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, 2010

OR

¨ 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 incorporation or organization)	(I.R.S. Employer Identification No.)

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   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x    No   ¨

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

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

Yes  ¨    No  x

31,916,989

Number of shares of Common Stock, $.01 par value, outstanding at September 30, 2010

ITT EDUCATIONAL SERVICES, INC.

Carmel, Indiana

Quarterly Report to Securities and Exchange Commission

September 30, 2010

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

Index

- 1 -

ITT EDUCATIONAL SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	As of
	September 30, 2010			December 31, 2009			September 30, 2009
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	119,956		$	128,788		$	130,971
Short-term investments		142,483			143,407			144,146
Restricted cash		108			1,891			5,723
Accounts receivable, net		85,246			85,426			93,819
Deferred income taxes		17,488			13,799			16,328
Prepaid expenses and other current assets		17,494			17,651			19,106
Total current assets		382,775			390,962			410,093
Property and equipment, net		197,383			195,449			192,341
Deferred income taxes		18,189			6,416			6,533
Other assets		29,383			23,878			20,705
Total assets	$	627,730		$	616,705		$	629,672
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long term debt	$	—		$	—		$	150,000
Accounts payable		79,620			61,275			67,183
Accrued compensation and benefits		19,545			26,323			23,340
Other current liabilities		12,051			25,261			23,801
Deferred revenue		195,168			171,933			146,203
Total current liabilities		306,384			284,792			410,527
Long-term debt		150,000			150,000			—
Other liabilities		29,004			25,328			22,262
Total liabilities		485,388			460,120			432,789
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		170,699			154,495			151,653
Retained earnings		1,270,248			1,006,903			913,310
Accumulated other comprehensive (loss)		(9,147	)		(10,093	)		(12,558	)
Treasury stock, 22,151,915, 18,622,809 and 17,123,838 shares, at cost		(1,289,999	)		(995,261	)		(856,063	)
Total shareholders’ equity		142,342			156,585			196,883
Total liabilities and shareholders’ equity	$	627,730		$	616,705		$	629,672

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

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ITT EDUCATIONAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Revenue	$	400,597		$	339,643		$	1,186,403		$	944,816
Costs and expenses:
Cost of educational services		134,478			116,730			402,623			328,609
Student services and administrative expenses		114,706			101,421			332,620			280,293
Total costs and expenses		249,184			218,151			735,243			608,902
Operating income		151,413			121,492			451,160			335,914
Interest income		634			716			1,876			2,827
Interest (expense)		(490	)		(191	)		(1,424	)		(593	)
Income before provision for income taxes		151,557			122,017			451,612			338,148
Provision for income taxes		58,380			47,409			174,944			131,526
Net income	$	93,177		$	74,608		$	276,668		$	206,622
Earnings per share:
Basic	$	2.84		$	2.00		$	8.15		$	5.44
Diluted	$	2.82		$	1.98		$	8.06		$	5.38
Weighted average shares outstanding:
Basic		32,777			37,324			33,954			37,950
Diluted		33,011			37,763			34,336			38,412

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

- 3 -

ITT EDUCATIONAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Cash flows from operating activities:
Net income	$	93,177		$	74,608		$	276,668		$	206,622
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		6,205			6,276			19,687			18,204
Provision for doubtful accounts		22,151			23,183			67,950			56,012
Deferred income taxes		(6,568	)		989			(16,031	)		(4,003	)
Excess tax benefit from stock option exercises		(1,313	)		(1,385	)		(3,253	)		(5,272	)
Stock-based compensation expense		3,708			2,891			12,707			10,247
Other		268			113			758			(309	)
Changes in operating assets and liabilities, net of acquisition:
Restricted cash		(38	)		(5,743	)		1,783			2,581
Accounts receivable		(9,007	)		(47,255	)		(67,770	)		(119,255	)
Accounts payable		3,504			4,763			18,345			10,819
Other operating assets and liabilities		6,756			(2,809	)		29,096			(301	)
Deferred revenue		(1,939	)		19,325			23,235			(17,631	)
Net cash flows from operating activities		116,904			74,956			363,175			157,714
Cash flows from investing activities:
Facility expenditures and land purchases		(1,775	)		(664	)		(4,368	)		(2,516	)
Capital expenditures, net		(8,090	)		(3,907	)		(20,629	)		(15,913	)
Acquisition of college, net of cash acquired		—			—			—			(20,792	)
Proceeds from sales and maturities of investments and notes		81,517			57,352			281,343			142,741
Purchase of investments and notes		(100,741	)		(56,614	)		(323,515	)		(161,353	)
Net cash flows from investing activities		(29,089	)		(3,833	)		(67,169	)		(57,833	)
Cash flows from financing activities:
Excess tax benefit from stock option exercises		1,313			1,385			3,253			5,272
Proceeds from exercise of stock options		5,210			2,756			7,830			8,750
Repurchase of common stock and shares tendered for taxes		(114,906	)		(84,497	)		(315,921	)		(209,187	)
Net cash flows from financing activities		(108,383	)		(80,356	)		(304,838	)		(195,165	)
Net change in cash and cash equivalents		(20,568	)		(9,233	)		(8,832	)		(95,284	)
Cash and cash equivalents at beginning of period		140,524			140,204			128,788			226,255
Cash and cash equivalents at end of period	$	119,956		$	130,971		$	119,956		$	130,971

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

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ITT EDUCATIONAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars and shares in thousands)

	Common Stock				Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Common Stock in Treasury						Total
	Shares		Amount										Shares			Amount
Balance as of December 31, 2008		54,069	$	541	$	135,655	$	718,100		($	13,384	)		(15,352	)	($	667,068	)	$	173,844
For the nine months ended September 30, 2009 (unaudited):
Net income								206,622												206,622
Other comprehensive income
Amortization of prior service cost, net of $8 of income tax											12									12
Amortization of net actuarial pension loss, net of $696 of income tax											1,078									1,078
Unrealized (loss)											(264	)								(264	)
Comprehensive income																				207,448
Exercise of stock options and equity awards								(11,414	)					209			20,164			8,750
Tax benefit from exercise of stock options and equity award vesting						5,751														5,751
Stock-based compensation						10,247														10,247
Common shares repurchased														(1,978	)		(208,828	)		(208,828	)
Issuance of shares for Directors’ compensation								2						1			28			30
Shares tendered for taxes														(4	)		(359	)		(359	)
Balance as of September 30, 2009		54,069		541		151,653		913,310			(12,558	)		(17,124	)		(856,063	)		196,883
For the three months ended December 31, 2009 (unaudited):
Net income								93,641												93,641
Other comprehensive income:
Amortization of prior service cost, net of $3 of income tax											5									5
Amortization of net actuarial pension loss, net of $1,690 of income tax											2,619									2,619
Pension settlement loss, net of $18 of income tax											28									28
Unrealized (loss)											(187	)								(187	)
Comprehensive income																				96,106
Exercise of stock options and equity awards								(48	)					1			98			50
Tax benefit from exercise of stock options and equity award vesting						15														15
Stock-based compensation						2,827														2,827
Common shares repurchased														(1,500	)		(139,295	)		(139,295	)
Shares tendered for taxes																	(1	)		(1	)
Balance as of December 31, 2009		54,069		541		154,495		1,006,903			(10,093	)		(18,623	)		(995,261	)		156,585
For the nine months ended September 30, 2010 (unaudited):
Net income								276,668												276,668
Other comprehensive income:
Amortization of prior service cost, net of $8 of income tax											13									13
Amortization of net actuarial pension loss, net of $561 of income tax											877									877
Unrealized gain											56									56
Comprehensive income																				277,614
Exercise of stock options and equity awards								(13,324	)					208			21,154			7,830
Tax benefit from exercise of stock options and equity award vesting						3,497														3,497
Stock-based compensation						12,707														12,707
Common shares repurchased														(3,728	)		(314,950	)		(314,950	)
Issuance of shares for Directors’ compensation								1						1			29			30
Shares tendered for taxes														(10	)		(971	)		(971	)
Balance as of September 30, 2010		54,069	$	541	$	170,699	$	1,270,248		($	9,147	)		(22,152	)	($	1,289,999	)	$	142,342

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

- 5 -

ITT EDUCATIONAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(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, 2010, we were offering master, bachelor and associate degree programs to approximately 88,000 students at ITT Technical Institute and Daniel Webster College locations. As of September 30, 2010, we had 130 locations (including 126 campuses and four learning sites) in 38 states. All of our locations 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 and since June 2009 under the “Daniel Webster College” 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, 2009 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. Arrangements where we may have a variable interest in another party are evaluated in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or “Codification”) 810, “Consolidation” (“ASC 810”), to determine whether we would be required to include the financial results of the other party in our consolidated financial statements. As of September 30, 2010, we were not required to include the financial results of any variable interest entity in our condensed consolidated financial statements. See Note 8 – Variable Interests, for additional discussion of our variable interests.

In the fourth quarter of 2009, we changed our accounting for direct costs that relate to the enrollment of new students (“Direct Marketing Costs”) to expense those costs in the period incurred. As required under the guidance for voluntary changes in accounting principles, our comparative condensed consolidated financial statements presented for the three and nine months ended September 30, 2009 have been adjusted to apply our new accounting principle for Direct Marketing Costs retrospectively. See our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the SEC for a more detailed discussion of our change in accounting principle for Direct Marketing Costs.

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, 2009.

2. New Accounting Guidance

In April 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-17, which is included in the Codification under ASC 605, “Revenue Recognition” (“ASC 605”). This update provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. This guidance became effective for our interim and annual reporting periods beginning July 1, 2010. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

In March 2010, the FASB issued ASU No. 2010-11, which is included in the Codification under ASC 815, “Derivatives and Hedging” (“ASC 815”). This update clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only an embedded credit derivative that is related to the subordination of one financial instrument to another qualifies for the exemption. This guidance became effective for our interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-09, which is included in the Codification under ASC 855, “Subsequent Events” (“ASC 855”). This update removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated and became effective for our interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, which is included in the Codification under ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”). This update requires the disclosure of transfers between the observable input categories and activity in the unobservable input category for fair value measurements. The guidance also requires disclosures about the inputs and valuation techniques used to measure fair value and became effective for our interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

- 6 -

In June 2009, the FASB set forth certain requirements to improve the financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This guidance was included in the Codification under ASC 810 and became effective for our interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

Also in June 2009, the FASB provided guidance to improve transparency about transfers of financial assets and a transferor’s continuing involvement, if any, with transferred financial assets. It also clarified the requirement for isolation and limitations on portions of financial assets that are eligible for sale accounting, eliminated exceptions for qualifying special-purpose entities from the consolidation guidance and eliminated the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the financial assets. This guidance was included in the Codification under ASC 860, “Transfers and Servicing” (“ASC 860”), and became effective for our interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

3. Fair Value

Fair value for financial reporting is defined as the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date. The fair value measurement of our financial assets utilized assumptions categorized as observable inputs under the accounting guidance. Observable inputs are assumptions based on independent market data sources.

The following table sets forth information regarding the fair value measurement of our financial assets as of September 30, 2010:

			Fair Value Measurements at Reporting Date Using
			(Level 1)		(Level 2)		(Level 3)
Description	As of September 30, 2010		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Cash equivalents:
Money market funds	$	116,067	$	116,067	$	—	$	—
Short-term investments:
U.S. Treasury securities		90,374		90,374		—		—
Government agency obligations		36,165		—		36,165		—
Corporate bonds		10,683		—		10,683		—
Certificate of deposit		5,261		—		5,261		—
Other assets:
Money market fund		4,241		4,241		—		—
	$	262,791	$	210,682	$	52,109	$	—

We used quoted prices in active markets for identical assets as of the measurement date to value our financial assets that were categorized as Level 1. For assets that were categorized as Level 2, we used:

• quoted prices for similar assets in active markets;

• quoted prices for identical or similar assets in markets that were not active or in which little public information had been released;

• inputs other than quoted prices that were observable for the assets; or

• inputs that were principally derived from or corroborated by observable market data by correlation or other means.

The carrying amounts for cash and cash equivalents, restricted cash, accounts receivable, accounts payable, other current liabilities and deferred revenue approximate fair value because of the immediate or short-term maturity of these financial instruments. Investments classified as available-for-sale are recorded at their market value.

The fair value of the notes receivable included in Other assets on our Condensed Consolidated Balance Sheet as of September 30, 2010 is estimated by discounting the future cash flows using current rates for similar arrangements. As of September 30, 2010, each of the carrying value and the estimated fair value of these financial instruments was approximately $15,000.

The fair value of our long-term debt is estimated by discounting the future cash flows using current rates for similar loans with similar characteristics and remaining maturities. As of September 30, 2010, each of the carrying value and the estimated fair value of our long-term debt was approximately $150,000.

- 7 -

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,
	2010			2009			2010			2009
Stock-based compensation expense	$	3,708		$	2,891		$	12,707		$	10,247
Income tax (benefit)	($	1,428	)	($	1,113	)	($	4,893	)	($	3,946	)

We did not capitalize any stock-based compensation cost in the three or nine months ended September 30, 2010 or 2009.

As of September 30, 2010, we estimated that pre-tax compensation expense for unvested stock-based compensation grants in the amount of approximately $19,494 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 1.9 years.

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

	Nine Months Ended September 30, 2010
	# of Shares			Weighted Average Exercise Price		Aggregate Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (1)
Outstanding at beginning of period		1,605,806		$	67.31	$	108,094
Granted		305,000		$	113.41		34,590
Forfeited		(334	)	$	35.93		(12	)
Exercised		(172,879	)	$	45.29		(7,830	)
Expired		(6,601	)	$	50.30		(332	)
Outstanding at end of period		1,730,992		$	77.71	$	134,510			4.5 years	$	—
Exercisable at end of period		1,195,467		$	61.85	$	73,936			3.4 years	$	10,070

(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 30, 2010, and subtracting the applicable aggregate exercise price.

The following table sets forth information regarding the stock options granted and exercised in the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Shares subject to stock options granted		—		—		305,000		258,000
Weighted average grant date fair value	$	—	$	—	$	43.59	$	54.05
Shares subject to stock options exercised		101,550		65,150		172,879		209,044
Intrinsic value of stock options exercised	$	3,410	$	3,613	$	8,582	$	14,582
Proceeds received from stock options exercised	$	5,210	$	2,756	$	7,830	$	8,750
Tax benefits realized from stock options exercised	$	1,313	$	1,388	$	3,255	$	5,458

The intrinsic value of a stock option is the difference between the fair market value of the stock and the option exercise price.

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,
	2010		2009		2010			2009
Risk-free interest rates		Not applicable		Not applicable		2.2	%		1.6	%
Expected lives (in years)		Not applicable		Not applicable		4.6			4.5
Volatility		Not applicable		Not applicable		43	%		54	%
Dividend yield		Not applicable		Not applicable		None			None

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

	Nine Months Ended September 30, 2010
	# of RSUs			Weighted Average Grant Date Fair Value
Unvested at beginning of period		125,550		$	92.31
Granted		46,965		$	109.49
Forfeited		(7,045	)	$	106.86
Vested		(34,875	)	$	85.32
Unvested at end of period		130,595		$	99.57

The total fair market value of the RSUs vested during the nine months ended September 30, 2010 was $3,581.

5. Stock Repurchases

As of September 30, 2010, 1,766,725 shares remained available for repurchase under the share repurchase program (the “Repurchase Program”) authorized by our Board of Directors. 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.

The following table sets forth information regarding the shares of our common stock that we repurchased in the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Number of shares		1,775,000		827,842		3,727,500		1,977,875
Total cost	$	114,891	$	84,492	$	314,950	$	208,828
Average cost per share	$	64.73	$	102.06	$	84.49	$	105.58

6. Debt

We are a party to a Second Amended and Restated Credit Agreement dated as of January 11, 2010 and amended as of February 3, 2010 and August 10, 2010 (the “Credit Agreement”) with two unaffiliated lenders to borrow up to $150,000 under two revolving credit facilities: one in the maximum principal amount of $50,000; and the other in the maximum principal amount of $100,000. The Credit Agreement was amended as of August 10, 2010 to change the point of measurement of one of our financial covenants under the Credit Agreement from monthly to quarterly. We can borrow under the credit facilities on either a secured or unsecured basis at our election, except if an event that would be a default under the Credit Agreement has occurred and is continuing, we may not elect to borrow on an unsecured basis. Both revolving credit facilities under the Credit Agreement mature on May 1, 2012.

Borrowings under the Credit Agreement bear interest, at our option, at the London Interbank Offered Rate (“LIBOR”) plus an applicable margin or at an alternative base rate, as defined under the Credit Agreement. We pay a facility fee equal to 0.30% per annum on the daily amount of the commitment of each lender (whether used or unused). As of September 30, 2010, the borrowings under the Credit Agreement were $150,000, all of which were secured and bore interest at a rate of 0.79% per annum. Approximately $157,950 of our investments and cash equivalents served as collateral for the secured borrowings as of September 30, 2010.

The following table sets forth the interest expense (including the facility fee) that we recognized on our borrowings under the Credit Agreement and under the prior credit agreement that was replaced by the Credit Agreement in the periods indicated:

Three Months Ended September 30,			Nine Months  Ended September 30,
2010	2009		2010		2009
$490	$	189	$	1,424	$	584

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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, 2010						December 31, 2009						September 30, 2009
	Available- for-Sale		Held-to- Maturity		Total		Available-for-Sale		Held-to- Maturity		Total		Available-for-Sale		Held-to- Maturity		Total
Short-term investments	$	137,222	$	—	$	137,222	$	138,270	$	—	$	138,270	$	139,050	$	—	$	139,050

The following table sets forth the aggregate fair value, amortized cost basis and the net unrealized gains and losses included in accumulated other comprehensive income (loss) of our available-for-sale investments as of the dates indicated:

	As of:
	September 30, 2010							December 31, 2009							September 30, 2009
	Aggregate Fair Value		Amortized Cost		Net Unrealized Gains (Losses)			Aggregate Fair Value		Amortized Cost		Net Unrealized Gains (Losses)			Aggregate Fair Value		Amortized Cost		Net Unrealized Gains
Available-for-Sale Investments:
Government obligations	$	90,374	$	90,348	$	26		$	81,591	$	81,634	($	43	)	$	78,291	$	78,231	$	60
Government agency obligations		36,165		36,153		12			27,932		27,969		(37	)		27,863		27,843		20
Corporate obligations		10,683		10,688		(5	)		28,747		28,690		57			32,896		32,812		84
	$	137,222	$	137,189	$	33		$	138,270	$	138,293	($	23	)	$	139,050	$	138,886	$	164

We also held a certificate of deposit with a total principal value of $5,261 as of September 30, 2010, $5,137 as of December 31, 2009 and $5,096 as of September 30, 2009. This investment is included in short-term investments on our Condensed Consolidated Balance Sheet.

The following table sets forth the unrealized gains and losses on available-for-sale investments that were included in other comprehensive income (loss) in the periods indicated:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010		2009
Unrealized gains	$	—		$	—		$	56	$	—
Unrealized (losses)	($	14	)	($	84	)	$	—	($	264	)

No unrealized gains or losses were reclassified out of our accumulated other comprehensive income (loss) in the three or nine months ended September 30, 2010 and 2009. We recognized investment gains in our Condensed Consolidated Statements of Income of $51 in the three months ended September 30, 2010 and $150 in the nine months ended September 30, 2010.

The following table sets forth the components of investment income included in interest income in our Condensed Consolidated Statements of Income in the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Interest income on investments	$	188	$	655	$	551	$	2,766
Realized gains on the sale of investments		51		61		150		61
	$	239	$	716	$	701	$	2,827

The following table sets forth the contractual maturities of our debt securities classified as available-for-sale as of September 30, 2010:

Contractual Maturity	Available-for-Sale
Due within five years	$	137,222
Due after five years through ten years		—
Due after ten years		—
	$	137,222

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8. Variable Interests

On January 20, 2010, we entered into agreements with unrelated third parties to establish the PEAKS Private Student Loan Program (“PEAKS Program”), which is a private education loan program for our students. Under the PEAKS Program, an unaffiliated lender makes private education loans to our eligible students and, subsequently, sells those loans to an unaffiliated trust that purchases, owns and collects private education loans (“PEAKS Trust”). The PEAKS Trust issued senior debt in the aggregate principal amount of $300,000 (“PEAKS Senior Debt”) to investors. The lender disburses the proceeds of the private education loans to us for application to the students’ account balances with us that represent their unpaid education costs. We transfer a portion of the amount of each private education loan disbursed to us under the PEAKS Program to the PEAKS Trust in exchange for a subordinated note issued by the PEAKS Trust (“Subordinated Note”).

The Subordinated Note is non-interest bearing and has been recorded net of an unamortized discount based on an imputed interest rate of 9.0% in Other assets on our Condensed Consolidated Balance Sheet. The discount will be amortized over the term of the Subordinated Note, which is expected to be approximately 15 years. The face value of the Subordinated Note as of September 30, 2010 was approximately $47,200.

The PEAKS Trust utilizes the proceeds from the issuance of the PEAKS Senior Debt and the Subordinated Note to purchase the private education loans made by the lender to our students. The assets of the PEAKS Trust (which include, among other assets, the private education loans owned by the PEAKS Trust) serve as collateral for, and are intended to be the principal source of, the repayment of the PEAKS Senior Debt and the Subordinated Note. We guarantee payment of the principal, interest and certain call premiums owed on the PEAKS Senior Debt, and the administrative fees and expenses of the PEAKS Trust (“PEAKS Guarantee”). See Note 11 – Contingencies, for further discussion of the PEAKS Guarantee.

We did not explicitly or implicitly provide any financial or other support to the PEAKS Trust during the three or nine months ended September 30, 2010 that we were not contractually required to provide, and we do not intend to provide any such support to the PEAKS Trust in the foreseeable future, other than what we are contractually required to provide.

The PEAKS Trust is a variable interest entity as defined under ASC 810. We held variable interests in the PEAKS Trust as of September 30, 2010 as a result of the Subordinated Note and PEAKS Guarantee. To determine whether we were the primary beneficiary of the PEAKS Trust, we:

• assessed the risks that the PEAKS Trust was designed to create and pass through to its variable interest holders;

• identified the variable interests in the PEAKS Trust;

• identified the other variable interest holders and their involvement in the activities of the PEAKS Trust;

• identified the activities that most significantly impact the PEAKS Trust’s economic performance;

• determined whether we have the power to direct those activities; and

• determined whether we have the right to receive the benefits from, or the obligation to absorb the losses of, the

PEAKS Trust that could potentially be significant to the PEAKS Trust.

We determined that the activities of the PEAKS Trust that most significantly impact the economic performance of the PEAKS Trust involve:

• establishing the underwriting criteria of, and the interest rates and fees charged on, the private education loans acquired by the PEAKS Trust; and

• the servicing (which includes the collection) of the private education loans owned by the PEAKS Trust.

To make that determination, we analyzed various possible scenarios of student loan portfolio performance to evaluate the potential economic impact on the PEAKS Trust. In our analysis, we made what we believe are conservative assumptions based on historical data for the following key variables:

• the composition of the credit profiles of the borrowers;

• the interest rates and fees charged on the loans;

• the default rates and the timing of defaults associated with similar types of loans; and

• the prepayment and the speed of repayment associated with similar types of loans.

Based on our analysis, we concluded that we are not the primary beneficiary of the PEAKS Trust, because we do not have the power to direct the activities that most significantly impact the economic performance of the PEAKS Trust. As a result, we are not required under ASC 810 to include the financial results of the PEAKS Trust in our condensed consolidated financial statements for the three or nine months ended September 30, 2010. Our conclusion that we are not the primary beneficiary of the PEAKS Trust did not change from the prior reporting period. Therefore, there was no effect on our condensed consolidated financial statements.

On February 20, 2009, we entered into agreements with an unaffiliated entity (the “2009 Entity”) to create a program that makes private education loans available to our students to help pay the students’ cost of education that student financial aid from

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federal, state and other sources do not cover (the “2009 Loan Program”). Under the 2009 Loan Program, an unaffiliated lender makes private education loans to our eligible students and, subsequently, sells those loans to the 2009 Entity. The 2009 Entity purchases the private education loans from the lender utilizing funds received from its owners in exchange for participation interests in the private education loans acquired by the 2009 Entity. The lender disburses the proceeds of the private education loans to us for application to the students’ account balances with us that represent their unpaid education costs.

In connection with the 2009 Loan Program, we entered into a risk sharing agreement (the “2009 RSA”) with the 2009 Entity under which we have guaranteed the repayment of any private education loans that are charged off above a certain percentage of the private education loans made under the 2009 Loan Program, based on the annual dollar volume. See Note 11 – Contingencies, for further discussion of the 2009 RSA.

In addition, we have made advances to the 2009 Entity under a revolving promissory note (the “Revolving Note”). We provided advances of $215 in the three months ended September 30, 2010 and $2,934 in the nine months ended September 30, 2010 to the 2009 Entity under the Revolving Note that we were not contractually required to provide. In the three months ended September 30, 2010, the amount of repayments made by the 2009 Entity to us under the Revolving Note exceeded the amount of our advances to the 2009 Entity under the Revolving Note by $2,100. We provided advances of $2,106 in the three months ended September 30, 2009 and $16,106 in the nine months ended September 30, 2009 to the 2009 Entity under the Revolving Note that we were not contractually required to provide. Substantially all of the assets of the 2009 Entity serve as collateral for the Revolving Note. The Revolving Note bears interest, is subject to customary terms and conditions and may be repaid at any time without penalty prior to its 2025 maturity date.

The advances under the Revolving Note were primarily used by the 2009 Entity to purchase additional private education loans under the 2009 Loan Program. We made the advances instead of retaining the funds and providing internal student financing, which is non-interest bearing. We do not intend to significantly increase the amount of advances that we make to the 2009 Entity under the Revolving Note in the foreseeable future.

The 2009 Entity is a variable interest entity as defined under ASC 810. We held variable interests in the 2009 Entity as of September 30, 2010 as a result of the Revolving Note and 2009 RSA. To determine whether we were the primary beneficiary of the 2009 Entity, we:

• assessed the risks that the 2009 Entity was designed to create and pass through to its variable interest holders;

• identified the variable interests in the 2009 Entity;

• identified the other variable interest holders and their involvement in the activities of the 2009 Entity;

• identified the activities that most significantly impact the 2009 Entity’s economic performance;

• determined whether we have the power to direct those activities; and

• determined whether we have the right to receive the benefits from, or the obligation to absorb the losses of, the 2009 Entity that could potentially be significant to the 2009 Entity.

To identify the activities of the 2009 Entity that most significantly impact the economic performance of the 2009 Entity, we analyzed various possible scenarios of private education loan portfolio performance. In our analysis, we made what we believe are conservative assumptions based on historical data for the following key variables:

• the composition of the credit profiles of the borrowers;

• the interest rates and fees charged on the loans;

• the default rates and the timing of defaults associated with similar types of loans; and

• the prepayment and the speed of repayment associated with similar types of loans.

We determined that the activities of the 2009 Entity that most significantly impact its economic performance involve:

• establishing the underwriting criteria of, and the interest rates and fees charged on, the private education loans acquired by the 2009 Entity; and

• the servicing (which includes the collection) of the private education loans owned by the 2009 Entity.

Based on our analysis, we concluded that we are not the primary beneficiary of the 2009 Entity, because we do not direct those activities. As a result, we are not required under ASC 810 to include the financial results of the 2009 Entity in our condensed consolidated financial statements for the three or nine months ended September 30, 2010. Our conclusion that we are not the primary beneficiary of the 2009 Entity did not change from the prior reporting period. Therefore, there was no effect on our condensed consolidated financial statements.

The carrying value of the Subordinated Note and the Revolving Note as of September 30, 2010 was $15,306 and is included in Other assets on our Condensed Consolidated Balance Sheet.

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9. Earnings Per Common Share

Earnings per common share for all periods have been calculated in conformity with ASC 260, “Earnings Per Share”. This data is based on historical net income and the weighted average number of shares of our common stock outstanding during each period as set forth in the following table:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(In thousands)
Shares:
Weighted average number of shares of common stock outstanding		32,777		37,324		33,954		37,950
Shares assumed issued (less shares assumed purchased for treasury) for stock-based compensation		234		439		382		462
Outstanding shares for diluted earnings per share calculation		33,011		37,763		34,336		38,412

A total of 1,000,832 shares at September 30, 2010 and 272,400 shares at September 30, 2009 were excluded from the calculation of our diluted earnings per common share because the effect was anti-dilutive.

10. Employee Pension Benefits

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

	Three Months Ended  September 30,						Nine Months Ended  September 30,
	2010			2009			2010			2009
Interest cost	$	846		$	779		$	2,286		$	2,327
Expected return on assets		(1,081	)		(956	)		(3,301	)		(2,864	)
Recognized net actuarial loss		684			641			1,438			1,773
Amortization of prior service cost		7			7			21			21
Net periodic pension cost	$	456		$	471		$	444		$	1,257

The benefit accruals under the ESI Pension Plan and ESI Excess Pension Plan were frozen effective March 31, 2006. As a result, no service cost has been included in the net periodic pension cost.

We made no contributions to the ESI Pension Plan or the ESI Excess Pension Plan in the three or nine months ended September 30, 2010. We made no contributions to the ESI Pension Plan in the three or nine months ended September 30, 2009. We made no contributions to the ESI Excess Pension Plan in the three months ended September 30, 2009, but we contributed $528 in the nine months ended September 30, 2009. We do not expect to make any contributions to the ESI Pension Plan or the ESI Excess Pension Plan in 2010.

11. Contingencies

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, 2010, the total face amount of those surety bonds was approximately $25,634.

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 campuses to additional regulatory scrutiny.

Guarantees. We entered into the PEAKS Guarantee in connection with the PEAKS Program. Under the PEAKS Guarantee, we guarantee payment of the principal, interest and certain call premiums owed on the PEAKS Senior Debt, and the administrative fees and expenses of the PEAKS Trust. The PEAKS Senior Debt bears interest at a variable rate based on the LIBOR plus an applicable margin and matures in January 2020. The PEAKS Guarantee agreement contains, among other things, representations and warranties and events of default customary for guarantees. In addition, under the PEAKS Program, some or all of the holders of the PEAKS Senior Debt could require us to purchase their PEAKS Senior Debt in certain limited circumstances that pertain to our continued eligibility to participate in the federal student financial aid programs under Title IV of the Higher Education Act of 1965, as amended (the “Title IV Programs”). We believe that the likelihood of those limited circumstances occurring is remote. Our guarantee and purchase obligations under the PEAKS Program remain in effect until the PEAKS Senior Debt and the PEAKS Trust’s fees and expenses are paid in full. At such time, we will be entitled to repayment of the amount of any payments made under the PEAKS Guarantee to the extent that funds are remaining in the PEAKS Trust.

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The maximum future payments that we could be required to make under the PEAKS Guarantee include:

• up to $300,000 in principal of PEAKS Senior Debt;

• accrued interest on the PEAKS Senior Debt;

• certain call premiums associated with the PEAKS Senior Debt; and

• the fees and expenses of the PEAKS Trust.

We are not able to estimate the undiscounted maximum potential amount of future payments that we could be required to make under the PEAKS Guarantee, because those payments will be affected by:

• the amount of the private education loans made under the PEAKS Program;

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

• the repayment performance of those loans, the proceeds from which will be used to repay the PEAKS Senior Debt and to pay the fees and expenses of the PEAKS Trust;

• the fact that the interest rate on the PEAKS Senior Debt is a variable rate based on the LIBOR plus a margin;

• whether certain call premiums will be payable in connection with the PEAKS Senior Debt; and

• the amount of fees and expenses of the PEAKS Trust.

We entered into the 2009 RSA in connection with the 2009 Loan Program. Under the 2009 RSA, we have guaranteed the repayment of the principal amount (including capitalized origination fees) and accrued interest payable on any private education loans that are charged off above a certain percentage of the private education loans made under the 2009 Loan Program, based on the annual dollar volume. The total initial principal amount of private education loans that the 2009 Entity is expected to purchase under the 2009 Loan Program is approximately $141,000. Our obligations under the 2009 RSA will remain in effect until all private education loans made under the 2009 Loan Program are paid in full or charged off. The standard repayment term for a private education loan made under the 2009 Loan Program is ten years, with repayment generally beginning six months after a student graduates or three months after a student withdraws or is terminated from his or her program of study.

Pursuant to the 2009 RSA, we are required to maintain collateral to secure our guarantee obligation in an amount equal to a percentage of the outstanding balance of the private education loans disbursed to our students under the 2009 Loan Program. As of September 30, 2010, the total collateral maintained in a restricted bank account was not material. This amount is included in Other assets on our Condensed Consolidated Balance Sheet as of September 30, 2010. The 2009 RSA also requires that we comply with certain covenants, including that we maintain certain financial ratios which are measured on a quarterly basis. We were in compliance with these covenants as of September 30, 2010.

We also are a party to a separate risk sharing agreement (the “2007 RSA”) with a different lender for certain private education loans that were made to our students in 2007 and early 2008. We guaranteed the repayment of any private education loans that the lender charges off above a certain percentage of the total dollar volume of private education loans made under this agreement. We will have the right to pursue repayment from the borrowers for those charged off private education loans under the 2007 RSA that we pay to the lender pursuant to our guarantee obligation. The 2007 RSA was terminated effective February 22, 2008, such that no private education loans have been or will be made under the 2007 RSA after that date. Our obligations under the 2007 RSA will remain in effect until all private education loans under the agreement are paid in full or charged off by the lender. The standard repayment term for a private education loan made under the 2007 RSA is ten years, with repayment generally beginning six months after a student graduates, withdraws or is terminated from his or her program of study.

The maximum future payments that we could be required to make pursuant to our guarantee obligation under the 2007 RSA are affected by:

• the amount of the private educations loans made under the 2007 RSA;

• the fact that those loans 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 the 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 2007 RSA.

As of September 30, 2010, we had not made any guarantee payments under the PEAKS Guarantee, the 2009 RSA or the 2007 RSA, and our recorded liability for the guarantee obligations related to those arrangements 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

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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 laws and regulations with respect to education and accreditation standards, or the interpretation or enforcement of those laws and 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 campuses;

• our ability to implement our growth strategies;

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

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

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

• our ability to collect internally funded financing from our students;

• our exposure under our guarantees related to private student loan programs; 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, 2009 filed with the SEC and in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q. 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 “Daniel Webster College” (in singular or plural form) refer to an individual campus 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, 2009 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 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; and

• repurchase of shares of our common stock.

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, expenses, and contingent assets and liabilities. Actual results may differ from those estimates and judgments under different assumptions or conditions.

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The financial information discussed in this management’s discussion and analysis of financial condition and results of operations related to the three and nine months ended September 30, 2009 are as adjusted to reflect the effect of our change in accounting principle for Direct Marketing Costs. See our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the SEC for a more detailed discussion of our change in accounting principle for Direct Marketing Costs.

In this management’s discussion and analysis of financial condition and results of operations, when we discuss factors that contributed to a change in our financial condition or results of operations, we disclose the primary factors that materially contributed to that change.

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, 2010, we were offering master, bachelor and associate degree programs to approximately 88,000 students. As of September 30, 2010, we had 130 locations (including 126 campuses and four learning sites) in 38 states. All of our locations 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. We have provided career-oriented education programs since 1969 under the “ITT Technical Institute” name and since June 2009 under the “Daniel Webster College” name.

In the third quarter of 2010, we began operations at one new ITT Technical Institute campus. We plan to begin operations at three to five additional locations during the remainder of 2010. Our overall expansion plans include:

• operating new campuses;

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

• increasing the number of our campuses that offer bachelor degree programs; and

• adding learning sites to existing campuses.

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, expenses, and contingent assets and liabilities. 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, 2009 filed with the SEC. There have been no material changes to those critical accounting policies or the underlying accounting estimates or judgments.

New Accounting Guidance

In April 2010, the FASB issued ASU No. 2010-17, which is included in the Codification under ASC 605. This update provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. This guidance became effective for our interim and annual reporting periods beginning July 1, 2010. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

In March 2010, the FASB issued ASU No. 2010-11, which is included in the Codification under ASC 815. This update clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only an embedded credit derivative that is related to the subordination of one financial instrument to another qualifies for the exemption. This guidance became effective for our interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-09, which is included in the Codification under ASC 855. This update removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated and became effective for our interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, which is included in the Codification under ASC 820. This update requires the disclosure of transfers between the observable input categories and activity in the unobservable input category for fair value measurements. The guidance also requires disclosures about the inputs and valuation techniques used to measure fair value and became effective for our interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

In June 2009, the FASB set forth certain requirements to improve the financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This guidance was included in the Codification under ASC 810 and became effective for our interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

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Also in June 2009, the FASB provided guidance to improve transparency about transfers of financial assets and a transferor’s continuing involvement, if any, with transferred financial assets. It also clarified the requirement for isolation and limitations on portions of financial assets that are eligible for sale accounting, eliminated exceptions for qualifying special-purpose entities from the consolidation guidance and eliminated the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the financial assets. This guidance was included in the Codification under ASC 860 and became effective for our interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on our condensed 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 September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of educational services		33.6	%		34.4	%		33.9	%		34.8	%
Student services and administrative expenses		28.6	%		29.9	%		28.0	%		29.7	%
Operating income		37.8	%		35.7	%		38.0	%		35.5	%
Interest income, net		0.0	%		0.2	%		0.0	%		0.2	%
Income before provision for income taxes		37.8	%		35.9	%		38.1	%		35.7	%

The following table sets forth our total student enrollment as of the dates indicated:

	2010					2009
Total Student Enrollment as of:	Total Student Enrollment		Increase Over Prior Year			Total Student Enrollment(1)		Increase Over Prior  Year(1)
March 31		84,555		28.9	%		65,620		21.1	%
June 30		84,695		21.2	%		69,889		27.6	%
September 30		88,004		11.1	%		79,208		28.7	%
December 31		Not applicable		Not applicable			80,766		30.3	%

(1) Students enrolled at Daniel Webster College have been included beginning with the June 30, 2009 period.

Total student enrollment includes all new and continuing students. A continuing student is any student who, in the academic term being measured, is enrolled in a program of study at one of our campuses and was enrolled in the same program at any of our campuses at the end of the immediately preceding academic term. A new student is any student who, in the academic term being measured, enrolls in and begins attending any program of study at one of our campuses:

• for the first time at that campus;

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

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

The following table sets forth our new student enrollment in the periods indicated:

	2010					2009
New Student Enrollment in the Three Months Ended:	New Student Enrollment		Increase Over Prior Year			New Student Enrollment(1)		Increase Over Prior  Year(1)
March 31		23,064		21.8	%		18,935		36.8	%
June 30		21,673		10.1	%		19,692		33.5	%
September 30		26,664		(3.9	%)		27,738		27.2	%
December 31		Not applicable		Not applicable			19,563		31.2	%
Total for the year		Not applicable		Not applicable			85,928		31.6	%

(1) New students enrolled at Daniel Webster College have been included beginning with the September 30, 2009 period.

We believe that economic downturns in the United States, in particular those that result in higher unemployment rates among unskilled workers, have historically been associated with increased student enrollment at postsecondary educational institutions. Based on this, we believe that the recent economic recession in the United States which has given rise to higher unemployment among unskilled workers in 2009 and 2010 contributed to the year-over-year increases in our new and total student enrollment in prior fiscal quarters. These increases had a material favorable effect on our results of operations, cash flows and financial condition. There are a number of other factors, however, that affect student enrollment and could negatively impact this trend.

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Our new student enrollment in the three months ended September 30, 2010 was the second largest quarterly new student enrollment in our history, but it decreased 3.9% compared to the same 2009 period, primarily due to, in order of significance:

• the year-over-year comparison to the largest quarterly new student enrollment in our history that occurred in the three months ended September 30, 2009; and

• a decrease in the rate at which inquiries from prospective students resulted in new student enrollments in the three months ended September 30, 2010 compared to the three months ended September 30, 2009, primarily as a result of increasing our expenditures on lower cost advertising media.

In addition, tighter credit markets in the United States have contributed to reduced availability of private education loans from third-party lenders to our students and, as a result, have led to an increase in the amount of internal student financing that we have provided to our students and an increase in the level of guarantees that we have provided to third parties related to private education loans made to our students.

At the vast majority of our campuses, we generally organize the academic schedule for programs of study offered on the basis of four 12-week academic quarters in a calendar year. The academic quarters 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 term is divided by the total student enrollment in the immediately preceding academic term.

The following table sets forth the rates of our students’ persistence as of the dates indicated:

	Student Persistence as of (1):
Year	March 31			June 30			September 30			December 31
2008		76.1	%		73.9	%		72.5	%		76.5	%
2009		75.3	%		75.3	%		73.6	%		77.3	%
2010		76.1	%		74.5	%		72.4	%		Not applicable

(1) Students enrolled at Daniel Webster College have been included beginning with the rate as of September 30, 2009. The impact of our students’ persistence as a result of the inclusion of Daniel Webster College students in the calculation was not material.

The decrease in student persistence as of September 30, 2010 and June 30, 2010 compared to the corresponding prior year dates was primarily due to, in order of significance:

• a higher number of students who graduated at the end of the academic periods that began in June 2010 and March 2010 compared to the end of the same academic periods in 2009; and

• a slight decrease in student retention in the academic periods that began in June 2010 and March 2010 compared to the same academic periods in 2009.

Three Months Ended September 30, 2010 Compared with Three Months Ended September 30, 2009. Revenue increased $61.0 million, or 17.9%, to $400.6 million in the three months ended September 30, 2010 compared to $339.6 million in the three months ended September 30, 2009. The primary factors that contributed to this increase included, in order of significance:

• a 21.2% increase in total student enrollment at June 30, 2010 compared to June 30, 2009; and

• a 5.0% increase in tuition rates implemented in March 2010.

The primary factors that contributed to the increase in student enrollment included, in order of significance:

• student enrollment growth in programs of study and at locations that were in operation prior to 2009;

• new programs of study offered at our campuses; and

• operating new campuses.

The increase in revenue was partially offset by:

• an increase in the amount of institutional scholarships and other awards that we granted to our students in 2010; and

• the impact of the Subordinated Note on the accounting for revenue earned under the PEAKS Program.

Cost of educational services increased $17.8 million, or 15.2%, to $134.5 million in the three months ended September 30, 2010 compared to $116.7 million in the three months ended September 30, 2009. The primary factors that contributed to this increase included, in order of significance:

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

• increased costs associated with operating new campuses.

The increase in cost of educational services was partially offset by greater leverage of our fixed costs in the operation of our campuses.

Cost of educational services as a percentage of revenue decreased 80 basis points to 33.6% in the three months ended September 30, 2010 compared to 34.4% in the three months ended September 30, 2009. The primary factor that contributed to this decrease was greater leverage of our fixed costs in the operation of our campuses. The decrease in cost of educational services as a percentage of revenue was partially offset by the costs associated with operating new campuses.

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Student services and administrative expenses increased $13.3 million, or 13.1%, to $114.7 million in the three months ended September 30, 2010 compared to $101.4 million in the three months ended September 30, 2009. The principal causes of this increase included, in order of significance:

• an increase in media advertising expenditures; and

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

Student services and administrative expenses decreased to 28.6% of revenue in the three months ended September 30, 2010 compared to 29.9% of revenue in the three months ended September 30, 2009. The principal cause of this decrease was a reduction of bad debt expense as a percentage of revenue to 5.5% in the three months ended September 30, 2010, compared to 6.8% in the three months ended September 30, 2009. The primary factor that contributed to the decrease in bad debt expense as a percentage of revenue was that the amount of internal student financing that we provided to our students in the three months ended September 30, 2010 decreased compared to the amount of internal student financing that we provided to our students in the three months ended September 30, 2009, due to the private education loan programs available to our students in 2010. We believe that our bad debt expense as a percentage of revenue will be in the range of 4.0% to 6.0% in 2010, primarily as a result of the amount of internal student financing that we provide to our students increasing at a lower rate than the increase in student enrollment due to the private education loan programs available to our students in 2010.

Operating income increased $29.9 million, or 24.6%, to $151.4 million in the three months ended September 30, 2010 compared to $121.5 million in the three months ended September 30, 2009, as a result of the impact of the factors discussed above in connection with revenue, cost of educational services, and student services and administrative expenses. Our operating margin increased to 37.8% in the three months ended September 30, 2010 compared to 35.7% in the three months ended September 30, 2009, as a result of the impact of the factors discussed above.

Interest income decreased $0.1 million, or 11.5%, to $0.6 million in the three months ended September 30, 2010 compared to $0.7 million in the three months ended September 30, 2009, primarily due to a decrease in investment returns in the overall market which was partially offset by the recognition of interest income from the Subordinated Note. Interest expense increased $0.3 million, or 156.5%, to $0.5 million in the three months ended September 30, 2010 compared to $0.2 million in the three months ended September 30, 2009, due to an increase in the effective interest rate on our revolving credit facilities.

Our combined federal and state effective income tax rate was 38.5% in the three months ended September 30, 2010 compared to 38.9% in the three months ended September 30, 2009.

Nine Months Ended September 30, 2010 Compared with Nine Months Ended September 30, 2009. Revenue increased $241.6 million, or 25.6%, to $1,186.4 million in the nine months ended September 30, 2010 compared to $944.8 million in the nine months ended September 30, 2009. The primary factors that contributed to this increase included, in order of significance:

• a 21.2% increase in total student enrollment at June 30, 2010 compared to June 30, 2009;

• a 28.9% increase in total student enrollment at March 31, 2010 compared to March 31, 2009;

• a 5.0% increase in tuition rates in March 2010 and March 2009; and

• a 30.3% increase in total student enrollment at December 31, 2009 compared to December 31, 2008.

The primary factors that contributed to the increase in student enrollment included, in order of significance:

• student enrollment growth in programs of study and at locations that were in existence prior to 2009;

• new programs of study offered at our campuses; and

• operating new campuses.

The increase in revenue was partially offset by:

• an increase in the amount of institutional scholarships and other awards that we granted to our students in 2010; and

• the impact of the Subordinated Note on the accounting for revenue earned under the PEAKS Program.

Cost of educational services increased $74.0 million, or 22.5%, to $402.6 million in the nine months ended September 30, 2010 compared to $328.6 million in the nine months ended September 30, 2009. The primary factors that contributed to this increase included, in order of significance:

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

• increased costs associated with operating new campuses.

The increase in cost of educational services was partially offset by greater leverage of our fixed costs in the operation of our campuses.

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Cost of educational services as a percentage of revenue decreased 90 basis points to 33.9% in the nine months ended September 30, 2010 from 34.8% in the nine months ended September 30, 2009. The primary factor that contributed to this decrease was greater leverage of our fixed costs in the operation of our campuses. The decrease in cost of educational services as a percentage of revenue was partially offset by the costs associated with operating new campuses.

Student services and administrative expenses increased $52.3 million, or 18.7%, to $332.6 million in the nine months ended September 30, 2010 compared to $280.3 million in the nine months ended September 30, 2009. The principal causes of this increase included, in order of significance:

• an increase in media advertising expenditures;

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

• an increase in bad debt expense associated with increases in the amount of internal student financing.

Student services and administrative expenses decreased to 28.0% of revenue in the nine months ended September 30, 2010 compared to 29.7% of revenue in the nine months ended September 30, 2009. The primary cause of this decrease was media advertising costs and compensation costs increasing at a lower rate than the increase in revenue. Bad debt expense as a percentage of revenue decreased to 5.7% in the nine months ended September 30, 2010, compared to 5.9% in the nine months ended September 30, 2009. The primary factor that contributed to this decrease was that the amount of internal student financing that we provided to our students in the nine months ended September 30, 2010 increased at a lower rate than the increase in student enrollment during that period, due to the private education loan programs available to our students in 2010.

Operating income increased $115.2 million, or 34.3%, to $451.2 million in the nine months ended September 30, 2010 compared to $335.9 million in the nine months ended September 30, 2009, as a result of the impact of the factors discussed above in connection with revenue, cost of educational services, and student services and administrative expenses. Our operating margin increased to 38.0% in the nine months ended September 30, 2010 compared to 35.5% in the nine months ended September 30, 2009, as a result of the impact of the factors discussed above.

Interest income decreased $1.0 million, or 33.6%, to $1.9 million in the nine months ended September 30, 2010 compared to $2.8 million in the nine months ended September 30, 2009, primarily due to lower average investment balances and a decrease in investment returns in the overall market. Interest expense increased $0.8 million, or 140.1%, to $1.4 million in the nine months ended September 30, 2010 compared to $0.6 million in the nine months ended September 30, 2009, due to an increase in the effective interest rate on our revolving credit facilities.

Our combined federal and state effective income tax rate was 38.7% in the nine months ended September 30, 2010 compared to 38.9% in the nine months ended September 30, 2009.

Financial Condition, Liquidity and Capital Resources

Cash and cash equivalents were $120.0 million as of September 30, 2010 compared to $128.8 million as of December 31, 2009 and $131.0 million as of September 30, 2009. We also had short-term investments of $142.5 million as of September 30, 2010 compared to $143.4 million as of December 31, 2009 and $144.1 million as of September 30, 2009. In total, our cash and cash equivalents and short-term investments were $262.4 million as of September 30, 2010 compared to $272.2 million as of December 31, 2009 and $275.1 million as of September 30, 2009. The $9.8 million decrease in cash and cash equivalents and short-term investments as of September 30, 2010 compared to December 31, 2009 was primarily due to repurchases of our common stock which were offset by cash generated from operations. The $12.7 million decrease in cash and cash equivalents and short-term investments as of September 30, 2010 compared to September 30, 2009 was primarily due to repurchases of our common stock which were offset by cash generated from operations.

We are required to recognize the funded status of our defined benefit postretirement plans on our balance sheet. We recorded an asset of $4.4 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 $0.3 million for the ESI Excess Pension Plan, a nonqualified, unfunded retirement plan, on our Condensed Consolidated Balance Sheet as of September 30, 2010.

We do not expect to make any contributions to the ESI Pension Plan or the ESI Excess Pension Plan in 2010. In 2009, we contributed $0.5 million to the ESI Excess Pension Plan and made no contributions to the ESI Pension Plan.

Operations. Cash from operating activities was $116.9 million in the three months ended September 30, 2010 compared to cash from operating activities of $75.0 million in the three months ended September 30, 2009. The $41.9 million increase in operating cash flow was primarily due to higher student enrollments and an increase in funds received from private education loans made to our students by third party lenders. The increase was partially offset by higher income tax payments resulting from higher operating income.

Cash from operating activities increased $205.5 million to $363.2 million in the nine months ended September 30, 2010 compared to $157.7 million in the nine months ended September 30, 2009, primarily due to higher student enrollments and an increase in funds received from private education loans made to our students by third party lenders. The increase was partially offset by higher income tax payments primarily resulting from higher operating income.

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Accounts receivable less allowance for doubtful accounts was $85.2 million as of September 30, 2010 compared to $93.8 million as of September 30, 2009. Days sales outstanding was 19.6 days at September 30, 2010 and 25.4 days at September 30, 2009. Our accounts receivable balance and days sales outstanding at September 30, 2010 decreased primarily due to, in order of significance:

• an increase in the amount of funds received from private education loan programs available to our students in 2010; and

• an increase in the amount of scholarships and other awards provided to our students in 2010.

The amount of scholarships and other awards provided to our students increased 109.4% to $46.9 million in the nine months ended September 30, 2010 compared to $22.4 million in the nine months ended September 30, 2009. We believe that our days sales outstanding at the end of 2010 will be in the range of 10 to 15 days, primarily as a result of:

• the expected amount of internal student financing that we provide to our students decreasing due to the private education loan programs available to our students in 2010; and

• an increased amount of scholarships and other awards available to our students in 2010.

Investing. In the three months ended September 30, 2010, we spent $1.8 million to renovate, expand and construct buildings at seven of our locations, compared to $0.7 million for similar expenditures at nine of our locations in the three months ended September 30, 2009. In the nine months ended September 30, 2010, we spent $4.4 million to renovate, expand or construct buildings at 17 of our locations compared to $2.5 million for similar expenditures at 15 of our locations in the nine months ended September 30, 2009.

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

• $8.1 million in the three months ended September 30, 2010 compared to $3.9 million in the three months ended September 30, 2009; and

• $20.6 million in the nine months ended September 30, 2010 compared to $15.9 million in the nine months ended September 30, 2009.

These expenditures consisted primarily of classroom and laboratory equipment (such as computers and electronic equipment), classroom and office furniture, software and leasehold improvements. We also spent $20.8 million in the nine months ended September 30, 2009 to acquire substantially all of the assets and assume certain liabilities of Daniel Webster College. These assets included the land, buildings, furniture, equipment and other operating assets of Daniel Webster College.

We plan to continue to upgrade and expand our current facilities and equipment in 2010. Cash generated from operations is expected to be sufficient to fund our capital expenditure requirements.

Financing. We are a party to the Credit Agreement which provides that we may borrow up to $150.0 million under two revolving credit facilities: one in the maximum principal amount of $50.0 million; and the other in the maximum principal amount of $100.0 million. Borrowings under the Credit Agreement are 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 locations and the accrediting agencies that accredit our locations.

Both revolving credit facilities under the Credit Agreement mature on May 1, 2012. The borrowings under each credit facility may be secured or unsecured at our election, except if an event that would be a default under the Credit Agreement has occurred and is continuing, we may not elect to borrow on an unsecured basis. Cash equivalents and investments held in a pledged account serve as the collateral for any 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 the representations and warranties contained in the Credit Agreement and related loan documents continue to be true and correct. Under the Credit Agreement, we are also required to maintain:

• a certain maximum leverage ratio at the end of each of our fiscal quarters;

• a quarterly minimum ratio of cash and investments to indebtedness; and

• a minimum ED financial responsibility composite ratio as of the end of each fiscal year.

The Credit Agreement was amended as of August 10, 2010 to change the point of measurement of the minimum ratio of cash and investments to indebtedness financial covenant from monthly to quarterly. We were in compliance with the applicable ratio requirements as of September 30, 2010.

Borrowings under the Credit Agreement bear interest, at our option, at LIBOR plus an applicable margin or at an alternative base rate as defined under the Credit Agreement. We pay a facility fee equal to 0.30% per annum on the daily amount of the commitment of each lender (whether used or unused). As of September 30, 2010, the borrowings under the Credit Agreement were $150.0 million, all of which were secured, and bore interest at a rate of 0.79% per annum. Approximately $158.0 million of our investments and cash equivalents served as collateral for the secured borrowings as of September 30, 2010.

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Our Board of Directors has authorized us to repurchase shares of our common stock in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Exchange Act under the Repurchase Program. The following table sets forth information regarding our share repurchase activity in the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(Dollars in thousands, except per share data)
Number of shares		1,775,000		827,842		3,727,500		1,977,875
Total cost	$	114,891	$	84,492	$	314,950	$	208,828
Average price per share	$	64.73	$	102.06	$	84.49	$	105.58

Approximately 1.8 million shares remained available for repurchase under the Repurchase Program as of September 30, 2010. In October 2010, our Board of Directors authorized us to repurchase an additional 5.0 million shares of our common stock pursuant to our existing repurchase authorization. We plan to repurchase additional shares of our common stock 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, loan repayment 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 provide student financing, purchase facilities, construct facilities, repay loans or repurchase shares of our common stock 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, 2010:

	Payments Due by Period
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5  Years
	(In thousands)
Operating lease obligations	$	176,579	$	40,040	$	78,232	$	45,952	$	12,355
Long-term debt, including scheduled interest payments	$	152,615	$	1,654	$	150,961	$	—	$	—
Total	$	329,194	$	41,694	$	229,193	$	45,952	$	12,355

The long-term debt represents our revolving credit facilities under the Credit Agreement and assumes that the $150.0 million outstanding balance under the facilities as of September 30, 2010 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 and facility fees. Interest payments have been calculated based on their scheduled payment dates using the interest rate charged on our borrowings as of September 30, 2010.

Off-Balance Sheet Arrangements

As of September 30, 2010, 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 13 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 certain 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, 2010, the total face amount of those surety bonds was approximately $25.6 million.

On January 20, 2010, we entered into agreements with unrelated parties to establish the PEAKS Program. Under the PEAKS Program, an unaffiliated lender makes private education loans to our eligible students and, subsequently, sells those loans to the PEAKS Trust. The PEAKS Trust has issued PEAKS Senior Debt in the aggregate principal amount of $300.0 million to investors. The assets of the PEAKS Trust (which include, among other assets, the student loans held by the PEAKS Trust) serve as collateral for, and are intended to be the principal source of, the repayment of the PEAKS Senior Debt. The PEAKS Senior Debt bears interest at a variable rate based on the LIBOR plus a margin and matures in January 2020.

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In connection with the PEAKS Program, we transfer to the PEAKS Trust a portion of the amount of each private student loan disbursed to us, in exchange for a Subordinated Note. The Subordinated Note does not bear interest, and principal is due on the Subordinated Note following the repayment of the PEAKS Senior Debt, the payment of fees and expenses of the PEAKS Trust and the reimbursement of the amount of any payments made by us under the PEAKS Guarantee. The PEAKS Trust utilizes the proceeds from the issuance of the PEAKS Senior Debt and the Subordinated Note to purchase the student loans from the lender.

Under the PEAKS Guarantee, we guarantee payment of the principal, interest and certain call premiums owed on the PEAKS Senior Debt, and the administrative fees and expenses of the PEAKS Trust. The PEAKS Guarantee contains, among other things, representations and warranties and events of default customary for guarantees. In addition, under the PEAKS Program, some or all of the holders of the PEAKS Senior Debt could require us to purchase their PEAKS Senior Debt in certain limited circumstances that pertain to our continued eligibility to participate in the Title IV Programs. We believe that the likelihood of those limited circumstances occurring is remote. Our guarantee and purchase obligations under the PEAKS Program remain in effect until the PEAKS Senior Debt and the PEAKS Trust’s fees and expenses are paid in full. At such time, we will be entitled to repayment of the amount of any payments made under our guarantee and payment of the Subordinated Note, in each case only to the extent of available funds remaining in the PEAKS Trust.

We entered into the PEAKS Program to offer our students another source of private education loans that they could use to help pay their education costs owed to us and to supplement the limited amount of private education loans available to our students under other private education loans programs, including the 2009 Loan Program. Under the PEAKS Program, our students have access to a greater amount of private education loans, which has resulted in a reduction in the amount of internal financing that we provide to our students.

In February 2009, we entered into the 2009 Loan Program. In connection with the 2009 Loan Program, we entered into the 2009 RSA under which we have guaranteed the repayment of the principal amount (including capitalized origination fees) and accrued interest payable on any private education loans that are charged off above a certain percentage of the private education loans made under the 2009 Loan Program, based on the annual dollar volume. The total initial principal amount of private education loans that the 2009 Entity is expected to purchase under the 2009 Loan Program is approximately $141.0 million. Our obligations under the 2009 RSA will remain in effect until all private education loans made under the 2009 Loan Program are paid in full or charged off. The standard repayment term for a private education loan made under the 2009 Loan Program is ten years, with repayment generally beginning six months after a student graduates or three months after a student withdraws or is terminated from his or her program of study.

Pursuant to the 2009 RSA, we are required to maintain collateral to secure our guarantee obligation in an amount equal to a percentage of the outstanding balance of the private education loans disbursed to our students under the 2009 Loan Program. As of September 30, 2010, the total collateral maintained in a restricted bank account was not material. The 2009 RSA also requires that we comply with certain covenants, including that we maintain certain financial ratios which are measured on a quarterly basis. We were in compliance with these covenants as of September 30, 2010.

In addition, beginning in the second quarter of 2009, we have made advances to the unaffiliated third party that is holding the private education loans made to our students under the 2009 Loan Program. We made the advances, which bear interest, so that the third party could use those funds to provide additional funding for the private education loans, instead of retaining the funds ourselves and providing internal student financing, which is non-interest bearing. The Revolving Note bears interest at a rate based on the prime rate plus an applicable margin. Substantially all of the assets of the third party serve as collateral for the Revolving Note. The Revolving Note is subject to customary terms and conditions and may be repaid at any time without penalty prior to its 2025 maturity date.

We also are a party to the 2007 RSA with a different lender for certain private education loans that were made to our students in 2007 and early 2008. We guaranteed the repayment of any private education loans that the lender charges off above a certain percentage of the total dollar volume of private education loans made under this agreement. We will have the right to pursue repayment from the borrowers for those charged off private education loans under the 2007 RSA that we pay to the lender pursuant to our guarantee obligation. The 2007 RSA was terminated effective February 22, 2008, such that no private education loans have been or will be made under the 2007 RSA after that date. Our obligations under the 2007 RSA will remain in effect until all private education loans under the agreement are paid in full or charged off by the lender. The standard repayment term for a private education loan made under the 2007 RSA is ten years, with repayment generally beginning six months after a student graduates, withdraws or is terminated from his or her program of study.

As of September 30, 2010, we had not made any guarantee payments under the PEAKS Guarantee, the 2009 RSA or the 2007 RSA, and our recorded liability for the guarantee obligations related to those arrangements was not material.

Based on the prior repayment history of our students with respect to private education loans and current economic conditions, we do not believe that our guarantee obligations under either RSA or the PEAKS Program will have a material adverse effect on our financial condition, results of operations or cash flows. See Notes 8 and 11 of the Notes to Condensed Consolidated Financial Statements for further discussion of the PEAKS Program, the 2009 RSA and the 2007 RSA.

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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 government and governmental obligations and marketable debt 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 facilities. 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 our results from operations and cash flow would not have been material for the three and nine months ended September 30, 2010.

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 2010, 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 campuses to additional regulatory scrutiny.

Item 1A. Risk Factors.

You should carefully consider the risks and uncertainties we describe in this Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 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. Except as set forth below, there have been no material changes from the risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Pending rulemaking by the U.S. Department of Education could result in regulatory changes that materially and adversely affect our business.

In the fall of 2009, the ED initiated the process of negotiated rulemaking to make changes to certain provisions of the ED regulations governing the Title IV Programs. The negotiated rulemaking focused on 14 program integrity issues. On June 18 and 26, 2010, the ED issued Notices of Proposed Rulemaking (“NPRM”) which addressed all 14 program integrity issues. The public comment periods related to both NPRMs have expired. The ED has stated that it intends to issue final rules related to the June 18, 2010 NPRM by November 1, 2010 that would take effect beginning July 1, 2011, and the July 26, 2010 NPRM in early 2011 that would take effect beginning July 1, 2012.

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As proposed, these NPRMs could materially and adversely affect our business. Among the most significant of the proposed rules for our business are:

• the elimination of 12 safe harbors that set forth certain types of activities and payment arrangements that an institution may carry out without violating the rules that prohibit payment of incentive compensation to employees or third parties involved in student recruiting, admissions or financial aid activities;

• establishing a definition of “gainful employment” for purposes of determining which programs of study are eligible under the Title IV Programs; and

• significantly broadening institutional liability for “substantial misrepresentation” that would, among other things, subject institutions to sanctions for statements containing inadvertent errors and made to non-students, including any member of the public, impose vicarious liability on institutions for the conduct of others, and expose institutions to liability when no actual harm occurs.

We believe that the proposed changes related to incentive compensation, including the elimination of the 12 safe harbors, will increase the uncertainty about what types of compensation are prohibited and which employees are covered by the regulation, and may require us and other schools to change our compensation practices for recruitment and financial aid personnel and other employees (including our executives), as well as for certain third parties who perform Internet-based marketing activities for us. This could adversely affect our ability to compensate our employees based on their performance of their job responsibilities, which could make it more difficult to attract and retain highly-qualified employees. It could also impair our ability to sustain and grow our business, which could have an adverse effect on our results of operations and future growth.

There are many open questions and interpretive issues with respect to the proposed regulations related to gainful employment, including questions as to the availability of, and the ability of institutions to obtain and verify, the information needed to calculate the applicable metrics. Due to the unavailability of data, we cannot predict with any certainty which or how many of our programs of study would be restricted or ineligible under the Title IV Programs. In addition, the continuing eligibility of our programs of study under the Title IV Programs would be at risk due to factors beyond our control, such as:

• changes in the income level of persons employed in specific occupations or sectors;

• increases in interest rates;

• changes in student mix to persons requiring higher amounts of student loans to complete their programs;

• changes in student loan delinquency rates;

• changes in the economy; and

• other factors.

If a particular program ceased to be eligible under the Title IV Programs, in most cases it would not be practical to continue offering that program of study. The gainful employment regulations as proposed could result in significant changes to the types of programs of study that we offer, in order to comply with the rules or to avoid the uncertainty associated with such compliance. The proposed gainful employment regulations could also put downward pressure on tuition prices, so that students do not incur debt that exceeds the levels required for a program to remain fully eligible under the Title IV Programs, which could increase the percentage of our revenue that is derived from Title IV Programs and, therefore, adversely impact our compliance with the 90/10 Rule. We may also have to limit enrollment in certain programs of study and/or substantially increase our efforts to promote student loan repayment, which could have a material adverse effect on our financial condition and results of operations. In addition, we may be required to warn consumers and current students about high debt levels related to certain of our programs of study and provide the most recent debt information for those programs. Any or all of these factors could reduce our enrollment, perhaps materially, which could have a material adverse effect on our business, prospects, financial condition, results of operations, cash flows and stock price.

We cannot predict the form of any final rules regarding the program integrity issues that may be adopted by the ED, or predict with certainty the impact of any new regulations on our operations. Compliance with these rules, as proposed by the ED in the NPRMs, could reduce our enrollment, increase our cost of doing business and have a material adverse effect on our business, financial condition, results of operations and cash flows.

The U.S. Senate Health, Education, Labor and Pensions (“HELP”) Committee recently commenced an examination of the for-profit postsecondary education industry that could result in legislation or further U.S. Department of Education rulemaking restricting Title IV Program participation by for-profit colleges in a manner that materially and adversely affects our business.

On June 24, 2010, the HELP Committee released a report regarding various aspects of for-profit higher education and held the first in a series of hearings to examine the for-profit postsecondary education sector. On August 4, 2010, the HELP Committee held a second hearing, during which it examined student recruitment practices at for-profit colleges. At this hearing, the Government Accountability Office (“GAO”) presented a report detailing the results of its investigation into recruiting and marketing practices in the for-profit education industry, which found fraudulent, deceptive or otherwise questionable practices in connection with student recruitment activities. In connection with the August 4, 2010 hearing, the HELP Committee requested information from the 30 largest for-profit providers of postsecondary education in the U.S., including us. The HELP Committee’s

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request seeks information and documents to more accurately understand our participation in the Title IV Programs, as well as data on most aspects of the student experience. We are complying with the HELP Committee’s request and providing information and documents in response to that request. On September 30, 2010, the Chairman of the HELP Committee released a report based on the Democratic staff’s analysis of information provided by 16 of the for-profit providers that received the Committee’s request. Also on September 30, 2010, the HELP Committee held a third hearing, which examined the federal investment in for-profit colleges and student success. The Chairman of the HELP Committee indicated that a fourth hearing was likely to occur and that he would likely introduce legislation that, if passed into law, could result in additional restrictions on our operations.

We cannot predict the extent to which, or whether, the HELP Committee’s hearings, review of information and/or reports will result in laws, regulations or administrative actions affecting our participation in the Title IV Programs or other aspects of our business. To the extent that any laws or regulations are adopted, or other administrative actions are taken, that limit our participation in the Title IV Programs, our enrollments, results of operations and financial condition could be materially and 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, 2010:

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, 2010 through July 31, 2010		245,125	(2)	$	80.82		245,000		3,296,725
August 1, 2010 through August 31, 2010		1,530,009	(3)		62.15		1,530,000		1,766,725
September 1, 2010 through September 30, 2010		55	(4)		58.55		—		1,766,725
Total		1,775,189	(5)	$	64.73		1,775,000

(1) The shares that remained available for repurchase under the Repurchase Program were 1,766,725 as of September 30, 2010. 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
5,000,000	January 2010
5,000,000	October 2010

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.

(2) Includes 125 shares of our common stock that were tendered to us by employees to satisfy the income tax obligations associated with the vesting of certain equity awards granted to those employees.

(3) Includes nine shares of our common stock that were tendered to us by employees to satisfy the income tax obligations associated with the vesting of certain equity awards granted to those employees.

(4) These shares of our common stock were tendered to us by employees to satisfy the income tax obligations associated with the vesting of certain equity awards granted to those employees.

(5) Includes 189 shares of our common stock that were tendered to us by employees to satisfy the income tax obligations associated with the vesting of certain equity awards granted to those employees.

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.

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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 22, 2010
	By:	/s/ Daniel M. Fitzpatrick
		Daniel M. Fitzpatrick
		Executive 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 current report on Form 8-K dated January 19, 2009)
10.37	Second Amendment to Second Amended and Restated Credit Agreement, dated as of August 10, 2010, among ITT Educational Services, Inc., JPMorgan Chase Bank, N.A. and Bank of America, N.A.
10.38	Third Amendment of ESI Pension 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
101	The following materials from ITT Educational Services, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Income; (iii) Condensed Consolidated Statements of Cash Flows; (iv) Condensed Consolidated Statements of Shareholders’ Equity; and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text

EX-10.37

Exhibit 10.37

SECOND AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT

This Second Amendment to Second Amended and Restated Credit Agreement (herein, the “Amendment”) is entered into as of August 10, 2010, among ITT Educational Services, Inc., a Delaware corporation (the “Borrower”), the Lenders party to the hereinafter defined Credit Agreement (the “Lenders”) and JPMorgan Chase Bank, National Association, as Administrative Agent (the “Administrative Agent”).

PRELIMINARY STATEMENTS

A. The Borrower, the Lenders and the Administrative Agent entered into a certain Second Amended and Restated Credit Agreement dated as of January 11, 2010, as amended by that certain First Amendment to Second Amended and Restated Credit Agreement dated as of February 3, 2010 (the Credit Agreement, as so amended, being referred to herein as the “Credit Agreement”). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement.

B. The Borrower has requested that the Lenders make certain amendments to the financial covenants set forth in the Credit Agreement, and the Lenders are willing to do so under the terms and conditions set forth in this Amendment.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

SECTION 1. AMENDMENTS.

Subject to the satisfaction of the conditions precedent set forth in Section 2 below, the Credit Agreement shall be and hereby is amended as follows:

1.1. Section 5.01 of the Credit Agreement is hereby amended by adding the word “and” at the end of clause (c) thereof, deleting clause (d) in its entirety, and reordering clause (e) thereof as clause (d) thereof.

1.2. Section 5.11 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

Section 5.11. Financial Covenants. The Borrower and its Subsidiaries shall have, on a consolidated basis (except as otherwise provided in the definition of “DOE Ratio” herein):

(a) Leverage Ratio. A Leverage Ratio, as determined as of the end of each fiscal quarter, of not greater than 1.0 to 1.0.

(b) Unrestricted Cash and Investments to Indebtedness. A ratio of (i) the combination of unrestricted cash and unrestricted investments (including any investments in the Custodial Account), to (ii) Indebtedness, of not less than 1.10 to 1.0, as of (A) the last day of each fiscal quarter (the “Testing Date”), or (B) any day after the related Testing Date but on or before the fifth calendar day immediately succeeding the related Testing Date, with the Borrower being entitled to choose as of which date within the parameters specified in clauses (A) and (B) that this ratio is measured each quarter, which date the Borrower will specify on the related certificate provided by the Borrower pursuant to Section 5.01(c).

(c) DOE Financial Responsibility Composite Ratio. A DOE Ratio determined as of the last day of any fiscal year to be greater than or equal to 1.50 to 1.00.

1.3. Schedule I to Exhibit F-1 to the Credit Agreement to the Credit Agreement is hereby amended and restated in its entirety to read as Schedule I attached hereto.

1.4. Exhibit F-2 to the Credit Agreement is hereby deleted in its entirety.

SECTION 2. CONDITIONS PRECEDENT.

The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent:

2.1. The Borrower, the Required Lenders and the Administrative Agent shall have executed and delivered this Amendment.

2.2. The Administrative Agent shall have received copies (executed or certified, as may be appropriate) of all legal documents or proceedings taken in connection with the execution and delivery of this Amendment to the extent the Administrative Agent or its counsel may reasonably request.

2.3. Legal matters incident to the execution and delivery of this Amendment shall be satisfactory to the Administrative Agent and its counsel.

SECTION 3. REPRESENTATIONS.

In order to induce the Lenders to execute and deliver this Amendment, the Borrower hereby represents to the Lenders that as of the date hereof (a) the representations and warranties set forth in Article III of the Credit Agreement are true and correct and (b) the Borrower is in compliance with the terms and conditions of the Credit Agreement and no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result after giving effect to this Amendment.

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SECTION 4. MISCELLANEOUS.

4.1. The Borrower heretofore executed and delivered to the Administrative Agent the Security Agreement, the Control Agreement and certain other Collateral Documents. The Borrower hereby acknowledges and agrees that the Liens created and provided for by the Collateral Documents continue to secure, among other things, the obligations of the Borrower arising under the Credit Agreement as amended hereby; and the Collateral Documents and the rights and remedies of the Administrative Agent and the Lenders thereunder, the obligations of the Borrower thereunder, and the Liens created and provided for thereunder remain in full force and effect and shall not be affected, impaired or discharged hereby. Nothing herein contained shall in any manner affect or impair the priority of the liens and security interests created and provided for by the Collateral Documents as to the indebtedness which would be secured thereby prior to giving effect to this Amendment.

4.2. Except as specifically amended herein, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement, any promissory note executed in connection with the Credit Agreement, or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby.

4.3. The Borrower agrees to pay on demand all costs and expenses of or incurred by the Administrative Agent in connection with the negotiation, preparation, execution and delivery of this Amendment, including the fees and expenses of counsel for the Administrative Agent.

4.4. This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. Delivery of executed counterparts of this Amendment by telecopy shall be effective as an original. This Amendment shall be governed by the laws of the State of New York.

[SIGNATURE PAGE TO FOLLOW]

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This Second Amendment to Second Amended and Restated Credit Agreement is entered into as of the date and year first above written.

ITT EDUCATIONAL SERVICES, INC.
By	/s/ Daniel M. Fitzpatrick
	Name:	Daniel M. Fitzpatrick
	Title:	Executive VP, CFO
JPMORGAN CHASE BANK, National Association, individually as a Lender and as Administrative Agent
By	/s/ John V. Schlechte
	Name:	John V. Schlechte
	Title:	Senior Vice President
BANK OF AMERICA, N.A., as a Lender
By	/s/ Christine M. Tierney
	Name:	Christine M. Tierney
	Title:	Senior Vice President

[Signature Page to Second Amendment]

SCHEDULE I

COMPLIANCE CERTIFICATE

	PERIOD ENDED
LEVERAGE RATIO (CALCULATED QUARTERLY)
TOTAL INDEBTEDNESS
EBITDA (four consecutive quarters)
Leverage Ratio
Maximum = 1.0 to 1.0
	PERIOD ENDED (SPECIFY DATE OF CALCULATION)
UNRESTRICTED CASH AND INVESTMENTS TO INDEBTEDNESS RATIO (CALCULATED QUARTERLY)
TOTAL INDEBTEDNESS
Cash & Investments to Indebtedness Ratio
Minimum = 1.10 to 1.0
	PERIOD ENDED
DOE RATIO (CALCULATED ANNUALLY)
DOE Ratio (as defined)
Minimum = 1.50 to 1.0

EX-10.38

Exhibit 10.38

THIRD AMENDMENT OF ESI PENSION PLAN

This Third Amendment of the ESI Pension Plan (the “Plan”) is adopted by ITT Educational Services, Inc. (the “Employer”).

Background

A. The Employer originally established the Plan effective June 9, 1998.

B. The Plan was amended and restated in its entirety effective January 1, 2006.

C. The 2006 restatement of the Plan has been amended by a First Amendment and a Second Amendment.

D. The Employer now wishes to amend the Plan further.

Amendment

Effective as of the dates specified below, the Plan is amended as follows:

1. Effective January 1, 2008, the definition of “Actuarial Equivalent” is amended to read as follows:

“Actuarial Equivalent” means, with respect to a benefit, another benefit that has the same actuarially-determined value. The determination of an Actuarial Equivalent benefit will be computed using the mortality table as prescribed in Revenue Ruling 2001-62, and an interest rate equal to an Applicable Percentage for that Plan Year. For purposes of distributions with Annuity Starting Dates on or after December 31, 2007, and notwithstanding any other Plan provisions to the contrary, the applicable mortality table used for purposes of adjusting any benefit or limitation under Code subparagraphs 415(b)(2)(B), (C) or (D) as set forth in Section 11.02 of the Plan is the table prescribed in Code subsection 417(e)(3)(A)(ii)(I).

This Third Amendment of ESI Pension Plan is executed this 30 day of June, 2010.

ITT EDUCATIONAL SERVICES, INC.
By:	/s/ Nina Esbin
	(Signature)
	Nina Esbin
	(Printed)
	Sr. VP, Human Resources
	(Title)

ATTEST:

/s/ Jenny Yonce

(Signature)

Jenny Yonce

(Printed)

Mgr, Benefits & HRIS

(Title)

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EX-31.1

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 22, 2010

/s/ Kevin M. Modany

Chief Executive Officer

EX-31.2

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 22, 2010

/s/ Daniel M. Fitzpatrick

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

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, 2010 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 22, 2010

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

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, 2010 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 22, 2010