Forward-Looking Statements

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

• 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;

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

• 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 federal or state authorizations or accreditations of our campuses or programs of study;

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

• loss of access by our students to lenders for education 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, 2011 filed with the SEC, in Part II, Item 1A. "Risk Factors" of our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2012 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 school or campus owned and operated by ITT/ESI, including its learning sites, if any. The term "institution" (in singular or plural form) means 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, 2011 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.

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 proprietary provider of postsecondary degree programs in the United States based on revenue and student enrollment. As of June 30, 2012, we were offering master, bachelor and associate degree programs to approximately 66,000 students. As of June 30, 2012, we had 149 college locations (including 146 campuses and three learning sites) in 39 states. In addition, we offered one or more of our online programs to students who are located in 48 states. All of our college 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 and other constituents, 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 second quarter of 2012, we began operations at one new ITT Technical Institute campus. We plan to begin operations at one new location during the remainder of 2012. Our strategy is to pursue multiple opportunities for growth. We are implementing a growth strategy designed to:

• improve the academic outcomes of our students;

• increase the value proposition of our education programs for our students; and

• increase access to high-quality, career-based education.

We intend to pursue this strategy by:

• increasing student enrollment in existing programs at existing campuses;

• increasing the number and types of program and other educational offerings that are delivered in residence and/or online;

• increasing our students' engagement in their programs of study;

• enhancing the relevancy of our educational offerings;

• assessing student achievement and learning;

• improving the flexibility and convenience of how our institutions deliver their educational offerings;

• increasing our students' access to financial aid;

• helping our graduates obtain entry-level employment involving their fields of study at higher starting annual salaries;

• operating new campuses across the United States and new institutions in international markets;

• adding learning sites to existing campuses; and

• investing in other education-related opportunities.

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, 2011 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 December 2011, the FASB issued ASU No. 2011-12, which is included in the Codification under ASC 220. This update defers the effective date of ASU No. 2011-05 for changes that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. None of the other requirements in ASU 2011-05 are affected by this update. This guidance became effective for our interim and annual reporting periods beginning January 1, 2012. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

Also in December 2011, the FASB issued ASU No. 2011-11, which is included in the Codification under ASC 210. This update provides for enhanced disclosures to help users of financial statements evaluate the effect or potential effect of netting arrangements on an entity's financial position. This guidance is effective for interim and annual reporting periods beginning January 1, 2013. We have not yet determined the effect that the adoption of this guidance will have on our condensed consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08, which is included in the Codification under ASC 350. This update allows an entity to assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. This guidance became effective for our interim and annual reporting periods beginning January 1, 2012. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, which is included in the Codification under ASC 220. This update requires total comprehensive income, the components of net income and the components of other comprehensive income to be presented either in a single continuous statement or in two separate but consecutive statements. This guidance became effective for our interim and annual reporting periods beginning January 1, 2012. Prior to January 1, 2012, we presented total Comprehensive income and the components of Other comprehensive income in our Condensed Consolidated Statement of Shareholders' Equity. After December 31, 2011, we present total Comprehensive income and the components of Other comprehensive income in our Condensed Consolidated Statements of Comprehensive Income.

In May 2011, the FASB issued ASU 2011-04, which is included in the Codification under ASC 820. This update provides guidance and clarification about the application of existing fair value measurements and disclosure requirements. This guidance became effective for our interim and annual reporting periods beginning January 1, 2012. 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             Six Months Ended
                                                          June 30,                      June 30,
                                                    2012            2011           2012          2011
Revenue                                               100.0 %        100.0 %        100.0 %       100.0 %
Cost of educational services                           42.7 %         36.7 %         41.1 %        36.3 %
Student services and administrative expenses           33.8 %         29.8 %         32.4 %        28.6 %

Operating income                                       23.5 %         33.5 %         26.5 %        35.1 %
Interest (expense) income, net                        (0.3% )          0.1 %        (0.1% )         0.1 %

Income before provision for income taxes               23.2 %         33.6 %         26.4 %        35.2 %

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

                                               2012                            2011
                                      Total          (Decrease)        Total         (Decrease)
                                     Student             To           Student            To
Total Student Enrollment as of:     Enrollment       Prior Year      Enrollment      Prior Year
March 31                                  71,123          (15.4%)         84,030       (0.6%)
June 30                                   66,397          (15.7%)         78,743       (7.0%)
September 30                      Not applicable   Not applicable         79,219      (10.0%)
December 31                       Not applicable   Not applicable         73,255      (13.5%)

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:

                                                2012                                  2011
                                      New               (Decrease)            New           (Decrease)
New Student Enrollment in the       Student                 To              Student             To
Three Months Ended:                Enrollment           Prior Year         Enrollment       Prior Year
March 31                                  18,067              (17.0%)           21,761           (5.6%)
June 30                                   15,698               (9.5%)           17,351          (19.9%)
September 30                      Not applicable       Not applicable           22,909          (14.1%)
December 31                       Not applicable       Not applicable           15,125          (14.7%)

Total for the year                Not applicable       Not applicable           77,146          (13.4%)

We believe that the decrease in new student enrollment in the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was primarily due to:

• a decrease in the rate at which prospective students who applied for enrollment actually began attending classes in their program of study;

• changes that we made to program offerings at select campuses which resulted in a more significant decline in new student enrollment in the criminal justice programs of study compared to our other curricula; and

• a decline in new student enrollment in the drafting and design programs of study compared to our other curricula, which we believe may have been due to economic changes in the construction industry generally.

We believe that the decrease in new student enrollment in the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily due to:

• changes that we made to program offerings at select campuses which resulted in a more significant decline in new student enrollment in the criminal justice programs of study compared to our other curricula; and

• a decline in new student enrollment in the drafting and design programs of study compared to our other curricula, which we believe may have been due to economic changes in the construction industry generally.

A continued decline in new and total student enrollment could have a material adverse effect on our business, financial condition, revenue and other results of operations and cash flows. We have taken a number of steps in an attempt to reverse the decline in total and new student enrollment, including, without limitation, refining our marketing, advertising and communications to focus more on the student value proposition and outcomes of an ITT Technical Institute education.

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:
        Year    March 31        June 30         September 30          December 31
        2010         76.1 %         74.5 %                72.4 %                76.1 %
        2011         73.5 %         73.1 %                71.5 %                73.4 %
        2012         72.4 %         71.3 %      Not applicable        Not applicable

The decrease in student persistence as of June 30 and March 31, 2012 compared to the corresponding prior year dates was primarily due to a higher number of students who graduated at the end of the academic period that began in March 2012 and December 2011 compared to the end of the same academic period in the prior year.

Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011. Revenue decreased $58.1 million, or 15.0%, to $329.8 million in the three months ended June 30, 2012 compared to $387.9 million in the three months ended June 30, 2011. The primary factors that contributed to this decrease included, in order of significance:

• a 15.4% decrease in total student enrollment as of March 31, 2012 compared to March 31, 2011; and

• a 15.7% decrease in total student enrollment as of June 30, 2012 compared to June 30, 2011.

The decrease in revenue was partially offset by a lesser impact of the private education loan programs, which expired in 2011, on our revenue recognition in the three months ended June 30, 2012 compared to the same prior year period.

The primary factors that contributed to the decrease in total student enrollment as of March 31, 2012 compared to March 31, 2011 included, in order of significance:

• the 17.0% decrease in new student enrollment in the three months ended March 31, 2012 and the 14.7% decrease in new student enrollment in the three months ended December 31, 2011 compared to the same prior year periods; and

• an increase in the number of students who graduated in the three months ended March 31, 2012 compared to the same prior year period.

The primary factors that contributed to the decrease in total student enrollment as of June 30, 2012 compared to June 30, 2011 included, in order of significance:

• the 9.5% decrease in new student enrollment in the three months ended June 30, 2012 and the 17.0% decrease in new student enrollment in the three months ended March 31, 2012 compared to the same prior year periods; and

• an increase in the number of students who graduated in the three months ended June 30, 2012 compared to the same prior year period.

Cost of educational services decreased $1.3 million, or 0.9%, to $140.9 million in the three months ended June 30, 2012 compared to $142.3 million in the three months ended June 30, 2011. The primary factor that contributed to this decrease was a decrease in compensation costs, which was partially offset by the increased costs associated with operating new campuses.

Cost of educational services as a percentage of revenue increased 600 basis points to 42.7% in the three months ended June 30, 2012 compared to 36.7% in the three months ended June 30, 2011. The primary factor that contributed to this increase was a decline in revenue, which was partially offset by a decrease in compensation costs.

Student services and administrative expenses decreased $4.2 million, or 3.6%, to $111.5 million in the three months ended June 30, 2012 compared to $115.6 million in the three months ended June 30, 2011. The principal causes of this decrease were decreases in expenses related to student scholarships and media advertising expenses, which were partially offset by an increase in bad debt expense.

Student services and administrative expenses increased to 33.8% of revenue in the three months ended June 30, 2012 compared to 29.8% of revenue in the three months ended June 30, 2011. The principal causes of this increase were a decline in revenue and an increase in bad debt expense, which were partially offset by decreases in expenses related to student scholarships and media advertising expenses. Bad debt expense as a percentage of revenue increased to 5.8% in the three months ended June 30, 2012 compared to 4.5% in the three months ended June 30, 2011, primarily as a result of an increase in the amount of internal student financing that we provided to our students in the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The increase in the amount of internal student financing was primarily due to a decline in the amount of private education loans available to our students in the three months ended June 30, 2012 as a result of the expiration in 2011 of the two private education loan programs that provided the vast majority of private education loans to our students in 2011.

Operating income decreased $52.6 million, or 40.4%, to $77.4 million in the three months ended June 30, 2012 compared to $130.0 million in the three months ended June 30, 2011, primarily 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 decreased to 23.5% in the three months ended June 30, 2012 compared to 33.5% in the three months ended June 30, 2011, primarily as a result of the impact of the factors discussed above.

Interest income decreased $0.3 million, or 36.5%, to $0.5 million in the three months ended June 30, 2012 compared to $0.8 million in the three months ended June 30, 2011, primarily due to lower investment balances. Interest expense increased $0.8 million, or 147.3%, to $1.3 million in the three months ended June 30, 2012 compared to $0.5 million in the three months ended June 30, 2011, primarily due to an increase in the effective interest rate on our revolving credit facility.

Our combined federal and state effective income tax rate was 40.0% in the three months ended June 30, 2012 compared to 39.4% in the three months ended June 30, 2011. Our combined effective income tax rate increased primarily due to settlements of certain state income tax audits and changes in state income tax laws.

Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011. Revenue decreased $99.4 million, or 12.9%, to $671.6 million in the six months ended June 30, 2012 compared to $771.0 million in the six months ended June 30, 2011. The primary factors that contributed to this decrease included, in order of significance:

• a 15.4% decrease in total student enrollment as of March 31, 2012 compared to March 31, 2011;

• a 13.5% decrease in total student enrollment as of December 31, 2011 compared to December 31, 2010; and

• a 15.7% decrease in total student enrollment as of June 30, 2012 compared to June 30, 2011.

The decrease in revenue was partially offset by a lesser impact of the private education loan programs, which expired in 2011, on our revenue recognition in the six months ended June 30, 2012 compared to the same prior year period.

Cost of educational services decreased $4.3 million, or 1.5%, to $275.9 million in the six months ended June 30, 2012 compared to $280.2 million in the six months ended June 30, 2011. The primary factors that contributed to this decrease included, in order of significance:

• a decrease in compensation costs; and

• a decrease in legal expenses.

Cost of educational services as a percentage of revenue increased 480 basis points to 41.1% in the six months ended June 30, 2012 compared to 36.3% in the six months ended June 30, 2011. The primary factor that contributed to this increase was a decline in revenue, which was partially offset by decreases in compensation costs and legal expenses.

Student services and administrative expenses decreased $2.5 million, or 1.1%, to $217.7 million in the six months ended June 30, 2012 compared to $220.2 million in the six months ended June 30, 2011. The principal cause of this decrease was a decrease in expenses related to student scholarships, which was partially offset by an increase in bad debt expense.

Student services and administrative expenses increased to 32.4% of revenue in the six months ended June 30, 2012 compared to 28.6% of revenue in the six months ended June 30, 2011. The principal causes of this increase were a decline in revenue and an increase in bad debt expense, which were partially offset by a decrease in expenses related to student scholarships. Bad debt expense as a percentage of revenue increased to 5.2% in the six months ended June 30, 2012 compared to 3.9% in the six months ended June 30, 2011, primarily as a result of an increase in the amount of internal student financing that we provided to our students in the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The increase in the amount of internal student financing was primarily due to a decline in the amount of private education loans available to our students in the six months ended June 30, 2012 as a result of the expiration in 2011 of the two private education loan programs that provided the vast majority of private education loans to our students in 2011.

. . .