10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 1-13144

ITT EDUCATIONAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware 36-2061311

(State or other jurisdiction of (I.R.S. Employer Identification No.)

incorporation or organization)

13000 North Meridian Street

Carmel, Indiana 46032-1404

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (317) 706-9200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

39,752,692

Number of shares of Common Stock, $.01 par value, outstanding at September 30, 2007

ITT EDUCATIONAL SERVICES, INC.

Carmel, Indiana

Quarterly Report to Securities and Exchange Commission

September 30, 2007

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

Index

Condensed Consolidated Balance Sheets as of September 30, 2007 and 2006 (unaudited) and

December 31, 2006

Condensed Consolidated Statements of Income (unaudited) for the three and nine months ended

September 30, 2007 and 2006

Condensed Consolidated Statements of Cash Flows (unaudited) for the three and nine months ended

September 30, 2007 and 2006

Condensed Consolidated Statements of Shareholders’ Equity for the nine months ended

September 30, 2007 and 2006 (unaudited) and the year ended December 31, 2006

Notes to Condensed Consolidated Financial Statements

ITT EDUCATIONAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
		As of
	September 30, 2007	December 31, 2006	September 30, 2006
	(unaudited)		(unaudited)
Assets
Current assets:
Cash and cash equivalents	$10,322	$161,905	$4,661
Short-term investments	261,760	195,007	183,464
Accounts receivable, net	16,351	9,367	12,172
Deferred income taxes	10,216	4,771	5,538
Prepaid expenses and other current assets	11,825	9,902	11,385
Total current assets	310,474	380,952	217,220
Property and equipment, net	153,394	148,411	149,751
Direct marketing costs, net	21,195	21,628	20,560
Other assets	12,285	9,329	19,734
Total assets	$497,348	$560,320	$407,265
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt	$42,857	$ --	$ --
Accounts payable	57,658	47,948	53,875
Accrued compensation and benefits	16,515	13,899	9,760
Other accrued liabilities	12,947	20,496	17,902
Deferred revenue	192,673	202,162	199,741
Total current liabilities	322,650	284,505	281,278
Long-term debt	107,143	150,000	--
Deferred income taxes	11,768	13,713	13,950
Minimum pension liability	--	--	9,899
Other liabilities	15,766	8,157	7,687
Total liabilities	457,327	456,375	312,814
Shareholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized, none issued	--	--	--
Common stock, $.01 par value, 300,000,000
shares authorized, 54,068,904 issued	541	541	541
Capital surplus	6,790	46,982	54,729
Retained earnings	613,487	508,195	467,316
Accumulated other comprehensive (loss)	(6,280)	(6,533)	(6,016)
Treasury stock, 14,316,212, 13,029,471
and 12,702,130 shares, at cost	(574,517)	(445,240)	(422,119)
Total shareholders' equity	40,021	103,945	94,451
Total liabilities and shareholders' equity	$497,348	$560,320	$407,265
The accompanying notes are an integral part of these condensed consolidated financial statements.

ITT EDUCATIONAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(unaudited)
	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2007	2006	2007	2006
Revenue	$217,932	$189,667	$639,084	$551,551
Costs and expenses:
Cost of educational services	88,822	84,554	270,173	267,472
Student services and administrative expenses	66,192	53,969	204,210	166,546
Special legal and other investigation costs	--	--	--	(430)
Total costs and expenses	155,014	138,523	474,383	433,588
Operating income	62,918	51,144	164,701	117,963
Interest income, net	313	1,740	1,877	6,257
Income before provision for income taxes	63,231	52,884	166,578	124,220
Provision for income taxes	23,563	19,832	63,455	46,583
Net income	$39,668	$33,052	$103,123	$77,637
Earnings per share:
Basic	$0.99	$0.79	$2.55	$1.80
Diluted	$0.98	$0.77	$2.51	$1.76
Weighted average shares outstanding:
Basic	39,958	41,810	40,437	43,248
Diluted	40,572	42,703	41,087	44,181
The accompanying notes are an integral part of these condensed consolidated financial statements.

ITT EDUCATIONAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2007	2006	2007	2006
Cash flows from operating activities:
Net income	$39,668	$33,052	$103,123	$77,637
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization	5,030	5,115	17,770	15,109
Provision for doubtful accounts	3,845	2,156	13,835	7,488
Deferred income taxes	(839)	(1,911)	(7,390)	(2,769)
Excess tax benefit from stock option exercises	(6,280)	(3,302)	(29,554)	(10,268)
Stock-based compensation expense	896	543	4,067	2,777
Changes in operating assets and liabilities:
Accounts receivable	(10,266)	(4,592)	(20,819)	(5,671)
Direct marketing costs, net	12	(968)	433	(3,070)
Accounts payable	(2,459)	(6,035)	9,710	(2,226)
Other operating assets and liabilities	23,050	7,691	30,290	5,536
Deferred revenue	281	25,676	(9,489)	24,287
Net cash flows from operating activities	52,938	57,425	111,976	108,830
Cash flows from investing activities:
Facility expenditures and land purchases	(2,764)	(5,951)	(11,460)	(16,764)
Capital expenditures, net	(4,351)	(7,601)	(11,293)	(20,690)
Proceeds from sales and maturities of investments	440,766	397,799	1,625,072	1,203,920
Purchase of investments	(412,241)	(375,309)	(1,691,825)	(989,694)
Net cash flows from investing activities	21,410	8,938	(89,506)	176,772
Cash flows from financing activities:
Excess tax benefit from stock option exercises	6,280	3,302	29,554	10,268
Proceeds from exercise of stock options	6,931	4,049	24,472	18,816
Repurchase of common stock	(87,316)	(77,126)	(228,079)	(323,760)
Net cash flows from financing activities	(74,105)	(69,775)	(174,053)	(294,676)
Net change in cash and cash equivalents	243	(3,412)	(151,583)	(9,074)
Cash and cash equivalents at beginning of period	10,079	8,073	161,905	13,735
Cash and cash equivalents at end of period	$10,322	$4,661	$10,322	$4,661
The accompanying notes are an integral part of these condensed consolidated financial statements.

ITT EDUCATIONAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars and shares in thousands)
					Accumulated
	Common Stock		Capital	Retained	Other Comprehensive	Common Stock in Treasury
	Shares	Amount	Surplus	Earnings	Income/(Loss)	Shares	Amount	Total
Balance as of December 31, 2005	54,069	$541	$68,714	$389,679	($6,016)	(8,378)	($144,324)	$308,594
For the nine months ended September 30, 2006 (unaudited):
Net income				77,637				77,637
Exercise of stock options			(26,877)			712	45,693	18,816
Tax benefit from exercise of stock options			10,268					10,268
Common shares repurchased						(5,040)	(323,760)	(323,760)
Stock-based compensation			2,777					2,777
Issuance of shares for Directors' Deferred Compensation Plan			(153)			4	272	119
Balance as of September 30, 2006	54,069	541	54,729	467,316	(6,016)	(12,702)	(422,119)	94,451
For the three months ended December 31, 2006 (unaudited):
Net income				40,879				40,879
Other comprehensive income:
Minimum pension liability, net of tax					6,016			6,016
Comprehensive income								46,895
Adoption of SFAS No. 158, net of tax					(6,533)			(6,533)
Exercise of stock options			(10,157)			211	14,301	4,144
Tax benefit from exercise of stock options			4,021					4,021
Common shares repurchased						(567)	(39,213)	(39,213)
Stock-based compensation			290					290
Restricted stock awards and shares tendered for taxes			(1,901)			29	1,791	(110)
Balance as of December 31, 2006	54,069	541	46,982	508,195	(6,533)	(13,029)	(445,240)	103,945
Effect of adoption of FIN 48				2,169				2,169
Balance as of January 1, 2007 (unaudited)	54,069	541	46,982	510,364	(6,533)	(13,029)	(445,240)	106,114
For the nine months ended September 30, 2007 (unaudited):
Net income				103,123				103,123
Other comprehensive income:
SFAS No. 158 amortization of pension loss, net of tax					253			253
Comprehensive income								103,376
Exercise of stock options			(74,270)			1,071	98,742	24,472
Tax benefit from exercise of stock options			30,011					30,011
Common shares repurchased						(2,359)	(228,079)	(228,079)
Stock-based compensation			4,067					4,067
Issuance of shares for Directors’ Deferred Compensation Plan						1	60	60
Balance as of September 30, 2007	54,069	$541	$6,790	$613,487	($6,280)	(14,316)	($574,517)	$40,021

The accompanying notes are an integral part of these condensed consolidated financial statements.

ITT EDUCATIONAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Dollars in thousands, except per share data and unless otherwise stated)

1. The Company and Basis of Presentation

We are a leading provider of technology-oriented postsecondary education in the United States based on revenue and student enrollment. As of September 30, 2007, we were offering diploma and associate, bachelor and master degree programs to approximately 54,000 students. As of September 30, 2007, we had 95 institutes and nine learning sites located in 34 states. All of our institutes are authorized by the applicable education authorities of the states in which they operate and are accredited by an accrediting commission recognized by the U.S. Department of Education (“ED”). We have provided career-oriented education programs since 1969 under the “ITT Technical Institute” name. Our corporate headquarters are located in Carmel, Indiana.

The accompanying unaudited condensed consolidated financial statements include our wholly-owned subsidiaries' accounts and have been prepared in accordance with generally accepted accounting principles in the United States of America for interim periods and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, including significant accounting policies, normally included in a complete presentation of financial statements prepared in accordance with those principles, rules and regulations have been omitted. The Condensed Consolidated Balance Sheet as of December 31, 2006 was derived from audited financial statements but, as presented in this report, may not include all disclosures required by accounting principles generally accepted in the United States. In the opinion of our management, the financial statements contain all adjustments necessary to fairly state our financial condition and results of operations. The interim financial information should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K as filed with the SEC for the year ended December 31, 2006.

2. Summary of Certain Accounting Policies

Income Taxes. Effective January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation Number 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which prescribes a single, comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on its tax returns. Upon adoption of FIN 48, we recognized a decrease of approximately $3,391 in the liability for unrecognized tax benefits, which was accounted for as an increase to retained earnings of $2,169 as of January 1, 2007 and a reduction of federal tax benefits of $1,222.

As of January 1, 2007, after the implementation of FIN 48, our unrecognized tax benefits were $6,820. We estimated that our unrecognized tax benefits would increase by approximately $1,500 in the 12 months following the adoption of FIN 48 for federal and state tax positions related to the current and prior years. As of September 30, 2007, we did not anticipate any circumstance or event that would cause us to materially revise this estimate. The amount of unrecognized tax benefits that, if recognized, would have affected the effective tax rate as of the date of adoption was $5,494 and as of September 30, 2007 was approximately $6,827.

We record interest and penalties related to unrecognized tax benefits in income tax expense. As of January 1, 2007, we had approximately $523 accrued for the payment of interest and penalties related to unrecognized tax benefits in our Condensed Consolidated Balance Sheet.

We file income tax returns in the United States (federal) and in various state and local jurisdictions. As of January 1, 2007, in most instances, we were no longer subject to federal, state and local income tax examinations for years prior to 2003. As of September 30, 2007, in most instances, we were no longer subject to federal, state and local income tax examinations for years prior to 2004.

Guarantees. In accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34” (“FIN 45”), we recognize a liability for the fair value of a guarantee obligation upon its issuance.

3. New Accounting Pronouncements

In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits companies to choose to measure certain financial instruments and other items at fair value that are not currently required to be measured at fair value.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We will adopt SFAS No. 159 no later than January 1, 2008. We do not believe that SFAS No. 159 will have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”), which requires a company to measure the funded status of a defined benefit postretirement plan as of the date of the company’s year-end balance sheet. This provision of SFAS No. 158 is effective for fiscal years ending after December 15, 2008 and will be adopted by us no later than December 31,

2008. We have not determined the effect that the adoption of this provision of SFAS No. 158 will have on our consolidated financial statements.

Also in September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which provides guidance on the use of fair value to measure assets and liabilities and expands the disclosure required in a company’s financial statements for fair value measurements. SFAS No. 157 will apply whenever other accounting pronouncements require or permit fair value measurements for assets and liabilities and is effective for fiscal years beginning after November 15, 2007. We will adopt SFAS No. 157 no later than January 1, 2008. We do not believe that SFAS No. 157 will have a material impact on our consolidated financial statements.

4. Equity Compensation

The stock-based compensation expense and related income tax benefit recognized in our Condensed Consolidated Statements of Income in the periods indicated were as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2007	2006	2007	2006
Stock-based compensation expense	$896	$543	$4,067	$2,777
Income tax (benefit)	($345)	($209)	($1,565)	($1,069)

We did not capitalize any stock-based compensation cost in the three or nine months ended September 30, 2007 or 2006.

As of September 30, 2007, we estimated that pre-tax compensation expense for unvested stock-based compensation grants in the amount of approximately $8,585, net of estimated forfeitures, will be recognized in future periods. This expense will be recognized over the remaining service period applicable to the grantees which, on a weighted-average basis, is approximately 3.0 years.

The stock options granted, forfeited, exercised and expired in the period indicated were as follows:

	Nine Months Ended September 30, 2007
		Weighted		Weighted
		Average	Aggregate	Average	Aggregate
	# of	Exercise	Exercise	Remaining	Intrinsic
	Shares	Price	Price	Contractual Term	Value (1)
Outstanding at beginning of period	2,570,809	$33.88	$87,103
Granted	231,362	79.10	18,300
Forfeited	(33,432)	69.96	(2,339)
Exercised	(1,071,355)	22.84	(24,472)
Expired	--	--	--
Outstanding at end of period	1,697,384	$46.30	$78,592	5.5 years	$127,962
Exercisable at end of period	1,417,062	$40.92	$57,985	5.3 years	$114,458

_____________________________

(1) The aggregate intrinsic value of the stock options was calculated by multiplying the number of shares subject to the options outstanding or exercisable, as applicable, by the closing market price of our common stock on September 28, 2007, and subtracting the applicable aggregate exercise price.

Information regarding the stock options granted and exercised in the periods indicated was as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2007	2006	2007	2006
Shares subject to stock options granted	--	14,000	231,362	80,500
Weighted average grant date fair value	$ --	$24.31	$ 29.11	$ 22.31
Shares subject to stock options exercised	215,272	189,777	1,071,355	711,481
Intrinsic value of stock options exercised	$16,717	$8,609	$78,117	$26,784
Proceeds received from stock options exercised	$6,931	$4,049	$24,472	$18,816
Tax benefits realized from stock options exercised	$6,429	$3,302	$30,011	$10,268

The fair value of each stock option grant was estimated on the date of grant using the following assumptions:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2007	2006	2007	2006
Risk-free interest rates	Not applicable	4.3%	4.5% - 4.8%	4.3%
Expected lives (in years)	Not applicable	4.3	4.7	4.3
Volatility	Not applicable	42%	35%	42%
Dividend yield	Not applicable	None	None	None

There were no stock options granted in the three months ended September 30, 2007.

The following table sets forth the shares of restricted stock and the restricted stock units (“RSUs”) that were granted, forfeited and vested in the period indicated:

	Nine Months Ended September 30, 2007
	# of Shares of Restricted Stock	Weighted Average Grant Date Fair Value	# of RSUs	Weighted Average Grant Date Fair Value
Unvested at beginning of period	24,532	$60.90	88	$68.25
Granted	--	--	60,193	83.94
Forfeited	(982)	60.04	(2,268)	77.78
Vested	--	--	--	--
Unvested at end of period	23,550	$60.94	58,013	$84.16

5. Share Repurchases

Our Board of Directors has authorized us to repurchase the following number of shares of our common stock pursuant to our share repurchase program (the “Repurchase Program”):

Number of Shares	Board Authorization Date
2,000,000	April 1999
2,000,000	April 2000
5,000,000	October 2002
5,000,000	April 2006
5,000,000	April 2007

The shares that remained available for repurchase under the Repurchase Program were 5,322,100 as of September 30, 2007. The terms of the Repurchase Program provide that we may repurchase shares of our common stock, from time to time depending on market conditions and other considerations, in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Unless earlier terminated by our Board of Directors, the Repurchase Program will expire when we repurchase all shares authorized for repurchase thereunder.

Information regarding the shares of our common stock that we repurchased in the periods indicated is as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2007	2006	2007	2006
Number of shares	829,100	1,153,900	2,359,000	5,040,100
Total cost	$87,316	$77,126	$228,079	$323,760
Average price per share	$105.31	$66.84	$96.68	$64.24

6. Debt

On December 22, 2006, we entered into a credit agreement with a single lender to borrow up to $150,000 under a revolving credit facility. We can borrow under the credit facility on either a secured or unsecured basis. The credit agreement matures on October 1, 2009 and the amount of credit available thereunder decreases by $21,429 each calendar quarter beginning April 1, 2008.

Borrowings under the credit agreement bear interest at variable rates based on fixed increments over the London Interbank Offered Rate (“LIBOR”). As of September 30, 2007, we had $150,000 of secured borrowings under the credit agreement at an interest rate of 5.65% per annum. Approximately $157,950 of our investments served as collateral for the secured borrowings as of September 30, 2007.

We recognized interest expense on our borrowings under the credit agreement in the amount of $2,117 during the three months ended September 30, 2007 and $6,297 during the nine months ended September 30, 2007. The interest expense is recorded in interest income, net in the Condensed Consolidated Statements of Income.

7. Investments

The following table sets forth how our investments were classified on our Condensed Consolidated Balance Sheets as of the dates indicated:

	As of:
	September 30, 2007			December 31, 2006			September 30, 2006
	Available-for-Sale	Held-to-Maturity	Total	Available-for-Sale	Held-to-Maturity	Total	Available-for-Sale	Held-to-Maturity	Total
Short-term investments	$261,760	$ --	$261,760	$185,535	$9,472	$195,007	$171,970	$11,494	$183,464
Non-current investments	--	--	--	--	--	--	--	--	--
Total	$261,760	$ --	$261,760	$185,535	$9,472	$195,007	$171,970	$11,494	$183,464

The following table sets forth the aggregate fair market value of our available-for-sale investments and aggregate amortized cost of our held-to-maturity investments as of the dates indicated:

	As of:
	September 30, 2007	December 31, 2006	September 30, 2006
Available-for-Sale Investments:
Auction rate equity securities	$ --	$ 21,300	$ 21,300
Auction rate debt securities and
variable rate demand notes	261,760	164,235	150,670
	$261,760	$ 185,535	$ 171,970
Held-to-Maturity Investments:
Marketable debt securities	$ --	$ 9,472	$ 11,494

We had no material gross unrealized holding or realized gains (losses) from our investments in auction rate securities and variable rate demand notes in the three or nine months ended September 30, 2007 and 2006. All income generated from those investments was recorded as interest income. The interest income recognized from our investments in the periods indicated was as follows:

Three Months Ended September 30,		Nine Months Ended September 30,
2007	2006	2007	2006
$2,427	$1,681	$8,006	$6,181

The following table sets forth the contractual maturities of our debt securities classified as available-for-sale and held-to-maturity as of September 30, 2007:

Contractual Maturity	Available-for-Sale	Held-to-Maturity
Due within five years	$ --	$ --
Due after five years through ten years	35,835	--
Due after ten years	225,925	--
	$261,760	$ --

8. Earnings Per Common Share

Earnings per common share for all periods have been calculated in conformity with SFAS No. 128, “Earnings Per Share.” This data is based on the weighted average number of shares of our common stock outstanding in each period as set forth in the following table:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2007	2006	2007	2006
	(In thousands)
Shares:
Weighted average number of shares of common stock outstanding	39,958	41,810	40,437	43,248
Shares assumed issued (less shares assumed purchased for treasury) for stock-based compensation	614	893	650	933
Outstanding shares for diluted
earnings per share calculation	40,572	42,703	41,087	44,181

A total of 0 shares at September 30, 2007 and 30,000 shares at September 30, 2006 have been excluded from the calculation of our diluted earnings per common share because the effect was anti-dilutive.

9. Employee Pension Benefits

The following table sets forth the components of net periodic pension benefit costs of the ESI Pension Plan and ESI Excess Pension Plan for the periods indicated:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2007	2006	2007	2006
Service cost	$ --	$--	$ --	$1,669
Interest cost	769	786	2,307	2,276
Expected return on assets	(1,202)	(1,219)	(3,606)	(3,259)
Recognized net actuarial loss	138	188	414	667
Amortization of prior service cost	--	--	--	(22)
Net periodic pension cost/(benefit)	($295)	($245)	($885)	$1,331

We do not expect to make any contributions to the ESI Pension Plan in 2007.

Effective March 31, 2006, the benefit accruals under the ESI Pension Plan and the ESI Excess Pension Plan were frozen for all participants in those plans. As a result of the freeze, we recognized a pre-tax curtailment gain of $684 in the nine months ended September 30, 2006, due to the acceleration of the amortization of prior service cost and decrease in projected benefit obligation.

We adopted the recognition provisions of SFAS No. 158 effective December 31, 2006. SFAS No. 158 requires that the funded status of a defined benefit postretirement plan be recognized on a company’s balance sheet, and that any changes in the funded status of that type of plan be recognized through comprehensive income. We recorded $8,277 in other assets for our qualified pension plan, a liability of $1,656 in other liabilities for our nonqualified pension plan and $6,533, net of tax, in accumulated other comprehensive loss on our December 31, 2006 Condensed Consolidated Balance Sheet upon our adoption of SFAS No. 158. Our September 30, 2007 Condensed Consolidated Balance Sheet reflects an asset of $9,648 in other assets for our qualified pension plan, a liability of $1,728 in other liabilities for our nonqualified pension plan and $6,280, net of tax, in accumulated other comprehensive loss.

Retrospective application of SFAS No. 158 is not permitted and, therefore, prior period balances and activity related to the pension plans have not been changed. Prepaid pension costs of $18,681 are included in other assets on the Condensed Consolidated Balance Sheet as of September 30, 2006.

10. Contingencies and Guarantees

As part of our normal operations, one of our insurers issues surety bonds for us that are required by various education authorities that regulate us. We are obligated to reimburse our insurer for any of those surety bonds that are paid by the insurer. As of September 30, 2007, the total face amount of those surety bonds was approximately $19,773.

We are also subject to various claims and contingencies in the ordinary course of our business, including those related to litigation, business transactions, employee-related matters and taxes, among others. We cannot assure you of the ultimate outcome of any litigation involving us. Any litigation alleging violations of education or consumer protection laws and/or regulations, misrepresentation, fraud or deceptive practices may also subject our affected institutes to additional regulatory scrutiny.

Guarantees. In October 2007, we entered into a risk sharing agreement (“RSA”) with an unaffiliated lender for private education loans to be provided to our students by or through that lender to help pay the students’ cost of education that student financial aid from federal, state and other sources do not cover. Under the RSA, if more than a certain percentage of the private education loans, based on dollar volume, are charged off by the lender, we guarantee the repayment of any private education loans that the lender charges off above that percentage. Our obligations under the RSA will remain in effect until all private education loans made under the RSA are paid in full or charged off by the lender. We will have the right to pursue repayment from the borrowers for those charged off private education loans under the RSA that we pay to the lender pursuant to our guarantee obligation.

The RSA requires that we comply with certain covenants, including that we maintain certain financial ratios which are measured as of December 31 in each year. If we are not in compliance with those ratios at any measurement date, we are obligated to provide the lender with a letter of credit in an amount based on a percentage of the outstanding private education loans under the RSA that have not been paid in full or charged off from time to time.

The maximum potential future payments that we could be required to make pursuant to our guarantee obligation under the RSA are affected by:

• the amount of the private education loans made under the RSA;

• the fact that those loans will consist of a large number of loans of individually immaterial amounts;

• the interest and fees associated with those loans;

• the repayment performance of those loans; and

• when during the life of those loans they are charged off.

As a result, we are not able to estimate the undiscounted maximum potential future payments that we could be required to make under the RSA. Our recorded liability related to the RSA as of September 30, 2007 was not material.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

All statements, trend analyses and other information contained in this report that are not historical facts are forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and as defined in Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Exchange Act. Forward-looking statements are made based on our management’s current expectations and beliefs concerning future developments and their potential effects on us. You can identify those statements by the use of words such as “could,” “should,” “would,” “may,” “will,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” and “contemplate,” as well as similar words and expressions. Forward-looking statements involve risks and uncertainties and do not guarantee future performance. We cannot assure you that future developments affecting us will be those anticipated by our management. Among the factors that could cause actual results to differ materially from those expressed in our forward-looking statements are the following:

• business conditions and growth in the postsecondary education industry and in the general economy;

• changes in federal and state governmental regulations with respect to education and accreditation standards, or the interpretation or enforcement of those regulations, including, but not limited to, the level of government funding for, and our eligibility to participate in, student financial aid programs utilized by our students;

• our failure to comply with the extensive education laws and regulations and accreditation standards that we are subject to;

• effects of any change in our ownership resulting in a change in control, including, but not limited to, the consequences of such changes on the accreditation and federal and state regulation of our institutes;

• our ability to implement our growth strategies;

• our failure to maintain or renew required regulatory authorizations or accreditation of our institutes;

• receptivity of students and employers to our existing program offerings and new curricula;

• loss of access by our students to lenders for student loans; and

• our ability to successfully defend litigation and other claims brought against us.

Readers are also directed to other risks and uncertainties discussed in other documents we file with the SEC, including, without limitation, those discussed in Item 1A. “Risk Factors.” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the SEC. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.

Overview

You should keep in mind the following points as you read this report:

• References in this document to “we,” “us,” “our” and “ITT/ESI” refer to ITT Educational Services, Inc. and its subsidiaries.

• The terms “ITT Technical Institute” or “institute” (in singular or plural form) refer to an individual school owned and operated by ITT/ESI, including its learning sites, if any. The terms “institution” or “campus group” (in singular or plural form) mean a main campus and its additional locations, branch campuses and/or learning sites, if any.

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the same titled section contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the SEC for discussion of, among other matters, the following items:

• cash receipts from financial aid programs;

• nature of capital additions;

• seasonality of revenue;

• components of income statement captions;

• federal regulations regarding:

• timing of receipt of funds from the federal student financial aid programs under Title IV of the Higher Education Act of 1965, as amended (the “Title IV Programs”);

• percentage of applicable revenue that may be derived from the Title IV Programs;

• return of Title IV Program funds for withdrawn students; and

• default rates;

• private loan programs;

• investments;

• repurchase of shares of our common stock; and

• minimum pension liability.

This management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses. Actual results may differ from those estimates and judgments, under different assumptions or conditions.

Background

We are a leading provider of technology-oriented postsecondary education programs in the United States based on revenue and student enrollment. As of September 30, 2007, we were offering diploma and associate, bachelor and master degree programs to approximately 54,000 students. As of September 30, 2007, we had 95 institutes and nine learning sites located in 34 states. All of our institutes are authorized by the applicable education authorities of the states in which they operate, and are accredited by an accrediting commission recognized by the ED. We design our education programs, after consultation with employers, to help graduates prepare for careers in various fields involving their areas of study. As of September 30, 2007, all of our program offerings were degree programs, except for a few diploma programs offered at six institutes that are being converted to degree programs. We have provided career-oriented education programs since 1969 under the “ITT Technical Institute” name.

In the third quarter of 2007, we began operations at two new institutes. In the nine months ended September 30, 2007, we began operations at eight institutes. In the fourth quarter of 2007, we began operations at one additional institute. Our overall expansion plans include:

• operating new institutes;

• adding learning sites to existing institutes;

• offering a broader range of both residence and online programs at our existing institutes; and

• increasing the number of our institutes that offer bachelor degree programs.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses. Actual results may differ from those estimates and judgments under different assumptions or conditions. We have discussed the critical accounting policies that we believe affect our more significant estimates and judgments used in the preparation of our consolidated financial statements in the “Management's Discussion and Analysis of Financial Condition and Results of the Operations – Critical Accounting Policies and Estimates” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the SEC. There have been no material changes to those critical accounting policies or the underlying accounting estimates or judgments, except as discussed below.

Income Taxes. Effective January 1, 2007, we adopted FIN 48, which prescribes a single, comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Upon adoption of FIN 48, we recognized a decrease of approximately $3.4 million in the liability for unrecognized tax benefits, which was accounted for as an increase to retained earnings of $2.2 million as of January 1, 2007 and a reduction of federal tax benefits of $1.2 million.

As of January 1, 2007, after the implementation of FIN 48, our unrecognized tax benefits were $6.8 million. We estimated that our unrecognized tax benefits would increase by approximately $1.5 million in the 12 months following the adoption of FIN 48 for federal and state tax positions related to the current and prior years. As of September 30, 2007, we did not anticipate any circumstance or event that would cause us to materially revise this estimate. The amount of unrecognized tax benefits that, if recognized, would have affected the effective tax rate as of the date of adoption was $5.5 million and as of September 30, 2007 was approximately $6.8 million. See also Note 2 of the Notes to Condensed Consolidated Financial Statements.

Equity-Based Compensation. The equity instruments exchanged for employee and director services have been accounted for in accordance with SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”). We use a binomial option pricing model to determine the fair value of all stock options granted on or after January 1, 2005, and we use the market price of our common stock to determine the fair value of restricted stock and RSUs granted. Various assumptions are used in the model to determine the fair value of the stock options. See Note 4 of the Notes to Condensed Consolidated Financial Statements for further discussion of equity compensation and the assumptions.

Stock-based compensation expense in the three months ended September 30, 2007 was $0.9 million, or approximately $0.6 million, net of tax, compared to $0.5 million, or $0.3 million net of tax, in the three months ended September 30, 2006. Stock-based compensation expense in the nine months ended September 30, 2007 was $4.1 million, or $2.5 million, net of tax, compared to $2.8 million, or $1.7 million, net of tax, in the nine months ended September 30, 2006.

Guarantees. In accordance with FIN 45, we recognize a liability for the fair value of a guarantee obligation upon its issuance.

New Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, which permits companies to choose to measure certain financial instruments and other items at fair value that are not currently required to be measured at fair value.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We will adopt SFAS No. 159 no later than January 1, 2008. We do not believe that SFAS No. 159 will have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, which requires a company to measure the funded status of a defined benefit postretirement plan as of the date of the company’s year-end balance sheet. This provision of SFAS No. 158 is effective for fiscal years ending after December 15, 2008 and will be adopted by us no later than December 31, 2008. We have not determined the effect that the adoption of this provision of SFAS No. 158 will have on our consolidated financial statements.

Also in September 2006, the FASB issued SFAS No. 157, which provides guidance on the use of fair value to measure assets and liabilities and expands the disclosure required in a company’s financial statements for fair value measurements. SFAS No. 157 will apply whenever other accounting pronouncements require or permit fair value measurements for assets and liabilities and is effective for fiscal years beginning after November 15, 2007. We will adopt SFAS No. 157 no later than January 1, 2008. We do not believe that SFAS No. 157 will have a material impact on our consolidated financial statements.

Results of Operations

The following table sets forth the percentage relationship of certain statement of income data to revenue for the periods indicated:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2007	2006	2007	2006
Revenue	100.0%	100.0%	100.0%	100.0%
Cost of educational services	40.7%	44.6%	42.3%	48.4%
Student services and administrative expenses	30.4%	28.4%	31.9%	30.2%
Special legal and other investigation costs	--	--	--	--
Operating income	28.9%	27.0%	25.8%	21.4%
Interest income, net	0.1%	0.9%	0.3%	1.1%
Income before provision for income taxes	29.0%	27.9%	26.1%	22.5%

The following table sets forth our total student enrollment as of the dates indicated, exclusive of international enrollments:

	2007		2006
	Total	Increase	Total	Increase
Total Student	Student	Over	Student	Over
Enrollment as of:	Enrollment	Prior Year	Enrollment	Prior Year
March 31	49,295	12.4%	43,868	5.6%
June 30	48,873	11.0%	44,025	6.3%
September 30	53,675	11.5%	48,155	8.6%
December 31	Not applicable	Not applicable	46,896	9.1%

Total student enrollment includes all new and continuing students. A continuing student is any student who, in the academic quarter being measured, is enrolled in a program of study at an ITT Technical Institute and was enrolled in the same program at any ITT Technical Institute at the end of the immediately preceding academic quarter. A new student is any student who, in the academic quarter being measured, enrolls in and begins attending any program of study at an ITT Technical Institute:

• for the first time at that institute;

• after graduating in a prior academic quarter from a different program of study at that institute; or

• after having withdrawn or been terminated from a program of study at that institute.

The following table sets forth our new student enrollment in the periods indicated, exclusive of international enrollments:

	2007		2006
New Student Enrollment	New	Increase	New	Increase
in the Three	Student	Over	Student	Over
Months Ended:	Enrollment	Prior Year	Enrollment	Prior Year
March 31	12,738	13.1%	11,264	14.7%
June 30	12,043	3.2%	11,674	10.4%
September 30	18,270	8.8%	16,789	6.0%
December 31	Not applicable	Not applicable	10,208	15.6%
Total for the year	Not applicable	Not applicable	49,935	10.8%

We generally organize the academic schedule for programs of study offered at our institutes on the basis of four 12-week academic quarters in a calendar year that typically begin in early March, mid-June, early September, and late November or early December. To measure the persistence of our students, the number of continuing students in any academic quarter is divided by the total student enrollment in the immediately preceding academic quarter.

The following table sets forth the rates of our students’ persistence for the periods indicated, exclusive of international enrollments:

	Student Persistence for the Three Months Ended
Year	March 31	June 30	September 30	December 31
2005	77.6%	74.2%	68.8%	77.0%
2006	75.8%	73.7%	71.2%	76.2%
2007	78.0%	74.7%	72.4%	Not applicable

Under our hybrid delivery model, certain program courses are taught in residence on campus and others are taught either online over the Internet or partially online over the Internet and partially in residence on campus (the “Hybrid Delivery Model”). Student retention is typically lower in the courses that we teach online over the Internet compared to the courses that we teach on campus. As a result of the use of the Hybrid Delivery Model, our students’ persistence decreased. In the second quarter of 2006, we began modifying the Hybrid Delivery Model such that, by the third quarter of 2006, students were no longer required to take one course online each academic quarter. As modified, the Hybrid Delivery Model provides qualifying students with the option of taking one course online each academic quarter. Nonqualifying students are required to take all of their courses in residence at the institute each academic quarter. We consider a number of factors in determining whether a student qualifies, including his or her previous academic performance and success in courses taught online. We believe that increasing our students’ face-to-face interaction with their instructors has contributed to the improvement in our students’ persistence.

Three Months Ended September 30, 2007 Compared with Three Months Ended September 30, 2006. Revenue increased $28.2 million, or 14.9%, to $217.9 million in the three months ended September 30, 2007 compared to $189.7 million in the three months ended September 30, 2006, primarily due to:

• an 11.0% increase in total student enrollment at June 30, 2007 compared to June 30, 2006;

• a 5.0% increase in tuition rates in March 2007; and

• a 120 basis point increase in our students' persistence to 72.4% for the three months ended September 30, 2007 compared to 71.2% for the three months ended September 30, 2006.

The increase in revenue was partially offset by lower sales of laptop computers. The increase in student enrollment was primarily due to:

• operating new institutes and learning sites;

• an increased number of institutes offering bachelor degree programs; and

• an increased number of new programs of study offered by our institutes.

Cost of educational services increased $4.2 million, or 5.0%, to $88.8 million in the three months ended September 30, 2007 compared to $84.6 million in the three months ended September 30, 2006, primarily due to increased costs associated with operating new institutes and learning sites, and the costs required to service the increased total student enrollment. The increase in cost of educational services was partially offset by decreased costs associated with decreased sales of laptop computers.

Cost of educational services as a percentage of revenue decreased 390 basis points to 40.7% in the three months ended September 30, 2007 from 44.6% in the three months ended September 30, 2006, primarily due to greater efficiencies in the operation of our institutes. The decrease in cost of educational services as a percentage of revenue was partially offset by the costs associated with operating new institutes and learning sites.

Student services and administrative expenses increased $12.2 million, or 22.6%, to $66.2 million in the three months ended September 30, 2007 compared to $54.0 million in the three months ended September 30, 2006. The principal causes of this increase included:

• a 20.2% increase in media advertising expenditures to promote new locations and program offerings;

• an increase in compensation and benefit costs associated with a greater number of employees; and

• an increase in bad debt expense.

Student services and administrative expenses increased to 30.4% of revenue in the three months ended September 30, 2007 compared to 28.4% of revenue in the three months ended September 30, 2006, primarily due to:

• an increase in bad debt expense;

• increased media advertising costs; and

• an increase in compensation and benefit expense associated with a greater number of employees.

Bad debt expense as a percentage of revenue increased to 1.8% in the three months ended September 30, 2007, compared to 1.1% in the three months ended September 30, 2006.

Operating income increased $11.8 million, or 23.0%, to $62.9 million in the three months ended September 30, 2007 compared to $51.1 million in the three months ended September 30, 2006. The operating margin increased to 28.9% of revenue in the three months ended September 30, 2007 compared to 27.0% in the three months ended September 30, 2006. The increases in operating income and operating margin were primarily due to:

• greater efficiencies in the operation of our institutes; and

• additional leveraging of our fixed operating costs.

The increases in operating income and operating margin were partially offset by:

• the costs required to service the increased total student enrollment;

• increased media advertising costs; and

• increased bad debt expense.

Interest income, net decreased $1.4 million, or 82.0%, to $0.3 million in the three months ended September 30, 2007 compared to $1.7 million in the three months ended September 30, 2006, primarily due to interest expense of $2.1 million associated with borrowings under our revolving credit agreement.

Our combined federal and state effective income tax rate was 37.3% in the three months ended September 30, 2007 compared to 37.5% in the three months ended September 30, 2006.

Nine Months Ended September30, 2007 Compared with Nine Months Ended September30, 2006. Revenue increased $87.5 million, or 15.9%, to $639.1 million in the nine months ended September 30, 2007 compared to $551.6 million in the nine months ended September 30, 2006, primarily due to:

• a 5.0% increase in tuition rates in March 2007 and March 2006;

• a 9.1% increase in total student enrollment at December 31, 2006 compared to December 31, 2005;

• a 12.4% increase in total student enrollment at March 31, 2007 compared to March 31, 2006; and

• an 11.0% increase in total student enrollment at June 30, 2007 compared to June 30, 2006.

The increase in revenue was partially offset by lower sales of laptop computers. The increases in student enrollment were primarily due to:

• operating new institutes and learning sites;

• an increased number of institutes offering bachelor degree programs; and

• an increased number of new programs of study offered by our institutes.

Cost of educational services increased $2.7 million, or 1.0%, to $270.2 million in the nine months ended September 30, 2007 compared to $267.5 million in the nine months ended September 30, 2006, primarily due to:

• increased costs associated with operating new institutes and learning sites; and

• the costs required to service the increased total student enrollment.

The increase in cost of educational services was partially offset by:

• greater efficiencies in the operation of our institutes; and

• decreased costs associated with decreased sales of laptop computers.

Cost of educational services as a percentage of revenue decreased 610 basis points to 42.3% in the nine months ended September 30, 2007 from 48.4% in the nine months ended September 30, 2006, primarily due to greater efficiencies in the operation of our institutes. The decrease in cost of educational services as a percentage of revenue was partially offset by the costs associated with operating new institutes and learning sites.

Student services and administrative expenses increased $37.7 million, or 22.6%, to $204.2 million in the nine months ended September 30, 2007 compared to $166.5 million in the nine months ended September 30, 2006. The principal causes of this increase included:

• a 20.1% increase in media advertising expenditures to promote new locations and program offerings;

• an increase in compensation and benefit costs associated with a greater number of employees; and

• an increase in bad debt expense.

Student services and administrative expenses increased to 31.9% of revenue in the nine months ended September 30, 2007 compared to 30.2% of revenue in the nine months ended September 30, 2006, primarily due to an increase in media advertising costs for the promotion of new institutes and an increase in bad debt expense. Bad debt expense as a percentage of revenue increased to 2.2% in the nine months ended September 30, 2007, compared to 1.4% in the nine months ended September 30, 2006.

Operating income increased $46.7 million, or 39.6%, to $164.7 million in the nine months ended September 30, 2007 compared to $118.0 million in the nine months ended September 30, 2006. The operating margin increased to 25.8% of revenue in the nine months ended September 30, 2007 compared to 21.4% in the nine months ended September 30, 2006. The increases in operating income and operating margin were primarily due to:

• greater efficiencies in the operation of our institutes; and

• increased student enrollment.

The increases in operating income and operating margin were partially offset by:

• the costs required to service the increased total student enrollment;

• an increase in compensation and benefit costs associated with a greater number of employees; and

• increased media advertising costs.

Interest income, net decreased $4.4 million, or 70.0%, to $1.9 million in the nine months ended September 30, 2007 compared to $6.3 million in the nine months ended September 30, 2006, primarily due to interest expense of $6.3 million associated with borrowings under our revolving credit agreement.

Our combined federal and state effective income tax rate was 38.1% in the nine months ended September 30, 2007 compared to 37.5% in the nine months ended September 30, 2006. The effective income tax rate increase was primarily due to certain expenses incurred in the nine months ended September 30, 2007 that were not deductible for tax purposes.

Financial Condition, Liquidity and Capital Resources

Cash and cash equivalents were $10.3 million as of September 30, 2007 compared to $161.9 million as of December 31, 2006 and $4.7 million as of September 30, 2006. The December 31, 2006 cash and cash equivalents balance included a $150.0 million certificate of deposit which represented the short-term investment of proceeds from borrowings under our revolving credit facility. We also had investments of $261.8 million as of September 30, 2007 which increased $66.8 million from $195.0 million as of December 31, 2006, primarily due to investing the proceeds from borrowings under our revolving credit agreement.

We are required to recognize the funded status of our defined benefit postretirement plans on our balance sheet. We recorded an asset of $9.6 million for the ESI Pension Plan, a non-contributory defined benefit pension plan commonly referred to as a cash balance plan, and a liability of $1.7 million for the ESI Excess Pension Plan, a nonqualified, unfunded retirement plan, on our Condensed Consolidated Balance Sheet as of September 30, 2007.

In January 2006, we contributed $15.0 million to the ESI Pension Plan. We do not expect to make any contribution to the ESI Pension Plan in 2007.

Operations.Cash from operating activities decreased $4.5 million to $52.9 million in the three months ended September 30, 2007 compared to $57.4 million in the three months ended September 30, 2006, primarily due to processing delays affecting the timing of the receipt of certain student loan funds, which was partially offset by the timing of vendor and income tax payments.

Cash from operating activities increased $3.2 million to $112.0 million in the nine months ended September 30, 2007 compared to $108.8 million in the nine months ended September 30, 2006, primarily due to:

• an increase in net income;

• no contributions to the ESI Pension Plan in 2007; and

• the timing of vendor and income tax payments.

The increase in cash from operating activities was partially offset by processing delays affecting the timing of the receipt of certain student loan funds.

Accounts receivable, net, was $16.4 million as of September 30, 2007 compared to $12.2 million as of September 30, 2006. Days sales outstanding was 6.9 days at September 30, 2007 and 5.9 days at September 30, 2006.

Investing.In the three months ended September 30, 2007, we spent $2.8 million to purchase, renovate, expand or construct buildings at eight of our locations compared to $5.9 million for similar expenditures at eight facilities in the three months ended September 30, 2006. In the nine months ended September 30, 2007, we spent $11.5 million to purchase, renovate, expand or construct buildings at 14 of our locations compared to $16.8 million for similar expenditures at 13 facilities in the nine months ended September 30, 2006.

Capital expenditures, excluding facility and land purchases and facility construction, totaled:

• $4.4 million in the three months ended September 30, 2007 compared to $7.6 million in the three months ended September 30, 2006; and

• $11.3 million in the nine months ended September 30, 2007 compared to $20.7 million in the nine months ended September 30, 2006.

These expenditures consisted primarily of classroom and laboratory equipment (such as computers and electronic equipment), classroom and office furniture, software and leasehold improvements. We plan to continue to upgrade and expand current facilities

and equipment throughout the remainder of 2007. Cash generated from operations is expected to be sufficient to fund our capital expenditure requirements.

Financing.On December 22, 2006, we entered into a credit agreement with a single lender to borrow up to $150.0 million under a revolving credit facility. The credit facility will be used to allow us to continue repurchasing shares of our common stock while maintaining compliance with certain financial ratios required by the ED, the state education authorities that regulate our institutes and the accrediting agency that accredits our institutes.

The credit agreement matures on October 1, 2009 and the amount of credit available thereunder decreases by $21.4 million each calendar quarter beginning April 1, 2008. Cash generated from operations is expected to be sufficient to fund the repayment of borrowings. We have the option of borrowing under the credit agreement on either a secured or unsecured basis which, subject to certain conditions, can be changed by us at any time upon ten days prior written notice to the lender. Certain investments held in a pledged account serve as the collateral for any secured borrowings under the credit agreement.

Borrowings under the credit agreement bear interest at variable rates based on fixed increments over the LIBOR. As of September 30, 2007, the borrowings under the credit agreement were $150.0 million, all of which were secured, and bore interest at a rate of 5.65% per annum. Approximately $158.0 million of our investments as of September 30, 2007 served as collateral for the secured borrowings under the credit agreement.

The availability of borrowings under the credit agreement is subject to our ability at the time of borrowing to satisfy certain specified conditions. These conditions include the absence of default by us, as defined in the credit agreement, and that certain representations and warranties contained in the credit agreement continue to be true and accurate. We are also required to maintain a certain maximum leverage ratio and a minimum ratio of cash and investments to outstanding indebtedness at the end of each of our fiscal quarters. We were in compliance with those ratio requirements as of September 30, 2007.

Our Board of Directors increased the number of shares of our common stock that we are authorized to repurchase under the Repurchase Program by 5,000,000 in April 2006 and by an additional 5,000,000 in April 2007. Information regarding the shares of our common stock that we repurchased in the periods indicated is as follows:

	Three Months Ended September30,		Nine Months Ended September30,
	2007	2006	2007	2006
	(Dollars in thousands, except per share data)
Number of shares	829,100	1,153,900	2,359,000	5,040,100
Total cost	$87,316	$77,126	$228,079	$323,760
Average price per share	$105.31	$66.84	$96.68	$64.24

The shares that remained available for repurchase under the Repurchase Program were 5,322,100 as of September 30, 2007. We plan to repurchase additional shares of our common stock under the Repurchase Program from time to time in the future depending on market conditions and other considerations.

We believe that cash generated from operations and our investments will be adequate to satisfy our working capital and capital expenditure requirements for the foreseeable future. We also believe that any reduction in cash and cash equivalents or investments that may result from their use to repurchase shares of our common stock, purchase facilities or construct facilities will not have a material adverse effect on our expansion plans, planned capital expenditures, ability to meet any applicable regulatory financial responsibility standards or ability to conduct normal operations.

Contractual Obligations

The following table sets forth our specified contractual obligations as of September 30, 2007:

	Payments Due by Period
		Less than	1-3	3-5	More than
Contractual Obligations	Total	1 Year	Years	Years	5 Years
	(In thousands)
Operating lease obligations	$115,772	$31,612	$45,044	$24,723	$14,393
Long-term debt, including scheduled interest payments	$160,594	$50,425	$110,169	$0	$0

The long-term debt represents our revolving credit facility and assumes that the full amount of the facility will be outstanding at all times through the date of maturity. The amounts shown include the principal payments that will be due upon maturity as well as interest payments. Interest payments have been calculated based on their scheduled payment dates using the interest rate charged on our borrowings as of September 30, 2007.

Off-Balance Sheet Arrangements

As of September 30, 2007, we leased our non-owned facilities under operating lease agreements. A majority of the operating leases contain renewal options that can be exercised after the initial lease term. Renewal options are generally for periods of one to five years. All operating leases will expire over the next nine years and management believes that:

• those leases will be renewed or replaced by other leases in the normal course of business;

• we may purchase the facilities represented by those leases; or

• we may purchase or build other replacement facilities.

There are no material restrictions imposed by the lease agreements, and we have not entered into any significant guarantees related to the leases. We are required to make additional payments under the terms of the operating leases for taxes, insurance and other operating expenses incurred during the operating lease period.

As part of our normal course of operations, one of our insurers issues surety bonds for us that are required by various education authorities that regulate us. We are obligated to reimburse our insurer for any of those surety bonds that are paid by the insurer. As of September 30, 2007, the total face amount of those surety bonds was approximately $19.8 million.

In October 2007, we entered into the RSA with an unaffiliated lender for private education loans to be provided to our students by or through that lender to help pay the students’ cost of education that student financial aid from federal, state and other sources do not cover. Under the RSA, if more than a certain percentage of the private education loans, based on dollar volume, are charged off by the lender, we guarantee the repayment of any private education loans that the lender charges off above that percentage. Our recorded liability related to the RSA as of September 30, 2007 was not material. Based on the prior repayment history of our students with respect to private education loans, we do not believe that our guarantee obligation under the RSA will have a material adverse effect on our financial condition, results of operations or cash flows. See Note 10 of the Notes to Condensed Consolidated Financial Statements for further discussion of the RSA.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

In the normal course of our business, we are subject to fluctuations in interest rates that could impact the return on our investments and the cost of our financing activities. Our primary interest rate risk exposure results from changes in short-term interest rates and the LIBOR.

Our investments consist primarily of marketable debt securities, variable rate demand notes, and auction rate debt and equity securities. We estimate that the market risk associated with these investments can best be measured by a potential decrease in the fair value of these investments from a hypothetical 10% increase in interest rates. If such a hypothetical increase in rates were to occur, the reduction in the market value of our portfolio of marketable securities would not be material.

Changes in the LIBOR would affect the borrowing costs associated with our revolving credit facility. We estimate that the market risk can best be measured by a hypothetical 100 basis point increase in the LIBOR. If such a hypothetical increase in the LIBOR were to occur, the effect on results from operations and cash flow would not have been material for the three and nine months ended September 30, 2007.

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures.

We are responsible for establishing and maintaining disclosure controls and procedures (“DCP”) that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (b) accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosures. In designing and evaluating our DCP, we recognize that any controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving the desired control objectives, and that our management’s duties require it to make its best judgment regarding the design of our DCP. As of the end of our third fiscal quarter of 2007, we conducted an evaluation, under the supervision (and with the participation) of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our DCP pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our DCP were effective.

(b) Changes in Internal Control Over Financial Reporting.

There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

We are subject to various claims and contingencies in the ordinary course of our business, including those related to litigation, business transactions, employee-related matters and taxes, among others. We cannot assure you of the ultimate outcome of any litigation involving us. Any litigation alleging violations of education or consumer protection laws and/or regulations, misrepresentation, fraud or deceptive practices may also subject our affected institutes to additional regulatory scrutiny.

Item 1A. Risk Factors.

You should carefully consider the risks and uncertainties we describe both in this Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the SEC before deciding to invest in, or retain, shares of our common stock. These are not the only risks and uncertainties that we face. Additional risks and uncertainties that we do not currently know about, we currently believe are immaterial or we have not predicted may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, results of operations or cash flows could be materially adversely affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth information regarding purchases made by us of shares of our common stock on a monthly basis in the three months ended September 30, 2007:

	Issuer Purchases of Equity Securities
	Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1, 2007 through July 31, 2007		50,000	$106.46	50,000	6,101,200
August 1, 2007 through August 31, 2007		779,100	105.24	779,100	5,322,100
September 1, 2007 through September 30, 2007		--	--	--	5,322,100
	Total	829,100	$105.31	829,100

_____________________________

(1) Our Board of Directors has authorized us to repurchase the following number of shares of our common stock pursuant to the Repurchase Program:

Number of Shares	Board Authorization Date
2,000,000	April 1999
2,000,000	April 2000
5,000,000	October 2002
5,000,000	April 2006
5,000,000	April 2007

The shares that remained available for repurchase under the Repurchase Program were 5,322,100 as of September 30, 2007. The terms of the Repurchase Program provide that we may repurchase shares of our common stock, from time to time depending on market conditions and other considerations, in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Exchange Act. Unless earlier terminated by our Board of Directors, the Repurchase Program will expire when we repurchase all shares authorized for repurchase thereunder.

Item 5. Other Information.

On October 22, 2007, the Compensation Committee of our Board of Directors approved and adopted the ITT Educational Services, Inc. Senior Executive Severance Plan (the “Senior Executive Severance Plan”), which provides severance benefits for each of our executive officers when:

• the covered executive's employment is terminated, other than for Cause (as defined in the Senior Executive Severance Plan), or when the covered executive terminates his or her employment for Good Reason (as defined in the Senior Executive Severance Plan), in each case within two years after the occurrence of an Acceleration Event (as defined in the Senior Executive Severance Plan); or

• the covered executive's employment is terminated, other than for Cause, during an Imminent Acceleration Event Period (as defined in the Senior Executive Severance Plan).

Upon adoption of the Senior Executive Severance Plan, the ESI Senior Executive Severance Pay Plan and the ESI Special Senior Executive Severance Pay Plan were terminated.

The Senior Executive Severance Plan provides two levels of benefits for covered executives, based on the covered executive’s position with us. Under the Senior Executive Severance Plan, the Chief Executive Officer would receive the higher level of benefits and the other executive officers would receive the lower level of benefits. If payments under the Senior Executive Severance Plan are triggered, the Chief Executive Officer would be entitled to the following from us:

• three times his highest annual base salary rate paid and his highest bonus paid or awarded any time during the three years immediately preceding the Acceleration Event (or in the case of a termination that occurs during an Imminent Acceleration Event Period, the three year period immediately preceding the first day of the Imminent Acceleration Event Period);

• a lump sum amount equal to three times the product of his highest annual base salary rate paid during the three years immediately preceding the Acceleration Event (or in the case of a termination that occurs during an Imminent Acceleration Event Period, the three year period immediately preceding the first day of the Imminent Acceleration Event Period), multiplied by the highest percentage rate of our contributions with respect to him under the ESI 401(k) Plan and the ESI Excess Savings Plan at any time during that three year period;

• a lump sum stipend equal to 36 times the monthly premium that, as of the date of the Chief Executive Officer's termination of employment, is charged to qualified beneficiaries for health care continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1984, as amended (“COBRA”), for the same coverage options and levels of medical, prescription drug, dental and vision coverage that he had in effect under our welfare plans immediately prior to his termination of employment;

• a lump sum stipend equal to 36 times the full monthly premium payable to our life insurance carrier for the type and level of life insurance coverage (including, if applicable, dependent life insurance coverage) in effect for him immediately prior to his termination of employment; and

• a tax gross-up payment that covers any excise tax, interest and penalties under the Internal Revenue Code of 1986, as amended (the “IRC”), arising from the payment to him of any amount under the Senior Executive Severance Plan or otherwise as a result of an Acceleration Event.

If payments under the Senior Executive Severance Plan are triggered, the other executive officers would be entitled to the following from us:

• two times his or her highest annual base salary rate paid and his or her highest bonus paid or awarded any time during the three years immediately preceding the Acceleration Event (or in the case of a termination that occurs during an Imminent Acceleration Event Period, the three year period immediately preceding the first day of the Imminent Acceleration Event Period);

• a lump sum amount equal to two times the product of his or her highest annual base salary rate paid during the three years immediately preceding the Acceleration Event (or in the case of a termination that occurs during an Imminent Acceleration Event Period, the three year period immediately preceding the first day of the Imminent Acceleration Event Period), multiplied by the highest percentage rate of our contributions with respect to that executive under the ESI 401(k) Plan and the ESI Excess Savings Plan at any time during that three year period;

• a lump sum stipend equal to 24 times the monthly premium that, as of the date of the executive’s termination of employment, is charged to qualified beneficiaries for COBRA continuation coverage for the same coverage options and levels of medical, prescription drug, dental and vision coverage that he or she had in effect under our welfare plans immediately prior to his or her termination of employment; and

• a lump sum stipend equal to 24 times the full monthly premium payable to our life insurance carrier for the type and level of life insurance coverage (including, if applicable, dependent life insurance coverage) in effect for him or her immediately prior to his or her termination of employment;

provided, however, that in the event that any payments to one of these other executive officers under the Senior Executive Severance Plan or otherwise in connection with an Acceleration Event would be subject to any excise tax under Section 4999 of the IRC, then those payments will be reduced to the extent necessary to prevent any portion of the payments from being subject to an excise tax under that section of the IRC, but only if such reduction would allow the executive to retain a greater net after-tax benefit than he or she would have received if the payments had not been reduced and the executive had paid all applicable income, employment and excise taxes.

The Senior Executive Severance Plan provides that, in order to receive any severance benefits under that plan, the covered executive must agree to comply with certain restrictive covenants, including that he or she will not compete with us, solicit our employees or customers or disparage us, in each case for a period of one year after termination of employment, and will not disclose or use our confidential information for as long a period of time as permitted by applicable law, and in any event for a period of at least three years after termination of employment. The covered executive must also execute a general release releasing us and certain related entities and individuals from all claims that he or she has or may have against us or them that arise on or before the

date the executive signs the release. Payments under the Senior Executive Severance Plan will be made in a lump sum cash payment.

A copy of the Senior Executive Severance Plan is attached to this Form 10-Q as Exhibit 10.26 and is incorporated herein by reference.

Item 6. Exhibits.

A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes the exhibits, and is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ITT Educational Services, Inc.

Date: October 25, 2007

	By: /s/ Daniel M. Fitzpatrick
Daniel M. Fitzpatrick
Senior Vice President, Chief Financial Officer
(Duly Authorized Officer, Principal Financial Officer
and Principal Accounting Officer)

INDEX TO EXHIBITS

Exhibit
No.	Description

3.1	Restated Certificate of Incorporation, as Amended to Date (incorporated herein by reference from the same exhibit number to ITT/ESI’s 2005 second fiscal quarter report on Form 10-Q)
3.2	Restated By-Laws, as Amended to Date (incorporated herein by reference from the same exhibit number to ITT/ESI's 2007 second fiscal quarter report on Form 10-Q)
10.26	ITT Educational Services, Inc. Senior Executive Severance Plan
31.1	Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
31.2	Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
32.1	Chief Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350
32.2	Chief Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350

EX-10

Exhibit 10.26

ITT Educational Services, Inc. Senior Executive Severance Plan

1. Purposes

This document, to be known as the ITT Educational Services, Inc. Senior Executive Severance Plan, has been established by the Company as of the date set forth in Section 11, and it replaces and supersedes the ESI Special Senior Executive Severance Pay Plan and the ESI Senior Executive Severance Pay Plan, which have been terminated. The Plan provides Severance Benefits to certain key executives of the Company whose employment terminates under certain conditions following an Acceleration Event or during an Imminent Acceleration Event Period. The capitalized words and terms used throughout the Plan are defined in Section 9.

The purpose of the Plan is to reinforce and encourage the continued attention and dedication of Severance Executives to their assigned duties, without distraction in the face of potentially disruptive circumstances arising from the possibility of an Acceleration Event. The accomplishment of this purpose is in the best interest of the Company and its shareholders.

2. Covered Employees

This Plan covers Severance Executives.

3. Entitlement to Severance Benefits

(a)Subject to the provisions of Subsection 3(b), the Company will pay to a Severance Executive the applicable Severance Benefits set forth in Section 4 if (i) during an Imminent Acceleration Event Period, or within two (2) years after an Acceleration Event, the Company terminates a Severance Executive's employment with the Company other than for Cause, or (ii) within two (2) years after an Acceleration Event, the Severance Executive terminates his or her employment with the Company for Good Reason and the conditions described in the following sentence are satisfied. A Severance Executive will be entitled to Severance Benefits upon his or her termination of employment for Good Reason within two (2) years following an Acceleration Event only if all of the following additional conditions are satisfied:

(A) the Severance Executive provides written notice to the Company of the existence of the condition claimed to constitute Good Reason within ninety (90) calendar days of the initial existence of the condition;

(B) the Company does not remedy the condition within thirty (30) calendar days of the Company's receipt of the written notice described in clause (A); and

(C) the Severance Executive terminates his or her employment with the Company during the six (6) month period following the expiration of the cure period described in clause (B) above.

(b)Notwithstanding any other provision of this Plan, a Severance Executive will not be eligible for any Severance Benefits under this Plan unless both of the following conditions are satisfied:

(i) The Severance Executive timely signs, and does not timely revoke, a General Release, in substantially the form attached as Exhibit A (which may be amended from time to time in accordance with Section 8). The Severance Executive must sign the General Release by the deadline communicated to him or her in writing. If a Severance Executive is age 40 or older, and thereby covered by the ADEA, the Severance Executive will have a period of either 21 or 45 days, as specified in the General Release, to consider the General Release before signing it and the Severance Executive will be advised to consult an attorney before signing the General Release. If the Severance Executive is subject to the ADEA, he or she will also have the right to revoke the General Release within the Revocation Period. A Severance Executive must wait until his or her employment has terminated to sign a General Release. The Plan Administrator will not accept from any Severance Executive a General Release signed before the Severance Executive has terminated employment with the Company.

(ii) The Severance Executive signs a Noncompetition Agreement, substantially in the form attached as Exhibit B (which may be amended from time to time in accordance with Section 8).

4. Severance Benefits

(I) Severance Benefits for Severance Executives in Band A shall be as follows:

(a) Severance Pay. Severance Pay in a total amount equal to the sum of (i) three (3) times the highest annual base salary rate paid (whether or not deferred) to the Severance Executive at any time during the three (3) year period immediately preceding the Acceleration Event (or, in the case of a termination of employment that occurs prior to an Acceleration Event, the three (3) year period immediately preceding the first day of the Imminent Acceleration Event Period), and (ii) three (3) times the highest bonus paid or awarded (whether or not deferred) to the Severance Executive in any of the three (3) years preceding the Acceleration Event (or, in the case of a termination of employment that occurs prior to an Acceleration Event, the three (3) year period immediately preceding the first day of the Imminent Acceleration Event Period), including, among the bonuses taken into account for this purpose, any bonus paid or awarded by reason of an Acceleration Event, without regard to whether such bonus is paid (whether or not deferred) during such three (3) year period or after an Acceleration Event.

(b) Savings Plan Lump Sum Amount. A lump sum amount equal to three (3) times the product of (i) and (ii), where (i) is the highest annual base salary rate paid (whether or not deferred) to the Severance Executive at any time during the three (3) year period immediately preceding the Acceleration Event (or, in the case of a termination of employment that occurs prior to an Acceleration Event, the three (3) year period immediately preceding the first day of the Imminent Acceleration Event Period), and (ii)

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is the highest percentage rate of Company contributions (including matching contributions) with respect to the Severance Executive under the Savings Plans at any time during the three (3) year period immediately preceding the Acceleration Event (or, in the case of a termination of employment that occurs prior to an Acceleration Event, the three (3) year period immediately preceding the first day of the Imminent Acceleration Event Period).

(c) Welfare Coverage Stipend. A lump sum stipend equal to the sum of (i) thirty-six (36) times the monthly COBRA premium that, as of the date of the Severance Executive's termination of employment, is charged to COBRA qualified beneficiaries for the same coverage options and levels of medical, prescription drug, dental, and vision coverage that the Severance Executive had in effect under the Company's welfare plans immediately prior to his or her termination of employment; and (ii) thirty-six (36) times the full monthly premium payable to the Company's life insurance carrier for the type and level of life insurance coverage (including, if applicable, dependent life insurance coverage) in effect for the Severance Executive immediately prior to the Severance Executive's termination of employment. The Welfare Coverage Stipend shall be payable irrespective of whether or not the Severance Executive or any of his or her eligible family members elects COBRA continuation coverage or conversion or continuation of life insurance coverage, whether or not coverage is continued for the maximum permissible period, or whether or not the Severance Executive receives welfare benefits coverage from another employer. Payment of the Welfare Coverage Stipend will not in any way extend or modify the Severance Executive's continuation coverage rights under COBRA or any similar continuation coverage law or welfare benefit plan provision.

(d) Gross-Up Payment. In the event that the Payments paid or payable to or for the benefit of a Severance Executive in Band A would be subject to any Excise Tax, then, in accordance with the provisions of this Subsection 4.I.(d), the Company will pay to the Severance Executive a Gross-Up Payment in an amount such that, after the Severance Executive's payment of all federal, state and local taxes (including any interest, penalties, additional tax, or similar items imposed with respect to such taxes), including, without limitation, any income and employment taxes (and any interest and penalties imposed with respect to such taxes) and Excise Tax imposed upon the Gross-Up Payment, the Severance Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. An initial determination as to whether a Gross-Up Payment is required pursuant to this Subsection 4.I.(d), and the amount of any such Gross-Up Payment, will be made at the Company's expense by an Accounting Firm selected by the Company and reasonably acceptable to the Severance Executive. The Accounting Firm will provide its determination, together with detailed supporting calculations and documentation, to the Company and the Severance Executive within ten (10) business days after the date on which the Severance Executive terminates employment with the Company. The determination will be final, binding, and conclusive on the Company and the Severance Executive, and the Company will pay the Gross-Up Payment, if any, to the Severance Executive, in accordance with the Accounting Firm's determination, within five (5) business days after the Company's receipt of the Accounting Firm's determination, except that no Gross-Up Payment shall be paid prior to the expiration of the applicable Revocation Period or in the event the

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Severance Executive revokes the General Release during the Revocation Period. For purposes of determining the amount of the Gross-Up Payment, the Severance Executive will be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and applicable state and local income taxes at the highest marginal rate of taxation in the state and locality of the Severance Executive's residence on the date of his or his termination of employment with the Company, net of the maximum reduction in federal income taxation that would be obtained from deduction of those state and local taxes. Notwithstanding anything in this Subsection 4.I.(d) to the contrary, in the event that, according to the Accounting Firm's determination, an Excise Tax will be imposed on the Payments, the Company will pay to the applicable governmental taxing authorities, as Excise Tax withholding, the amount of the Excise Tax that the Company has actually withheld from the Payments in accordance with applicable law. Notwithstanding any of the foregoing provisions of this Subsection 4.I.(d), any Gross-Up Payment due under this Subsection shall be paid by no later than March 15 of the calendar year following the calendar year in which the Severance Executive’s termination of employment with the Company occurs.

(II) Severance Benefits for Severance Executives in Band B shall be as follows:

(a) Severance Pay. Severance Pay in a total amount equal to the sum of (i) two (2) times the highest annual base salary rate paid (whether or not deferred) to the Severance Executive at any time during the three (3) year period immediately preceding the Acceleration Event (or, in the case of a termination of employment that occurs prior to an Acceleration Event, the three (3) year period immediately preceding the first day of the Imminent Acceleration Event Period), and (ii) two (2) times the highest bonus paid or awarded (whether or not deferred) to the Severance Executive in any of the three (3) years preceding an Acceleration Event (or, in the case of a termination of employment that occurs prior to an Acceleration Event, the three (3) year period immediately preceding the first day of the Imminent Acceleration Event Period), including, among the bonuses taken into account for this purpose, any bonus paid or awarded by reason of an Acceleration Event, without regard to whether such bonus is paid (whether or not deferred) during such three (3) year period or after an Acceleration Event.

(b) Savings Plan Lump Sum Amount. A lump sum amount equal to two (2) times the product of (i) and (ii), where (i) is the highest annual base salary rate paid (whether or not deferred) to the Severance Executive at any time during the three (3) year period immediately preceding the Acceleration Event (or, in the case of a termination of employment that occurs prior to an Acceleration Event, the three (3) year period immediately preceding the first day of the Imminent Acceleration Event Period), and (ii) is the highest percentage rate of Company contributions (including matching contributions) with respect to the Severance Executive under the Savings Plans at any time during the three (3) year period immediately preceding the Acceleration Event (or, in the case of a termination of employment that occurs prior to an Acceleration Event, the three (3) year period immediately preceding the first day of the Imminent Acceleration Event Period).

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(c) Welfare Coverage Stipend. A lump sum stipend equal to the sum of (i) twenty-four (24) times the monthly COBRA premium that, as of the date of the Severance Executive's termination of employment, is charged to COBRA qualified beneficiaries for the same coverage options and levels of medical, prescription drug, dental, and vision coverage that the Severance Executive had in effect immediately prior to his or her termination of employment; and (ii) twenty-four (24) times the full monthly premium payable to the Company's life insurance carrier for the type and level of life insurance coverage (including, if applicable, dependent life insurance coverage) in effect for the Severance Executive immediately prior to the Severance Executive's termination of employment. The Welfare Coverage Stipend shall be payable irrespective of whether or not the Severance Executive or any of his or her family members elects COBRA continuation coverage or conversion or continuation of life insurance coverage, whether or not coverage is continued for the maximum permissible period, or whether or not the Severance Executive receives welfare benefits coverage from another employer. Payment of the Welfare Coverage Stipend will not in any way extend or modify the Severance Executive's continuation coverage rights under COBRA or any similar continuation coverage law or welfare benefit plan provision.

(d) Limitation on Severance Benefits. Notwithstanding anything to the contrary contained in this Plan, in the event that the total Payments to a Severance Executive in Band B pursuant to this Plan or otherwise in connection with an Acceleration Event would otherwise exceed the amount that could be received by the Severance Executive without the imposition of an Excise Tax (the “Safe Harbor Amount”), then the value of the Payments will be reduced to the Safe Harbor Amount, but only if, by reason of that reduction, the Net After-Tax Benefit to the Severance Executive would exceed the Net After-Tax Benefit to the Severance Executive if no such reduction was made. For purposes of this Subsection 4.II.(d), the determination of whether any portion of the Payments would be subject to an Excise Tax, and the determinations of the Safe Harbor Amount and the greater Net After-Tax Benefit, will be made at the Company's expense by an Accounting Firm selected by the Company and reasonably acceptable to the Severance Executive. For purposes of those determinations, the value of any non-cash benefit or any deferred payment or benefit included in the Payments will be determined by the Accounting Firm in accordance with the principles of Code Section 280G(d)(3) and (4). In the event that the Payments to a Severance Executive must be reduced pursuant to this Subsection 4.II.(d), the nature (cash or non-cash) and the source (the Plan or any other plan, agreement, or arrangement) of the Payments to be reduced first will be as directed by the Severance Executive. In the event a Severance Executive receives Payments that, according to the Accounting Firm, are subject to an Excise Tax, the Company will pay to the applicable governmental taxing authorities, as Excise Tax withholding, the amount of the Excise Tax that the Company has actually withheld from the Payments in accordance with applicable law.

5. Form and Time of Payment of Severance Benefits

Except as otherwise provided in this Section 5, the Severance Benefits due to a Severance Executive will be paid in a lump sum cash payment within thirty (30) calendar days after the date on which the Severance Executive's employment with the Company is terminated, or, if later, on

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the first business day after expiration of the applicable Revocation Period (provided that the Severance Executive does not revoke the General Release during the Revocation Period), but in no case will payment be made later than March 15 of the calendar year following the calendar year in which the Severance Executive’s termination of employment with the Company occurs. Payment of any amount due under Subsection 4.I.(d) will be paid as provided in that Subsection. Severance Benefits are intended to be short-term deferrals exempt from Code Section 409A, but in the event that any portion of the Severance Benefits due to a Severance Executive constitutes deferred compensation within the meaning of Code Section 409A, and the Severance Executive, at the time of his or her termination of employment, is a Specified Employee, then payment of the portion of the Severance Benefits that constitutes deferred compensation will be delayed until the first business day following the date that is six (6) calendar months after the date of the Severance Executive's termination of employment with the Company (or, if earlier, the date of the Severance Executive's death following his or her termination of employment).

6. Administration of Plan

The Compensation Committee or its designee will be the Plan Administrator and will have the exclusive right and discretionary authority to interpret this Plan, adopt any rules and regulations for carrying out this Plan as may be appropriate, and decide any and all matters arising under this Plan, including but not limited to the right to determine claims and appeals under Section 7. Subject to applicable federal and state law, all interpretations and decisions by the Plan Administrator will be final, conclusive, and binding on all affected parties.

7. Claims and Appeals Procedures

If a Severance Executive (or his or her beneficiary) believes that he or she is entitled to a benefit under the Plan that has not been paid, or to a different benefit than what has been paid, he or she may file a written claim for the benefit with the Plan Administrator. If any claim for benefits is denied, in whole or in part, the claimant will be given written notice of the denial within ninety (90) days following receipt of the claim. The notice will include (i) the specific reason or reasons for the denial; (ii) specific reference to the pertinent Plan provision(s) on which the denial was based; (iii) a description of any additional material or information necessary for the claimant to perfect the claims and an explanation of why that material is necessary, and (iv) an explanation of the Plan's claims review procedures. If special circumstances require an extension of time for processing the claim, written notice of the extension will be furnished to the claimant prior to the end of the initial ninety (90) day period following receipt of the claim. If the claim has not been granted, and a written notice of the denial of the claim is not furnished, within ninety (90) days after receipt of the claim, the claim may be treated as denied for purposes of proceeding to the claims review procedure described in the following paragraph.

A claimant or his or her authorized representative may request review of a denied claim within sixty (60) days after receipt of written notification of denial of a claim (or, if timely notice of denial is not given, within sixty (60) days after expiration of the ninety (90) day response period described in the preceding paragraph). To request review of the denial, the claimant or his or her authorized representative must submit a written request for review to the Plan Administrator. In connection with the request for review, the claimant or his or her authorized representative may review

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pertinent documents in the Plan Administrator's possession or control and submit issues and comments in writing to the Plan Administrator within the sixty (60) days period following receipt of written notice of the claim denial. Not later than sixty (60) days after receipt of the request for review, the Plan Administrator will render and furnish to the claimant a written decision, which will include specific reasons for the decision and make specific reference to the pertinent Plan provision(s) on which the decision is based. If special circumstances require an extension of time for processing, the decision shall be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of the request for review, provided that written notice and explanation of the delay are given to the claimant prior to commencement of the extension.

If the claimant disputes the Plan Administrator's decision on review, the dispute will be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules. Judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. Notwithstanding the foregoing, if the claimant believes the claims procedure or dispute resolution mechanism provided under this Section 7 would be futile, the claimant, in his or her sole discretion, may elect to pursue his or her rights under the Plan pursuant to Section 502 of ERISA.

The Company shall bear the expense of any enforcement proceeding brought by a Severance Executive (or his or her beneficiary) under this Section 7 and shall reimburse the claimant for all of his or her reasonable costs and expenses relating to such enforcement proceeding, including, without limitation, reasonable attorney's fees and expenses, provided that the claimant is the prevailing party in the proceeding. For purposes of the preceding sentence, the trier of fact in the enforcement proceeding will be asked to make a determination as to the reimbursement of the claimant's costs and expenses as a prevailing party under the Plan. In no event shall the claimant be required to reimburse the Company for any costs or expenses relating to the enforcement proceeding.

If a claimant is entitled to payment or reimbursement of fees and expenses pursuant to the preceding paragraph, payment or reimbursement will be made within fifteen (15) business days after receipt of the claimant's written request for payment or reimbursement, accompanied by such evidence of fees and expenses as the Company may reasonably require, but the claimant may not submit such a request until the dispute has been finally resolved (either by agreement or by an order or judgment that is not subject to appeal or with respect to which all appeals have been exhausted). Notwithstanding the forgoing, any payment pursuant to this paragraph must be made no later than the end of the calendar year following the calendar year in which the dispute is finally resolved by a legally binding settlement or nonappealable judgment or order.

8. Termination or Amendment

ESI may make a Plan Change at any time, except that, during an Imminent Acceleration Event Period or following an Acceleration Event, no Plan Change that would adversely affect any Severance Executive may be made without the prior written consent of the affected Severance Executive.

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9. Definitions

"Acceleration Event" means any of the following: (i) a report on Schedule 13D is filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Act disclosing that any Person, other than ESI or an ESI Subsidiary or any employee benefit plan sponsored by ESI or an ESI Subsidiary, is the beneficial owner directly or indirectly of 20% or more of the outstanding shares of the Stock; (ii) any Person, other than ESI or an ESI Subsidiary, or any employee benefit plan sponsored by ESI or an ESI Subsidiary, purchases shares pursuant to a tender offer or exchange offer to acquire any Stock (or securities convertible into Stock) for cash, securities or any other consideration, provided that after consummation of the offer, the Person in question is the beneficial owner (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of fifteen (15) percent or more of the outstanding Stock (calculated as provided in paragraph (d) of Rule 13d-3 under the Act in the case of rights to acquire Stock); (iii) the stockholders of ESI approve (A) any consolidation or merger of ESI in which ESI is not the continuing or surviving corporation or pursuant to which shares of Stock would be converted into cash, securities or other property, other than a merger of ESI in which holders of Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger as they had in the Stock immediately before, or (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of ESI, or (iv) a change in a majority of the members of the Board of Directors of ESI occurring within a twelve (12) month period, unless the election or nomination for election by ESI's stockholders of each new director during that twelve (12) month period was approved by the vote of two-thirds of the directors then still in office who were directors at the beginning of that twelve (12) month period.

"Accounting Firm" means an accounting firm that is designated as one of the five largest accounting firms in the United States (which may include the Company's independent auditors).

"Act" means the Securities Exchange Act of 1934, as amended.

"ADEA" means the Age Discrimination in Employment Act of 1967, as amended.

"Board" means the Board of Directors of ESI.

"Cause" means, with respect to a Severance Executive, action by the Severance Executive involving willful malfeasance or the Severance Executive's failure to act involving material nonfeasance that would have a materially adverse effect on the Company. An act or omission on the part of the Severance Executive shall not be considered "willful" unless it is done or omitted in bad faith or without reasonable belief that the action or omission was in the interest of the Company.

"COBRA" means the health care continuation coverage provisions of the Consolidated Omnibus Budget Reconciliation Act of 1984, as amended, and any health care continuation coverage available or provided pursuant to that law.

"Code" means the Internal Revenue Code of 1986, as amended, and interpretive rules and regulations.

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"Company" means, collectively, ESI and all ESI Subsidiaries. After an Acceleration Event, the "Company" also includes any successors to ESI and the ESI Subsidiaries and any affiliates of those successors.

"Compensation Committee" means the Compensation Committee of the Board.

"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.

"ESI" means ITT Educational Services, Inc. After an Acceleration Event, "ESI" also includes any successor to ESI.

"ESI Subsidiary" means a subsidiary company of ESI. After an Acceleration Event, an "ESI Subsidiary" also includes any successor to an ESI Subsidiary.

"Excise Tax" means the excise tax imposed by Section 4999 of the Code, or any successor to that provision, and any interest or penalties incurred by a Severance Executive with respect to that excise tax.

"General Release" means a written document, substantially in the form attached to this Plan as Exhibit A (as it may be amended from time to time in accordance with Section 8), intended to create a binding agreement between the Company and a Severance Executive pursuant to which the Severance Executive, as a condition of receiving Severance Benefits under the Plan, agrees to release the Company and certain related entities and individuals from all claims that the Severance Executive has or may have against any or all of them that arise on or before the date on which the Severance Executive signs the General Release, including, without limitation, claims under the ADEA.

"Good Reason" means, with respect to a Severance Executive, one or more of the following conditions, arising without the Severance Executive's consent: (i) a material diminution in the Severance Executive's base compensation; (ii) a material diminution in the Severance Executive's authority, duties, or responsibilities; (iii) a material diminution in the authority, duties, or responsibilities of the person to whom the Severance Executive is required to report (including, for example, a requirement that a Severance Executive who previously reported to the Board instead report to a corporate officer or employee); (iv) a material diminution in the budget over which the Severance Executive retains authority; (v) a material change in the geographic location at which the Severance Executive must perform services; and (vi) if the terms and conditions of a Severance Executive's employment are governed by an agreement, any other action or inaction that constitutes a material breach by the Company of the agreement.

"Gross-Up Payment" means, with respect to a Severance Executive in Band A, the additional payment described in Subsection 4.I.(d).

"Imminent Acceleration Event Period" means the period (a) beginning on the first to occur of (i) a public announcement (whether by advertisement, press release, press interview, public statement, Securities and Exchange Commission filing, or otherwise) of a proposal or offer that, if consummated, would be an Acceleration Event, (ii) the making to a director or executive officer of the Company a written proposal that, if consummated, would be an Acceleration Event, or (iii) approval by the Board or the stockholders of ESI of a transaction that, upon closing, would be an Acceleration Event; and (b) ending upon the first to occur of (i) a public announcement that the prospective Acceleration Event contemplated by the events described in clause (a) has been terminated or

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abandoned, (ii) the occurrence of the contemplated Acceleration Event, or (iii) 18 months after the beginning of the Imminent Acceleration Event Period.

"Net After-Tax Benefit" means, with respect to the total Payments or the Safe Harbor Amount, whichever is applicable, that amount net of all applicable federal, state, and local income and employment taxes and Excise Taxes. The Net After-Tax Benefit will be determined in accordance with the assumptions, principles, and other applicable provisions of Subsection 4.II.(d).

"Noncompetition Agreement" means a written agreement substantially in the form attached to this Plan as Exhibit B (as it may be amended from time to time in accordance with Section 8).

"Payments" means any payments or distributions by the Company in the nature of compensation to or for the benefit of a Severance Executive in connection with an Acceleration Event (with an Acceleration Event being defined for this purpose as a "change" described in Code Section 280G(b)(2)(A)(i) (I) or (II)), whether paid or payable or distributed or distributable pursuant to the terms of this Plan or otherwise, but determined without regard to any additional payments required under Subsection 4.I.(d). The following will not be treated as Payments with respect to a Severance Executive: (i) any payment or benefits the receipt or enjoyment of which the Severance Executive effectively waived in writing prior to the date of his or her termination of employment; and (ii) any payment that, in the opinion of the Accounting Firm, does not constitute a "parachute payment" within the meaning of Code Section 280G(b)(2). In determining the extent to which amounts constitute "parachute payments" within the meaning of Code Section 280G(b)(2), the Accounting Firm will make a reasonable determination of the value to be assigned to the restrictive covenant in effect for the Severance Executive pursuant to the Noncompetition Agreement, and the amount of the Severance Executive's potential parachute payment under Code Section 280G will be reduced by the value of the restrictive covenant to the extent consistent with Code Section 280G.

"Person" means a person within the meaning of Section 13(d) of the Act.

"Plan" means the ITT Educational Services, Inc. Senior Executive Severance Plan.

"Plan Administrator" means the Compensation Committee or its designee.

"Plan Change" means an amendment to or termination of the Plan.

"Revocation Period" means, with respect to a Severance Executive, the period of time during which the Severance Executive may revoke the General Release. If a Severance Executive is covered by the ADEA, the Executive's Revocation Period, which will be specified in the General Release, will be at least seven (7) calendar days from the date on which the Severance Executive signs the General Release. If a Severance Executive is not covered by the ADEA (for example, because he or she is under age 40), and there is no Revocation Period specified in the Severance Executive's General Release, then the Severance Executive's Revocation Period will be zero (0) days and will be deemed to expire on the day on which the Severance Executive signs the General Release.

"Safe Harbor Amount" has the meaning given such term in Subsection 4.II.(d).

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"Savings Plan Lump Sum Amount" means, with respect to a Severance Executive, the Severance Benefits described in Subsection 4.I.(b) or 4.II.(b), whichever is applicable to the Severance Executive.

"Savings Plans" means the ESI 401(k) Plan and the ESI Excess Savings Plan and any successors to those plans.

"Severance Benefits" means the benefits described in Section 4.

"Severance Executive" means a full-time regular salaried employee and officer of the Company who is in either Band A or Band B. The Severance Executives in Band A include any Chief Executive Officer of ESI; and the Severance Executives in Band B include any officer below the level of Chief Executive Officer of ESI and above the level of Vice President of ESI.

"Severance Pay" means, with respect to a Severance Executive, the Severance Benefits described in Subsection 4.I.(a) or 4.II.(a), whichever is applicable to the Severance Executive.

"Specified Employee" has the meaning given in Code Section 409A(a)(2)(B)(i). The determination of which individuals are Specified Employees will be made in accordance with such rules and practices, consistent with Code Section 409A and interpretive regulations, as are established from time to time by the Board, or its designee, in its discretion.

"Stock" means the common stock, $0.01 par value, of ESI.

"Welfare Coverage Stipend" means, with respect to a Severance Executive, the Severance Benefit described in Subsection 4.I.(c) or 4.II.(c), whichever is applicable to the Severance Executive.

10. Miscellaneous

The Severance Executive shall not be entitled to any notice of termination from the Company or pay in lieu of such notice.

Severance Benefits under this Plan will be paid entirely by the Company from its general assets.

This Plan is not a contract of employment, does not guarantee the Severance Executive employment for any specified period and does not limit the right of the Company to terminate the employment of the Severance Executive at any time.

If a Severance Executive dies while any amount is still payable to the Severance Executive under the Plan, all such amounts shall be paid in accordance with this Plan to the Severance Executive's designated heirs or, in the absence of such designation, to the Severance Executive's estate.

The numbered paragraph headings contained in this Plan are included solely for convenience of reference and shall not in any way affect the meaning of any provision of this Plan.

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If, for any reason, any one or more of the provisions or part of a provision contained in this Plan shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Plan not held so invalid, illegal or unenforceable, and each other provision or part of a provision will, to the full extent consistent with law, remain in full force and effect.

This Plan is intended to comply with the requirements of Code Section 409A, to the extent applicable, and will be construed accordingly. In construing or interpreting any vague or ambiguous provision of the Plan, the interpretation that will prevail is the interpretation that will cause the Plan to comply with the applicable standards for nonqualified deferred compensation plans established by Code Section 409A. Any provision that would cause the Plan or any benefits provided under it to fail to satisfy Code Section 409A will have no force or effect until amended to comply with Code Section 409A, which amendment may be retroactive to the extent permitted by Code Section 409A. For purposes of this Plan, a Severance Executive will not be treated as having terminated employment with the Company until he or she has incurred a separation from service within the meaning of Code Section 409A.

11. Adoption Date

The Plan was adopted by ESI on October 22, 2007 ("Adoption Date") and does not apply to any termination of employment that occurred or was communicated to any Severance Executive prior to the Adoption Date.

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Exhibit A

GENERAL RELEASE

I am a participant in the ITT Educational Services, Inc. Senior Executive Severance Plan (the "Plan") and have terminated employment with ITT Educational Services, Inc. and its subsidiaries (the "Company") under circumstances that will entitle me to certain severance benefits (the "Severance Benefits") under the Plan, provided I meet the applicable conditions specified in the Plan. I understand that, under the terms of the Plan, I will only be able to receive the Severance Benefits in consideration for my signing this General Release ("Release").

I hereby acknowledge and agree to the following:

[I will have ___________(__) days [21 days for individual terminations, 45 days for group terminations] from the date I receive this Release to consider and sign it. If I do not return this signed Release in ____________ (__) days, the Company will consider this my refusal to sign, and I will not receive the Severance Benefits. If I do sign this Release, it will not be effective for a period of seven (7) days, during which time I can change my mind and revoke my signature. To revoke my signature, I must notify the Company in writing within seven (7) days of the date I signed this Release.] [To be used for individuals age 40 or older.]

By signing this Release, I am giving up my right to sue ITT Educational Services, Inc. and any and all affiliates, parent companies and subsidiaries, and their past, present, and future officers, directors, employees, and agents (together, the "Releasees") based upon any act or event occurring prior to my signing this Release. Without limitation, I specifically release the Releasees from any and all claims arising out of my employment and termination, including claims based on discrimination under federal anti-discrimination laws such as Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, and any and all federal, state, and local laws.

By signing this Release, I am NOT giving up my right to appeal a denial of a claim for benefits submitted under any health coverage (medical, dental, vision, and prescription drug coverage), life insurance or disability program maintained by the Company, nor am I giving up any claim for benefits under the terms of any pension or retirement plan maintained by the Company. Also, I am not giving up my right to file for unemployment insurance benefits at the appropriate time if I so choose, and my signing of this Release will not affect my rights, if any, to any coverage by workers' compensation insurance. In addition, this Release will not affect any benefits to which I am entitled under the Plan or any claim arising out of the enforcement of the Plan. I also am not giving up any right to indemnification or directors and officers liability insurance coverage and benefits to which I am entitled under applicable law, the Company's articles of incorporation or by-laws or any agreements, or under which I have been covered.

My signature below acknowledges that I have read the above, understand what I am signing, and am acting of my own free will. The Company has advised me to consult with an attorney and any other advisors of my choice prior to signing this Release.

Signature:_____________________________ Date:_____________________________

Print Name:___________________________

Witness:______________________________

Exhibit B

FORM OF NONCOMPETITION AGREEMENT

This Non-Competition Agreement ("Agreement") is made and entered into as of [**date**] by and between ITT EDUCATIONAL SERVICES, INC., a corporation having its principal place of business in Carmel, Indiana (the "Company"), and [**NAME**] ("Executive").

Recitals

A. Executive has been employed with the Company in an executive capacity.

B.During Executive's employment with the Company, Executive has had access to and has acquired trade secrets and confidential information of the Company.

C.Executive is a participant in that certain ITT Educational Services, Inc. Senior Executive Severance Plan (the "Severance Plan").

D.Executive's employment with the Company will terminate or has terminated effective as of [**date**] under circumstances that make Executive eligible for benefits under the Severance Plan. As a condition to Executive's entitlement to benefits under the Severance Plan, Executive must enter into this Agreement.

E.Executive is willing to enter into this Agreement for the protection of the Company in exchange for Executive's receipt of benefits under the Severance Plan.

Agreement

NOW, THEREFORE, in consideration of the foregoing recitals, the Executive's receipt of benefits under the Severance Plan, the promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive agree as follows:

1.Acknowledgment. Executive acknowledges that: (a) the Company is engaged in a highly competitive business; (b) Executive has served the Company in an executive and/or high-level managerial capacity; (c) Executive has had access to and has gained knowledge of substantial trade secrets and confidential information of the Company; and (d) the covenants and restrictions contained in this Agreement are reasonably necessary to protect the legitimate interests of the Company.

2.Non-Disclosure of Confidential Information. As used in Sections 2 and 3 of this Agreement, the term "Company" means and includes not only ITT Educational Services, Inc. but also any subsidiary of ITT Educational Services, Inc. and/or any other affiliate entity that controls, is controlled by, or is under common control with, ITT Educational Services, Inc., provided that Executive has provided services for the benefit of or has received or had access to confidential information concerning such subsidiary or affiliate. As used in this Agreement, the term "Confidential Information" means any and all of the Company's trade secrets, confidential and proprietary information and all other non-public information and data of or about the Company and its business, including, but not limited to, confidential business methods and processes, research and development information, business plans and strategies, marketing plans

and strategies, information pertaining to customers, pricing information, cost information, financial information, personnel information, contract information, data compilations, information received from third parties that the Company is obligated to keep confidential, and information about prospective products or services, whether or not reduced to writing or other tangible medium of expression, including work product created by Executive in rendering services for the Company. Executive acknowledges that the Confidential Information is a valuable, special and unique asset of the Company. For as long a period of time as permitted by applicable law, and in any event for a period of at least three (3) years after the termination of Executive's employment with the Company, Executive will not, except as may be authorized in writing by the Company, use or disclose to others any of the Confidential Information. Executive agrees that the Company owns the Confidential Information and Executive has no rights, title or interest in any of the Confidential Information. Executive will immediately deliver to the Company any and all materials (including all copies and electronically stored data) containing any Confidential Information in Executive's possession or subject to Executive's custody or control. Executive's non-disclosure obligations hereunder shall continue as long as the Confidential Information remains confidential, and shall not apply to any information which Executive is required by law or judicial process to disclose or which becomes generally publicly available through no fault or action of Executive or others who were under confidentiality obligations with respect to such information.

3.Non-Competition Covenants. Executive agrees to the following non-competition covenants:

a.During the Restricted Time Period, Executive will not within the Restricted Geographic Area be employed by, work for, consult with, lend assistance to, or engage in any Competitive Business (i) in the same or similar capacity or function to that in which Executive worked for the Company, (ii) in any executive or managerial capacity (iii) in any consulting capacity or function or (iv) in any other capacity in which Executive's knowledge of the Company's Confidential Information would facilitate or support Executive's work for the Competitive Business. For purposes of this Agreement, the term "Restricted Time Period" means the twelve (12) month period immediately after the termination of Executive's employment with the Company. For purposes of this Agreement, the term "Restricted Geographic Area" means each of the States of the United States of America. For purposes of this Agreement, the term "Competitive Business" means any for-profit entity that is engaged in the business of providing post-secondary education with annual revenues of at least $100 million and that is competitive with the business of the Company. Executive acknowledges that the foregoing restriction is reasonable given (x) the position in which Executive has been employed with the Company, (y) the Company's business is national in scope, and (z) Executive, for or on behalf of a Competitive Business, could compete effectively with the Company from any location in the United States. Notwithstanding the restrictions contained in this Section 3.a, if a Competitive Business has multiple divisions, units or segments, some of which are not engaged in providing post-secondary education, Executive may work for or consult with only that division, unit or segment that is not engaged in providing post-secondary education, provided that (I) Executive first provides the Company with a written notice describing in reasonable detail Executive's position with and anticipated activities for the Competitive Business, which such written notice also includes an assurance that Executive's affiliation with and work for the Competitive Business will relate only to the non-competitive division, unit or segment and will not involve any activities that are competitive with the Company, and (II) Executive's affiliation with

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and/or work for the non-competitive division, unit or segment of the Competitive Business would not likely cause Executive to inevitably use and/or disclose any Confidential Information.

b.During the Restricted Time Period, Executive will not (i) solicit, recruit, hire, employ or attempt to hire or employ any person who is an employee of the Company, (ii) assist any person or entity in the recruitment or hiring of any person who is an employee of the Company, (iii) urge, induce or seek to induce any person to terminate his/her employment with the Company, or (iv) advise, suggest to or recommend to any person or entity that it employ or solicit for employment any person who is an employee of the Company.

c.During the Restricted Time Period, Executive will not urge, induce or seek to induce any of the Company's customers, independent contractors, subcontractors, consultants, business partners, licensors, licensees, vendors, suppliers or others with whom the Company has a business relationship to terminate their relationship with, or representation of, the Company, or to cancel, withdraw, reduce, limit or in any manner modify any such person's or entity's business with, or representation of, the Company.

d.During the Restricted Time Period, Executive will not make or publish any statements or comments that disparage or injure the reputation or goodwill of the Company or any of its affiliates, or any of its or their respective officers or directors, or otherwise make any oral or written statements that a reasonable person would expect at the time such statement is made to likely have the effect of diminishing or injuring the reputation or goodwill of the Company, or any of its affiliates, or any of its or their respective officers or directors; provided, however, nothing herein shall prevent Executive from providing any information that may be compelled by law.

e.Executive acknowledges and agrees that the non-competition covenants contained in Section 3 of this Agreement prohibit Executive from engaging in certain activities on Executive's own behalf or on behalf of or in conjunction with any person or entity, regardless whether Executive is acting as an employee, owner, independent contractor, consultant or advisor and regardless whether Executive is acting directly or indirectly.

f.In the event Executive violates any non-competition covenant contained in Section 3 of this Agreement, the duration of such non-competition covenant shall automatically be extended by the length of time during which Executive was in violation of such covenant, including, but not limited to, an extension for the period from the date of Executive's first violation until an injunction is entered enjoining such violation.

4.Cooperation. During the Restricted Time Period, Executive agrees and covenants that if the Company desires Executive to provide any information or testimony relating to any judicial, administrative or other proceeding involving the Company or any of its affiliated entities, Executive will cooperate in making himself reasonably available for such purposes and will provide truthful information and/or testimony. The Company agrees to reimburse Executive for all necessary and reasonable out-of-pocket expenses Executive incurs in connection with such matters. Should Executive be served with a subpoena in any legal proceeding relating to the Company or any of its affiliates, Executive agrees: (a) to inform the Company immediately of the subpoena; (b) to reasonably cooperate with the Company and its attorneys in responding to such

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subpoena and in preparing for any hearings, depositions or other formal process by which evidence is taken or received; and (c) to provide truthful testimony in response to questions that are within the scope of proper discovery.

5.Severability; Reformation of Restrictions. The covenants and restrictions in this Agreement are separate and divisible, and to the extent any covenant, provision or portion of this Agreement is determined to be unenforceable or invalid for any reason, the Company and Executive acknowledge and agree that such unenforceability or invalidity shall not affect the enforceability or validity of the remainder of this Agreement. If any particular covenant, provision or portion of this Agreement is determined to be unreasonable or unenforceable for any reason, including, without limitation, the time period, geographical area, and/or scope of activity covered by any non-competition or non-disclosure covenant, provision, or clause, the Company and Executive acknowledge and agree that such covenant, provision or clause shall automatically be deemed reformed such that the contested covenant, provision or clause will have the closest effect permitted by applicable law to the original form and shall be given effect and enforced as so reformed to whatever extent would be reasonable and enforceable under applicable law. The Company and Executive agree that any court interpreting any non-competition or non-disclosure provision of this Agreement shall, if necessary, reform any such provision to make it enforceable under applicable law.

6.Remedies. Executive recognizes that a breach or threatened breach by Executive of this Agreement will give rise to irreparable injury to the Company and that money damages will not be adequate relief for such injury, and, accordingly, agrees that the Company shall be entitled to obtain equitable relief, including, but not limited to, specific performance, temporary restraining orders, preliminary injunctions and/or permanent injunctions, without having to post any bond or other security, to restrain or prohibit such breach or threatened breach, in addition to any other legal remedies which may be available, including the recovery of monetary damages from Executive. In addition to all other relief to which it shall be entitled, the Company shall be entitled to recover from Executive all litigation costs and attorneys' fees incurred by the Company in any action or proceeding relating to this Agreement in which the Company prevails.

7.Governing Law; Choice of Forum. This Agreement shall be construed and enforced in accordance with the laws of the State of Indiana, without giving effect to any conflict of law principle (whether of the State of Indiana or any other jurisdiction) that would cause the application of the law of any jurisdiction other than the State of Indiana. This Agreement is intended, among other things, to supplement the provisions of the Indiana Uniform Trade Secrets Act, as amended from time to time. The parties agree that any legal action relating to this Agreement shall be commenced and maintained exclusively before any appropriate state court of record in Hamilton County, Indiana, or the United States District Court for the Southern District of Indiana, Indianapolis Division, and the parties hereby submit to the jurisdiction and venue of such courts and waive any right to challenge or otherwise object to personal jurisdiction or venue (including, without limitation any objection based on inconvenient forum grounds) in any action commenced or maintained in such courts; provided, however, the Company may, in its sole discretion, elect to bring an action or claim relating to or arising from this Agreement in the county or federal district where any breach by Executive occurred or where Executive resides.

8.Successors and Assigns. The Company shall have the right to assign this Agreement. This Agreement shall inure to the benefit of, and may be enforced by, any and all successors and assigns of the Company, including without limitation by asset assignment, stock

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sale, merger, consolidation or other corporate reorganization. Executive shall not have the right to assign this Agreement.

9.Entire Agreement; Modification. This Agreement constitutes the entire agreement of the parties with respect to the subjects specifically addressed herein, and supersedes any prior agreements, understandings or representations, oral or written, on the subjects addressed herein. This Agreement may not be amended, supplemented, or modified except by a written document signed by both Executive and a duly authorized officer of the Company specifically designated by the Company's Board of Directors.

10.No Waiver. The failure of the Company to insist in any one or more instances upon such performance of any of the provisions of this Agreement or to pursue its rights hereunder shall not be construed as a waiver of any such provisions or the relinquishment of any such rights.

11.Voluntary Agreement. Executive acknowledges that: (a) Executive has been given ample time to consider this Agreement; (b) Executive has been given the opportunity to consult with an attorney or other advisor if Executive so chooses; and (c) Executive is knowingly and voluntarily entering into this Agreement.

12.Counterparts. This Agreement may be executed in one or more counterparts (or upon separate signature pages bound together into one or more counterparts), all of which taken together shall constitute one agreement.

[Remainder of page intentionally left blank; signature page follows.]

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IN WITNESS WHEREOF, the Company and Executive have executed this Agreement as of the date first hereinabove stated.

EXECUTIVE ITT EDUCATIONAL SERVICES, INC.

____________________________________ By:_________________________________

[**Name**] Printed Name: _______________________

Title: ______________________________

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EX-31

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULE 13a–14(a)/15d–14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934

I, Kevin M. Modany, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ITT Educational Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: October 25, 2007

/s/ Kevin M. Modany

Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULE 13a–14(a)/15d–14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934

I, Daniel M. Fitzpatrick, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ITT Educational Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: October 25, 2007

/s/ Daniel M. Fitzpatrick

Chief Financial Officer

EX-32

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of ITT Educational Services, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kevin M. Modany, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)          The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities

Exchange Act of 1934; and

(2)          The information contained in the Report fairly presents, in all material respects, the financial

condition and results of operations of the Company.

/s/ Kevin M. Modany

Chief Executive Officer

October 25, 2007

EX-32

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of ITT Educational Services, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel M. Fitzpatrick, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)          The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities

Exchange Act of 1934; and

(2)          The information contained in the Report fairly presents, in all material respects, the financial

condition and results of operations of the Company.

/s/ Daniel M. Fitzpatrick

Chief Financial Officer

October 25, 2007