Certain statements in this Management's Discussion and Analysis (MD&A), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in "Risk Factors" in Part I, Item 1A, of our Annual Report on Form 10-K (Annual Report). We undertake no obligation to publicly update or revise any forward-looking statements, including any changes that might result from any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.

This MD&A is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. As used in this MD&A, the words, "we," "our" and "us" refer to K12 Inc. and its consolidated subsidiaries. This MD&A should be read in conjunction with our condensed consolidated financial statements and related notes included in this report, as well as the consolidated financial statements and MD&A of our Annual Report. The following overview provides a summary of the sections included in our MD&A:

• Executive Summary - a general description of our business and key highlights of the three and nine month periods ended March 31, 2012.

• Critical Accounting Policies and Estimates - a discussion of critical accounting policies requiring critical judgments and estimates.

• Results of Operations - an analysis of our results of operations in our condensed consolidated financial statements.

• Liquidity and Capital Resources - an analysis of cash flows, sources and uses of cash, commitments and contingencies, seasonality in the results of our operations, and quantitative and qualitative disclosures about market risk.

Executive Summary

We are a technology-based education company. We offer proprietary curriculum, software systems and educational services designed to facilitate individualized learning for students primarily in kindergarten through 12th grade, or K-12. Our mission is to maximize a child's potential by providing access to an engaging and effective education, regardless of geographic location or socio-economic background. Since our inception, we have invested approximately $275 million to develop and, to a lesser extent, acquire curriculum and online learning platforms that promote mastery of core concepts and skills for students of all abilities. This learning system combines our curriculum and offerings with an individualized learning approach well-suited for virtual public schools, hybrid schools, school district online programs, public charter schools and private schools that utilize varying degrees of online and traditional classroom instruction, and other educational applications. We offer foreign language courses and camps with Middlebury Interactive Languages (MIL), our joint venture with Middlebury College. We also operate three online private schools:
K12 International Academy, Keystone School and the George Washington University Online High School, as well as a brick and mortar private school, IS Berne. The Company currently has a 20% ownership interest in The Web International Education Group, Ltd. (Web) which provides English instruction to young adults in China. We also currently serve the post-secondary market through Capital Education LLC, a provider of online services to post-secondary institutions.

As with a traditional public school, a virtual public school or hybrid school must comply with state education regulations. The fundamental difference between traditional public schools and virtual public schools is that students attend virtual and hybrid public schools primarily over the Internet instead of traveling to a physical classroom. In their online learning environment, students receive assignments, complete lessons and obtain instruction from certified teachers with whom they interact online, telephonically, in virtual classroom environments and sometimes face-to-face. The majority of states have embraced virtual public schools or hybrid schools as a means to provide families with a publicly-funded alternative to a traditional classroom-based education. For parents who believe their child is not thriving and for whom relocating or attending a private school is not an option, virtual and hybrid public schools can provide a compelling choice. A hybrid school is a virtual public school that combines the benefits of face-to-face time for students and teachers in a traditional classroom setting along with the flexibility and individualized learning advantages of online instruction. From an education policy standpoint, virtual and hybrid public schools often represent a savings to taxpayers when compared with traditional public schools because they are generally funded at a lower per pupil level than the per pupil state average as reported by the U.S. Department of Education. Finally, because parents are generally not required to pay tuition to attend a public school, virtual and hybrid public schools make our learning system an attractive alternative within the public school system.

Our proprietary curriculum, online learning platform and varying levels of academic and management services, which can range from individual courses to complete turnkey online schools, are offered to our virtual public school, school district and private school partners. Virtual and hybrid public schools under turnkey management contracts (Managed Schools) account for approximately 84% of our revenue during the current fiscal year. For the 2011-12 school year, we manage schools in 29 states and the District of Columbia. In July 2010, through our acquisition of KC Distance Learning, Inc. (KCDL), we added iQ Academies and now manage these programs in five states where we also manage other virtual public schools. These Managed Schools generally are able to enroll students on a statewide basis. From time-to-time, service agreements with certain Managed Schools may not be renewed by us or the customer, although students are usually able to migrate to other Managed Schools serving the particular state.

We currently serve over 2,000 school districts or individual schools in all 50 states. The services we provide to these districts are designed to assist them in launching their own virtual school or hybrid programs and vary according to the needs of the individual school districts and may include teacher training programs, administrator support and our student account management system. With our services, districts can offer programs that allow students to participate full-time, as their primary school, or part-time, supplementing their education with core courses, electives or credit recovery options. We are serving a growing number of schools and school districts enabling them to offer our course catalogue to students either full-time or on an individual course basis. We have established a dedicated sales team to focus on this sector and, through our acquisition of KCDL, specifically Aventa, in July 2010 and The American Education Corporation (AEC) in December 2010, we increased the size and expertise of our sales team, added a reseller network, and expanded our course portfolio.

We manage four private schools where parents can enroll students on a tuition basis for either a full-time online education or individual courses to supplement their children's traditional instruction. In 2008, we launched the K12 International Academy, a private school that we operate using our curriculum. This school is accredited and enables us to offer students worldwide the same full-time education programs that we provide to the virtual and hybrid public schools we manage, including the option to enroll in individual courses. This school is organized as a private international school and enrolled students can interact with their classmates from more than 85 countries. Through our acquisition of KCDL, we added The Keystone School, a private school that has been serving students for over 37 years and offers online and correspondence courses. In January 2011, we launched the George Washington University Online High School (GWUOHS), a program that offers our college preparatory curriculum and is designed for high school students who are seeking a challenging academic experience and aspire to attend top colleges and universities. In April 2011, we acquired the operations and substantially all the assets of the International School of Berne (IS Berne), a traditional private school located in Berne, Switzerland serving students in grades Pre-K through 12.

We provide educational services to post-secondary institutions through our subsidiary, Capital Education. Programs are designed for colleges and universities seeking to build or expand their online presence. Our services include course development and distribution through a proprietary learning management platform, hosting and technical support, student advisory services and program administration.

We made a strategic investment for a 20% minority ownership interest in Web, a provider of English language training in China. This investment gives us the option by June 30, 2012 to: (i) purchase no less than 51% of Web before July 1, 2012, (ii) purchase all remaining equity interest between January 1, 2013 and December 31, 2015, (iii) put the shares back to Web for the $10 million investment plus interest, or (iv) maintain the 20% minority interest. Web serves learners of all ages including university students, government workers, and employees of international companies. Web currently has an extensive network of learning centers throughout China. Web education centers are outfitted with learning labs that use modern computer terminals and internet connections. Students can access our curriculum and other electronic learning resources from the Web centers. We are currently evaluating whether we will exercise our option to purchase additional interest in Web.

Across our educational programs, families come from a broad range of social, economic and academic backgrounds. They share the desire for individualized instruction so as to maximize their child's potential. Examples include, but are not limited to, families with: (i) students seeking to learn faster or slower than they could in a "one size fits all" traditional classroom; (ii) safety, social and health concerns about their local school; (iii) students with disabilities who are underserved in traditional classrooms; (iv) students with geographic or travel constraints; and (v) student-athletes and performers who are not able to attend regularly scheduled classes. Our individualized learning approach allows students to optimize their academic performance and, therefore, their chances of achieving their goals.

For the three months ended March 31, 2012, our total average enrollment was 147,728 students as compared to 101,030 students for the same period in the prior year, a growth rate of 46.2%. Our enrollments include students in Managed Schools, students in programs offered by school districts (Institutional Business) and students in our Private Schools. Students served through our Institutional Business and Private School offerings may enroll in a single course. For better comparability, these students are converted to full-time equivalents (FTEs) on a four course basis. We currently exclude selected programs from our reported enrollment. For example, we do not include students in our consumer channel as we do not monitor the progress of these students in the same way as we do in other programs. We typically sell our A+ curriculum as a site license. As these schools are not limited in the number of students who may access our curriculum, we do not include these students in our enrollment totals. We also exclude students from Capital Education and our classroom pilots. As our business continues to evolve and diversify, we will be evaluating other metrics that may be more useful to investors.

For the three months ended March 31, 2012, we increased revenues to $178.2 million from $130.3 million in the same period in the prior year, a growth rate of 36.8%. The growth of revenue in the quarter reflects our organic revenue growth in our core Managed Schools business, increases in revenue from our Institutional Business and Private Schools, plus revenue from our acquisition of the International School of Berne on April 1, 2011, and the Kaplan/Insight asset acquisition on July 1, 2011, neither of which were included in our prior period results. Our operating income increased to $11.6 million from $10.8 million in the same period in the prior year, a growth rate of 7.4%. Net income to stockholders increased to $6.7 million from net income to stockholders of $5.3 million, an increase of 26.4%. The increase in net income was primarily attributable to the increase in operating income and lower income tax expense compared to the same period in the prior year.

In the last two years, we completed several strategic transactions to accelerate our growth, expand our course catalogue and service offerings and extend our distribution capabilities. With these initiatives and our recent acquisitions, we believe we have improved our growth potential and the long-term ability to scale our business and operations. See Note 10 "Business combination" in the accompanying unaudited condensed consolidated financial statements for additional information on our acquisitions and investments.

Acquisition of The American Education Corporation

In December 2010, we acquired the stock of The American Education Corporation (AEC) for a total cash purchase price of $35.2 million, including certain amounts held in escrow (which the Company received back) of $6.8 million and cash of $3.8 million, resulting in a net purchase price of approximately $24.6 million. AEC is a leading provider of research-based core curriculum instructional software for kindergarten through adult learners. The acquisition increased our portfolio of innovative, high quality instruction and curriculum used by school districts all over the country.

Investment in Web International Education Group, Ltd.

In January 2011, we invested $10 million in cash in Web International Education Group Ltd. (Web). This investment gives us a 20% minority interest in Web, with the option by June 30, 2012 to: (i) purchase no less than 51% of the shares of Web, (ii) purchase all remaining equity interest between January 1, 2013 and December 31, 2015, (iii) put the shares back to Web for the $10 million investment plus interest, or (iv) maintain the 20% minority interest. Web is a provider of English language training for learners of all ages throughout China with an extensive network of learning centers in cities throughout the country. We are currently evaluating whether we will exercise our option to purchase additional interest in Web.

Acquisition of International School of Berne

In April, 2011, we finalized our acquisition of the operations of the International School of Berne (IS Berne) for 2 million Swiss Francs ($2.2 million). IS Berne is a traditional private school located in Berne, Switzerland serving students in grades Pre-K through 12. IS Berne is an International Baccalaureate school in its 50th year of operation. We acquired substantially all of IS Berne's assets, excluding real estate, and our purchase provided us with the right to operate the school.

Investment by Technology Crossover Ventures in K12 Inc.

In April 2011, we completed a private placement sale of 4 million shares of restricted Common Stock at a price of $31.46 per share to investment funds affiliated with Technology Crossover Ventures (TCV). The proceeds of $125.8 million were unrestricted and may be used for acquisitions, strategic investments and general corporate purposes. Under the terms of the transaction, our Board of Directors (Board) appointed a director nominated by TCV to the Board to hold office until the next annual meeting of stockholders and on December 22, 2011, the TCV nominee was elected by the stockholders at the Company's annual meeting. Additionally, we granted TCV the right to participate on a pro-rata basis in any subsequent private offerings of Common Stock by the Company, subject to certain exclusions such as issuances in connection with acquisitions or employee equity plans. As provided by the terms of the transaction, we filed a resale registration statement with respect to these shares with the Securities and Exchange Commission on December 8, 2011 and the shelf-registration became effective on December 28, 2011.

Acquisition of Assets from Kaplan Virtual Education

In July 2011, we completed the purchase of certain assets and Insight School management contracts (Kaplan/Insight Assets) of Kaplan Virtual Education, a subsidiary of Kaplan, Inc. The Kaplan/Insight Assets included contracts to serve online public schools in eight states serving students in grades 6-12. The acquisition allows us to serve more students with multiple curriculum platforms, leverage the Insight School brand in certain schools to create a differentiated product offering for "at-risk" students and leverage our existing virtual academy operations. The Kaplan/Insight Assets have been integrated with our online charter school operations.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our consolidated financial statements. Critical accounting policies are disclosed in our year 2011 audited consolidated financial statements, which are included in our Annual Report. Other than those described in the condensed consolidated financial statements, there have been no significant updates to our critical accounting policies disclosed in our Annual Report.

Financial Statement Overview

The Company has experienced a number of changes that affect the comparability of period to period financial results. These changes include: the acquisition of KCDL on July 23, 2010; the acquisition of American Education Corporation (AEC) on December 1, 2010; the acquisition of the International School of Berne on April 1, 2011; and the acquisition of Kaplan Virtual Education and Insight Schools (Kaplan/Insight Assets), on July 1, 2011. The operating activities from these acquisitions are included in our third quarter and year to date financial results. The prior year to date results include KCDL for approximately eight months and AEC for four months.

The third quarter and year to date results include operating activities associated with investments to support our growth and business expansion that were not incurred during the prior year periods. These investments include our internal business support systems, a second data center to support operations, and expansion of our products and services into new international, academic and institutional sales markets. Certain business support systems and a second data center were under development during prior periods and development costs were generally capitalized. The third quarter includes maintenance and license costs, depreciation and other operating costs associated with operating these assets. The operating costs associated with maintaining these systems will continue in future periods.

Our student enrollment has experienced a shift in the mix of students in our programs with an increased level of high school students as compared to prior periods. The shift occurred from organic growth in our Virtual Academies, expansion of our private schools, and our acquisition of Kaplan/Insight Assets, which only included students in grades 6-12. Our continued expansion into the institutional sales business and private school markets also shifts the mix of our revenue and associated costs of providing services, including additional sales personnel, third party distributor costs and third party royalty costs for our institutional sales business. We may continue to experience changes in our enrollment, revenue and cost mix as we continue expansion into markets different than our traditional Virtual Academy business. Our other nascent businesses have not yet reached scale and are creating negative pressure on margins.

We incurred transition and integration costs during the current year to date period associated with the acquisition of the Kaplan/Insight Assets and temporary teach out costs associated with private school students acquired in the acquisition. During the three months ended March 31, 2012, we have incurred additional legal costs defending various litigation against the Company. We believe that all the above factors, particularly the large infrastructure investments, mergers and the lower current year capitalization rate for various development projects, reduce the comparability of our operating results for the periods ended March 31, 2012 with the comparable 2011 periods.

Funding Overview

State education budgets remain under pressure due to the current economic environment, and public school funding levels, including for the online public schools that we manage, have been reduced in many states over the past few years and even mid-year adjustments have occurred. We routinely monitor state legislative activity and regulatory proceedings that might impact the funding received by the schools we serve and to the extent possible, factor potential outcomes into our business planning decisions. We have taken reserves during the current year in light of certain funding proposals and for individual school deficit allowances in several states. In addition, because of current economic pressures on state funding, some states are delaying their payments to public schools. We have experienced delays in receiving payments from our Managed Schools that are dependent on state funding before remitting payment to us. As a result of these deferred payments, we have experienced higher accounts receivable throughout the third quarter and year, which has negatively impacted our cash position and cash provided from operations. We currently expect to receive payment from certain states that have deferred payment in the early part of our 2013 fiscal year.

Results of Operations

Enrollment

Our reported total average enrollments include students in Managed Schools, students taking K12 curriculum or Aventa online programs offered by school districts (Institutional Business), and students in Private Schools. Students served through our Institutional Business and Private School offerings may enroll in a single course. For better comparability, these students are converted to full-time equivalents (FTEs) on a four course basis. We currently exclude selected programs from our reported enrollment. For example, we do not include students in our consumer channel as we do not monitor the progress of these students in the same way as we do in other programs. We typically sell our A+ curriculum (acquired with AEC) as a site license. As these schools are not limited in the number of students who may access our curriculum, we do not include these students in our enrollment totals. We also exclude students from post-secondary institutions served by Capital Education and our classroom pilots. As our business continues to evolve and diversify, we will be evaluating other metrics that may be more useful to investors.

Total average enrollments for the three months ended March 31, 2012 increased to 147,728 or 46.2% as compared to 101,030 for the same period in the prior year. High school students comprised 44.8% of public school enrollment as compared to 26.1% in the same period in the prior year. Enrollments in Managed Schools for the three months ended March 31, 2012 increased 46.4% to 105,912 from 72,344 for the same period in the prior year. Managed Schools include virtual and hybrid public schools.

Enrollments in Institutional Business for the three months ended March 31, 2012 increased 49.4% to 31,367 from 21,002 for the same period in the prior year. Our Institutional Business provides curriculum and services to schools and school districts. For better comparability, enrollments reported are converted to full-time equivalents (FTEs) on a four course basis.

Enrollments in Private Schools for the three months ended March 31, 2012 increased 36.0% to 10,449 from 7,684 for the same period in the prior year. Private schools include the K12 International Academy, Keystone, GWUOHS, and IS Berne. These private schools offer educational services on a full and part-time basis. For better comparability, enrollments reported are converted to full-time equivalents (FTEs) on a four course basis.

The following table sets forth average enrollment data by distribution channel for each of the periods indicated:

                                       Three Months Ending                Growth                 Nine Months Ending                Growth
                                            March 31,                   2012 / 2011                   March 31,                  2012 / 2011
                                        2012          2011         Change       Change %          2012          2011        Change       Change %

K12 Average Enrollment
Managed Public Schools                  105,912        72,344       33,568           46.4 %       105,109       72,332       32,777           45.3 %
Institutional Business                   31,367        21,002       10,365           49.4 %        29,981       19,674       10,307           52.4 %
Private Schools                          10,449         7,684        2,765           36.0 %        10,125        7,650        2,475           32.4 %

Total Average Enrollment                147,728       101,030       46,698           46.2 %       145,215       99,656       45,559           45.7 %

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