan or Eurodollar Loan or otherwise as permitted hereunder, each of which is a “type” of Loan hereunder. -9-

“Loan Documents” means this Agreement, the Note, the Applications, the Collateral Documents, the Guaranties, and each other instrument or document to be delivered hereunder or thereunder or otherwise in connection therewith. “Maintenance Capital Expenditures” means, with respect to any period, the aggregate amount of all expenditures of Parent and its Subsidiaries during that period with respect to fixed or capital assets (including replacements, capitalized repairs, and improvements) which should be capitalized on the balance sheet of such Person in accordance with GAAP as depreciable assets for the ongoing use or maintenance of the corporate information technology systems of Parent and its Subsidiaries (as opposed to expenditures that expand or enhance the capabilities thereof); provided, however, there shall be excluded from Maintenance Capital Expenditures those expenditures that are financed through Indebtedness permitted by Sections 6.11(d), 6.11(e) or 6.11(g). “Material Adverse Effect” means (a) a material adverse change in, or material adverse effect upon, the operations, business, Property or condition (financial or otherwise) of Parent, Borrower or one or more of their Subsidiaries taken as a whole, (b) a material impairment of the ability of Parent, Borrower and their Subsidiaries taken as a whole to perform their obligations under any Loan Document or (c) a material adverse effect upon (1) the legality, validity, binding effect or enforceability against Parent, Borrower or any Subsidiary of any Loan Document or the rights and remedies of the Lender thereunder or (2) the perfection or priority of any Lien granted under any Collateral Document. “Material Agreement” means (a) any indenture, agreement, lease, note or other document governing or relating to any material Indebtedness, and (b) any other agreement the breach, termination or loss of which would reasonably be expected to result in a Material Adverse Effect. “Moody‟s” means Moody‟s Investors Service, Inc. “Net Income” means, with reference to any period, the net income (or net loss) of Parent and its Subsidiaries for such period computed on a consolidated basis in accordance with GAAP; provided that there shall be excluded from Net Income (a) the net income (or net loss) of any Person accrued prior to the date it becomes a Subsidiary of, or has merged into or consolidated with, Parent or another Subsidiary, and (b) the net income (or net loss) of any Person (other than a Subsidiary) in which Parent or any of its Subsidiaries has an equity interest in, except to the extent of the amount of dividends or other distributions actually paid to Parent or any of its Subsidiaries during such period. “Net Worth” means, at any time the same is to be determined, the total shareholders equity (including capital and accumulated surplus or deficit) that would appear on the balance sheet of Parent and its Subsidiaries determined on a consolidated basis in accordance with GAAP. “Note” means the Revolving Note. “Obligations” means all obligations of Borrower to pay principal and interest on the Loans, all Reimbursement Obligations owing under the Applications, all fees and charges -10-

payable hereunder, and all other payment obligations of Parent, Borrower or any of their Subsidiaries arising under or in relation to any Loan Document, in each case whether now existing or hereafter arising, due or to become due, direct or indirect, absolute or contingent, and howsoever evidenced, held or acquired. “Parent” is defined in the introductory paragraph of this Agreement. “Participant” has the meaning assigned to such term in Section 9.9(b). “Patriot Act” is defined in Section 5.24. “PBGC” means the Pension Benefit Guaranty Corporation or any Person succeeding to any or all of its functions under ERISA. “Permitted Acquisition” means any Acquisition with respect to which all of the following conditions shall have been satisfied: (1) the Acquired Business is engaged predominantly in the business of providing educational content or curricula management systems; (2) if a new Subsidiary is formed or acquired as a result of or in connection with the Acquisition, Borrower shall have complied with the requirements of Section 4 in connection therewith; (3) after giving effect to the Acquisition, no Default or Event of Default shall exist, including with respect to the covenants contained in Section 6.21 on a pro forma basis and Parent shall have delivered to the Lender a compliance certificate in the form of Exhibit A evidencing such compliance with Section 6.21; (4) either the Acquisition is the TW Acquisition or the aggregate purchase price of such Acquisition and all other Permitted Acquisitions other than the TW Acquisition does not exceed $10,000,000 plus the value of an unrestricted amount of Capital Stock of Parent which is not Redeemable Capital Stock; (5) if the Acquired Business has its primary operations within the United States of America, the purchase price of such Acquisition does not exceed $5,000,000 plus the value of an unrestricted amount of Capital Stock of Parent which is not Redeemable Capital Stock; and (6) if the Acquired Business does not have its primary operations within the United States of America, either the Acquisition is the TW Acquisition or the purchase price of such Acquisition does not exceed $2,000,000 plus the value of an unrestricted amount of Capital Stock of Parent which is not Redeemable Capital Stock. “Permitted Acquisition Cash Purchase Price” means, with respect to any period, the amount of the cash portion of the purchase price of all Permitted Acquisitions paid at the closing of each such Permitted Acquisition during such period in excess of the cash proceeds of any Indebtedness provided by third parties incurred by Parent or any Subsidiary within 60 days of the -11-

closing of such Permitted Acquisition to finance such cash portion of the purchase price of such Permitted Acquisitions. “Permitted Lien” is defined in Section 6.12. “Person” means any natural person, partnership, corporation, limited liability company, association, trust, unincorporated organization or any other entity or organization, including a government or agency or political subdivision thereof. “Plan” means any employee pension benefit plan covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code that either (a) is maintained by a member of the Controlled Group for employees of a member of the Controlled Group or (b) is maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. “Pledge Agreements” mean the Pledge Agreements of even date herewith executed by Parent and any Guarantor in favor of the Lender pledging equity interests in Borrower and any other Subsidiary, as the same may be amended, modified, supplemented or restated from time to time, and “Pledge Agreement” means any of the Pledge Agreements. “Product Development Expenditures” means, with respect to any period, those expenditures of Parent and its Subsidiaries capitalized in accordance with GAAP for the design, development or improvement of Parent‟s proprietary educational content and curricula. “Property” means, as to any Person, all types of real, personal, tangible, intangible or mixed property owned by such Person whether or not included in the most recent balance sheet of such Person and its Subsidiaries under GAAP. “RCRA” means the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. §§6901 et seq., and any future amendments. “Receivables” means all rights to the payment of a monetary obligation now or hereafter owing to Parent, Borrower or any Subsidiary, evidenced by accounts or instruments. “Redeemable Capital Stock” means any Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or otherwise, (a) is, or upon the happening or an event or passage of time would be, required to be redeemed on or prior to the Termination Date; (b) is redeemable at the option of the holder thereof at any time prior to the Termination Date; or (c) is convertible into or exchangeable for debt securities at any time prior to the Termination Date; provided, however, that Redeemable Capital Stock shall not include shares of Parent‟s Series C Preferred Stock issued as Series C PIK Dividends (in each case as defined in Parent‟s certificate of incorporation as in effect on the date of this Agreement). “Reimbursement Obligation” is defined in Section 2.2(c). -12-

“Related Parties” means, with respect to any Person, such Person‟s Affiliates and the partners, members, directors, officers and employees of such Person and of such Person‟s Affiliates. “Release” shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing or migration into the environment. “Reserve Percentage” means, for any Borrowing of Eurodollar Loans, the daily average for the applicable Interest Period of the maximum rate, expressed as a decimal, at which reserves (including, without limitation, any supplemental, marginal, and emergency reserves) are imposed during such Interest Period by the Board of Governors of the Federal Reserve System (or any successor) on “eurocurrency liabilities”, as defined in such Board‟s Regulation D (or in respect of any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Loans is determined or any category of extensions of credit or other assets that include loans by non-United States offices of the Lender to United States residents), subject to any amendments of such reserve requirement by such Board or its successor, taking into account any transitional adjustments thereto. For purposes of this definition, the Eurodollar Loans shall be deemed to be “eurocurrency liabilities” as defined in Regulation D without benefit or credit for any prorations, exemptions or offsets under Regulation D. “Responsible Officer” means each of the following officers of Parent: chief executive officer, chief operating officer and chief financial officer. “Restricted Payment” means: (a) the payment of any dividend on, or distribution in respect of, any shares of Parent‟s Capital Stock (other than dividends or distributions payable in shares of Parent‟s Capital Stock or in options, warrants or other rights to purchase such Capital Stock, but excluding dividends or distributions payable in Redeemable Capital Stock or in options, warrants or other rights to purchase Redeemable Capital Stock); (b) the purchase, redemption, retirement for value, or other acquisition of and Capital Stock of Parent or any options, warrants or other rights to acquire such Capital Stock (other than Capital Stock issued upon the exercise of stock options and warrants in an aggregate amount after the date of this Agreement not in excess of $500,000); and (c) any principal payment on or voluntary repurchase, redemption, defeasement or other acquisition or retirement for value, prior to any scheduled principal payment, sinking fund payment or maturity, on or with respect to Subordinated Debt. “Revolving Credit” means the credit facility for making Revolving Loans and issuing Letters of Credit described in Sections 2.1 and 2.2. “Revolving Loan” is defined in Section 2.1 and, as so defined, includes a Base Rate Loan and a Eurodollar Loan, each of which is a “type” of Revolving Loan hereunder. “Revolving Note” is defined in Section 2.10(a). -13-

“S&P” means Standard & Poor‟s Ratings Services Group, a division of The McGraw-Hill Companies, Inc. “Security Agreement” means that certain Security Agreement dated the date of this Agreement between, as the case may be, Borrower or any Guarantor and the Lender, as the same may be amended, modified, supplemented or restated from time to time; and each Rider to Security Agreement between a Borrower or any Guarantor and the Lender as the same may be amended, modified, supplemented or restated from time to time; and “Security Agreements” means every Security Agreement. “Shareholder Loan” mean the Indebtedness of Parent to certain of its shareholders and their Affiliates in the outstanding amount of approximately $5,000,000 due December 31, 2006. “Specified Restricted Payment” means a cash dividend with respect to Parent‟s Series C Convertible Preferred Stock to be paid from the proceeds of the Contemplated Subordinated Debt. “Subordinated Debt” means all Indebtedness of Borrower or Guarantor for money borrowed which is subject to, and is only entitled to the benefits of, terms and provisions (including maturity, amortization, acceleration, interest rate, sinking fund, collateral, covenant, default and subordination provisions) satisfactory in form and substance to the Lender, in each case as evidenced by its written approval thereof. “Subsidiary” means, as to any particular parent corporation or organization, any other corporation or organization more than 50% of the outstanding Voting Stock of which is at the time directly or indirectly owned by such parent corporation or organization or by any one or more other entities which are themselves subsidiaries of such parent corporation or organization. Unless otherwise expressly noted herein, the term “Subsidiary” means a Subsidiary of Parent or of any of its direct or indirect Subsidiaries. “Telerate Page 3750” means the display designated as “Page 3750” on the Telerate Service (or such other page as may replace Page 3750 on that service or such other service as may be nominated by the British Bankers‟ Association as the information vendor for the purpose of displaying British Bankers‟ Association Interest Settlement Rates for U.S. Dollar deposits). “Termination Date” means December 20, 2009 or such earlier date on which the Commitment is terminated in whole pursuant to Section 2.9, 7.2 or 7.3. “Total Debt” means, at any time the same is to be determined, the aggregate of all Indebtedness of Parent and its Subsidiaries at such time determined on a consolidated basis in accordance with GAAP. “Total Debt to EBITDA” means, as of the last day of each Fiscal Quarter, Total Debt as of the determination date divided by EBITDA for the four Fiscal Quarters ended on the determination date. -14-

“TW Acquisition” means Parent‟s proposed acquisition of 100% of the outstanding equity interests in Tutoring Worldwide, Inc. (a) for a purchase price not to exceed $7,000,000, (b) no more than $3,000,000 of which purchase price is payable in the form of cash or Indebtedness and (c) the balance of which purchase price is payable in the form of Capital Stock of Parent which is not Redeemable Capital Stock. “Unfunded Vested Liabilities” means, for any Plan at any time, the amount (if any) by which the present value of all vested nonforfeitable accrued benefits under such Plan exceeds the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Controlled Group to the PBGC or the Plan under Title IV of ERISA. “Voting Stock” of any Person means capital stock or other equity interests of any class or classes (however designated) having ordinary power for the election of directors or other similar governing body of such Person, other than stock or other equity interests having such power only by reason of the happening of a contingency. “Welfare Plan” means a “welfare plan” as defined in Section 3(1) of ERISA. “Wholly-owned Subsidiary” means a Subsidiary of which all of the issued and outstanding shares of Capital Stock (other than directors‟ qualifying shares as required by law) or other equity interests are owned by Parent and/or one or more Wholly-owned Subsidiaries within the meaning of this definition. 1.2 Interpretation . The foregoing definitions are equally applicable to both the singular and plural forms of the terms defined. The words “hereof”, “herein”, and “hereunder” and words of like import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All references to time of day herein are references to Washington, D.C., time unless otherwise specifically provided. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, it shall be done in accordance with GAAP except where such principles are inconsistent with the specific provisions of this Agreement. All terms that are used in this Agreement which are defined in the Uniform Commercial Code of the Commonwealth of Virginia as in effect from time to time (“UCC”) shall have the same meanings herein as such terms are defined in the UCC, unless this Agreement shall otherwise specifically provide. 1.3 Change in Accounting Principles . If, after the date of this Agreement, there shall occur any change in GAAP from those used in the preparation of the financial statements referred to in Section 5.3 and such change shall result in a change in the method of calculation of any financial covenant, standard or term found in this Agreement, Borrower or the Lender may by notice to the Lender and Borrower, respectively, require that the Lender and Borrower negotiate in good faith to amend such covenants, standards, and term so as equitably to reflect such change in accounting principles, with the desired result being that the criteria for evaluating the financial condition of Parent and its Subsidiaries shall be the same as if such change had not been made. No delay by Borrower or the Lender in requiring such negotiation shall limit their right to so -15-

require such a negotiation at any time after such a change in accounting principles. Until any such covenant, standard, or term is amended in accordance with this Section 1.3, financial covenants shall be computed and determined in accordance with GAAP in effect prior to such change in accounting principles. Without limiting the generality of the foregoing, Borrower shall neither be deemed to be in compliance with any financial covenant hereunder nor out of compliance with any financial covenant hereunder if such state of compliance or noncompliance, as the case may be, would not exist but for the occurrence of a change in accounting principles after the date hereof. 2. THE CREDIT FACILITIES . 2.1 Commitment . Prior to the Termination Date, the Lender agrees, subject to the terms and conditions hereof, to make revolving loans (each individually a “Revolving Loan” and, collectively, the “Revolving Loans”) in Dollars to Borrower from time to time up to the amount of the Commitment. As provided in Section 2.4(a), and subject to the terms hereof, Borrower may elect that each Borrowing of Revolving Loans be either Base Rate Loans or Eurodollar Loans. Revolving Loans may be repaid and reborrowed before the Termination Date, subject to the terms and conditions hereof. 2.2 Letters of Credit . (a) General Terms . Subject to the terms and conditions hereof, as part of the Revolving Credit, the L/C Issuer shall issue letters of credit (each a “Letter of Credit”) for Borrower‟s account in an aggregate undrawn face amount up to the L/C Sublimit. (b) Applications . At any time before the Termination Date, the L/C Issuer shall, at the request of Borrower, issue one or more Letters of Credit in Dollars, in form and substance reasonably acceptable to the L/C Issuer, with expiration dates no later than the earlier of 12 months from the date of issuance (or which are cancelable not later than 12 months from the date of issuance and each renewal) or 30 days prior to the Termination Date, in an aggregate face amount as set forth above, upon the receipt of a duly executed application for the relevant Letter of Credit in the form then customarily prescribed by the L/C Issuer for the Letter of Credit requested (each an “Application”). Notwithstanding anything contained in any Application to the contrary: (1) Borrower shall pay fees in connection with each Letter of Credit as set forth in Section 2.11(c), and (2) if the L/C Issuer is not timely reimbursed for the amount of any drawing under a Letter of Credit on the date such drawing is paid, Borrower‟s obligation to reimburse the L/C Issuer for the amount of such drawing shall bear interest (which Borrower hereby promises to pay) from and after the date such drawing is paid at a rate per annum equal to the sum of 2% plus the Applicable Margin plus the Base Rate from time to time in effect (computed on the basis of a year of 365 or 366 days, as the case may be, and the actual number of days elapsed). Without limiting the foregoing, the L/C Issuer‟s obligation to issue, amend or extend the expiration date of a Letter of Credit is subject to the terms or conditions of this Agreement (including the conditions set forth in Section 3.1 and the other terms of this Section 2.2). (c) The Reimbursement Obligations . Subject to Section 2.2(b), the obligations of Borrower to reimburse the L/C Issuer for all drawings under a Letter of Credit (a “Reimbursement Obligation”) shall be governed by the Application related to such Letter of -16-

Credit, except that reimbursement shall be made by no later than 12:00 Noon (Washington, D.C. time) on the date when each drawing is to be paid if Borrower has been informed of such drawing by the L/C Issuer on or before 11:30 a.m. (Washington, D.C. time) on the date when such drawing is to be paid or, if notice of such drawing is given to Borrower after 11:30 a.m. (Washington, D.C. time) on the date when such drawing is to be paid, by the end of such day, in immediately available funds at the L/C Issuer‟s principal office in Washington, D.C. or such other office as the L/C Issuer may designate in writing to Borrower. In addition, Borrower agrees that, notwithstanding any provision of any Application, its obligations under this Section 2.2(c) and each Application shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and the Applications, under all circumstances whatsoever, including without limitation (1) any lack of validity or enforceability of any Loan Document; (2) any amendment or waiver of or any consent to departure from all or any of the provisions of any Loan Document; (3) the existence of any claim, set-off, defense or other right Borrower may have at any time against a beneficiary of a Letter of Credit (or any Person for whom a beneficiary may be acting), the L/C Issuer or any other Person, whether in connection with this Agreement, another Loan Document, the transaction related to the Letter of Credit or Application or any unrelated transaction; (4) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (5) payment by the L/C Issuer under a Letter of Credit against presentation to the L/C Issuer of a draft or certificate that does not comply with the terms of the Letter of Credit, provided that the L/C Issuer‟s determination that documents presented under the Letter of Credit comply with the terms thereof did not constitute fraud, gross negligence or willful misconduct of the L/C Issuer; or (6) any other act or omission to act or delay of any kind by the L/C Issuer or any other Person or any other event or circumstance whatsoever that might, but for the provisions of this Section 2.2(c), constitute a legal or equitable discharge of Borrower‟s obligations hereunder or under an Application. (d) Manner of Requesting a Letter of Credit . Borrower shall provide at least five (5) Business Days‟ advance written notice to the L/C Issuer of each request for the issuance of a Letter of Credit, each such notice to be accompanied by a properly completed and executed Application for the requested Letter of Credit and, in the case of an extension or an increase in the amount of a Letter of Credit, a written request therefor, in a form reasonably acceptable to the L/C Issuer, in each case, together with the fees called for by this Agreement. 2.3 Applicable Interest Rates . (a) Base Rate Loans . Each Base Rate Loan made or maintained by the Lender shall bear interest during each Interest Period it is outstanding (computed on the basis of a year of 365 or 366 days, as the case may be, and the actual days elapsed) on the unpaid principal amount thereof from the date such Loan is advanced, continued or created by conversion from a Eurodollar Loan until maturity (whether by acceleration or otherwise) at a rate per annum equal to the sum of the Applicable Margin plus the Base Rate from time to time in effect, payable on the last day of its Interest Period and at maturity (whether by acceleration or otherwise). (b) Eurodollar Loans . Each Eurodollar Loan made or maintained by the Lender shall bear interest during each Interest Period it is outstanding (computed on the basis of -17-

a year of 360 days and actual days elapsed) on the unpaid principal amount thereof from the date such Loan is advanced, continued or created by conversion from a Base Rate Loan until maturity (whether by acceleration or otherwise) at a rate per annum equal to the sum of the Applicable Margin plus the Adjusted LIBOR applicable for such Interest Period, payable on the last day of its Interest Period and at maturity (whether by acceleration or otherwise). (c) Default Rate . While any Event of Default exists or after acceleration, Borrower shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on the principal amount of all Loans owing by it at a rate per annum equal to: (1) for any Base Rate Loan, the sum of 2.0% per annum plus the Applicable Margin plus the Base Rate from time to time in effect; and (2) for any Eurodollar Loan, the sum of 2.0% per annum plus the rate of interest in effect thereon at the time of such default until the end of the Interest Period applicable thereto and, thereafter, at a rate per annum equal to the sum of 2.0% plus the Applicable Margin for Base Rate Loans plus the Base Rate from time to time in effect; provided, however, that in the absence of acceleration, any adjustments pursuant to this Section 2.3(c) shall be made at the election of the Lender, with written notice to Borrower. While any Event of Default exists or after acceleration, interest shall be paid on demand of the Lender. (d) Rate Determinations . The Lender shall determine each interest rate applicable to the Loans and the Reimbursement Obligations hereunder, and its determination thereof shall be conclusive and binding except in the case of manifest error. 2.4 Manner of Borrowing Loans and Designating Applicable Interest Rates . (a) Notice to the Lender . Borrower shall give notice to the Lender by no later than 10:00 a.m. (Washington, D.C. time): (1) at least 3 Business Days before the date on which Borrower requests the Lender to advance a Borrowing of Eurodollar Loans and (2) on the date Borrower requests the Lender to advance a Borrowing of Base Rate Loans. The Loans included in each Borrowing shall bear interest initially at the type of rate specified in such notice. Thereafter, Borrower may from time to time elect to change or continue the type of interest rate borne by each Borrowing or, subject to Section 2.5 hereof, a portion thereof, as follows: (x) if such Borrowing is of Eurodollar Loans, on the last day of the Interest Period applicable thereto, Borrower may continue part or all of such Borrowing as Eurodollar Loans or convert part or all of such Borrowing into Base Rate Loans or (y) if such Borrowing is of Base Rate Loans, on any Business Day, Borrower may convert all or part of such Borrowing into Eurodollar Loans for an Interest Period or Interest Periods specified by Borrower. Borrower shall give all such notices requesting the advance, continuation or conversion of a Borrowing to the Lender by telephone or facsimile transmission (which notice shall be irrevocable once given and, if by telephone, shall be promptly confirmed in writing), substantially in the form attached hereto as Exhibit B (Notice of Borrowing) or Exhibit C (Notice of Continuation/Conversion), as applicable, or in such other form acceptable to the Lender. Notice of the continuation of a Borrowing of Eurodollar Loans for an additional Interest Period or of the conversion of part or all of a Borrowing of Base Rate Loans into Eurodollar Loans must be given by no later than 10:00 a.m. (Washington, D.C. time) -18-

at least 3 Business Days before the date of the requested continuation or conversion. All notices concerning the advance, continuation or conversion of a Borrowing shall specify the date of the requested advance, continuation or conversion of a Borrowing (which shall be a Business Day), the amount of the requested Borrowing to be advanced, continued or converted, the type of Loans to comprise such new, continued or converted Borrowing and, if such Borrowing is to be comprised of Eurodollar Loans, the Interest Period applicable thereto. Borrower agrees that the Lender may rely on any such telephonic or telecopy notice given by any person the Lender in good faith believes is an Authorized Representative without the necessity of independent investigation (Borrower hereby indemnifies the Lender from any liability or loss ensuing from such good faith reliance except to the extent caused by the Lender‟s gross negligence) and, in the event any such notice by telephone conflicts with any written confirmation, such telephonic notice shall govern if the Lender has acted in good faith reliance thereon. (b) Notice to Borrower . If a notice from Borrower received pursuant to Section 2.4(a) requests the Lender to make Eurodollar Loans, the Lender shall give notice to Borrower of the interest rate applicable thereto promptly after the Lender has made such determination. (c) Borrower’s Failure to Notify; Automatic Continuations and Conversions . Any outstanding Borrowing of Base Rate Loans shall automatically be continued for an additional Interest Period on the last day of its then current Interest Period unless Borrower has properly notified the Lender that Borrower intends to convert such Borrowing, subject to Section 3.1, into a Borrowing of Eurodollar Loans or such Borrowing is prepaid in accordance with Section 2.7(a). If Borrower fails to give proper notice of the continuation or conversion of any outstanding Borrowing of Eurodollar Loans before the last day of its then current Interest Period within the period required by Section 2.4(a) or, whether or not such notice has been given, one or more of the conditions set forth in Section 3.1 for the continuation or conversion of a Borrowing of Eurodollar Loans would not be satisfied, and such Borrowing is not prepaid in accordance with Section 2.7(a), such Borrowing shall automatically be converted into a Borrowing of Base Rate Loans. In the event Borrower fails to give notice pursuant to Section 2.4(a) of a Borrowing equal to the amount of a Reimbursement Obligation and has not notified the Lender by 1:00 p.m. (Washington, D.C. time) on the day such Reimbursement Obligation becomes due that it intends to repay such Reimbursement Obligation through funds not borrowed under this Agreement, Borrower shall be deemed to have requested a Borrowing of Base Rate Loans under the Revolving Credit on such day in the amount of the Reimbursement Obligation then due, which Borrowing shall be applied to pay the Reimbursement Obligation then due. (d) Disbursement of Loans . Not later than 1:00 p.m. (Washington, D.C. time) on the date of any requested advance of a new Borrowing, subject to Section 3, the Lender shall make the proceeds of each new Borrowing available to Borrower by crediting such proceeds to an account maintained with the Lender specified by Borrower in its notice requesting a Loan. 2.5 Minimum Borrowing Amounts; Maximum Eurodollar Loans . Each Borrowing of Base Rate Loans shall be in an amount not less than $100,000. Each Borrowing of Eurodollar Loans advanced, continued or converted shall be in an amount equal to $500,000 or such greater -19-

amount which is an integral multiple of $250,000. Without the Lender‟s consent, there shall not be more than 5 Borrowings of Eurodollar Loans outstanding at any one time. 2.6 Maturity of Loans . Each Revolving Loan, both for principal and interest, shall mature and become due and payable by Borrower on the Termination Date. 2.7 Prepayments . (a) Voluntary . Borrower may prepay without premium or penalty (except as set forth in Section 8.1) and in whole or in part any Borrowing of Eurodollar Loans at any time upon 3 Business Days prior notice by Borrower to the Lender or, in the case of a Borrowing of Base Rate Loans, notice delivered by Borrower to the Lender no later than 10:00 a.m. (Washington, D.C. time) on the date of prepayment, such prepayment to be made by the payment of the principal amount to be prepaid and, in the case of any Eurodollar Loans, accrued interest thereon to the date fixed for prepayment plus any amounts due the Lender under Section 8.1; provided, however, except in the case where Borrower wishes to pay in full an outstanding Eurodollar Loan or all Base Rate Loans and except for any prepayment described in Section 2.7(b), Borrower may not partially repay a Borrowing (1) if such Borrowing is of Base Rate Loans, in a principal amount less than $100,000, (2) if such Borrowing is of Eurodollar Loans, in a principal amount less than $250,000, and (3) in each case, unless it is in an amount such that the minimum amount required for a Borrowing pursuant to Section 2.5 remains outstanding. (b) Mandatory . (1) Borrower shall, on each date the Commitment is reduced pursuant to Section 2.9, prepay the Revolving Loans and, if necessary, prefund the L/C Obligations by the amount, if any, necessary to reduce the sum of the aggregate principal amount of Revolving Loans and L/C Obligations then outstanding to the amount to which the Commitment has been so reduced. (2) Unless Borrower otherwise directs, prepayments of Loans under this Section 2.7(b) shall be applied first to Borrowings of Base Rate Loans until payment in full thereof with any balance applied to Borrowings of Eurodollar Loans in the order in which their Interest Periods expire. Each prepayment of Loans under this Section 2.7(b) shall be made by the payment of the principal amount to be prepaid and, in the case of any Eurodollar Loans, accrued interest thereon to the date of prepayment together with any amounts due the Lender under Section 8.1. Each prefunding of L/C Obligations shall be made in accordance with Section 7.4. 2.8 Place and Application of Payments . All payments of principal of and interest on the Loans and the Reimbursement Obligations, and of all other Obligations payable by Borrower under this Agreement and the other Loan Documents, shall be made by Borrower to the Lender by no later than 12:00 Noon (Washington, D.C. time) on the due date thereof at the office of the Lender in Washington, D.C. (or such other location as the Lender may designate in writing to Borrower). Any payments received after such time shall be deemed to have been received by the Lender on the next Business Day. All such payments shall be made in Dollars, in immediately available funds at the place of payment, in each case without set-off or counterclaim -20-

Anything contained herein to the contrary notwithstanding, (a) pursuant to the exercise of remedies under Sections 7.2 and 7.3 or (b) after the occurrence and during the continuation of an Event of Default, all payments and collections received in respect of the Obligations and all proceeds of the Collateral received by the Lender shall be applied as follows: (1) first, to the payment of any outstanding costs and expenses incurred by the Lender, and any security trustee therefor, in accordance with the terms and conditions of the Loan Documents, in monitoring, verifying, protecting, preserving or enforcing the Liens on the Collateral, in protecting, preserving or enforcing rights under the Loan Documents, and in any event all costs and expenses of a character which Borrower has agreed to pay the Lender under Section 9.12; (2) second, to the payment of any outstanding interest and fees due under the Loan Documents; (3) third, to the payment of principal on the Note, unpaid Reimbursement Obligations, together with amounts to be held by the L/C Issuer as collateral security for any outstanding L/C Obligations pursuant to Section 7.4 (until the L/C Issuer is holding an amount of cash equal to the then outstanding amount of all such L/C Obligations), and Hedging Liability; (4) fourth, to the payment of all other unpaid Obligations and all other indebtedness, obligations, and liabilities of Parent, Borrower and their Subsidiaries secured by the Collateral Documents (including, without limitation, Funds Transfer and Deposit Account Liability); and (5) fifth, to Borrower or whoever else may be lawfully entitled thereto. 2.9 Voluntary Commitment Terminations . Borrower shall have the right at any time and from time to time, upon 3 Business Days prior written notice to the Lender, to terminate the Commitment in whole or in part, any partial termination to be in an amount not less than $500,000 or such greater amount which is an integral multiple of $100,000, provided that the Commitment may not be reduced to an amount less than the sum of the aggregate principal amount of Revolving Loans, and of L/C Obligations then outstanding. Any termination of the Commitment below the L/C Sublimit then in effect shall reduce the L/C Sublimit by a like amount. Any termination of the Commitment pursuant to this Section 2.9 may not be reinstated. 2.10 The Note . (a) Issuance . The Revolving Loans made to Borrower by the Lender shall be evidenced by a single promissory note of Borrower issued to the Lender in the form of Exhibit D. Such promissory note is hereinafter referred to as a “Revolving Note.” (b) Outstanding Amount . The Lender shall record on its books and records or on a schedule to its Note the amount and type of each Loan advanced, continued or converted by it, all payments of principal and interest and the principal balance from time to time outstanding thereon, and, for any Eurodollar Loan, the Interest Period and the interest rate applicable thereto. The Lender‟s record thereof, whether shown on its books and records or on a schedule to the relevant Note, shall be prima facie evidence as to all such matters; provided, however, that the failure of the Lender to record any of the foregoing or any error in any such record shall not limit -21-

or otherwise affect the obligation of Borrower to repay all Loans made to it together with accrued interest thereon. At the request of the Lender and upon the Lender‟s tendering to Borrower the Note to be replaced, Borrower shall furnish a new Note to the Lender to replace any outstanding Note, and at such time the first notation appearing on a schedule on the reverse side of, or attached to, such new Note shall set forth the aggregate unpaid principal amount of all Loans, if any, then outstanding thereon. 2.11 Fees . (a) Closing Fee . Borrower shall pay to the Lender a closing fee on the date hereof in the amount of $25,000. (b) Commitment Fee . Borrower shall pay to the Lender an unused commitment fee equal to the Applicable Margin applied to the daily average unused portion of the Commitment, payable quarterly in arrears commencing on December 31, 2006 and on the last day of each calendar quarter thereafter and when the Loans are due. The unused commitment fee shall be computed on the basis of a 365/366 day year (as the case may be). (c) Letter of Credit Fees . On the date of issuance or extension, or increase in the amount, of any Letter of Credit pursuant to Section 2.2, Borrower shall pay to the L/C Issuer a letter of credit fee at a rate per annum equal to the Applicable Margin for Eurodollar Loans (computed on the basis of a year of 360 days and the actual number of days) applied to the face amount of such Letter of Credit and the term thereof. In addition, Borrower shall pay the L/C Issuer‟s standard issuance, drawing, negotiation, amendment, transfer and other administrative fees for each Letter of Credit. Such standard fees referred to in the preceding sentence may be established by the L/C Issuer from time to time. (d) Audit Fees . Borrower shall pay to the Lender charges for audits of the Collateral performed by the Lender or its agents or representatives in such amounts as the Lender may from time to time reasonably request (the Lender acknowledging and agreeing that such charges shall be computed in the same manner as it at the time customarily uses for the assessment of charges for similar collateral audits); provided, however, that in the absence of any Default and Event of Default (1) Borrower shall not be required to pay for any such audit if no Loans or L/C Obligations are outstanding at the time of such audit, and (2) Borrower shall not be required to pay for more than one such audit in any 12 month period. 3. CONDITIONS PRECEDENT . The obligation of the Lender to advance, continue or convert any Loan (other than the continuation of, or conversion into, a Base Rate Loan) or of the L/C Issuer to issue, extend the expiration date (including by not giving notice of non-renewal) of or increase the amount of any Letter of Credit under this Agreement, shall be subject to the following conditions precedent: 3.1 All Credit Events . At the time of each Credit Event hereunder: -22-

(a) Representations Correct . Each of the representations and warranties set forth herein and in the other Loan Documents shall be and remain true and correct in all material respects as of said time, except to the extent the same expressly relate to an earlier date. (b) No Default . Parent, Borrower and each Subsidiary shall be in compliance with all of the terms and conditions hereof and of the other Loan Documents, and no Default or Event of Default shall have occurred and be continuing or would occur as a result of such Credit Event. (c) Within Commitment . After giving effect to any requested extension of credit, the aggregate principal amount of all Revolving Loans and L/C Obligations under this Agreement shall not exceed the Commitment. (d) Notices . In the case of a Borrowing the Lender shall have received the notice required by Section 2.4(a), in the case of the issuance of any Letter of Credit the L/C Issuer shall have received a duly completed Application together with any fees called for by Section 2.11, and, in the case of an extension or increase in the amount of a Letter of Credit, a written request therefor in a form acceptable to the L/C Issuer together with fees called for by Section 2.11. (e) No Violation . Such Credit Event shall not violate any order, judgment or decree of any court or other authority or any provision of law or regulation applicable to the Lender or the Lender (including, without limitation, Regulation U of the Board of Governors of the Federal Reserve System) as then in effect. Each request for a Borrowing hereunder and each request for the issuance of, increase in the amount of, or extension of the expiration date of, a Letter of Credit shall be deemed to be a representation and warranty by Borrower on the date of such Credit Event as to the facts specified in Sections 3.1(a) through 3.1(d). 3.2 Initial Credit Event . Before or concurrently with the initial Credit Event: (a) Note . The Lender shall have received a duly executed Note of Borrower dated the date hereof and otherwise in compliance with the provisions of Section 2.10. (b) Guaranties . The Lender shall have received the Guaranties duly executed by each Guarantor. (c) Security Agreements . The Lender shall have received the Security Agreements duly executed by Borrower and the Guarantors, together with (1) UCC financing statements to be filed against each of them, as debtor, in favor of the Lender, as secured party, and (2) deposit account, securities account, and commodity account control agreements to the extent requested by the Lender; (d) Pledge Agreements . The Lender shall have received the Pledge Agreements duly executed by Parent and any Guarantor together with the documents required by the Pledge Agreements. -23-

(e) Evidence of Insurance . The Lender shall have received evidence of insurance required to be maintained under the Loan Documents, naming the Lender as lender loss payee. (f) Governing Documents . The Lender shall have received copies of each Borrower‟s and Guarantor‟s articles of incorporation and bylaws (or comparable organizational documents) and any amendments thereto, certified in each instance; (g) Authorizing Resolutions . The Lender shall have received copies of resolutions of each Borrower‟s and Guarantor‟s governing body authorizing the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party and the consummation of the transactions contemplated hereby and thereby, together with incumbency certificates and specimen signatures of the persons authorized to execute such documents on Borrower‟s or Guarantor‟s behalf, all certified in each instance; (h) Good Standing . The Lender shall have received copies of the certificates of existence or good standing, as appropriate, for each Borrower and Guarantor (dated no earlier than 30 days prior to the date hereof) from the office of the secretary of state or other appropriate governmental department or agency of the state of its incorporation or organization and of each state in which it is qualified to do business as a foreign organization. (i) Authorized Representatives . The Lender shall have received a list of the Authorized Representatives. (j) Fees . The Lender shall have received the initial fees called for by Section 2.11. (k) Diligence . The Lender shall have received such evaluations and certifications as it may reasonably require in order to satisfy itself as to the value of the Collateral, the financial condition of Parent and Borrower, and the lack of material contingent liabilities of Parent and Borrower. (l) Lien Searches . The Lender shall have received financing statement, tax, and judgment lien search results against the Property of Borrower and each Guarantor evidencing the absence of Liens on its respective Property except for Permitted Liens. (m) Opinion of Counsel . The Lender shall have received the favorable written opinion of counsel to Borrower, in form and substance satisfactory to the Lender. (n) Other Documents . The Lender shall have received such other agreements, instruments, documents, certificates, and opinions as it may reasonably request. 4. THE COLLATERAL AND GUARANTIES . 4.1 Collateral . The Obligations, Hedging Liability, and Funds Transfer and Deposit Account Liability shall be secured by valid, perfected, and enforceable Liens on all right, title, and interest of Borrower and each Subsidiary in all Inventory, Receivables, monies and deposit accounts, tangible personal property, real estate, contract rights (to the extent permissible under -24-

applicable law and the terms of the underlying contracts), chattel paper and general intangibles whether now owned or hereafter acquired or arising, and all proceeds thereof; provided, however, that until a Default or Event of Default has occurred and is continuing and thereafter until otherwise required by the Lender, Liens on local petty cash deposit accounts maintained by Borrower and the Subsidiaries in proximity to their operations need not be perfected, provided that the total amount on deposit at any one time not so perfected shall not exceed $50,000 in the aggregate and Liens on payroll accounts maintained by Borrower and the Subsidiaries need not be perfected, provided that the total amount on deposit at any time does not exceed the current amount of their payroll obligations. Borrower acknowledges and agrees that the Liens on the Collateral shall be valid and perfected first priority Liens subject, however, to the Permitted Liens and the proviso appearing at the end of the immediately preceding sentence, in each case pursuant to one or more Collateral Documents from such Persons, each in form and substance satisfactory to the Lender. 4.2 Guaranties . The payment and performance of all Obligations, Hedging Liability, and Funds Transfer and Deposit Account Liability shall at all times be guaranteed by each direct and indirect Subsidiary of Parent (other than a Borrower) pursuant to one or more guaranty agreements in form and substance acceptable to the Lender, as the same may be amended, modified or supplemented from time to time (individually a “Guaranty” and collectively the “Guaranties”). 4.3 Further Assurances . Borrowers agree that each of them shall, and shall cause each Subsidiary to, from time to time at the reasonable request of the Lender, execute and deliver such documents and do such acts and things as the Lender may reasonably request in order to provide for or perfect or protect such Liens on the Collateral. If Borrower or any Subsidiary forms or acquires any other Subsidiary after the date hereof, such Person shall promptly upon such formation or acquisition cause such newly formed or acquired Subsidiary to execute a Guaranty and such Collateral Documents as the Lender may then reasonably require, and Borrower shall also deliver to the Lender, or cause such Subsidiary to deliver to the Lender, at Borrower‟s cost and expense, such other instruments, documents, certificates, and opinions reasonably required by the Lender in connection therewith. 5. REPRESENTATIONS AND WARRANTIES . Borrower represents and warrants to the Lender and agrees, that all representations and warranties of and by Borrower made in the Loan Documents or any instruments or documents delivered pursuant thereto constitute the joint and several representations and warranties of and by each and all Borrowers, except to the extent explicitly otherwise provided, and further that: 5.1 Organization and Qualification . Parent and each of its Subsidiaries (1) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (2) has the power and authority to own its property and to transact the business in which it is engaged and (3) is duly qualified and in good standing in each jurisdiction where the ownership, leasing or operation of property or the conduct of its business requires such qualification and where the lack of such qualification or good standing could reasonably be expected to have a Material Adverse Effect. -25-

5.2 Authority and Enforceability . Each of Parent and Borrower has full right and authority to enter into this Agreement and the other Loan Documents executed by it, to make the borrowings herein provided for, to issue its Note in evidence thereof, to grant to the Lender the Liens described in the Collateral Documents executed by such Person, and to perform all of its obligations hereunder and under the other Loan Documents executed by it. Each Subsidiary that is not also Borrower, if any, has full right and authority to enter into the Loan Documents executed by it, to guarantee the Obligations, Hedging Liability, and Funds Transfer and Deposit Account Liability, to grant to the Lender the Liens described in the Collateral Documents executed by such Person, and to perform all of its obligations under the Loan Documents executed by it. The Loan Documents delivered by Borrower and by each Subsidiary that is not also Borrower, if any, have been duly authorized, executed, and delivered by such Person and constitute valid and binding obligations of such Person enforceable against it in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance or similar laws affecting creditors‟ rights generally and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law); and this Agreement and the other Loan Documents do not, nor does the performance or observance by Borrower or any Subsidiary of any of the matters and things herein or therein provided for, (a) contravene or constitute a default under any provision of law or any judgment, injunction, order or decree binding upon Borrower or any Subsidiary or any provision of the organizational documents (e.g., charter, articles of organization or incorporation or by-laws, articles of association or operating agreement, partnership agreement or other similar document) of Borrower or any Subsidiary, (b) contravene or constitute a default under any covenant, indenture or agreement of or affecting Borrower or any Subsidiary or any of its Property, in each case where such contravention or default, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect or (c) result in the creation or imposition of any Lien on any Property of Borrower or any Subsidiary other than the Liens granted in favor of the Lender pursuant to the Collateral Documents. 5.3 Financial Reports . The audited consolidated financial statements of Parent dated June 30, 2005, the unaudited consolidated financial statements of Parent dated June 30, 2006, and the unaudited interim consolidated financial statements of Parent dated September 30, 2006, for the 3 months then ended, heretofore furnished to the Lender, fairly present in all material respects the consolidated financial condition of Parent and its Subsidiaries at said dates and the consolidated results of their operations and cash flows for the periods then ended in conformity with GAAP applied on a consistent basis, except that such unaudited statements to not contain the footnote disclosures required by GAAP and that such unaudited interim statements may exclude immaterial adjustments (that are to be reflected in year-end adjustments). Neither Parent nor any Subsidiary has contingent liabilities or judgments, orders or injunctions against it that are material to it other than as indicated on the notes to the audited consolidated financial statements of Parent dated June 30, 2005, or, with respect to future periods, on the financial statements furnished pursuant to Section 6.1. 5.4 No Material Adverse Change . Since June 30, 2006, except as set forth on Schedule 5.4, there has been no Material Adverse Effect. 5.5 Litigation and other Controversies . Except as set forth on Schedule 5.5, there is no litigation, arbitration or governmental proceeding pending or, to the knowledge of Parent and its Subsidiaries, threatened against Parent or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect. -26-

5.6 True and Complete Disclosure . To their best knowledge, all information furnished by or on behalf of Parent or any of its Subsidiaries in writing to the Lender for purposes of or in connection with this Agreement, or any transaction contemplated herein, is true and accurate in all material. 5.7 Use of Proceeds; Margin Stock . (a) All proceeds of Loans shall be used by Borrower for working capital purposes and other general business or corporate purposes of Parent and its Subsidiaries. No part of the proceeds of any Loan or other extension of credit hereunder will be used by Parent or any Subsidiary thereof to purchase or carry any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System) or to extend credit to others for the purpose of purchasing or carrying any margin stock. Neither the making of any Loan or other extension of credit hereunder nor the use of the proceeds thereof will violate or be inconsistent with the provisions of Regulations T, U or X of the Board of Governors of the Federal Reserve System and any successor to all or any portion of such regulations. Margin Stock (as defined above) constitutes less than 25% of the value of those assets of Parent and its Subsidiaries that are subject to any limitation on sale, pledge or other restriction hereunder. 5.8 Taxes . Parent and each of its Subsidiaries has timely filed or caused to be timely filed (or filed, or caused to be filed, a proper extension to allow later filing of) all tax returns required to be filed by Parent and/or any of its Subsidiaries and the failure of which could reasonably be expected to result in a Material Adverse Effect. Parent and each of its Subsidiaries has paid all taxes, assessments and other governmental charges payable by them other than taxes, assessments and other governmental charges which are not delinquent or are being contested in good faith with adequate reserves established therefor in accordance with GAAP and as to which no Liens exist, except for Permitted Liens. 5.9 ERISA . Parent and each other member of its Controlled Group has fulfilled its obligations under the minimum funding standards of, and is in compliance in all material respects with, ERISA and the Code to the extent applicable to it and, other than a liability for premiums under Section 4007 of ERISA, has not incurred any liability to the PBGC or a Plan under Title IV of ERISA. Parent and its Subsidiaries have no contingent liabilities with respect to any post-retirement benefits under a welfare plan, as defined in Section 3(1) of ERISA, other than liability for continuation coverage described in article 6 of Title 1 of ERISA. 5.10 Subsidiaries . Schedule 5.10 correctly sets forth, as of the Closing Date, each Subsidiary of Parent, its respective jurisdiction of organization and the percentage ownership (direct and indirect) of Parent in each class of Capital Stock or other equity interests of each of its Subsidiaries and also identifies the direct owner thereof. 5.11 Compliance with Laws . Parent and each of its Subsidiaries is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental authority, or any subdivision thereof, in respect of the conduct of their businesses and the ownership of their property, except such noncompliances as could not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. -27-

5.12 Environmental Matters . To the best of its knowledge, Parent and each of its Subsidiaries is in compliance with all applicable Environmental Laws and the requirements of any permits issued under Environmental Laws, except to the extent that the aggregate effect of all noncompliances could not reasonably be expected to have a Material Adverse Effect. There are no pending with respect to which it has received written notice or, to the best knowledge of Parent and its Subsidiaries, threatened Environmental Claims, including any such claims (regardless of materiality) for liabilities under CERCLA relating to the disposal of Hazardous Materials, against Parent or any of its Subsidiaries or any real property, including leaseholds, owned or operated by Parent or any of its Subsidiaries. There are no facts, circumstances, conditions or occurrences on any real property, including leaseholds, owned or operated by Parent or any of its Subsidiaries that, to the best knowledge of Parent and its Subsidiaries, could reasonably be expected (1) to form the basis of an Environmental Claim against Parent or any of its Subsidiaries or any such real property, or (2) to cause any such real property to be subject to any restrictions on the ownership, occupancy, use or transferability of such real property by Parent or any of its Subsidiaries under any applicable Environmental Law. Hazardous Materials have not been Released on or from any real property, including leaseholds, owned or operated by Parent or any of its Subsidiaries where such Release, individually, may reasonably be expected to require Parent or any of its Subsidiaries to expend in excess of $10,000 in response costs under any applicable Environmental Law. 5.13 Investment Company . Neither Parent nor any Subsidiary is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended. 5.14 Intellectual Property . Parent and each of its Subsidiaries owns all the patents, trademarks, permits, service marks, trade names, copyrights, franchises and formulas, or rights with respect to the foregoing, or each has obtained licenses of all other rights of whatever nature necessary for the present conduct of its businesses, in each case without any known conflict with the rights of others which, or the failure to obtain which, as the case may be, could reasonably be expected to result in a Material Adverse Effect. 5.15 Good Title . Parent and its Subsidiaries have good and marketable title, or valid leasehold interests, to their material assets as reflected on Parent‟s most recent consolidated balance sheet provided to the Lender, except for sales of assets in the ordinary course of business, subject to no Liens, other than Permitted Liens. 5.16 Labor Relations . Neither Parent nor any of its Subsidiaries is engaged in any unfair labor practice that could reasonably be expected to have a Material Adverse Effect. There is (1) no strike, labor dispute, slowdown or stoppage pending against Parent or any of its Subsidiaries or, to the best knowledge of Parent and its Subsidiaries, threatened against Parent or any of its Subsidiaries and (2) to the best knowledge of Parent and its Subsidiaries, no union representation proceeding is pending with respect to the employees of Parent or any of its Subsidiaries and no union organizing activities are taking place, except (with respect to any matter specified in clause (1) or (2) above) such as could not reasonably be expected to have a Material Adverse Effect. -28-

5.17 Capitalization . All outstanding equity interests of Parent and each Subsidiary have been duly authorized and validly issued, and are fully paid and nonassessable, and there are no outstanding commitments or other obligations of Parent or any Subsidiary to issue, and no rights of any Person to acquire, any equity interests in Parent or any Subsidiary except as set forth on Schedule 5.17. 5.18 Other Agreements . Neither Parent nor any Subsidiary is in default under the terms of any covenant, indenture or agreement of or affecting Parent, any Subsidiary or any of their Property, which default if uncured could reasonably be expected to have a Material Adverse Effect. 5.19 Governmental Authority and Licensing . Parent and its Subsidiaries have received all licenses, permits, and approvals of all federal, state, local, and foreign governmental authorities, if any, necessary to conduct their businesses, in each case where the failure to obtain or maintain the same could reasonably be expected to have a Material Adverse Effect. No investigation or proceeding that, if adversely determined, could reasonably be expected to result in revocation or denial of any material license, permit or approval is pending and for which Parent or any of its Subsidiaries has received written notice or, to the knowledge of Parent and its Subsidiaries, threatened. 5.20 Approvals . No authorization, consent, license or exemption from, or filing or registration with, any court or governmental department, agency or instrumentality, nor any approval or consent of any other Person, is or will be necessary to the valid execution, delivery or performance by Parent or any Subsidiary of any Loan Document, except for such approvals which have been obtained prior to the date of this Agreement and remain in full force and effect. 5.21 Affiliate Transactions . Except as set forth on Schedule 5.21, neither Parent nor any Subsidiary is a party to any contracts or agreements with any of its Affiliates (other than with Borrower or Wholly-owned Subsidiaries) on terms and conditions which are less favorable to Parent or such Subsidiary than would be usual and customary in similar contracts or agreements between Persons not affiliated with each other. 5.22 Solvency . Parent and its Subsidiaries are solvent, able to pay their debts as they become due, and have sufficient capital to carry on their business. 5.23 OFAC . Neither Parent nor any of its Subsidiaries is (1) a person whose property or interest in property is blocked or subject to blocking pursuant to Section 1 of Executive Order 13224 of September 23, 2001 Blocking Party and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)), (2) a person who engages in any dealings or transactions prohibited by Section 2 of such executive order, or is otherwise associated with any such person in any manner violative of Section 2, or (3) a person on the list of Specially Designated Nationals and Blocked Persons or subject to the limitations or prohibitions under any other U.S. Department of Treasury‟s Office of Foreign Assets Control regulation or executive order. 5.24 Patriot Act . Parent and each of its Subsidiaries is in compliance, in all material respects, with the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, -29-

2001)) (the “Patriot Act”). No part of the proceeds of the Loans will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended. 6. COVENANTS . Each Borrower covenants and agrees, jointly and severally, that, so long as any Loans or Letter of Credit are available to Borrower hereunder and until all Obligations are paid in full: 6.1 Information Covenants . Parent will furnish to the Lender: (a) Quarterly Reports . Within 45 days after the end of each Fiscal Quarter, Parent‟s consolidated and consolidating balance sheet as at the end of such quarter and the related consolidated and consolidating statement of operations for such quarter and for the elapsed portion of the Fiscal Year-to-date period then ended, each in reasonable detail, prepared in accordance with GAAP, setting forth comparative consolidated figures for the corresponding periods in the prior Fiscal Year of Parent and comparable consolidated budgeted figures for the current Fiscal Quarter and the elapsed portion of the Fiscal Year-to-date period then ended, all of which shall be certified by the chief financial officer or other officer of Parent, acceptable to the Lender that they fairly present in all material respects in accordance with GAAP the financial condition of Parent and its Subsidiaries as of the dates indicated and the results of their operations for the periods indicated, subject to normal year-end audit adjustments and the absence of footnotes. (b) Annual Statements . Within 120 days after the close of each Fiscal Year of Parent, a copy of Parent‟s consolidated and consolidating balance sheet as of the last day of the Fiscal Year then ended and Parent‟s consolidated and consolidating statement of operations and consolidated statements of shareholders equity and cash flows for the Fiscal Year then ended, and accompanying notes thereto, each in reasonable detail showing in comparative form the consolidated figures for the previous Fiscal Year, accompanied by an unqualified opinion of a firm of independent public accountants of recognized national standing, selected by Parent and reasonably acceptable to the Lender, to the effect that the consolidated financial statements have been prepared in accordance with GAAP and present fairly in accordance with GAAP the consolidated financial condition of Parent and its Subsidiaries as of the close of such Fiscal Year and the results of their operations and cash flows for the Fiscal Year of Parent then ended and that the examination by such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards. (c) Officer’s Certificates . At the time of the delivery of the financial statements provided for in Sections 6.1(a) and 6.1(b), a certificate of the chief financial officer or other officer of Parent acceptable to the Lender in the form of Exhibit A (x) stating no Default or Event of Default has occurred during the period covered by such statements or, if a Default or Event of Default exists, a detailed description of the Default or Event of Default and all actions Borrower is taking with respect to such Default or Event of Default, (y) confirming that the representations and warranties stated in Section 5 remain true and correct in all material respects (except to the extent such representations and warranties relate to an earlier date, in which case -30-

they are true and correct in all material respects as of such date), and (z) showing Borrowers‟ compliance with the covenants set forth in Section 6.21. (d) Budgets . As soon as available, but in any event at least 90 days after the first day of each Fiscal Year of Parent, a budget in form reasonably satisfactory to the Lender (including budgeted consolidated statements of operations and cash flows for Parent and its Subsidiaries) of Parent and its Subsidiaries in reasonable detail for the four Fiscal Quarters of the current Fiscal Year of Parent and, with appropriate discussion, the principal assumptions upon which such budget is based. (e) Contract Backlog Report . As soon as available, but in any event at least 90 days after the first day of each Fiscal Year of Parent, a contract backlog report for all contracts that generate at least $1,000,000 in annual revenue in form reasonably satisfactory to the Lender (including, without limitation, a summary of all such contract terms) of Parent and its Subsidiaries in reasonable detail as of the first day of each such Fiscal Year of Parent. (f) Notice of Default or Litigation . Promptly, and in any event within three Business Days after any Responsible Officer of Parent or Borrower obtains knowledge thereof, notice of (1) the occurrence of any event which constitutes a Default or an Event of Default or any other event which could reasonably be expected to have a Material Adverse Effect, which notice shall specify the nature thereof, the period of existence thereof and what action Borrower proposes to take with respect thereto, (2) the commencement of, or threat of, or any significant development in, any litigation, labor controversy, arbitration or governmental proceeding pending against Parent or any of its Subsidiaries which, if adversely determined, could reasonably be expected to have a Material Adverse Effect. (g) Management Letters . Promptly upon presentation to Parent or Parent‟s audit committee, a copy of each report or any “management letter” submitted to Parent or any of its Subsidiaries by its certified public accountants and the management‟s responses thereto. (h) Environmental Matters . Promptly upon, and in any event within five Business Days after any Responsible Officer of Parent or Borrower obtains knowledge thereof, notice of one or more of the following environmental matters which may reasonably be expected to have a Material Adverse Effect: (1) any notice of Environmental Claim against Parent or any of its Subsidiaries or any real property owned or operated by Parent or any of its Subsidiaries; (2) any condition or occurrence on or arising from any real property owned or operated by Parent or any of its Subsidiaries that (A) results in noncompliance by Parent or any of its Subsidiaries with any applicable Environmental Law or (B) could reasonably be expected to form the basis of an Environmental Claim against Parent or any of its Subsidiaries or any such real property; (3) any condition or occurrence on any real property owned or operated by Parent or any of its Subsidiaries that could reasonably be expected to cause such real property to be subject to any restrictions on the ownership, occupancy, use or transferability by Parent or any of its Subsidiaries of such real property under any Environmental Law; and (4) any removal or remedial actions to be taken in response to the actual or alleged presence of any Hazardous Material on any real property owned or operated by Parent or any of its Subsidiaries as required by any Environmental Law or any governmental or other administrative agency. All such notices shall describe in reasonable detail the nature of the claim, investigation, condition, -31-

occurrence or removal or remedial action and Parent‟s or such Subsidiary‟s response thereto. In addition, Parent and Borrower agree to provide the Lender with copies of all material written communications by Parent or any of its Subsidiaries with any Person, government or governmental agency relating to any of the matters set forth in clauses (1)-(4) above, and such detailed reports relating to any of the matters set forth in clauses (1)-(4) above as may reasonably be requested by the Lender. (i) Other Information . From time to time, such other information or documents (financial or otherwise) as the Lender may reasonably request in writing. 6.2 Inspections . Parent will, and will cause each Subsidiary to, permit officers, representatives and agents of the Lender, to visit and inspect any Property of Parent or such Subsidiary, and, subject to Section 2.11(d), to examine the books of account of Parent or such Subsidiary and discuss the affairs, finances and accounts of Parent or such Subsidiary with its and their executive officers and independent accountants, all at such reasonable times and with reasonable notice as the Lender may request. 6.3 Maintenance of Property, Insurance, etc . Parent will, and will cause each of its Subsidiaries to, (1) keep its material property, plant and equipment in reasonably good repair, working order and condition, normal wear and tear excepted, and shall from time to time make all necessary and proper repairs, renewals, replacements, extensions, additions, betterments and improvements thereto so that at all times such property, plant and equipment are reasonably preserved and maintained and (2) maintain in full force and effect with financially sound and reputable insurance companies insurance which provides substantially the same (or greater) coverage and against at least such risks as is in accordance with industry practice, and shall furnish to the Lender upon written request full information as to the insurance so carried. In any event, Parent shall, and shall cause each of its Subsidiaries to, maintain insurance on the Collateral to the extent required by the Collateral Documents. 6.4 Preservation of Existence . Parent will, and will cause each of its Subsidiaries to, do or cause to be done, all things necessary to preserve and keep in full force and effect its existence and, except where the failure to do so would not reasonably be expected to have a Material Adverse Effect, its franchises, authority to do business, permits, licenses, patents, trademarks, copyrights and other proprietary rights; provided, however, that nothing in this Section 6.4 shall prevent, to the extent permitted by Section 6.13, sales of assets by Parent or any of its Subsidiaries, or the merger or consolidation between or among the Subsidiaries of Parent. 6.5 Compliance with Laws . Parent shall, and shall cause each of its Subsidiaries to, comply in all respects with the requirements of all federal, state, local, and foreign laws, rules, regulations, ordinances and orders applicable to its property or business operations, where any such non-compliance could reasonably be expected to have a Material Adverse Effect or result in a Lien upon any of its material Property. 6.6 ERISA . Parent shall, and shall cause each of its Subsidiaries to, promptly pay and discharge all obligations and liabilities arising under ERISA of a character which if unpaid or unperformed could reasonably be expected to have a Material Adverse Effect or result in a Lien upon any of its material Property. Parent shall, and shall cause each of its Subsidiaries to, -32-

promptly notify the Lender of: (a) the occurrence of any material reportable event (as defined in ERISA) with respect to a Plan, (b) receipt of any notice from the PBGC of its intention to seek termination of any material Plan or appointment of a trustee therefor, (c) its intention to terminate or withdraw from any material Plan, and (d) the occurrence of any event with respect to any Plan which would result in the incurrence by Parent or any Subsidiary of any material liability, fine or penalty, or any material increase in the contingent liability of Parent or any Subsidiary with respect to any post-retirement Welfare Plan benefit. 6.7 Payment of Taxes . Parent will, and will cause each of its Subsidiaries to, pay and discharge, all taxes, assessments, fees and other governmental charges imposed upon it or any of its Property, before becoming delinquent and before any penalties accrue thereon, unless and to the extent that the same are being contested in good faith and by proper proceedings and as to which appropriate reserves are provided therefor, unless and until any Lien resulting therefrom attaches to any of its Property. 6.8 Contracts With Affiliates . Except with respect to contracts, agreements and business arrangements solely among Borrower and Guarantors, Parent shall not, nor shall it permit any of its Subsidiaries to, enter into any contract, agreement or business arrangement with any of its Affiliates on terms and conditions which are less favorable to Parent or such Subsidiary than would be usual and customary in similar contracts, agreements or business arrangements between Persons not affiliated with each other. 6.9 No Changes in Fiscal Year . Parent shall not, nor shall it permit any of its Subsidiaries to, change the Fiscal Year from its present basis. 6.10 Change in the Nature of Business . Parent shall not, nor shall it permit any of its Subsidiaries to, engage in any business or activity if as a result the general nature of the business of Parent or any Subsidiary would be changed in any material respect from the general nature of the business engaged in by it as of the Closing Date. 6.11 Indebtedness . Parent will not, and will not permit any of its Subsidiaries to, contract, create, incur, assume or suffer to exist any Indebtedness, except; (a) To Lender . The Obligations, Hedging Liability, and Funds Transfer and Deposit Account Liability of Parent and its Subsidiaries owing to the Lender (and its Affiliates); (b) Existing Indebtedness . Existing Indebtedness; (c) Intercompany Indebtedness . intercompany Indebtedness among Parent and its Subsidiaries to the extent permitted by Section 6.14; (d) Purchase Money Indebtedness . purchase money Indebtedness (excluding Capitalized Lease Obligations) of Parent and its Subsidiaries in an amount not to exceed $1,000,000 in the aggregate at any one time outstanding; (e) Capitalized Lease Obligations . Capitalized Lease Obligations of Parent and its Subsidiaries in an amount not to exceed the amounts set forth below at the times set forth below in the aggregate at any one time outstanding: -33-

Period

Limitation

From the Closing Date through June 30, 2007 From July 1, 2007 through June 30, 2008 From July 1, 2008 through the Termination Date (f) Subordinated Debt . the Contemplated Subordinated Debt; and

$ $ $

6,500,000 13,000,000 15,500,000

(g) Other Indebtedness . unsecured Indebtedness of Parent and its Subsidiaries not otherwise permitted by this Section in an amount not to exceed $1,000,000 in the aggregate at any one time outstanding. 6.12 Liens . Parent will not, nor will it permit any of its Subsidiaries to, create, incur or suffer to exist any Lien on any of its Property; provided that the foregoing shall not prevent the following (the Liens described below, the “Permitted Liens”): (a) Taxes . inchoate Liens for the payment of taxes which are not yet due and payable or the payment of which is not required by Section 6.7 or, if such taxes are due and payable, the Person owing such taxes is contesting such taxes in good faith and by appropriate proceedings and appropriate reserves have been provided for such taxes; (b) Statutory Liens . Liens arising by statute in connection with worker‟s compensation, unemployment insurance, old age benefits, social security obligations, taxes, assessments, statutory obligations or other similar charges (other than Liens arising under ERISA), good faith cash deposits in connection with tenders, contracts or leases to which Parent or any Subsidiary is a party or other cash deposits required to be made in the ordinary course of business other than deposits securing Reclamation Bonds, provided in each case that the obligation is not for borrowed money and that the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves have been established therefor; (c) Mechanics’ Liens . mechanics‟, workmen‟s, materialmen‟s, landlords‟, carriers‟ or other similar Liens arising in the ordinary course of business with respect to obligations which are not due or which are being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest; (d) To Lender . Liens created by or pursuant to this Agreement and the Collateral Documents; (e) Operating Leases . any interest or title of a lessor under any operating lease; -34-

(f) Other Permitted Liens . Liens on property of Parent or any Subsidiary created solely for the purpose of securing indebtedness permitted by Sections 6.11(d) or 6.11(e) representing or incurred to finance the purchase price of Property, provided that no such Lien shall extend to or cover other Property of Parent or such Subsidiary other than the respective Property so acquired, and the principal amount of indebtedness secured by any such Lien shall at no time exceed the purchase price of such Property, as reduced by repayments of principal thereon; (g) Easement . easements, rights-of-way, restrictions, and other similar encumbrances against real property incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not materially detract from the value of the Property subject thereto or materially interfere with the ordinary conduct of the business of Parent or any Subsidiary; (h) Contemplated Subordinated Debt . Liens on the Collateral subordinate to the Lien of the Lender securing the Contemplated Subordinated Debt; and (i) Existing Indebtedness . those Liens described on Schedule 6.12 hereto securing Existing Indebtedness. 6.13 Consolidation, Merger, Sale of Assets, etc . Parent will not, nor will it permit any of its Subsidiaries to, wind up, liquidate or dissolve its affairs or agree to any merger or consolidation, or convey, sell, lease or otherwise dispose of all or any part of its property, including any disposition as part of any sale-leaseback transactions except that this Section shall not prevent: (a) Inventory . the sale and lease of Inventory in the ordinary course of business; (b) Obsolete Property . the sale, transfer or other disposition of any tangible personal property that, in the reasonable judgment of Parent or any of its Subsidiaries, has become uneconomic, obsolete or worn out; (c) Intercompany Sales . the sale, transfer, lease, or other disposition of Property of Parent and its Wholly-owned Subsidiaries (except any Foreign Subsidiaries) to one another; (d) Permitted Acquisitions . any merger or consolidation as part of a Permitted Acquisition; (e) Intercompany Mergers . the merger of any Wholly-owned Subsidiary (except any Foreign Subsidiaries) with and into Parent or any other Wholly-owned Subsidiary (except any Foreign Subsidiaries), provided that, in the case of any merger involving Parent, Parent is the legal entity surviving the merger; and (f) Other Sales . the sale, transfer, lease, or other disposition of Property of Parent or any Subsidiary (including any disposition of Property as part of a sale and leaseback -35-

transaction) aggregating for Parent and its Subsidiaries not more than $4,000,000 during any Fiscal Year of Parent. 6.14 Advances, Investments and Loans . Parent will not, nor will it permit any of its Subsidiaries to, directly or indirectly, make loans or advances to or make, retain or have outstanding any investments (whether through purchase of equity interests or obligations or otherwise) in, any Person or enter into any partnerships or joint ventures, or purchase or own a futures contract or otherwise become liable for the purchase or sale of currency or other commodities at a future date in the nature of a futures contract, except that this Section shall not prevent: (a) Receivables . Receivables created in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (b) Contract Advances . Advances made in the ordinary course of business and pursuant to contractual terms to schools or school districts in an amount not to exceed $5,000,000 in the aggregate at any one time outstanding; (c) Cash Equivalents . investments in Cash Equivalents; (d) Disputed Amounts . investments (including debt obligations) received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business; (e) Subsidiaries . Parent‟s investments from time to time in its Subsidiaries that are also Borrowers or Guarantors, and investments made from time to time by a Subsidiary in one or more of its Subsidiaries that are also Borrowers or Guarantors; (f) Intercompany . intercompany advances made from time to time among Borrower and any one or more Subsidiaries that are also Guarantors in the ordinary course of business; (g) Permitted Acquisitions . Permitted Acquisitions; (h) Hedging Liability . Hedging Liability; and (i) Other . Other investments, loans and advances in addition to those otherwise permitted by this Section 6.14 in an amount not to exceed $500,000 in the aggregate at any one time outstanding. 6.15 Restricted Payments by Parent . Parent shall not make any Restricted Payments other than the Specified Restricted Payment. 6.16 Limitation on Restrictions . Parent will not, nor will it permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any restriction on the ability of any such Subsidiary to (a) pay dividends or make any other distributions on its Capital Stock or other equity interests owned by Parent or any other -36-

Subsidiary, (b) pay or repay any Indebtedness owed to Parent or any other Subsidiary, (c) make loans or advances to Parent or any other Subsidiary, (d) transfer any of its Property to Parent or any other Subsidiary, (e) encumber or pledge any of its assets to or for the benefit of the Lender or (f) guaranty the Obligations, Hedging Liability and Funds Transfer and Deposit Account Liability. 6.17 Limitation on Issuances of New Equity by Subsidiaries . Parent will not permit any of its Subsidiaries to issue any new Capital Stock (including by way of sales of treasury stock) or other equity interests or any options or warrants to purchase, or securities convertible into, Capital Stock or other equity interests, except for transfers and replacements of then outstanding shares of Capital Stock or other equity interests. 6.18 Limitation on the Creation of Subsidiaries . Notwithstanding anything to the contrary contained in this Agreement, Parent will not, nor will it permit any of its Subsidiaries to, establish, create or acquire after the Closing Date any Subsidiary; provided that each Borrower and its Wholly-owned Subsidiaries shall be permitted to establish or create Wholly-owned Subsidiaries so long as at least 30 days written notice thereof is given to the Lender from the time such Subsidiary is formed, and Parent and its Subsidiaries timely comply with the requirements of Section 4 (at which time Section 5.10 shall be deemed to include a reference to such Subsidiary). 6.19 OFAC . Parent will not, nor will it permit any of its Subsidiaries to, (1) become a person whose property or interests in property are blocked or subject to blocking pursuant to Section 1 of Executive Order 13224 of September 23, 2001 Blocking Party and Prohibiting Transactions With Persons Who Commit, Threaten to Commit or Support Terrorism (66 Fed. Reg. 49079(2001), (2) engage in any dealings or transactions prohibited by Section 2 of such executive order, or be otherwise associated with any such person in any manner violative of Section 2, or (3) become a person on the list of Specially Designated Nationals and Blocked Persons or subject to the limitations or prohibitions under any other U.S. Department of Treasury‟s Office of Foreign Assets Control regulation or executive order. 6.20 Operating Accounts . Parent and each of its Subsidiaries shall maintain all of its primary or substantial operating and depository accounts at the Lender; provided, however, Parent and its Subsidiaries may maintain depository accounts having insignificant balances in jurisdictions in which they operate and in which the Lender does not maintain a presence. 6.21 Financial Covenants . (a) Maximum Leverage Ratio . Borrower shall not, as of the last day of each Fiscal Quarter of Parent, permit the Leverage Ratio to be more than 2.50 to 1.00. (b) Minimum Net Worth . Borrower shall not, as of the last day of each Fiscal Year of Parent, permit Net Worth to be less than the total of (1) 85% of Net Worth as of the Closing Date plus (2) 50% of cumulative Net Income of Parent from the Closing Date to the determination date minus (3) 85% of all Specified Restricted Payments made by Parent. (c) Minimum Accumulated Cash . Borrower shall not, as of the last day of each Fiscal Quarter, permit the Accumulated Cash to be less than $0. -37-

7. EVENTS OF DEFAULT AND REMEDIES . 7.1 Events of Default . Any one or more of the following shall constitute an “Event of Default” hereunder: (a) Payment . default in the payment when due (whether at the stated maturity thereof or at any other time provided for in this Agreement) of all or any part of the principal of or interest on any Note or any other Obligation payable hereunder or under any other Loan Document, provided, however that if Parent has in effect an auto-debit arrangement with the Lender with respect to periodic interest payments due on the Loans, no such default shall constitute an Event of Default until 2 Business Days shall have elapsed; (b) Covenants . default in the observance or performance of any covenant set forth in Section 6.9, 6.11, 6.12, 6.13, 6.14, 6.16, 6.18, 6.19, 6.20 or 6.21 or of any provision in any Loan Document dealing with the use, disposition or remittance of the proceeds of Collateral or requiring the maintenance of insurance thereon; (c) Other Loan Document Agreements . default in the observance or performance of any other provision hereof or of any other Loan Document which is not remedied within 30 days after the earlier of (i) the date on which such failure shall first become known to any Responsible Officer or (ii) written notice thereof is given to Borrower by the Lender; (d) Representations and Warranties . any representation or warranty made herein or in any other Loan Document or in any certificate delivered to the Lender pursuant hereto or thereto or in connection with any transaction contemplated hereby or thereby proves untrue in any material respect as of the date of the making or deemed making thereof; (e) Other Loan Documents . any event occurs or condition exists (other than those described in Sections 7.1(a) through 7.1(d)) which is specified as an event of default under any of the other Loan Documents, or any of the Loan Documents shall for any reason not be or shall cease to be in full force and effect or is declared to be null and void, or any of the Collateral Documents shall for any reason fail to create a valid and perfected first priority Lien in favor of the Lender in any Collateral purported to be covered thereby except as expressly permitted by the terms thereof, or Parent, any Guarantor or any Subsidiary takes any action for the purpose of terminating, repudiating or rescinding any Loan Document executed by it or any of its obligations thereunder; (f) Other Obligations to Lender . default shall occur under any Indebtedness or other obligation of Parent or any Subsidiary in favor of the Lender or its Affiliates; (g) Cross Default . default shall occur under any Indebtedness of Parent or any Subsidiary aggregating in excess of $1,000,000, or under any indenture, agreement or other instrument under which the Indebtedness aggregating in excess of $1,000,000 may be issued, and such default shall continue for a period of time sufficient to permit the acceleration of the maturity of any such Indebtedness (whether or not such maturity is in fact accelerated), or any such Indebtedness shall not be paid when due (whether by demand, lapse of time, acceleration or otherwise); -38-

(h) Judgments . any judgment or judgments, writ or writs or warrant or warrants of attachment, or any similar process or processes, shall be entered or filed against Parent or any Subsidiary, or against any of its Property, in an aggregate amount in excess of $1,000,000 (except to the extent fully covered by insurance pursuant to which the insurer has accepted liability therefor in writing), and which remains undischarged, unvacated, unbonded or unstayed for a period of 30 days; (i) Pension Liabilities . Parent or any Subsidiary, or any member of its Controlled Group, shall fail to pay when due an amount or amounts aggregating in excess of $500,000 which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans having aggregate Unfunded Vested Liabilities in excess of $500,000 (collectively, a “Material Plan”) shall be filed under Title IV of ERISA by Parent or any Subsidiary, or any other member of its Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Material Plan or a proceeding shall be instituted by a fiduciary of any Material Plan against Parent or any Subsidiary, or any member of its Controlled Group, to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 60 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; (j) Material Adverse Effect . in the exercise of the Lender‟s good faith judgment, the Lender shall have determined that a Material Adverse Effect has occurred or will occur, provided, however, that if Lender shall have so determined that a Material Adverse Effect will occur, it shall provide Parent with prior written notice reasonable under the circumstances of such determination; (k) Change of Control . any Change of Control shall occur; (l) Insolvency . Parent, any Guarantor or any Subsidiary shall (1) have entered involuntarily against it an order for relief under the United States Bankruptcy Code, as amended, (2) not pay, or admit in writing its inability to pay, its debts generally as they become due, (3) make an assignment for the benefit of creditors, (4) apply for, seek, consent to or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any substantial part of its Property, (5) institute any proceeding seeking to have entered against it an order for relief under the United States Bankruptcy Code, as amended, to adjudicate it insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (6) take any business or corporate action in furtherance of any matter described in parts (1) through (5) above, or (7) fail to contest in good faith any appointment or proceeding described in Section 7.1(l); (m) Appointment of Receiver . a custodian, receiver, trustee, examiner, liquidator or similar official shall be appointed for Parent or any Subsidiary, or any substantial part of any of its Property, or a proceeding described in Section 7.1(l)(5) shall be instituted against Parent or any Subsidiary, and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 60 days; -39-

(n) Extension of Mandatory Redemption Date . Parent‟s failure on or before September 30, 2008 to extend the mandatory redemption date of Parent‟s preferred stock to a date after March 15, 2010; or (o) Extension of Maturity Dates . Parent‟s failure on or before October 15 of each year during the term of the Commitment to extend the maturity of the Contemplated Subordinated Debt to a date at least 14 / 2 months after such October 15.
1

7.2 Non-Bankruptcy Defaults . When any Event of Default other than those described in Sections 7.1(l) or 7.1(m) has occurred and is continuing, the Lender may, by written notice to Borrower: (a) terminate the remaining Commitment and all other obligations of the Lender hereunder on the date stated in such notice (which may be the date thereof); (b) declare the principal of and the accrued interest on all outstanding Notes to be forthwith due and payable and thereupon all outstanding Notes, including both principal and interest thereon, shall be and become immediately due and payable together with all other amounts payable under the Loan Documents without further demand, presentment, protest or notice of any kind; and (c) demand that Borrower immediately pay to the Lender the full amount then available for drawing under each or any Letter of Credit, and Borrower agrees to immediately make such payment and acknowledge and agree that the Lender would not have an adequate remedy at law for failure by Borrower to honor any such demand and that the Lender shall have the right to require Borrower to specifically perform such undertaking whether or not any drawings or other demands for payment have been made under any Letter of Credit. 7.3 Bankruptcy Defaults . When any Event of Default described in Sections 7.1(l) or 7.1(m)has occurred and is continuing, then all outstanding Notes shall immediately become due and payable together with all other amounts payable under the Loan Documents without presentment, demand, protest or notice of any kind, the obligation of the Lender to extend further credit pursuant to any of the terms hereof shall immediately terminate and Borrower shall immediately pay to the Lender the full amount then available for drawing under all outstanding Letters of Credit, Borrower acknowledging and agreeing that the Lender would not have an adequate remedy at law for failure by Borrower to honor any such demand and that the Lender shall have the right to require Borrower to specifically perform such undertaking whether or not any draws or other demands for payment have been made under any of the Letters of Credit. 7.4 Collateral for Undrawn Letters of Credit . (a) Obligation to Provide . If the prepayment of the amount available for drawing under any or all outstanding Letters of Credit is required under Section 2.7(b) or under Section 7.2 or 7.3, Borrower shall forthwith pay the amount required to be so prepaid, to be held by the Lender as provided in Section 7.4(b). (b) Use of Collateral . All amounts prepaid pursuant to Section 7.4(a) shall be held by the Lender in one or more separate collateral accounts (each such account, and the credit balances, properties, and any investments from time to time held therein, and any substitutions -40-

for such account, any certificate of deposit or other instrument evidencing any of the foregoing and all proceeds of and earnings on any of the foregoing being collectively called the “Collateral Account”) as security for, and for application by the Lender (to the extent available) to, the reimbursement of any payment under any Letter of Credit then or thereafter made by the Lender, and to the payment of the unpaid balance of any other Obligations. The Collateral Account shall be held in the name of and subject to the exclusive dominion and control of the Lender. If and when requested by Borrower, the Lender shall invest funds held in the Collateral Account from time to time in direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America with a remaining maturity of one year or less, provided that the Lender is irrevocably authorized to sell investments held in the Collateral Account when and as required to make payments out of the Collateral Account for application to amounts due and owing from Borrower to the L/C Issuer; provided, however, that if (1) Borrower shall have made payment of all such obligations referred to in subsection (a) above, (2) all relevant preference or other disgorgement periods relating to the receipt of such payments have passed, and (3) no Letters of Credit, Commitment, Loans or other Obligations remain outstanding hereunder, then the Lender shall release to Borrower any remaining amounts held in the Collateral Account. 7.5 Expenses . Borrower agrees to pay to the Lender, and any other holder of any Note outstanding hereunder, all costs and expenses reasonably incurred or paid by the Lender or any such holder, including reasonable attorneys‟ fees and court costs, in connection with any Default or Event of Default by Borrower hereunder or in connection with the enforcement of any of the Loan Documents (including all such costs and expenses incurred in connection with any proceeding under the United States Bankruptcy Code involving Parent or any Subsidiary as a debtor thereunder). 8. CHANGE IN CIRCUMSTANCES AND CONTINGENCIES . 8.1 Funding Indemnity . If the Lender shall incur any loss, cost or expense (including, without limitation, any loss of profit, and any loss, cost or expense incurred by reason of the liquidation or re-employment of deposits or other funds acquired by the Lender to fund or maintain any Eurodollar Loan or the relending or reinvesting of such deposits or amounts paid or prepaid to the Lender or by reason of breakage of interest rate swap agreements or the liquidation of other hedging contracts or agreements) as a result of: (1) any payment, prepayment or conversion of a Eurodollar Loan on a date other than the last day of its Interest Period, (2) any failure (because of a failure to meet the conditions of Section 3 or otherwise) by Borrower to borrow or continue a Eurodollar Loan, or to convert a Base Rate Loan into a Eurodollar Loan, on the date specified in a notice given pursuant to Section 2.4(a), (3) any failure by Borrower to make any payment of principal on any Eurodollar Loan when due (whether by acceleration or otherwise), or -41-

(4) any acceleration of the maturity of a Eurodollar Loan as a result of the occurrence of any Event of Default hereunder, then, upon the demand of the Lender, Borrower shall pay to the Lender such amount as will reimburse the Lender for such loss, cost or expense. If the Lender makes such a claim for compensation, it shall provide to Borrower a certificate setting forth the amount of such loss, cost or expense in reasonable detail (including an explanation of the basis for and the computation of such loss, cost or expense) and the amounts shown on such certificate shall be conclusive absent manifest error. 8.2 Illegality . Notwithstanding any other provisions of this Agreement or any Note, if at any time any change in applicable law, rule or regulation or in the interpretation thereof makes it unlawful for the Lender to make or continue to maintain any Eurodollar Loans or to perform its obligations as contemplated hereby, the Lender shall promptly give notice thereof to Borrower and the Lender‟s obligations to make or maintain Eurodollar Loans under this Agreement shall be suspended until it is no longer unlawful for the Lender to make or maintain Eurodollar Loans. Borrower shall prepay on demand the outstanding principal amount of any such affected Eurodollar Loans, together with all interest accrued thereon and all other amounts then due and payable to the Lender under this Agreement; provided, however, subject to all of the terms and conditions of this Agreement, Borrower may then elect to borrow the principal amount of the affected Eurodollar Loans from the Lender by means of Base Rate Loans. 8.3 Unavailability of Deposits or Inability to Ascertain, or Inadequacy of, LIBOR . If on or prior to the first day of any Interest Period for any Borrowing of Eurodollar Loans the Lender determines that: (1) deposits in Dollars (in the applicable amounts) are not being offered to it in the interbank eurodollar market for such Interest Period, or that by reason of circumstances affecting the interbank eurodollar market adequate and reasonable means do not exist for ascertaining the applicable LIBOR, or (2) (A) LIBOR as determined by the Lender will not adequately and fairly reflect the cost to the Lender of funding its Eurodollar Loans for such Interest Period or (B) the making or funding of Eurodollar Loans has become impracticable, then the Lender shall forthwith give notice thereof to Borrower, whereupon until the Lender notifies Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Lender to make Eurodollar Loans shall be suspended. 8.4 Yield Protection . (a) Taxes and Reserves . If, on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender (or its Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: -42-

(1) shall subject the Lender (or its Lending Office) to any tax, duty or other charge with respect to its Eurodollar Loans, its Note, its Letter(s) of Credit, any Reimbursement Obligations owed to it or its obligation to make Eurodollar Loans, issue a Letter of Credit, or shall change the basis of taxation of payments to the Lender (or its Lending Office) of the principal of or interest on its Eurodollar Loans, Letter(s) of Credit or any other amounts due under this Agreement or any other Loan Document in respect of its Eurodollar Loans, Letter(s) of Credit, any Reimbursement Obligations owed to it, or its obligation to make Eurodollar Loans, or issue a Letter of Credit (except for changes in the rate of tax on the overall net income of the Lender or its Lending Office imposed by the jurisdiction in which the Lender‟s principal executive office or Lending Office is located); or (2) shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any Eurodollar Loans any such requirement included in an applicable Reserve Percentage) against assets of, deposits with or for the account of, or credit extended by, the Lender (or its Lending Office) or shall impose on the Lender (or its Lending Office) or on the interbank market any other condition affecting its Eurodollar Loans, its Note, its Letter(s) of Credit, any Reimbursement Obligation owed to it, or its obligation to make Eurodollar Loans, or to issue a Letter of Credit; and the result of any of the foregoing is to increase the cost to the Lender (or its Lending Office) of making or maintaining any Eurodollar Loan, issuing or maintaining a Letter of Credit, or to reduce the amount of any sum received or receivable by the Lender (or its Lending Office) under this Agreement or under any other Loan Document with respect thereto, by an amount deemed by the Lender to be material, then, within 15 days after demand by the Lender (accompanied by a certificate of the Lender explaining such increase in cost and the calculation thereof in reasonable detail), Borrower shall be obligated to pay to the Lender such additional amount or amounts as will compensate the Lender for such increased cost or reduction. (b) Capital . If, after the date hereof, the Lender shall have determined that the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender (or its Lending Office) or any corporation controlling the Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has had the effect of reducing the rate of return on the Lender‟s or such corporation‟s capital as a consequence of its obligations hereunder to a level below that which the Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration the Lender‟s or such corporation‟s policies with respect to capital adequacy) by an amount deemed by the Lender to be material, then from time to time, within 15 days after demand by the Lender (accompanied by a certificate of the Lender explaining such reduction and the calculation thereof in reasonable detail), Borrower shall pay to the Lender such additional amount or amounts as will compensate the Lender for such reduction. -43-

(c) Certificate . A certificate of the Lender claiming compensation under this Section 8.4 and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive absent manifest error. In determining such amount, the Lender may use any reasonable averaging and attribution methods. 8.5 Lending Offices . The Lender may, at its option, elect to make its Loans hereunder at the branch, office or affiliate specified on the appropriate signature page hereof (each a “Lending Office”) for each type of Loan available hereunder or at such other of its branches, offices or affiliates as it may from time to time elect and designate in a written notice to Borrower. To the extent reasonably possible, the Lender shall designate an alternative branch or funding office with respect to its Eurodollar Loans to reduce any liability of Borrower to the Lender under Section 8.4 or to avoid the unavailability of Eurodollar Loans under Section 8.3, so long as such designation is not disadvantageous to the Lender. 8.6 Discretion of Lender as to Manner of Funding . Notwithstanding any other provision of this Agreement, the Lender shall be entitled to fund and maintain its funding of all or any part of the Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder with respect to Eurodollar Loans shall be made as if the Lender had actually funded and maintained each Eurodollar Loan through the purchase of deposits in the interbank eurodollar market having a maturity corresponding to such Loan‟s Interest Period, and bearing an interest rate equal to LIBOR for such Interest Period. 8.7 Hedging Liability and Funds Transfer and Deposit Account Liability Arrangements . By virtue of the Lender‟s execution of this Agreement, any Affiliate of the Lender with whom Parent or any Subsidiary has entered into an agreement creating Hedging Liability or Funds Transfer and Deposit Account Liability shall be deemed a Lender party hereto, it being understood and agreed that the rights and benefits of such Affiliate under the Loan Documents consist exclusively of such Affiliate‟s right to share in payments and collections out of the Collateral and the Guaranties as more fully set forth in Section 2.8 and Section 4 hereof. 9. MISCELLANEOUS . 9.1 Withholding Taxes . Each payment by Borrower under this Agreement or the other Loan Documents shall be made without withholding for or on account of any present or future taxes (other than overall net income taxes on the recipient imposed by the jurisdiction in which its principal executive office or Lending Office is located) imposed by or within the jurisdiction in which Borrower is domiciled, any jurisdiction from which Borrower makes any payment, or (in each case) any political subdivision or taxing authority thereof or therein. If any such withholding is so required, Borrower shall make the withholding, pay the amount withheld to the appropriate governmental authority before penalties attach thereto or interest accrues thereon and forthwith pay such additional amount as may be necessary to ensure that the net amount actually received by the Lender free and clear of such taxes (including such taxes on such additional amount) is equal to the amount that the Lender would have received had such withholding not been made. If the Lender pays any amount in respect of any such taxes, penalties or interest, Borrower shall reimburse the Lender for that payment on demand in the currency in which such payment was made. If Borrower pays any such taxes, penalties or interest, it shall -44-

deliver official tax receipts evidencing that payment or certified copies thereof to the Lender on or before the thirtieth day after payment. 9.2 No Waiver, Cumulative Remedies . No delay or failure on the part of the Lender or on the part of the holder or holders of any of the Obligations in the exercise of any power or right under any Loan Document shall operate as a waiver thereof or as an acquiescence in any default, nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The rights and remedies hereunder of the Lender and of the holder or holders of any of the Obligations are cumulative to, and not exclusive of, any rights or remedies which any of them would otherwise have. 9.3 Non-Business Days . If any payment hereunder becomes due and payable on a day which is not a Business Day, the due date of such payment shall be extended to the next succeeding Business Day on which date such payment shall be due and payable. In the case of any payment of principal falling due on a day which is not a Business Day, interest on such principal amount shall continue to accrue during such extension at the rate per annum then in effect, which accrued amount shall be due and payable on the next scheduled date for the payment of interest. 9.4 Documentary Taxes . Borrower agrees to pay on demand any documentary, stamp or similar taxes payable in respect of this Agreement or any other Loan Document, including interest and penalties, in the event any such taxes are assessed, irrespective of when such assessment is made and whether or not any credit is then in use or available hereunder. 9.5 Survival of Representations . All representations and warranties made herein or in any other Loan Document or in certificates given pursuant hereto or thereto shall survive the execution and delivery of this Agreement and the other Loan Documents, and shall continue in full force and effect with respect to the date as of which they were made as long as any credit is in use or available hereunder. 9.6 Survival of Indemnities . All indemnities and other provisions relative to reimbursement to the Lender of amounts sufficient to protect the yield of the Lender with respect to the Loans and Letters of Credit, including, but not limited to, Sections 8.1, 8.4, and 9.12, shall survive the termination of this Agreement and the other Loan Documents and the payment of the Obligations. 9.7 Notices . (a) Addresses and Times . Except as otherwise specified herein, all notices hereunder and under the other Loan Documents shall be in writing (including, without limitation, notice by telecopy) and shall be given to the relevant party at its address or facsimile number set forth below, or such other address or facsimile number as such party may hereafter specify by notice to the Lender and Borrower given by courier, by United States certified or registered mail, by facsimile or by other telecommunication device capable of creating a written record of such notice and its receipt. -45-

If to Parent or Borrower:

K12 Inc. 2300 Corporate Park Drive Herndon, Virginia 20171 Attention: Chief Financial Officer K12 Inc. 2300 Corporate Park Drive Herndon, Virginia 20171 Attention: General Counsel Kelley Drye & Warren LLP 8000 Towers Crescent Drive, Suite 1200 Vienna, Virginia 22182 Attention: Joseph B. Hoffman PNC Bank, National Association 808 17 th Street NW Washington, D.C. 20006-3944 Attention: Christine E. Whitney Greenebaum Doll & McDonald PLLC 255 East Fifth Street, Suite 2800 Cincinnati, Ohio 45202 Attention: Michael H. Brown

With a copy (which shall not constitute notice) to:

and to:

If to Lender:

With a copy (which shall not constitute notice) to:

Each such notice, request or other communication shall be effective (1) if given by facsimile, when such facsimile is transmitted to the facsimile number specified in this Section prior to 5:00 pm Washington, D.C. time on a Business Day and otherwise on the next Business Day and a confirmation of such facsimile has been received by the sender, (2) if given by mail, 5 days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid or (3) if given by any other means, when delivered at the addresses specified in this Section or on the signature pages hereof prior to 5:00 pm Washington, D.C. time on a Business Day and otherwise on the next Business Day; provided that any notice given pursuant to Section 2 hereof shall be effective only upon receipt. (b) Electronic Mail . Electronic mail and internet and intranet websites may be used only to distribute routine communications, such as financial statements, and to distribute Loan Documents for execution by the parties thereto, and may not be used for any other purpose. 9.8 Counterparts . This Agreement may be executed in any number of counterparts, and by the different parties hereto on separate counterpart signature pages, and all such counterparts taken together shall be deemed to constitute one and the same instrument. 9.9 Successors and Assigns; Assignments and Participations . (a) Successors and Assigns Generally . The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and -46-

assigns permitted hereby, except that neither Borrower nor Parent may assign or otherwise transfer any of its rights or obligations under any Loan Document without the prior written consent of the Lender, and Lender may not assign or otherwise transfer any of its rights or obligations hereunder except (1) by way of participation in accordance with the provisions of Section 9.9(b) or (2) by way of pledge or assignment of a security interest subject to the restrictions of Section 9.9(d) (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in Section 9.9(b) and, to the extent expressly contemplated hereby, the Related Parties of the Lender) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Participations . Lender may at any time, without the consent of, or notice to, Borrower, sell participations to any Person (other than a natural person or Borrower or any of Borrower‟s Affiliates or Subsidiaries) (each, a “Participant”) in all or a portion of the Lender‟s rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it); provided that (1) the Lender‟s obligations under this Agreement shall remain unchanged, (2) the Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (3) Borrower and L/C Issuer shall continue to deal solely and directly with the Lender in connection with the Lender‟s rights and obligations under this Agreement. Any agreement or instrument pursuant to which the Lender sells such a participation shall provide that the Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that the Lender will not, without the consent of the Participant, agree to any amendment or waiver described in Section 9.10 that affects such Participant. Subject to Section 9.9(c), Borrower agrees that each Participant shall be entitled to the benefits of Sections 8.1 and 8.4(b) to the same extent as if it were the Lender. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.13 as though it were the Lender. (c) Limitations upon Participant Rights . A Participant shall not be entitled to receive any greater payment under Section 8.4(a) than the Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with Borrower‟ prior written consent. A Participant that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) if it were the Lender shall not be entitled to the benefits of Section 9.1 unless the sale of the participation to such Participant is made with Borrower‟ prior written consent. (d) Certain Pledges . The Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of the Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release the Lender from any of its obligations hereunder or substitute any such pledgee or assignee for the Lender as a party hereto. -47-

9.10 Amendments . Any provision of this Agreement or the other Loan Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by (a) Borrower, (b) the Lender, and (c) if the rights or duties of the L/C Issuer are affected thereby, the L/C Issuer. 9.11 Headings . Section headings used in this Agreement are for reference only and shall not affect the construction of this Agreement. 9.12 Costs and Expenses; Indemnification . (a) Obligation to Pay . Borrowers agree to pay all costs and expenses of the Lender payable to third parties in connection with the preparation, negotiation, and administration of the Loan Documents, including, without limitation, the reasonable fees and disbursements of outside counsel to the Lender, in connection with the preparation and execution of the Loan Documents, and any amendment, waiver or consent related thereto, whether or not the transactions contemplated herein are consummated, together with any fees and charges suffered or incurred by the Lender and payable to third parties in connection with periodic collateral filing fees and lien searches. Borrower further agrees to indemnify the Lender, and its directors, officers, employees, agents, financial advisors, and consultants against all Damages (including, without limitation, all expenses of litigation or preparation therefor, whether or not the indemnified Person is a party thereto, or any settlement arrangement arising from or relating to any such litigation) which any of them may reasonably pay or incur arising out of or relating to any Loan Document or any of the transactions contemplated thereby or the direct or indirect application or proposed application of the proceeds of any Loan or Letter of Credit, other than those which arise from the fraud, gross negligence or willful misconduct of the party claiming indemnification. Borrower, upon demand by the Lender at any time, shall reimburse the Lender for any reasonable legal or other expenses incurred and payable to third parties in connection with investigating or defending against any of the foregoing (including any settlement costs relating to the foregoing) except if the same is directly due to the fraud, gross negligence or willful misconduct of the party to be indemnified. The obligations of Borrower under this Section 9.12 shall survive the termination of this Agreement. (b) Indemnity . Borrower unconditionally agrees to forever indemnify, defend and hold harmless, and covenant not to sue for any claim for contribution against, the Lender for any Damages, costs, loss or expense, including without limitation, response, remedial or removal costs, arising out of any of the following: (1) any presence, release, threatened release or disposal of any hazardous or toxic substance or petroleum by Parent, Borrower or any Subsidiary or otherwise occurring on or with respect to its Property (whether owned or leased), (2) the operation or violation of any environmental law, whether federal, state, or local, and any regulations promulgated thereunder by Parent, Borrower or any Subsidiary or otherwise occurring on or with respect to its Property (whether owned or leased), (3) any claim for personal injury or property damage in connection with Parent, Borrower or any Subsidiary or otherwise occurring on or with respect to its Property (whether owned or leased), and (4) the inaccuracy or breach of any environmental representation, warranty or covenant by Parent, Borrower or any Subsidiary made herein or in any other Loan Document evidencing or securing any Obligations or setting forth terms and conditions applicable thereto or otherwise relating thereto, except for Damages arising from the fraud, willful misconduct or gross negligence of the party claiming -48-

indemnification. This indemnification shall survive the payment and satisfaction of all Obligations and the termination of this Agreement, and shall remain in force beyond the expiration of any applicable statute of limitations and payment or satisfaction in full of any single claim under this indemnification. This indemnification shall be binding upon the successors and assigns of Borrower and shall inure to the benefit of the Lender, its directors, officers, employees, agents, and collateral trustees, and their successors and assigns. 9.13 Set-off . In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, Lender and each subsequent holder of any Obligation is hereby authorized by each of Parent and Borrower at any time or from time to time, without notice to Parent, Borrower or to any other Person, any such notice being hereby expressly waived, to set-off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured, but not including trust accounts, and in whatever currency denominated) and any other indebtedness at any time held or owing by the Lender or that subsequent holder to or for the credit or the account of Parent or Borrower, whether or not matured, against and on account of the Obligations of Borrower to the Lender or that subsequent holder under the Loan Documents, including, but not limited to, all claims of any nature or description arising out of or connected with the Loan Documents, irrespective of whether or not (a) the Lender or that subsequent holder shall have made any demand hereunder or (b) the principal of or the interest on the Loans or Note and other amounts due hereunder shall have become due and payable pursuant to Section 7 and although said obligations and liabilities, or any of them, may be contingent or unmatured. 9.14 Entire Agreement . The Loan Documents constitute the entire understanding of the parties thereto with respect to the subject matter thereof and any prior agreements, whether written or oral, with respect thereto are superseded hereby. 9.15 Governing Law . This Agreement and the other Loan Documents, and the rights and duties of the parties hereto, shall be construed and determined in accordance with the internal laws of the Commonwealth of Virginia. 9.16 Severability of Provisions . Any provision of any Loan Document which is unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. All rights, remedies and powers provided in this Agreement and the other Loan Documents may be exercised only to the extent that the exercise thereof does not violate any applicable mandatory provisions of law, and all the provisions of this Agreement and other Loan Documents are intended to be subject to all applicable mandatory provisions of law which may be controlling and to be limited to the extent necessary so that they will not render this Agreement or the other Loan Documents invalid or unenforceable. 9.17 Excess Interest . Notwithstanding any provision to the contrary contained herein or in any other Loan Document, no such provision shall require the payment or permit the collection of any amount of interest in excess of the maximum amount of interest permitted by applicable law to be charged for the use or detention, or the forbearance in the collection, of all or -49-

any portion of the Loans or other obligations outstanding under this Agreement or any other Loan Document (“Excess Interest”). If any Excess Interest is provided for, or is adjudicated to be provided for, herein or in any other Loan Document, then in such event (a) the provisions of this Section shall govern and control, (b) no Borrower, guarantor or endorser shall be obligated to pay any Excess Interest, (c) any Excess Interest that the Lender may have received hereunder shall, at the option of the Lender, be (1) applied as a credit against the then outstanding principal amount of Obligations hereunder and accrued and unpaid interest thereon (not to exceed the maximum amount permitted by applicable law), (2) refunded to Borrower, or (3) any combination of the foregoing, (d) the interest rate payable hereunder or under any other Loan Document shall be automatically subject to reduction to the maximum lawful contract rate allowed under applicable usury laws (the “Maximum Rate”), and this Agreement and the other Loan Documents shall be deemed to have been, and shall be, reformed and modified to reflect such reduction in the relevant interest rate, and (e) no Borrower, guarantor or endorser shall have any action against the Lender for any Damages whatsoever arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on any of Borrower‟s Obligations is calculated at the Maximum Rate rather than the applicable rate under this Agreement, and thereafter such applicable rate becomes less than the Maximum Rate, the rate of interest payable on such Obligations shall remain at the Maximum Rate until the Lender has received the amount of interest which the Lender would have received during such period on such Obligations had the rate of interest not been limited to the Maximum Rate during such period. 9.18 Construction . The parties acknowledge and agree that the Loan Documents shall not be construed more favorably in favor of any party hereto based upon which party drafted the same, it being acknowledged that all parties hereto contributed substantially to the negotiation of the Loan Documents. Nothing contained herein shall be deemed or construed to permit any act or omission which is prohibited by the terms of any Collateral Document, the covenants and agreements contained herein being in addition to and not in substitution for the covenants and agreements contained in the Collateral Documents. 9.19 USA Patriot Act . The Lender hereby notifies Borrower that pursuant to the requirements of the Patriot Act it is required to obtain, verify and record information that identifies Borrower, which information includes the name and address of Borrower and other information that will allow the Lender to identify Borrower in accordance with the Patriot Act. 9.20 Submission to Jurisdiction; Waiver of Jury Trial . Each of the Lender, Parent and Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Eastern District of Virginia and of any Virginia State court sitting in Fairfax County, Virginia for purposes of all legal proceedings arising out of or relating to this Agreement, the other Loan Documents or the transactions contemplated hereby or thereby. Each of the Lender, Parent and Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Parent, Borrower and the Lender hereby irrevocably waive any and all right to trial by jury in any legal proceeding arising out of or relating to any Loan Document or the transactions contemplated thereby. -50-

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IN WITNESS WHEREOF , the parties have entered into this Agreement as of the date first written above. K12 INC. By: John F. Baule, Executive Vice President (“Borrower”) SCHOOL LEASING CORPORATION By: John F. Baule, Executive Vice President (“Borrower”) AMERICAN SCHOOL SUPPLY CORPORATION By: John F. Baule, Executive Vice President (“Borrower”) PNC BANK, NATIONAL ASSOCIATION By: Christine E. Whitney, Vice President (“Lender” and “L/C Issuer”)

Exhibit 10.2 STOCKHOLDERS AGREEMENT THIS STOCKHOLDERS AGREEMENT (this “Agreement”) is entered into as of April 26, 2000 by and among PREMIERSCHOOL.COM, INC., a Delaware corporation (the “Company”), KNOWLEDGE UNIVERSE LEARNING, INC., a Delaware corporation (“KULI”), and RONALD J. PACKARD (“Packard”). RECITALS Concurrently with the execution of this Agreement, Packard has purchased 1,500,000 shares of Class A Common Stock of the Company from KULI and the parties desire to enter into this Agreement for the purpose of regulating certain aspects of their relationships with regard to each other. AGREEMENT NOW THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration, the parties agree as follows: ARTICLE I. DEFINITIONS As used herein, the following terms have the following meanings: 1.1 Affiliate . The term “Affiliate” means with respect to any Person, any other Person that directly or indirectly through one or more intermediaries controls or is controlled by, or is under common control with, that Person. The term “control” (including as used in the terms “controlling,” “controlled by,” and “under common control with”) of a Person means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. 1.2 Board . The term “Board” means the Board of Directors of the Company. 1.3 Class A Common Stock . The term “Class A Common Stock” means the Class A Common Stock of the Company, par value $0.0001 per share. 1.4 Class B Common Stock . The term “Class B Common Stock” means the Class B Common Stock of the Company, par value $0.0001 per share. 1

1.5 Common Stock . The term “Common Stock” means common stock of the Company, par value $0.0001 per share, including the Class A Common Stock and/or the Class B Common Stock. 1.6 IPO . The term “IPO” means the first underwritten public offering of Common Stock under the Securities Act that results in shares of Common Stock trading on a national securities exchange or the NASDAQ National Market System. 1.7 Permitted Transfer . The term “Permitted Transfer” means a transfer of Shares (a) to the spouse or children of Packard, or (b) to a trust for the benefit of Packard and/or a member or members of Packard‟s immediate family, or (c) pursuant to the will of Packard or the laws of descent and distribution, or (d) to KULI or an Affiliate of KULI, or (e) to any other Person with the prior written consent of KULI, which such consent KULI may withhold in its sole and absolute discretion; provided , however , that a transfer shall not constitute a Permitted Transfer unless (i) the transferee agrees to be bound by all of the obligations under this Agreement in the same manner as Packard and the transferee executes and delivers to the Company a written agreement to such effect in form and substance satisfactory to the Company, and (ii) the transfer is exempt from all registration and qualification requirements of the Securities Act and applicable state securities laws and the Company receives an opinion of counsel (which counsel and opinion are reasonably satisfactory to the Company) or other evidence acceptable to the Company confirming that such transfer is so exempt and otherwise does not violate federal or state securities laws. 1.8 Person . The term “Person” means any individual, sole proprietorship, partnership, joint venture, trust, incorporated organization, limited liability company, association, corporation, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). 1.9 Securities Act . The term “Securities Act” means the Securities Act of 1933, as amended. 1.10 Shares . The term “Shares” means shares of Common Stock, and securities convertible into, or exercisable or exchangeable for shares of Common Stock. 1.11 Transfer . The term “Transfer” means a voluntary or involuntary, direct or indirect, sale, transfer, assignment, hypothecation, pledge or alienation of any Shares, or any right or interest therein, whether by operation of law or otherwise. 2

ARTICLE II. RIGHT OF REFUSAL 2.1 General Restrictions on Transfer . Packard shall not allow any Transfer of his Shares to be consummated, except (a) a Permitted Transfer, (b) a Transfer pursuant Article III or IV hereof, or (c) a sale of Shares in compliance the provisions of Section 2.3 through 2.4 below. 2.2 Notice . Prior to consummating any sale of Shares that is outside the scope of Section 2.1 (a) and Section 2.1(b) above, Packard shall give KULI and the Company written notice (the “Notice”) of such proposed sale, which Notice shall offer to sell first to KULI and then to the Company the number of Shares proposed to be sold by Packard (the “Offered Shares”) at the same price per share and upon the same terms and conditions as Packard has received in a bona fide offer to purchase such Shares from an unrelated third party (the “Proposed Purchaser”). The Notice shall set forth: (i) the name and address of the Proposed Purchaser, (ii) the amount and form of consideration and terms and conditions of payment to be made by such Proposed Purchaser, and (iii) that the Proposed Purchaser has been informed of the right of first refusal provided for in this Article II and has agreed to act in accordance with the terms hereof. Anything contained herein to the contrary notwithstanding, in the event the proposed consideration for the purchase of the Offered Shares involves a form other than cash, KULI or the Company may substitute for such non-cash consideration an equivalent amount of cash as determined by the Board. 2.3 Option to Purchase . KULI shall have the option, for a period of fifteen (15) business days following receipt of the Notice, to acquire all (but not less than all) of the Offered Shares at the same price per share and upon the same terms and conditions as specified in the Notice. Such option shall be exercised by delivery of written notice of the exercise of the option to Packard. In the event that KULI does not exercise such option to acquire all of the Offered Shares within such fifteen (15) business day period, then the Company shall have the right for a period of five (5) business days after the expiration of the fifteen (15) business day period to acquire all (but not less than all) of the Offered Shares at the same price per share and upon the same terms and conditions as specified in the Notice. Such option shall be exercised by delivery of written notice of the exercise of the option to Packard. In the event that KULI and the Company do not exercise the options described above within the periods described above (or exercise the option but fail to close as provided in Section 2.4), then Packard shall have the right for a period of 60 days after the expiration of the five (5) business day period described above or such failure to close (or, if sooner, after written waiver by KULI and the Company of their options to purchase), to sell to the Proposed Purchaser the Offered Shares but only at the same price per share and upon the same terms and conditions as set forth in the Notice; provided , however , that as a condition to the transfer of the Offered Shares to the Proposed Purchaser (a) the transfer must be exempt from all registration and qualification requirements of the Securities Act and applicable state securities laws and the Company shall receive an opinion of counsel reasonably acceptable to the Company that such transfer is so exempt and otherwise does 3

not violate federal or state securities laws, and (b) such Proposed Purchaser agrees to be bound by all of the obligations under this Agreement in the same manner as Packard and such Proposed Purchaser executes and delivers to the Company a written agreement to such effect in form and substance satisfactory to the Company. Any Shares that continue to be held by Packard after such 60-day period shall remain subject to the restriction on transfer contained in Section 2.1 hereof. 2.4 Closing . In the event that KULI or the Company elect to acquire the Offered Shares from Packard pursuant to this Article II, the closing of such acquisition shall take place within ten (10) business days after the notice of such election. At the closing, Packard shall deliver to KULI or the Company, as applicable, the certificates representing the Offered Shares (duly endorsed for transfer and free and clear of all liens, claims and encumbrances) against delivery by KULI or the Company of the consideration for the Shares being acquired in immediately available funds to the extent such consideration is payable in cash. 2.5 Company Effecting Transfers . The Company agrees not to effect any Transfer of Shares by Packard until it has received evidence reasonably satisfactory to it that this Article II has been complied with. Any attempt to consummate a Transfer in violation of this Article II shall constitute a material breach of this Agreement and shall be null and void and of no force or effect. ARTICLE III. DRAG-ALONG RIGHTS In the event that KULI proposes to Transfer all of the shares of Common Stock owned by KULI to any Person(s) (a “Drag-Along Transferee”) other than an Affiliate of KULI, KULI shall have the right to require Packard to Transfer to the Drag-Along Transferee all of the Shares owned by Packard on the same terms and conditions that KULI is transferring its Shares (the “Drag-Along Right”). To exercise the Drag-Along Right, KULI shall give Packard written notice setting forth: (x) the amount of consideration and the other terms and conditions offered by the Drag-Along Transferee, and (y) the date, location and other provisions with respect to the closing of the transaction (the “Drag-Along Closing”). At the Drag-Along Closing, Packard shall deliver to the Drag-Along Transferee the certificates representing all of his Shares (duly endorsed for transfer and free and clear of any and all liens, claims and encumbrances) against delivery of the consideration for such Shares. ARTICLE IV. TAG-ALONG RIGHTS 4.1 General . In the event that KULI proposes to sell any of the shares of Common Stock owned by KULI to any Person(s) (a “Tag-Along Transferee”) other than an Affiliate of 4

KULI, Packard shall have the right to require the Tag-Along Transferee to purchase from Packard that number of shares of Common Stock owned by Packard equal to the total number of shares of Common Stock owned by Packard multiplied by a fraction the numerator of which is the number of shares of Common Stock to be sold by KULI and the denominator of which is the total number of shares of Common Stock owned by KULI (“Tag-Along Right”). All shares of Common Stock purchased from Packard pursuant to this Section 4.1 shall be paid for at the same price per share and on the same terms and conditions that KULI is selling its shares. 4.2 Notice . KULI shall give Packard a written notice (the “KULI Tag-Along Notice”) in connection with any sale that is subject to Section 4.1 setting forth: (i) the number of shares of Common Stock proposed to be sold by KULI, and (ii) the proposed amount and form of consideration and terms and conditions of payment to be made by such proposed purchaser. 4.3 Exercise of Tag-Along Right . The Tag-Along Right shall be exercised by Packard by giving written notice to KULI (the “Tag-Along Notice”) within 15 days following his receipt of the Tag-Along Notice. If the total number of shares of Common Stock proposed to be sold to the Tag-Along Transferee by KULI and Packard exceeds the number of shares of Common Stock that the Tag-Along Transferee is willing to purchase, the number of shares of Common Stock to be sold by KULI and Packard shall be reduced pro rata based on the total number of shares of Common Stock offered for sale by KULI and Packard. If no Tag-Along Notice is received by KULI during the 15-day period referred to above, KULI shall have the right to transfer to the Tag-Along Transferee the shares of Common Stock proposed to be sold on terms and conditions no more favorable to KULI than those stated in the related KULI Tag-Along Notice. ARTICLE V. IRREVOCABLE PROXY Packard hereby constitutes and appoints KULI and its successors and assigns as Packard‟s true and lawful proxy and attorney-in-fact to vote and/or give written consents with respect to any and all Shares now or hereafter owned by Packard and/or standing in the name of Packard on the books and records of the Company or with respect to which Packard otherwise may be entitled to vote at any and all annual or special meetings of stockholders of the Company or by written consent. The foregoing proxy is coupled with an interest and is irrevocable. The foregoing proxy shall terminate at such time as William J. Bennett agrees to include Packard in the list of individuals named in the definition of “Change in Control” in Section 3.8 of William J. Bennett‟s February 20, 2000 Employment Agreement with the Company. 5

ARTICLE VI. MISCELLANEOUS 6.1 Termination . This Agreement shall terminate and no longer be effective as of the closing of an IPO. 6.2 Legend . In addition to any legends required by federal or state securities laws, the certificates representing the Shares shall bear the following legend: “The securities represented by this certificate are subject to certain restrictions on transfer and other provisions set forth in a Stockholders Agreement dated as of April 26, 2000. A copy of such Agreement may be obtained from the Company upon request.” Packard agrees that absent (i) an effective registration statement under the Securities Act and qualification under applicable state securities laws or (ii) compliance with Rule 144 under the Securities Act, Packard will not effect any Transfer of Shares unless such Transfer is exempt from all registration and qualification requirements of the Securities Act and applicable state securities laws. Upon the Company‟s request, Packard shall provide the Company with an opinion of counsel (which counsel and opinion are reasonably satisfactory to the Company) or other evidence acceptable to the Company confirming that such disposition is exempt from all registration and qualification requirements of the Securities Act and applicable state securities laws and otherwise does not violate federal or state securities laws. 6.3 Transferees: Additional Restrictions on Transfer . Each transferee (other than KULI, an Affiliate thereof or the Company) of Shares from Packard or a subsequent transferee shall take such Shares subject to the same restrictions that existed in the hands of the transferor. Unless the Company and KULI otherwise consent in writing in their sole and absolute discretion, no transferee of Shares from Packard or a subsequent transferee, other than a transferee receiving Shares in a Permitted Transfer, shall be entitled to the benefits provided to Packard hereunder, including, without limitation, the Tag-Along Rights provided in Article IV hereof. 6.4 Specific Performance, Etc . In addition to being entitled to exercise all rights provided herein, in the Company‟s Certificate of Incorporation or granted by law, including recovery of damages, each party to this Agreement will be entitled to specific performance of its rights under this Agreement. Each party agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. 6.5 Notices . All notices, requests, demands and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have 6

been duly given when received if personally delivered; upon confirmation of transmission if transmitted by telecopy, electronic or digital transmission method; the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (e.g., Federal Express); and upon receipt, if sent by certified or registered mail, return receipt requested. If notice is given in multiple fashions, the date of first effective notice shall control. In each case notice shall be sent to: If to the Company, addressed to: PremierSchool.com, Inc. 844 Moraga Drive Los Angeles, California 90049 Fax:(310)440-3690 Attention: Board of Directors With a copy (not itself constituting notice) to: Maron & Sandier 844 Moraga Drive Los Angeles, California 90049 Fax: (310)440-3690 Attention: David S. Kyman, Esq. If to KULI, addressed to: Knowledge Universe Learning, Inc. 844 Moraga Drive Los Angeles, California 90049 Fax:(310)440-3690 Attention: Chief Executive Officer With a copy (not itself constituting notice) to: Maron & Sandier 844 Moraga Drive Los Angeles, California 90049 Fax: (310)440-3690 Attention: David S. Kyman, Esq. If to Packard, addressed to: Ronald J. Packard 844 Moraga Drive Los Angeles, California 90049 Fax: (310)440-3679 7

or to such other place and with such other copies as any party may designate by written notice to the others. 6.6 Entire Agreement; Amendments and Waivers . This Agreement constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties hereto relating to the subject matter hereof. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers of or consents to departures from the provisions hereof may not be given unless approved in writing by the Company, KULI and Packard. No action tak