10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended: August 31, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from [     ] to [     ]

Commission file number: 0-25232

APOLLO GROUP, INC.
(Exact name of Registrant as specified in its charter)

ARIZONA	86-0419443
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4615 EAST ELWOOD STREET, PHOENIX, ARIZONA 85040
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (480) 966-5394

Securities registered pursuant to Section 12(b) of the Act:

Apollo Group, Inc.
Class A common stock, no par value
(Title of each class)
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES o     NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o     NO þ

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 þ NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

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

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).  YES o     NO þ

No shares of Apollo Group, Inc. Class B common stock, its voting stock, are held by non-affiliates. The holders of Apollo Group, Inc. Class A common stock are not entitled to any voting rights. The aggregate market value of Apollo Group Class A common stock held by non-affiliates as of February 28, 2007 (last day of the Registrant’s most recently completed second quarter), was approximately $6.6 billion.

The number of shares outstanding for each of the Registrant’s classes of common stock as of April 30, 2007 is as follows:

Apollo Group, Inc. Class A common stock, no par value	172,710,000 Shares
Apollo Group, Inc. Class B common stock, no par value	475,000 Shares

Documents Incorporated by Reference: None

APOLLO GROUP, INC. AND SUBSIDIARIES

FORM 10-K

INDEX

			Page
PART I
Special Note Regarding Forward-Looking Statements				3
Explanatory Note Regarding Restatement and Material Weaknesses				3
	Item 1.	Business		5
	Item 1A.	Risk Factors		25
	Item 1B.	Unresolved Staff Comments		35
	Item 2.	Properties		36
	Item 3.	Legal Proceedings		36
	Item 4.	Submission of Matters to a Vote of Security Holders		41
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		42
	Item 6.	Selected Consolidated Financial Data		43
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		49
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		72
	Item 8.	Financial Statements and Supplementary Data		73
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		140
	Item 9A.	Controls and Procedures		140
	Item 9B.	Other Information		146
PART III
	Item 10.	Directors and Executive Officers of the Registrant		146
	Item 11.	Executive Compensation		151
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		159
	Item 13.	Certain Relationships and Related Transactions		162
	Item 14.	Principal Independent Registered Public Accounting Firm Fees and Services		162
PART IV
	Item 15.	Exhibits and Financial Statement Schedules		163
SIGNATURES				165
EX-10.4
Ex-10.7c
EX-10.12
EX-10.13a
EX-10.14
EX-10.16
EX-10.17
EX-10.18
EX-21
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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Special Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact may be forward-looking statements. Such forward-looking statements include, among others, those statements regarding future events and future results of Apollo Group, Inc. (“the Company,” “Apollo Group,” “Apollo,” “APOL,” “we,” “us” or “our”) that are based on current expectations, estimates, forecasts, and the beliefs and assumptions of us and our management, and speak only as of the date made and are not guarantees of future performance. The words “believes,” “expects,” “anticipates,” “estimates,” “plans,” “objectives,” and other similar statements of expectation identify forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, including those set forth in Item 1 under the sections titled “Regulatory Environment,” “Accreditation,” “Federal Financial Aid Programs,” and “State Authorization,” those factors set forth in Item 7 and those factors set forth in other reports that we file with the Securities and Exchange Commission (“SEC”). We undertake no obligation to publicly update or revise any forward-looking statements, or any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements.

Explanatory Note Regarding Restatement and Material Weaknesses

In this Annual Report on Form 10-K for the year ended August 31, 2006 (the “Annual Report”), Apollo Group, Inc. has restated its consolidated balance sheet as of August 31, 2005, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the fiscal years ended August 31, 2005 and 2004 for the effects of errors in accounting for stock options and other items (the “Restatement”). See Note 3, “Restatement of Consolidated Financial Statements” included in Part II, Item 8.

This Annual Report also presents the effects of the Restatement on our “Selected Consolidated Financial Data” in Item 6 for our fiscal years ended August 31, 2005, 2004, 2003 and 2002, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 for our fiscal years ended August 31, 2005 and 2004.

In response to a report published by an investment bank on June 8, 2006 that questioned whether the Company might have backdated stock option grants during its fiscal years ended August 31, 2000 through August 31, 2004, the Board of Directors authorized a special committee (the “Special Committee”) on June 23, 2006, to retain independent legal counsel, who in turn retained forensic accountants, to assist them in conducting an independent review of the Company’s historical practices related to stock option grants (the “Independent Review”). In November 2006, with the assistance of outside legal counsel, the Company began an in-depth internal review to ascertain the most likely measurement date of every stock option grant since the Company’s initial public offering during its fiscal year 1994 through September 2006 (the “Internal Review”).

Based on the Independent Review and the Internal Review, the Company determined that 57 of the 100 total grants made during this time period used incorrect measurement dates for accounting purposes. Of these 100 grants, 33 grants were issued to the Company’s management and other employees (“Management Grants”). The Company determined that incorrect measurement dates were used for accounting purposes for 24 of the 33 Management Grants. As a result, revised measurement dates were selected for many grants and resulted in exercise prices that were less than the fair market value of the stock on the most likely measurement dates. The Company recorded pre-tax compensation expense of $52.9 million ($59.9 million after-tax) in the aggregate over the fiscal years 1994 through 2005. The after-tax amount is higher due primarily to disallowed deductions pursuant to IRS Section 162(m) and related penalties and interest. This incremental share based compensation expense results in cumulative decrease to pre-tax income of $21.1 million ($34.2 million after-tax) for the years ended August 31, 2002 through 2005.

During the year ended August 31, 2006, the Company concluded that a significant increase in its allowance for doubtful accounts was required. A portion of the increase has been determined to be the correction of an error from

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prior periods and is included in the accompanying financial statements as an element of the Restatement. This error related to the fact that in prior years the Company did not properly consider available information related to (a) the cumulative differences between actual write-offs and its allowance for doubtful accounts and (b) significant increases in the “Return to Lender” dollars for Title IV recipients who withdraw from University of Phoenix, Inc. (“UPX”) or Western International University, Inc. (“WIU”). When a student with Title IV loans withdraws from UPX or WIU, the Company is sometimes required to return a portion of Title IV funds to the lenders. The Company is generally entitled to collect these funds from the students, but the collection of these receivables is significantly lower than its collection of receivables from students who remain in its educational programs. Accordingly, the Company has restated its allowance for doubtful accounts for all prior periods presented. This error resulted in adjustments to pre-tax bad debt expense in the amounts of $11.7 million ($7.1 million after-tax) and $4.1 million ($2.5 million after-tax) for the fiscal years ended 2005 and 2004, respectively.

The Company also concluded that various accounts such as cash, revenue, property and equipment, lease accounting and other investments were not properly recorded in accordance with generally accepted accounting principles (“GAAP”). Specifically, impairment in a venture capital fund investment should have been recorded in an earlier period; cash related to scholarships, grants and refunds should have been classified as restricted cash and student deposits; different assumptions should have been used in determining the fair value of options; certain share based compensation was improperly amortized amongst quarters; auction rate securities were improperly classified as cash and cash equivalents in certain periods; and certain revenue under tuition discount programs were not properly recorded.

The footnotes to the Company’s previously issued financial statements for the years ended August 31, 2005 and 2004, disclosed pro forma net income in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). This pro forma disclosure also included additional pre-tax errors not related to the measurement date changes in the amount of $19.8 million ($11.9 million after tax) and $123.5 million ($74.4 million after tax) for the fiscal years ended August 31, 2005 and August 31, 2004, respectively. These errors arose from the misapplication of SFAS 123 to the Company’s University of Phoenix Online (“UPX Online”) stock options which were converted to APOL stock options. Specifically, the Company’s footnote disclosure understated pro forma net income because it erroneously included deductions for pro forma share based compensation based on the intrinsic value of the converted options as computed under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), rather than the fair value of the converted options as computed under SFAS 123.

Management has determined that the Company did not maintain effective control over (i) the granting of stock options and the related recording and disclosure of share based compensation expense under APB 25, SFAS 123 and SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), (ii) the recording of allowance for doubtful accounts, (iii) the recording of impairments for goodwill and (iv) the deduction of compensation expenses under Section 162(m) of the Internal Revenue Code of 1986 (“IRC”). The control deficiencies identified constituted material weaknesses in internal control over financial reporting as of August 31, 2006. See Item 9A, “Controls and Procedures,” for a description of these material weaknesses.

Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q affected by the Restatement will not be amended. Accordingly, previously issued financial statements and related reports of our independent registered public accounting firm should not be relied upon.

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PART I

Item 1 — Business

Overview

Apollo Group, Inc. has been an education provider for more than 30 years, operating University of Phoenix, Inc. (“UPX”), Institute for Professional Development, Inc. (“IPD”), The College for Financial Planning Institutes Corporation (“CFP”), Western International University, Inc. (“WIU”) and Insight Schools, Inc., all of which are wholly-owned subsidiaries of the Company. The Company offers innovative and distinctive educational programs and services from high school through college-level at 99 campuses and 163 learning centers in 39 states, Puerto Rico, Alberta, British Columbia, The Netherlands and Mexico, as well as online throughout the world. Our combined Degreed Enrollment for UPX and Axia College as of August 31, 2006, was approximately 282,300. In addition, students are enrolled in WIU, CFP and IPD Client Institutions (as defined below), and additional non-degreed students are enrolled in UPX. See Customers/Students in Item 1 of this Report. Degreed Enrollments represent individual students enrolled in our degree programs who attended a course during the quarter and did not graduate as of the end of the quarter (including Axia students enrolled in UPX and WIU).

UPX is accredited by The Higher Learning Commission (“The HLC”) and has been a member of the North Central Association of Colleges and Schools since 1978. UPX has successfully replicated its teaching/learning model while maintaining educational quality at 75 local campuses and 123 learning centers in 37 states, Puerto Rico, Alberta, British Columbia, The Netherlands and Mexico. In Canada, we operate under Canadian subsidiary corporations. UPX also offers its educational programs worldwide through its computerized educational delivery system. UPX has customized computer programs for student tracking, marketing, faculty recruitment and training and academic quality management. These computer programs are intended to provide uniformity among UPX’s campuses and learning centers, which enhances UPX’s ability to expand into new markets while still maintaining academic quality. UPX’s tuition revenues represented approximately 84% of the Company’s consolidated revenues for the year ended August 31, 2006. Axia College, which has been a part of UPX since March 2006 (previously it was part of WIU), offers associate’s degrees in business, criminal justice, general studies, health administration and information technology worldwide through its computerized educational delivery system. Axia College is designed for students with little or no college experience and offers small classes of less than 20 students and dedicated faculty who are specially trained in facilitating the online learning experience.

WIU is accredited by The HLC and currently offers undergraduate and graduate degree programs at local campuses in Arizona and through joint educational agreements with educational institutions in China and India.

IPD provides program development and management consulting services to regionally accredited private colleges and universities (“Client Institutions”) that are interested in expanding or developing their programs for working students. These services typically include degree program design, curriculum development, market research, student recruitment, accounting and administrative services. IPD provides these services at 22 campuses and 36 learning centers in 24 states in exchange for a contractual share of the tuition revenues generated from these programs. IPD’s contracts with its Client Institutions generally range in length from five to ten years with provisions for renewal. IPD typically works with institutions that:

•  are interested in developing or expanding degree programs for working students;

•  recognize that working students require a different teaching/learning model than the typical 18- to 24-year-old student;

•  desire to increase enrollments with a limited investment in institutional capital; and

•  recognize the unmet educational needs of the working students in their market.

CFP, located near Denver, Colorado, provides financial planning education programs, including the Certified Financial Planner Professional Education Program^tm Certification, as well as regionally accredited graduate degree programs in financial planning, financial analysis and finance. CFP also offers some of its non-degree programs at UPX campuses.

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On October 20, 2006, the Company completed the acquisition of Insight Schools (“Insight”). Insight operates an online high school and engages in the business of servicing cyber high schools and other online education. The Company acquired all of the outstanding common stock of Insight for $15.5 million. The Company believes this acquisition allows it to expand into the online charter high school market.

We incorporated in Arizona in 1981 and maintain our principal executive offices at 4615 East Elwood Street, Phoenix, Arizona 85040. Our telephone number is (480) 966-5394. Our website addresses are as follows:

• Apollo Group	www.apollogrp.edu
• UPX	www.phoenix.edu
• IPD	www.ipd.org
• WIU	www.wintu.edu
• Axia College	www.axia.phoenix.edu
• CFP	www.cffp.edu

Our fiscal year is from September 1 to August 31. Unless otherwise stated, references to the years 2006, 2005, 2004, 2003 and 2002 relate to the fiscal years ended August 31, 2006, 2005, 2004, 2003 and 2002, respectively.

Industry Background

The non-traditional education market is a significant and growing component of the post-secondary education market, which is estimated by the U.S. Department of Education to be a more than $343.0 billion industry. According to the U.S. Department of Education, National Center for Education Statistics, over 6.5 million, or 39%, of all students enrolled in higher education programs are over the age of 24. A large percentage of these students would not be classified as traditional (i.e., living on campus, supported by parents and not working). The non-traditional students typically are looking to improve their skills and enhance their earnings potential within the context of their careers. Between 2002 and 2014, the percentage of 18- to 24-year-old students is expected to increase 16%. The market for non-traditional education should continue to increase reflecting the rapidly expanding knowledge-based economy. The National Center for Educational Statistics projects an increase of 11% in enrollments of persons under age 25 and an increase of 15% in persons age 25 and over during the period of 2004 to 2014.

Many working students seek accredited degree programs that provide flexibility to accommodate the fixed schedules and time commitments associated with their professional and personal obligations. The education formats offered by our institutions enable working students to attend classes and complete coursework on a more convenient schedule than traditional universities. Many universities and institutions offering technology-based education do not effectively address the unique requirements of working students due to the following specific constraints:

•  Traditional universities and colleges were designed to fulfill the educational needs of conventional, full-time students ages 18 to 24, and the market segment remains the primary focus of these universities and institutions. This focus has resulted in a capital-intensive teaching/learning model that may be characterized by:

•  a high percentage of full-time, tenured faculty;

•  physically configured library facilities and related full-time staff;

•  dormitories, student unions and other significant plant assets to support the needs of younger students; and

•  an emphasis on research and related laboratories, staff and other facilities.

•  The majority of accredited colleges and universities continue to provide the bulk of their educational programming on an agrarian calendar with time off for traditional breaks. The academic year generally runs from September to mid-December and from mid-January to May. As a result, most full-time faculty members only teach during that limited period of time. While this structure may serve the needs of the full-time resident, 18- to 24-year-old student, it limits the educational opportunity for working students who must delay their education for up to four months during these spring, summer and winter breaks.

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•  Traditional universities and colleges may also be limited in their ability to market to, or provide the necessary customer service for, working students because they require the development of additional administrative and enrollment infrastructure.

•  Diminishing financial support for public colleges and universities has required them to focus more tightly on their existing student populations and missions, which has made access to public education more restrictive than ever.

We believe that our track record for enrollment and revenue growth is attributable to our offering comprehensive services combining quality educational content, teaching resources and customer service with formats that are accessible and easy to use for students as well as corporate clients. We maintain a single-minded focus on providing quality education to serve the needs of working students.

Our Offerings

Our over 30-year history as a provider of higher education for working students enables us to provide students with quality education and responsive customer service. Our institutions have gained expertise in designing curriculum, recruiting and training faculty, monitoring academic quality and providing a high level of support services to students that allows our institutions to offer the following:

•  Accredited Degree Programs.  UPX, WIU and the graduate programs at CFP are accredited by The HLC of the North Central Association of Colleges and Schools. While IPD itself is not accredited, this regional accreditor or one of the other regional accrediting associations accredits the Client Institutions of IPD at their respective levels.

•  Experienced Faculty Resources.  All of our faculty must possess either a master’s or doctoral degree. On average, UPX faculty have 16 years of experience in the field in which they instruct. Our institutions have well-developed methods for hiring and training faculty, which include peer reviews of newly hired instructors by other members of the faculty, training in grading and instructing students and a teaching mentorship with a more experienced faculty member. Classes are designed to be small and engaging. Faculty members are also required to be accessible to students by maintaining online office hours.

•  Current and Relevant Standardized Programs.  Faculty content experts design curriculum for the majority of programs at our institutions. This enables us to offer current and relevant standardized programs to our students. We also utilize institution-wide systems to assess the educational outcomes of our students and improve the quality of our curriculum and instructional model. These systems evaluate the cognitive and affective skills of our students upon registration and upon conclusion of the program and also survey students two years after graduation in order to assess the quality of the education they received.

•  Benefits to Employers.  The employers of students enrolled at our institutions often provide input to faculty members in designing curriculum, and class projects are typically based on issues relevant to the companies that employ our students. Classes are taught by faculty members who emphasize the skills desired by employers. In addition, the class time flexibility further benefits employers since it avoids conflict with their employees’ work schedules.

Strategy

Our primary mission is to strengthen our position as a leading provider of high quality, accessible education for individuals around the world by affording strong returns for all of our stakeholders: students, employees, and investors. Our primary focus is providing the highest quality educational product and services for our students in order for them to maximize the benefits of their educational experience. A superior educational experience, combined with engaged and energized faculty and employees, should, in turn, enable our owners to achieve strong returns on their capital over time.

In light of the changes in our senior management team in 2006, we have committed to a strategic plan to best ensure the effective deployment of our resources and our capital. An outline of the plan is presented below which, we believe, is consistent with our stated mission of providing strong returns for all of our stakeholders.

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•  Maximize the value of our core existing operations.  This is our number one strategic goal over the next several years. This includes enhancing and expanding our current product offerings, improving student success rates, and maximizing the leverage of our existing infrastructure. We believe that we can increase our leading market position and produce solid top- and bottom-line organic growth through formalizing and sharing best practices in instruction, curriculum, and student support across our existing learning platforms. In addition, we will continue to explore new degree offerings and complementary programs.

•  Explore opportunities to expand our footprint into attractive and rapidly growing international markets. We believe that there is a growing need for high quality postsecondary education in several key geographies around the world, including China, Latin America and India, and that we have capabilities and expertise that can be useful in providing these services beyond our current reach. We intend to explore quality opportunities to partner with and/or acquire existing institutions of higher learning where we can best position ourselves for longer-term attractive growth and value creation by leveraging our more than 30 years of domestic experience to enhance the quality, delivery and student outcomes.

•  Leverage our existing infrastructure to expand our virtual high school platform as we seek public school charter recognition in those 21 states currently allowing virtual charter schools. We intend to further expand the platform into the remaining states through a private school model over time.

•  Employ a disciplined approach to our capital structure and redeployment of our excess cash flow. We will continue to invest capital in our high-return core domestic business, explore strategic and value creating global acquisition opportunities, and enhance our shareholder value.

•  Improve our performance as a responsible corporate citizen by contributing to our many local communities and supporting environmentally sound business practices.

Our goal over time is to generate mid- to-high single-digit domestic revenue growth and low double-digit operating income and free cash flow growth.

Teaching/Learning Model

The teaching/learning models used by UPX, IPD Client Institutions and WIU were designed specifically to meet the educational needs of working students. The models are structured to enable students who are employed full-time to earn their degrees and still meet their personal and professional responsibilities. Students attend weekly classes. In addition at UPX (excluding Axia College), students also meet weekly as part of a three- to five-person learning team. Learning team sessions are an integral part of each UPX course. They facilitate in-depth review of and reflection on course materials. Members work together to complete assigned group projects and develop communication and teamwork skills. Courses are designed to facilitate the application of knowledge and skills to the workplace and are taught by faculty members who possess advanced degrees and have professional experience in business, industry, government, or other professions. In this way, faculty members are able to share their professional knowledge and skills with the students.

Components of our teaching/learning models include:

Curriculum

Curriculum is designed by teams of academicians and practitioners to integrate academic theory and professional practice and their application to the workplace. The curriculum provides for the achievement of specified educational outcomes that are based on input from faculty, students and students’ employers. The standardized curriculum for each degree program is also designed to provide students with specified levels of knowledge and skills.

Faculty

In order to teach at UPX, faculty applicants must have earned a master’s or doctoral degree from a regionally accredited institution and have recent professional experience in a field related to the subject matter they seek to instruct. All faculty applicants participate in a rigorous selection and training process.

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Active Learning Environment	Courses are designed to encourage and facilitate collaboration among students and interaction with the instructor. The curriculum requires a high level of student participation for purposes of enhancing learning and increasing the student’s ability to work as part of a team.
Library and Other Learning Resource Services	Students and faculty members are provided with electronic and other learning resources for their information and research needs. Students access these services directly through the Internet or with the help of a Learning Resource Services research librarian, and use them at a high rate.
Sequential Enrollment	UPX students are enrolled in five- to eight-week courses year round and complete classes sequentially, rather than concurrently. This permits students to focus their attentions and resources on one subject at a time and creates a better balance between learning and ongoing personal and professional responsibilities. Axia College students are enrolled in nine week courses and are offered in pairs to complement each other. In Axia College, courses rotate their emphasis; one week they will emphasize reading and discussion, while the following week they will emphasize a work project.
Academic Quality	The Academic Quality Management System at UPX was designed to maintain and improve the quality of programs and academic and student services. This system includes the Adult Learning Outcomes Assessment, which measures student growth in both cognitive (subject matter) and affective (educational, personal and professional values) skills.

Structural Components of Teaching/Learning Model

While students over the age of 24 comprise approximately 39% of all higher education enrollments in the United States, the mission of most accredited four-year colleges and universities is to serve 18- to 24-year-old students and conduct research. UPX, WIU and IPD Client Institutions acknowledge the differences in educational needs between working students and traditional students and provide programs and services that allow students to earn their degrees without major disruption to their personal and professional lives.

The educational literature suggests that working students require a different teaching/learning model than that designed for traditional students. Working students seek accessibility, curriculum consistency, time- and cost-effectiveness and learning that has immediate application to the workplace.

The facilitating elements of our teaching/learning models include:

Accessibility	Academic programs that may be accessed through a variety of delivery modes (campus-based, electronically delivered, or a blend of both) that make the educational programs accessible and even portable, regardless of where the students work and live.
Instructional Costs	While the majority of the faculty members at most accredited colleges and universities are employed full-time in the winter and fall semesters, our faculty comprises both full-time and part time practitioner faculty. Many faculty members also work full-time in the fields in which they teach.
Facility Costs	We lease our campus and learning center facilities and rent additional classroom space on a short-term basis to accommodate growth in enrollments.

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Employed Students	Substantially all of UPX’s students are employed full-time. The average UPX student has been employed full-time for 13 years. Our focus on working, non-residential students minimizes the need for capital-intensive facilities and services like dormitories, student unions, food services, personal and employment counseling, health care, sports and entertainment.
Employer Support	Relationships are fostered with key employers for purposes of recruiting students and responding to specific employer needs. This relationship facilitates sensitivity to the needs and perceptions of employers and helps to generate and sustain diverse sources of revenues.

CFP currently offers text-based instructor-led and self-study programs for students preparing for the Certified Financial Planner certification and for students seeking further education in financial services, including master of science degrees in financial planning, financial analysis and finance. CFP has modularized the learning content for these programs to position them for alternative delivery formats, including but not limited to classroom and online modalities. With the exception of the master’s degrees, these same programs are offered in a classroom-based format through UPX campuses, as well as independent classroom providers and online-based formats. Most of CFP’s students are employed, and approximately 75% have a bachelor’s degree or higher. CFP’s programs are developed internally by 10 full-time faculty members. With the exception of the master’s programs, these programs are primarily self-study, non-degree programs that require only moderate faculty involvement in the actual delivery of the programs.

WIU’s teaching/learning model has similar characteristics to the teaching/learning model used by UPX and IPD Client Institutions, including the use of part-time practitioner faculty, standardized curriculum, computerized learning resources and leased facilities. WIU’s faculty consists of 13 part-time department chairs and 278 part-time faculty. WIU’s faculty are working professionals, possess earned master’s or doctoral degrees, and participate in a selection and training process that is similar to that used at UPX.

Degree Programs and Services

UPX Programs.  The following is a list of the degree programs and related areas of specialization that UPX offers:

Associate of Arts

•  Business

•  Accounting

•  Business

•  General Studies

•  Education

•  Paraprofessional Education

•  Health Care

•  Health Administration

•  Social & Behavioral Science

•  Criminal Justice

•  Technology

•  Information Technology

•  Information Technology/Networking

•  Information Technology/Visual Communication

Undergraduate Bachelor of Science

•  Business

•  Accounting

•  Administration

•  Communications

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•  e-Business

•  Finance

•  Global Business Management

•  Hospitality Management

•  Information Systems

•  Integrated Supply Chain & Operations Management

•  Management

•  Marketing

•  Organizational Innovation

•  Public Administration

•  Retail Management

•  Science in Management

•  Education

•  Education/Elementary Teacher Education

•  Health Care

•  Health Administration

•  Health Administration/Health Information Systems

•  Health Administration/Long-Term Care

•  Licensed Practical Nurse to Bachelor of Science in Nursing

•  RN to Bachelor of Science in Nursing

•  Social & Behavioral Science

•  Criminal Justice Administration

•  Human Services

•  Human Services/Management

•  Organizational Security & Management

•  Psychology

•  Technology

•  Information Technology

•  Information Technology/Information System Security

•  Information Technology/Multimedia and Visual Communication

•  Information Technology/Software Engineering

Graduate

•  Business

•  Master of Business Administration

•  Accounting

•  e-Business

•  Global Management

•  Global Management (Spanish)

•  Human Resources Management

•  Marketing

•  Public Administration

•  Technology Management

•  Master of Business Administration (Spanish)

•  Master of Management

•  Human Resources Management

•  Public Administration

•  Education Master of Arts

•  Specialization in Curriculum and Instruction

•  Specialization in Curriculum and Instruction — Adult Education and Training

•  Specialization in Curriculum and Instruction — Computer Education

•  Specialization in Curriculum and Instruction — English as a Second Language

•  Specialization in Early Childhood Education

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•  Specialization in Teacher Education for Elementary Licensure

•  Specialization in Teacher Education for Secondary Licensure

•  Administration and Supervision

•  Adult Education and Training

•  Curriculum and Instruction — English and Language Arts Education

•  Curriculum and Instruction — Mathematics Education

•  Early Childhood Education

•  Elementary Education/Early Childhood Specialization

•  Elementary Education/Middle Level Specialization

•  Elementary Teacher Education

•  Secondary Education/Middle Level Specialization

•  Secondary Teacher Education

•  Special Education

•  Health Care

•  Master of Business Administration/Health Care Management

•  Master of Health Administration

•  Gerontology

•  Health Care Education

•  Health Care Informatics

•  Master of Science in Nursing

•  Master of Business Administration/Health Care Management Bridge

•  Master of Health Administration

•  Bridge (from undergraduate program)

•  Family Nurse Practitioner Bridge

•  Health Care Education Bridge

•  Master of Business Administration/Health Care Management

•  Master of Health Administration

•  Nurse Practitioner Fast Track

•  Nurse Practitioner Fast Track Bridge

•  Nursing/Health Care Education Bridge

•  RN to MSN or MSN/FNP Bridge BSN Equivalency Requirement

•  Social & Behavioral Science

•  Master of Science in Counseling

•  Community Counseling

•  Marriage and Family Counseling

•  Marriage and Family Therapy

•  Marriage, Family and Child Therapy

•  Mental Health Counseling

•  School Counseling

•  Master of Science in Psychology

•  Master of Science/Administration of Justice and Security

•  Technology

•  Master of Business Administration/Technology Management

•  Master of Information Systems

•  Master of Information Systems/Management

Doctorate

•  Business

•  Business Administration

•  Management in Organizational Leadership

•  Education

•  Education in Educational Leadership

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•  Education in Educational Leadership with a Specialization in Curriculum and Instruction

•  Education in Educational Leadership/Educational Technology

•  Health Care

•  Health Administration

•  Technology

•  Management in Organizational Leadership with a Specialization in Information Systems and Technology

Undergraduate students may demonstrate and document college-level learning gained from experience through an assessment by faculty members, according to the guidelines of the Council for Adult and Experiential Learning (“CAEL”), for the potential award of credit. The average number of credits awarded to the approximately 5,000 UPX undergraduate students who utilized the process in 2006 was 5 credits of the 120 required to graduate with a bachelor’s degree. CAEL reports that over 300 regionally accredited colleges and universities are members of CAEL and currently accept credits awarded for college-level learning gained through experience.

IPD Services.  Though not an accredited educational facility itself, IPD contracts individually with regionally accredited private colleges and universities (its “Client Institutions”) to provide any or all of the various services listed below:

•  conducting market research;

•  assisting with curriculum development;

•  developing and executing marketing strategies;

•  marketing and recruiting of students;

•  performing student accounting and account receivable management;

•  recommending operational and administrative infrastructures;

•  offering faculty development and training;

•  developing and implementing financial accounting and management systems;

•  assessing the future needs of adult students;

•  assisting in developing additional degree programs suitable for the adult higher education market;

•  assisting in seeking approval from the respective regional accrediting association for new programs;

•  training of adult program staff;

•  conducting systems reviews for program quality improvements; and

•  consulting in areas related to regional accreditation and state licensure.

In consideration for its services, IPD receives a contractual share of tuition revenues, which are negotiated with each Client Institution.

In order to facilitate the sharing of information related to the operations of their respective programs, IPD, its Client Institutions and UPX formed the Consortium for the Advancement of Adult Higher Education. This consortium shares best practices in adult higher education. Conference topics include outcomes assessment, educational technology, leadership and continuous process improvement. IPD assisted programs also include a limited number of general education courses and certificate programs.

CFP Programs.  CFP currently offers master of science degree programs with majors in financial planning, financial analysis and finance. The financial planning major focuses on the fundamentals of financial planning and meets the educational requirement of the CFP Board of Standards, Inc. for taking the CFP^® Certification Examination. The financial analysis major incorporates the Certified Financial Analyst^® (“CFA”) Body of Knowledge learning objectives offered by the CFA Institute and helps prepare students for the CFA examinations.

CFP currently offers the following designation programs:

•  Accredited Asset Management Specialist^SM

•  Accredited Wealth Management Advisor^SM

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•  Registered Paraplanner^SM (Foundations in Financial Planning)

•  Chartered Mutual Fund Counselor^SM

•  Chartered Retirement Plans Specialist^SM

•  Chartered Retirement Planning Counselor^SM

WIU Programs.  WIU currently offers the following degree programs:

Undergraduate Degree Programs

•  Associate of Arts in Business

•  Bachelor of Arts

•  Behavioral Science

•  Human Resource Management

•  Bachelor of Science

•  Accounting

•  Business (Minors available in Accounting, Administration of Justice, E-Business, Finance, Human Resource Management, Information Technology, International Business, Management, Marketing, Public Administration, Supply Chain Management and Health Administration)

•  Business Administration

•  Information Technology

•  International Business

•  Management

Graduate Degree Programs

•  Master of Arts in Innovative Leadership

•  Master of Business Administration

•  Finance

•  Information Technology

•  International Business

•  Management

•  Marketing

•  Information Systems Engineering

•  Public Administration

Professional Studies — Certificate Programs

•  Post-Bachelor Accountancy Certificate

WIU also offers professional studies programs in Accountancy.

Distance Education

Our distance education components consist primarily of the following:

UPX Online.  UPX Online uses a proprietary Online Learning System for class delivery. Online classes are small and have mandatory participation requirements for both the faculty and the students. Each class is instructionally designed so that students have an experience that is consistent with their ground campus counterparts. Convenience is enhanced by asynchronous and mobile communication. All class materials are delivered electronically.

The teaching/learning model is based upon a philosophy that balances cognitive and affective strategies. The cognitive strategy includes content that is relevant and supports outcome-driven objectives. An assessment plan is used to determine student learning and provide information to make improvements to the curriculum. The affective strategy includes facilitation by trained instructors, collaboration through learning team assignments in upper division courses, online student services, proactive academic counseling, tutoring in selected courses, and class discussion that creates a peer social context. The learning outcomes balance theoretical knowledge and practical application of those concepts. Practitioner faculty facilitate learning by providing explanation and work experience examples as they relate to the course topics and objectives.

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CFP.  Business and investment professionals who require continuing professional education as part of their professional certification or for employment requirements may complete individual courses online utilizing most Internet browsers. These programs are mostly short courses designed to focus on important and emerging topics relevant to the students’ trades or professions. The students interact primarily with our Web-based software programs with little or no faculty involvement.

Distance education is currently subject to certain regulatory constraints. See Item 1, “Business — Federal Financial Aid Programs — Restrictions on Distance Education Programs” and “Business — State Authorization.”

Customers/Students

The following is a breakdown of our Degreed Enrollment information for UPX and Axia College (rounded to the nearest hundred):

	Number and Percentage of Students per Degree Program
Quarter Ended:	Associate’s			Bachelor’s			Master’s			Doctoral			Total
November 30, 2003		3,200	1.6%		139,200	67.9%		61,300	29.9%		1,400	0.7%		205,100	100.0%
February 29, 2004		3,700	1.7%		146,700	67.9%		63,800	29.6%		1,700	0.8%		215,900	100.0%
May 31, 2004		4,300	1.9%		154,300	68.5%		64,700	28.7%		2,100	0.9%		225,400	100.0%
August 31, 2004		4,000	1.7%		164,500	69.0%		67,600	28.4%		2,300	1.0%		238,400	100.0%
November 30, 2004		13,500	5.4%		162,500	65.5%		69,700	28.1%		2,500	1.0%		248,200	100.0%
February 28, 2005		23,400	9.1%		160,000	62.4%		70,400	27.5%		2,600	1.0%		256,400	100.0%
May 31, 2005		34,800	13.0%		161,600	60.2%		69,200	25.8%		2,800	1.0%		268,400	100.0%
August 31, 2005		41,700	15.4%		157,800	58.1%		68,900	25.4%		3,000	1.1%		271,400	100.0%
November 30, 2005		49,000	18.2%		149,200	55.4%		68,000	25.2%		3,200	1.2%		269,400	100.0%
February 28, 2006		54,900	20.3%		145,500	53.7%		66,700	24.6%		3,700	1.4%		270,800	100.0%
May 31, 2006		63,600	22.9%		145,200	52.4%		64,500	23.3%		3,900	1.4%		277,200	100.0%
August 31, 2006		74,000	26.2%		140,700	49.8%		63,400	22.5%		4,200	1.5%		282,300	100.0%

Degreed Enrollments represent individual students enrolled in our degree programs at UPX and Axia College that attended a course during the quarter and did not graduate as of the end of the quarter (including Axia students enrolled in UPX and WIU).

In recent years, the Company has experienced its greatest growth in its associate’s degree programs. This is due to the fact that UPX has expanded its degree program offerings such that students who were previously enrolled in bachelor’s degree programs are now frequently enrolled in associate’s degree programs.

Based on surveys of incoming students during 2006, the average age of UPX’s students is the early thirties, and approximately 62% are women and 38% are men. We have a diverse student population; as of August 31, 2006, our student population is composed of the following racial/ethnic groups:

Race/Ethnicity	% of Students
African-American		22.9	%
Asian/Pacific Islander		4.8	%
Caucasian		54.7	%
Hispanic		12.6	%
Native American/Alaskan		1.2	%
Other/Unknown		3.8	%
		100.0	%

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We believe that the demographics of students enrolled in IPD Client Institutions are similar to those of UPX. The approximate age percentage distribution of incoming UPX students is as follows:

Age	% of Students
22 and under		7.7	%
23 to 29		32.4	%
30 to 39		33.4	%
40 to 49		19.2	%
50 and over		7.3	%
		100.0	%

We also work closely with businesses and governmental agencies to meet their specific needs either by modifying existing programs or, in some cases, by developing customized programs. These programs are often held at the employers’ offices or on-site at select military bases. UPX has also formed educational partnerships with various corporations to provide programs specifically designed for their employees.

We consider the employers that provide tuition assistance to their employees through tuition reimbursement plans or direct bill arrangements our secondary customers.

Marketing

To generate interest among potential students, we engage in a broad range of activities to inform the public about our teaching/learning model and the programs offered. These activities include:

Internet Marketing.  We advertise extensively on the Internet using search placements, banners and other advertisements on targeted sites, such as education portals. We also benefit from non-paid Internet referrals, including leads directed to our domain names as a result of Web searches using Internet search engines. We believe these prospective students are more likely to enroll because these prospects are actively seeking information about our programs.

Direct Mail.  Direct mail is effective at reaching the working population that expresses interest in training, education and self-improvement. Direct mail also enables us to target specific career fields, such as Accounting, Business, Education, Information Technology, Criminal Justice and Nursing. We currently purchase education-related mailing lists from numerous suppliers that specialize in this area. In addition, we track leads for every direct mail campaign by allowing potential students the opportunity to respond using the following methods:

•  mailing a postage-paid reply card or envelope;

•  calling us at a specific toll-free number; or

•  directing the potential student to one of our specific URL addresses on the Internet that are used to track individual marketing campaigns for reach and effectiveness.

Print and Broadcast.  We rely on print and broadcast advertising to target new prospects and to assist with building brand recognition.

TV Campaign.  In January 2007, we began employing various schedules for network cable and locally and nationally for a brand awareness campaign to supplement our other advertising activities.

Stadium Naming Rights.  We obtained the naming rights on the University of Phoenix Stadium in Glendale, Arizona, which is home to the Arizona Cardinals National Football League football club. The naming rights include signage, advertising and other promotional benefits to enhance our brand awareness locally and nationally.

Re-Marketing.  Re-marketing efforts include direct mail, telephone and e-mail sent to existing leads in our database. Re-marketing is an important part of our marketing campaign because of our growing database of qualified prospects and their changing needs for education programs.

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Referrals.  Referrals continue to be an important source of new students, including those from employers, co-workers, current students, alumni, family members and friends.

Competition

The higher education market is highly fragmented and competitive with no private or public institution enjoying a significant market share. We compete primarily with four-year and two-year degree-granting public and private regionally accredited colleges and universities. Many of these colleges and universities enroll working students in addition to the traditional 18- to 24-year-old students. We expect that these colleges and universities will continue to modify their existing programs to serve working students more effectively. In addition, many colleges and universities have announced various distance education initiatives.

We believe that the competitive factors in the higher education market include the following:

•  reliable and high-quality products and services;

•  qualified and experienced faculty;

•  the ability to provide easy and convenient access to programs and classes;

•  cost of the program;

•  reputation of programs, classes and services; and

•  the time necessary to earn a degree.

In our offerings of non-degree programs, we compete with a variety of business and information technology providers, primarily those in the for-profit training sector. Many of these competitors have significantly more market share in given geographical regions and longer-term relationships with key vendors.

Employees

As of August 31, 2006, we had the following numbers of employees:

	Non-Faculty
	Full-Time		Part-Time		Faculty(1)			Total
Apollo Group Corporate(2)		658		10		—			668
UPX		11,699		117		22,975	(3)		34,791
IPD		442		8		—	(4)		450
CFP		75		2		29	(5)		106
WIU		110		—		291	(3)		401
Total		12,984		137		23,295			36,416

(1)	Includes both full-time and part-time faculty.
(2)	Consists primarily of employees in executive management, information systems, corporate accounting, financial aid, and human resources.
(3)	Consists of faculty contracted on a course-by-course basis who have instructed a course during FY 2006.
(4)	Faculty are employed by IPD Client Institutions.
(5)	Consist primarily of faculty involved in curriculum development and the instructional design process.

We consider our relations with our employees to be good.

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Regulatory Environment

The Higher Education Act of 1965, as reauthorized (the “Higher Education Act”), and the related regulations govern all higher education institutions participating in Title IV programs. The Higher Education Act mandates specific additional regulatory responsibilities for each of the following:

•  the accrediting agencies recognized by the U.S. Department of Education;

•  the federal government through the U.S. Department of Education; and

•  state higher education regulatory bodies.

All higher education institutions participating in Title IV programs must be accredited by an association recognized by the U.S. Department of Education. The U.S. Department of Education reviews all participating institutions for compliance with all applicable standards and regulations under the Higher Education Act.

New or revised interpretations of regulatory requirements could have a material adverse effect on the Company. In addition, changes in or new interpretations of applicable laws, rules, or regulations could have a material adverse effect on the accreditation, authorization to operate in various states, permissible activities and costs of doing business of UPX and WIU. The failure to maintain or renew any required regulatory approvals, accreditation, or state authorizations by UPX or WIU could have a material adverse effect on the Company. See Item 1A — “Risk Factors — Risks Related to the Highly Regulated Industry in Which We Operate.”

Accreditation

UPX, WIU and CFP are covered by regional accreditation, which provides the following:

•  recognition and acceptance by employers, other higher education institutions and governmental entities of the degrees and credits earned by students;

•  qualification to participate in Title IV programs; and

•  qualification for authorization in certain states.

Regional accreditation is accepted nationally as the basis for the recognition of earned credit and degrees for academic purposes, employment, professional licensure and, in some states, authorization to operate as a degree-granting institution. Under the terms of a reciprocity agreement among the six senior regional accrediting associations, representatives of each region in which a regionally accredited institution operates may participate in the evaluations for reaffirmation of accreditation of which the North Central Association of Colleges and Schools is a member.

UPX was granted accreditation by The HLC in 1978. UPX’s accreditation was reaffirmed in 1982, 1987, 1992, 1997 and 2002. The next comprehensive evaluation visit by The HLC is scheduled to be conducted in 2012. This 10-year period is the maximum period of reaffirmation granted by The HLC and reflects their confidence in UPX.

CFP received initial accreditation from The HLC of the North Central Association of Colleges and Schools in November 1994, three years prior to its acquisition by the Company. Such accreditation was based upon CFP’s offering the Master of Science degree in Personal Financial Planning. In 2003, The HLC extended approval to CFP to offer Master of Science degrees in Financial Analysis and Finance. All Master of Science programs are offered through online, instructor-led distance learning technology. CFP’s accreditation was reaffirmed in 1998 and 2004. The next reaffirmation visit is scheduled in 2011.

WIU was accredited by The HLC prior to the acquisition by the Company, and the accreditation was reaffirmed in 1998 and 2005. WIU’s next reaffirmation visit will occur in 2012.

Programs offered by IPD Client Institutions are evaluated by the Client Institutions’ respective regional accrediting associations either as part of a reaffirmation visit or a focused evaluation visit.

UPX’s Bachelor of Science in Nursing program received program accreditation from the National League for Nursing Accrediting Commission in 1989. The Master of Science in Nursing program earned the National League for Nursing Accrediting Commission accreditation in 1996. In 2000, both the Bachelor of Science in Nursing and

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the Master of Science in Nursing programs received reaccreditation status from the National League for Nursing Accreditation Commission. In September 2005, both nursing degree programs received the full five-year initial accreditation status from the Commission on Collegiate Nursing Education. At the time that the two degree programs were accredited by the Commission on Collegiate Nursing Education, UPX elected not to renew its accreditation with the National League for Nursing Accrediting Commission.

UPX’s Master of Counseling in Community Counseling degree received initial accreditation for its Phoenix and Tucson campuses from the Council for Accreditation of Counseling and Related Educational Programs (“CACREP”) in 1995, and the accreditation was reaffirmed in 2002. The next reaffirmation visit is expected in 2010. UPX’s Master of Counseling in Mental Health Counseling received initial accreditation from CACREP for its Utah campus in 2001, and the next reaffirmation visit is expected in 2008.

UPX received approval from The HLC to offer its first doctoral-level program in 1998. The first students were enrolled in the Doctor of Management in Organizational Leadership program beginning in 1999. Additionally, in 2002, UPX received approval from The HLC to offer three new doctoral programs: Doctor of Business Administration, Doctor of Education in Educational Leadership and Doctor of Health Administration. All of the doctoral programs are offered via distance learning technology with annual residencies in Phoenix and other domestic or select international locations.

The address and phone number for the accrediting bodies are as follows:

The Higher Learning Commission

30 North LaSalle Street, Suite 2400

Chicago, IL 60602-2504

(312) 263-0456

Commission on Collegiate Nursing Education

One Dupont Circle, NW, Suite 530

Washington, DC 20036

(202) 887-6791

CACREP

5999 Stevenson Avenue

Alexandria, VA 22304

(703) 823-9800 ext. 301

State Authorization

UPX is authorized to operate in the 37 states where it has a physical presence. UPX has held these authorizations for periods ranging from less than one year to over 25 years. UPX has also been approved to operate in Alabama, Alaska, Delaware, Montana and South Dakota, but does not yet have a physical presence in these states. An application for approval to operate in New York has been submitted and is awaiting approval.

All regionally accredited institutions, including UPX, are required to be evaluated separately for authorization to operate in Puerto Rico. UPX obtained authorization from the Puerto Rico Commission on Higher Education, and that authorization remains in effect.

UPX is registered and accredited by British Columbia’s Private Career Training Institutions Agency, the successor to the Private Post-Secondary Education Commission, which originally granted accreditation. UPX operates in Alberta pursuant to approval granted by Alberta Advanced Education.

In Mexico, the UPX subsidiary operates as the Instituto de Estudios Superiores de Phoenix and, in addition to the Instituto’s degrees, UPX grants degrees to Instituto graduates pursuant to an articulation agreement between UPX and the Instituto. The Instituto de Estudios Superiores de Phoenix has received accreditation from the Ministry of Education and Culture for the State of Chihuahua, Mexico and operates a campus in Juarez, Mexico pursuant to that authority.

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CFP is currently authorized to operate in Colorado and does not require authorization for its self-study programs that are offered worldwide.

WIU is currently authorized to operate in Arizona.

IPD Client Institutions possess authorization to operate in all states in which they maintain a physical presence, which are subject to renewal.

Some states assert authority to regulate all degree-granting institutions if their educational programs are available to their residents, whether or not the institutions maintain a physical presence within those states. UPX has obtained licensure in these states.

Admissions Standards

To gain admission to undergraduate programs at UPX, students must have a high school diploma or General Equivalency Diploma (“GED”) and satisfy employment requirements, if applicable for their field of study. Applicants whose native language is not English must take and pass the Test of English as a Foreign Language (“TOEFL”) or Test of English for International Communication (“TOEIC”). Non-U.S. citizens attending a campus located in the United States are required to hold an approved visa or have been granted permanent residency. Additional requirements may apply to individual programs or to students who are attending a specific campus. Students already in undergraduate programs may petition to be admitted on a provisional status if they do not meet certain criteria requirements. Some programs have work requirements (e.g., nursing) that state that students must have a certain amount of experience in given areas in order to be admitted. These vary by program, and not all programs have them.

To gain admission to undergraduate programs at WIU, students generally must have a high school diploma or GED and satisfy certain minimum grade point average and employment requirements, if applicable for their field of study. Additional requirements may apply to individual programs. Students already in undergraduate programs may petition to be admitted on provisional status if they do not meet certain admission requirements.

To gain admission to graduate programs at UPX, students must have an undergraduate degree from a regionally or nationally accredited college or university, satisfy the minimum grade point average requirement, have relevant work and employment experience, if applicable for their field of study, have taken and passed the TOEFL/TOEIC requirements, if the applicant’s native language is not English, and, for applicants who are not U.S. citizens and are attending a campus located in the United States, hold an approved visa or have been granted permanent residency. Additional requirements may apply to individual programs or to students who are attending a specific campus. Students in graduate programs may be admitted on provisional status if they do not meet grade point average admission requirements.

To gain admission to graduate programs at WIU, students generally must have an undergraduate degree from a regionally accredited college or university and satisfy minimum grade point average, work experience and employment requirements, if applicable for their field of study. Additional requirements may apply to individual programs. Students in graduate programs may petition to be admitted on provisional status if they do not meet certain admission requirements.

To gain admission to doctoral programs at UPX, students generally must have a master’s degree from a regionally accredited college or university, be currently employed in a professional position with three years of professional experience, have three letters of recommendation from professional associates who are able to assess the candidate’s leadership skills and potential for success and have a laptop and a membership in a research library. Applicants whose native language is not English must also have a minimum TOEFL score of 213 or a minimum Berlitz^® score of 550.

Federal Financial Aid Programs

Programs

Aid under the Title IV programs is awarded every academic year on the basis of financial need, generally defined under the Higher Education Act as the difference between the cost of attending an educational institution

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and the amount the family can reasonably expect to contribute to that cost. The amount of financial aid awarded per academic year is based on many factors, including, but not limited to, student program of study, student grade level, federal annual loan limits and expected family contribution. All recipients of Title IV program funds must maintain satisfactory academic progress within the guidelines published by the U.S. Department of Education.

The Company collected approximately 62% of its 2006 revenues from receipt of Title IV funds.

Students at UPX and WIU may receive grants and loans to fund their education under the following Title IV programs:

•  Federal Pell Grant (“Pell Grant”) program;

•  Academic Competitiveness Grant (“ACG”) program;

•  National Science and Mathematics Access to Retain Talent Grant (“National SMART Grant”) program;

•  Federal Supplemental Educational Opportunity Grant (“FSEOG”) program;

•  Federal Stafford Loan (“Stafford Loan”) program;

•  Federal PLUS Loan (“PLUS Loan”) program; and

•  Federal Perkins Loan (“Perkins Loan”) program;

Pell Grants are generally awarded based on need only to undergraduate students who have not earned a bachelor’s or professional degree. Unlike loans, Pell Grants do not have to be repaid. Pell Grants represent 8.6% of the Company’s Title IV funding.

ACG awards became available for the first time for the 2006-07 academic year for first-year students who graduated from high school after January 1, 2006 and for second-year students who graduated from high school after January 1, 2005. An ACG award will provide up to $750 for the first year of undergraduate study and up to $1,300 for the second year of undergraduate study to students who are U.S. citizens and eligible for a Pell Grant, and who have successfully completed a rigorous high school program, as determined by the state or local education agency and recognized by the Secretary of Education. Second-year students must also have maintained a cumulative grade point average (“GPA”) of at least 3.0 (on a 4.0 scale). Unlike loans, ACG awards do not have to be repaid. ACG awards represent a small portion of the Company’s Title IV funding.

A National SMART Grant award will provide up to $4,000 for each of the third and fourth years of undergraduate study to students who are U.S. citizens, eligible for a Pell Grant, and majoring in physical, life or computer sciences, mathematics, technology or engineering or a foreign language deemed critical to national security. The U.S. Department of Education will publish a list of eligible majors using the Classification of Instruction Program codes developed by the National Center for Education Statistics. The student must also have maintained a cumulative GPA of at least 3.0 in coursework required for the major. Unlike loans, National SMART Grants do not have to be repaid. National SMART Grants represent a small portion of the Company’s Title IV funding.

FSEOG awards are designed to supplement Pell Grants for the neediest students. The availability of FSEOG awards is limited by the amount of those funds allocated to the institution under a federal formula. UPX and WIU are required to contribute 25% of all FSEOG awards, with such funds to come from institutional grants, scholarships and other eligible funds and, in certain states, portions of state-funded student assistance programs. Unlike loans, FSEOG awards do not have to be repaid. FSEOG awards represent a small portion of the Company’s Title IV funding.

Stafford Loans are the most significant source of federal student aid and are low interest, need-based federally guaranteed loans made by a private lender. Annual and aggregate loan limits apply based on the student’s grade level. There are two types of Stafford Loans: (a) subsidized Stafford Loans, which are based on the federal formula calculation of student need, and (b) unsubsidized Stafford Loans, which can be used for costs in excess of calculated need. Neither Stafford Loan is based on creditworthiness. The Federal Government pays the interest on subsidized Stafford Loans while the student is enrolled in school; the borrower is responsible for the interest on unsubsidized Stafford Loans regardless of school attendance. The student has the option to defer payment on the principal and

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interest while enrolled in school. A dependent student may be eligible to borrow up to the annual limit of unsubsidized loan if the parent is unable to obtain a PLUS Loan. Repayment on Stafford Loans begins six months after the date the student ceases enrollment. The loan may be paid back to the lender over the course of up to 10 years or longer. Both graduate and undergraduate students may apply for Stafford Loans. For graduate student borrowers, UPX is one of the lenders that can be selected by the student; UPX offers this service as part of the federal “school-as-lender” program. After allowable administrative expenses, proceeds from the school-as-lender program are awarded to UPX students as need-based grants. Stafford Loans represent 90% of the Company’s Title IV funding.

The PLUS Loan is a low interest non-need-based federal loan made by a private lender that is based on creditworthiness. The borrower on this loan is one or both parents of a dependent student, or a graduate student. Borrowers under the PLUS Loan program are eligible to borrow up to the cost of attendance less estimated financial assistance from other federal loan programs. PLUS Loans represent a small portion of the Company’s Title IV funding.

A Perkins Loan is a low-interest loan for both undergraduate and graduate students showing exceptional financial need. UPX is the lender for the loan, and the loan must be repaid to UPX. The loan is made with government funds with a share contributed by the school. Perkins Loans represent a small portion of the Company’s Title IV funding.

Regulatory Requirements

All federal financial aid programs are established by the Higher Education Act and regulations promulgated thereunder. The Higher Education Act has an expiration date; in the past, if Congress did not reauthorize the Higher Education Act before its expiration date, Congress extended the authorization of the Higher Education Act. The Higher Education Act is set to expire on June 30, 2007.

To be eligible to participate in Title IV programs, an educational institution must meet three minimal requirements:

•  Maintain accreditation by an accrediting agency recognized by the U.S. Department of Education;

•  Maintain applicable state authorization to operate; and

•  Maintain certification with the U.S. Department of Education to participate in Title IV programs.

UPX and WIU currently meet all three requirements. In addition, as eligible institutions, UPX and WIU must maintain compliance with Title IV regulatory requirements. The most significant requirements are summarized below:

Eligibility and Certification Procedures.  The Higher Education Act specifies the manner in which the U.S. Department of Education reviews institutions for eligibility and certification to participate in Title IV programs. Every educational institution involved in Title IV programs must be certified to participate and is required to periodically renew this certification. UPX was recertified in June 2003 and its current certification for the Title IV programs expires in June 2007. In March 2007, UPX submitted its Title IV program participation recertification application to the U.S. Department of Education. WIU was recertified in October 2003 and its current certification for the Title IV programs expires in June 2009.

Student Loan Defaults.  To remain eligible to participate in Title IV programs, educational institutions must maintain a student loan cohort default rate below 25% for three consecutive years and below 40% for any given year to remain eligible to participate in Title IV programs. In addition, if its student loan default rate equals or exceeds 10%, the educational institution must delay for 30 days the release of federal student loan proceeds for first time borrowers and permanently loses the ability to participate in the “school-as-lender” program as part of the Stafford Loan program, among other penalties. In 2004, the most recent U.S. Department of Education cohort default rate reporting period, the national cohort default rate average for all proprietary higher education institutions was 8.6%. UPX and WIU students’ cohort default rates for the federal student loan programs for 2004 as reported by the U.S. Department of Education were 7.5% and 5.6%, respectively.

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Administrative Capability.  The Higher Education Act directs the U.S. Department of Education to assess the administrative capability of each institution to participate in Title IV programs. The failure of an institution to satisfy any of the criteria used to assess administrative capability may allow the U.S. Department of Education to determine that the institution lacks administrative capability and, therefore, may be subject to additional scrutiny or denied eligibility for Title IV programs.

Standards of Financial Responsibility.  Pursuant to the Title IV regulations, as revised, each eligible higher education institution must satisfy the minimum standard established for three tests which assess the financial condition of the institution at the end of the institution’s fiscal year. The tests provide three individual scores which must then satisfy a composite score standard. The maximum composite score is 3.0. If the institution achieves a composite score of at least 1.5, it is considered financially responsible. A composite score from 1.0 to 1.4 is considered financially responsible, subject to additional monitoring, and the institution may continue to participate as a financially responsible institution for up to three years. An institution that does not achieve a satisfactory composite score will fall under alternative standards. As of August 31, 2006, UPX’s and WIU’s composite scores were 2.9 and 3.0, respectively. On February 16, 2007, the U.S. Department of Education granted UPX and WIU an extension to May 31, 2007 to submit annual audited financial statements.

Limits on Title IV Program Funds.  The Title IV regulations define the types of educational programs offered by an institution that qualify for Title IV program funds. For students enrolled in qualified programs, the Title IV regulations place limits on the amount of Title IV program funds that a student is eligible to receive in any one academic year, as defined by the U.S. Department of Education. An academic year must consist of at least 30 weeks of instructional time and a minimum of 24 credit hours. Most of UPX’s and WIU’s degree programs meet the academic year minimum definition of 30 weeks of instructional time and 24 credit hours and, therefore, qualify for Title IV program funds. The programs that do not qualify for Title IV program funds consist primarily of corporate training programs and certain certificate and continuing professional education programs. These programs are paid for directly by the students or their employers.

Restricted Cash.  The U.S. Department of Education places restrictions on excess Title IV program funds collected for unbilled tuition and fees transferred to UPX or WIU. If an institution holds excess Title IV program funds with student authorization, the institution must maintain, at all times, cash in its bank account in an amount at least equal to the amount of funds the institution holds for students.

The “90/10 Rule.”  A requirement of the Higher Education Act, commonly referred to as the “90/10 Rule,” applies only to for-profit institutions of higher education, which includes UPX and WIU. Under this rule, for-profit institutions will be ineligible to participate in Title IV programs if the amount of Title IV program funds used by the students or institution to satisfy tuition, fees and other costs incurred by the students exceeds 90% of the institution’s cash-basis revenues from eligible programs. UPX and WIU are required to calculate this percentage at the end of each fiscal year. UPX’s and WIU’s percentages were 64% and 73%, respectively, for the year ended August 31, 2006.

Compensation of Representatives.  The Higher Education Act prohibits an institution from providing any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruitment, admission, or financial aid awarding activity. Title IV regulations provide safe harbors for activities and arrangements that an institution may carry out without violating the Higher Education Act, which include, but are not limited to, the payment of fixed compensation (annual salary), as long as that compensation is not adjusted up or down more than twice during any 12-month period, and any adjustment is not based solely on the number of students recruited, admitted, enrolled, or awarded financial aid. UPX and WIU believe that their current methods of compensating enrollment advisors and financial aid staff comply with the Title IV regulations. See Item 3, “Legal Proceedings,” regarding the Incentive Compensation Qui Tam Action case.

Authorizations for New Locations.  UPX, WIU and CFP are required to have authorization to operate as degree-granting institutions in each state where they physically provide educational programs. Certain states accept accreditation as evidence of meeting minimum state standards for authorization or for exempting the institution entirely from formal state licensure or approval. Other states require separate evaluations for authorization. Depending on the state, the addition of a degree program not offered previously or the addition of a new location

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must be included in the institution’s accreditation and be approved by the appropriate state authorization agency. UPX, WIU and CFP are currently authorized to operate in all states in which they have physical locations.

Although The HLC does not require UPX to obtain their prior approval before it is permitted to expand into new areas in North America and The Netherlands, they do require prior approval before UPX may expand into foreign countries outside of North America and The Netherlands. In addition, The HLC requires WIU and CFP to obtain their prior approval before they are permitted to expand into new states or foreign countries.

Branching and Classroom Locations.  The Title IV regulations contain specific requirements governing the establishment of new main campuses, branch campuses and classroom locations at which the eligible institution offers, or could offer, 50% or more of an educational program. In addition to classrooms at campuses and learning centers, locations affected by these requirements include the business facilities of client companies, military bases and conference facilities used by UPX and WIU. The U.S. Department of Education requires that the institution notify the U.S. Department of Education of each location prior to disbursing Title IV program funds to students at that location. UPX and WIU have procedures in place to ensure timely notification and acquisition of all necessary location approvals prior to disbursing Title IV funds to students attending any new location.

Restrictions on Distance Education Programs.  The Title IV regulations provide for differing restrictions on the number of course offerings and students that can be enrolled via distance education depending on the nature of the institution’s program offerings. For institutions whose eligible degree offerings equal or exceed their eligible certificate offerings, the Title IV regulations stipulate that an institution is not eligible to participate in the Title IV programs if: (1) more than 50% of its courses are offered via correspondence courses, or (2) 50% of its courses are offered via distance education (the combination of correspondence and telecommunication offerings). UPX and WIU provide more degree programs than certificate programs, thus the volume of students enrolled via distance education will not impact eligibility status as long as the institution maintains more residential courses than distance education courses. UPX’s and WIU’s percentage of courses offered through distance education were both below 50% during 2006. Effective July 1, 2006, the Higher Education Reconciliation Act eliminated the 50% rules for telecommunications programs.

Change of Ownership or Control.  A change of ownership or control, depending on the type of change, may have significant regulatory consequences for UPX, WIU and CFP. Such a change of ownership or control could trigger recertification by the U.S. Department of Education, reauthorization by state licensing agencies, or the evaluation of the accreditation by The HLC.

The U.S. Department of Education has adopted the change of ownership and control standards used by the federal securities laws for institutions owned by publicly-held corporations. Upon a change of ownership and control sufficient to require the Company to file a Form 8-K with the SEC, UPX and WIU would cease to be eligible to participate in Title IV programs until recertified by the U.S. Department of Education. Under some circumstances, the U.S. Department of Education may continue the institution’s participation in the Title IV programs on a temporary basis pending completion of the change in ownership approval process. This recertification would not be required, however, if the transfer of ownership and control was made upon a person’s retirement or death and was made either to a member of the person’s immediate family or to a person with an ownership interest in the Company who had been involved in its management for at least two years preceding the transfer. In addition, some states where UPX or WIU is presently licensed have requirements governing change of ownership or control. See Item 1A, “Our Acting Executive Chairman of the Board and his son control 99.9% of our voting stock and control substantially all actions requiring the vote or consent of our shareholders.” Moreover, UPX and WIU are required to report any material change in stock ownership. In the event of a material change in stock ownership, The HLC may seek to evaluate the effect of such a change of stock ownership on UPX’s, CFP’s and WIU’s continuing operations.

U.S. Department of Education Audits.  From time to time as part of the normal course of business, UPX and WIU are subject to periodic program reviews and audits by regulating bodies. The U.S. Department of Education, Office of Inspector General (“OIG”), conducted an audit of UPX for the period September 1, 2002 through March 31, 2004. On August 24, 2005, the OIG issued a final audit report whereby the OIG concluded that UPX had policies and procedures that provide reasonable assurances that the institution properly makes initial and subsequent disbursements to students enrolled in Title IV eligible programs and issued certain recommendations. On September 27, 2006, the U.S. Department of Education issued a final audit determination letter regarding disbursing

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Title IV funds to student accounts for allowable institutional charges and disbursing funds to students who were not in eligible programs. UPX has complied with the final audit determination letter.

On December 22, 2005, the OIG issued a separate audit report on their review of UPX’s policies and procedures for the calculation and return of Title IV funds. The OIG concluded that UPX had policies and procedures that provide reasonable assurances that it properly identified withdrawn students, appropriately determined whether a return of Title IV funds was required, returned Title IV funds for withdrawn students in a timely manner and used appropriate methodologies for most aspects of calculating the return of Title IV funds. The OIG did conclude, however, that UPX did not use appropriate methodologies for calculating the percentage of Title IV financial aid earned from March 1, 2004 through December 7, 2004. Since December 8, 2004, UPX has adopted the methodologies deemed appropriate by the U.S. Department of Education. The U.S. Department of Education will ultimately issue a final audit determination letter regarding the return of Title IV funds. UPX has accrued $3.7 million, which is its best estimate of the refund liability. While the outcome of the OIG audit proceedings are on-going, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from these actions.

Other Matters

The Company will make available free of charge on its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The Company’s website address is www.apollogrp.edu.

Item 1A —  Risk Factors

You should carefully consider the risks and uncertainties described below and all other information contained in this Annual Report on Form 10-K. In order to help assess the major risks in our business, we have identified many, but not all, of these risks. Due to the scope of our operations, a wide range of factors could materially affect future developments and performance.

If any events occur that give rise to the following risks, our business, financial condition, cash flow or results of operations could be materially and adversely affected, and as a result, the trading price of our Class A common stock could be materially and adversely impacted. These risk factors should be read in conjunction with other information set forth in this Annual Report, including our Consolidated Financial Statements and related Notes.

Risks Related to the Use of Incorrect Measurement Dates for Stock Option Grants and the Restatement

The matters relating to the investigation by the Special Committee of the Board of Directors and the restatement of the Company’s consolidated financial statements may result in additional litigation and governmental enforcement actions.

Based on the Independent Review and Internal Review, we determined, and our Audit Committee agrees, that incorrect measurement dates were used for financial accounting purposes for many stock option grants made during the period June 1994 through August 2006. See Explanatory Note immediately preceding Part I, Item 1, “Management’s Discussion and Analysis” in Part II, Item 7, and Note 3 “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements. As a result, we have recorded additional share based compensation expense, and related tax effects, with regard to certain past stock option grants, and we have restated certain previously issued financial statements included in this Annual Report on Form 10-K.

The Internal Review, the Independent Review and related activities have required that we incur substantial expenses for legal, accounting, tax and other professional services, have diverted management’s attention from our business and could in the future harm our business, financial condition, results of operations and cash flows.

We believe we have made appropriate judgments in determining the correct measurement dates for our stock option grants. There is a risk we may have to further restate our previously issued financial statements, amend prior filings with the SEC, or take other actions not currently contemplated in connection with any of the other restated

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items in this Report or our Quarterly Reports on Form 10-Q for the quarters ended May 31, 2006, November 30, 2006 and February 28, 2007.

Our past stock option practices and the resulting Restatement of previously issued financial statements have resulted in greater risks to the Company associated with litigation, regulatory proceedings and government enforcement actions. As described in Part I, Item 3, “Legal Proceedings,” litigation is now pending in state and federal courts against certain of our current and former directors and executive officers pertaining to allegations relating to stock option grants. We have fully cooperated with the inquiries by the SEC and the Department of Justice (the “DOJ”). We intend to continue full cooperation. No assurance can be given regarding the outcome of litigation, regulatory proceedings or government enforcement actions relating to our past stock option practices. The resolution of these matters may be time consuming and expensive and may distract management from the conduct of our business. Furthermore, if we are subject to adverse findings in litigation, regulatory proceedings or government enforcement actions, we could be required to pay damages or penalties or have other remedies imposed, which could harm our business, financial condition, results of operations and cash flows.

We did not historically maintain effective controls over our activities related to accounting for tax liability under IRC Section 162(m). The Company did not maintain effective controls over the implementation, documentation and the administration of its share based compensation plans. Specifically, the Company may have claimed deductions with respect to compensation attributable to the exercise of certain stock options, which may not qualify as performance-based compensation under IRC Section 162(m). As a result of this control deficiency, the Company may have claimed deductions with respect to those exercised options that were in excess of the limit imposed under IRC Section 162(m). The Company has accrued its best estimate with respect to potential tax liabilities, including interest and penalties for the taxable years 2003 through 2005 (which are currently the Company’s only open years subject to adjustment for federal tax purposes) of approximately $41.1 million as of August 31, 2006. The ultimate amount we will be required to pay to settle all of our tax liabilities for prior years may differ from the amount accrued.

We are subject to the oversight of the SEC and other regulatory agencies, and investigations by those agencies could divert management’s focus and have a material adverse impact on our reputation and financial condition.

As a result of this regulation and oversight, we may be subject to legal and administrative proceedings. As discussed in the previous risk factor, we are currently the subject of an ongoing SEC informal inquiry and DOJ investigation related to our historical stock option grant practices. As a result of these investigations and shareholder actions, we have incurred and will continue to incur significant legal costs and a significant amount of time of our senior management has been focused on these matters that otherwise would have been directed toward the growth and development of our business. We have concluded our Internal Review of our stock option grant practices as discussed in the Explanatory Note. The SEC inquiry and DOJ investigation are continuing and until these reviews of our stock option grant practices are complete, we are unable to predict the effect, if any, that these reviews and lawsuits will have on our business and financial condition, results of operations and cash flow. We cannot assure that the SEC and/or DOJ will not seek to impose fines or take other actions against us that could have a significant negative impact on our financial condition. In addition, publicity surrounding the SEC’s and DOJ’s investigations, the derivative causes of actions and class action lawsuits, or any enforcement action, even if ultimately resolved favorably for us, could have a material adverse impact on our cash flows, financial condition, results of operations or business.

Material weaknesses in internal control over activities relating to stock option grants, valuation of accounts receivable, valuation of goodwill, and the deduction of certain compensation expenses under IRC Section 162(m) resulted in a restatement of or adjustments to our financial statements, and the transitional changes to our control environment may be insufficient to effectively remediate these deficiencies.

Management has identified four material weaknesses in internal control over financial reporting, and we have restated our audited consolidated financial statements for the years ended August 31, 2005 and 2004, as well as our unaudited consolidated financial statements for the quarters ended November 30, 2005 and February 28, 2006 and all quarters in fiscal year 2005. We have taken steps to remediate these weaknesses by implementing changes to our

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control environment, including controls over financial reporting and additional steps are planned. Any ineffectiveness of these remedial measures, or a delay in their implementation, could affect the accuracy or timing of our future filings with the SEC or other regulatory authorities. See Item 9A, “Controls and Procedures.”

We had four material weaknesses in internal control over financial reporting that we identified and cannot assure you that additional material weaknesses will not be identified in the future. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

As discussed in the previous risk factor, management has identified four material weaknesses in our internal control over financial reporting. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal control over financial reporting.

Our management, including our President and Chief Financial Officer, does not expect that our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of material weaknesses could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

Because we did not file our annual report with the SEC for the year ended August 31, 2006, and our quarterly reports for the periods ended May 31, 2006, November 30, 2006 and February 28, 2007 on a timely basis, we may suffer adverse business consequences, including the delisting of our common stock by the Nasdaq Stock Market.

Due to the findings of the Independent Review and Internal Review and resulting Restatement, we did not file any of our periodic reports with the SEC on a timely basis since we last filed our quarterly report on Form 10-Q for the quarter ended February 28, 2006. See Item 3, “Legal Proceedings” for more information. With the filing of this Report and our Quarterly Reports on Form 10-Q for the quarters ended May 31, 2006, November 30, 2006 and February 28, 2007, we believe we will be current with SEC reporting requirements and Nasdaq listing requirements. However, if the SEC has comments on these Reports (or other reports that we previously filed) that require us to file amended reports, or if the Nasdaq Listing Council does not concur that we are in compliance with applicable listing requirements, we may be unable to maintain an effective listing of our stock on a national securities exchange. If this happens, the price of our stock and the ability of our stockholders to trade in our stock could be adversely affected. In addition, we would be subject to a number of restrictions regarding the registration of our stock under federal securities laws, and we would not be able to issue stock options or other equity awards to our employees or allow

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them to exercise their outstanding options, which could adversely affect retention of executive management and our business and results of operations.

Risks Related to the Control Over Our Voting Stock

Our Acting Executive Chairman of the Board and his son control 99.9% of our voting stock and control substantially all actions requiring the vote or consent of shareholders.

Dr. John G. Sperling, our Acting Executive Chairman of the Board and Founder, and his son, Peter V. Sperling, who is also one of our directors as well as our Senior Vice President and Secretary, control the John Sperling Voting Stock Trust and the Peter Sperling Voting Stock Trust, which together collectively own 99.9% of our voting securities, Apollo Group Class B common stock. Through their control of these trusts, Dr. Sperling, or Dr. Sperling and Mr. Sperling together, control the election of all members of our Board of Directors and substantially all other actions requiring a vote of our shareholders, except in certain limited circumstances. Holders of our outstanding Apollo Group Class A common stock do not have the right to vote for the election of directors or for substantially any other action requiring a vote of shareholders, except in certain limited circumstances. In the event of Dr. Sperling’s passing, control of the John Sperling Voting Stock Trust, which holds a majority of the outstanding Apollo Group Class B common stock, will be exercised by a majority of three successor trustees: Mr. Sperling, Terri Bishop and Darby Shupp. See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters” and Item 1, “Business — Change of Ownership or Control” for more information.

We are a “Controlled Company” as defined in Rule 4350(c) of the Marketplace Rules of The NASDAQ Stock Market LLC, since more than 50% of the voting power of Apollo Group is held by the John Sperling Voting Stock Trust. As a consequence, we are exempt from certain requirements of Marketplace Rule 4350, including that (a) our Board be composed of a majority of Independent Directors (as defined in Marketplace Rule 4200), (b) the compensation of our officers be determined by a majority of the independent directors or a compensation committee composed solely of independent directors and (c) nominations to the Board of Directors be made by a majority of the independent directors or a nominations committee comprised solely of independent directors. However, Marketplace Rule 4350(c) does require that our independent directors have regularly scheduled meetings at which only independent directors are present (“executive sessions”) and IRC Section 162(m) does require a compensation committee of outside directors (within the meaning of Section 162(m)) to approve stock option grants to executive officers in order for us to be able to deduct the stock option grants as an expense. Notwithstanding the foregoing exemptions, we do have a majority of independent directors on our Board of Directors and we do have a Compensation Committee and a Nominating and Governance Committee composed of independent directors.

Revised charters for the Compensation, Audit and Nominating and Governance Committees have been approved by the Board of Directors. These charters provide, among other items, that each member must be independent as such term is defined by the applicable rules of The NASDAQ Stock Market LLC and the SEC.

Risks Related to the Highly Regulated Industry in Which We Operate

If we fail to comply with the extensive regulatory requirements for our business, we could face significant monetary liabilities, fines and penalties, including loss of access to federal student loans and grants for our students.

As a provider of higher education, we are subject to extensive regulation on both the federal and state levels. In particular, the Higher Education Act and related regulations subject UPX and WIU, and all other higher education institutions that participate in the various federal student financial aid programs under Title IV of the Higher Education Act (“Title IV programs”) to significant regulatory scrutiny. We collected approximately 62% of our 2006 revenues from receipt of Title IV funds.

These regulatory requirements cover virtually all phases of our schools’ and programs’ operations, including educational program offerings, facilities, instructional and administrative staff, administrative procedures, marketing and recruiting, financial operations, payment of refunds to students who withdraw, acquisitions or openings of new schools or programs, addition of new educational programs and changes in our corporate structure and ownership.

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The Higher Education Act mandates specific regulatory responsibilities for each of the following components of the higher education regulatory triad: (1) the federal government through the U.S. Department of Education, (2) the accrediting agencies recognized by the U.S. Secretary of Education (the “Secretary of Education”) and (3) state education regulatory bodies.

The regulations, standards and policies of these regulatory agencies frequently change, and changes in, or new interpretations of, applicable laws, regulations, or standards could have a material adverse effect on our accreditation, authorization to operate in various states, permissible activities, receipt of funds under Title IV programs, or costs of doing business. We cannot predict with certainty how all of the requirements applied by these agencies will be interpreted or whether our schools will be able to comply with these requirements in the future.

If we are found to be in noncompliance with any of these regulations, standards or policies, any one of the regulatory agencies could do one or more of the following:

•  Impose monetary fines or penalties;

•  Limit or terminate our operations or ability to grant degrees and diplomas;

•  Restrict or revoke our accreditation, licensure or other approval to operate;

•  Limit, suspend or terminate our eligibility to participate in Title IV programs or state financial aid programs;

•  Require repayment of funds received under Title IV programs or state financial aid programs;

•  Require us to post a letter of credit with the U.S. Department of Education;

•  Subject our schools to heightened cash monitoring by the U.S. Department of Education;

•  Transfer us from the U.S. Department of Education’s advance system of receiving Title IV program funds to its reimbursement system, under which a school must disburse its own funds to students and document the students’ eligibility for Title IV program funds before receiving such funds from the U.S. Department of Education;

•  Subject us to other civil or criminal penalties; and

•  Subject us to other forms of censure.

Consequently, any of the penalties, injunctions, restrictions or other forms of censure listed above could have a material adverse effect on our business. See “Business — Federal Financial Aid Programs.”

If we are not recertified to participate in Title IV programs by the U.S. Department of Education, we would lose eligibility to participate in Title IV programs.

UPX and WIU are eligible and certified to participate in Title IV programs. UPX’s current certification for Title IV programs expires in June 2007; WIU’s current certification for Title IV programs expires in June 2009. Both UPX and WIU will seek recertification before their certifications expire; UPX has already initiated its recertification process. Generally, the recertification process includes a review by the U.S. Department of Education of the institution’s educational programs and locations, administrative capability, financial responsibility, and other oversight categories. The U.S. Department of Education could limit, suspend or terminate an institution for violations of the Higher Education Act or Title IV regulations, and such sanctions could have a material adverse effect on our business. See “Business — Federal Financial Aid Programs.”

Action by the U.S. Congress to revise the laws governing the federal student financial aid programs or reduce funding for those programs could reduce our student population and increase our costs of operation.

The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. The Higher Education Act has been extended to June 30, 2007, pending completion of the formal reauthorization process. In February 2006, the U.S. Congress enacted the Deficit Reduction Act of 2005, which contained a number of provisions affecting Title IV programs, including some provisions that had been in the Higher Education Act reauthorization bills. The U.S. Congress will either complete

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its reauthorization of the Higher Education Act or further extend additional provisions of the Higher Education Act. Changes to the Higher Education Act are likely to result from any further reauthorization and, possibly, from any extension of the remaining provisions of the Higher Education Act, but at this time we cannot predict all of the changes that the U.S. Congress will ultimately make. Any action by the U.S. Congress that significantly reduces Title IV program funding or the ability of our institutions or students to participate in Title IV programs could have a material adverse effect on our financial condition, results of operations and cash flows. Congressional action may also require us to modify our practices in ways that could increase our administrative costs and reduce our profit margin, which could have a material adverse effect on our financial condition and results of operations.

If the U.S. Congress significantly reduced the amount of available Title IV program funding, we would arrange for alternative sources of financial aid for our students. We cannot assure that one or more private organizations would be willing to provide loans to students attending one of our schools or programs, or that the interest rate and other terms of such loans would be as favorable as for Title IV program loans. In addition, private organizations could require us to guarantee all or part of this assistance and we might incur other additional costs. If we provided more direct financial assistance to our students, we would incur additional costs and assume increased credit risks. See “Business — Regulatory Environment.”

Student loan defaults could result in the loss of eligibility to participate in Title IV programs.

In general, under the Higher Education Act, an educational institution may lose its eligibility to participate in some or all Title IV programs if its student loan cohort default rate equals or exceeds 25% for three consecutive years or 40% for any given year. If we lose our eligibility to participate in Title IV programs because of high student loan default rates, it would have a material adverse effect on our business. In addition, if its student loan default rate equals or exceeds 10%, the educational institution is required to delay for 30 days the release of federal student loan proceeds for first time borrowers and permanently loses the ability to participate in the “school-as-lender” program, among other penalties. If our student loan cohort default rate exceeds 10%, the limitations on our business could have a material adverse impact. See “Business — Federal Financial Aid Programs — Student Loan Defaults.”

If any regulatory audit, investigation or other proceeding finds us not in compliance with the numerous laws and regulations applicable to the postsecondary education industry, we may not be able to successfully challenge such finding and our business could suffer.

Due to the highly regulated nature of the postsecondary education industry, we are subject to audits, compliance reviews, inquiries, complaints, investigations, claims of non-compliance and lawsuits by federal and state governmental agencies, regulatory agencies, present and former students and employees, shareholders and other third parties, any of whom may allege violations of any of the regulatory requirements applicable to us. If the results of any such claims or actions are unfavorable to us, we may be required to pay monetary fines or penalties, be required to repay funds received under Title IV programs or state financial aid programs, have restrictions placed on or terminate our schools’ or programs’ eligibility to participate in Title IV programs or state financial aid programs, have limitations placed on or terminate our schools’ operations or ability to grant degrees and certificates, have our schools’ accreditations restricted or revoked, or be subject to civil or criminal penalties. Any one of these sanctions could adversely affect our financial condition, results of operations and cash flows and result in the imposition of significant restrictions on us and our ability to operate. See “Business — Regulatory Environment.”

If we fail to maintain our institutional accreditation, we would lose our ability to participate in Title IV programs.

UPX and WIU are institutionally accredited by The HLC, one of the six regional accrediting agencies recognized by the Secretary of Education. Accreditation by an accrediting agency recognized by the Secretary of Education is required in order for an institution to become and remain eligible to participate in Title IV programs. The loss of accreditation would, among other things, render our schools and programs ineligible to participate in Title IV programs and would have a material adverse effect on our business. For proposed locations outside of North America, we are also required to obtain the approval of The HLC. See “Business — Accreditation.”

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If we fail to maintain any of our state authorizations, we would lose our ability to operate in that state and to participate in Title IV programs there.

UPX and WIU are authorized to operate and to grant degrees or diplomas by the applicable state agency of each state where such authorization is required and where we maintain a campus. In addition, eight states require UPX to obtain separate authorization for the delivery of distance education to residents of those states. Such state authorization is required for the campus located in the state or, in the case of states that require it, for UPX Online to offer post-secondary education and, in either case, for students at the campus or UPX Online to be eligible to participate in Title IV programs. The loss of such authorization would preclude the campus or UPX Online from offering post-secondary education and render students ineligible to participate in Title IV programs at least at those state campus locations or, in states that require it, at UPX Online and could have a material adverse effect on our business. See “Business — State Authorizations.”

A failure to demonstrate “administrative capability” or “financial responsibility” may result in the loss of eligibility to participate in Title IV programs.

If we fail to maintain “administrative capability” as defined by the U.S. Department of Education, we could lose our eligibility to participate in Title IV programs or have that eligibility adversely conditioned, which would have a material adverse effect on our business. Furthermore, if we fail to demonstrate “financial responsibility” under the U.S. Department of Education’s regulations, we could lose our eligibility to participate in Title IV programs or have that eligibility adversely conditioned, which would have a material adverse effect on our business. See “Business — Federal Financial Aid Programs — Standards of Financial Responsibility and Administrative Capability.”

Our schools and programs would lose their eligibility to participate in federal student financial aid programs if the percentage of our revenues derived from those programs were too high.

A proprietary institution loses its eligibility to participate in the federal student financial aid programs if it derives more than 90% of its revenues, on a cash basis, from federal student financial aid programs in any fiscal year. If we become ineligible to participate in federal student financial aid programs, it would have a material adverse effect on our business. See “Business — Federal Financial Aid Programs — The 90/10 Rule.”

We will be subject to sanctions if we fail to calculate and make timely payment of refunds of Title IV program funds for students who withdraw before completing their educational program.

The Higher Education Act and U.S. Department of Education regulations require us to calculate refunds of unearned Title IV program funds disbursed to students who withdraw from their educational program before completing it. If refunds are not properly calculated or timely paid, we may be sanctioned or subject to other adverse actions by the U.S. Department of Education, which could have a material adverse effect on our business. See “Business — Federal Financial Aid Programs.”

We are subject to sanctions if we pay impermissible commissions, bonuses, or other incentive payments to individuals involved in certain recruiting, admission, or financial aid activities.

A school participating in Title IV programs may not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruitment or admission activity or in making decisions regarding the awarding of Title IV program funds. The law and regulations governing this requirement do not establish clear criteria for compliance in all circumstances. If the U.S. Department of Education determined that our compensation practices violated these standards, the U.S. Department of Education could subject us to monetary fines, penalties, or other sanctions. Any substantial fine, penalty, or other sanction could have a material adverse effect on our financial condition, results of operations and cash flows. See “Business — Federal Financial Aid Programs — Compensation of Representatives.”

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If we were involved in conflicts of interest with student loan lenders, we could be subject to penalties and otherwise suffer adverse impacts on our business.

In 2007 the New York Attorney-General, several other attorneys-general, the United States Senate and House of Representatives Education Committees, and the United States Department of Education all launched investigations of potential conflicts of interest between university officials and various private lending organizations that provide student loans. These investigations are ongoing, but several universities and lending organizations have been implicated. Certain lenders, colleges and universities that have been implicated by these investigations have agreed to pay several million dollars in the aggregate to settle claims in this regard. In addition, several financial aid officials at other universities have been suspended or placed on leaves of absence. While no allegations have been raised concerning our institutions, we have received general requests for information from several state attorneys-general. We have no reason to believe that any of our employees have engaged in improper conduct in this regard. If any such impropriety were found, we could be subject to penalties and other adverse consequences. See “Business — Federal Financial Aid Programs.”

If IPD’s Client Institutions were sanctioned due to non-compliance with Title IV requirements, we could suffer adverse impacts on our business.

IPD provides a number of services to clients that are regionally accredited private colleges and universities, defined above as IPD Client Institutions. IPD provides its Client Institutions numerous consulting services in exchange for a contractual share of the Client Institution’s tuition revenues. If one or more IPD Client Institutions were sanctioned for noncompliance with Title IV requirements and such sanction(s) were to have a material adverse effect on enrollments and tuition revenue of such IPD Client Institution, it could have a material adverse effect on our business.

The complexity of regulatory environments in which we operate has increased and may continue to increase our costs.

Our business is subject to increasingly complex corporate governance, public disclosure, accounting and tax requirements and environmental legislation that have increased both our costs and the risk of noncompliance. Because our Class A common stock is publicly traded, we are subject to certain rules and regulations for federal, state and financial market exchange entities (including the Public Company Accounting Oversight Board, the SEC and Nasdaq). We have implemented new policies and procedures and continue developing additional policies and procedures in response to recent corporate scandals and laws enacted by Congress. Without limiting the generality of the foregoing, we have made a significant effort to comply with the provisions of the Sarbanes-Oxley Act of 2002 (including, among other things the development of policies and procedures to satisfy the provisions thereof regarding internal control over financial reporting, disclosure controls and procedures and certification of financial statements appearing in periodic reports) and the formation of a compliance department to develop policies and monitor compliance with laws (including, among others, privacy laws, export control laws, rules and regulations of the Office of Foreign Asset Controls and the Foreign Corrupt Practices Act). Our effort to comply with these new regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue generating activities to compliance activities. See “Business — Regulatory Environment.”

Risks Related to Our Business

If we are unable to successfully conclude the litigation, governmental investigations and inquiries pending against us, our business, financial condition, results of operations and growth prospects could be adversely affected.

We, certain of our subsidiaries and our current and former directors and executive officers have been named as defendants in lawsuits alleging violations of the federal securities laws. In addition, certain government agencies are conducting inquiries regarding us, including the SEC and the DOJ. We are also subject to various other lawsuits, investigations and claims, covering a range of matters, including, but not limited to, claims involving shareholders and routine employment matters. Please see Item 3 of this Annual Report on Form 10-K and Note 10

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“Commitments and Contingencies” of the notes to our consolidated financial statements of this Annual Report on Form 10-K for a detailed discussion of these matters.

We cannot predict the ultimate outcome of these matters and expect to incur significant defense costs and other expenses in connection with them. Such costs and expenses could have a material adverse effect on our business, financial condition, results of operations and the market price of our common stock. We may be required to pay substantial damages or settlement costs in excess of our insurance coverage related to these matters, which could have a further material adverse effect on our financial condition or results of operations.

While we continue in our efforts to cooperate with the SEC and the DOJ, we cannot predict the duration or outcome of these investigations, and those investigations may expand, and other regulatory agencies may become involved. The outcome and costs associated with these investigations could have a material adverse effect on our business, financial condition, or results of operations, and the investigations could result in adverse publicity and divert the efforts and attention of our management team from our ordinary business operations. The SEC and DOJ investigations and any related legal and administrative proceedings could also include the institution of administrative, civil injunctive, or criminal proceedings against us and/or our current or former officers or employees, the imposition of fines and penalties, suspensions and/or other remedies and sanctions.

We may not be able to sustain our recent growth rate or profitability, and we may not be able to manage future growth effectively.

Our ability to sustain our current rate of growth or profitability depends on a number of factors, including our ability to obtain and maintain regulatory approvals, our ability to recruit and retain high quality academic and administrative personnel at new campuses and competitive factors. Over the past three years, our growth has been predominately in our associate’s degree programs. If we are not able to sustain our growth rate in the associate’s degree programs, or fail to transition this growth to our bachelor’s degree, advanced degree and other potential new programs, our business could be adversely affected. In addition, growth and expansion of our operations may place a significant strain on our resources and increase demands on our management information and reporting systems, financial management controls and personnel. Although we have made a substantial investment in augmenting our financial and management information systems and other resources to support future growth, we cannot assure you that we will be able to manage further expansion effectively. Failure to do so could adversely affect our business, results of operations and cash flows.

If we cannot maintain student enrollments, our results of operations may be adversely affected.

Our strategy for growth and profitability depends, in part, upon managing attrition rates as well as increasing student enrollments in our schools and programs. Attrition rates are often due to factors outside our control. Many students face financial, personal, or family constraints that require them to withdraw from the school or the program. If we are unable to control the rate of student attrition, the overall enrollment levels are likely to decline. Also, to attract more students, we must develop and implement marketing and student recruitment programs, which may not succeed. If we cannot maintain and increase student enrollments, including retention of students in one or more degree programs, our business, results of operations and cash flows may be adversely affected.

Our computer systems may be vulnerable to security risks that could disrupt operations and require us to expend significant resources.

We have devoted and will continue to devote significant resources to the security of our computer systems. Nevertheless, our computer systems may be vulnerable to unauthorized access, computer hackers, computer viruses and other security problems and system disruptions. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. As a result, we may be required to expend significant resources to protect against the threat of those security breaches or to alleviate problems caused by those breaches. These factors could result in liability under state and federal privacy statutes and legal actions by state attorneys-general and private litigants, any of which could have a material adverse effect on our business, results of operations and cash flows.

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We face intense competition in the post-secondary education market.

Post-secondary education in our existing and new market areas is highly competitive. We compete with traditional public and private two-year and four-year colleges, other for-profit schools and alternatives to higher education, such as employment and military service. Some of our competitors, both public and private, have substantially greater financial and other resources than we have. Our competitors, both public and private, may offer programs similar to ours at a lower tuition level as a result of government subsidies, government and foundation grants, tax-deductible contributions and other financial sources not available to for-profit institutions. In addition, many of our competitors have begun to offer distance learning and other online education programs. As the online and distance learning segment of the post-secondary education market matures, the intensity of competition is expected to increase. This intense competition could adversely affect our business, results of operations and cash flows.

Our expansion into new markets outside the United States, if successful, will subject us to risks inherent in international operations.

As part of our growth strategy, we intend to establish campuses or universities in new markets outside the United States. If we are successful in implementing our strategy, we will face risks that are inherent in international operations, including:

•  Complexity of operations across borders;

•  Currency exchange rate fluctuations;

•  Monetary policy risks, such as inflation, hyperinflation and deflation;

•  Price controls or restrictions on exchange of foreign currencies;

•  Potential political and economic instability in the countries in which we operate, including potential student uprisings;

•  Expropriation of assets by local governments;

•  Multiple and possibly overlapping and conflicting tax laws;

•  Compliance with foreign regulatory environments; and

•  Acts of war, epidemics and natural disasters.

We may not be able to successfully complete or integrate future acquisitions.

As part of our growth strategy, we expect to consider selective acquisitions of proprietary educational institutions that complement our strategic direction. Any acquisition involves significant risks and uncertainties, including:

•  Inability to successfully integrate the acquired operations into our institutions and maintain uniform standards, controls, policies and procedures;

•  Distraction of management’s attention from normal business operations;

•  Challenges retaining the key employees of the acquired operation;

•  Insufficient revenue generation to offset liabilities assumed;

•  Expenses associated with the acquisition; and

•  Unidentified issues not discovered in our due diligence process, including legal contingencies.

Acquisitions are inherently risky. We cannot be certain that our previous or future acquisitions will be successful and will not materially adversely affect our business, results of operations and cash flows. Future transactions may involve use of our cash resources, issuance of equity or debt securities, incurrence of other forms of debt or a significant increase in our financial leverage, which could adversely affect our financial condition and

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results of operations, especially if the cash flows associated with any acquisition are not sufficient to cover the additional debt service. If we issue equity securities as consideration in an acquisition, current shareholders’ percentage ownership and earnings per share may be diluted. In addition, if we were to acquire an institution, it could be considered a change in ownership and control of the acquired institution under applicable regulatory standards. We would need approval from the U.S. Department of Education and most applicable state agencies and accrediting agencies and possibly other regulatory bodies when we were to acquire an institution. If we were unable to obtain such approvals with respect to an institution we acquired, depending on the size of that acquisition, that failure could have a material adverse effect on our business, results of operations and cash flows.

Our future success depends in part upon our ability to recruit and retain key personnel; we have experienced significant turnover in some of our senior management positions; and certain of our senior financial officers are currently serving on an interim basis.

Our success to date has been, and our continuing success will be, substantially dependent upon our ability to attract and retain highly qualified executive officers, faculty and management personnel and other key personnel. Since the beginning of fiscal year 2006, we have replaced our President, Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”). Moreover, our current CFO and CAO are currently engaged under contracts that provide for their services on an interim basis. In the case of the CFO, the contract provides for termination with 10 days’ prior written notice; in the case of the CAO, the contract expires on June 30, 2007, unless the parties mutually agree to an extension of this term. These individuals have led the process of completing the Restatement and have been integral to our efforts to remediate our material weaknesses in internal control. If we replace our CFO or CAO, we will need to implement procedures to ensure continuity of management in these crucial areas and to oversee important aspects of our corporate governance practices. There can be no assurance that future changes in senior financial management personnel will not adversely affect our efforts in this regard. Similarly, there is no assurance that we will be able to retain any of our existing key personnel, or attract, assimilate and retain the additional personnel needed to support our business. If we cannot retain and attract qualified personnel, we may not be able to comply with various legal requirements, including the timely filing of period reports under the federal securities laws, or expand our business as planned, and our business, results of operations and cash flows may be adversely affected.

Natural disasters or terrorist acts could have an adverse effect on our operations.

Hurricanes, earthquakes, floods, tornados and other natural disasters or breaches of security at our physical campuses could disrupt our operations. Natural disasters or breaches of security that directly impact our physical facilities or ability to recruit and retain students and employees could adversely affect our ability to deliver our programs to our students and, thereby, adversely affect our results of operations. Furthermore, natural disasters or breaches of security could adversely affect the economy and demographics of the affected region, which could cause significant declines in the number of students who attend our schools in that region and have a material adverse effect on our results of operations. While the occurrence of any of these events, or other unanticipated events, could harm our overall business, results of operations and cash flows, we believe that the nature of our business mitigates this risk due to our numerous physical campuses and emphasis on distance learning.

The trading price of our common stock may fluctuate substantially in the future

The trading price of our common stock may fluctuate substantially based on any of the foregoing risk factors as well as general economic conditions. Such fluctuation could prevent you from selling shares of our common stock at or above the price at which you purchase such shares. In addition, the stock markets from time to time experience extreme price and volume fluctuations that may be unrelated or disproportionate to our operating performance.

Item 1B — Unresolved Staff Comments

None.

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Item 2 — Properties

As of August 31, 2006 the Company utilized 324 facilities, all of which were leased. As of August 31, 2006, the Company leased approximately 7 million square feet, as follows:

Segment	Location	Type	Sq. Ft. Leased		# of Properties
UPX	United States	Office		965,800		14
		Dual Purpose		4,997,316		224
	Puerto Rico	Dual Purpose		67,348		1
	Mexico	Dual Purpose		14,035		1
	Canada	Dual Purpose		28,048		3
				6,072,547		243
Other Schools	United States	Office		33,486		15
		Dual Purpose		366,409		54
				399,895		69
Corporate	United States	Office		486,938		12
	Total			6,959,380		324

Dual purpose space includes office and classroom facilities. The Company leases substantially all of our administrative and educational facilities. In some cases, classes are held in the facilities of the students’ employers at no charge to us. Leases generally range from five to ten years with one to two renewal options for extended terms. The Company also leases space from time to time on a short-term basis in order to provide specific courses or programs.

The Company evaluates current utilization of the educational facilities and projected enrollment growth to determine facility needs. The Company anticipates that an additional 1,000,000 square feet will be leased in 2007.

Item 3 — Legal Proceedings

The Company is subject to various claims and contingencies in the ordinary course of business, including those related to regulation, litigation, business transactions, employee-related matters and taxes, among others. While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial positions, results of operations or cash flows.

In accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), when the Company becomes aware of a claim or potential claim, the likelihood of any loss or exposure is assessed. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company records a liability for the loss. The liability recorded includes probable and estimable legal costs associated with the claim or potential claim. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount is material. For matters where no loss contingency is recorded, the Company’s policy is to expense legal fees as incurred.

The following is a description of pending litigation and other proceedings that are outside the scope of ordinary and routine litigation incidental to the Company’s business.

Pending Litigation

Incentive Compensation Qui Tam Action

On August 29, 2003, the Company was notified that a qui tam action had been filed against it on March 7, 2003, in the U.S. District Court for the Eastern District of California by two current employees on behalf of themselves and the federal government. When the federal government declines to intervene in a qui tam action, as it has done in this case, the relators may elect to pursue the litigation on behalf of the federal government and, if they are successful, receive a portion of the federal government’s recovery. The qui tam action alleges, among other things,

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violations of the False Claims Act, 31 U.S.C. § 3729(a)(1) and (2), by UPX for submission of a knowingly false or fraudulent claim for payment or approval, and knowingly false records or statements to get a false or fraudulent claim paid or approved in connection with federal student aid programs, and asserts that UPX improperly compensates its employees; on or about October 20, 2003, a motion to dismiss the action was filed and was subsequently granted with leave to amend the complaint. Subsequently, a second amended complaint was filed on or about March 3, 2004. A motion to dismiss this amended complaint was filed on or about March 22, 2004, and the case was subsequently dismissed with prejudice. On June 11, 2004, an appeal was filed with the U.S. Court of Appeals for the Ninth Circuit. On September 5, 2006, the Ninth Circuit reversed the ruling of the district court and held that the relators had adequately alleged the elements of a False Claims Act cause of action. On January 22, 2007, UPX filed a Petition for Writ of Certiorari with the U.S. Supreme Court; on April 23, 2007, the U.S. Supreme Court denied UPX’s petition. As a result, the case has been remanded to the District Court in accordance with the order of the Ninth Circuit. In addition, on March 23, 2007, UPX filed a motion in the District Court to dismiss the complaint on the grounds that the September 7, 2004 settlement agreement between UPX and the U.S. Department of Education constituted an alternate remedy under the False Claims Act. In addition, the Company has filed a Motion to Dismiss based on the availability of an alternative remedy; this Motion is currently pending. Discovery has not yet commenced in the District Court. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Santa Teresa Qui Tam Action

On July 27, 2005, the Company received a subpoena from the U.S. Department of Education, Office of the Inspector General, requiring that the Company produce documents relating to enrollment and financial aid activities at the Santa Teresa campus during the period January 1, 2000 to August 31, 2004. Subsequently, an Assistant U.S. Attorney informed the Company that the subpoena was part of an investigation being conducted by the government for the purpose of determining whether or not the government would intervene in a qui tam lawsuit. On August 23, 2006, the DOJ filed a Notice of Election to Decline Intervention in this qui tam lawsuit, which had been filed in the U.S. District Court for the Western District of Texas. On or about December 8, 2006, the relators in this qui tam lawsuit served the Company with the complaint. On January 29, 2007, the relators filed a Motion to Dismiss Without Prejudice to the United States, which requested that the court dismiss the action with prejudice as to the relators but without prejudice as to the United States. The United States consented to the dismissal without prejudice as to the United States. On February 2, 2007, the court granted the relators’ motion. This action has not had and will not have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

Axia Qui Tam Action

On August 15, 2005, a relator filed a qui tam complaint under seal in the U.S. District Court for the District of Columbia. On April 12, 2006, the DOJ filed The Government’s Notice of Election to Decline Intervention in this qui tam lawsuit and on June 15, 2006, the court entered an order unsealing the complaint. An amended complaint was served on or about November 1, 2006. On November 15, 2006, the relator filed a Voluntary Notice of Dismissal. On November 17, 2006, the court ordered that the relator comply with the statutory requirements for dismissal of a qui tam False Claims Act action by December 1, 2006. On December 1, 2006, the United States consented to the dismissal of the action with prejudice as to the relator, so long as the dismissal is without prejudice as to the United States. On February 2, 2007, the court ordered the United States to articulate its reasons for consenting to the dismissal of the action. On February 21, 2007, the United States filed a Statement of Reasons for Consenting to Dismissal. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

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Sanders Class Action

On approximately September 26, 2003, a class action complaint was filed in the Superior Court of the State of California for the County of Orange, captioned Bryan Sanders et al v. University of Phoenix, Inc. et al, Case No. 03CC00430. Plaintiff, a former academic advisor with UPX, filed this class action on behalf of himself and current and former academic advisors employed by the Company in the State of California and seeks certification as a class, monetary damages in unspecified amounts and injunctive relief. Plaintiff alleges that during his employment, he and other academic advisors worked in excess of eight hours per day or 40 hours per week, and contends that the Company failed to pay overtime. On June 6, 2005, the court granted plaintiffs’ motion to remove Bryan Sanders as the named plaintiff and replace him with Deryl Clark and Romero Ontiveros. Plaintiffs’ counsel has advised defendants and the court that Mr. Ontiveros no longer intends to serve as a named plaintiff. Five status conferences have occurred and the parties are now in the process of discovery. The court granted defendants’ motion to transfer venue to the Superior Court of the State of California for the County of Solano. Plaintiffs’ motion to certify the class was continued by the court and scheduled for a hearing in August 2006. A motion for summary judgment was filed on May 15, 2006, on behalf of UPX and Apollo Group, Inc. On August 23, 2006, the court issued an order and denied Clark’s motion to certify the class. On October 24, 2006, the court granted UPX’s and Apollo Group’s motion for summary judgment. In November 2006, Clark agreed not to appeal the court’s ruling in exchange for a waiver of costs. This action has not had and will not have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

Sekuk Class Action

On approximately October 12, 2004, a class action complaint was filed in the U.S. District Court for the District of Arizona, captioned Sekuk Global Enterprises et al v. Apollo Group, Inc. et al, Case No. CV 04-2147 PHX NVW. A second class action complaint making similar allegations was filed on or about October 18, 2004, in the U.S. District Court for the District of Arizona, captioned Christopher Carmona et al v. Apollo Group, Inc. et al, Case No. CV 04-2204 PHX EHC. A third class action complaint making similar allegations was filed on or about October 28, 2004, in the U.S. District Court for the District of Arizona, captioned Jack B. McBride et al v. Apollo Group, Inc. et al, Case No. CV 04-2334 PHX LOA. The court consolidated the three pending class action complaints and a consolidated class action complaint was filed on May 16, 2005 by the lead plaintiff. Lead plaintiff purports to represent a class of the Company’s shareholders who acquired their shares between February 27, 2004 and September 14, 2004, and seeks monetary damages in unspecified amounts. Lead plaintiff alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under the Act by the Company for their issuance of allegedly materially false and misleading statements in connection with their failure to publicly disclose the contents of the U.S. Department of Education’s program review report. A motion to dismiss the consolidated class action complaint was filed on June 15, 2005, on behalf of Apollo Group, Inc. and the individual named defendants. The court denied the motion to dismiss on October 18, 2005 and discovery commenced. The parties conducted discovery from October 2005 until discovery closed on February 16, 2007. On March 9, 2007, both parties filed motions for summary judgment. Opposition briefs were filed on May 11, 2007, and reply briefs are due to be filed no later than June 8, 2007. The summary judgment motions are scheduled to be heard on September 4, 2007. The case remains set for trial on November 14, 2007. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Alaska Electrical Pension Fund Derivative Action

Three shareholder derivative suits are pending in the U.S. District Court for the District of Arizona, alleging on behalf of the Company that certain of the Company’s current and former officers and directors engaged in misconduct regarding stock option grants. As with any derivative action, an independent committee of the Board of Directors of the Company will need to determine whether it is in the Company’s best interest to itself pursue the allegations made on behalf of the Company. These derivative complaints were filed on or around September 5 and 19, 2006 and November 11, 2006 after the Company announced the formation of the Special Committee and the

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commencement of its investigation, and the Company has moved the Court to stay these actions pending the conclusion of the Special Committee’s investigation and review of plaintiffs’ claims. On December 4, 2006, the Court issued an order in the case captioned Alaska Electrical Pension Fund v. Sperling, Case No. CV06-02124-PHX-ROS, stating that the Company’s motion to stay the proceedings would be granted upon notice that Hedy F. Govenar had been replaced on the Special Committee by another board member who was not a party to the case. Effective December 8, 2006, K. Sue Redman has replaced Ms. Govenar as a member of the Special Committee. As of March 13, 2007, James R. Reis joined the Special Committee in place of Daniel D. Diethelm. Now that the Special Committee has concluded its factual findings, the Special Committee has been charged to analyze, in light of the investigation, whether the pursuit of these shareholder derivative cases would be in the Company’s best interest. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

EEOC v. UPX

On September 25, 2006, the Equal Employment Opportunity Commission (“EEOC”) filed a Title VII action against UPX captioned Equal Employment Opportunity Commission v. UPX, No. CV-06-2303-PHX-MHM, in the U.S. District Court for the District of Arizona on behalf of four identified individuals and an asserted class of unidentified individuals who were allegedly discriminated against because they were not members of the Church of Jesus Christ of Latter Day Saints. The Complaint also alleges that the identified individuals were retaliated against after complaining about the alleged discrimination. The EEOC did not serve its Complaint on UPX until November 21, 2006. UPX answered the Complaint on December 8, 2006, denying the material allegations asserted. An initial Scheduling Conference was held on February 15, 2007. The parties are currently engaged in initial discovery. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Barnett Derivative Action

On April 24, 2006, Larry Barnett filed a complaint derivatively on behalf of the Company. The lawsuit was filed in the Superior Court for the State of Arizona, Maricopa County and is entitled Barnett v. John Blair et al, Case Number CV2006-051558. On October 10, 2006, plaintiff filed a First Amended Complaint adding allegations of stock option backdating. The complaint names as defendants the Company, John M. Blair, Dino J. DeConcini, Hedy F. Govenar, Kenda Gonzales, Todd Nelson, Laura Palmer Noone, John Norton, John G. Sperling and Peter V. Sperling. The First Amended Complaint alleges, among other things, that the individual defendants breached their fiduciary duties to the Company and that certain of the individual defendants were unjustly enriched by their receipt of backdated stock option grants. The plaintiff seeks, among other things, an award of unspecified damages and reasonable costs and expenses, including attorneys’ fees. On August 21, 2006, the Company filed a Motion to Stay the case arguing that it is not in the best interests of the Company to prosecute plaintiffs’ purported derivative claims prior to resolution of the parallel federal securities class action pending against the Company in federal district court as described below under “Teamsters Local Union Putative Class Action.” The individual defendants joined in the Motion to Stay. On November 10, 2006, after plaintiff filed the First Amended Complaint and added allegations of stock option backdating, the Company filed an Amended Motion to Stay arguing that the action should be stayed pending resolution of the federal securities class action and pending the Special Committee’s investigation into the allegations of stock option backdating. Also on November 10, 2006, the Company filed a motion to sever the claims relating to stock option backdating from the claims made in the original complaint. On January 29, 2007, the Court granted the Amended Motion to Stay for a period of six months. The Court set an interim case management conference for June 4, 2007. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

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Bamboo Partners Derivative Action

On August 15, 2006, Bamboo Partners filed a complaint derivatively on behalf of the Company and UPX. The lawsuit was filed in the U.S. District Court, District of Arizona and is entitled Bamboo Partners v. Nelson et al., Case Number 2:06-at-10858. The complaint names as defendants Apollo Group, Inc., UPX, Todd Nelson, Kenda Gonzales, Daniel Bachus, John G. Sperling, Peter V. Sperling, Laura Palmer Noone, John M. Blair, Dino J. DeConcini, Hedy F. Govenar and John Norton III. The complaint alleges, among other things, that the defendants violated Sections 10(B) and 21D of the Exchange Act and numerous breaches of fiduciary duties. The complaint seeks damages sustained by Apollo and UPX as a result of breaches of fiduciary duty, abuse of control and waste of corporate assets. The complaint seeks damages against Laura Palmer Noone for unjust enrichment. The complaint also seeks attorneys’ fees, reasonable costs and disbursements. On November 13, 2006, the Company filed a Motion to Stay the case arguing that it is not in the best interests of the Company to prosecute plaintiffs’ purported derivative claims prior to resolution of the parallel federal securities class action pending against the Company in federal district court, as described below under “Teamsters Local Union Putative Class Action.” The individual defendants joined in the Motion to Stay. The court granted the Company’s motion to stay on May 18, 2007. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Teamsters Local Union Putative Class Action

On November 2, 2006, a plaintiff filed a class action complaint purporting to represent a class of shareholders who purchased the Company’s stock between November 28, 2001 and October 28, 2006. The complaint alleges that the Company and certain of its current and former directors and officers violated Sections 10(b) and 20(a) and Rule 10b-5 promulgated thereunder of the Securities Exchange Act of 1934 by purportedly failing to disclose alleged deficiencies in the Company’s stock option granting policies and practices. Plaintiff seeks compensatory damages and other relief. On January 3, 2007, other shareholders, through their separate attorneys, filed motions seeking appointment as lead plaintiff and approval of their designated counsel as lead counsel to pursue this action. Those motions are pending before the court. The Company has not yet responded to the complaint in this action, but intends to vigorously oppose plaintiffs’ allegations. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Regulatory and Other Legal Matters

U.S. Department of Education Audits

From time to time as part of the normal course of business, UPX and WIU are subject to periodic program reviews and audits by regulating bodies. The U.S. Department of Education, Office of Inspector General (“OIG”), conducted an audit of UPX for the period September 1, 2002, through March 31, 2004. On August 24, 2005, the OIG issued a final audit report whereby the OIG concluded that UPX had policies and procedures that provide reasonable assurances that the institution properly makes initial and subsequent disbursements to students enrolled in Title IV eligible programs and issued certain recommendations. On September 27, 2006 the U.S. Department of Education issued a final audit determination letter regarding disbursing Title IV funds to student accounts for allowable institutional charges and disbursing funds to students who were not in eligible programs. UPX has complied with the final audit determination letter.

On December 22, 2005, the OIG issued a separate audit report on their review of UPX’s policies and procedures for the calculation and return of Title IV funds. The OIG concluded that UPX had policies and procedures that provide reasonable assurances that it properly identified withdrawn students, appropriately determined whether a return of Title IV funds was required, returned Title IV funds for withdrawn students in a timely manner and used appropriate methodologies for most aspects of calculating the return of Title IV funds. The OIG did conclude, however, that UPX did not use appropriate methodologies for calculating the percentage of

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Title IV financial aid earned from March 1, 2004 through December 7, 2004. Since December 8, 2004, UPX has adopted the methodologies deemed appropriate by the U.S. Department of Education. The U.S. Department of Education will ultimately issue a final audit determination letter regarding the return of Title IV funds. UPX has accrued $3.7 million, which is its best estimate of the refund liability. While the outcome of the OIG audit proceedings are on-going, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from these actions.

Department of Justice Investigation

On June 19, 2006, the Company received a grand jury subpoena from the U.S. Attorney’s Office for the Southern District of New York requesting that the Company provide documents relating to its stock option grants. The Company is cooperating fully with this request.

SEC Informal Inquiry

On June 30, 2006, the Company was notified by letter from the SEC of an informal inquiry and the Commission’s request for the production of documents relating to the Company’s stock option grants. The Company is cooperating fully with this investigation.

Nasdaq Proceeding

Due to the Independent and Internal Reviews and the resulting Restatement, the Company did not timely file its Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, the Annual Report on Form 10-K for the fiscal year ended August 31, 2006 and the Quarterly Reports on Form 10-Q for the quarters ended November 30, 2006 and February 28, 2007. As a result, the Company received four Nasdaq Staff Determination letters, dated July 11, 2006, November 14, 2006, January 11, 2007 and April 11, 2007, respectively, stating that the Company was not in compliance with the filing requirements of Marketplace Rule 4310(c)(14) and, therefore, that the Company’s stock was subject to delisting from the Nasdaq Global Select Market. The Company appealed this determination, requested a hearing before a Nasdaq Listing Qualifications Panel (the “Panel”) and attended the hearing at which the Company sought appropriate exceptions to the filing requirements from the Panel, pending completion of its delinquent reports. On September 20, 2006, the Panel granted the Company’s request for continued listing of its securities on the Nasdaq Global Select Market, subject to the condition that the Company files this Report and its Quarterly Reports on Form 10-Q for the quarters ended May 31, 2006 and November 30, 2006 on or before December 29, 2006. On December 14, 2006, the Company informed the Panel that it would not be able to file its delinquent reports by December 29, 2006 and sought a reasonable extension of that date. On December 20, 2006, the Panel denied the Company’s request and notified the Company that it had determined to suspend trading of the Company’s securities on December 29, 2006. The Company appealed this determination, and on December 22, 2006, the Company was informed by the Listing Council that it had determined to call the Panel’s Delisting Decision for review, as contemplated by Marketplace Rule 4807(b), and had also stayed the delisting of the Company’s securities pending further review of the Listing Council. The Company submitted additional information for the Listing Council’s consideration on February 2, 2007. On March 29, 2007, the Panel determined to exercise its discretionary authority, under Rule 4802(b), to grant the Company an exception to demonstrate compliance with all of the Nasdaq Global Select Market continued listing requirements until May 25, 2007. With the filing of this Report and its Quarterly Reports on Form 10-Q for the quarters ended May 31, 2006, November 30, 2006 and February 28, 2007, the Company believes it is current with SEC reporting requirements and Nasdaq listing requirements.

Item 4 — Submission of Matters to a Vote of Security Holders

None.

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PART II

Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our Apollo Group Class A common stock trades on the Nasdaq Global Select Market under the symbol “APOL.” The holders of our Apollo Group Class A common stock are not entitled to any voting rights.

There is no established public trading market for our Apollo Group Class B common stock and all shares of our Apollo Group Class B common stock are beneficially owned by affiliates.

Due to the Independent and Internal Reviews of our historical practices related to stock option grants (see Explanatory Note Regarding Restatement and Item 3 — Legal Proceedings) and the resulting Restatement (see Note 3 — Restatement of Consolidated Financial Statements), we did not file our periodic reports with the SEC on time and therefore our Class A common stock was subject to delisting from the Nasdaq Global Select Market. With the filing of this Report and our Quarterly Reports on Form 10-Q for the quarters ended May 31, 2006, November 30, 2006 and February 28, 2007, we believe we are now current with SEC reporting requirements and Nasdaq listing requirements. See Item 1A — “Risk Factors — Risks Related to the Use of Incorrect Measurement Dates for Stock Option Grants.”

The table below sets forth the high and low bid share prices for our Apollo Group Class A common stock as reported by the Nasdaq Global Select Market.

	High		Low
2005
First Quarter	$	83.74	$	62.96
Second Quarter		85.33		73.64
Third Quarter		78.43		68.64
Fourth Quarter		81.21		71.58
2006
First Quarter	$	78.19	$	58.87
Second Quarter		72.61		49.38
Third Quarter		56.02		47.94
Fourth Quarter		55.47		43.12

As of March 31, 2007, there were approximately 288 holders of record of Apollo Group Class A common stock and four holders of record of Apollo Group Class B common stock. We estimate that, including shareholders whose shares are held in nominee accounts by brokers, there were approximately 69,000 holders of our Apollo Group Class A common stock as of March 31, 2007.

Although we are permitted to pay dividends on our Apollo Group Class A and Apollo Group Class B common stock, we have never paid cash dividends on our common stock. Dividends are payable at the discretion of the Board of Directors, and the Articles of Incorporation treat the declaration of dividends on the Apollo Group Class A and Apollo Group Class B common stock in an identical manner as follows: holders of our Apollo Group Class A common stock and Apollo Group Class B common stock are entitled to receive cash dividends, if and to the extent declared by the Board of Directors, payable to the holders of either class or both classes of common stock in equal or unequal per share amounts, at the discretion of the Board of Directors. We have no current plan to pay dividends in the foreseeable future. The decision of our Board of Directors to pay future dividends will depend on general business conditions, the effect of a dividend payment on our financial condition and other factors the Board of Directors may consider relevant.

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Our Board of Directors has authorized programs to repurchase shares of Apollo Group Class A common stock. The share repurchases under these programs for the three months ended August 31, 2006 have been as follows:

									Maximum Value
	Total # of						Average Price		of Shares
(Numbers in thousands,	Shares						Paid per		Available for
except per share amounts)	Repurchased			Cost			Share		Repurchase
Treasury stock as of May 31, 2006		15,553		$	1,061,172		$	68.23	$	136,092
New authorizations		—			—			—		—
Shares repurchased		—			—			—		—
Shares reissued		(20	)		(1,363	)		68.23		—
Treasury stock as of June 30, 2006		15,533			1,059,809			68.23		136,092
New authorizations		—			—			—		—
Shares repurchased		—			—			—		—
Shares reissued		(54	)		(3,725	)		68.23		—
Treasury stock as of July 31, 2006		15,479			1,056,084			68.23		136,092
New authorizations		—			—			—		—
Shares repurchased		—			—			—		—
Shares reissued		(30	)		(2,038	)		68.23		—
Treasury stock as of August 31, 2006		15,449		$	1,054,046		$	68.23	$	136,092

There is no expiration date on the repurchase authorizations and repurchases occur at the Company’s discretion. We may in the future make additional purchases under the stock repurchase program following our return to full compliance with the filing of the Company’s Annual Report on Form 10-K for the fiscal year ended August 30, 2006 and Quarterly Reports on Form 10-Q for the quarters ended May 31, 2006, November 30, 2006 and February 28, 2007.

Item 6 — Selected Consolidated Financial Data

The following selected consolidated financial data and operating statistics are qualified by reference to and should be read in conjunction with the consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The statement of income data for the years ended August 31, 2006, 2005, and 2004, and the balance sheet data as of August 31, 2006 and 2005, were derived from the audited consolidated financial statements, included herein. Diluted income per share and diluted weighted average shares outstanding have been retroactively restated for stock splits.

The consolidated balance sheet as of August 31, 2005 and the consolidated statements of income for the fiscal years ended August 31, 2005 and 2004 have been restated and audited as set forth in this Form 10-K. The data for the consolidated balance sheets as of August 31, 2004, 2003, and 2002 and the consolidated statements of income for the fiscal years ended August 31, 2003 and 2002 have been restated, but such restated data have not been audited and is derived from the books and records of the Company. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below. The information presented in the following tables has been adjusted to reflect the restatement of the Company’s financial results, which is more fully described in the “Explanatory Note” immediately preceding Part I, Item 1; Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and in Note 3, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements of this Form 10-K.

The Company has not amended its previously filed Annual Reports on Form 10-K or Quarterly Reports on Forms 10-Q for the periods affected by this restatement. The financial information that was presented in previous

43

filings or otherwise reported for these periods is amended by the information in this Annual Report on Form 10-K, and the financial statements and related financial information contained in such previously filed reports should no longer be relied upon.

	August 31,
($ in thousands)	2005		2004		2003		2002
	As Previously Reported
Balance Sheet Data:
Total cash, cash equivalents, restricted cash and securities, and marketable securities	$	692,775	$	994,068	$	1,045,802	$	688,655
Total assets	$	1,302,945	$	1,495,101	$	1,408,317	$	1,008,008
Current liabilities	$	517,972	$	469,782	$	342,299	$	270,067
Long-term liabilities		78,099		68,178		39,093		38,948
Total shareholders’ equity		706,874		957,141		1,026,925		698,993
Total liabilities and shareholders’ equity	$	1,302,945	$	1,495,101	$	1,408,317	$	1,008,008
Operating Statistics:
Degreed enrollments at end of year		307,400		255,600		200,100		157,800
Number of locations at end of year:
Campuses		90		82		71		65
Learning centers		154		137		121		111
Total number of locations		244		219		192		176

	August 31,
	2005			2004			2003			2002
	Adjustments(1)
Total cash, cash equivalents, restricted cash and securities, and marketable securities	$	(7,027	)	$	(193	)	$	—		$	1
Total assets	$	(21,397	)	$	(7,351	)	$	9,071		$	10,651
Current liabilities	$	48,773		$	55,457		$	42,221		$	27,565
Long-term liabilities		2,484			(632	)		8,979			5,614
Total shareholders’ equity		(72,654	)		(62,176	)		(42,129	)		(22,528	)
Total liabilities and shareholders’ equity	$	(21,397	)	$	(7,351	)	$	9,071		$	10,651
Operating Statistics:
Degreed enrollments at end of year(2)		(36,000	)		(17,200	)		(10,300	)		(13,400	)

44

	August 31,
	2006		2005		2004		2003		2002
			Restated(1)
Total cash, cash equivalents, restricted cash and securities, and marketable securities	$	646,995	$	685,748	$	993,875	$	1,045,802	$	688,656
Total assets	$	1,283,005	$	1,281,548	$	1,487,750	$	1,417,388	$	1,018,659
Current liabilities	$	595,756	$	566,745	$	525,239	$	384,520	$	297,632
Long-term liabilities		82,876		80,583		67,546		48,072		44,562
Total shareholders’ equity		604,373		634,220		894,965		984,796		676,465
Total liabilities and shareholders’ equity	$	1,283,005	$	1,281,548	$	1,487,750	$	1,417,388	$	1,018,659
Operating Statistics:
Degreed enrollments at end of year(2)		282,300		271,400		238,400		189,800		144,400
Number of locations at end of year:
Campuses		99		90		82		71		65
Learning centers		163		154		137		121		111
Total number of locations		262		244		219		192		176

(1)	See Note 3, “Restatement of Consolidated Financial Statements” included in Item 8 of this Form 10-K.
(2)	Restated Degreed Enrollments includes only UPX and Axia College and represent individual students enrolled in our degree programs that attended a course during the quarter and did not graduate as of the end of the quarter (including Axia students enrolled in UPX and WIU). Previously, the Company used a different definition of enrollment. Previously reported enrollment numbers are restated above.

	August 31,
	2005		2004		2003		2002
	As Previously Reported
Statements of Income:
($ in thousands)
Revenues:
Tuition and other, net	$	2,251,472	$	1,798,423	$	1,339,517	$	1,009,455
Costs and expenses:
Instructional costs and services		935,743		765,495		612,940		498,454
Selling and promotional		484,770		383,078		272,348		198,889
General and administrative		98,286		88,090		66,970		58,260
Share-based compensation(2)		19,824		123,535		—		—
Total costs and expenses		1,538,623		1,360,198		952,258		755,603
Income from operations		712,849		438,225		387,259		253,852
Interest income and other, net		16,993		18,263		14,545		12,072
Income before income taxes		729,842		456,488		401,804		265,924
Provision for income taxes		285,111		178,714		154,794		104,774
Net income	$	444,731	$	277,774	$	247,010	$	161,150

45

	August 31,
	2005			2004			2003			2002
	Adjustments(1)
Revenues:
Tuition and other, net	$	(358	)	$	1,624		$	(535	)	$	(1,519	)
Costs and expenses:
Instructional costs and services		20,888			15,942			17,626			32,878
Selling and promotional		681			722			—			—
General and administrative		(3,801	)		(3,764	)		(5,656	)		(3,872	)
Share-based compensation(2)		(2,929	)		(23,252	)		—			—
Total costs and expenses		14,839			(10,352	)		11,970			29,006
Income from operations		(15,197	)		11,976			(12,505	)		(30,525	)
Interest income and other, net		(206	)		(1,958	)		(307	)		(891	)
Income before income taxes		(15,403	)		10,018			(12,812	)		(31,416	)
Provision for income taxes		1,395			7,707			(1,685	)		(5,667	)
Net income	$	(16,798	)	$	2,311		$	(11,127	)	$	(25,749	)

	August 31,
	2006		2005		2004		2003		2002
	Restated(1)
Revenues:
Tuition and other, net	$	2,477,533	$	2,251,114	$	1,800,047	$	1,338,982	$	1,007,936
Costs and expenses:
Instructional costs and services		1,112,660		956,631		781,437		630,566		531,332
Selling and promotional		544,706		485,451		383,800		272,348		198,889
General and administrative		149,928		94,485		84,326		61,314		54,388
Goodwill impairment		20,205		—		—		—		—
Share based compensation(2)		—		16,895		100,283		—		—
Total costs and expenses		1,827,499		1,553,462		1,349,846		964,228		784,609
Income from operations		650,034		697,652		450,201		374,754		223,327
Interest income and other, net		18,054		16,787		16,305		14,238		11,181
Income before income taxes		668,088		714,439		466,506		388,992		234,508
Provision for income taxes		253,255		286,506		186,421		153,109		99,107
Net income	$	414,833	$	427,933	$	280,085	$	235,883	$	135,401

(1)	See Note 3, “Restatement of Consolidated Financial Statements” included in Item 8 of this Form 10-K.
(2)	Share based compensation in 2005 and 2004 is related to the 2004 conversion of the UPX Online stock options into Apollo Group Class A stock options. Share based compensation expense resulting from the revised measurement dates is included in instructional costs and services, selling and promotional, and general and administrative expenses.

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	Year Ended August 31,
	2005		2004			2003			2002
	As Previously Reported
Common Stock and Earnings per Share Data:
($ in thousands, except per share amounts)
Income attributed to Apollo Group Class A common stock:
Net income	$	444,731	$	277,774		$	247,010		$	161,150
Stock dividends paid(2)		—		(114,155	)		—			—
Net income attributed to UPX Online common shareholders		—		(25,819	)		(15,308	)		(7,989	)
Net income attributed to Apollo Group Class A common shareholders	$	444,731	$	137,800		$	231,702		$	153,161
Income attributed to UPX Online common stock:
Net income			$	25,819		$	15,308		$	7,989
Stock dividends paid(2)				114,155			—			—
Net income attributed to UPX Online common shareholders			$	139,974		$	15,308		$	7,989
Earnings per share attributed to Apollo Group Class A common stock:
Diluted income per share	$	2.39	$	0.77		$	1.30		$	0.87
Diluted weighted average shares outstanding		186,015		178,897			177,637			175,697
Earnings per share attributed to UPX Online common stock:
Diluted income per share			$	8.19		$	0.93		$	0.53
Diluted weighted average shares outstanding				17,081			16,518			15,098

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	August 31,
	2005			2004			2003			2002
	Adjustments(1)
Income attributed to Apollo Group Class A common stock:
Net income	$	(16,798	)	$	2,311		$	(11,127	)	$	(25,749	)
Net income attributed to UPX Online common shareholders		—			1,624			2,469			8,624
Net income attributed to Apollo Group Class A common shareholders	$	(16,798	)	$	3,935		$	(8,658	)	$	(17,125	)
Income attributed to UPX Online common stock:
Net income (loss)				$	(1,624	)	$	(2,469	)	$	(8,624	)
Earnings per share attributed to Apollo Group Class A common stock:
Diluted income per share	$	(0.09	)	$	0.02		$	(0.05	)	$	(0.10	)
Diluted weighted average shares outstanding		51			17			91			(90	)
Earnings per share attributed to UPX Online common stock:
Diluted income per share				$	(0.09	)	$	(0.16	)	$	(0.57	)
Diluted weighted average shares outstanding					(7	)		67			(30	)

	August 31,
	2006		2005		2004			2003			2002
	Restated(1)
Income attributed to Apollo Group Class A common stock:
Net income	$	414,833	$	427,933	$	280,085		$	235,883		$	135,401
Stock dividends paid(2)		—		—		(114,155	)		—			—
Net income attributed to UPX Online common shareholders		—		—		(24,195	)		(12,839	)		635
Net income attributed to Apollo Group Class A common shareholders	$	414,833	$	427,933	$	141,735		$	223,044		$	136,036
Income attributed to UPX Online common stock:
Net income (loss)					$	24,195		$	12,839		$	(635	)
Stock dividends paid(2)						114,155			—			—
Net income (loss) attributed to UPX Online common shareholders					$	138,350		$	12,839		$	(635	)
Earnings per share attributed to Apollo Group Class A common stock:
Diluted income per share	$	2.35	$	2.30	$	0.79		$	1.25		$	0.77
Diluted weighted average shares outstanding		176,205		186,066		178,914			177,728			175,607
Earnings per share attributed to UPX Online common stock:
Diluted income (loss) per share					$	8.10		$	0.77		$	(0.04	)
Diluted weighted average shares outstanding						17,074			16,585			15,068

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(1)	See Note 3, “Restatement of Consolidated Financial Statements” included in Item 8 of this Form 10-K.
(2)	Stock dividends paid in 2004 are related to the 2004 conversion of the UPX Online common stock outstanding into Apollo Group Class A common stock outstanding.

Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) has been revised for the effects of the Restatement as discussed in Note 3 to the consolidated financial statements included in Item 8 of this Form 10-K.

This MD&A is intended to help investors understand Apollo Group, Inc. (“the Company,” “Apollo Group,” “Apollo,” or “APOL”), our operations, and our present business environment. The MD&A is provided as a supplement to — and should be read in conjunction with — our consolidated financial statements and the accompanying notes (“Notes”). The following overview provides a summary of the sections included in our MD&A:

•  Forward-Looking Statements — cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from our historical results or our current expectations or projections.

•  Results of Independent and Internal Review; Effect of Restatement — a discussion of the results of our Independent Review and Internal Review of our historical practices related to stock option grants and the effects of the Restatement.

•  Executive Summary — a general description of our business and the education industry, as well as key highlights of the current year.

•  Critical Accounting Policies and Estimates — a discussion of accounting policies that require critical judgments and estimates.

•  Results of Operations — an analysis of our results of operations in our consolidated financial statements. We operate in one business sector: education. Except to the extent that differences between our reportable segments are material to an understanding of our business as a whole, we present the discussion in our MD&A on a consolidated basis.

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

Forward-Looking Statements

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact may be forward-looking statements. Such forward-looking statements include, among others, those statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and the beliefs and assumptions of us and our management, and speak only as of the date made and are not guarantees of future performance. The words “believes,” “expects,” “anticipates,” “estimates,” “plans,” “objectives,” and other similar statements of expectation identify forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Future events and actual results could differ materially from those set forth in the forward-looking statements as a result of many factors. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, including those set forth in Item 1 under the sections titled “Regulatory Environment,” “Accreditation,” “Federal Financial Aid Programs,” and “State Authorization,” those factors set forth in this Item 7 and those factors set forth in other reports that we file with the SEC. We undertake no

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obligation to publicly update or revise any forward-looking statements, or any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements.

Results of Independent and Internal Review; Effect of Restatement

In this Annual Report for the year ended August 31, 2006, we have restated our consolidated balance sheet as of August 31, 2005, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the fiscal years ended August 31, 2005 and 2004. See Note 3, “Restatement of Consolidated Financial Statements,” Note 14 “Employee and Director Benefit Plans” and Note 17, “Quarterly Results of Operations (Restated and Unaudited)” included in Part II, Item 8 for a discussion of the effect of the Restatement.

As part of the Restatement, we have recorded additional (decreased) pre-tax share based compensation expense with regard to past stock option grants of approximately $4.9 million and $14.9 million under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for our fiscal years ended August 31, 2005 and August 31, 2004, respectively.

This Annual Report on Form 10-K also presents the effects of the Restatement on our “Selected Consolidated Financial Data” in Item 6 for our fiscal years ended August 31, 2005, 2004, 2003, and 2002, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Item 7 for our fiscal years ended August 31, 2005 and 2004.

Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q affected by the Restatement will not be amended. Accordingly, previously issued financial statements and related reports of our independent registered public accounting firm should not be relied upon.

Background

In response to comments in a report published by an investment bank on June 8, 2006 that questioned whether we might have backdated stock option grants during its fiscal years ended August 31, 2000 through August 31, 2004, our Board of Directors authorized a Special Committee on June 23, 2006, and authorized it to retain independent legal counsel, who in turn retained forensic accountants, to assist them in conducting the Independent Review of the Company’s historical practices related to stock option grants. In November 2006, with the assistance of outside legal counsel, we began an in-depth Internal Review to ascertain the most likely measurement date of every stock option grant since our initial public offering (“IPO”) during our fiscal year 1994 through September 2006 (the “Internal Review”).

On December 15, 2006, we announced in a Form 8-K that the Special Committee presented the final factual findings of the Independent Review to the Board disclosing, among other things, that:

•  “In the accounting of certain stock option grants, the Company did not correctly apply the requirements of APB 25. In certain instances, the Company used a measurement date for option awards that corresponded with the [stated] grant date even though the approvals for those grants as set forth in the operative plans were not obtained until after the reported grant date and the final lists of grantees and award amounts were incomplete at the time of the reported grant date.”

•  “The Company misapplied Internal Revenue Code Section 162(m) with respect to the contemporaneous tax treatment of certain stock option grants and may face significant tax liability for prior years.”

•  “The Company prepared and maintained inaccurate documentation concerning the date that grant award lists were completed and approved.”

•  “The Special Committee has found no direct evidence that the grant date for any of the large Management Grants was selected with the benefit of hindsight. In two instances, though, the price on the grant date is at a relative low point for the Company’s stock, and there is little contemporaneous evidence to establish that the grant was made on the grant date. While there is a possibility that the grant date was retroactively selected, there is insufficient evidence to reach such a conclusion.”

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•  ‘‘[T]he Special Committee, in connection with its factual findings, reported to the Board that certain former officers took steps that may have been intended to mask failures in the grant approval process with respect to the Company’s financial reporting and payment of taxes. The Special Committee also recently discovered additional evidence that raises questions whether another grant (in addition to the two grants referenced in a previous Form 8-K dated November 6, 2006) may have been retroactively selected by a day, although there is insufficient evidence to reach such a conclusion.”

Based on the Independent Review and the Internal Review, we determined that 57 of the 100 total grants made during this time period used incorrect measurement dates for accounting purposes. Of these 100 grants, 33 grants were Management Grants. We determined that incorrect measurement dates were used for accounting purposes for 24 of the 33 Management Grants. As a result, revised measurement dates were selected for many grants and resulted in exercise prices that were less than the fair market value of the stock on the most likely measurement dates. We recorded pre-tax compensation expense of $52.9 million ($59.9 million after-tax) in the aggregate over the fiscal years 1994 through 2005. The after-tax amount is higher due primarily to disallowed deductions pursuant to IRS Section 162(m) and related penalties and interest. This incremental share based compensation expense results in a cumulative decrease to pre-tax income of $21.1 million ($34.2 million after-tax) for the years ended August 31, 2002 through 2005.

Based on the available documentation and evidence, the following summarizes our understanding of our historical granting process and determination of the most likely measurement dates for our stock option grants.

Historically, we made annual grants of APOL and UPX Online options. We have historically granted stock options to the following groups:

•  Management and other employees (annual grants), including those officers covered by Section 16 of the Securities and Exchange Act of 1934 (“Section 16 Officers”) and other employees;

•  Non-employee directors (the “Director Grants”);

•  Faculty (full- and part-time employees) (the “Faculty Grants”); and

•  Individual employees (new hires, promotions, transfers, etc.) (the “Individual Grants”).

Employee Stock Option Plans

We typically awarded stock options to certain employees (including the Section 16 Officers) on an annual basis. From June 1994 to March 24, 2000, we issued Management Grants pursuant to the Long Term Incentive Plan dated May 13, 1994, as amended on September 22, 1995 (“LTIP”). The LTIP required approval of all grants by the majority of the members of the Compensation Committee. Subsequent to March 24, 2000, we awarded Management Grants pursuant to the 2000 Stock Incentive Plan (“2SIP”). The 2SIP required the approval of all grants by the Compensation Committee or by both the President and CEO. Our former CEO became President of the Company in 1998 and was promoted to President and CEO in August 2001, and he retained both offices until he resigned in January 2006 (the “Former CEO”). The Former CEO had authority to approve the option grants for employees other than himself. Grant approval memoranda (“Approval Memoranda” or “Approval Memorandum”) were signed by the Former CEO or the Compensation Committee for a number of grants to employees.

Our Process for Granting Stock Options

Management Grants

Our annual Management Grant process followed a similar pattern each year. Generally, near the end of each fiscal year (before the grant date), we began developing a list of grantees. Over a period of time the list was finalized. Once the total number of shares to be issued to each grantee was known, the list was submitted to the Stock Option Manager (“Manager”) in our accounting department.

Over the next few weeks to a few months, changes were made to the list: names were added, shares were adjusted, and underlying vesting goals were developed. We understand that prior to August 2001, most grant dates were selected at Board or Compensation Committee meetings. We understand that beginning in August 2001, the

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Former CEO generally selected the grant date. The majority of the Management Grants have a 10-year term with 4-year standard vesting. The grants typically contained vesting acceleration provisions based upon meeting certain financial performance goals (e.g., earnings per share, stock price, net income, etc.). Once the list was finalized by the accounting department, the Former CEO communicated his approval; however, no contemporaneous evidence exists to support on what date this occurred. It was then communicated to the Manager that the list could be entered into Equity Edge, our stock option plan administration software.

Our Use of Equity Edge

We began using Equity Edge in approximately May 1997 and still use it today. Data relating to pre-May 1997 grants was also entered into the system in 1997 for recordkeeping purposes. The date a grant is first entered in Equity Edge is referred to as the “Equity Edge Record Added Date.” After February 2000, the Equity Edge data was then uploaded to an external third-party broker-dealer firm. On each day that activity occurred in Equity Edge, the third-party broker-dealer’s system would automatically download the option grant information into the individual employee brokerage accounts that night. The grantees could then view the options in their brokerage accounts online.

Approval of Management Grants

Management Grants issued from June 1994 to August 2001 under both the LTIP and the 2SIP required approval by both members of the Compensation Committee. Such approval was mostly documented by Compensation Committee minutes. However, often no list was attached to the minutes. We believe that most grant dates were set at Board or Compensation Committee meetings. Based on a review of past granting practices, the Compensation Committee did not and has not invalidated any grants and we have honored all grants. In 2000, instead of using Compensation Committee minutes, we began using Approval Memoranda to memorialize grants to employees. Beginning in August 2001, an Approval Memorandum was prepared for grants to the Former CEO. At this time, the Former CEO also had the authority to approve the option grants for employees other than himself.

In the course of the Independent Review and the Internal Review, two types of Approval Memoranda were found. We found Approval Memoranda signed by either the Compensation Committee or, beginning in August 2001, signed by the Former CEO approving grants to all employees. These Approval Memoranda, in limited instances, indicate the specific number of shares to be received by each grantee. We also found Approval Memoranda signed by the Compensation Committee for grants to the Former CEO. These Approval Memoranda typically stated the number of shares being granted to the Former CEO.

Although there exists a general lack of documentation surrounding the creation and execution of Approval Memoranda, we understand that Approval Memoranda were created at some point in the grant-making process, and in certain cases, the Approval Memoranda were dated “as of” the date of the grant it was approving, such that in certain cases, the date on the Memorandum contained a date before the actual creation date of the Memorandum. In many instances, the Approval Memorandum was signed by only the Chairman of the Compensation Committee and we lack evidence as to whether all of the grants issued were, in fact, approved by a majority of the members of the Compensation Committee. As a result of the Independent Review and Internal Review, we understand that the Approval Memoranda are not conclusive as to the actual date of approval, but they do reflect that the approval was given and that the grant was authorized. As a result of the review of our past granting practices, we determined the Equity Edge Record Added Date represents the most likely measurement date as to when the terms of the awards were finalized and approved. After the Former CEO resigned in January 2006, to the extent evidence exists of Compensation Committee approval of the final terms of the grant on the original grant date, we used the original grant date.

Section 16 Officer Grants (Except the Former CEO)

Section 16 Officers received Management Grants according to the same general Management Grant process described above. After August 2002, we filed timely Forms 4 for the Section 16 Officers within two days of a grant. When the list was finalized, grant information was provided to the Manager, who would enter the grant into Equity Edge, which was used to prepare and file the Forms 4. The Section 16 Officers typically took up to but no longer

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than two days to file the Forms 4. Beginning in August 2001, the Former CEO had the authority to approve the grants to Section 16 Officers. We generally determined the original stated grant date is the most likely measurement date for Section 16 Officer grants after August 2002.

Former CEO Grants

Under the LTIP and the 2SIP, only the Compensation Committee could approve grants to the Former CEO. While Compensation Committee minutes generally stated approvals for grants, these minutes did not always specify the shares the Former CEO was to receive in the grant. The Former CEO was typically in attendance at the Compensation Committee meetings where the minutes reflect that option grants were discussed and approved. The minutes reflect the Former CEO was excused prior to his compensation being discussed.

The number of APOL options granted to the Former CEO remained the same from 1998 through 2001. From 2001, specific approval for grants to the Former CEO was documented using Approval Memoranda signed by the Chairman of the Compensation Committee. By early 2001, approval was obtained verbally by the Former CEO and was typically later memorialized in an Approval Memorandum. Prior to August 2002, to the extent we were able to determine that evidence of Board or Compensation Committee approval existed, we concluded the original grant date was the most likely measurement date. If we were unable to determine that evidence of approval existed for a grant, we used the Equity Edge Record Added Date as the measurement date.

As discussed above for the Section 16 Officers, after August 2002, the Former CEO began filing Forms 4 with the SEC within two days of a grant. We generally concluded the original stated grant date is the most likely measurement date after August 2002, based on the history of the filing process for Forms 4 after a grant.

Director Grants

We grant options to non-employee directors on an annual basis. From December 6, 1994 through September 1, 2003, we granted annual Director Grants pursuant to the Apollo Director Stock Plan (“DSP”), which was approved on and effective as of August 5, 1994. The DSP provisions stated that each director received a defined number of stock options on a defined date and price on the date of grant. As a result, we generally concluded that the original stated grant date was the most likely measurement date for Director Grants made under the DSP.

Subsequent to September 1, 2003, the Director Grants were made pursuant to the 2SIP. Forms 4 were prepared in the same manner as the Section 16 Officers discussed above, except that the forms were emailed to the Directors for signatures. As a result, after September 2003, we concluded the original stated grant date is the most likely measurement date based on the history of our granting process for Forms 4.

Faculty Grants

Each qualifying faculty member was eligible to receive one Faculty Grant per calendar year. Starting in fiscal year 1999, each qualifying faculty member received a fixed number of shares annually. The Faculty Grants were issued to eligible faculty that met certain previously communicated criteria. Faculty Grants were awarded under both the LTIP and 2SIP; however, provisions do not specifically address Faculty Grants. Detailed Faculty Grant information was posted to the Company website and in the Faculty Handbook, including the frequency and timing of the grants for the upcoming year. The strike price per share was to be equal to the closing price on the grant date or the nearest day before the grant date if it fell on a weekend or holiday, pursuant to the plan.

In most cases, grants were entered into Equity Edge by the Manager and then a few days later Human Resources sent a grant email to faculty. After 2000, Faculty Grants are also uploaded nightly to an external third-party broker-dealer’s system and automatically downloaded into the individual employee brokerage accounts that same night.

As a result of the pre-defined criteria, we determined that the original stated grant date was generally the most likely measurement date. In certain instances, we noted that certain faculty met the pre-established criteria but were not included in the appropriate quarterly/semi-annual stated grant. Because they met all the criteria at the stated grant date and had completed an Eligibility Checklist, they should have received an award on that date but were left

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off due to administrative delay. Therefore, we determined the most likely measurement date was the date of the quarterly/semi-annual grant date in which the award should have been included.

Individual Grants

We also granted options to certain employees on an ad hoc basis throughout the year for various reasons such as new hire, transfer, promotion, etc. These options were granted pursuant to the LTIP or the 2SIP, and the terms normally matched all terms in the grant agreements used for the Management Grant issued during that same fiscal year. Prior to 2001, all of the information and approvals required to establish a proper measurement date for certain grants were either not documented or we lacked sufficient evidence as to whether such information and approvals were obtained by the originally selected grant date. Beginning in August 2001, the Former CEO picked the grant date and determined the number of shares. We normally did not document these types of option grants in a letter or in the employee’s personnel file. The individuals were notified of their grants either verbally or via an email from Human Resources. Certain grants were documented via an Approval Memorandum signed by the Former CEO after August 2001, as discussed in the Management Grants discussion above.

The grant was entered into Equity Edge following the process described above for Management Grants. We similarly concluded that the Equity Edge Record Added Date is the most likely measurement date for Individual Grants.

Income Tax Related Matters

Section 162(m)

In relation to the Restatement, certain tax deductions in prior years with respect to compensation attributable to the exercise of certain stock options by executive officers may be in question. Under IRC Section 162(m), the amount of such deduction per covered executive officer is limited to $1.0 million per year, except to the extent the compensation qualifies as performance-based. Compensation attributable to options with revised measurement dates may not have qualified as performance-based compensation. Accordingly, we may have claimed deductions with respect to those exercised options that were in excess of the limit imposed under IRC Section 162(m). As a result, we have accrued our best estimate with respect to potential tax liabilities, including interest and penalties for the taxable years 2003 through 2005 (which are currently our only open years subject to adjustment for federal tax purposes), of approximately $41.1 million as of August 31, 2006. These accruals have been recorded because we believe it is more likely than not that the deductions will be disallowed by the IRS. For prior periods where a liability existed and where the statute of limitations has expired, the accrual relating to that period has been reversed in the appropriate period.

Section 409A

The revised measurement dates for certain stock options discussed above may result in adverse tax consequences to holders of those options under IRC Section 409A. Section 409A was enacted in 2004 to impose certain restrictions on deferred compensation arrangements, including limitations on the subsequent distribution of deferred amounts. Deferred compensation for this purpose is defined very broadly and, as a result, includes in that definition, options granted at a discounted exercise price, to the extent those options vest after December 31, 2004 (“409A Affected Options”). Therefore, the revised measurement dates for the options discussed above could subject the options that vest after calendar year 2004 to treatment as 409A Affected Options. Each holder of a 409A Affected Option would recognize taxable income on the option spread at the time of vesting (or, for 409A Affected Options exercised in calendar years 2006 or 2007, at the time of exercise) and would incur, in addition to regular income taxes, an additional 20% penalty tax on such spread and interest. Similar penalty taxes could apply under state tax laws. We are subject to certain reporting and withholding obligations with respect to the taxable income on the option spread.

(1) Unexercised 409A Affected Options

Section 16 Officers:  In December 2006, we entered into irrevocable written agreements with each of our Section 16 Officers and certain Former Section 16 Officers, holding 409A Affected Options pursuant to which those

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options were to be brought into compliance with Section 409A, and thereby would avoid the adverse tax consequences summarized above, through either of the following alternatives: (a) amendment of the option to increase the exercise price to the market price per share of our Class A common stock on the revised measurement date or (b) the optionee’s commitment to exercise the option (to the extent in the money) during the 2007 calendar year prior to its contractual expiration date. Generally, these amendments will be treated as a modification of the option under SFAS 123(R). However, in this circumstance, there are no accounting consequences under SFAS 123(R).

Non-Section 16 Officers:  An offer to amend the 409A Affected Options held by non-Section 16 Officers to increase the exercise price to the market price per share of the underlying Class A common stock on the revised measurement date cannot be made until after this Annual Report on Form 10-K and all other delinquent filings are filed with the SEC. In order to avoid adverse taxation under Section 409A, this amendment must be made on or before the earlier of (i) December 31, 2007 or (ii) the exercise of the 409A Affected Options during the 2007 calendar year. We anticipate that we will commence such an offer after the filing of this Annual Report and all other delinquent filings.

As part of the offer and amendment process under IRC Section 409A, we may provide bonuses to the holders of the amended options to compensate them for the resulting increase in their stock option exercise price. However, we have not yet made a decision to implement a bonus program to compensate either the Section 16 Officers or the non-Section 16 Officers resulting from the increased exercise prices. A decision to compensate for increased prices through a bonus would represent a modification to the grant and would result in accounting consequences under SFAS 123(R).

(2) Exercised 409A Affected Options

In February 2007, we elected to participate in a program announced by the Internal Revenue Service in Notice 2007-30, which pertains to 409A Affected Options exercised by non-Section 16 Officers during the calendar year 2006 and which allows us to pay the penalty tax and interest due to the related measurement date changes that would otherwise be payable by the option holders who exercised the 409A Affected Options. The payment of the tax penalty and interest on behalf of the option holders in 2007 will result in additional taxable income to the option holders. As such, we will pay on behalf of or reimburse the option holders for applicable payroll and income taxes related to the additional income, as well as provide a gross up for any tax consequences of the penalty tax and interest reimbursement we make. We recorded a pre-tax liability in the second quarter of 2007 for compensation expense under this program totaling approximately $2.6 million.

Restatement Adjustments

(1) Share Based Compensation — As discussed above, we have restated our financial results to record additional share based compensation expense.

(2) Allowance for Doubtful Accounts — During the year ended August 31, 2006, we concluded that a significant increase in our allowance for doubtful accounts was required. A portion of the increase has been determined to be the correction of an error from prior periods and is included in the accompanying financial statements as an element of the Restatement. This error related to the fact that in prior years we did not properly consider available information related to (a) the cumulative differences between actual write-offs and our allowance for doubtful accounts and (b) significant increases in the “Return to Lender” dollars for Title IV recipients who withdraw from UPX or WIU. When a student with Title IV loans withdraws from UPX or WIU, we are sometimes required to return a portion of Title IV funds to the lenders. We are generally entitled to collect these funds from the students, but the collection of these receivables is significantly lower than our collection of receivables from students who remain in our educational programs. Accordingly, we have restated our allowances for doubtful accounts for all prior periods presented. This error resulted in adjustments to pre-tax bad debt expense in the amounts of $11.7 million ($7.1 million after-tax) and $4.1 million ($2.5 million after-tax) for the fiscal years ended 2005 and 2004, respectively.

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(3) Other Adjustments — We concluded that the accounting for various accounts such as cash, revenue, property and equipment, lease accounting and other investments was not properly recorded in accordance with GAAP. Specifically, the impairment in a venture capital fund investment should have been recorded in an earlier period; cash related to scholarships, grants, and refunds should have been classified as restricted cash and student deposits; different assumptions should have been used in determining the fair value of options; certain share based compensation was improperly amortized amongst quarters; auction rate securities were improperly classified as cash and cash equivalents in certain periods; and certain revenue under tuition discount programs were not properly recorded. Certain of these errors resulted in adjustments to pre-tax expense shown in other adjustments in the table below.

Adjustments to our lease accounting resulted in a net increase in expense of $2.6 million and $0.7 million for the years ended August 31, 2005 and 2004, respectively, and adjustments to the balance sheet of $2.6 million as of August 31, 2005. Specifically, we determined that the accounting for our tenant improvement allowances was not in accordance with GAAP. As part of the Restatement, the errors in our accounting for the tenant improvement allowances were corrected and certain of our operating leases now have been properly accounted for as capital leases. These adjustment amounts are included in Other Adjustments in the table below.

(4) Tax Effect of Adjustments — The tax effect of the Restatement adjustments is shown below.

Impact of the Restatement

As a result of the Restatement, retained earnings as of September 1, 2003 has been adjusted from $765.2 million to $702.7 million. The financial information presented in this Item 7 has been adjusted to reflect the incremental impact resulting from the Restatement adjustments discussed above, as follows:

Summary of Impact of Restatement Adjustments

												Tax Effect of Adjustments(4)
	Share											Income Tax Provision (Benefit)									Penalty
	Based								Total			Related to			Related to						and		Tax Effect		Total			Total
	Compensation			Bad Debt		Other			Adjustments,			Share Based			Bad Debt						Interest on		of 162(m)		Tax			Adjustments,
Fiscal Year	Expense(1)			Expense(2)		Adjustments(3)			Pre-Tax			Compensation			and Other			Total			Exercises		Limitation		Effect			Net of Tax
($ in thousands)
1994	$	—		$	—	$	—		$	—		$	—		$	—		$	—		$	—	$	—	$	—		$	—
1995		176			—		—			176			(71	)		—			(71	)		—		—		(71	)		105
1996		—			—		—			—			—			—			—			—		—		—			—
1997		397			—		—			397			(160	)		—			(160	)		—		—		(160	)		237
1998		487			—		—			487			(196	)		—			(196	)		21		67		(108	)		379
1999		652			—		—			652			(262	)		—			(262	)		92		277		107			759
2000		2,091			—		—			2,091			(841	)		—			(841	)		268		757		184			2,275
2001		28,001			—		—			28,001			(11,256	)		—			(11,256	)		1,307		3,821		(6,128	)		21,873
2002		22,782			4,576		4,058			31,416			(9,158	)		(3,471	)		(12,629	)		3,334		3,628		(5,667	)		25,749
2003		8,294			3,600		918			12,812			(3,314	)		(1,805	)		(5,119	)		3,350		84		(1,685	)		11,127
Cumulative effect on September 1, 2003 opening retained earnings		62,880			8,176		4,976			76,032			(25,258	)		(5,276	)		(30,534	)		8,372		8,634		(13,528	)		62,504
2004		(14,929	)		4,103		808			(10,018	)		5,941			(1,954	)		3,987			2,541		1,179		7,707			(2,311	)
2005		4,935			11,701		(1,233	)		15,403			(1,963	)		(4,163	)		(6,126	)		4,050		3,471		1,395			16,798
Total	$	52,886		$	23,980	$	4,551		$	81,417		$	(21,280	)	$	(11,393	)	$	(32,673	)	$	14,963	$	13,284	$	(4,426	)	$	76,991

(1), (2), (3), & (4)  See Note 3, “Restatement of Consolidated Financial Statements,” included in Item 8 of this Form 10-K for a detailed summary of adjustments.

Pro Forma Share Based Compensation Expense

The footnotes to our previously issued financial statements for the years ended August 31, 2005 and 2004, disclosed pro forma net income in accordance with SFAS 123. This pro forma disclosure also included errors not

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related to measurement date changes in the amount of $19.8 million ($11.9 million after tax) and $123.5 million ($74.4 million after tax) for the fiscal years ended August 31, 2005 and August 31, 2004, respectively. These errors arose from the misapplication of SFAS 123 to our UPX Online stock options which were converted to APOL options. Specifically, our footnote disclosure understated pro forma net income because it erroneously included deductions for pro forma share based compensation based on the intrinsic value of the converted options as computed under APB 25 rather than the fair value of the converted options as computed under SFAS 123.

Changes to Controls, Processes and Procedures

Management is committed to remediating the control deficiencies that constitute the material weaknesses described herein by implementing changes to our internal control over financial reporting. For its stock option grants, management has implemented or has plans to implement all of the improvements in internal control over financial reporting suggested as a result of the Independent Review into stock option granting practices. Management plans to continue to implement further changes and improvements during the remainder of the current fiscal year. In addition, management has established procedures to consider the ongoing effectiveness of both the design and operation of our internal control over financial reporting.

We have implemented a number of significant changes and improvements in our internal control over financial reporting during the first and second quarters of fiscal year 2007. Our President and CFO of the Company have taken responsibility to implement changes and improvements in the internal control over financial reporting and remediate the control deficiencies that gave rise to the material weaknesses. Specifically, these changes include:

Management

•  We engaged our new Chief Financial Officer on November 14, 2006.

•  We engaged our Corporate Controller effective December 15, 2006, who was subsequently appointed our new Vice President, Corporate Controller and Chief Accounting Officer on February 6, 2007.

•  We hired a new Vice President, Controller of Accounting.

•  We hired a new Vice President of Tax.

•  We appointed a new Stock Option Plan Administrator in January 2007 to work under the supervision of and report to the new Chief Financial Officer.

•  We are conducting a search for an experienced and well-qualified individual to serve as our General Counsel.

Outside Legal Counsel; Board of Directors and Committees

•  We considered and adopted the recommendations of the Special Committee with respect to procedures, processes and controls related to stock option grants.

•  We hired Morgan, Lewis & Bockius LLP (“Morgan Lewis”) as counsel to the Company with respect to reporting with the SEC, options and related matters, tax matters and corporate governance matters. Morgan Lewis is an experienced counsel with regard to stock plan administration.

•  We added two independent directors to the Board of Directors.

•  The members of the Audit Committee changed in 2007. The Chairman of the Audit Committee resigned from that committee. The Board appointed a new Chairperson of the Audit Committee, with the requisite experience. The Audit Committee revised and adopted its charter to reflect additional policies, processes, procedures and controls.

•  The members of the Compensation Committee completely changed in 2007. The Chairman of the Compensation Committee resigned from the Board, and the Board appointed a new Chairman of the Compensation Committee who had not been previously involved in the option grant process. In addition, the Board expanded the size of the Compensation Committee to three members.

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•  The Compensation Committee suspended the exercise of stock options until we are in compliance with our periodic reporting requirements under the Act, as amended, and retained Pearl, Meyer & Partners (“Pearl Meyer”) to provide consulting advice related to compensation.

•  The Compensation Committee revised and adopted its charter to reflect additional policies, processes, procedures and controls as noted below. For example, minutes of all Compensation Committee meetings are prepared timely and documentation for stock option grants are included as attachments to such minutes. The Company also now requires all stock options to be granted by the Compensation Committee, as now reflected in an amendment to the 2000 Stock Incentive Plan adopted by the Board in March 2007.

•  The Charter of the Compensation Committee requires all grants under the Company’s stock option plans (other than new hire grants) to be made within a designated period following the release of financial results for the prior fiscal quarter or fiscal year.

Policies, Processes, Procedures and Controls

•  We are monitoring industry and regulatory developments in stock option awards, with the intent to implement and maintain best practices with respect to grants of equity-based compensation awards.

•  We have enhanced and standardized the process and documentation required for (i) the granting, exercise and cancellation of all equity-based compensation awards, (ii) analyzing the required allowance for doubtful accounts balance and (iii) the use of third-party firms for valuation and other services.

•  Accounting personnel are now conducting quarterly (or annual) reviews and reconciliations related to equity-based compensation award activity, allowance for doubtful accounts activity and the valuation of goodwill. The CFO and/or the CAO will specifically review and approve each of these calculations.

•  Employees previously involved in key roles or the decision making process for each of the material weaknesses are no longer involved in the process.

•  We have retained third-party stock option software administration professionals to assist with the understanding of our stock option administration software and to train our employees that are involved in the stock option administration process.

•  Our Internal Audit reporting line has been clarified such that the Director of Internal Audit reports directly to the Chairperson of the Audit Committee.

Executive Summary

We have been an education provider for more than 30 years, operating University of Phoenix, Inc. (“UPX”), Institute for Professional Development, Inc. (“IPD”), The College for Financial Planning Institutes Corporation (“CFP”), Western International University, Inc. (“WIU”) and Insight Schools, Inc., all of which are wholly-owned subsidiaries of the Company. We offer innovative and distinctive educational programs and services from high school through college-level at 99 campuses and 163 learning centers in 39 states, Puerto Rico, Alberta, British Columbia, The Netherlands and Mexico, as well as online throughout the world. Our combined Degreed Enrollment for UPX and Axia College as of August 31, 2006 was approximately 282,300. In addition, students are enrolled in WIU, CFP and IPD Client Institutions, and additional non-degreed students are enrolled in UPX. See Customers/Students in Item 1 of this Report. Degreed Enrollments represent individual students enrolled in our degree programs who attended a course during the quarter and did not graduate as of the end of the quarter (including Axia students enrolled in UPX and WIU).

The non-traditional education market is a significant and growing component of the post-secondary education market, which is estimated by the U.S. Department of Education to be a more than $343.0 billion industry. According to the U.S. Department of Education, National Center for Education Statistics, over 6.5 million, or 39%, of all students enrolled in higher education programs are over the age of 24. A large percentage of these students would not be classified as traditional (i.e., living on campus, supported by parents and not working). The non-traditional students typically are looking to improve their skills and enhance their earnings potential within the context of their careers. Between 2002 and 2014, the percentage of 18- to 24-year-old students is expected to

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increase 16%. The market for non-traditional education should continue to increase reflecting the rapidly expanding knowledge-based economy. The National Center for Education Statistics projects an increase of 11% in enrollments of persons under age 25 and an increase of 15% in persons age 25 and over during the period of 2004 to 2014.

During 2006, we experienced the following significant events:

1. Senior Management Changes — three members of our senior management team left Apollo Group. Todd Nelson, our Former President and CEO, Laura Palmer Noone, our former President of UPX, and Bob Carroll, our former Chief Information Officer (“CIO”), were replaced by three very capable and experienced executives: Brian E. Mueller is our new President, Dr. William J. Pepicello is our new President of the University of Phoenix, and Joseph N. Mildenhall is our new CIO. We believe these changes are very positive for our future growth prospects and are confident that those individuals will perform well in these roles.

2. Enrollment and Revenue Growth While Investing in our Business for the Future — Despite the management changes discussed above, we were able to achieve 5.4% average quarterly Degreed Enrollment growth in 2006 versus 2005, which resulted in 10.1% increase in revenue. These increases help fund a significant portion of our investment in product development and marketing and lead generation to ensure our continued growth and viability in the future.

3. Stock Option Investigation — In response to a report published by an investment bank in June 2006, our Board of Directors established the Special Committee and authorized it to retain independent legal counsel, who in turn retained forensic accountants, to assist them in conducting the Independent Review. On December 15, 2006, we announced in a Form 8-K that the Special Committee presented the final factual findings of the Independent Review to the Board of Directors. The findings and results are discussed elsewhere in this document. With the filing of this Annual Report on Form 10-K and all other delinquent filings, we have substantially completed the processes related to the stock option investigation and restatement.

Critical Accounting Policies and Estimates

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We believe that our critical accounting policies, which involve a higher degree of judgments, estimates and complexity, are as follows:

Revenue Recognition

Tuition and other net revenues consist largely of tuition and fees associated with different educational programs as well as related educational resources such as printed text books and access to online materials, and are shown net of discounts relating to a variety of promotional programs including military discounts, special promotional incentives designed to generate new student enrollment, early payment discounts and other incentives.

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The following table presents the most significant components as percentages of total tuition and other, net revenue for the years ended August 31, 2006, 2005 and 2004:

	Year Ended August 31,
	2006					2005					2004
						Restated(1)					Restated(1)
($ in millions)
Tuition revenue	$	2,304.3		93.0	%	$	2,114.1		93.9	%	$	1,679.0		93.3	%
IPD services revenue		74.4		3.0	%		69.5		3.1	%		62.6		3.5	%
Application and related fees		33.8		1.4	%		36.4		1.6	%		28.7		1.6	%
Online course material revenue		138.7		5.6	%		104.5		4.6	%		69.1		3.8	%
Other revenue		31.7		1.3	%		33.8		1.5	%		23.0		1.3	%
Tuition and other revenue, gross		2,582.9		104.3	%		2,358.3		104.7	%		1,862.4		103.5	%
Less: Discounts		(105.4	)	(4.3	)%		(107.2	)	(4.7	)%		(62.4	)	(3.5	)%
Tuition and other revenue, net	$	2,477.5		100.0	%	$	2,251.1		100.0	%	$	1,800.0		100.0	%

(1)	See Note 3, “Restatement of Consolidated Financial Statements,” included in Item 8 of this Form 10-K.
	Tuition revenue encompasses both online and classroom-based learning. Tuition revenue is recognized pro rata, on a weekly basis, over the period of instruction as services are delivered to students. During certain periods of the year and in certain businesses, we adjust our revenue recognition to account for holiday breaks such as Christmas and Thanksgiving.
	IPD services revenues consist of the contractual share of tuition revenues from students enrolled in IPD programs at Client Institutions. IPD contracts with Client Institutions to provide services including, but not limited to, management consulting and training; program development; program administration; instructor and student recruiting; and student accounting, collection and recordkeeping. The contractual share varies by contract and may change over time. Our contractual share ranges between 30% and 50%. Contracts generally have terms of 10 years with provisions for renewal. The portion of service revenue to which we are entitled under the terms of the contracts is recognized on a pro rata basis as defined.
	Application and related fees consist of the fees students pay when submitting an enrollment application and the application costs related to the expenses associated with processing the applications. Both the fees and the costs are deferred and recognized over the average length of time it takes for a student to complete a program of study.
	Online course material revenue relates to online course materials delivered to students over the period of instruction. Revenue associated with these materials is recognized pro rata over the period of the related course to correspond with delivery of the materials to students.
	Other revenue is primarily composed of non-tuition generating revenues, such as renting classroom space and other student support services. This revenue is recognized as these services are provided.

Goodwill

Goodwill is primarily the result of our acquisition of CFP, which was acquired in September 1997. SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) addresses goodwill and other intangible assets that have indefinite useful lives and prescribes that these assets will not be amortized, but instead tested for impairment at least annually or more frequently if circumstances arise indicating potential impairment. If the carrying amount of the reporting unit containing goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized to the extent the “implied fair value” of the goodwill is less than the carrying amount of the goodwill. This pronouncement provides specific guidance on performing impairment tests for goodwill and indefinite-lived intangibles.

The process of evaluating the potential impairment of goodwill requires judgment. In assessing the fair value of our reporting units, we make estimates about the future cash flows of our reporting units. Our cash flow forecast is based on assumptions that are consistent with the plans and estimates the Company is using to manage the

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underlying businesses. Other factors we consider include, but are not limited to, significant underperformance relative to expected historical or projected future operating results, significant changes in the manner or use of the acquired assets or the overall business strategy, and significant negative industry or economic trends. If our estimates or related assumptions change in the future, we may be required to record non-cash impairment charges for these assets. In addition, we make certain judgments about allocating shared assets and liabilities to the balance sheets for our reporting units. We have engaged a third-party valuation expert to assist in evaluating the fair values of our reporting units. We have selected August 31 as the date on which we perform our annual goodwill impairment test.

As of August 31, 2006, we concluded that the goodwill for CFP was impaired in the amount of $20.2 million. This impairment was included in our Other Schools segment In performing our annual impairment test, we assessed the recoverability of the goodwill by evaluating the future discounted cash flows and the fair value of CFP’s tangible and intangible assets. The total discounted future cash flows was determined to be significantly less than our original expectations due to slower than forecasted revenue growth. After the impairment charge, the remaining goodwill totaled $16.9 million, which represents approximately 1.3% of total assets. There are no other long-lived assets at CFP that we believe are impaired. Additional impairments could affect future results of operations.

Share Based Compensation

See also Item 8, Note 3, “Restatement of Consolidated Financial Statements,” for the discussion of the Restatement related to our stock option grants.

Prior to September 1, 2005, we accounted for all employee and non-employee director share based compensation awards using the intrinsic value method under APB 25, and provided the required disclosures in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). On September 1, 2005, we adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective transition method. Under both APB 25 and SFAS 123(R), the requisite service period over which share based compensation is expensed generally equals the vesting periods of the awards.

Under SFAS 123(R), our share based compensation is based on the fair value of the option at the grant date. The fair value is affected by the stock price, as well as the Black-Scholes-Merton option pricing model (the “BSM”) valuation assumptions, including the volatility of the stock price, expected term of the option, risk-free interest rate and dividend yield. We use the BSM for estimating the fair value on the date of the grant of stock options. We used the following weighted average assumptions in the BSM:

	For the Year Ended August 31,
	2006		2005		2004
			Restated(1)
Expected volatility		34.6%		30.2%		38.7%
Expected life (years)		5.9		3.9		3.2
Risk-free interest rate		4.8%		3.4%		3.2%
Dividend yield		0.0%		0.0%		0.0%

(1) See Note 3, “Restatement of Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

The assumptions that have the most significant affect on the fair value of the grants and therefore, share based compensation expense, are the expected life and expected volatility. The following table illustrates how changes to the BSM assumptions would affect the weighted average per option fair values as of the grant date for grants made during fiscal year 2006:

	Expected Volatility
Expected Life (years)	32.5%		34.6%		36.6%
4.4	$	21.62	$	22.36	$	23.09
5.9		25.25		26.06		26.87
7.5		28.25		29.10		29.95

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Sensitivity Analysis — Stock Option Restatement

In connection with the Restatement, we determined that during the period from June 1994 through September 2006, we applied incorrect measurement dates in our accounting for certain stock options.

Based on the available facts and circumstances surrounding our stock option granting practices, we adopted a methodology for determining the most likely measurement dates. We believe the application of this methodology indicated the most likely date when the number of options granted to each employee was approved and the exercise price and number of shares were known with finality. When there was not conclusive documentation or evidence of an earlier date, we believe the best indication of finality and approval is the Equity Edge Record Added Date.

However, we acknowledge that many of the measurement date conclusions are dependent on the facts and circumstances of each stock option grant and involved the application of significant judgment. Because the revised measurement date is subjective, we performed a sensitivity analysis to determine the impact of using alternative measurement dates for certain grants other than the Equity Edge Record Added Date.

We performed the sensitivity analysis to the annual Management and Individual Grants issued under APB 25 for the period June 1994 through August 31, 2005. This sensitivity analysis also included the stock options issued to the Former CEO from June 1994 through October 2002 (the date when we began filing timely Forms 4) to the extent the Equity Edge Record Added Date was used as the most likely measurement date. To perform the sensitivity analysis, we used the highest and lowest market price of APOL or UPX Online stock for the period from the original grant date to the revised measurement date. For the Management and Individual grants issued under APB 25, the Restatement resulted in a pre-tax increase in share based compensation expense of $52.9 million from the amounts previously reported. The use of the low stock prices during the period from the stated grant date to the revised measurement date instead of the price on the revised measurement date would result in no increase in share-based compensation expense from the amounts previously reported. The use of the high stock prices during the period from the stated grant date to the revised measurement date instead of the price on the revised measurement date would result in a pre-tax increase of $8.9 million from the share based compensation expense reflected in the Restatement.

We believe our methodology, based on the best evidence available, results in the most likely measurement date for our stock option grants.

Allowance for Doubtful Accounts

See also Item 8, Note 3, “Restatement of Consolidated Financial Statements,” for the discussion of the Restatement related to our allowance for doubtful accounts.

We extend unsecured credit to a portion of the students who are enrolled at our schools and programs, and based upon past experience and current trends, we establish an allowance for doubtful accounts with respect to tuition receivables. Our allowance estimation methodology has been refined and considers a number of factors that, based on collections history, we believe have an impact on our ability to collect student receivables.

We monitor our collections and write-off experience and periodically determine whether adjustments to our allowance percentage estimates are necessary. As a result, we believe that our allowance estimation methodology reflects historical trends as well as our most recent collections experience and reasonably estimates future losses attributable to receivable write-offs. Our standard allowance estimation methodology is periodically evaluated for sufficiency by management and modified as necessary. Changes to the design of our standard allowance estimation methodology, including our allowance percentage estimates, may impact our estimate of our allowance for doubtful accounts and our financial results.

When a student with Title IV loans withdraws from UPX or WIU, we are sometimes required to return a portion of Title IV funds to the lenders. We are generally entitled to collect these funds from the students, but collection of these receivables is significantly lower than our collection of receivables from students who remain in our educational programs. An increase in the amount of “Return to Lender” and a lower collection rate is factored into the determination of an appropriate allowance amount.

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A one percentage point change in our allowance for doubtful accounts as a percentage of gross student receivables as of August 31, 2006, would have resulted in a pre-tax change in net income of $2.1 million ($1.3 million after-tax). Additionally, if our allowance for doubtful accounts was to change by 1% of tuition and other revenues, net for the fiscal year ended August 31, 2006, we would have recorded a pre-tax change in net income of approximately $24.8 million ($14.9 million after-tax).

Accounts receivable are written off when the account is deemed to be uncollectible. This typically occurs once we have exhausted all efforts to collect the account, which includes collection attempts by our employees and outside collection agencies.

Insurance Reserves

We record liabilities for claims and related expenses that are estimable and probable related to our self-insured medical and dental insurance programs in accordance with the contractual terms of the insurance policies. Accounting for insurance liabilities that are self-insured involves uncertainty because estimates and judgments are used to determine the ultimate liability for reported claims as well as claims incurred but not reported. We consider our historical experience in determining the appropriate insurance reserves. We record reserves for claims incurred but not recorded assuming a 45-day lag in the submission of claims. The following table displays the required increase or decrease to the insurance reserve if current claim lag time trends differed from our historical claim lag time experience:

	Pre-Tax
	(Decrease)
Claim Lag Time	Increase
($ in millions)
30 days	$	(2.7	)
45 days		—
60 days		2.7

Loss Contingencies

In accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), when we become aware of a claim or potential claim, the likelihood of any loss or exposure is assessed. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, we record a liability for the loss. The liability recorded includes probable and estimable legal costs associated with the claim or potential claim. If the loss is not probable or the amount of the loss cannot be reasonably estimated, we disclose the claim if the likelihood of a potential loss is reasonably possible and the amount is material. For matters where no loss contingency is recorded, our policy is to expense legal fees as incurred.

Accounting for Income Taxes

We account for income taxes using the asset and liability method in accordance with SFAS 109, “Accounting for Income Taxes” (“SFAS 109”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted laws and tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that includes the enactment date. Management judgment is required in determining the provision for income taxes and, in particular, whether or not a valuation allowance should be recorded against our deferred tax assets.

In relation to the Restatement, certain tax deductions in prior years with respect to compensation attributable to the exercise of certain stock options by executive officers may be in question. Under IRC Section 162(m), the amount of such deduction per covered executive officer is limited to $1.0 million per year, except to the extent the compensation qualifies as performance-based. Compensation attributable to options with revised measurement dates may not have qualified as performance-based compensation. Accordingly, we may have claimed deductions with respect to those exercised options that were in excess of the limit imposed under IRC Section 162(m). As a result, we have accrued our best estimate with respect to potential tax liabilities, including interest and penalties for

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the taxable years 2003 through 2005 (which are currently our only open years subject to adjustment for federal tax purposes), of approximately $41.1 million as of August 31, 2006. These accruals have been recorded because we believe it is more likely than not that the deductions will be disallowed by the IRS. For prior periods where a liability existed and where the statute of limitations has expired, the accrual relating to that period has been reversed in the appropriate period.

Results of Operations

We have included below a discussion of our operating results and significant items which explain the material changes in our operating results during the last three years. All comparative statements and historical financial information discussed is based on the restated financial statements for the periods presented prior to the fiscal year ended August 31, 2006.

The following table sets forth an analysis of our Consolidated Statements of Income for fiscal years ended 2006, 2005, and 2004:

							% of Revenues									% Change
	Year Ended August 31,						Year Ended August 31,									2006 vs.			2005 vs.
	2006		2005		2004		2006			2005			2004			2005			2004
			Restated(1)							Restated(1)									Restated(1)
($ in millions, except percentages)
Revenues:
Tuition and other, net	$	2,477.5	$	2,251.1	$	1,800.0		100.0	%		100.0	%		100.0	%		10.1	%		25.1	%
Costs and expenses:
Instructional costs and services		1,112.7		956.6		781.4		44.9	%		42.5	%		43.4	%		16.3	%		22.4	%
Selling and promotional		544.7		485.5		383.8		22.0	%		21.6	%		21.3	%		12.2	%		26.5	%
General and administrative		149.9		94.5		84.3		6.1	%		4.2	%		4.7	%		58.6	%		12.1	%
Goodwill impairment		20.2		—		—		0.8	%		—			—
Share based compensation(2)		—		16.9		100.3		—			0.7	%		5.6	%
		1,827.5		1,553.5		1,349.8		73.8	%		69.0	%		75.0	%		17.6	%		15.1	%
Income from operations		650.0		697.6		450.2		26.2	%		31.0	%		25.0	%		(6.8	)%		55.0	%
Interest income and other, net		18.1		16.8		16.3		0.7	%		0.7	%		0.9	%		7.7	%		3.1	%
Income before income taxes		668.1		714.4		466.5		26.9	%		31.7	%		25.9	%		(6.5	)%		53.1	%
Provision for income taxes		253.3		286.5		186.4		10.2	%		12.7	%		10.4	%		(11.6	)%		53.7	%
Net income	$	414.8	$	427.9	$	280.1		16.7	%		19.0	%		15.5	%		(3.1	)%		52.8	%

(1)	See Note 3, “Restatement of Consolidated Financial Statements,” included in Item 8 of this Form 10-K.
(2)	Share based compensation in 2005 and 2004 is related to the 2004 conversion of the UPX Online stock options into Apollo Group Class A stock options. Share based compensation expense resulting from the revised measurement dates is included in instructional costs and services, selling and promotional, and general and administrative expenses.

We categorize our expenses as instructional costs and services, selling and promotional, and general and administrative.

Instructional costs and services at UPX, WIU, and the CFP consist primarily of costs related to the delivery and administration of our educational programs and include faculty compensation, administrative salaries for departments that provide service directly to the students, financial aid processing costs, the costs of educational materials sold, facility leases and other occupancy costs, bad debt expense, technology spending in support of student systems and depreciation and amortization of property and equipment. UPX and WIU faculty members are primarily contracted for one course offering at a time. All classroom facilities are leased or, in some cases, are provided by the students’ employers at no charge to us. Instructional costs and services at IPD consist primarily of program

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administration, student services, and classroom lease expense. Most of the other instructional costs for IPD-assisted programs, including faculty, financial aid processing, and other administrative salaries, are the responsibility of IPD’s Client Institutions.

Selling and promotional costs consist primarily of compensation and employee benefits for enrollment counselors, management and support staff, corporate marketing, advertising, production of marketing materials, and other costs related to selling and promotional functions. We expense selling and promotional costs as incurred.

General and administrative costs consist primarily of administrative salaries, occupancy costs, depreciation and amortization, and other related costs for departments such as executive management, information systems, corporate accounting, human resources, and other departments that do not provide direct services to our students. To the extent possible, we centralize these services to avoid duplication of effort.

Tuition and Other, Net Revenues

Information about our tuition and other net revenues by reportable segment on a percentage basis is as follows:

	Year Ended August 31,
	2006			2005			2004
UPX		83.7	%		89.5	%		94.4	%
Other Schools		16.2	%		10.4	%		5.4	%
Corporate		0.1	%		0.1	%		0.2	%
Tuition and other, net		100.0	%		100.0	%		100.0	%

Our tuition and other revenues, net increased by 10.1% in 2006 primarily due to a 5.4% increase in average quarterly Degreed Enrollments and selective tuition price increases depending on the geographic area and program. These increases include a 113.0% increase in average quarterly Degreed Enrollments in our lower-tuition associate’s degree programs. As of August 31, 2006, 26.2% of our students are Degreed Enrollments in associates degree programs compared with 15.4% of our students as of August 31, 2005.

Our tuition and other revenues, net increased by 25.1% in 2005 primarily due to an 18.2% increase in average quarterly Degreed Enrollments and generally a 4-6% increase in average tuition prices (depending on the geographic area and program). The remaining increase is related to increased pricing and higher sales of online course materials.

Tuition and other revenues, net at Other Schools increased as a percentage of total revenues in 2005 and 2006 due to enrollment in associates degree programs at Axia College of WIU during 2005. Axia College began offering these programs in September 2004. In March 2006 (our third quarter of fiscal 2006), we began offering all Axia College programs within UPX, instead of WIU. Therefore, we expect the percentage of revenue within Other Schools to decrease in fiscal 2007.

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Instructional Costs and Services

Instructional costs and services increased by 16.3% in 2006 versus 2005, and 22.4% in 2005 versus 2004. The following table sets forth the increases in significant components of instructional costs and services:

							% of Revenues									% Change
	Year Ended August 31,						Year Ended August 31,									2006 vs.			2005 vs.
	2006		2005		2004		2006			2005			2004			2005			2004
			Restated (1)							Restated (1)									Restated (1)
($ in millions)
Employee compensation and related expenses	$	382.3	$	343.9	$	282.5		15.4	%		15.3	%		15.7	%		11.2	%		21.7	%
Faculty compensation		212.3		195.1		154.2		8.6	%		8.7	%		8.6	%		8.8	%		26.5	%
Classroom lease expenses and depreciation		193.4		171.3		145.1		7.8	%		7.6	%		8.1	%		12.9	%		18.1	%
Other instructional costs and services		158.2		142.0		122.3		6.4	%		6.3	%		6.8	%		11.4	%		16.1	%
Bad debt expense		101.6		57.2		31.1		4.1	%		2.5	%		1.7	%		77.6	%		83.9	%
Financial aid processing costs		52.5		43.3		32.4		2.1	%		1.9	%		1.8	%		21.2	%		33.6	%
Share based compensation		12.4		3.8		4.0		0.5	%		0.2	%		0.2	%		226.3	%		(5.0	)%
U.S. Department of Education settlement		—		—		9.8		N/A			N/A			0.5	%		N/A			N/A
Instructional costs and services	$	1,112.7	$	956.6	$	781.4		44.9	%		42.5	%		43.4	%		16.3	%		22.4	%

(1) See Note 3, “Restatement of Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

Instructional costs and services as a percentage of tuition and other net revenues increased in 2006 versus 2005 due primarily to an increase in bad debt expense. The increase is the result of increased aged accounts receivable and write-offs as a result of increased student withdrawals and an increase in “Return to Lender” dollars for students who withdraw from UPX or WIU. When a student withdraws from UPX or WIU, we are sometimes required to return a certain portion of any disbursed student financial aid loans to the lender (“Return to Lender” dollars for Title IV recipients). We are generally entitled to collect these funds from the students, but collection on these receivables is significantly lower than receivables for students who remain in our educational programs. During the second half of our fiscal 2004 and the first quarter of 2005, we were required by regulatory authorities to modify our Return to Lender calculations when a student withdraws from UPX or WIU. These changes forced us to return additional dollars to the lenders than had previously been required. We attempt to collect these funds from our students but as a result of the increased “Return to Lender” dollars, our bad debt expense significantly increased in 2005 and 2006.

Instructional costs and services as a percentage of tuition and other net revenues decreased in 2005 versus 2004 due primarily to greater tuition and other net revenues being spread over the fixed costs related to centralized student services. Additionally, a $9.8 million settlement with the U.S. Department of Education in 2004 related to the U.S. Department of Education’s program review contributed to the decline. Finally, the impact of the changes related to “Return to Lender” dollars discussed above increased bad debt expense in 2005 versus 2004.

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Selling and Promotional Expenses

Selling and promotional expenses increased by 12.2% in 2006 versus 2005, and 26.5% in 2005 versus 2004. The following table sets forth the increases in significant components of selling and promotional expenses:

							% of Revenues									% Change
	Year Ended August 31,						Year Ended August 31,									2006 vs.			2005 vs.
	2006		2005		2004		2006			2005			2004			2005			2004
			Restated (1)							Restated (1)									Restated (1)
($ in millions)
Enrollment advisors’ compensation and related expenses	$	254.3	$	204.6	$	155.6		10.3	%		9.1	%		8.6	%		24.3	%		31.5	%
Advertising		231.6		224.0		174.6		9.3	%		10.0	%		9.7	%		3.4	%		28.3	%
Other selling and promotional expenses		56.5		56.2		52.9		2.3	%		2.5	%		2.9	%		0.5	%		6.2	%
Share based compensation		2.3		0.6		0.7		0.1	%		0.0	%		0.1	%		283.3	%		(14.3	)%
Selling and promotional expenses	$	544.7	$	485.4	$	383.8		22.0	%		21.6	%		21.3	%		12.2	%		26.5	%

(1) See Note 3, “Restatement of Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

Selling and promotional expenses increased as a percentage of revenue in 2006 versus 2005 and in 2005 versus 2004 due primarily to an increase in the number of enrollment advisors to support leads for our Internet advertising campaign and the establishment of a national qualifying center for efficiency and timelines in lead distribution. We also increased the entry-level pay for enrollment advisors in an attempt to bring in more highly qualified staff. Advertising costs increased in 2005 over 2004 as a result of a planned focus on investment in increasing Internet-based leads.

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General and Administrative Expenses

General and administrative expenses increased 58.6% in 2006 versus 2005, and 12.1% in 2005 versus 2004. The following table sets forth the increases in significant components of general and administrative expenses:

							% of Revenues									% Change
	Year Ended August 31,						Year Ended August 31,									2006 vs.			2005 vs.
	2006		2005		2004		2006			2005			2004			2005			2004
			Restated (1)							Restated (1)									Restated (1)
($ in millions)
Employee compensation and related expenses	$	73.7	$	41.0	$	41.8		3.0	%		1.8	%		2.3	%		79.8	%		(1.9	)%
Other general and administrative expenses		27.2		22.0		20.0		1.1	%		1.0	%		1.1	%		23.6	%		10.0	%
Administrative space and depreciation		22.7		18.7		11.9		0.9	%		0.8	%		0.7	%		21.4	%		57.1	%
Legal, audit, and corporate insurance		13.3		9.4		7.0		0.6	%		0.4	%		0.4	%		41.5	%		34.3	%
Share based compensation		13.0		3.4		3.6		0.5	%		0.2	%		0.2	%		282.4	%		(5.6	)%
General and administrative expenses	$	149.9	$	94.5	$	84.3		6.1	%		4.2	%		4.7	%		58.6	%		12.1	%

(1) See Note 3, “Restatement of Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

Included in 2006 employee compensation and related expenses are severance expenses related to the Former CEO of $26.0 million. Excluding this amount, general and administrative expenses increased $29.4 million, or 31.1%. This remaining increase is primarily due to:

•  $3.9 million increase in legal, audit, and corporate insurance expenses primarily due to legal defense costs associated with class action complaints;

•  $9.6 million increase in share based compensation charges primarily resulting from the adoption of SFAS 123(R);

•  $4.0 million of increased administrative space and depreciation costs due to higher information technology spending primarily as a result of the opening of a new data center in August 2005; and

•  other increases including increased employee headcount to support our growth in 2006.

General and administrative expenses increased $10.2 million in 2005 versus 2004 due primarily to increases in employee compensation and related expenses and administrative space and depreciation, as a result of our new data center that was completed in the third quarter of 2005, and an increase in legal, audit and corporate insurance costs associated with our class action complaints.

Goodwill Impairment

Goodwill is primarily the result of our acquisition of CFP in September 1997. As of August 31, 2006, we concluded that the goodwill for CFP was impaired in the amount of $20.2 million. This impairment was included in our Other Schools segment. In performing our annual impairment test, we assessed the recoverability of the goodwill by evaluating the future discounted cash flows and the fair value of CFP’s tangible and intangible assets. The total discounted future cash flows was determined to be significantly less than our original expectations due to slower than forecasted revenue growth. After the impairment charge, our remaining goodwill totaled $16.9 million, which represents approximately 1.3% of total assets. There are no other long-lived assets at CFP that we believe are impaired. Additional impairment of this goodwill could affect future results of operations.

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Share Based Compensation — Conversion of UPX Stock Options

The conversion of UPX Online common stock on August 27, 2004, required us to record a share based compensation charge related to the conversion of UPX Online stock options into Apollo Group Class A stock options. As required by Emerging Issues Task Force (“EITF”) Statement No. 00-23 “Issues Related to the Accounting for Stock Compensation under APB 25 and FASB Interpretation No. 44” (“EITF 00-23”), we recognized pre-tax share based compensation expense of $16.9 million, and $100.3 million in 2005 and 2004, respectively, as options vested.

Interest Income and Other, Net

Interest income and other, net increased $1.3 million in 2006 versus 2005, and increased $0.5 million in 2005 versus 2004. The increase in 2006 was primarily attributable to an increase in interest rates partially offset by a decrease in average cash and cash equivalents, restricted cash and marketable securities. The $0.5 million increase in 2005 versus 2004 includes a $1.7 million non-cash impairment in 2004 for the write down of an investment in a venture capital fund. Excluding this non-cash impairment, interest income and other, net would have decreased in 2005 versus 2004 by $1.2 million. The decrease in 2005 was primarily attributable to a decrease in cash and cash equivalents, restricted cash and marketable securities between periods primarily as a result of stock repurchases and capital expenditures, partially offset by increases in overall interest rates.

Provision for Income Taxes

Our effective income tax rate decreased to 37.9% in 2006, from 40.1% in 2005, primarily as a result of a reduction in non-deductible compensation and state taxes, combined with an increase in tax-exempt interest. Our effective income tax rate was essentially flat between 2005 and 2004.

Liquidity, Capital Resources, and Financial Position

Based on past performance and current expectations, we believe that our cash and cash equivalents, marketable securities, and cash generated from operations will satisfy our working capital needs, capital expenditures, stock repurchases, commitments, acquisitions and other liquidity requirements associated with our existing operations through at least the next 12 months and the foreseeable future. We believe that the most strategic uses of our cash resources include potential acquisition opportunities, possible repurchase of shares, and start-up costs associated with new campuses. There are no transactions, arrangements, and other relationships with unconsolidated entities or other persons of whom we are aware of that are reasonably likely to materially affect liquidity or the availability of our requirements for capital during at least the next 12 months.

Cash and Cash Equivalents and Marketable Securities

Cash and cash equivalents and marketable securities decreased $49.9 million, or 10.9%, to $408.7 million as of August 31, 2006 from $458.6 million as of August 31, 2005. Cash and cash equivalents and marketable securities represented 35.8% and 31.9% of our total assets as of August 31, 2005 and August 31, 2006, respectively. The reduction was primarily due to $514.9 million of repurchases of Apollo Group Class A common stock and $111.2 million of capital expenditures, partially offset by cash provided by operating activities of $551.0 million and cash provided by the issuance of Apollo Group Class A common stock of $29.0 million.

69

Cash Flows

Operating Activities.  Operating activities provided $551.0 million in cash during 2006 compared to providing $549.6 million in 2005. Included below is a summary of our operating cash flows:

	Year Ended August 31,
	2006			2005
				Restated
($ in millions)
Net income	$	414.8		$	427.9
Non-cash items		180.0			174.0
Changes in certain operating assets and liabilities		(43.8	)		(52.3	)
Net cash from operating activities	$	551.0		$	549.6

Our non-cash items primarily consist of the following:

	Year Ended August 31,
	2006			2005
				Restated
($ in millions)
Share based compensation	$	27.7		$	24.8
Excess tax benefits from share based compensation		(17.5	)		—
Tax benefits from stock options exercised		—			42.6
Depreciation and amortization		67.3			45.6
Provision for uncollectible accounts receivable		101.0			57.1
Other, net		1.5			3.9
	$	180.0		$	174.0

Changes in certain operating assets and liabilities primarily consist of the following (in millions):

	Year Ended August 31,
	2006			2005
				Restated
($ in millions)
Accounts receivable, net	$	(89.0	)	$	(99.9	)
Accounts payable and accrued liabilities		20.4			(20.1	)
Student deposits		11.5			31.0
Deferred revenue		1.9			26.3
Other, net		11.4			10.4
	$	(43.8	)	$	(52.3	)

Days sales outstanding (“DSO”) in accounts receivable as of August 31, 2006 and 2005, were 32 days and 34 days, respectively. Our accounts receivable and DSO are primarily affected by collections performance.

Investing Activities.  Investing activities provided $95.6 million in cash during 2006 compared to $193.5 million in 2005. The 2006 amount primarily includes net maturities of marketable securities including auction rate securities of $216.2 million, partially offset by $111.2 million of capital expenditures, which includes $66.6 million related to the build out of our new corporate headquarters building in Phoenix, Arizona. The 2005 amount primarily includes net maturities of marketable securities including auction rate securities of $286.6 million, partially offset by $94.5 million of capital expenditures, including $5.7 million for our new corporate headquarters. We expect to

70

spend $90.0 to $110.0 million on capital expenditures in 2007, of which approximately $40-50 million will be utilized for our new corporate headquarters building.

On June 20, 2006, we entered into an option agreement (which was amended in November 2006) with Macquarie Riverpoint AZ, LLC (“Macquarie”). The option agreement allows us to execute a sale and simultaneous leaseback of the new corporate headquarters buildings located in Phoenix, Arizona. We anticipate beginning to occupy this building late in fiscal year 2007 and finishing construction by the end of the third quarter of 2008. In the third quarter of 2008, we anticipate executing the sale lease-back option. When the sale-leaseback option is exercised, we anticipate receiving approximately $170 million in cash for the building and land, and expect to generate a gain on the sale for approximately $20-30 million. The gain will be deferred over the 12-year term of the lease agreement.

Financing Activities.  Financing activities used $474.8 million of cash during 2006 compared to $755.4 million in 2005. These amounts primarily relate to repurchases of our Class A common stock, net of proceeds from stock option exercises.

The Board of Directors has authorized us to repurchase outstanding shares of Apollo Group Class A common stock, from time to time, depending on market conditions and other considerations.

Shares of Apollo Group Class A common stock repurchased and reissued, and the related total cost, for the last two years is as follows:

									Maximum
							Average		Value
	Total # of						Price		of Shares
	Shares						Paid per		Available for
	Repurchased			Cost			Share		Repurchase
(Numbers in millions, except per share amounts)
Treasury stock as of August 31, 2004		—		$	—		$	—	$	109.2
New authorizations		—			—			—		750.0
Shares repurchased		11.0			808.2			73.14		(808.2	)
Shares reissued		(2.2	)		(162.5	)		72.75		—
Treasury stock as of August 31, 2005		8.8			645.7			73.24		51.0
New authorizations		—			—			—		600.0
Shares repurchased		8.2			514.9			63.00		(514.9	)
Shares reissued		(1.5	)		(106.6	)		69.15		—
Treasury stock as of August 31, 2006		15.5		$	1,054.0		$	68.23	$	136.1

Contractual Obligations and Other Commercial Commitments

The following table lists our contractual cash obligations as of August 31, 2006:

	Payments Due by Fiscal Year
	2007		2008-2009		2010-2011		Thereafter		Total
($ in millions)
Operating lease obligations	$	132.1	$	249.0	$	187.9	$	146.3	$	715.3
Stadium naming rights(1)		7.2		12.1		12.8		122.4		154.5
Capital lease obligations		0.7		1.0		0.6		—		2.3
Purchase obligations(2)		41.1		—		—		—		41.1
Other long-term obligations(3)		3.0		—		—		3.0		6.0
Total	$	184.1	$	262.1	$	201.3	$	271.7	$	919.2

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(1)	Amounts consist of an agreement for 20-year naming rights to the Glendale, Arizona Sports Complex
(2)	Amounts primarily consist of purchase obligations for construction of buildings for future expansion.
(3)	Amounts primarily consist of deferred compensation payments due to John G. Sperling, our Founder.

We have no other material commercial commitments not included in the above table.

Recent Accounting Pronouncements

See Note 2 of our financial statements included in Part II, Item 8, which is incorporated by reference in this Part II, Item 7.

Item 7A — Quantitative and Qualitative Disclosures about Market Risk

Impact of Inflation

Inflation has not had a significant impact on our historical operations.

Interest Rate Risk

Our portfolio of marketable securities includes numerous issuers, varying types of securities, and varying maturities. We intend to hold all securities, other than auction-rate securities, to maturity. During the fiscal year ended August 31, 2006, interest income earned on our portfolio of marketable securities would have decreased $3.0 to $4.0 million due to a 100 basis point decrease in interest rates. We manage this interest rate risk by monitoring market conditions and the value of these assets. We have no significant short-term or long-term debt; therefore, we do not face any other significant interest rate risk.

Concentration of Credit Risk

A substantial portion of credit extended to students is paid through the students’ participation in various federal financial aid programs authorized by Title IV of the Higher Education Act of 1965, as reauthorized (the “Higher Education Act”), which the Company refers to as “Title IV programs.” The following table summarizes the Company’s total revenues from Title IV programs for the fiscal years ended 2006, 2005, and 2004.

	2006			2005			2004
($ in millions)
Total Title IV funding received	$	1,536.6		$	1,345.4		$	1,004.9
Total tuition and other revenues, net		2,477.5			2,251.1			1,800.0
Total Title IV funding as a percentage of total revenue		62.0	%		59.8	%		55.8	%

We extend unsecured credit to a portion of the students enrolled. Receivables are not collateralized; however, credit risk is reduced as the amounts owed by any individual student is small relative to the total tuition receivable and the customer base is geographically diverse.

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Item 8 — Financial Statements and Supplementary Data

	Page
Report of Independent Registered Public Accounting Firm		74
Consolidated Balance Sheets		75
Consolidated Statements of Income		76
Consolidated Statements of Comprehensive Income		77
Consolidated Statements of Changes in Shareholders’ Equity		78
Consolidated Statements of Cash Flows		80
Notes to Consolidated Financial Statements		81

73

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Apollo Group, Inc. and Subsidiaries

Phoenix, Arizona

We have audited the accompanying consolidated balance sheets of Apollo Group, Inc. and subsidiaries (the “Company”) as of August 31, 2006 and 2005 and the related consolidated statements of income, other comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended August 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Apollo Group, Inc. and subsidiaries as of August 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” on September 1, 2005.

As discussed in Note 3 to the consolidated financial statements, the accompanying fiscal 2005 and 2004 consolidated financial statements have been restated.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of August 31, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 21, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of material weaknesses.

/s/  DELOITTE & TOUCHE LLP

Phoenix, Arizona

May 21, 2007

74

APOLLO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	As of August 31,
	2006			2005
				Restated(1)
($ in thousands)
Assets:
Current assets
Cash and cash equivalents	$	309,058		$	137,184
Restricted cash		238,267			227,102
Marketable securities, current portion		45,978			224,112
Accounts receivable, net		160,583			172,602
Deferred tax assets, current portion		32,622			25,506
Other current assets		16,424			22,643
Total current assets		802,932			809,149
Property and equipment, net		328,440			270,645
Marketable securities, less current portion		53,692			97,350
Goodwill		16,891			37,096
Deferred tax assets, less current portion		53,131			40,542
Other assets (includes receivable from related party of $15,758 and $14,843 as of 2006 and 2005, respectively)		27,919			26,766
Total assets	$	1,283,005		$	1,281,548
Liabilities and Shareholders’ Equity:
Current liabilities
Accounts payable	$	61,289		$	40,129
Accrued liabilities		73,513			61,315
Income taxes payable		47,812			69,163
Current portion of long-term liabilities		23,101			19,499
Student deposits		254,130			242,675
Current portion of deferred revenue		135,911			133,964
Total current liabilities		595,756			566,745
Deferred revenue, less current portion		384			351
Long-term liabilities, less current portion		82,492			80,232
Total liabilities		678,632			647,328
Commitments and contingencies (Notes 11, 15, and 18)
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued		—			—
Apollo Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 188,004,000 and 188,002,000 issued as of August 31, 2006 and 2005, respectively, and 172,555,000 and 179,184,000 outstanding as of August 31, 2006 and 2005, respectively		103			103
Apollo Group Class B voting common stock, no par value, 3,000,000 shares authorized; 475,000 and 477,000 issued and outstanding as of August 31, 2006 and 2005, respectively		1			1
Additional paid-in capital		—			—
Apollo Group Class A treasury stock, at cost, 15,449,000 and 8,818,000 shares as of August 31, 2006 and 2005, respectively		(1,054,046	)		(645,742	)
Retained earnings		1,659,349			1,280,996
Accumulated other comprehensive loss		(1,034	)		(1,138	)
Total shareholders’ equity		604,373			634,220
Total liabilities and shareholders’ equity	$	1,283,005		$	1,281,548

(1) See Note 3, “Restatement of Consolidated Financial Statements.”

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

75

APOLLO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Year Ended August 31,
	2006		2005		2004
			Restated (1)
($ in thousands, except per share amounts)
Revenues:
Tuition and other, net	$	2,477,533	$	2,251,114	$	1,800,047
Costs and expenses:
Instructional costs and services		1,112,660		956,631		781,437
Selling and promotional		544,706		485,451		383,800
General and administrative		149,928		94,485		84,326
Goodwill impairment		20,205		—		—
Share based compensation(2)		—		16,895		100,283
Total costs and expenses		1,827,499		1,553,462		1,349,846
Income from operations		650,034		697,652		450,201
Interest income and other, net		18,054		16,787		16,305
Income before income taxes		668,088		714,439		466,506
Provision for income taxes		253,255		286,506		186,421
Net income	$	414,833	$	427,933	$	280,085
Income attributed to Apollo Group Class A common stock:
Net income	$	414,833	$	427,933	$	280,085
Stock dividends paid(2)		—		—		(114,155	)
Income attributed to UPX Online common shareholders		—		—		(24,195	)
Income attributed to Apollo Group Class A common shareholders	$	414,833	$	427,933	$	141,735
Income attributed to UPX Online common stock:(2)
Net income					$	24,195
Stock dividends paid(2)						114,155
Income attributed to UPX Online common shareholders					$	138,350
Earnings per share attributed to Apollo Group Class A common stock:
Basic income per share	$	2.38	$	2.34	$	0.80
Diluted income per share	$	2.35	$	2.30	$	0.79
Basic weighted average shares outstanding		174,351		182,928		176,175
Diluted weighted average shares outstanding		176,205		186,066		178,914
Earnings per share attributed to UPX Online common stock:(2)
Basic income per share					$	8.74
Diluted income per share					$	8.10
Basic weighted average shares outstanding						15,825
Diluted weighted average shares outstanding						17,074

(1)	See Note 3, “Restatement of Consolidated Financial Statements.”
(2)	Related to the August 27, 2004, conversion of UPX Online common stock outstanding and stock options to Apollo Group Class A common stock outstanding and stock options. Share based compensation expense resulting from the revised measurement dates is included in instructional costs and services, selling and promotional, and general and administrative expenses.

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

76

APOLLO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Year Ended August 31,
	2006		2005			2004
			Restated(1)
($ in thousands)
Net income	$	414,833	$	427,933		$	280,085
Other comprehensive income (net of tax):
Currency translation gain (loss)		104		(573	)		(241	)
Comprehensive income	$	414,937	$	427,360		$	279,844

(1) See Note 3, “Restatement of Consolidated Financial Statements.”

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

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APOLLO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

	Common Stock														Treasury Stock
	Apollo Group									UPX Online					Apollo Group
	Class A Nonvoting				Class B Voting					Nonvoting					Class A						UPX Online
			Stated					Stated					Stated					Stated						Stated
	Shares		Value		Shares			Value		Shares			Value		Shares			Value			Shares			Value
($ in thousands)
Balance as of August 31, 2003 (As Previously Reported)		177,389	$	103		477		$	1		15,659		$	—		2,103		$	(27,100	)		86		$	(4,601	)
Cumulative effect of restatement on prior years		—		—		—			—		—			—		—			—			—			—
Balance as of August 31, 2003 (Restated(1))		177,389		103		477			1		15,659			—		2,103			(27,100	)		86			(4,601	)
Treasury stock purchases		—		—		—			—		(1,484	)		—		5,674			(443,500	)		1,484			(117,996	)
Treasury stock issued under stock purchase plans		—		—		—			—		77			—		(73	)		2,057			(37	)		2,746
Treasury stock issued under stock option plans		—		—		—			—		616			—		(1,300	)		27,264			(187	)		11,735
Tax benefits of stock options exercised (Restated)		—		—		—			—		—			—		—			—			—			—
Conversion of UPX Online common stock (Restated)		10,178		—		—			—		(14,868	)		—		(6,404	)		441,279			(1,346	)		108,116
Stock dividends paid		—		—		—			—		—			—		—			—			—			—
Share based compensation (Restated)		—		—		—			—		—			—		—			—			—			—
Currency translation adjustment, net of tax		—		—		—			—		—			—		—			—			—			—
Net income (Restated)		—		—		—			—		—			—		—			—			—			—
Balance as of August 31, 2004 (Restated(1))		187,567		103		477			1		—			—		—			—			—			—
Treasury stock purchases		—		—		—			—		—			—		11,051			(808,192	)		—			—
Common and treasury stock issued under stock purchase plans (Restated)		41		—		—			—		—			—		(122	)		8,928			—			—
Common and treasury stock issued under stock option plans (Restated)		394		—		—			—		—			—		(2,111	)		153,522			—			—
Tax benefits of stock options exercised (Restated)		—		—		—			—		—			—		—			—			—			—
Share based compensation (Restated)		—		—		—			—		—			—		—			—			—			—
Currency translation adjustment, net of tax		—		—		—			—		—			—		—			—			—			—
Net income (Restated)		—		—		—			—		—			—		—			—			—			—
Balance as of August 31, 2005 (Restated(1))		188,002		103		477			1		—			—		8,818			(645,742	)		—			—
Treasury stock purchases		—		—		—			—		—			—		8,173			(514,931	)		—			—
Treasury stock issued under stock purchase plans		—		—		—			—		—			—		(147	)		10,102			—			—
Treasury stock issued under stock option plans		—		—		—			—		—			—		(1,395	)		96,525			—			—
Tax benefits of stock options exercised		—		—		—			—		—			—		—			—			—			—
Share based compensation		—		—		—			—		—			—		—			—			—			—
Cash paid for cancellation of vested stock options		—		—		—			—		—			—		—			—			—			—
Conversion of Apollo Group Class B common stock		2		—		(2	)		—		—			—		—			—			—			—
Currency translation adjustment, net of tax		—		—		—			—		—			—		—			—			—			—
Net income		—		—		—			—		—			—		—			—			—			—
Balance as of August 31, 2006		188,004	$	103		475		$	1		—		$	—		15,449		$	(1,054,046	)		—		$	—

(1) See Note 3, “Restatement of Consolidated Financial Statements.”

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

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APOLLO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CONTINUED)

							Accumulated
	Additional						Other			Total
	Paid-in			Retained			Comprehensive			Shareholders’
	Capital			Earnings			Income			Equity
($ in thousands)
Balance as of August 31, 2003 (As Previously Reported)	$	293,650		$	765,196		$	(324	)	$	1,026,925
Cumulative effect of restatement on prior years		20,375			(62,504	)		—			(42,129	)
Balance as of August 31, 2003 (Restated(1))		314,025			702,692			(324	)		984,796
Treasury stock purchases		—			—			—			(561,496	)
Treasury stock issued under stock purchase plans		4,154			—			—			8,957
Treasury stock issued under stock option plans		3,098			—			—			42,097
Tax benefits of stock options exercised (Restated)		32,161			—			—			32,161
Conversion of UPX Online common stock (Restated)		(549,395	)		—			—			—
Stock dividends paid		114,155			(114,155	)		—			—
Share based compensation (Restated)		108,606			—			—			108,606
Currency translation adjustment, net of tax		—			—			(241	)		(241	)
Net income (Restated)		—			280,085			—			280,085
Balance as of August 31, 2004 (Restated(1))		26,804			868,622			(565	)		894,965
Treasury stock purchases		—			—			—			(808,192	)
Common and treasury stock issued under stock purchase plans (Restated)		1,317			—			—			10,245
Common and treasury stock issued under stock option plans (Restated)		(95,448	)		(15,559	)		—			42,515
Tax benefits of stock options exercised (Restated)		42,568			—			—			42,568
Share based compensation (Restated)		24,759			—			—			24,759
Currency translation adjustment, net of tax		—			—			(573	)		(573	)
Net income (Restated)		—			427,933			—			427,933
Balance as of August 31, 2005 (Restated(1))		—			1,280,996			(1,138	)		634,220
Treasury stock purchases		—			—			—			(514,931	)
Treasury stock issued under stock purchase plans		(2,389	)		—			—			7,713
Treasury stock issued under stock option plans		(38,787	)		(36,480	)		—			21,258
Tax benefits of stock options exercised		19,772			—			—			19,772
Share based compensation		27,735			—			—			27,735
Cash paid for cancellation of vested stock options		(6,331	)		—			—			(6,331	)
Conversion of Apollo Group Class B common stock		—			—			—			—
Currency translation adjustment, net of tax		—			—			104			104
Net income		—			414,833			—			414,833
Balance as of August 31, 2006	$	—		$	1,659,349		$	(1,034	)	$	604,373

(1) See Note 3, “Restatement of Consolidated Financial Statements.”

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

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APOLLO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended August 31,
	2006			2005			2004
				Restated(1)
($ in thousands)
Cash flows provided by operating activities:
Net income	$	414,833		$	427,933		$	280,085
Adjustments to reconcile net income to net cash provided by operating activities:
Share based compensation		27,735			7,864			8,323
Share based compensation — conversion of UPX Online stock options		—			16,895			100,283
Tax benefits from stock options exercised		—			42,568			32,161
Excess tax benefits from share based compensation		(17,476	)		—			—
Depreciation and amortization		67,290			45,592			45,787
Amortization of marketable securities discount and premium, net		929			3,586			6,121
Provision for uncollectible accounts receivable		101,038			57,113			30,981
Goodwill impairment		20,205			—			—
Investment impairment		—			—			1,700
Deferred income taxes		(19,705	)		333			(40,961	)
Changes in assets and liabilities:
Accounts receivable, net		(89,019	)		(99,902	)		(49,379	)
Other assets		5,609			(2,872	)		(4,664	)
Accounts payable and accrued liabilities		20,424			(20,078	)		34,122
Income taxes payable		(1,579	)		4,355			21,774
Student deposits		11,455			31,008			54,489
Deferred revenue		1,947			26,288			19,880
Other liabilities		7,322			8,921			5,506
Net cash provided by operating activities		551,008			549,604			546,208
Cash flows provided by investing activities:
Additions to property and equipment		(44,629	)		(88,802	)		(76,526	)
Purchase of land and buildings related to UPX Online expansion in 2004 and new headquarters building in 2006		(66,611	)		(5,680	)		(33,003	)
Proceeds from sale-leaseback		—			—			31,278
Purchase of marketable securities including auction rate securities		(1,420,055	)		(475,009	)		(1,132,801	)
Maturities of marketable securities including auction rate securities		1,636,283			761,654			1,282,700
Other change in restricted cash		(6,530	)		5,000			1,042
Purchase of other assets		(2,881	)		(3,657	)		(3,081	)
Net cash provided by investing activities		95,577			193,506			69,609
Cash flows used in financing activities:
Repurchase of Apollo Group Class A common stock		(514,931	)		(808,192	)		(443,500	)
Issuance of Apollo Group Class A common stock		28,971			52,760			36,183
Cash paid for cancellation of vested options		(6,331	)		—			—
Excess tax benefits from share based compensation		17,476			—			—
Repurchase of UPX Online common stock		—			—			(117,996	)
Issuance of UPX Online common stock		—			—			14,871
Net cash used in financing activities		(474,815	)		(755,432	)		(510,442	)
Currency translation gain (loss)		104			(573	)		(241	)
Net increase (decrease) in cash and cash equivalents		171,874			(12,895	)		105,134
Cash and cash equivalents, beginning of year		137,184			150,079			44,945
Cash and cash equivalents, end of year	$	309,058		$	137,184		$	150,079
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes	$	273,915		$	239,327		$	173,715
Supplemental disclosure of non-cash investing activities
Deferred gain on sale-leaseback	$	—		$	—		$	12,967
Credits received for tenant improvements	$	11,709		$	16,429		$	19,372
Purchases of property and equipment included in accounts payable	$	12,934		$	2,352		$	7,415

(1) See Note 3, “Restatement of Consolidated Financial Statements.”

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 1.   Nature of Operations

Apollo Group, Inc. has been an education provider for more than 30 years, operating University of Phoenix, Inc. (“UPX”), Institute for Professional Development, Inc. (“IPD”), The College for Financial Planning Institutes Corporation (“CFP”), Western International University, Inc. (“WIU”) and Insight Schools, Inc. (“Insight”), all of which are wholly-owned subsidiaries of the Company. The Company offers innovative and distinctive educational programs and services from high school through college-level at 99 campuses and 163 learning centers in 39 states, Puerto Rico, Alberta, British Columbia, The Netherlands and Mexico, as well as online throughout the world. The Company’s combined Degreed Enrollment for UPX and Axia College as of August 31, 2006, was approximately 282,300. In addition, students are enrolled in WIU, CFP and IPD Client Institutions (as defined below), and additional non-degreed students are enrolled in UPX. Degreed Enrollments represent individual students enrolled in the Company’s degree programs who attended a course during the quarter and did not graduate as of the end of the quarter (including Axia students enrolled in UPX and WIU).

UPX is accredited by The Higher Learning Commission (“HLC”), and has been a member of the North Central Association of Colleges and Schools since 1978. UPX offers associate’s, bachelor’s, master’s, and doctoral degree programs at 75 local campuses and 123 learning centers located in 37 states, Puerto Rico, Alberta, British Columbia, The Netherlands, and Mexico. UPX also offers these educational programs worldwide through its computerized educational delivery system. Axia College, which has been a part of UPX since March 2006 (previously it was part of WIU), offers associate’s degrees in business, criminal justice, general studies, health administration, and information technology worldwide through its computerized educational delivery system.

WIU is accredited by The HLC, and currently offers undergraduate and graduate degree programs at local campuses in Arizona and through joint educational agreements with educational institutions in China and India.

IPD provides program development and management consulting services to regionally accredited private colleges and universities (“Client Institutions”) who are interested in expanding or developing their programs for working students. IPD provides these services at 22 colleges and 36 learning centers in 24 states in exchange for a contractual share of the tuition revenues generated from these programs.

CFP, located near Denver, Colorado, provides financial planning education programs, as well as regionally accredited graduate degree programs in financial planning, financial analysis, and finance. CFP also offers some of its non-degree programs at UPX campuses.

The Company’s fiscal year is from September 1 to August 31. Unless otherwise stated, references to the years 2006, 2005, and 2004 relate to the fiscal years ended August 31, 2006, 2005, and 2004, respectively.

Note 2.   Significant Accounting Policies

Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of Apollo and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

The Company’s educational programs range in length from one-day seminars to degree programs lasting up to four years. Students in the degree programs generally enroll in a program of study encompassing a series of five- to nine-week courses taken consecutively over the length of the program. Generally, students are billed on a course-by-course basis when the student first attends a session, resulting in the recording of a receivable from the student and deferred revenue in the amount of the billing. Students generally fund their education through grants and/or loans under various Title IV programs, tuition assistance from their employers or personal funds.

Tuition and other net revenues consist largely of tuition and fees associated with different educational programs as well as related educational resources such as access to online materials. Tuition and other revenues are shown net of discounts relating to a variety of promotional programs including military discounts, special promotional incentives designed to generate new student enrollment, early payment discounts and other incentives. Tuition benefits for the Company’s employees are included in tuition revenue and as a part of employee benefit expense. Total employee tuition benefits were $52.9 million, $48.2 million, and $34.9 million for the years ended 2006, 2005 and 2004, respectively.

The following table presents the most significant components as percentages of total tuition and other, net revenue for the years ended August 31, 2006, 2005 and 2004:

	Year Ended August 31,
	2006					2005					2004
						Restated					Restated
($ in thousands)
Tuition revenue	$	2,304,288		93	%	$	2,114,082		94	%	$	1,678,994		93	%
IPD services revenue		74,442		3	%		69,564		3	%		62,664		3	%
Application and related fees		33,795		1	%		36,381		2	%		28,705		2	%
Online course material revenue		138,661		6	%		104,528		5	%		69,084		4	%
Other revenue		31,728		1	%		33,786		1	%		23,039		1	%
Tuition and other revenue, gross		2,582,914		104	%		2,358,341		105	%		1,862,486		103	%
Less: Discounts		(105,381	)	(4	)%		(107,227	)	(5	)%		(62,439	)	(3	)%
Tuition and other revenue, net	$	2,477,533		100	%	$	2,251,114		100	%	$	1,800,047		100	%

Tuition revenue encompasses both online and classroom-based learning. Tuition revenue is recognized pro rata, on a weekly basis, over the period of instruction as services are delivered to students. During certain periods of the year and in certain businesses, the Company adjusts its revenue recognition to account for holiday breaks such as Christmas and Thanksgiving.

IPD services revenues consist of the contractual share of tuition revenues from students enrolled in IPD programs at Client Institutions. IPD contracts with Client Institutions to provide services including, but not limited to, management consulting and training; program development; program administration; instructor and student recruiting; and student accounting, collection and recordkeeping. The contractual share varies by contract and may change over time. The Company’s contractual share ranges between 30% and 50%. Contracts generally have terms of 10 years with provisions for renewal. The portion of service revenue to which the Company is entitled under the terms of the contracts is recognized on a pro rata basis as defined.

Application and related fees consist of the fees students pay when submitting an enrollment application and the application costs related to the expenses associated with processing the applications. Both the fees and the costs are deferred and recognized over the average length of time it takes for a student to complete a program of study.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Online course material revenue relates to online course materials delivered to students over the period of instruction. Revenue associated with these materials is recognized pro rata over the period of the related course to correspond with delivery of the materials to students.

Other revenue is primarily composed of non-tuition generating revenues, such as renting classroom space and other student support services. This revenue is recognized as these services are provided.

Generally, tuition and other net revenues vary from period to period based on several factors, including (1) the aggregate number of students attending classes, (2) the number of classes held during the period, and (3) the tuition price per credit hour.

Tuition and other net revenues exclude any applicable state and city sales taxes. Upon conclusion of a taxable transaction, the amount of tax collected is withheld and subsequently paid to the appropriate taxing jurisdiction.

Concentration of Credit Risk

A substantial portion of credit extended to students is paid through the students’ participation in various federal financial aid programs authorized by Title IV of the Higher Education Act of 1965, as reauthorized (the “Higher Education Act”), which the Company refers to as “Title IV programs.” The following table summarizes total revenues from Title IV programs for the fiscal years ended 2006, 2005 and 2004.

	2006			2005			2004
($ in thousands)
Total Title IV funding received	$	1,536,616		$	1,345,405		$	1,004,946
Total tuition and other revenues, net		2,477,533			2,251,114			1,800,047
Total Title IV funding as a percentage of total revenue		62.0	%		59.8	%		55.8	%

The Company is subject to annual compliance audits as well as reviews by the U.S. Department of Education. The Company believes it is in compliance with Title IV requirements.

The Company extends unsecured credit to a portion of the students enrolled. Receivables are not collateralized; however, credit risk is reduced as the amount owed by any individual student is small relative to the total tuition receivable and the customer base is geographically diverse.

Allowance for Doubtful Accounts

See also Note 3, “Restatement of Consolidated Financial Statements,” for the discussion of the restatement related to the allowance for doubtful accounts.

The Company reduces accounts receivable by an allowance for amounts that may become uncollectible in the future. Estimates are used in determining the allowance for doubtful accounts and are based on historical collection experience and current trends. In determining these amounts, the Company looks at the historical write-offs of its receivables. The Company monitors its collections and write-off experience to assess whether adjustments are necessary. When a student with Title IV loans withdraws from UPX or WIU, the Company is sometimes required to return a portion of Title IV funds to the lenders. The Company is generally entitled to collect these funds from the students, but collection of these receivables is significantly lower than its collection of receivables for students who remain in the Company’s educational programs. An increase in the amount of return to the lenders and a lower collection rate are factored into the determination of an appropriate allowance amount. Management periodically evaluates the standard allowance estimation methodology for propriety and modifies as necessary. In doing so, the Company believes its allowance for doubtful accounts reflects the most recent collections experience and is responsive to changes in trends. The Company’s accounts receivable are written off once the account is deemed to be uncollectible. This typically occurs once the Company has exhausted all efforts to collect the account, which include collection attempts by Company employees and outside collection agencies.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents include money market funds, bank overnight deposits, and tax-exempt commercial paper, which are all placed with high-credit-quality institutions. The Company has not experienced any losses on its cash and cash equivalents.

Restricted Cash

A significant portion of the Company’s revenue is received from students who participate in government financial aid and assistance programs. Restricted cash primarily represents amounts received from the federal and state governments under various student aid grant and loan programs, such as Title IV program funds. These funds are received subsequent to the completion of the authorization and disbursement process for the benefit of the student. The U.S. Department of Education requires Title IV program funds collected in advance of student billings to be kept in separate cash or cash equivalent accounts until the students are billed for that portion of their program. The Company records these amounts as restricted cash. On average, the majority of these funds remains as restricted cash for a period between 60 and 90 days from date of receipt. Restricted cash is excluded from cash and cash equivalents in the Consolidated Balance Sheets and Statements of Cash Flows until the cash is transferred from these restricted accounts to the Company’s operating accounts. The Company’s restricted cash is primarily invested in municipal bonds and U.S. government-sponsored enterprises with maturities of 90 days or less. Changes in restricted cash are included in purchases and maturities of marketable securities on the Consolidated Statements of Cash Flows.

Marketable Securities

Marketable securities consist of auction rate securities, municipal bonds, U.S. government-sponsored enterprises, and corporate obligations. The Company accounts for marketable securities in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). Marketable securities with a maturity date greater than one year are considered noncurrent, while all other marketable securities are considered current. The Company has the ability and intention to hold its marketable securities, other than auction-rate securities, until maturity and therefore classifies these investments as held-to-maturity, reported at amortized cost. Auction-rate securities with auction or reset dates prior to the maturity date of the underlying security are classified as current and available for sale and are reported at amortized cost, which approximates the estimated market value. Interest and dividend income, including the amortizations of the premium and discount, are included in interest income and other, net in the Company’s Consolidated Statements of Income.

Property and Equipment, net

Property and equipment is recorded at cost less accumulated depreciation. Furniture, equipment, and software is depreciated using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Leasehold improvements and tenant improvement allowances are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets. Construction in progress is recorded at cost until the corresponding asset is placed into service and depreciation begins. Buildings are depreciated using the straight-line method over the estimated useful life of seven to ten years. Maintenance and repairs are expensed as incurred.

The Company capitalizes certain internal software development costs in accordance with Statement of Position (“SOP”) 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use.” Such costs consist primarily of the direct labor associated with building the internally developed software. Capitalized costs are amortized using the straight-line method over the estimated lives of the software, not to exceed five years. SOP 98-1 describes three stages of software development projects: the preliminary project stage (all

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

costs expensed as incurred), the application development stage (certain costs capitalized, certain costs expensed as incurred), and the post-implementation/operation stage (all costs expensed as incurred). The costs capitalized in the application development stage include the costs of designing the chosen path, coding, installation of hardware, and testing. The Company capitalizes costs incurred during the development phase of the project as permitted.

Goodwill

Goodwill is primarily the result of the Company’s acquisition of CFP, which was acquired in September 1997. SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), addresses goodwill and other intangible assets that have indefinite useful lives and prescribes that these assets will not be amortized, but instead tested for impairment at least annually or more frequently if circumstances arise indicating potential impairment. If the carrying amount of the reporting unit containing goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized to the extent the “implied fair value” of the goodwill is less than the carrying amount of the goodwill. This pronouncement provides specific guidance on performing impairment tests for goodwill and indefinite-lived intangibles.

The process of evaluating the potential impairment of goodwill requires judgment. In assessing the fair value of the Company’s reporting units, the Company makes estimates about the future cash flows of its reporting units. The Company’s cash flow forecast is based on assumptions that are consistent with the plans and estimates the Company is using to manage the underlying businesses. Other factors the Company considers include, but are not limited to, significant underperformance relative to expected historical or projected future operating results, significant changes in the manner or use of the acquired assets or the overall business strategy, and significant negative industry or economic trends. If the Company’s estimates or related assumptions change in the future, the Company may be required to record non-cash impairment charges for these assets. In addition, the Company makes certain judgments about allocating shared assets and liabilities to the balance sheets for its reporting units. The Company has engaged a third-party valuation expert to assist in evaluating the fair values of its reporting units. The Company has selected August 31 as the date on which it performs its annual goodwill impairment test.

As of August 31, 2006, the Company concluded that the goodwill for CFP was impaired in the amount of $20.2 million. This impairment was included in the Company’s Other Schools segment. In performing its annual impairment test, the Company assessed the recoverability of the goodwill by evaluating the future discounted cash flows and the fair value of CFP’s tangible and intangible assets. The total discounted future cash flows was determined to be significantly less than the Company’s original expectations due to slower-than-forecasted revenue growth. After the impairment charge, the remaining goodwill totaled $16.9 million, which represents approximately 1.3% of total assets. There are no other long-lived assets that the Company believes are impaired. Additional impairments could affect future results of operations.

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), the Company evaluates the carrying amount of its major long-lived assets whenever changes in circumstances or events indicate that the value of such assets may not be fully recoverable. The Company’s major long-lived asset as of August 31, 2006 is property and equipment. The Company believes the carrying amounts are fully recoverable and no impairment exists.

Insurance Reserves

The Company records liabilities for claims and related expenses that are estimable and probable related to its self-insured medical and dental insurance programs in accordance with the contractual terms of the insurance policies. Accounting for insurance liabilities that are self-insured involves uncertainty, because estimates and judgments are used to determine the liability to be recorded for reported claims and claims incurred but not reported. The Company considers its historical experience in determining the appropriate insurance reserves to record in the

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidated Balance Sheets. If the current claim trends were to differ significantly from the Company’s historic claim experience, a corresponding adjustment would be made to the insurance reserves.

Share Based Compensation

See also Note 3, “Restatement of Consolidated Financial Statements,” for the discussion of the restatement related to the Company’s stock option grants.

On September 1, 2005, the Company adopted the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 107 (“SAB 107”) relating to SFAS 123(R), which the Company applied in its adoption of SFAS 123(R). SFAS 123(R) requires the measurement and recognition of compensation expense for all share based awards issued to employees and directors, based on estimated fair values of the share award on the date of grant. The Company adopted the fair value recognition provisions of SFAS 123(R) using the modified prospective transition method, which requires compensation expense to be recorded for all share based awards granted after September 1, 2005 and for all unvested stock options outstanding as of September 1, 2005. For all unvested options outstanding as of September 1, 2005, the remaining unrecognized compensation expense, based on the fair value as determined under the provisions of SFAS 123, will be recognized as share based compensation in the Consolidated Statements of Income over the remaining vesting period. For share based awards granted subsequent to September 1, 2005, compensation expense is based on the fair value as determined under the provisions of SFAS 123(R) and will be recognized in the Consolidated Statements of Income over the vesting period. Under the modified prospective transition method, prior periods are not restated for the effect of SFAS 123(R).

SFAS 123(R) requires the Company to calculate the fair value of share based awards on the date of grant. The Company uses the Black-Scholes-Merton option pricing model (“BSM”) to estimate fair value. The BSM requires the Company to estimate key assumptions such as expected life, volatility, risk-free interest rates and dividend yield to determine the fair value of share based awards, based on both historical information and management judgment regarding market factors and trends. The Company amortizes the share based compensation expense over the period that the awards are expected to vest, net of estimated forfeiture rates. If the actual forfeitures differ from management estimates, additional adjustments to compensation expense may be required in future periods.

Income Taxes

The Company accounts for income taxes using the asset and liability method in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted laws and tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that includes the enactment date. Management judgment is required in determining the provision for income taxes and, in particular, whether or not a valuation allowance should be recorded against the Company’s deferred tax assets.

Earnings per Share

Earnings per share have been calculated in accordance with SFAS No. 128, “Earnings per Share” (“SFAS 128”). When one class of common stock is convertible into another class of common stock, SFAS 128 requires the use of the two-class method of computing earnings per share. The two-class method is an earnings allocation formula that determines the earnings per share according to participation rights in undistributed earnings. For the period September 1, 2003 through August 27, 2004, the Company presented basic and diluted earnings per share for Apollo Group Class A common stock and UPX Online common stock using the two-class method. With

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

respect to the Apollo Group Class A and Class B common stock, dividends are payable at the discretion of the Board of Directors, and the Articles of Incorporation treat the declaration of dividends on the Apollo Group Class A and Apollo Group Class B common stock in an identical manner as follows: holders of the Company’s Apollo Group Class A common stock and Apollo Group Class B common stock are entitled to receive cash dividends, if and to the extent declared by the Board of Directors, payable to the holders of either class or both classes of common stock in equal or unequal per share amounts, at the discretion of the Board of Directors.

Basic earnings per share for Apollo Group Class A common stock for these periods was calculated by dividing Apollo Group earnings (including its retained interest in UPX Online earnings) by the weighted average number of shares of Apollo Group Class A and Class B common stock outstanding. Diluted earnings per share was calculated similarly, except that it included the dilutive effect of the assumed exercise of options issuable under the Company’s stock option plans, exclusive of options granted with respect to UPX Online common stock, where applicable.

For periods in which UPX Online common stock was outstanding, basic earnings per share for UPX Online common stock for these periods was calculated by dividing UPX Online earnings (excluding Apollo Group’s retained interest in UPX Online earnings) by the weighted average number of shares of UPX Online common stock outstanding. Diluted earnings per share was calculated similarly, except that it included the dilutive effect of the assumed exercise of options with respect to UPX Online common stock.

On August 27, 2004, the UPX Online common stock was converted to Apollo Group Class A common stock. Beginning on August 28, 2004, and for the years ended August 31, 2006 and 2005, the financial results of the Apollo Group Class A common stock reflect Apollo’s consolidated operations. Basic earnings per share is calculated using the weighted average number of Apollo Group Class A and Class B common shares outstanding during the period. Diluted income per share is calculated similarly except that it includes the dilutive effect of the assumed exercise of options issuable under the Company’s stock option plans.

Both basic and diluted weighted average shares have been retroactively restated for stock splits effected in the form of stock dividends. The amount of any tax benefit to be credited to additional paid-in capital related to the exercise of options is included when applying the treasury stock method to stock options in the computation of earnings per share.

Leases

See also Note 3, “Restatement of Consolidated Financial Statements,” for the discussion of the restatement related to the Company’s leases.

The Company currently leases substantially all of its administrative and educational facilities under operating lease agreements. Most lease agreements contain renewal options, tenant improvement allowances, rent holidays, and/or rent escalation clauses. In accordance with SFAS No. 13 “Accounting for Leases” (“SFAS 13”), in instances where one or more of these items are included in a lease agreement, the Company records a deferred rent asset or liability on the Consolidated Balance Sheets and records the rent expense evenly over the term of the lease. All tenant improvement allowances that are spent on leasehold activities are reflected under investing activities as additions to property and equipment on the Consolidated Statements of Cash Flows. Cash received for tenant improvement allowances are reflected as a component of operating activities and credits received against rent for tenant improvement allowances are reflected as a component of non-cash investing activities on the Consolidated Statements of Cash Flows. Lease terms generally range from five to ten years with one to two renewal options for extended terms. For leases with renewal options, the Company records rent expense and amortizes the leasehold improvements on a straight-line basis over the initial non-cancelable lease term (in instances where the lease term is shorter than the economic life of the asset) when the Company does not believe that the renewal of the option is reasonably assured. The Company is also required to make additional payments under operating lease terms for taxes, insurance, and other operating expenses incurred during the operating lease period. The Company also leases facility space from time to time on a short-term basis in order to provide specific courses or programs.

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Rental deposits are provided for lease agreements that specify payments in advance or deposits held in security that are refundable, less any damages at lease end.

Selling and Promotional Costs

Selling and promotional costs consist primarily of compensation and employee benefits for enrollment counselors, management and support staff, corporate marketing, advertising, production of marketing materials, and other costs related to selling and promotional functions. The Company expenses selling and promotional costs as incurred.

Start-Up Costs

Costs such as advertising, marketing, temporary services, employee relocation, and supplies related to the start-up of new campuses and learning centers are expensed as incurred.

Foreign Currency Translation

The financial position and results of operations for the Company’s foreign operations are measured using the local currency as the functional currency. The assets and liabilities of these operations are translated to U.S. dollars using exchange rates in effect at the balance sheet dates. Income and expense items are translated at monthly average rates of exchange. The resulting translation adjustments are included in the component of Shareholders’ Equity designated as accumulated other comprehensive income.

Fair Value of Financial Instruments

The carrying amount reported in the Consolidated Balance Sheets for cash and cash equivalents, restricted cash, certain marketable securities, accounts receivable and accounts payable approximate fair value because of the short-term nature of these financial instruments.

The related party receivable represents a promissory note due from Dr. John G. Sperling, the founder and Acting Executive Chairman of the Board, as described in Note 9. The note was executed on December 14, 2001 in an arms-length transaction and accrues interest at a fixed annual rate of six percent. The carrying value of the related party receivable reasonably approximates its fair value, as determined by applying historical index adjusted interest rates to the outstanding balance between the execution date and August 31, 2006.

Loss Contingencies

In accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), when the Company becomes aware of a claim or potential claim, the likelihood of any loss or exposure is assessed. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company records a liability for the loss. The liability recorded includes probable and estimable legal costs associated with the claim or potential claim. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount is material. For matters where no loss contingency is recorded, the Company’s policy is to expense legal fees as incurred.

Certain Reclassifications

The Company revised the presentation of the consolidated statements of cash flows to combine the purchase and maturities of marketable securities with the changes in restricted cash, including the purchase and maturity of restricted auction rate securities.

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Recent Accounting Pronouncements

On September 1, 2005, the Company adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for all share based awards made to employees and directors, based on estimated fair values of the share award on the date of grant. SFAS 123(R) supersedes the Company’s previous accounting under APB 25 for periods beginning in fiscal 2006. In March 2005, the SEC issued SAB 107 which provided additional guidelines for implementing SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change, which should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement was issued. The Company adopted SFAS 154 beginning in the first quarter of fiscal year 2007. There was no impact upon adoption.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides a single definition of fair value, along with a framework for measuring it. It also requires additional disclosure about using fair value to measure assets and liabilities. It is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods. The Company is currently evaluating the impact SFAS 157 will have on its financial condition and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (SFAS 159). Under SFAS 159, companies have an opportunity to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact SFAS 159 will have on its financial condition and results of operations.

In September 2006, the SEC released SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which addresses how uncorrected errors in previous years should be considered when quantifying errors in current-year financial statements. SAB 108 requires registrants to consider the effect of all carry-over and reversing effects of prior-year misstatements when quantifying errors in current-year financial statements. SAB 108 does not change the SEC staff’s previous guidance on evaluating the materiality of errors. It allows registrants to record the effects of adopting SAB 108 guidance as a cumulative-effect adjustment to retained earnings. This adjustment must be reported in the annual financial statements of the first fiscal year ending after November 15, 2006. The application of the provisions of SAB 108 is not expected to have a material impact on the Company’s financial condition and results of operations.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is in the process of evaluating the impact FIN 48 will have on its financial condition and results of operations.

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In June 2006, the Emerging Issues Task Force (“EITF”) issued Statement Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences” (“EITF 06-2”). EITF 06-2 clarified that an employee’s right to a compensated absence under a sabbatical or similar benefit arrangement in which the employee is not required to perform any duties during the absence “accumulates” and therefore should be accounted for as a liability if the other conditions for recognition under FASB Statement No. 43 are met. The Company has not applied this guidance as it does not offer sabbaticals to its faculty or staff.

Note 3.   Restatement of Consolidated Financial Statements

As a result of the errors discussed below, the Company has restated its consolidated balance sheet as of August 31, 2005, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows, including related disclosures, for each of the fiscal years ended August 31, 2005 and 2004 (the “Restatement”).

Share Based Compensation Expense Adjustment

With the completion of the Company’s reviews discussed below, the Company determined that errors had occurred in the accounting for share based compensation. Specifically, the Company determined that 57 of the 100 total grants made from June 1994 to September 2006 used incorrect measurement dates for accounting purposes. Of these 100 grants, 33 grants were issued to the Company’s management and other employees (“Management Grants”). The Company determined that incorrect measurement dates were used for accounting purposes for 24 of the 33 Management Grants. As a result, revised measurement dates were selected for many grants and resulted in exercise prices that were less than the fair market value of the stock on the most likely measurement dates. The Company recorded pre-tax compensation expense of $52.9 million ($59.9 million after-tax) in the aggregate over the fiscal years 1994 through 2005. The after-tax amount is higher due primarily to disallowed deductions pursuant to Internal Revenue Code (“IRC”) Section 162(m) and related penalties and interest. This incremental share based compensation expense results in a cumulative decrease to pre-tax income of $21.1 million ($34.2 million after-tax) for the years ended August 31, 2002 through 2005.

Independent Review and Internal Review

In response to comments in a report published by an investment bank on June 8, 2006 that questioned whether the Company might have backdated stock option grants during its fiscal years ended August 31, 2000 through August 31, 2004, the Board of Directors authorized a special committee (the “Special Committee”), on June 23, 2006, to retain independent legal counsel, who in turn retained forensic accountants, to assist them in conducting an independent review of the Company’s historical practices related to stock option grants (the “Independent Review”). In November 2006, with the assistance of outside legal counsel, the Company also began an in-depth internal review to ascertain the most likely measurement date of every stock option grant since the Company’s initial public offering during its fiscal year 1994 through September 2006 (the “Internal Review”).

The Special Committee presented its report of findings (the “Special Committee Report”) to the Board of Directors on December 8, 2006, and the Company reported these findings publicly on December 15, 2006. The Special Committee’s findings include, among other things, that many of the stock option grants it reviewed were not accounted for in accordance with GAAP and that the Company’s internal controls over financial reporting with respect to stock option grants were inadequate.

Based on the facts and circumstances surrounding each grant, management and the Special Committee concluded that during the period from June 1994 through September 2006, the Company used incorrect measurement dates for accounting purposes. As a result, revised measurement dates for many grants resulted in exercise prices that were less than the fair market value of the stock on the revised measurement dates.

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As part of its Internal Review, the Company adopted a methodology for determining the most likely accounting measurement dates for stock option grants in the following categories: (1) grants to management and other employees; (2) grants to Section 16 officers, except the Former CEO (the “Section 16 Grants”); (3) grants to its Former CEO (the “Former CEO Grants”); (4) grants to employees upon hiring, promotion and other special circumstances (the “Individual Grants”); (5) grants to non-employee Directors (the “Director Grants”); and (6) grants to faculty employees (the “Faculty Grants”). The Company applied the following hierarchy for determining the most likely measurement dates for each category as follows:

Management, Section 16, Former CEO and Individual Grants

1. The Company used the original stated grant date for any grant where evidence of Compensation Committee or, after August 2002, Former CEO approval on the stated grant date exists and the recipients and the numbers of stock options were final.

2. The Company used the original stated grant date for Section 16 and Former CEO Grants issued after August 2002 when Forms 4 were filed within two days of the stated grant date as long as there was not evidence that the grants were not final and approved as of the stated grant date.

3. The Company used the Form 4 filing date for the Section 16 and Former CEO grants issued after August 2002 when there was evidence that the grants were not final and approved as of the stated grant date but were final and approved by the date of the filing of the Form 4.

4. For the majority of the grants, where the measurement date was not determined by the criteria above, the Company determined that the most likely measurement date was the date the grant was entered into Equity Edge, the Company’s stock and option plan accounting software (the “Equity Edge Record Added Date”). This methodology was used when the Company was unable to locate contemporaneous documentation confirming that the stock option award terms were finalized and approved on the stated grant date.

Director Grants

5. The Company used the original stated grant date for Director Grants issued under the Director Stock Plan (which expired on August 31, 2003). The Director Stock Plan was a grant program pursuant to which option grants for a specific number of shares were automatically made to the non-employee Board members on a pre-established date each year. The Company used the original stated grant date for Director Grants awarded subsequent to August 2002 under the 2000 Incentive Stock Plan when Forms 4 were filed within two days of the stated grant date.

Faculty Grants

6. The Company generally used the original grant date for Faculty Grants since faculty employees received grants only when the employee met the criteria set forth in the Company’s faculty handbook or website posting, which states the strike price (market value on the date of grant), number of shares to be granted, and the date and frequency of the grant.

Income Tax Related Matters — Section 162(m)

In relation to the Restatement, certain tax deductions in prior years with respect to compensation attributable to the exercise of certain stock options by executive officers may be in question. Under IRC Section 162(m), the amount of such deduction per covered executive officer is limited to $1.0 million per year, except to the extent the compensation qualifies as performance-based. Compensation attributable to options with revised measurement dates may not have qualified as performance-based compensation. Accordingly, the Company may have claimed deductions with respect to those exercised options that were in excess of the limit imposed under IRC Section 162(m). As a result, the Company has accrued its best estimate with respect to potential tax liabilities, including interest and penalties for the taxable years 2003 through 2005 (which are currently its only open years subject to

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

adjustment for federal tax purposes), of approximately $41.1 million as of August 31, 2006. These accruals have been recorded because the Company believes it is more likely than not that the deductions will be disallowed by the IRS. For prior periods where a liability existed and where the statute of limitations has expired, the accrual relating to that period has been reversed in the appropriate period.

Restatement Adjustments

(1) Share Based Compensation — As discussed above, the Company has restated its financial results to record share based compensation expense.

(2) Allowance for Doubtful Accounts — During the year ended August 31, 2006, the Company concluded that a significant increase in its allowance for doubtful accounts was required. A portion of the increase has been determined to be the correction of an error from prior periods and is included in the accompanying financial statements as an element of the Restatement. This error related to the fact that in prior years the Company did not properly consider available information related to (a) the cumulative differences between actual write-offs and its allowance for doubtful accounts and (b) significant increases in the “Return to Lender” dollars for Title IV recipients who withdraw from UPX or WIU. When a student with Title IV loans withdraws from UPX or WIU, the Company is sometimes required to return a portion of Title IV funds to the lenders. The Company is generally entitled to collect these funds from the students, but the collection of these receivables is significantly lower than its collection of receivables from students who remain in its educational programs. Accordingly, the Company has restated its allowance for doubtful accounts for all prior periods presented.

(3) Other Adjustments — The Company concluded that the accounting for various accounts such as cash, revenue, property and equipment, lease accounting and other investments was not properly recorded in accordance with GAAP. Specifically, the impairment in a venture capital fund investment should have been recorded in an earlier period; cash related to scholarships, grants, and refunds should have been classified as restricted cash and student deposits; different assumptions should have been used in determining the fair value of options; certain share based compensation was improperly amortized amongst quarters; auction rate securities were improperly classified as cash and cash equivalents in certain periods; and certain revenue under tuition discount programs were not properly recorded. Certain of these errors resulted in adjustments to pre-tax expense shown in other adjustments in the table below.

Adjustments to the Company’s lease accounting resulted in a net increase in expense of $2.6 million and $0.7 million for the years ended August 31, 2005 and 2004, respectively, and adjustments to the balance sheet of $2.6 million as of August 31, 2005. Specifically, the Company determined that the accounting for its tenant improvement allowances was not in accordance with GAAP. As part of the Restatement, the errors in the Company’s accounting for the tenant improvement allowances were corrected and certain of its operating leases now have been properly accounted for as capital leases. These adjustment amounts are included in Other Adjustments in the table below.

(4) Tax Effect of Adjustments — The tax effect of the Restatement adjustments is shown below. The adjustment of $59.4 million to income taxes payable as of August 31, 2005 is comprised primarily of potential taxes attributable to IRC Section 162(m) and related penalties and interest. Due to statute expirations in fiscal year 2006, the amount accrued as of August 31, 2006 for federal taxes is $41.1 million.

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Impact of the Restatement

As a result of the Restatement, retained earnings as of September 1, 2003 has been adjusted from $765.2 million to $702.7 million.

Summary of Impact of Restatement Adjustments
												Tax Effect of Adjustments(4)
												Income Tax Provision (Benefit)
												Related
	Share Based								Total			to Share			Related to						Penalty and		Tax Effect					Total
	Compensation			Bad Debt		Other			Adjustments,			Based			Bad Debt						Interest on		of 162(m)		Total Tax			Adjustments,
Fiscal Year	Expense(1)			Expense(2)		Adjustments(3)			Pre-Tax			Compensation			and Other			Total			Exercises		Limitation		Effect			Net of Tax
($ in thousands)
1994	$	—		$	—	$	—		$	—		$	—		$	—		$	—		$	—	$	—	$	—		$	—
1995		176			—		—			176			(71	)		—			(71	)		—		—		(71	)		105
1996		—			—		—			—			—			—			—			—		—		—			—
1997		397			—		—			397			(160	)		—			(160	)		—		—		(160	)		237
1998		487			—		—			487			(196	)		—			(196	)		21		67		(108	)		379
1999		652			—		—			652			(262	)		—			(262	)		92		277		107			759
2000		2,091			—		—			2,091			(841	)		—			(841	)		268		757		184			2,275
2001		28,001			—		—			28,001			(11,256	)		—			(11,256	)		1,307		3,821		(6,128	)		21,873
2002		22,782			4,576		4,058			31,416			(9,158	)		(3,471	)		(12,629	)		3,334		3,628		(5,667	)		25,749
2003		8,294			3,600		918			12,812			(3,314	)		(1,805	)		(5,119	)		3,350		84		(1,685	)		11,127
Cumulative effect on September 1, 2003 opening retained earnings		62,880			8,176		4,976			76,032			(25,258	)		(5,276	)		(30,534	)		8,372		8,634		(13,528	)		62,504
2004		(14,929	)		4,103		808			(10,018	)		5,941			(1,954	)		3,987			2,541		1,179		7,707			(2,311	)
2005		4,935			11,701		(1,233	)		15,403			(1,963	)		(4,163	)		(6,126	)		4,050		3,471		1,395			16,798
Total	$	52,886		$	23,980	$	4,551		$	81,417		$	(21,280	)	$	(11,393	)	$	(32,673	)	$	14,963	$	13,284	$	(4,426	)	$	76,991

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following tables present the effects of the Restatement on the Company’s previously issued Consolidated Balance Sheet as of August 31, 2005, Consolidated Statements of Income for the years ended August 31, 2005 and 2004 and Consolidated Statements of Cash Flows for the years ended August 31, 2005 and 2004.

Consolidated Balance Sheet

	August 31, 2005
	As Previously
	Reported			Adjustments			Restated
($ in thousands)
Assets:
Current assets
Cash and cash equivalents	$	145,607		$	(8,423	)(3)	$	137,184
Restricted cash		225,706			1,396	(3)		227,102
Marketable securities, current portion		224,112			—			224,112
Accounts receivable, net		201,615			(29,013	)(2-3)		172,602
Deferred tax assets, current portion		14,991			10,515	(4)		25,506
Other current assets		23,058			(415	)(3)		22,643
Total current assets		835,089			(25,940	)		809,149
Property and equipment, net		268,661			1,984	(3)		270,645
Marketable securities, less current portion		97,350			—			97,350
Goodwill		37,096			—			37,096
Deferred tax assets, less current portion		35,756			4,786	(4)		40,542
Other assets (includes receivable from related party of $14,843)		28,993			(2,227	)(3)		26,766
Total assets	$	1,302,945		$	(21,397	)	$	1,281,548
Liabilities and Shareholders’ Equity:
Current liabilities
Accounts payable	$	40,129		$	—		$	40,129
Accrued liabilities		61,315			—			61,315
Income taxes payable		9,740			59,423	(4)		69,163
Current portion of long-term liabilities		18,878			621	(3)		19,499
Student deposits		249,696			(7,021	)(3)		242,675
Current portion of deferred revenue		138,214			(4,250	)(3)		133,964
Total current liabilities		517,972			48,773			566,745
Deferred revenue, less current portion		351			—			351
Long-term liabilities, less current portion		77,748			2,484	(3)		80,232
Total liabilities		596,071			51,257			647,328
Commitments and contingencies (Notes 11, 15, and 18)
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued		—			—			—
Apollo Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 188,002,000 issued and 179,184,000 outstanding as of August 31, 2005		103			—			103
Apollo Group Class B voting common stock, no par value, 3,000,000 shares authorized; 477,000 issued and outstanding as of August 31, 2005		1			—			1
Additional paid-in capital		—			—			—
Apollo Group Class A treasury stock, at cost, 8,818,000 shares as of August 31, 2005		(645,742	)		—			(645,742	)
Retained earnings		1,353,650			(72,654	)(1-4)		1,280,996
Accumulated other comprehensive loss		(1,138	)		—			(1,138	)
Total shareholders’ equity		706,874			(72,654	)		634,220
Total liabilities and shareholders’ equity	$	1,302,945		$	(21,397	)	$	1,281,548

See Note 17 for restatement of previously reported quarterly financial statements.

(1), (2), (3) & (4) See above under “Restatement Adjustments” for a detailed summary of adjustments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidated Statements of Income

	Year Ended August 31, 2005							Year Ended August 31, 2004
	As Previously							As Previously
	Reported		Adjustments			Restated		Reported			Adjustments			Restated
($ in thousands, except per share amounts)
Revenues:
Tuition and other, net	$	2,251,472	$	(358	)(3)	$	2,251,114	$	1,798,423		$	1,624	(3)	$	1,800,047
Costs and expenses:
Instructional costs and services		935,743		20,888	(1-3)		956,631		765,495			15,942	(1-3)		781,437
Selling and promotional		484,770		681	(1)		485,451		383,078			722	(1)		383,800
General and administrative		98,286		(3,801	)(1,3)		94,485		88,090			(3,764	)(1,3)		84,326
Share based compensation(5)		19,824		(2,929	)(1)		16,895		123,535			(23,252	)(1)		100,283
Total costs and expenses		1,538,623		14,839			1,553,462		1,360,198			(10,352	)		1,349,846
Income from operations		712,849		(15,197	)		697,652		438,225			11,976			450,201
Interest income and other, net		16,993		(206	)(3)		16,787		18,263			(1,958	)(3)		16,305
Income before income taxes		729,842		(15,403	)		714,439		456,488			10,018			466,506
Provision for income taxes		285,111		1,395	(4)		286,506		178,714			7,707	(4)		186,421
Net income	$	444,731	$	(16,798	)	$	427,933	$	277,774		$	2,311		$	280,085
Income attributed to Apollo Group Class A common stock:
Net income	$	444,731	$	(16,798	)	$	427,933	$	277,774		$	2,311		$	280,085
Stock dividends paid(5)		—		—			—		(114,155	)		—			(114,155	)
Income attributed to UPX Online common shareholders		—		—			—		(25,819	)		1,624			(24,195	)
Income attributed to Apollo Group Class A common shareholders	$	444,731	$	(16,798	)	$	427,933	$	137,800		$	3,935		$	141,735
Income attributed to UPX Online common stock:(5) Net income								$	25,819		$	(1,624	)	$	24,195
Stock dividends paid(5)									114,155			—			114,155
Income attributed to UPX Online common shareholders								$	139,974		$	(1,624	)	$	138,350
Earnings per share attributed to Apollo Group Class A common stock:
Basic income per share	$	2.43	$	(0.09	)	$	2.34	$	0.78		$	0.02		$	0.80
Diluted income per share	$	2.39	$	(0.09	)	$	2.30	$	0.77		$	0.02		$	0.79
Basic weighted average shares outstanding		182,928		—			182,928		176,175			—			176,175
Diluted weighted average shares outstanding		186,015		51			186,066		178,897			17			178,914
Earnings per share attributed to UPX Online common stock:(5) Basic income per share								$	8.85		$	(0.10	)	$	8.74
Diluted income per share								$	8.19		$	(0.09	)	$	8.10
Basic weighted average shares outstanding									15,825			—			15,825
Diluted weighted average shares outstanding									17,081			(7	)		17,074

See Note 17 for restatement of previously reported quarterly financial statements.

(1), (2), (3) & (4) See above under “Restatement Adjustments” for a detailed summary of adjustments.

(5) Related to the August 27, 2004, conversion of UPX Online common stock outstanding and stock options to Apollo Group Class A common stock outstanding and stock options. Share based compensation expense resulting from the revised measurement dates is included in instructional costs and services, selling and promotional, and general and administrative expenses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidated Statements of Cash Flows

	Year Ended August 31, 2005
	As Previously
	Reported			Adjustments			Restated
($ in thousands)
Cash flows provided by (used in) operating activities:
Net income	$	444,731		$	(16,798	)(1-4)	$	427,933
Adjustments to reconcile net income to net cash provided by operating activities:
Share based compensation		—			7,864	(1)		7,864
Share based compensation — conversion of UPX Online stock options		19,824			(2,929	)(1)		16,895
Tax benefits from stock options exercised		41,183			1,385	(4)		42,568
Depreciation and amortization		54,498			(8,906	)(3)		45,592
Amortization of marketable securities discount and premium, net		3,586			—			3,586
Provision for uncollectible accounts receivable		45,412			11,701	(2)		57,113
Deferred income taxes		6,793			(6,460	)(4)		333
Changes in assets and liabilities:
Accounts receivable, net		(100,530	)		628	(3)		(99,902	)
Other assets		(3,814	)		942	(3)		(2,872	)
Accounts payable and accrued liabilities		(20,078	)		—			(20,078	)
Income taxes payable		(2,116	)		6,471	(4)		4,355
Student deposits		37,841			(6,833	)(3)		31,008
Deferred revenue		26,181			107	(3)		26,288
Other liabilities		12,234			(3,313	)(3)		8,921
Net cash provided by operating activities		565,745			(16,141	)		549,604
Cash flows provided by investing activities:
Additions to property and equipment		(98,110	)		9,308	(3)		(88,802	)
Purchase of land and buildings related to Online expansion		(5,680	)		—			(5,680	)
Purchase of marketable securities including auction rate securities		(475,009	)		—			(475,009	)
Maturities of marketable securities including auction rate securities		761,654			—			761,654
Increase in restricted cash		—			5,000	(3)		5,000
Purchase of other assets		(3,657	)		—			(3,657	)
Net cash provided by investing activities		179,198			14,308			193,506
Cash flows used in financing activities:
Purchase of Apollo Group Class A common stock		(808,192	)		—			(808,192	)
Issuance of Apollo Group Class A common stock		52,760			—			52,760
Net cash used in financing activities		(755,432	)		—			(755,432	)
Currency translation loss		(573	)		—			(573	)
Net increase (decrease) in cash and cash equivalents		(11,062	)		(1,833	)(1-4)		(12,895	)
Cash and cash equivalents, beginning of year		156,669			(6,590	)(1-4)		150,079
Cash and cash equivalents, end of year	$	145,607		$	(8,423	)	$	137,184
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes	$	239,327		$	—		$	239,327
Supplemental disclosure of non-cash investing activities
Credits received for tenant improvements	$	16,429		$	—		$	16,429
Purchases of property and equipment included in accounts payable	$	2,352		$	—		$	2,352

(1), (2), (3) & (4) See above under “Restatement Adjustments” for a detailed summary of adjustments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Year Ended August 31, 2004
	As Previously
	Reported			Adjustments			Restated
($ in thousands)
Cash flows provided by operating activities:
Net income	$	277,774		$	2,311	(1-4)	$	280,085
Adjustments to reconcile net income to net cash provided by operating activities:
Share based compensation		—			8,323	(1)		8,323
Share based compensation — conversion of UPX Online stock options		123,535			(23,252	)(1)		100,283
Tax benefits from stock options exercised		39,590			(7,429	)(4)		32,161
Depreciation and amortization		43,196			2,591	(3)		45,787
Amortization of marketable securities discount and premium, net		6,121			—			6,121
Provision for uncollectible accounts receivable		26,877			4,104	(2)		30,981
Investment impairment		—			1,700	(3)		1,700
Deferred income taxes		(47,287	)		6,326	(4)		(40,961	)
Changes in assets and liabilities:
Accounts receivable, net		(49,646	)		267	(3)		(49,379	)
Other assets		(4,664	)		—			(4,664	)
Accounts payable and accrued liabilities		34,122			—			34,122
Income taxes payable		12,698			9,076	(4)		21,774
Student deposits		54,683			(194	)(3)		54,489
Deferred revenue		21,770			(1,890	)(3)		19,880
Other liabilities		5,834			(328	)(3)		5,506
Net cash provided by operating activities		544,603			1,605			546,208
Cash flows provided by (used in) investing activities:
Additions to property and equipment		(74,727	)		(1,799	)(3)		(76,526	)
Purchase of land and buildings related to Online expansion		(33,003	)		—			(33,003	)
Proceeds from sale-leaseback		31,278			—			31,278
Purchase of marketable securities including auction rate securities		(1,132,801	)		—			(1,132,801	)
Maturities of marketable securities including auction rate securities		1,282,700			—			1,282,700
Increase in restricted cash		—			1,042	(3)		1,042
Purchase of other assets		(3,081	)		—			(3,081	)
Net cash provided by investing activities		70,366			(757	)		69,609
Cash flows used in financing activities:
Repurchase of Apollo Group Class A common stock		(443,500	)		—			(443,500	)
Issuance of Apollo Group Class A common stock		36,183			—			36,183
Repurchase of UPX Online common stock		(117,996	)		—			(117,996	)
Issuance of UPX Online common stock		14,871			—			14,871
Net cash used in financing activities		(510,442	)		—			(510,442	)
Currency translation loss		(241	)		—			(241	)
Net increase (decrease) in cash and cash equivalents		104,286			848	(1-4)		105,134
Cash and cash equivalents, beginning of year		52,383			(7,438	)(1-4)		44,945
Cash and cash equivalents, end of year	$	156,669		$	(6,590	)	$	150,079
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes	$	173,715		$	—		$	173,715
Supplemental disclosure of non-cash investing activities
Deferred gain on sale-leaseback	$	12,967		$	—		$	12,967
Credits received for tenant improvements	$	19,372		$	—		$	19,372
Purchases of property and equipment included in accounts payable	$	7,415		$	—		$	7,415

(1), (2), (3) & (4) See above under “Restatement Adjustments” for a detailed summary of adjustments.

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pro Forma Share Based Compensation Expense

The footnotes to the Company’s previously issued financial statements for the years ended August 31, 2005 and 2004, disclosed pro forma net income in accordance with SFAS 123. This pro forma disclosure also included errors not related to measurement date changes in the amount of $19.8 million ($11.9 million after tax) and $123.5 million ($74.4 million after tax) for the fiscal years ended August 31, 2005 and August 31, 2004, respectively. These errors arose from the misapplication of SFAS 123 to the Company’s UPX Online stock options which were converted to APOL options. Specifically, the Company’s footnote disclosure understated pro forma net income because it erroneously included deductions for pro forma share based compensation based on the intrinsic value of the converted options as computed under APB 25 rather than the fair value of the converted options as computed under SFAS 123.

The following table presents the effects of the errors relating to the revision of measurement dates on share based compensation included in the determination of net income, for each of the fiscal years preceding 2004 reported in the Company’s pro forma disclosures presented in accordance with the provisions of SFAS 123. There was no share based compensation expense as previously reported under APB 25 for the years presented below:

	Pre-Tax					As Restated,
Fiscal Year	Adjustment		Tax Adjustment			Net of Tax
($ in thousands)
1994	$	—	$	—		$	—
1995		176		(71	)		105
1996		—		—			—
1997		397		(160	)		237
1998		487		(108	)		379
1999		652		107			759
2000		2,091		184			2,275
2001		28,001		(6,128	)		21,873
2002		22,782		(2,196	)		20,586
2003		8,294		120			8,414
	$	62,880	$	(8,252	)	$	54,628

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4.   Marketable Securities

Marketable securities are reflected at amortized cost in the accompanying Consolidated Balance Sheets and consist of the following as of August 31:

	2006						2005
					Unrecognized						Unrecognized
	Estimated		Amortized		Holding		Estimated		Amortized		Holding
	Market Value		Cost		Losses		Market Value		Cost		Losses
($ in thousands)
Classified as current and available for sale:
Auction rate securities	$	3,300	$	3,300	$	—	$	57,445	$	57,445	$	—
Classified as current and held to maturity:
Municipal bonds		21,550		21,679		129		120,822		121,310		488
U.S. government-sponsored enterprises		20,698		20,999		301		38,135		38,449		314
Corporate obligations		—		—		—		6,862		6,908		46
		42,248		42,678		430		165,819		166,667		848
Total classified as current	$	45,548	$	45,978	$	430	$	223,264	$	224,112	$	848
Classified as noncurrent and held to maturity:
Municipal bonds due in 1-3 years	$	19,397	$	19,711	$	314	$	41,932	$	42,384	$	452
U.S. government-sponsored enterprises		25,630		27,000		1,370		46,199		47,994		1,795
Corporate obligations		6,145		6,981		836		6,086		6,972		886
Total classified as noncurrent		51,172		53,692		2,520		94,217		97,350		3,133
Total marketable securities	$	96,720	$	99,670	$	2,950	$	317,481	$	321,462	$	3,981

Auction Rate Securities:  Auction rate securities have an underlying component of long-term debt or equity. Auction rate securities trade or mature on a shorter term than the underlying debt or equity based on an auction bid that resets the interest rate of the security. The auction or reset dates occur at intervals that are generally between 7 and 90 days of the purchase. These securities provide a higher interest rate than similar securities and provide high liquidity to otherwise longer-term investments. The Company’s intent is to invest in auction rate securities throughout the fiscal year to maximize its yield, but to liquidate these securities prior to quarterly or annual reporting dates. As of August 31, 2006 and 2005 the Company was unable to liquidate all of its auction rate securities, as shown above. Auction rate securities are classified as available for sale. Subsequent to August 31, 2006, all auction rate securities have been liquidated.

Municipal Bonds:  Municipal bonds represent debt obligations issued by states, cities, counties, and other governmental entities, which earn federally tax-exempt interest. The Company has the ability and intention to hold municipal bonds until maturity and therefore classifies these investments as held-to-maturity, reported at amortized cost. Based on the nature of the investments and the intent and ability to hold them to maturity, the Company has not recorded an impairment as of August 31, 2006 because it believes the unrecognized holding loss is temporary.

U.S. Government-Sponsored Enterprises:  U.S. government-sponsored enterprises are fixed-income investments that include the Federal Farm Credit Note, Federal Home Loan Banks, and Federal National Mortgage Association (Fannie Mae). The Company has the ability and intention to hold U.S. government-sponsored enterprises until maturity and therefore classifies these investments as held-to-maturity, reported at amortized

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

cost. Based on the nature of the investments and the intent and ability to hold them to maturity, the Company has not recorded an impairment as of August 31, 2006 because it believes the unrecognized holding loss is temporary.

Corporate Obligations:  Corporate obligations include secured commercial paper with the Royal Bank of Canada. The Company has the ability and intention to hold corporate obligations until maturity and therefore classifies these investments as held-to-maturity, reported at amortized cost. Based on the nature of the investments and the intent and ability to hold them to maturity, the Company has not recorded an impairment as of August 31, 2006 because it believes the unrecognized holding loss is temporary.

Marketable securities are exposed to various risks and rewards, such as interest rate, market and credit risk. Due to these risks and rewards associated with marketable security investments, it is possible that changes in the values of these investments may occur and that such changes could affect the amounts reported on the balance sheet. The Company holds investments in certain debt securities with the following aggregate maturities as of August 31, 2006 (in thousands):

	Held-to-Maturity				Available-for-Sale
	Estimated		Amortized		Estimated		Amortized
Year	Market Value		Cost		Market Value		Cost
2007	$	42,248	$	42,678	$	3,300	$	3,300
2008 to 2012		51,172		53,692		—		—
	$	93,420	$	96,370	$	3,300	$	3,300

For fiscal years ended August 31, 2006, 2005 and 2004, respectively, proceeds from the liquidation of available-for-sale securities, at par value, were $463.3 million, $309.5 million and $195.2 million, respectively. The cost of liquidated securities is based on the specific identification method.

Note 5.   Accounts Receivable, net

See also Note 3, “Restatement of Consolidated Financial Statements,” for the discussion of the restatement adjustments related to the Company’s allowance for doubtful accounts.

Accounts receivable, net consist of the following as of August 31:

	2006			2005
				Restated
(In thousands)
Tuition accounts receivable	$	214,257		$	209,432
Less allowance for doubtful accounts		(65,184	)		(45,785	)
Net tuition accounts receivable		149,073			163,647
Insurance recovery receivable		3,331			—
Other receivables		8,179			8,955
Total accounts receivable, net	$	160,583		$	172,602

Tuition accounts receivable is composed primarily of amounts due from students. Insurance recovery receivable represents amounts due from the Company’s liability insurance policy for legal fees related to a securities litigation matter.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Bad debt expense is included in Instructional Costs and Services in the Company’s Consolidated Statements of Income. The following table summarizes the activity in the related allowance for doubtful accounts:

	August 31,
	2006			2005			2004
				Restated
(In thousands)
Beginning allowance for doubtful accounts balance	$	45,785		$	23,909		$	19,057
Charged to bad debt expense		101,038			57,113			30,981
Write-offs, net of recoveries		(81,639	)		(35,237	)		(26,129	)
Ending allowance for doubtful accounts balance	$	65,184		$	45,785		$	23,909

Note 6.   Other Assets

Other assets consist of the following as of August 31:

	2006			2005
				Restated
($ in thousands)
Prepaid expenses	$	20,683		$	25,898
Related party receivable		15,758			14,843
Other investments		3,835			3,719
Textbook inventories, deposits and other		4,067			4,949
Total other assets		44,343			49,409
Less current portion		(16,424	)		(22,643	)
Total long-term other assets	$	27,919		$	26,766

The related party receivable represents a promissory note due from Dr. John G. Sperling. See Note 9 below.

Other investments represent an investment in a related entity, Apollo International, Inc., recorded at cost (as described in Note 9) and investments in venture capital funds. The Company recorded an other-than-temporary impairment of $1.7 million as of August 31, 2004 related to this investment in a venture capital fund, which is included in interest income and other on the Consolidated Statements of Income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 7.   Property and Equipment, net

Property and equipment, net consist of the following as of August 31:

	2006			2005
				Restated
($ in thousands)
Furniture and equipment	$	304,146		$	266,957
Software		82,206			68,453
Leasehold improvements		96,097			77,773
Tenant improvement allowances		94,756			85,871
Land and buildings		21,619			21,457
Less accumulated depreciation and amortization		(356,092	)		(292,133	)
Depreciable property and equipment, net		242,732			228,378
Construction in progress		85,708			42,267
Property and equipment, net	$	328,440		$	270,645

Construction in progress primarily represents total cumulative costs related to the construction of the Company’s new corporate headquarters in Phoenix, Arizona, which is expected to be completed in the third quarter of fiscal year 2008. The Company has entered into an option agreement to execute a sale lease-back of this new corporate headquarters building (see Note 15). Depreciation is not recorded on construction in progress assets until they are placed into service.

Depreciation and amortization expense was $67.3 million, $45.6 million, and $45.8 million for the fiscal years ended August 31, 2006, 2005, and 2004, respectively.

Note 8.   Accrued Liabilities

Accrued liabilities consist of the following as of August 31:

	2006		2005
($ in thousands)
Salaries, wages, and benefits	$	23,040	$	23,441
Accrued advertising		22,512		15,631
Accrued professional fees		9,888		8,494
Student refunds, grants and scholarships		11,848		8,530
Other accrued liabilities		6,225		5,219
Total accrued liabilities	$	73,513	$	61,315

Salaries, wages, and benefits represent amounts due to employees, faculty and third parties for salaries, bonuses, vacation pay, and health insurance. Accrued advertising represents amounts due for Internet marketing, direct mail campaigns, and print and broadcast advertising. Accrued professional fees represent amounts due to third parties for outsourced student financial aid processing and other accrued professional and legal obligations. Student refunds, grants and scholarships represent amounts due to students for tuition refunds, state grants payable, and scholarships. Other accrued liabilities primarily includes sales and business taxes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9.   Related Party Transactions

Dr. John G. Sperling Note Receivable

In August 1998, the Company together with Hughes Network Systems and Hermes Onetouch, LLC (“Hermes”) formed Interactive Distance Learning, Inc. (“IDL”), a new corporation, to acquire One Touch Systems, a provider of interactive distance learning solutions. The Company contributed $10.8 million in October 1999 and $1.2 million in December 1999, in exchange for a 19% interest in IDL. The Company accounted for its investment in IDL under the cost method. Hermes is owned by Dr. John G. Sperling.

On December 14, 2001, Hermes acquired the Company’s investment in IDL in exchange for a promissory note in the principal amount of $11.9 million, which represented the related carrying value and approximated the related fair value as of that date. The promissory note accrues interest at a fixed annual rate of six percent and is due at the earlier of December 14, 2021 or nine months after Dr. John G. Sperling’s death. The promissory note is included in other assets as a receivable from a related party in the Consolidated Balance Sheets as of August 31, 2006 and 2005.

Apollo International, Inc.

As of August 31, 2006, the Company directly owns 3.78% of the preferred stock of Apollo International, Inc. (“Apollo International”), which provides educational products and services in Brazil, India, and The Netherlands. Dr. John G. Sperling was a director of Apollo International. Additionally, shares of Apollo International stock are beneficially owned by the Company indirectly through the Company’s 4% investment in a venture capital fund (see Note 6) that owns 17% of Apollo International stock.

India:  Effective September 2002, the Company, through WIU, entered into an agreement with Apollo International that allows for WIU’s educational offerings to be made available in India through a joint venture agreement with K.K. Modi Investment and Financial Services Private Limited (“Modi”), which together formed Modi Apollo International Group Private Limited (“MAI”). Apollo International manages the relationship with the entities in India that are offering the WIU programs while WIU maintains the educational content of the programs. The Company received $170,000, $156,000, and $244,000 during the years ended August 31, 2006, 2005, and 2004, respectively, for services rendered to Apollo International in connection with this agreement.

The Netherlands:  Effective October 1, 2005, the Company acquired certain assets of Apollo International’s campus in The Netherlands for a nominal amount. When the Company executed the acquisition on October 1, 2005, an independent appraisal was not performed, but it was the Company’s belief that the purchase price approximated fair value.

Governmental Advocates, Inc.

Effective July 1, 1989, the Company entered into an agreement with Governmental Advocates, Inc. to provide consulting services to the Company with respect to matters concerning legislation, regulations, public policy, electoral politics, and any other topics of concern to it relating to state government in the state of California. Hedy F. Govenar, one of the Company’s directors, is the founder and Chairwoman of Governmental Advocates, Inc. On June 1, 2006, the Company renewed this agreement for an additional one year. Pursuant to the agreement, the Company paid consulting fees to Governmental Advocates, Inc. of $120,000 per year for the years ended August 31, 2006, 2005, and 2004.

Yo Pegasus, LLC

Yo Pegasus, LLC, an entity controlled by Dr. John G. Sperling, leases an aircraft to the Company as well as to other entities. Payments to this entity for the Company’s business use of the airplane, including airplane usage, fuel, travel expenses and flight attendants, during the years ended August 31, 2006, 2005, and 2004, were $378,000, $421,000, and $573,000, respectively, and are included in General and Administrative expenses in the Consolidated

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Statements of Income. Beginning in 2005, the pilots were employed by the Company and the costs of salaries and fringe benefits were paid through the Company’s payroll and are included in General and Administrative expenses in the Consolidated Statements of Income. The cost to the Company, including payments made to Yo Pegasus and the cost of pilots’ wages (including fringe benefits) during the years ended August 31, 2006, 2005, and 2004 were $565,000, $595,000 and $573,000, respectively. The Company believes this value represents the market rate for private chartered aircraft for the usage incurred by the Company. Effective May 2007, the pilots are no longer employees of the Company. However, the Company intends to continue its use of the aircraft under a new arrangement.

The Kronos Group

The Company has entered into a sublease with The Kronos Group, an entity controlled by Dr. John G. Sperling, to lease 56,410 square feet of office space in Tempe, Arizona for the period from July 1, 2006, to November 30, 2007. The Company can extend the sublease for additional 30-day periods until February 29, 2008. Payments to this entity during the year ended August 31, 2006, were $152,000. The Company performed a test of comparable lease rates at the time it entered into the lease and concluded these payments approximate fair value.

Deferred Compensation Agreement with Dr. John G. Sperling

See Note 10.

Note 10.  Long-Term Liabilities

Long-term liabilities consist of the following as of August 31:

	2006			2005
				Restated
($ in thousands)
Deferred rent and other lease incentives	$	86,310		$	80,307
Deferred gains on sale-leasebacks		12,261			13,757
Deferred compensation agreement with Dr. John G. Sperling		2,090			1,413
Other long-term liabilities		4,932			4,254
Total liabilities		105,593			99,731
Less current portion		(23,101	)		(19,499	)
Total long-term liabilities	$	82,492		$	80,232

Deferred rent and other lease incentives represent amounts included in lease agreements and are amortized on a straight-line basis over the term of the lease. Deferred gains on sale-leasebacks are deferred and recognized over the respective lease terms. The deferred compensation agreement relates to an agreement between the Company and Dr. John G. Sperling. Other long-term liabilities include primarily capital lease obligations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 11.   Income Taxes

Deferred tax assets and liabilities result primarily from temporary differences in book versus tax basis accounting. Deferred tax assets and liabilities consist of the following as of August 31:

	2006			2005
				Restated
($ in thousands)
Gross deferred tax assets:
Allowance for doubtful accounts	$	24,368		$	18,376
Deferred tuition revenue		540			882
Reserves		5,658			3,097
Share based compensation		41,139			42,127
Deferred gain on sale-leaseback		4,226			4,682
Deferred tenant improvement allowances		20,285			19,514
Other		13,278			8,966
Valuation allowance		(2,050	)		(1,408	)
Total gross deferred tax assets		107,444			96,236
Gross deferred tax liabilities:
Amortization of goodwill		—			6,876
Depreciation of fixed assets		20,458			22,178
Other		1,233			1,134
Total gross deferred tax liabilities		21,691			30,188
Net deferred tax assets	$	85,753		$	66,048

Net deferred tax assets are reflected in the accompanying Consolidated Balance Sheets as follows, as of August 31:

	2006		2005
			Restated
($ in thousands)
Current deferred tax assets, net	$	32,622	$	25,506
Noncurrent deferred tax assets/(liabilities), net		53,131		40,542
Net deferred tax assets	$	85,753	$	66,048

The Company has recorded a non-current valuation allowance related to foreign tax credit carryforwards, as it is more likely than not that these credits will expire unutilized. In light of the Company’s history of profitable operations, management has concluded that it is more likely than not that the Company will ultimately realize the full benefit of its deferred tax assets other than the foreign tax credits mentioned above. Accordingly, the Company believes that a valuation allowance is not required for its remaining net deferred tax assets.

105

APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The related components of the income tax provision/(benefit) are as follows for the years ended August 31, 2006, 2005 and 2004:

	2006			2005		2004
				Restated
($ in thousands)
Current:
Federal	$	226,578		$	237,717	$	190,351
State and other		46,185			48,071		37,923
Total current		272,763			285,788		228,274
Deferred:
Federal		(17,364	)		652		(36,870	)
State and other		(2,144	)		66		(4,983	)
Total deferred		(19,508	)		718		(41,853	)
Total provision for income taxes	$	253,255		$	286,506	$	186,421

The provision for income taxes differs from the tax computed using the statutory U.S. federal income tax rate as a result of the following items for the years ended August 31, 2006, 2005 and 2004:

	2006			2005			2004
				Restated
($ in thousands)
Statutory U.S. federal income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal benefit		4.3	%		4.6	%		4.5	%
Non-deductible compensation		(0.6	)%		1.0	%		0.8	%
Tax-exempt interest		(0.8	)%		(0.6	)%		(1.1	)%
Other, net		0.0	%		0.1	%		0.8	%
Effective income tax rate		37.9	%		40.1	%		40.0	%

Non-deductible compensation is composed of amounts limited by IRC Section 162(m) and related interest and penalties.

In relation to the Restatement, certain tax deductions in prior years with respect to compensation attributable to the exercise of certain stock options by executive officers may be in question. Under IRC Section 162(m), the amount of such deduction per covered executive officer is limited to $1.0 million per year, except to the extent the compensation qualifies as performance based. Compensation attributable to options with revised measurements dates may not have qualified as performance-based compensation. Accordingly, the Company may have claimed deductions with respect to those exercised options that were in excess of the limit imposed under IRC Section 162(m). As a result, the Company has accrued its best estimate with respect to potential tax liabilities, including interest and penalties for the taxable years 2003 through 2005 (which are currently its only open years subject to adjustment for federal tax purposes) of approximately $41.1 million as of August 31, 2006. These accruals have been recorded because the Company believes it is more likely than not that the deductions will be disallowed by the IRS. For prior periods where a liability existed and where the statute of limitations has expired, the accrual relating to that period has been reversed in the appropriate period.

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 12.   Shareholders’ Equity

Conversion of UPX Online Stock Options and Common Stock

On March 24, 2000, the Company’s Board of Directors authorized the issuance of a new class of stock called UPX Online common stock, to reflect the separate performance of UPX Online, a campus within UPX. The Company’s other institutions and its retained interest in UPX Online were subsequently referred to as “Apollo Group.” On October 3, 2000, an offering of 5,750,000 shares of UPX Online common stock was completed at a price of $14.00 per share.

The Company’s Articles of Incorporation (“Articles”) gave it the right, at any time, to convert shares of UPX Online common stock to shares of Apollo Group Class A common stock. On August 6, 2004, the Company’s Board of Directors authorized the conversion of each share of UPX Online common stock to shares of Apollo Group Class A common stock effective August 27, 2004. In accordance with the terms of the Articles, each outstanding share of UPX Online common stock was converted into 1.11527 shares of Apollo Group Class A common stock as of August 27, 2004. The conversion ratio was based upon the relative market values of Apollo Group Class A common stock and UPX Online common stock averaged over the 20 trading days (July 9, 2004 through August 5, 2004) ending five trading days prior to August 12, 2004, the announcement date, and included a 10% premium on the value of UPX Online common stock, all as required by the terms of the Articles. The conversion resulted in the issuance of approximately 16.6 million new shares of Apollo Group Class A common stock. In addition, each unexercised option to purchase UPX Online common stock as of August 27, 2004, was converted to 1.0766 options to purchase Apollo Group Class A common stock. The conversion ratio was based upon the relative market values of Apollo Group Class A common stock and UPX Online common stock at the close of the market on August 12, 2004, prior to the announcement. As a result of the conversion of UPX Online common stock to Apollo Group Class A common stock, the Company no longer reports separate financial statements for UPX Online.

The conversion of UPX Online common stock required the Company to adjust net income attributable to Apollo Group Class A common stock and UPX Online common stock by the premium paid to convert outstanding shares of UPX Online common stock to Apollo Group Class A common stock and to record a share based compensation charge related to the conversion of UPX Online stock options into Apollo Group Class A stock options.

As required by SFAS 128, the Company reduced income attributable to Apollo Group Class A common stock in the fourth quarter of 2004 by $114.2 million related to the non-cash 10% premium paid to redeem the UPX Online common stock, as this premium is considered a benefit that constitutes an additional contractual return to UPX Online shareholders. The amount of the reduction to income attributable to Apollo Group Class A common stock was calculated based on the number of UPX Online common stock shares outstanding and converted on August 27, 2004. This non-cash premium is included on the Consolidated Statements of Changes in Shareholders’ Equity and in the reconciliation of income attributable to Apollo Group Class A common stock on the Consolidated Statements of Income as stock dividends paid.

As required by Emerging Issues Task Force (“EITF”) Statement No. 00-23 “Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44” (“EITF 00-23”), the Company recognized pre-tax share based compensation expenses of $16.9 million, and $100.3 million in 2005 and 2004, respectively, as the options vested.

Treasury Stock

The Board of Directors has authorized the Company to repurchase outstanding shares of Apollo Group Class A common stock, from time to time, depending on market conditions and other considerations, in the open market.

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Shares of Apollo Group Class A and UPX Online common stock repurchased and reissued, and the related total cost, for the last three years are as follows:

									Maximum Value
	Total # of						Average Price		of Shares
	Shares						Paid per		Available for
	Repurchased			Cost			Share		Repurchase
(Numbers in thousands, except per share amounts)
Treasury stock as of August 31, 2003		2,189		$	31,701		$	14.48	$	170,711
New authorizations		—			—			—		500,000
Shares repurchased		7,158			561,496			78.44		(561,496	)
Shares reissued		(9,347	)		(593,197	)		63.46		—
Treasury stock as of August 31, 2004		—			—			—		109,215
New authorizations		—			—			—		750,000
Shares repurchased		11,051			808,192			73.13		(808,192	)
Shares reissued		(2,233	)		(162,450	)		72.75		—
Treasury stock as of August 31, 2005		8,818			645,742			73.23		51,023
New authorizations		—			—			—		600,000
Shares repurchased		8,173			514,931			63.00		(514,931	)
Shares reissued		(1,542	)		(106,627	)		69.15		—
Treasury stock as of August 31, 2006		15,449		$	1,054,046		$	68.23	$	136,092

Cancellation of Executive Officer Stock Options

On January 11, 2006, Todd S. Nelson, the former Chief Executive Officer and President (“Former CEO”), resigned as a director and an officer of the Company. As part of his Separation Agreement dated January 11, 2006, the Company paid the Former CEO $32.3 million ($18.0 million after-tax) on January 26, 2006, which was primarily in exchange for the cancellation of all of his outstanding vested and unvested stock options. The separation agreement resulted in compensation expense of $26.0 million and a reduction of additional paid in capital of $6.3 million, which represents the fair value of the canceled options.

Note 13.   Earnings Per Share

Earnings attributable to the Company’s common stock are as follows:

	Year Ended August 31,
	2006		2005		2004
			Restated
($ in thousands)
Apollo Group Class A	$	414,833	$	427,933	$	141,735
UPX Online		N/A		N/A		138,350
Net income	$	414,833	$	427,933	$	280,085

For the year ended August 31, 2004, the earnings attributable to UPX Online common stock represents the portion of the earnings of UPX Online attributed to the shares of UPX Online common stock outstanding through August 27, 2004, when all of the stock was converted to Apollo Group Class A common stock excluding Apollo Group’s retained interest in UPX Online.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Apollo Group Class A Common Stock

A reconciliation of the basic and diluted earnings per share computations for Apollo Group Class A common stock is as follows:

	Year Ended August 31,
	2006							2005							2004
			Weighted							Weighted							Weighted
			Average		Per Share					Average		Per Share					Average		Per Share
	Income		Shares		Amount			Income		Shares		Amount			Income		Shares		Amount
								Restated							Restated
(Numbers in thousands, except per share amounts)
Basic income per share	$	414,833		174,351	$	2.38		$	427,933		182,928	$	2.34		$	141,735		176,175	$	0.80
Effect of dilutive securities:
Stock options		—		1,854		(0.03	)		—		3,138		(0.04	)		—		2,739		(0.01	)
Diluted income per share	$	414,833		176,205	$	2.35		$	427,933		186,066	$	2.30		$	141,735		178,914	$	0.79

Diluted weighted average shares outstanding include the incremental effect of shares that would be issued upon the assumed exercise of stock options. For the years ended August 31, 2006 and 2005, approximately 4,322,000 and 97,000, respectively, of the Company’s stock options outstanding were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average share price for the year, and, therefore, their inclusion would have been anti-dilutive. These options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options. For the year ended August 31, 2004, all stock options were included in the calculation as the exercise price of all stock options was less than the average share price for the year.

UPX Online Common Stock

A reconciliation of the basic and diluted earnings per share computations for UPX Online common stock through the August 27, 2004 conversion date is as follows:

	For the Period
	September 1, 2003 to August 27,
	2004
			Weighted
			Average		Per Share
	Income		Shares		Amount
	Restated
(Numbers in thousands, except per share amounts)
Basic income per share	$	138,350		15,825	$	8.74
Effect of dilutive securities:
Stock options		—		1,249		(0.64	)
Diluted income per share	$	138,350		17,074	$	8.10

Note 14.   Employee and Director Benefit Plans

401(k) Plan

The Company sponsors a 401(k) plan for certain qualifying employees which provides for employee contributions. Participant contributions are subject to certain restrictions as set forth in the Internal Revenue Code. Upon completion of one year of service and 1,000 hours worked, the Company matches 30% of the eligible

109

APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

participant’s contributions up to 15% of the participant’s gross compensation per paycheck. The Company’s matching contributions totaled $5.6 million, $4.6 million, and $4.0 million for the fiscal years ended August 31, 2006, 2005, and 2004, respectively.

Employee Stock Purchase Plan

The Company’s Third Amended and Restated 1994 Employee Stock Purchase Plan allows the Company’s employees to purchase shares of Apollo Group Class A common stock at quarterly intervals through periodic payroll deductions at a price per share equal to 95% of the fair market value on the purchase date. Prior to the amendment and restatement of the Purchase Plan on October 1, 2005, the Apollo Group, Inc. Second Amended and Restated 1994 Employee Stock Purchase Plan allowed the Company’s employees to purchase shares of the Company’s Apollo Group Class A common stock and, during the period it was outstanding, UPX Online common stock, at a purchase price per share, in general, that was 85% of the lower of (1) the fair market value (as defined) on the enrollment date into the respective quarterly offering period or (2) the fair market value on the purchase date.

Share Based Compensation Plans

See also Note 3, “Restatement of Consolidated Financial Statements,” for the discussion of the restatement related to the Company’s stock option grants.

The Company has three share based compensation plans: the Apollo Group, Inc. Second Amended and Restated Director Stock Plan (“DSP”), the LTIP and the 2SIP.

The DSP provided for an annual grant to the Company’s non-employee directors of options to purchase shares of the Company’s Apollo Group Class A common stock on September 1 of each year through 2003. No additional options are available for issuance under this plan.

Under the LTIP, the Company may grant non-qualified stock options, stock appreciation rights, and other share based awards in the Company’s Apollo Group Class A common stock to certain officers, key employees, or directors of the Company. Most of the options granted under the LTIP vest 25% per year over four years. The vesting may be accelerated for certain grants if certain operational goals are met.

Under the 2SIP, the Company may grant non-qualified stock options, incentive stock options, stock appreciation rights, and other share based awards in the Company’s Apollo Group Class A common stock to certain officers, key employees, or directors of the Company. Prior to the conversion of UPX Online common stock to Apollo Group Class A common stock, the Company had the ability to also grant non-qualified stock options, incentive stock options, stock appreciation rights, and other share based awards in UPX Online common stock. Any unexercised UPX Online common stock options outstanding as of August 27, 2004, were converted to options to purchase Apollo Group Class A common stock. Most of the options granted under the 2SIP vest 25% per year over four years. The vesting may be accelerated for certain grants if certain operational goals are met.

Under all of the above Plans, the stock option price may not be less than 100% of the fair market value of the common stock on the date of grant. Options are granted for terms of up to ten years and can vest over periods from six months up to four years. The requisite service period for all options is equal to the vesting period. Under the Plans currently in effect (the LTIP and 2SIP), the Company is authorized to grant up to 30.8 million shares of common stock under these Plans. As of August 31, 2006, approximately 2.8 million authorized and unissued shares of common stock are reserved for issuance under the LTIP and the 2SIP.

110

APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Apollo Group Class A Stock Options

A summary of the activity and changes related to stock options to purchase Apollo Group Class A common stock granted under the DSP, the LTIP, and the 2SIP is as follows:

Summary of Stock Options Outstanding

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Total			Exercise Price		Contractual		Intrinsic
	Shares			per Share		Term (years)		Value ($)(1)
(Numbers in thousands, except per share amounts)
Outstanding as of August 31, 2003		6,758		$	21.02
Granted		1,957			65.17
Exercised		(1,300	)		24.42
Forfeited, canceled or expired		(126	)		30.98
Converted from UPX Online common stock		2,881			20.41
Outstanding as of August 31, 2004		10,170			28.79
Granted		1,311			71.94
Exercised		(2,505	)		16.87
Forfeited, canceled or expired		(260	)		46.27
Outstanding as of August 31, 2005		8,716			38.30
Granted		3,874			57.37
Exercised		(1,395	)		15.32
Forfeited, canceled or expired		(1,871	)		61.08
Outstanding as of August 31, 2006		9,324			44.96		6.15	$	110,135
Vested and expected to vest as of August 31, 2006		8,747			44.15		5.99		110,043
Exercisable as of August 31, 2006		5,811			38.02		4.80		107,166
Available for issuance as of August 31, 2006		2,786

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on August 31, 2006 ($50.21) in excess of the exercise price multiplied by the number of options outstanding or exercisable.

As of August 31, 2006, there was approximately $63.6 million of total unrecognized share based compensation cost related to unvested share based awards granted under the Company’s share based compensation plans. The Company expects that this compensation will be recognized through the fiscal year ended August 31, 2010.

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes information related to the stock options to purchase outstanding and exercisable options as of August 31, 2006:

	Options Outstanding						Options Exercisable
			Weighted Avg.		Weighted Avg.				Weighted Avg.
			Contractual		Exercise				Exercise
Range of	Options		Life		Price		Options		Price
Exercise Prices	Outstanding		Remaining		per Share		Exercisable		per Share
(Options in thousands)
$ 6.50 to $17.65		2,151		3.34	$	11.28		2,076	$	11.27
$17.66 to $44.00		1,487		4.69		32.47		1,484		32.46
$51.33 to $51.33		2,018		8.94		51.33		—		—
$56.20 to $63.79		2,132		7.08		62.17		1,236		61.33
$64.07 to $91.00		1,536		6.50		71.99		1,015		72.45
$ 6.50 to $91.00		9,324		6.15		44.96		5,811		38.02

The following table summarizes information related to stock options exercised for the years ended August 31:

	For the Year Ended August 31,
	2006		2005		2004
(In thousands)
Amounts related to options exercised:
Intrinsic value realized by optionee		58,962		150,466		98,475
Actual tax benefit realized by Company for tax deductions		19,161		47,640		32,636

The Company issues shares of treasury stock upon exercise of stock options.

Adoption of SFAS 123(R) on September 1, 2005

The table below outlines the effects on share based compensation expense for fiscal year ended August 31, 2006, as a result of adopting SFAS 123(R):

	Year Ended August 31, 2006
(Numbers in thousands, except per share amounts)
Instructional costs and services	$	12,418
Selling and promotional		2,287
General and administrative		13,030
Share based compensation expense included in operating expenses		27,735
Tax effect of share based compensation		(10,986	)
Share based compensation expense, net of tax	$	16,749

112

APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

SFAS 123(R) Assumptions

Fair Value — The Company uses the BSM to estimate the fair value of its options as of the grant dates using the following weighted average assumptions:

	For the Year Ended August 31,
	2006			2005			2004
				Restated
Expected volatility		34.6	%		30.2	%		38.7	%
Expected life (years)		5.9			3.9			3.2
Risk-free interest rate		4.8	%		3.4	%		3.2	%
Dividend yield		0.0	%		0.0	%		0.0	%

The weighted average estimated grant date fair value, as defined by SFAS 123(R), for options granted under the Company’s stock option plan during the year ended August 31, 2006 was $26.06 per share.

Expected Volatility — The Company uses an average of its historical volatility and the implied volatility of long-lived call options to estimate expected volatility consistent with SFAS 123(R) and SAB 107. Prior to the adoption of SFAS 123(R), the Company had used an estimate based on its historical volatility for purposes of its pro forma disclosure.

Expected Life (years) — Beginning on September 1, 2005, the expected life was determined taking into account both the contractual term of the option and the effects of employees’ expected exercise. Where applicable, the expected life has been determined using the simplified method pursuant to SAB 107. Prior to September 1, 2005, the expected life was determined based on an analysis of historical exercise behavior and management judgment.

Risk-Free Interest Rate — The Company uses the U.S. constant maturity treasury rates as the risk-free rate interpolated between the years commensurate with the expected life assumptions.

Dividend Yield — The dividend yield assumption is based on the fact that the Company has not historically paid dividends and does not expect to pay dividends in the future.

Forfeitures — Forfeitures are estimated at the time of grant based on historical forfeiture activity adjusted for any known nonrecurring activity. If necessary, management estimates are trued up at the end of each vesting period if actual forfeitures differ from those estimates.

Expected Vesting Period — The Company amortizes the share based compensation expense, net of forfeitures, over the expected vesting period using the accelerated recognition method for pre-September 1, 2005 grants and the straight-line method for awards with only service conditions and the accelerated recognition method for awards with performance conditions for post-September 1, 2005 grants in accordance with SFAS 123(R).

Pro forma Disclosures under SFAS 123 prior to September 1, 2005

Prior to fiscal year 2006, the Company accounted for stock options under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and its related Interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to options granted under the Company’s stock option plans for the fiscal years ended August 31, 2005 and 2004. For purposes of the pro forma disclosure, under SFAS 123, the fair

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

value of the options is estimated using the BSM and the expense is amortized over the options’ vesting periods, and forfeitures are accounted for as they occur.

Apollo Group

	2005			2004
	Restated
($ in thousands, except per share amounts)
Net income	$	427,933		$	141,735
Add:
Share based compensation expense — intrinsic value as reported under APB 25: UPX Online converted options, net of tax		10,176			62,454
Share based compensation expense — intrinsic value as reported under APB 25: all other options, net of tax		4,737			3,174
Deduct:
Share based compensation expense — fair value as determined under SFAS 123: all options, net of tax		(29,712	)		(17,428	)
Pro forma net income	$	413,134		$	189,935
Earnings per share:
Basic	$	2.34		$	0.80
Basic — pro forma	$	2.26		$	1.08
Diluted	$	2.30		$	0.79
Diluted — pro forma	$	2.22		$	1.06

UPX Online

	For the Period From
	September 1, 2003 to
	August 27, 2004
	Restated
($ in thousands, except per share amounts)
Net income	$	138,350
Add:
Share based compensation expense — intrinsic value as reported under APB 25: all other options, net of tax		1,838
Deduct:
Share based compensation expense — fair value as determined under SFAS 123: all options, net of tax		(5,166	)
Pro forma net income	$	135,022
Earnings per share:
Basic	$	8.74
Basic — pro forma	$	8.53
Diluted	$	8.10
Diluted — pro forma	$	7.91

114

APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Conversion of UPX Online Stock Options

As part of the Company’s conversion of UPX Online common stock to Apollo Group Class A common stock, each unexercised option to purchase UPX Online common stock as of August 27, 2004, was converted to 1.0766 options to purchase Apollo Group Class A common stock. The conversion ratio was based upon the relative market values of Apollo Group Class A common stock and UPX Online common stock at the close of the market on August 12, 2004, prior to the announcement.

A summary of the activity related to stock options to purchase UPX Online common stock granted under the DSP and the 2SIP is as follows:

Summary of UPX Online Stock Options

				Weighted
				Average
	Total			Exercise Price
	Shares			per Share
(In thousands)
Outstanding as of August 31, 2003		3,064		$	13.74
Granted		485			64.80
Exercised		(803	)		16.93
Canceled		(70	)		24.77
Converted to Apollo Group Class A common stock		(2,676	)		21.98
Outstanding as of August 27, 2004		—		$	—

Note 15.   Commitments and Contingencies

The Company is subject to various claims and contingencies in the ordinary course of business, including those related to regulation, litigation, business transactions, employee related matters and taxes, among others. While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial positions, results of operations or cash flows.

Guarantees

The Company has agreed to indemnify its officers and directors for certain events or occurrences. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer liability insurance policies that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, management believes the estimated fair value of these indemnification agreements is minimal.

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APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Lease Commitments

The Company is obligated under property and equipment leases which have been classified as operating leases. The following is a schedule of future minimum lease commitments as of August 31, 2006:

	Operating Leases
($ in thousands)
2007	$	132,115
2008		129,384
2009		119,573
2010		103,646
2011		84,259
Thereafter		146,333
	$	715,310

Facility and equipment expense under operating leases totaled $141.2 million, $107.6 million, and $114.8 million for the years ended August 31, 2006, 2005, and 2004, respectively.

The Company has entered into five separate sale-leaseback agreements with unrelated third parties. These agreements were related to property located throughout Phoenix, Arizona, which the Company currently uses to support its operations. The property is subject to ten year lease terms expiring between 2010 and 2014. In total the Company received approximately $46.2 million in cash for the property, which generated a combined gain of approximately $17.5 million that is being deferred over the respective lease terms. The Company recognized total gains in its income statement of $1.5 million, $1.7 million and $0.9 million in 2006, 2005 and 2004, respectively. The balance of the total deferred gain was $12.3 million as of August 31, 2006 and $13.8 million as of August 31, 2005 and is included in long-term liabilities on the Consolidated Balance Sheets.

Letter of Credit

As of August 31, 2006, an unsecured letter of credit for WIU in the amount of $5.3 million is outstanding. The letter of credit expired in March 2007.

Sale Lease Back Option

On June 20, 2006, the Company entered into an option agreement (which was amended in November 2006) with Macquarie Riverpoint AZ, LLC (“Macquarie”). The option agreement allows the Company to execute a sale and simultaneous leaseback of the new corporate headquarters buildings located in Phoenix, Arizona. The Company anticipates beginning to occupy this building late in fiscal year 2007 and finishing construction by the end of the third quarter of 2008. In the third quarter of 2008, the Company anticipates executing the sale lease-back option. When the sale-leaseback option is exercised, the Company anticipates receiving approximately $170 million in cash for the building and land, and expects to generate a gain on the sale of approximately $20-30 million. The gain will be deferred over the 12-year term of the lease agreement.

Internal Revenue Service Audit

On September 13, 2006, the Internal Revenue Service (“IRS”) commenced an audit of the Company’s U.S. federal income tax returns for the fiscal years ended August 31, 2003 through 2005 for income and deductions previously claimed by the Company, including deductions claimed under IRC Section 162(m). In relation to the Restatement, certain tax deductions in prior years with respect to compensation attributable to the exercise of certain stock options by executive officers may be in question. Under IRC Section 162(m), the amount of such deduction per covered executive officer is limited to $1.0 million per year, except to the extent the compensation

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qualifies as performance-based. Compensation attributable to options with revised measurement dates may not have qualified as performance-based compensation. Accordingly, the Company may have claimed deductions with respect to those exercised options that were in excess of the limit imposed under IRC Section 162(m). As a result, the Company has accrued its best estimate with respect to potential tax liabilities, including interest and penalties for the taxable years 2003 through 2005 (which are currently its only open years subject to adjustment for federal tax purposes), of approximately $41.1 million as of August 31, 2006. These accruals have been recorded because the Company believes it is more likely than not that the deductions will be disallowed by the IRS. For prior periods where a liability existed and where the statute of limitations has expired, the accrual relating to that period has been reversed in the appropriate period. In addition, the IRS audit may result in additional tax, penalties and interest, the amount of which may or may not be material, but this will not be known until the IRS audit is complete. The Company does not anticipate that the IRS audit will be complete prior to the second quarter of fiscal year 2008, and it may extend past such quarter, depending on the issues raised by the IRS with respect to such years.

Income Tax Related Matters — Section 409A

The revised measurement dates for certain stock options discussed above may result in adverse tax consequences to holders of those options under IRC Section 409A. Section 409A was enacted in 2004 to impose certain restrictions on deferred compensation arrangements, including limitations on the subsequent distribution of deferred amounts. Deferred compensation for this purpose is defined very broadly and, as a result, includes in that definition, options granted at a discounted exercise price, to the extent those options vest after December 31, 2004 (“409A Affected Options”). Therefore, the revised measurement dates for the options discussed above could subject the options that vest after calendar year 2004 to treatment as 409A Affected Options. Each holder of a 409A Affected Option would recognize taxable income on the option spread at the time of vesting (or, for 409A Affected Options exercised in calendar years 2006 or 2007, at the time of exercise) and would incur, in addition to regular income taxes, an additional 20% penalty tax on such spread and interest. Similar penalty taxes could apply under state tax laws. We are subject to certain reporting and withholding obligations with respect to the taxable income on the option spread.

(1) Unexercised 409A Affected Options

Section 16 Officers:  In December 2006, the Company entered into irrevocable written agreements with each of its Section 16 Officers and certain Former Section 16 Officers, holding 409A Affected Options pursuant to which those options were to be brought into compliance with Section 409A, and thereby would avoid the adverse tax consequences summarized above, through either of the following alternatives: (a) amendment of the option to increase the exercise price to the market price per share of the Company’s Class A common stock on the revised measurement date or (b) the optionee’s commitment to exercise the option (to the extent in the money) during the 2007 calendar year prior to its contractual expiration date. Generally, these amendments will be treated as a modification of the option under SFAS 123(R). However, in this circumstance, there are no accounting consequences under SFAS 123(R).

Non-Section 16 Officers:  An offer to amend the 409A Affected Options held by non-Section 16 Officers to increase the exercise price to the market price per share of the underlying Class A common stock on the revised measurement date cannot be made until after this Annual Report on Form 10-K and all other delinquent filings are filed with the SEC. In order to avoid adverse taxation under Section 409A, this amendment must be made on or before the earlier of (i) December 31, 2007 or (ii) the exercise of the 409A Affected Options during the 2007 calendar year. The Company anticipates that it will commence such an offer after the filing of this Annual Report on Form 10-K and all other delinquent filings.

As part of the offer and amendment process under IRC Section 409A, the Company may provide bonuses to the holders of the amended options to compensate them for the resulting increase in their stock option exercise price. However, the Company has not yet made a decision to implement a bonus program to compensate either the Section 16 Officers or the non-Section 16 Officers resulting from the increased exercise prices. A decision to

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compensate for increased prices through a bonus would represent a modification to the grant and would result in accounting consequences under SFAS 123(R).

(2) Exercised 409A Affected Options

In February 2007, the Company elected to participate in a program announced by the Internal Revenue Service in Notice 2007-30, which pertains to 409A Affected Options exercised by non-Section 16 Officers during the calendar year 2006 and which allows the Company to pay the penalty tax and interest due to the related measurement date changes that would otherwise be payable by the option holders who exercised the 409A Affected Options. The payment of the tax penalty and interest on behalf of the option holders in 2007 will result in additional taxable income to the option holders. As such, the Company will pay on behalf of or reimburse the option holders for applicable payroll and income taxes related to the additional income, as well as provide a gross up for any tax consequences of the penalty tax and interest reimbursement it makes. The Company recorded a pre-tax liability in the second quarter of 2007 for compensation expense under this program totaling approximately $2.6 million.

Contingencies Related to Litigation and Other Proceedings

The following is a description of pending litigation and other proceedings that fall outside the scope of ordinary and routine litigation incidental to the Company’s business.

Pending Litigation

Incentive Compensation Qui Tam Action

On August 29, 2003, the Company was notified that a qui tam action had been filed against it on March 7, 2003, in the U.S. District Court for the Eastern District of California by two current employees on behalf of themselves and the federal government. When the federal government declines to intervene in a qui tam action, as it has done in this case, the relators may elect to pursue the litigation on behalf of the federal government and, if they are successful, receive a portion of the federal government’s recovery. The qui tam action alleges, among other things, violations of the False Claims Act, 31 U.S.C. § 3729(a)(1) and (2), by UPX for submission of a knowingly false or fraudulent claim for payment or approval, and knowingly false records or statements to get a false or fraudulent claim paid or approved in connection with federal student aid programs, and asserts that UPX improperly compensates its employees; on or about October 20, 2003, a motion to dismiss the action was filed and was subsequently granted with leave to amend the complaint. Subsequently, a second amended complaint was filed on or about March 3, 2004. A motion to dismiss this amended complaint was filed on or about March 22, 2004, and the case was subsequently dismissed with prejudice. On June 11, 2004, an appeal was filed with the U.S. Court of Appeals for the Ninth Circuit. On September 5, 2006, the Ninth Circuit reversed the ruling of the district court and held that the relators had adequately alleged the elements of a False Claims Act cause of action. On January 22, 2007, UPX filed a Petition for Writ of Certiorari with the U.S. Supreme Court; on April 23, 2007, the U.S. Supreme Court denied UPX’s petition. As a result, the case has been remanded to the District Court in accordance with the order of the Ninth Circuit. In addition, on March 23, 2007, UPX filed a motion in the District Court to dismiss the complaint on the grounds that the September 7, 2004 settlement agreement between UPX and the U.S. Department of Education constituted an alternate remedy under the False Claims Act. In addition, the Company has filed a Motion to Dismiss based on the availability of an alternative remedy; this Motion is currently pending. Discovery has not yet commenced in the District Court. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

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Santa Teresa Qui Tam Action

On July 27, 2005, the Company received a subpoena from the U.S. Department of Education, Office of the Inspector General, requiring that the Company produce documents relating to enrollment and financial aid activities at the Santa Teresa campus during the period January 1, 2000 to August 31, 2004. Subsequently, an Assistant U.S. Attorney informed the Company that the subpoena was part of an investigation being conducted by the government for the purpose of determining whether or not the government would intervene in a qui tam lawsuit. On August 23, 2006, the DOJ filed a Notice of Election to Decline Intervention in this qui tam lawsuit, which had been filed in the U.S. District Court for the Western District of Texas. On or about December 8, 2006, the relators in this qui tam lawsuit served the Company with the complaint. On January 29, 2007, the relators filed a Motion to Dismiss Without Prejudice to the United States, which requested that the court dismiss the action with prejudice as to the relators but without prejudice as to the United States. The United States consented to the dismissal without prejudice as to the United States. On February 2, 2007, the court granted the relators’ motion. This action has not had and will not have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

Axia Qui Tam Action

On August 15, 2005, a relator filed a qui tam complaint under seal in the U.S. District Court for the District of Columbia. On April 12, 2006, the DOJ filed The Government’s Notice of Election to Decline Intervention in this qui tam lawsuit and on June 15, 2006, the court entered an order unsealing the complaint. An amended complaint was served on or about November 1, 2006. On November 15, 2006, the relator filed a Voluntary Notice of Dismissal. On November 17, 2006, the court ordered that the relator comply with the statutory requirements for dismissal of a qui tam False Claims Act action by December 1, 2006. On December 1, 2006, the United States consented to the dismissal of the action with prejudice as to the relator, so long as the dismissal is without prejudice as to the United States. On February 2, 2007, the court ordered the United States to articulate its reasons for consenting to the dismissal of the action. On February 21, 2007, the United States filed a Statement of Reasons for Consenting to Dismissal. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Sanders Class Action

On approximately September 26, 2003, a class action complaint was filed in the Superior Court of the State of California for the County of Orange, captioned Bryan Sanders et al v. University of Phoenix, Inc. et al, Case No. 03CC00430. Plaintiff, a former academic advisor with UPX, filed this class action on behalf of himself and current and former academic advisors employed by the Company in the State of California and seeks certification as a class, monetary damages in unspecified amounts and injunctive relief. Plaintiff alleges that during his employment, he and other academic advisors worked in excess of eight hours per day or 40 hours per week, and contends that the Company failed to pay overtime. On June 6, 2005, the court granted plaintiffs’ motion to remove Bryan Sanders as the named plaintiff and replace him with Deryl Clark and Romero Ontiveros. Plaintiffs’ counsel has advised defendants and the court that Mr. Ontiveros no longer intends to serve as a named plaintiff. Five status conferences have occurred and the parties are now in the process of discovery. The court granted defendants’ motion to transfer venue to the Superior Court of the State of California for the County of Solano. Plaintiffs’ motion to certify the class was continued by the court and scheduled for a hearing in August 2006. A motion for summary judgment was filed on May 15, 2006, on behalf of UPX and Apollo Group, Inc. On August 23, 2006, the court issued an order and denied Clark’s motion to certify the class. On October 24, 2006, the court granted UPX’s and Apollo Group’s motion for summary judgment. In November 2006, Clark agreed not to appeal the court’s ruling in exchange for a waiver of costs. This action has not had and will not have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

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Sekuk Class Action

On approximately October 12, 2004, a class action complaint was filed in the U.S. District Court for the District of Arizona, captioned Sekuk Global Enterprises et al v. Apollo Group, Inc. et al, Case No. CV 04-2147 PHX NVW. A second class action complaint making similar allegations was filed on or about October 18, 2004, in the U.S. District Court for the District of Arizona, captioned Christopher Carmona et al v. Apollo Group, Inc. et al, Case No. CV 04-2204 PHX EHC. A third class action complaint making similar allegations was filed on or about October 28, 2004, in the U.S. District Court for the District of Arizona, captioned Jack B. McBride et al v. Apollo Group, Inc. et al, Case No. CV 04-2334 PHX LOA. The court consolidated the three pending class action complaints and a consolidated class action complaint was filed on May 16, 2005 by the lead plaintiff. Lead plaintiff purports to represent a class of the Company’s shareholders who acquired their shares between February 27, 2004 and September 14, 2004, and seeks monetary damages in unspecified amounts. Lead plaintiff alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under the Act by the Company for their issuance of allegedly materially false and misleading statements in connection with their failure to publicly disclose the contents of the U.S. Department of Education’s program review report. A motion to dismiss the consolidated class action complaint was filed on June 15, 2005, on behalf of Apollo Group, Inc. and the individual named defendants. The court denied the motion to dismiss on October 18, 2005 and discovery commenced. The parties conducted discovery from October 2005 until discovery closed on February 16, 2007. On March 9, 2007, both parties filed motions for summary judgment. Opposition briefs were filed on May 11, 2007, and reply briefs are due to be filed no later than June 8, 2007. The summary judgment motions are scheduled to be heard on September 4, 2007. The case remains set for trial on November 14, 2007. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Alaska Electrical Pension Fund Derivative Action

Three shareholder derivative suits are pending in the U.S. District Court for the District of Arizona, alleging on behalf of the Company that certain of the Company’s current and former officers and directors engaged in misconduct regarding stock option grants. As with any derivative action, an independent committee of the Board of Directors of the Company will need to determine whether it is in the Company’s best interest to itself pursue the allegations made on behalf of the Company. These derivative complaints were filed on or around September 5 and 19, 2006 and November 11, 2006 after the Company announced the formation of the Special Committee and the commencement of its investigation, and the Company has moved the Court to stay these actions pending the conclusion of the Special Committee’s investigation and review of plaintiffs’ claims. On December 4, 2006, the Court issued an order in the case captioned Alaska Electrical Pension Fund v. Sperling, Case No. CV06-02124-PHX-ROS, stating that the Company’s motion to stay the proceedings would be granted upon notice that Hedy F. Govenar had been replaced on the Special Committee by another board member who was not a party to the case. Effective December 8, 2006, K. Sue Redman has replaced Ms. Govenar as a member of the Special Committee. As of March 13, 2007, James R. Reis joined the Special Committee in place of Daniel D. Diethelm. Now that the Special Committee has concluded its factual findings, the Special Committee has been charged to analyze, in light of the investigation, whether the pursuit of these shareholder derivative cases would be in the Company’s best interest. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

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EEOC v. UPX

On September 25, 2006, the Equal Employment Opportunity Commission (“EEOC”) filed a Title VII action against UPX captioned Equal Employment Opportunity Commission v. UPX, No. CV-06-2303-PHX-MHM, in the U.S. District Court for the District of Arizona on behalf of four identified individuals and an asserted class of unidentified individuals who were allegedly discriminated against because they were not members of the Church of Jesus Christ of Latter Day Saints. The Complaint also alleges that the identified individuals were retaliated against after complaining about the alleged discrimination. The EEOC did not serve its Complaint on UPX until November 21, 2006. UPX answered the Complaint on December 8, 2006, denying the material allegations asserted. An initial Scheduling Conference was held on February 15, 2007. The parties are currently engaged in initial discovery. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Barnett Derivative Action

On April 24, 2006, Larry Barnett filed a complaint derivatively on behalf of the Company. The lawsuit was filed in the Superior Court for the State of Arizona, Maricopa County and is entitled Barnett v. John Blair et al, Case Number CV2006-051558. On October 10, 2006, plaintiff filed a First Amended Complaint adding allegations of stock option backdating. The complaint names as defendants the Company, John M. Blair, Dino J. DeConcini, Hedy F. Govenar, Kenda Gonzales, Todd Nelson, Laura Palmer Noone, John Norton, John G. Sperling and Peter V. Sperling. The First Amended Complaint alleges, among other things, that the individual defendants breached their fiduciary duties to the Company and that certain of the individual defendants were unjustly enriched by their receipt of backdated stock option grants. The plaintiff seeks, among other things, an award of unspecified damages and reasonable costs and expenses, including attorneys’ fees. On August 21, 2006, the Company filed a Motion to Stay the case arguing that it is not in the best interests of the Company to prosecute plaintiffs’ purported derivative claims prior to resolution of the parallel federal securities class action pending against the Company in federal district court as described below under “Teamsters Local Union Putative Class Action.” The individual defendants joined in the Motion to Stay. On November 10, 2006, after plaintiff filed the First Amended Complaint and added allegations of stock option backdating, the Company filed an Amended Motion to Stay arguing that the action should be stayed pending resolution of the federal securities class action and pending the Special Committee’s investigation into the allegations of stock option backdating. Also on November 10, 2006, the Company filed a motion to sever the claims relating to stock option backdating from the claims made in the original complaint. On January 29, 2007, the Court granted the Amended Motion to Stay for a period of six months. The Court set an interim case management conference for June 4, 2007. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Bamboo Partners Derivative Action

On August 15, 2006, Bamboo Partners filed a complaint derivatively on behalf of the Company and UPX. The lawsuit was filed in the U.S. District Court, District of Arizona and is entitled Bamboo Partners v. Nelson et al., Case Number 2:06-at-10858. The complaint names as defendants Apollo Group, Inc., UPX, Todd Nelson, Kenda Gonzales, Daniel Bachus, John G. Sperling, Peter V. Sperling, Laura Palmer Noone, John M. Blair, Dino J. DeConcini, Hedy F. Govenar and John Norton III. The complaint alleges, among other things, that the defendants violated Sections 10(B) and 21D of the Exchange Act and numerous breaches of fiduciary duties. The complaint seeks damages sustained by Apollo and UPX as a result of breaches of fiduciary duty, abuse of control and waste of corporate assets. The complaint seeks damages against Laura Palmer Noone for unjust enrichment. The complaint also seeks attorneys’ fees, reasonable costs and disbursements. On November 13, 2006, the Company filed a Motion

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to Stay the case arguing that it is not in the best interests of the Company to prosecute plaintiffs’ purported derivative claims prior to resolution of the parallel federal securities class action pending against the Company in federal district court, as described below under “Teamsters Local Union Putative Class Action.” The individual defendants joined in the Motion to Stay. The court granted the Company’s motion to stay on May 18, 2007. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Teamsters Local Union Putative Class Action

On November 2, 2006, a plaintiff filed a class action complaint purporting to represent a class of shareholders who purchased the Company’s stock between November 28, 2001 and October 28, 2006. The complaint alleges that the Company and certain of its current and former directors and officers violated Sections 10(b) and 20(a) and Rule 10b-5 promulgated thereunder of the Securities Exchange Act of 1934 by purportedly failing to disclose alleged deficiencies in the Company’s stock option granting policies and practices. Plaintiff seeks compensatory damages and other relief. On January 3, 2007, other shareholders, through their separate attorneys, filed motions seeking appointment as lead plaintiff and approval of their designated counsel as lead counsel to pursue this action. Those motions are pending before the court. The Company has not yet responded to the complaint in this action, but intends to vigorously oppose plaintiffs’ allegations. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. In addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Regulatory and Other Legal Matters

U.S. Department of Education Audits

From time to time as part of the normal course of business, UPX and WIU are subject to periodic program reviews and audits by regulating bodies. The U.S. Department of Education, OIG, conducted an audit of UPX for the period September 1, 2002, through March 31, 2004. On August 24, 2005, the OIG issued a final audit report whereby the OIG concluded that UPX had policies and procedures that provide reasonable assurances that the institution properly makes initial and subsequent disbursements to students enrolled in Title IV eligible programs and issued certain recommendations. On September 27, 2006, the U.S. Department of Education issued a final audit determination letter regarding disbursing Title IV funds to student accounts for allowable institutional charges and disbursing funds to students who were not in eligible programs. UPX has complied with the final audit determination letter.

On December 22, 2005, the OIG issued a separate audit report on their review of UPX’s policies and procedures for the calculation and return of Title IV funds. The OIG concluded that UPX had policies and procedures that provide reasonable assurances that it properly identified withdrawn students, appropriately determined whether a return of Title IV funds was required, returned Title IV funds for withdrawn students in a timely manner and used appropriate methodologies for most aspects of calculating the return of Title IV funds. The OIG did conclude, however, that UPX did not use appropriate methodologies for calculating the percentage of Title IV financial aid earned from March 1, 2004 through December 7, 2004. Since December 8, 2004, UPX has adopted the methodologies deemed appropriate by the U.S. Department of Education. The U.S. Department of Education will ultimately issue a final audit determination letter regarding the return of Title IV funds. UPX has accrued $3.7 million, which is its best estimate of the refund liability. While the outcome of the OIG audit proceedings are on-going, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from these actions.

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Department of Justice Investigation

On June 19, 2006, the Company received a grand jury subpoena from the U.S. Attorney’s Office for the Southern District of New York requesting that the Company provide documents relating to its stock option grants. The Company is cooperating fully with this request.

SEC Informal Inquiry

On June 30, 2006, the Company was notified by letter from the SEC of an informal inquiry and the Commission’s request for the production of documents relating to the Company’s stock option grants. The Company is cooperating fully with this investigation.

Nasdaq Proceeding

Due to the Independent and Internal Reviews and the resulting Restatement, the Company did not timely file its Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, the Annual Report on Form 10-K for the fiscal year ended August 31, 2006 and the Quarterly Reports on Form 10-Q for the quarters ended November 30, 2006 and February 28, 2007. As a result, the Company received four Nasdaq Staff Determination letters, dated July 11, 2006, November 14, 2006, January 11, 2007 and April 11, 2007, respectively, stating that the Company was not in compliance with the filing requirements of Marketplace Rule 4310(c)(14) and, therefore, that the Company’s stock was subject to delisting from the Nasdaq Global Select Market. The Company appealed this determination, requested a hearing before a Nasdaq Listing Qualifications Panel (the “Panel”) and attended the hearing at which the Company sought appropriate exceptions to the filing requirements from the Panel, pending completion of its delinquent reports. On September 20, 2006, the Panel granted the Company’s request for continued listing of its securities on the Nasdaq Global Select Market, subject to the condition that the Company files this Report and its Quarterly Reports on Form 10-Q for the quarters ended May 31, 2006 and November 30, 2006 on or before December 29, 2006. On December 14, 2006, the Company informed the Panel that it would not be able to file its delinquent reports by December 29, 2006 and sought a reasonable extension of that date. On December 20, 2006, the Panel denied the Company’s request and notified the Company that it had determined to suspend trading of the Company’s securities on December 29, 2006. The Company appealed this determination, and on December 22, 2006, the Company was informed by the Listing Council that it had determined to call the Panel’s Delisting Decision for review, as contemplated by Marketplace Rule 4807(b), and had also stayed the delisting of the Company’s securities pending further review of the Listing Council. The Company submitted additional information for the Listing Council’s consideration on February 2, 2007. On March 29, 2007, the Panel determined to exercise its discretionary authority, under Rule 4802(b), to grant the Company an exception to demonstrate compliance with all of the Nasdaq Global Select Market continued listing requirements until May 25, 2007. With the filing of this Report and its Quarterly Reports on Form 10-Q for the quarters ended May 31, 2006, November 30, 2006 and February 28, 2007, the Company believes it is current with SEC reporting requirements and Nasdaq listing requirements.

Note 16.   Segment Reporting

The Company operates exclusively in the educational industry providing higher education. The Company’s five operating segments are aggregated into three reportable segments for financial reporting purposes: UPX, Other Schools, and Corporate. The Other Schools segment includes IPD, WIU, and CFP. The UPX and Other Schools segments are composed of educational operations. The Company’s operations are also subject to a similar regulatory environment, which includes licensing and accreditation.

Consistent with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), the Company’s reportable segments have been determined based on the method by which management evaluates performance and allocates resources. Management evaluates performance based on reportable segment profit. This measure of profit includes allocating all corporate support costs to each segment,

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as part of a general allocation, but, excludes interest income and certain revenue and unallocated corporate charges. The revenue and corporate charges which are not allocated to UPX or Other School segments are included in the Corporate segment.

The accounting policies of each segment are consistent with those described in the summary of significant accounting policies in Note 2. Transactions between segments, which are not significant, are consummated on a basis intended to reflect the market value of the underlying services and are eliminated upon consolidation.

The Company’s principal operations are located in the United States, and the results of operations and long-lived assets in geographic regions outside of the United States are not significant. During the years ended August 31, 2006, 2005, and 2004, no individual customer accounted for more than 10% of the Company’s consolidated revenues.

Summary financial information by reportable segment is as follows:

	Year Ended August 31,
	2006			2005			2004
				Restated			Restated
($ in thousands)
Tuition and other revenue, net
UPX	$	2,074,443		$	2,014,124		$	1,699,005
Other Schools		402,051			235,183			96,982
Corporate		1,039			1,807			4,060
Total tuition and other revenue, net		2,477,533		$	2,251,114		$	1,800,047
Income from operations:
UPX		605,708		$	636,463		$	478,639
Other Schools		65,790			70,417			15,665
Corporate/Eliminations		(21,464	)		(9,228	)		(44,103	)
		650,034			697,652			450,201
Reconciling items:
Interest income and other, net		18,054			16,787			16,305
Income before income taxes	$	668,088		$	714,439		$	466,506

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	Year Ended August 31,
	2006		2005		2004
			Restated		Restated
Depreciation and Amortization:
UPX	$	40,239	$	26,187	$	33,080
Other Schools		4,720		4,686		2,955
Corporate/Eliminations		22,331		14,719		9,752
	$	67,290	$	45,592	$	45,787
Capital Expenditures:
UPX	$	42,655	$	57,823	$	79,185
Other Schools		1,497		4,211		2,889
Corporate		67,088		32,448		27,455
	$	111,240	$	94,482	$	109,529

	As of August 31,
	2006		2005
			Restated
Assets:
UPX	$	764,854	$	870,225
Other Schools		137,355		155,881
Corporate/Eliminations		380,796		255,442
	$	1,283,005	$	1,281,548

Note 17.   Quarterly Results of Operations (Restated and Unaudited)

Seasonality

The Company’s operations are generally subject to seasonal trends. The Company experiences, and expects to continue to experience, seasonal fluctuations in the results of operations as a result of changes in the level of student enrollments. While the Company enrolls students throughout the year, second quarter (December through February) enrollments and related revenues generally are lower than other quarters due to holiday breaks in December and January. The Company experiences a seasonal increase in new enrollments in August of each year when most other colleges and universities begin their fall semesters.

Quarterly Results of Operations

As discussed in Note 3, the Company has restated its financial statements for each of the years ended August 31, 2005 and 2004, and the related quarterly periods for the year ended August 31, 2005, the first two quarters in 2006 and the six months ended February 28, 2006. Additionally, the 2005 quarters were restated to correct for incorrect amortization of share based compensation and the classification of auction rate securities. The unaudited consolidated financial information presented should be read in conjunction with other information included in the Company’s consolidated financial statements. The following unaudited consolidated financial information reflects all adjustments (see Note 3) necessary for the fair presentation of the results of interim periods.

125

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following tables set forth selected unaudited quarterly financial information for each of the Company’s last eight quarters.

	2006
	Q2			Q1
	February 28			November 30
	As Previously Reported
($ in thousands)
Consolidated Quarterly Balance Sheets:
Assets:
Current assets
Cash and cash equivalents	$	20,539		$	165,330
Restricted cash		238,351			225,316
Marketable securities, current portion		97,801			141,579
Accounts receivable, net		200,719			201,068
Deferred tax assets, current portion		17,565			16,632
Other current assets		19,738			20,862
Total current assets		594,713			770,787
Property and equipment, net		287,068			267,231
Marketable securities, less current portion		76,079			87,525
Goodwill		37,096			37,096
Deferred tax assets, less current portion		32,193			40,494
Other assets (includes receivable from related party of $15,294 and $15,067 as of February 28, 2006 and November 30, 2005, respectively)		28,003			29,368
Total assets	$	1,055,152		$	1,232,501
Liabilities and Shareholders’ Equity:
Current liabilities
Accounts payable	$	44,879		$	38,328
Accrued liabilities		62,428			59,747
Income taxes payable		9,185			80,229
Current portion of long-term liabilities		20,432			19,231
Student deposits		261,138			249,371
Current portion of deferred revenue		130,776			125,591
Total current liabilities		528,838			572,497
Deferred revenue, less current portion		359			238
Long-term liabilities, less current portion		84,537			81,237
Total liabilities		613,734			653,972
Commitments and contingencies (Notes 11, 15, and 18)
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued		—			—
Apollo Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 188,002,000 issued as of February 28, 2006 and November 30, 2005, and 172,205,000 and 175,266,000 outstanding as of February 28, 2006 and November 30, 2005, respectively		103			103
Apollo Group Class B voting common stock, no par value, 3,000,000 shares authorized; 477,000 and 477,000 issued and outstanding as of February 28, 2006 and November 30, 2005, respectively		1			1
Additional paid-in capital		—			—
Apollo Group Class A treasury stock, at cost, 15,797,000 and 12,736,000 shares as of February 28, 2006 and November 30, 2005, respectively		(1,079,274	)		(887,726	)
Retained earnings		1,522,022			1,467,410
Accumulated other comprehensive loss		(1,434	)		(1,259	)
Total shareholders’ equity		441,418			578,529
Total liabilities and shareholders’ equity	$	1,055,152		$	1,232,501

126

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2006
	Q2			Q1
	February 28			November 30
	Adjustments
($ in thousands)
Consolidated Quarterly Balance Sheets:
Assets:
Current assets
Cash and cash equivalents	$	(8,041	)(3)	$	(6,122	)(3)
Restricted cash		(3,561	)(3)		(4,152	)(3)
Marketable securities, current portion		—			—
Accounts receivable, net		(37,350	)(2,3)		(34,633	)(2,3)
Deferred tax assets, current portion		15,872	(4)		14,114	(4)
Other current assets		(415	)(3)		(415	)(3)
Total current assets		(33,495	)		(31,208	)
Property and equipment, net		1,537	(3)		1,772	(3)
Marketable securities, less current portion		—			—
Goodwill		—			—
Deferred tax assets, less current portion		7,032	(4)		2,806	(4)
Other assets (includes receivable from related party of $15,294 and $15,067 as of February 28, 2006		—			—
and November 30, 2005, respectively)		(2,227	)(3)		(2,227	)(3)
Total assets	$	(27,153	)	$	(28,857	)
Liabilities and Shareholders’ Equity:
Current liabilities
Accounts payable	$	—		$	—
Accrued liabilities		(2,200	)(3)		(2,400	)(3)
Income taxes payable		68,116	(4)		65,992	(4)
Current portion of long-term liabilities		580	(3)		620	(3)
Student deposits		(9,396	)(3)		(7,868	)(3)
Current portion of deferred revenue		(5,505	)(3)		(5,662	)(3)
Total current liabilities		51,595			50,682
Deferred revenue, less current portion		—			—
Long-term liabilities, less current portion		2,193	(3)		2,326	(3)
Total liabilities		53,788			53,008
Commitments and contingencies (Notes 11, 15, and 18)
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued		—			—
Apollo Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 188,002,000 issued as of February 28, 2006 and November 30, 2005, and 172,205,000 and 175,266,000 outstanding as of February 28, 2006 and November 30, 2005, respectively		—			—
Apollo Group Class B voting common stock, no par value, 3,000,000 shares authorized; 477,000 and 477,000 issued and outstanding as of February 28, 2006 and November 30, 2005, respectively		—			—
Additional paid-in capital		—			—
Apollo Group Class A treasury stock, at cost, 15,797,000 and 12,736,000 shares as of February 28, 2006 and November 30, 2005, respectively		—			—
Retained earnings		(80,941	)(1-4)		(81,865	)(1-4)
Accumulated other comprehensive loss		—			—
Total shareholders’ equity		(80,941	)		(81,865	)
Total liabilities and shareholders’ equity	$	(27,153	)	$	(28,857	)

(1), (2), (3), & (4) See Note 3, “Restatement of Consolidated Financial Statements,” for a detailed summary of adjustments.

127

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2006
	Q4			Q3			Q2			Q1
	August 31			May 31			February 28			November 30
							Restated(1)
($ in thousands)
Consolidated Quarterly Balance Sheets:
Assets:
Current assets
Cash and cash equivalents	$	309,058		$	191,981		$	12,498		$	159,208
Restricted cash		238,267			235,884			234,790			221,164
Marketable securities, current portion		45,978			72,190			97,801			141,579
Accounts receivable, net		160,583			149,482			163,369			166,435
Deferred tax assets, current portion		32,622			33,763			33,437			30,746
Other current assets		16,424			19,709			19,323			20,447
Total current assets		802,932			703,009			561,218			739,579
Property and equipment, net		328,440			308,992			288,605			269,003
Marketable securities, less current portion		53,692			62,929			76,079			87,525
Goodwill		16,891			37,096			37,096			37,096
Deferred tax assets, less current portion		53,131			41,763			39,225			43,300
Other assets (includes receivable from related party of $15,758, $15,524, $15,294 and $15,067 as of August 31, May 31, February 28, 2006 and November 30, 2005, respectively)		27,919			26,021			25,776			27,141
Total assets	$	1,283,005		$	1,179,810		$	1,027,999		$	1,203,644
Liabilities and Shareholders’ Equity:
Current liabilities
Accounts payable	$	61,289		$	48,920		$	44,879		$	38,328
Accrued liabilities		73,513			64,417			60,228			57,347
Income taxes payable		47,812			78,327			77,301			146,221
Current portion of long-term liabilities		23,101			22,680			21,012			19,851
Student deposits		254,130			255,400			251,742			241,503
Current portion of deferred revenue		135,911			125,391			125,271			119,929
Total current liabilities		595,756			595,135			580,433			623,179
Deferred revenue, less current portion		384			441			359			238
Long-term liabilities, less current portion		82,492			81,985			86,730			83,563
Total liabilities		678,632			677,561			667,522			706,980
Commitments and contingencies (Notes 11, 15, and 18)
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued		—			—			—			—
Apollo Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 188,004,000, 188,002,000, 188,002,000 and 188,002,000 issued as of August 31, May 31, February 28, 2006 and November 30, 2005, respectively, and 172,555,000, 172,449,000, 172,205,000 and 175,266,000 outstanding as of August 31, May 31, February 28, 2006 and November 30, 2005, respectively		103			103			103			103
Apollo Group Class B voting common stock, no par value, 3,000,000 shares authorized; 475,000, 477,000, 477,000 and 477,000 issued and outstanding as of August 31, May 31, February 28, 2006 and November 30, 2005, respectively		1			1			1			1
Additional paid-in capital		—			—			—			—
Apollo Group Class A treasury stock, at cost, 15,449,000, 15,553,000, 15,797,000 and 12,736,000 shares as of August 31, May 31, February 28, 2006 and November 30, 2005, respectively		(1,054,046	)		(1,061,172	)		(1,079,274	)		(887,726	)
Retained earnings		1,659,349			1,564,980			1,441,081			1,385,545
Accumulated other comprehensive loss		(1,034	)		(1,663	)		(1,434	)		(1,259	)
Total shareholders’ equity		604,373			502,249			360,477			496,664
Total liabilities and shareholders’ equity	$	1,283,005		$	1,179,810		$	1,027,999		$	1,203,644

(1) See Note 3, “Restatement of Consolidated Financial Statements.”

128

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2006
	Q2		Q1
	February 28		November 30
	As Previously Reported
Consolidated Quarterly Statements of Income:
($ in thousands, except per share amounts)
Revenues:
Tuition and other, net	$	569,551	$	628,884
Costs and expenses:
Instructional costs and services		258,447		259,885
Selling and promotional		124,426		128,120
General and administrative		57,205		30,080
Goodwill impairment		—		—
Total costs and expenses		440,078		418,085
Income from operations		129,473		210,799
Interest income and other, net		3,567		4,503
Income before income taxes		133,040		215,302
Provision for income taxes		52,405		84,528
Net income	$	80,635	$	130,774
Earnings per share attributed to Apollo Group Class A common stock:
Basic income per share	$	0.46	$	0.73
Diluted income per share	$	0.46	$	0.73
Basic weighted average shares outstanding		173,496		178,104
Diluted weighted average shares outstanding		175,235		180,331

129

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2006
	Q2			Q1
	February 28			November 30
	Adjustments
Consolidated Quarterly Statements of Income:
($ in thousands, except per share amounts)
Revenues:
Tuition and other, net	$	999	(3)	$	(211	)(3)
Costs and expenses:
Instructional costs and services		4,187(1-3	)		5,223(1-3	)
Selling and promotional		(180	)(1)		(148	)(1)
General and administrative		1,762(1,3	)		(2,750	)(1,3)
Goodwill impairment		—			—
Total costs and expenses		5,769			2,325
Income from operations		(4,770	)		(2,536	)
Interest income and other, net		(41	)(3)		(45	)(3)
Income before income taxes		(4,811	)		(2,581	)
Provision for income taxes		(3,265	)(4)		(386	)(4)
Net income	$	(1,546	)	$	(2,195	)
Earnings per share attributed to Apollo Group Class A common stock:
Basic income per share	$	—		$	(0.01	)
Diluted income per share	$	(0.01	)	$	(0.02	)
Basic weighted average shares outstanding		—			—
Diluted weighted average shares outstanding		200			310

(1), (2), (3), & (4) See Note 3, “Restatement of Consolidated Financial Statements,” for a detailed summary of adjustments.

130

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2006
	Q4		Q3		Q2		Q1
	August 31		May 31		February 28		November 30
					Restated(1)
Consolidated Quarterly Statements of Income:
($ in thousands, except per share amounts)
Revenues:
Tuition and other, net	$	624,913	$	653,397	$	570,550	$	628,673
Costs and expenses:
Instructional costs and services		300,543		284,375		262,634		265,108
Selling and promotional		154,293		138,195		124,246		127,972
General and administrative		33,880		29,751		58,967		27,330
Goodwill impairment		20,205		—		—		—
Total costs and expenses		508,921		452,321		445,847		420,410
Income from operations		115,992		201,076		124,703		208,263
Interest income and other, net		5,633		4,437		3,526		4,458
Income before income taxes		121,625		205,513		128,229		212,721
Provision for income taxes		45,914		74,059		49,140		84,142
Net income	$	75,711	$	131,454	$	79,089	$	128,579
Earnings per share attributed to Apollo Group Class A common stock:
Basic income per share	$	0.44	$	0.76	$	0.46	$	0.72
Diluted income per share(2)	$	0.43	$	0.75	$	0.45	$	0.71
Basic weighted average shares outstanding		172,981		172,817		173,496		178,104
Diluted weighted average shares outstanding		174,514		174,453		175,435		180,641

(1)	See Note 3, “Restatement of Consolidated Financial Statements.”
(2)	The sum of quarterly income per share may not equal annual income per share due to rounding.

131

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2005
	Q4			Q3			Q2			Q1
	August 31			May 31			February 28			November 30
	As Previously Reported
Consolidated Quarterly Balance Sheets:
($ in thousands)
Assets:
Current assets
Cash and cash equivalents	$	145,607		$	68,775		$	7,878		$	123,657
Restricted cash		225,706			240,483			142,049			209,855
Auction-rate securities — restricted		—			—			85,650			—
Marketable securities, current portion		224,112			248,881			255,442			260,188
Accounts receivable, net		201,615			180,916			171,238			151,583
Income taxes receivable		—			—			14,220			—
Deferred tax assets, current portion		14,991			12,541			11,198			10,625
Other current assets		23,058			21,783			22,946			23,017
Total current assets		835,089			773,379			710,621			778,925
Property and equipment, net		268,661			257,740			234,220			178,656
Marketable securities, less current portion		97,350			137,113			176,165			232,718
Goodwill		37,096			37,096			37,096			37,096
Deferred tax assets, less current portion		35,756			27,900			29,296			34,118
Other assets (includes receivable from related party of $14,843, $14,622, $14,405 and $14,191 as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively)		28,993			28,169			28,923			28,047
Total assets	$	1,302,945		$	1,261,397		$	1,216,321		$	1,289,560
Liabilities and Shareholders’ Equity:
Current liabilities
Accounts payable	$	40,129		$	41,893		$	38,174		$	41,290
Accrued liabilities		61,315			51,254			50,884			49,435
Income taxes payable		9,740			41,802			—			43,095
Current portion of long-term liabilities		18,878			16,101			13,608			4,179
Student deposits		249,696			245,341			252,469			238,148
Current portion of deferred revenue		138,214			118,892			124,249			114,203
Total current liabilities		517,972			515,283			479,384			490,350
Deferred revenue, less current portion		351			460			470			393
Deferred tax liability, net, less current portion		—			—			—			—
Long-term liabilities, less current portion		77,748			77,709			67,730			29,827
Total liabilities		596,071			593,452			547,584			520,570
Commitments and contingencies (Notes 11, 15, and 18)
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued		—			—			—			—
Apollo Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 188,002,000, 188,002,000, 188,002,000 and 187,567,000 issued as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively, and 179,184,000, 180,071,000, 181,944,000 and 183,515,000 outstanding as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively		103			103			103			103
Apollo Group Class B voting common stock, no par value, 3,000,000 shares authorized; 477,000 issued and outstanding as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively		1			1			1			1
Additional paid-in capital		—			—			—			14,291
Apollo Group Class A treasury stock, at cost, 8,818,000, 7,931,000, 6,058,000 and 4,052,000 shares as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively		(645,742	)		(580,058	)		(445,184	)		(282,640	)
Deferred share-based compensation expense under APB 25		—			—			—			—
Retained earnings		1,353,650			1,248,728			1,114,738			1,038,346
Accumulated other comprehensive loss		(1,138	)		(829	)		(921	)		(1,111	)
Total shareholders’ equity		706,874			667,945			668,737			768,990
Total liabilities and shareholders’ equity	$	1,302,945		$	1,261,397		$	1,216,321		$	1,289,560

132

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2005
	Q4			Q3			Q2			Q1
	August 31			May 31			February 28			November 30
	Adjustments
Consolidated Quarterly Balance Sheets:
($ in thousands)
Assets:
Current assets
Cash and cash equivalents	$	(8,423	)(3)	$	(4,369	)(3)	$	(5,704	)(3)	$	(26,272	)(3)
Restricted cash		1,396	(3)		(8,365	)(3)		(9,772	)(3)		(127,235	)(3)
Auction-rate securities		—			—			—			18,450	(3)
Auction-rate securities — restricted		—			—			—			124,900	(3)
Marketable securities, current portion		—			—			—			—
Accounts receivable, net		(29,013	)(2,3)		(27,171	)(2,3)		(22,611	)(2,3)		(18,852	)(2,3)
Income taxes receivable		—			—			(14,220	)(4)		—
Deferred tax assets, current portion		10,515	(4)		10,778	(4)		10,198	(4)		7,918	(4)
Other current assets		(415	)(3)		—	(3)		—	(3)		—(3	)
Total current assets		(25,940	)		(29,127	)		(42,109	)		(21,091	)
Property and equipment, net		1,984	(3)		2,158	(3)		(3,857	)(3)		47,154	(3)
Marketable securities, less current portion		—			—			—			—
Goodwill		—			—			—			—
Deferred tax assets, less current portion		4,786	(4)		8,416	(4)		7,461	(4)		5,492	(4)
Other assets (includes receivable from related party of $14,843, $14,622, $14,405 and $14,191 as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively)		(2,227	)(3)		(1,700	)(3)		(1,700	)(3)		(1,701	)(3)
Total assets	$	(21,397	)	$	(20,253	)	$	(40,205	)	$	29,854
Liabilities and Shareholders’ Equity:
Current liabilities
Accounts payable		—			—			—			—
Accrued liabilities		—			—			(2,300	)(3)		(400	)(3)
Income taxes payable		59,423	(4)		62,942	(4)		49,732	(4)		61,007	(4)
Current portion of long-term liabilities		621	(3)		634	(3)		1,394	(3)		11,578	(3)
Student deposits		(7,021	)(3)		(12,733	)(3)		(13,176	)(3)		(9,757	)(3)
Current portion of deferred revenue		(4,250	)(3)		(3,822	)(3)		(3,518	)(3)		(3,142	)(3)
Total current liabilities		48,773			47,021			32,132			59,286
Deferred revenue, less current portion		—			—			—			—
Long-term liabilities, less current portion		2,484	(3)		2,621	(3)		(1,503	)(3)		39,398	(3)
Total liabilities	$	51,257		$	49,642		$	30,629		$	98,684
Commitments and contingencies (Notes 11, 15, and 18)
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued		—			—			—			—
Apollo Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 188,002,000, 188,002,000, 188,002,000 and 187,567,000 issued as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively, and 179,184,000, 180,071,000, 181,944,000 and 183,515,000 outstanding as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively		—			—			—			—
Apollo Group Class B voting common stock, no par value, 3,000,000 shares authorized; 477,000 issued and outstanding as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively		—			—			—			—
Additional paid-in capital		—			—			18,453(1,4	)		30,836(1,4	)
Apollo Group Class A treasury stock, at cost, 8,818,000, 7,931,000, 6,058,000 and 4,052,000 shares as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively		—			—			—			—
Deferred share-based compensation expense under APB 25		(9,470	)(1)		(17,523	)(1)		(23,077	)(1)		(28,373	)(1)
Retained earnings		(63,184	)(1-4)		(52,372	)(1-4)		(66,210	)(1-4)		(71,293	)(1-4)
Accumulated other comprehensive loss		—			—			—			—
Total shareholders’ equity		(72,654	)		(69,895	)		(70,834	)		(68,830	)
Total liabilities and shareholders’ equity	$	(21,397	)	$	(20,253	)	$	(40,205	)	$	29,854

(1), (2), (3), & (4) See Note 3, “Restatement of Consolidated Financial Statements,” for a detailed summary of adjustments.

133

APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2005
	Q4			Q3			Q2			Q1
	August 31			May 31			February 28			November 30
	Restated(1)
Consolidated Quarterly Balance Sheets:
($ in thousands)
Assets:
Current assets
Cash and cash equivalents	$	137,184		$	64,406		$	2,174		$	97,385
Restricted cash		227,102			232,118			132,277			82,620
Auction-rate securities		—			—			—			18,450
Auction-rate securities — restricted		—			—			85,650			124,900
Marketable securities, current portion		224,112			248,881			255,442			260,188
Accounts receivable, net		172,602			153,745			148,627			132,731
Income taxes receivable		—			—			—			—
Deferred tax assets, current portion		25,506			23,319			21,396			18,543
Other current assets		22,643			21,783			22,946			23,017
Total current assets		809,149			744,252			668,512			757,834
Property and equipment, net		270,645			259,898			230,363			225,810
Marketable securities, less current portion		97,350			137,113			176,165			232,718
Goodwill		37,096			37,096			37,096			37,096
Deferred tax assets, less current portion		40,542			36,316			36,757			39,610
Other assets (includes receivable from related party of $14,843, $14,622, $14,405 and $14,191 as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively)		26,766			26,469			27,223			26,346
Total assets	$	1,281,548		$	1,241,144		$	1,176,116		$	1,319,414
Liabilities and Shareholders’ Equity:
Current liabilities
Accounts payable	$	40,129		$	41,893		$	38,174		$	41,290
Accrued liabilities		61,315			51,254			48,584			49,035
Income taxes payable		69,163			104,744			49,732			104,102
Current portion of long-term liabilities		19,499			16,735			15,002			15,757
Student deposits		242,675			232,608			239,293			228,391
Current portion of deferred revenue		133,964			115,070			120,731			111,061
Total current liabilities		566,745			562,304			511,516			549,636
Deferred revenue, less current portion		351			460			470			393
Long-term liabilities, less current portion		80,232			80,330			66,227			69,225
Total liabilities		647,328			643,094			578,213			619,254
Commitments and contingencies (Notes 11, 15, and 18)
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued		—			—			—			—
Apollo Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 188,002,000, 188,002,000, 188,002,000 and 187,567,000 issued as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively, and 179,184,000, 180,071,000, 181,944,000 and 183,515,000 outstanding as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively		103			103			103			103
Apollo Group Class B voting common stock, no par value, 3,000,000 shares authorized; 477,000 issued and outstanding as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively		1			1			1			1
Additional paid-in capital		—			—			18,453			45,127
Apollo Group Class A treasury stock, at cost, 8,818,000, 7,931,000, 6,058,000 and 4,052,000 shares as of August 31, May 31, February 28, 2005 and November 30, 2004, respectively		(645,742	)		(580,058	)		(445,184	)		(282,640	)
Deferred share-based compensation expense under APB 25		(9,470	)		(17,523	)		(23,077	)		(28,373	)
Retained earnings		1,290,466			1,196,356			1,048,528			967,053
Accumulated other comprehensive loss		(1,138	)		(829	)		(921	)		(1,111	)
Total shareholders’ equity		634,220			598,050			597,903			700,160
Total liabilities and shareholders’ equity	$	1,281,548		$	1,241,144		$	1,176,116		$	1,319,414

(1) See Note 3, “Restatement of Consolidated Financial Statements.”

134

APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2005
	Q4		Q3		Q2		Q1
	August 31		May 31		February 28		November 30
	As Previously Reported
Consolidated Quarterly Statements of Income:
($ in thousands, except per share amounts)
Revenues:
Tuition and other, net	$	591,842	$	619,011	$	505,693	$	534,926
Costs and expenses:
Instructional costs and services		253,459		243,232		221,635		217,417
Selling and promotional		125,016		118,153		121,016		120,585
General and administrative		24,276		29,323		23,499		21,188
Share based compensation(1)		19,824		—		—		—
Total costs and expenses		422,575		390,708		366,150		359,190
Income from operations		169,267		228,303		139,543		175,736
Interest income and other, net		4,592		3,984		3,855		4,562
Income before income taxes		173,859		232,287		143,398		180,298
Provision for income taxes		67,611		90,449		56,284		70,767
Net income	$	106,248	$	141,838	$	87,114	$	109,531
Earnings per share attributed to Apollo Group Class A common stock:
Basic income per share	$	0.59	$	0.78	$	0.47	$	0.59
Diluted income per share(2)	$	0.58	$	0.77	$	0.47	$	0.58
Basic weighted average shares outstanding		180,142		181,461		183,742		186,369
Diluted weighted average shares outstanding		182,903		184,322		187,007		189,831

(1)	Related to the August 27, 2004, conversion of UPX Online stock options to Apollo Group Class A stock options.
(2)	The sum of quarterly income per share may not equal annual income per share due to rounding.

135

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2005
	Q4			Q3			Q2			Q1
	August 31			May 31			February 28			November 30
	Adjustments
Consolidated Quarterly Statements of Income:
($ in thousands, except per share amounts)
Revenues:
Tuition and other, net	$	357	(3)	$	(1,266	)(3)	$	(82	)(3)	$	633	(3)
Costs and expenses:
Instructional costs and services		6,337	(1-3)		2,832	(1-3)		5,636	(1-3)		6,083	(1-3)
Selling and promotional		331	(1)		115	(1)		127	(1)		108	(1)
General and administrative		(143	)(1,3)		(1,326	)(1,3)		(1,130	)(1,3)		(1,202	)(1,3)
Share based compensation(5)		(15,600	)(1)		4,223			4,224			4,224
Total costs and expenses		(9,075	)		5,844			8,857			9,213
Income from operations		9,432			(7,110	)		(8,939	)		(8,580	)
Interest income and other, net		(47	)(3)		(50	)(3)		(53	)(3)		(56	)(3)
Income before income taxes		9,385			(7,160	)		(8,992	)		(8,636	)
Provision for income taxes		4,869	(4)		(2,585	)(4)		(3,354	)(4)		2,465	(4)
Net income	$	4,516		$	(4,575	)	$	(5,638	)	$	(11,101	)
Earnings per share attributed to Apollo Group Class A common stock:
Basic income per share	$	0.02		$	(0.02	)	$	(0.03	)	$	(0.06	)
Diluted income per share(6)	$	0.03		$	(0.03	)	$	(0.03	)	$	(0.06	)
Basic weighted average shares outstanding		—			—			—			—
Diluted weighted average shares outstanding		48			38			32			27

(1), (2), (3), & (4) See Note 3, “Restatement of Consolidated Financial Statements,” for a detailed summary of adjustments.

(5)	Related to the August 27, 2004, conversion of UPX Online stock options to Apollo Group Class A stock options. Share based compensation expense resulting from the revised measurement dates is included in instructional costs and services, selling and promotional, and general and administrative expenses.
(6)	The sum of quarterly income per share may not equal annual income per share due to rounding.

136

APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2005
	Q4		Q3		Q2		Q1
	August 31		May 31		February 28		November 30
	Restated (1)
Consolidated Quarterly Statements of Income:
($ in thousands, except per share amounts)
Revenues:
Tuition and other, net	$	592,199	$	617,745	$	505,611	$	535,559
Costs and expenses:
Instructional costs and services		259,796		246,064		227,271		223,500
Selling and promotional		125,347		118,268		121,143		120,693
General and administrative		24,133		27,997		22,369		19,986
Share based compensation(2)		4,224		4,223		4,224		4,224
Total costs and expenses		413,500		396,552		375,007		368,403
Income from operations		178,699		221,193		130,604		167,156
Interest income and other, net		4,545		3,934		3,802		4,506
Income before income taxes		183,244		225,127		134,406		171,662
Provision for income taxes		72,480		87,864		52,930		73,232
Net income	$	110,764	$	137,263	$	81,476	$	98,430
Earnings per share attributed to Apollo Group Class A common stock:
Basic income per share	$	0.61	$	0.76	$	0.44	$	0.53
Diluted income per share(3)	$	0.61	$	0.74	$	0.44	$	0.52
Basic weighted average shares outstanding		180,142		181,461		183,742		186,369
Diluted weighted average shares outstanding		182,951		184,360		187,039		189,858

(1)	See Note 3, “Restatement of Consolidated Financial Statements.”
(2)	Related to the August 27, 2004, conversion of UPX Online stock options to Apollo Group Class A stock options. Share based compensation expense resulting from the revised measurement dates is included in instructional costs and services, selling and promotional, and general and administrative expenses.
(3)	The sum of quarterly income per share may not equal annual income per share due to rounding.

137

APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 18.   Subsequent Events

Review of Stock Option Grant Practices

See Note 3 “Restatement of Consolidated Financial Statements” in these Notes to Consolidated Financial Statements for discussion of the Independent review and the Internal Review of the Company’s stock option grant practices and subsequent restatement of previously issued financial statements.

Naming Rights to Glendale, Arizona Sports Complex

On September 22, 2006, the Company entered into an agreement with New Cardinals Stadium LLC, B&B Holdings, Inc., an unrelated third party doing business as the Arizona Cardinals, for UPX naming rights on a stadium in Glendale, Arizona, which is home to the Arizona Cardinals National Football League football club. The naming rights include signage, advertising and other promotional benefits. The initial agreement term is 20 years with options to extend. Pursuant to the agreement, the Company is required to pay a total of $5.8 million for the 2006 contract year, which is increased 3% per year until 2026. Other payments apply if certain events occur, such as the Cardinals playing in the Super Bowl or if there are sold-out home games.

Insight Schools Acquisition

On October 20, 2006, the Company completed the acquisition of Insight. Insight operates an online high school and engages in the business of servicing cyber high schools and other online education. The Company acquired all of the outstanding common stock of Insight for $15.5 million. The purchase price included the payment of seller transaction fees, the repayment of certain existing indebtedness, payment of employee sale bonuses, and payments to option holders, warrant holders, and convertible note holders. The Company believes this acquisition allows it to expand into the online charter high school market. The acquisition has been accounted for using the purchase method in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.” As a result of the acquisition, goodwill increased by $14.1 million.

Apollo International

Apollo International (see Note 9) paid us a return of capital of approximately $100,000 in October 2006.

Faculty Stock Option Grant

On January 12, 2007, the Compensation Committee of the Board of Directors approved a stock option grant to faculty under the Apollo Group, Inc. 2SIP, which was issued on February 12, 2007.

Changes in Board of Directors Members

On December 8, 2006, Mr. John R. Norton III resigned from the Company’s Board of Directors. Mr. Norton was replaced by Ms. K. Sue Redman as a Director. On January 12, 2007, Mr. James R. Reis joined the Company’s Board of Directors, and on March 9, 2007, Daniel D. Diethelm resigned from the Company’s Board of Directors. As previously reported in a Current Report on Form 8-K filed May 4, 2007, Mr. John M. Blair and Ms. Hedy F. Govenar have also resigned from the Company’s Board of Directors, effective immediately after the Company files its Annual Report on Form 10-K for the fiscal year ended August 31, 2006 and its other delinquent reports.

Changes in Board of Directors Committees

On December 8, 2006, Ms. Hedy F. Govenar was replaced on the Special Committee by Ms. K. Sue Redman. Ms. Redman was also appointed to the Audit and Compensation Committees, and Mr. Dino J. DeConcini replaced Mr. John R. Norton III as Chairman of the Compensation Committee. On January 12, 2007, Mr. John M. Blair resigned from the Compensation Committee and as Chairman of the Audit Committee. Replacing Mr. Blair as Chair of the Audit Committee was Ms. K. Sue Redman and taking over his position on the Compensation Committee was Mr. George A. Zimmer. As of March 13, 2007, James R. Reis joined as Chairman of the Special Committee in place

138

APOLLO GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of Mr. Diethelm. With their resignations, Mr. Blair and Ms. Govenar no longer serve on the Nominating and Governance Committee, effective immediately after the Company files its Annual Report on Form 10-K for the fiscal year ended August 31, 2006 and its other delinquent reports.

Changes in Management

On September 25, 2006, Dr. William J. Pepicello was promoted to President, University of Phoenix. On November 1, 2006, Ms. Kenda B. Gonzales resigned as Chief Financial Officer and Treasurer of the Company. Ms. Gonzales was replaced by Mr. Joseph L. D’Amico who was appointed Chief Financial Officer on November 14, 2006. On November 5, 2006, Mr. Daniel E. Bachus resigned as Chief Accounting Officer and Controller of the Company and was replaced by Mr. Brian L. Swartz, who was engaged effective December 15, 2006 and appointed Vice President, Corporate Controller, and Chief Accounting Officer on February 6, 2007. On March 31, 2007, Mr. Gregory W. Cappelli entered into an employment contract with the Company and was appointed Executive Vice President, Global Strategy and Assistant to the Executive Chairman. Under the terms of his employment agreement, Mr. Cappelli will be granted 1,000,000 options (subject to an Equalization Grant, as defined) to purchase shares in the Company’s Class A common stock and $5 million in restricted stock units.

Stock Option Plans

On January 12, 2007, the Company’s Compensation Committee of the Board of Directors approved a resolution to modify the terms of the stock option grants for approximately 50 individuals. These modifications allowed employees, including officers, terminated on or after November 3, 2006 to exercise their options beyond the normal 90 day post-termination period provided under the 2SIP and their option agreements thereunder. The Company extended the exercise periods of these options because the Company was unable, during the financial statement restatement process, to sell shares of its Class A common stock to such individuals in compliance with the applicable registration requirements of the Securities Act of 1933, as amended. Absent the extension, the options would have expired prior to the employee having the opportunity to exercise, since the 90 day post-termination exercise period would have expired prior to the Company completing its financial statement restatement process.

As a result of these modifications, the Company recorded a non-cash charge to share based compensation of $12.1 million during the second quarter of 2007. In addition, the modified awards held by employees who terminated prior to the January 12, 2007 modification are subject to the provisions of EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). Of the $12.1 million in expense recognized upon modification of the awards, $11.8 million related to awards subject to the provisions of EITF 00-19, under which, these awards are classified as liabilities and reported in Current portion of Long-Term Liabilities in the Company’s consolidated balance sheets. EITF 00-19 also requires the Company to report the awards classified as liabilities at their fair value as of each balance sheet date. Any increase or decrease in this fair value is recorded in general and administrative expense in the Company’s consolidated statements of income. During the second quarter of 2007, the Company recorded an additional expense of $2.8 million as a result of the increase in the fair value of the awards to $14.6 million as of February 28, 2007. The exercise prices of the approximately 475,000 options subject to EITF 00-19 range between $6.50 and $71.23.

On May 15, 2007, holders of the Company’s Class B common stock increased the number of shares reserved for issuance under the 2SIP by 5.0 million shares.

Tax Matters

See Note 15 for a discussion of subsequent events concerning income tax related matters regarding IRC Section 409A.

139

Item 9 — Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A — Controls and Procedures

Disclosure Controls and Procedures

The Company intends to maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (the “Act”) is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to management, including its President (Principal Executive Officer) and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Management, under the supervision and with the participation of its President (Principal Executive Officer) and CFO, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Act), as of the end of the period covered by this report. Based on that evaluation, management concluded that, as of that date, the Company’s disclosure controls and procedures were not effective at the reasonable assurance level because of the identification of material weaknesses in its internal control over financial reporting, which the Company views as an integral part of its disclosure controls and procedures.

Attached as exhibits to this Annual Report on Form 10-K are certifications of the Company’s President (Principal Executive Officer) and CFO, which are required in accordance with Rule 13a-14 of the Act. This Disclosure Controls and Procedures section includes information concerning management’s evaluation of disclosure control and procedures referred to in those certifications and, as such, should be read in conjunction with the certifications of the Company’s President (Principal Executive Officer) and CFO.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining effective internal control over financial reporting of the Company. Management’s intent is to design this system to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP in the United States of America.

The Company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in there being a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of August 31, 2006, utilizing the criteria described in the “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The objective of this assessment was to determine whether the Company’s internal control over financial reporting was effective as of August 31, 2006. In its assessment of the effectiveness of internal control over financial reporting as of August 31, 2006, management determined that there were control deficiencies that constituted material weaknesses, as described below.

140

  (i)   Control Activities Relating to Stock Option Grants

The Company did not maintain effective controls over its granting of stock options and the related recording and disclosure of share based compensation expense under APB 25, SFAS 123, SFAS 123(R) and their related interpretations. Specifically, effective controls, including monitoring, were not designed and in place to provide reasonable assurance regarding the existence, completeness, accuracy, valuation and presentation of activity related to the Company’s granting of stock options in the financial statements. These control deficiencies resulted in errors in (i) share based compensation expense, additional paid-in capital, related income tax accounts and weighted averaged diluted shares outstanding and (ii) related financial statement disclosures that resulted in the restatement of the Company’s historical financial statements. Accordingly, management determined that in the aggregate these control deficiencies constitute a material weakness in internal control over financial reporting.

(ii) Control Activities Relating to Accounting for the Allowance for Doubtful Accounts

The Company did not maintain effective controls over its accounting for bad debt expense and the related allowance for doubtful accounts. Specifically, the Company did not properly consider all available historical information as well as current trends in estimating its required bad debt reserve. This control deficiency resulted in errors in bad debt expense and the allowance for doubtful accounts, and related income tax accounts which resulted in a restatement of the Company’s historical financial statements for 2004 through 2006. Accordingly, management determined that this control deficiency constituted a material weakness in internal control over financial reporting.

(iii) Control Activities Relating to the Valuation of Goodwill

The Company did not maintain effective controls over the valuation of goodwill. Specifically, the Company did not adequately review, analyze and test assumptions provided to its third-party appraiser and the related valuation in accordance with SFAS 142. This control deficiency resulted in errors in goodwill and impairment expense that resulted in an adjustment to the Company’s previously released earnings on October 18, 2006 for the fourth quarter of 2006. Accordingly, management determined that this control deficiency constituted a material weakness in internal control over financial reporting.

(iv) Control Activities Relating to Accounting for Tax Liability Under IRC Section 162(m)

The Company did not maintain effective controls over the implementation, documentation and the administration of its share based compensation plans. In relation to the Restatement, certain tax deductions in prior years with respect to compensation attributable to the exercise of certain stock options by executive officers may be in question. Under IRC Section 162(m), the amount of such deduction per covered executive officer is limited to $1.0 million per year, except to the extent the compensation qualifies as performance-based. Compensation attributable to options with revised measurements dates may not have qualified as performance-based compensation. Accordingly, the Company may have claimed deductions with respect to those exercised options that were in excess of the limit imposed under IRC Section 162(m). As a result, the Company has accrued its best estimate with respect to potential tax liabilities, including interest and penalties for the taxable years 2003 through 2005 (which are currently its only open years subject to adjustment for federal tax purposes), of approximately $41.1 million as of August 31, 2006. These accruals have been recorded because the Company believes it is more likely than not that the deductions will be disallowed by the IRS. For prior periods where a liability existed and where the statute of limitations has expired, the accrual relating to that period has been reversed in the appropriate period. Accordingly, management determined that the control deficiency constituted a material weakness in internal controls over financial reporting.

Based on this assessment, and because of the material weaknesses described above, management has concluded that internal control over financial reporting was not effective as of August 31, 2006.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche, LLP, an independent registered public accounting firm, as stated in their report which is included herein.

141

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting during the quarter ended August 31, 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Remediation of Material Weaknesses

Management is committed to remediating the control deficiencies that constitute the material weaknesses described above by implementing changes to the Company’s internal control over financial reporting. For its stock option grants, management has implemented or has plans to implement all of the improvements in internal control over financial reporting suggested as a result of the Independent Review and Internal Review into stock option granting practices. Management plans to continue to implement further changes and improvements during the remainder of the current fiscal year. In addition, management has established procedures to consider the ongoing effectiveness of both the design and operation of the Company’s internal control over financial reporting.

As mentioned above, the Company has implemented a number of significant changes and improvements in the Company’s internal control over financial reporting during the first and second quarters of fiscal year 2007. The President and CFO of the Company have taken the responsibility to implement changes and improvements in the Company’s internal control over financial reporting and remediate the control deficiencies that gave rise to the material weaknesses. Specifically, these changes include:

Management

•  The Company engaged its new Chief Financial Officer on November 14, 2006.

•  The Company engaged its Corporate Controller effective December 15, 2006, who was subsequently appointed its new Vice President, Corporate Controller and Chief Accounting Officer on February 6, 2007.

•  The Company has hired a new Vice President, Controller of Accounting.

•  The Company has hired a new Vice President of Tax.

•  The Company appointed a new Stock Option Plan Administrator in January 2007 to work under the supervision of and report to the new Chief Financial Officer.

•  The Company is conducting a search for an experienced and well-qualified individual to serve as a General Counsel to the Company.

Outside Legal Counsel; Board of Directors and Committees

•  The Company considered and adopted the recommendations of the Special Committee with respect to procedures, processes and controls related to stock option grants.

•  The Company hired Morgan, Lewis & Bockius LLP (“Morgan Lewis”) as counsel to the Company with respect to reporting with the SEC, options and related matters, tax matters and corporate governance matters. Morgan Lewis is an experienced counsel with regard to stock plan administration.

•  The Company added two independent directors to the Board of Directors.

•  The members of the Audit Committee changed in 2007. The Chairman of the Audit Committee resigned from that committee. The Board appointed a new Chairperson of the Audit Committee, with the requisite experience. The Audit Committee revised and adopted its charter to reflect additional policies, processes, procedures and controls.

•  The members of the Compensation Committee completely changed in 2007. The Chairman of the Compensation Committee resigned from the Board, and the Board appointed a new Chairman of the Compensation Committee who had not been previously involved in the option grant process. In addition, the Board expanded the size of the Compensation Committee to three members.

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•  The Compensation Committee suspended the exercise of stock options until the Company is in compliance with its periodic reporting requirements under the Act, as amended, and retained Pearl, Meyer & Partners (“Pearl Meyer”) to provide consulting advice related to compensation.

•  The Compensation Committee revised and adopted its charter to reflect additional policies, processes, procedures and controls as noted below. For example, minutes of all Compensation Committee meetings are prepared timely and documentation for stock option grants are included as attachments to such minutes. The Company also now requires all stock options to be granted by the Compensation Committee, as now reflected in an amendment to the 2SIP adopted by the Board in March 2007.

•  The Charter of the Compensation Committee requires all grants under the Company’s stock option plans (other than new hire grants) to be made within a designated period following the release of financial results for the prior fiscal quarter or fiscal year.

Policies, Processes, Procedures and Controls

•  The Company is monitoring industry and regulatory developments in stock option awards, with the intent to implement and maintain best practices with respect to grants of equity-based compensation awards.

•  The Company has enhanced and standardized the process and documentation required for (i) the granting, exercise and cancellation of all equity-based compensation awards, (ii) analyzing the required allowance for doubtful accounts balance, and (iii) the use of third-party firms for valuation and other services.

•  Accounting personnel are now conducting quarterly (or annual) reviews and reconciliations related to equity-based compensation award activity, allowance for doubtful accounts activity and the valuation of goodwill. The CFO and/or the CAO will specifically review and approve each of these calculations.

•  Employees previously involved in key roles or the decision making process for each of the material weaknesses are no longer involved in the process.

•  The Company has retained third-party stock option software administration professionals to assist with the understanding of the Company’s stock option administration software and to train its employees that are involved in the stock option administration process.

•  The Company’s Internal Audit reporting line has been clarified such that the Director of Internal Audit reports directly to the Chairperson of the Audit Committee.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Apollo Group, Inc. and Subsidiaries

Phoenix, Arizona

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Apollo Group, Inc. and subsidiaries (the “Company”) did not maintain effective internal control over financial reporting as of August 31, 2006, because of the effect of the material weaknesses identified in management’s assessment based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment: (1) The Company did not maintain effective controls over its granting of stock options and the related recording and disclosure of share based compensation expense under APB 25, SFAS 123 and SFAS 123(R) and their related Interpretations. Specifically, effective controls, including monitoring, were not designed and in place to provide reasonable assurance regarding the existence, completeness, accuracy, valuation and presentation of activity related to the Company’s granting of stock options in the financial statements. These control deficiencies resulted in errors in (i) share based compensation expense, additional paid-in capital, related income tax accounts and weighted averaged diluted shares outstanding and (ii) related financial statement disclosures that resulted in the restatement of the Company’s historical financial statements; (2) The Company did not maintain effective controls over its accounting for bad debt expense and the related allowance for doubtful accounts. Specifically, the Company

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did not properly consider all available historical information as well as current trends in estimating its required bad debt reserve. This control deficiency resulted in errors in bad debt expense and the related allowance for doubtful accounts and related income tax accounts which resulted in a restatement of the Company’s historical financial statements for 2004 through 2006; (3) The Company did not maintain effective controls over the valuation of goodwill. Specifically, the Company did not adequately review, analyze and test assumptions provided to its third-party appraiser and the related valuation in accordance with SFAS 142. This control deficiency resulted in errors in goodwill and impairment expense that resulted in an adjustment to the Company’s previously released earnings for the fourth quarter of 2006; and (4) The Company did not maintain effective controls over the implementation, documentation and the administration of its share based compensation plans. Specifically, the Company claimed deductions with respect to compensation attributable to the exercise of certain stock options, which may not qualify as performance- based compensation under Internal Revenue Code of 1986 (“IRC”) Section 162(m). As a result of this control deficiency, the Company may have claimed deductions with respect to those exercised options which were in excess of the limit imposed under IRC Section 162(m). This control deficiency resulted in errors to the Company’s potential tax liabilities, including interest and penalties for the taxable years 2003 through 2005. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended August 31, 2006, of the Company and this report does not affect our report on such financial statements.

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of August 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of August 31, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended August 31, 2006, of the Company and our report dated May 21, 2007 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of a new accounting standard.

DELOITTE & TOUCHE LLP

Phoenix, Arizona

May 21, 2007

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Item 9B — Other Information

None.

PART III

Item 10 — Directors and Executive Officers of the Registrant

Our Board of Directors is elected by the holders of our Class B common stock. The following sets forth information as of April 30, 2007, concerning our directors and executive officers:

Name	Age		Position
Dr. John G. Sperling		86	Founder, Acting Executive Chairman of the Board, and Director
Brian E. Mueller		53	President and Director
Gregory W. Cappelli		39	Executive Vice President Global Strategy, Assistant to the Executive Chairman
Joseph L. D’Amico		57	Chief Financial Officer
John R. Kline		44	Chief Administrative Officer
Dr. William J. Pepicello		57	President, University of Phoenix
Dianne M. Pusch		48	Executive Vice President
Diane L. Thompson		51	Chief Human Resources Officer
Terri C. Bishop		53	Senior Vice President and Chief Communications Officer
Joseph N. Mildenhall		53	Chief Information Officer
Peter V. Sperling		47	Senior Vice President, Secretary, and Director
Larry A. Fleischer		51	Vice President of Finance
W. Stan Meyer		46	Vice President of Marketing
Brian L. Swartz		34	Vice President, Corporate Controller and Chief Accounting Officer
John M. Blair(1)		68	Director
Dino J. DeConcini		72	Director
Hedy F. Govenar(1)		62	Director
K. Sue Redman		50	Director
James R. Reis		49	Director
George A. Zimmer		58	Director

(1) These board members have submitted their resignation effective as of the filing of this report on Form 10-K.

DR. JOHN G. SPERLING, is the founder, the Acting Executive Chairman and a director of the Board of Apollo Group. Dr. Sperling was President of Apollo Group from its inception until February 1998, Chief Executive Officer of Apollo Group until August 2001, and Chairman of the Board until June 2004. Prior to his involvement with Apollo Group, from 1961 to 1973, Dr. Sperling was a professor of Humanities at San Jose State University where he was the Director of the Right to Read Project and the Director of the NSF Cooperative College-School Science Program in Economics. At various times from 1955 to 1961, Dr. Sperling was a member of the faculty at the University of Maryland, Ohio State University and Northern Illinois University. Dr. Sperling received his Doctor of Philosophy from Cambridge University, a Master of Arts from the University of California, Berkeley, and a Bachelor of Arts from Reed College. Dr. Sperling is the father of Peter V. Sperling.

BRIAN E. MUELLER became President and a director of Apollo Group in January 2006 and has been with Apollo Group since 1987. Mr. Mueller served as Chief Operating Officer of Apollo Group from December 2005 to January 2006, Chief Executive Officer of UPX Online from March 2002 to November 2005, and Chief Operating

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Officer and Senior Vice President of UPX Online from May 1997 to March 2002. Mr. Mueller served as Vice President/Director of UPX, San Diego, from 1995 to 1997, and Vice President/Director of UPX, New Mexico, from 1993 to 1995. From 1990 to 1993 he was Director of Enrollment of UPX, Phoenix Campus, and before that, he was an Enrollment Advisor of UPX, Phoenix. From 1983 to 1987, Mr. Mueller was a Professor for Concordia University. Mr. Mueller received his Master of Arts in Education and his Bachelor of Arts in Education from Concordia University.

GREGORY W. CAPPELLI was appointed Executive Vice President of Global Strategy and Assistant to the Executive Chairman in April 2007. Before joining Apollo Group, Mr. Cappelli spent 10 years as a research analyst for Credit Suisse, where he most recently served as Managing Director and Senior Research Analyst and founded the Credit Suisse Global Services Teams. Before joining Credit Suisse, Mr. Cappelli was Vice President and Senior Research Analyst with ABN AMRO. He holds his Bachelor of Arts in Economics from Indiana University and his Master of Business Administration from the Brennan School of Business at Dominican University.

JOSEPH L. D’AMICO commenced service as Chief Financial Officer of Apollo Group in November 2006, pursuant to a contract between his employer, FTI Consulting, Inc. (“FTI”), and Apollo Group. He is a senior managing director with FTI Palladium Partners, an interim management company and a division of FTI. Prior to joining FTI in August 2002, he was a partner with PricewaterhouseCoopers LLP for 21 years where he served in leadership roles in the firm’s Financial Advisory Services group as well as having served as an audit partner earlier in his career. Mr. D’Amico is a Certified Public Accountant and a Certified Insolvency and Restructuring Advisor. He received his Master of Business Administration from the University of Chicago and his Bachelor of Science in Accountancy from the University of Illinois at Urbana-Champaign.

JOHN R. KLINE has served as Chief Administrative Officer of Apollo Group since February 2006. From 1998 to February 2006, Mr. Kline was Senior Vice President of Operations and Finance of UPX Online. From 1996 to 1998 he was Director of Finance of UPX, Colorado. Prior to 1996, he worked in Apollo Group’s corporate accounting department. Mr. Kline began his career in public accounting and received his Bachelor of Science in Accounting from Arizona State University.

DR. WILLIAM J. PEPICELLO became President of UPX in June 2006 and was made Provost in January 2006. Dr. Pepicello has been with UPX since 1995. Dr. Pepicello served as Vice Provost for Academic Affairs from 2003 to 2006 and Dean of the School of Advanced Studies from 2002 to 2003. From 2000 to 2002, Dr. Pepicello was President of University of Sarasota and then Chief Academic Officer of American Intercontinental University. From 1995 to 2000, he was Dean of the College of General and Professional Studies and also held the position of Vice President of Academic Affairs of UPX. Dr. Pepicello holds both a Master of Arts and a Doctor of Philosophy in Linguistics from Brown University and his Bachelor of Arts in Classics from Gannon University.

DIANNE M. PUSCH was appointed Executive Vice President of Apollo Group in April 2007. Ms. Pusch has been with Apollo Group since 1988, having served most recently as Senior Regional Vice President. She has also been Vice President/Director, Associate Director and Director of Operations of UPX, Southern California. Ms. Pusch has served on the faculty of UPX since 1995. Ms. Pusch received her Master of Business Administration from UPX and her bachelor’s degree from Southern Illinois University.

DIANE L. THOMPSON has served as Chief Human Resources Officer since March 2006 and has been with Apollo Group since September 1997. Ms. Thompson held the position of Vice President/Counsel of Human Resources from October 2000 to March 2006 and Director of Human Resources from 1998 to 2000. Prior to her tenure with Apollo Group, Ms. Thompson was a Deputy County Attorney in the Pima County Attorney’s Office employment division. Ms. Thompson received her Bachelor of Arts in Special Education, her Master of Arts in Women’s Studies and her Juris Doctor from the University of Arizona.

TERRI C. BISHOP has served as Chief Communications Officer and Senior Vice President of Public Affairs of Apollo Group since 1999, overseeing public and government relations. Except for her service as Executive Vice President of Convene International, an education software company, from 1998 to 1999, Ms. Bishop has been with the Apollo Group of companies since 1982 and during that time she has served in the areas of institutional licensure and accreditation, curriculum development, institutional research and online learning. She was the founding

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director of UPX Online, providing oversight during its first 10 years of start up and development. Ms. Bishop received her Master of Arts in Human Relations and Organizational Management from UPX.

JOSEPH N. MILDENHALL has served as Chief Information Officer since April 2007 and has been with Apollo Group since 1999. Previously, Mr. Mildenhall held the title of Vice President of Information Technology from January 2006 to April 2007. From 1998 until 2006, Mr. Mildenhall directed the design, development and deployment of the UPX student and faculty Internet portal and the online education environment supporting the rapid growth of UPX Online. From 1979 to 1998, Mr. Mildenhall held increasingly responsible roles in software development at J&K Computer Systems, which was acquired by National Computer Systems in 1988. Mr. Mildenhall holds his Master of Business Administration from UPX and his Bachelor of Science in Accounting from Brigham Young University.

PETER V. SPERLING has been a Senior Vice President of Apollo Group since June 1998 and Secretary of Apollo Group since June 2006. Mr. Sperling has been with Apollo Group since 1983. Mr. Sperling was Vice President of Administration from 1992 to June 1998 and served as Secretary and Treasurer of Apollo Group from 1988 to January 2003. From 1987 to 1992, Mr. Sperling was Director of Operations at Apollo Education Corporation. From 1983 to 1987, Mr. Sperling was Director of Management Information Services of Apollo Group. Mr. Sperling received his Master of Business Administration from UPX and his Bachelor of Arts from University of California, Santa Barbara. Mr. Sperling is also the Chairman and co-founder of CallWave, Inc., a telecommunications services corporation. Mr. Sperling is the son of Dr. John G. Sperling.

LARRY A. FLEISCHER has served as Vice President of Finance of Apollo Group since 1995 and has been with Apollo Group since 1981. From 1981 to 1995 he held various positions with UPX and in Apollo Group’s corporate accounting department. Mr. Fleischer received his Bachelor of Science in Accounting from Arizona State University and his Master of Business Administration from UPX. He is a Certified Public Accountant.

W. STAN MEYER has been Vice President of Marketing of Apollo Group since June 2006 and has been with Apollo Group since August 2002. Mr. Meyer previously served as a Regional Vice President of UPX and Division Director of Axia College and of the School of Advanced Studies. From 1983 to 2002, Mr. Meyer held several positions with the Concordia University System including director for the Concordia University’s education network. Mr. Meyer holds both a Doctor of Education in Institutional Management and a Master of Business Administration from Pepperdine University. He earned his Bachelor of Arts in Communications from Concordia University, Nebraska.

BRIAN L. SWARTZ has been with Apollo Group since December 2006 and was appointed Vice President, Corporate Controller and Chief Accounting Officer in February 2007. Mr. Swartz is serving in this role pursuant to a contract that currently has a term through June 30, 2007. Mr. Swartz was with EaglePicher Incorporated from 2002 to 2006, most recently as its Vice-President and Corporate Controller. At EaglePicher, Mr. Swartz was an integral member of their senior management team and successfully guided the company through a bankruptcy restructuring. From 1994 to 2002, Mr. Swartz was at Arthur Andersen LLP where he had primary responsibilities in international audit and due diligence projects. He graduated magna cum laude from the University of Arizona with a Bachelor of Science in Accounting and was a member of the Warren Berger Entrepreneurship Program. Mr. Swartz is a Certified Public Accountant.

JOHN M. BLAIR has been a director of Apollo Group since September 2000 and a member of the Nominating and Governance Committee of the Board of Directors of Apollo Group. As previously reported in a Current Report on Form 8-K, Mr. Blair has resigned from the Board of Directors and from its Nominating and Governance Committee, effective immediately after the Company files its Annual Report on Form 10-K for the fiscal year ended August 31, 2006 and its other delinquent reports. In addition, Mr. Blair served from 1982 to September 2000 as a director of WIU. Mr. Blair was Chief Operating Officer of Integrated Information Systems, Inc., a provider of integrated Internet solutions, from May 1999 through December 2000, and a director from January 2001 through March 2004. In 1984, Mr. Blair founded J. Blair Consulting, an independent consulting business that provides management counsel to individuals and organizations and continues to be active in this professional services firm. Mr. Blair earned a Bachelor of Science in Engineering from Purdue University and a Master of Arts in Organizational Management from UPX.

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DINO J. DECONCINI has been a director of Apollo Group since 1981 and is currently Chairman of the Compensation Committee and a member of the Audit Committee and the Nominating and Governance Committee of the Board of Directors of Apollo Group. From 1993 to 1995 and from 2002 to date, Mr. DeConcini was Vice President and Senior Associate of Project International, Inc., an international business consulting firm. From 2001 to 2002, Mr. DeConcini was the Director of Financial Education at Consumer Federation of America. From 1995 to 2000, Mr. DeConcini was the Executive Director, Savings Bonds Marketing Office, U.S. Department of the Treasury. From 1979 to 1995, Mr. DeConcini was a shareholder and employee in DeConcini, McDonald, Brammer, Yetwin and Lacy, P.C., Attorneys at Law. From 1991 to 1993 and 1980 to 1990, Mr. DeConcini was a Vice President and partner of Paul R. Gibson & Associates, an international business consulting firm.

HEDY F. GOVENAR has been a director of Apollo Group since 1997 and Chairperson of the Nominating and Governance Committee since March 2006. As previously reported in a Current Report on Form 8-K, Ms. Govenar has resigned from the Board of Directors and from its Nominating and Governance Committee, effective immediately after the Company files its Annual Report on Form 10-K for the fiscal year ended August 31, 2006 and its other delinquent reports. Ms. Govenar was a director of UPX from 1992 to February 1997. Ms. Govenar is founder and Chairwoman of the Board of Governmental Advocates, Inc., a lobbying and political consulting firm in Sacramento, California. As one of the lobbyists in the firm, she has represented a variety of corporate and trade association clients since 1979. From 1989 to 1999, Ms. Govenar served as a commissioner on the California State Film Commission as an appointee of the California State Assembly. Currently, she is a member of the California Education Master Plan Alliance Advisory Committee whose mission is to improve public and private education from pre-kindergarten through university. Ms. Govenar received her Master of Arts in Education from California State University, Northridge, and her Bachelor of Arts in English from University of California, Los Angeles.

K. SUE REDMAN has been a director of Apollo Group and Chairperson of the Audit Committee since December 2006. Ms. Redman is also a member of the Compensation Committee and the Special Committee of the Board of Directors of Apollo Group. Since 2004 Ms. Redman has been Senior Vice President and Chief Financial Officer of Texas A&M University. From 1999 to 2004, Ms. Redman was a Vice President and Corporate Controller at AdvancePCS. From 1980 to 1999, Ms. Redman held various positions, most notably as an Assurance/Business Advisory Services partner with PricewaterhouseCoopers LLP, where she provided accounting and consulting services to both public and private companies in a variety of industries. Ms. Redman earned her Bachelor of Business Administration in Accounting from Texas A&M University and is a Certified Public Accountant in Texas, Arizona and California.

JAMES R. REIS has been director of Apollo Group and a member of the Audit Committee since January 2007 and Chairman of the Special Committee of the Board of Directors of Apollo Group since March 2007. Mr. Reis is also the sole member of an ad hoc committee of the Board of Directors. Mr. Reis has served as Executive Vice President of GAINSCO, INC. since 2005. Since 2001, Mr. Reis has performed merchant banking and management consulting services through First Western Capital, LLC, of which he is the founder, managing director and owner, and through which he provided consulting services to a subsidiary of GAINSCO, INC. from 2003 to 2005. Mr. Reis served as Vice Chairman of ING Pilgrim Capital Corporation, an asset management company, which he co-founded, from 1989 to 2000 when it was acquired by ING Groep. Mr. Reis received his Bachelor of Science from St. John Fisher College in Rochester, New York and is an inactive Certified Public Accountant.

GEORGE A. ZIMMER has been a director of Apollo Group since June 2006 and is a member of the Compensation Committee of the Board of Directors of Apollo Group. Mr. Zimmer is the founder, CEO and Chairman of Men’s Wearhouse, Inc. Mr. Zimmer is currently co-chair of the board of the Institute of Noetic Sciences and serves on several advisory boards including The Boys & Girls Club of Oakland, California, and the World Business Academy of Ojai, California. Mr. Zimmer received his Bachelor of Arts in Economics from Washington University.

Committees of the Board of Directors

The Board of Directors has five principal committees as of March 31, 2007: (1) an Audit Committee composed of K. Sue Redman (Chairperson), Dino J. DeConcini and James R. Reis, (2) a Compensation Committee composed of Dino J. DeConcini (Chairperson), K. Sue Redman and George A. Zimmer, (3) a Nominating and Governance

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Committee composed of Hedy F. Govenar (Chairperson), Dino J. DeConcini and John M. Blair, (4) a Special Committee (from June 2006 to the present) composed of James R. Reis (Chairperson) and K. Sue Redman and (5) an ad hoc committee composed of James R. Reis (sole member). Upon the effective date of the resignations of Mr. Blair and Ms. Govenar, the Nominating and Governance Committee will consist of Mr. DeConcini (sole member).

Meetings of the Board of Directors and its Committees

During the year ended August 31, 2006, the Board of Directors met on 14 occasions. All of the directors attended 100% of the Board of Directors meetings and meetings of each of the committees on which he or she served, except for Mr. DeConcini and Mr. Mueller, who each missed one meeting during the year.

The Board of Directors consists of a majority of independent directors, as independence is determined in accordance with Rule 4200 of the Marketplace Rules of the NASDAQ Stock Market LLC. The Board of Directors has determined that John M. Blair, Dino J. DeConcini, Hedy F. Govenar, K. Sue Redman, James R. Reis and George A. Zimmer of the Board of Directors are independent under these standards. After the resignations of Mr. Blair and Ms. Govenar, the Board of Directors still consists of a majority of independent directors.

Audit Committee.  The Board of Directors has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The Audit Committee is responsible for reviewing the financial information provided to shareholders and others, the systems of internal controls established by management and the Board of Directors, the performance and selection of independent registered public accounting firm, and our audit and financial reporting processes. The Audit Committee held six meetings during 2006. The Board of Directors has determined that K. Sue Redman and James R. Reis are “audit committee financial experts” as defined in Item 401(h) of Regulation S-K. Each of the members of this committee is an “independent director” as defined in Rule 4200 of the Marketplace Rules of the NASDAQ Stock Market LLC. The report of the Audit Committee for 2006 is set forth in Item 11. The Audit Committee charter is available on the Company’s website at http://www.apollogrp.edu/CorporateGovernance/CorporateGovernance.aspx.

Compensation Committee.  The Compensation Committee of our Board of Directors, which met 16 times during 2006, determines all aspects of compensation of executive officers, subject, in certain instances, to ratification by a majority of the independent members of the Board of Directors. Each of the members of this committee is an “independent director” as defined in Rule 4200 of the Marketplace Rules of the NASDAQ Stock Market LLC and an “outside director” as defined in IRC Section 162(m). The Compensation Committee also reviews competitive practice data regarding our non-employee director compensation and works in conjunction with our Nominating and Governance Committee in establishing the amount and form of such compensation. The Compensation Committee charter is available on the Company’s website at http://www.apollogrp.edu/CorporateGovernance/CorporateGovernance.aspx.

Nominating and Governance Committee.  The Nominating and Governance Committee was formed in 2006. The Nominating and Governance Committee is responsible for recommending individuals to the Board of Directors to constitute nominees of the Board of Directors for election to the Board, recommending individuals to the Board of Directors to fill the unexpired term of any vacancy existing on the Board of Directors, the development of qualification criteria for new nominees to the Board of Directors, conducting an assessment of the size and composition of the Board of Directors and recommending changes in the Board’s size, assisting the Board of Directors with corporate governance matters, overseeing the orientation and training of new directors, and consulting with the Chairman of the Board regarding the composition of standing committees of the Board. This committee held three meetings during 2006. The Nominating and Governance Committee charter is available on the Company’s website at http://www.apollogrp.edu/CorporateGovernance/CorporateGovernance.aspx.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, as well as persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in beneficial ownership. Directors, executive officers and greater than 10% shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of the copies of such forms furnished to us, or written representations that no Forms 5 were

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required, we believe that during the fiscal year ended August 31, 2006, our directors and officers complied with all Section 16(a) filing requirements except as set forth below. During the fiscal year ended August 31, 2006, the following individuals failed to timely file a Form 4: Dr. John G. Sperling, Peter V. Sperling and Todd S. Nelson, each for a disposition of shares.

Code of Ethical Conduct

We have adopted a code of ethical conduct that applies to all employees, including our directors, executive officers, and all members of our finance department, including the principal financial officer and principal accounting officer. This code of ethical conduct is available on the Company’s website at http://www.apollogrp.edu/CorporateGovernance/CorporateGovernance.aspx. In the event that the Company makes any amendment to, or grants any waiver from, a provision of the Code of Ethical Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer, controller or certain other senior officers and requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver and the reasons for the amendment or waiver on our website, http://www.apollogrp.edu and, as required by Nasdaq, file a Current Report on Form 8-K with the SEC reporting the amendment or waiver.

Controlled Company

We are a “Controlled Company” as defined in Rule 4350(c) of the Marketplace Rules of The NASDAQ Stock Market LLC, since more than 50% of the voting power of Apollo Group is held by the John Sperling Voting Stock Trust. As a consequence, we are exempt from certain requirements of Marketplace Rule 4350, including that (a) our Board be composed of a majority of Independent Directors (as defined in Marketplace Rule 4200), (b) the compensation of our officers be determined by a majority of the independent directors or a compensation committee composed solely of independent directors and (c) nominations to the Board of Directors be made by a majority of the independent directors or a nominations committee comprised solely of independent directors. However, Marketplace Rule 4350(c) does require that our independent directors have regularly scheduled meetings at which only independent directors are present (“executive sessions”) and IRC Section 162(m) does require a compensation committee of outside directors (within the meaning of Section 162(m)) to approve stock option grants to executive officers in order for us to be able to deduct the stock option grants as an expense. Notwithstanding the foregoing exemptions, we do have a majority of independent directors on our Board of Directors and we do have a Compensation Committee and a Nominating and Governance Committee composed of independent directors.

Revised charters for the Compensation, Audit and Nominating and Governance Committees have been approved by the Board of Directors. These charters provide, among other items, that each member must be independent as such term is defined by the applicable rules of The NASDAQ Stock Market LLC and the SEC.

Item 11 — Executive Compensation

Director Compensation

Fees.  For the year ended August 31, 2006, our non-employee directors received a $24,000 annual retainer and $2,000 for each Board meeting attended. In addition, members of the Audit Committee received $2,000 for each Audit Committee meeting attended, members of the Compensation Committee received $1,000 for each Compensation Committee meeting attended, and members of the Nominating and Governance Committee received $1,000 for each Nominating and Governance Committee meeting attended. The Audit Committee Chairperson received an additional $5,000 for each meeting they chaired, the Compensation Committee Chairperson also received $4,500 for each meeting they chaired, and the Nominating and Governance Committee Chairperson also received an additional $2,500 for each meeting they chaired. Non-employee directors are also reimbursed for out-of-pocket expenses.

Effective September 1, 2006, the Audit Committee Chairperson receives a $20,000 annual retainer, the Compensation Committee Chairman is paid an $18,000 annual retainer and the Chairperson of the Nominating and Governance Committee receives a $16,000 annual retainer. The Chairpersons of the Board Committees no longer receive additional compensation for each meeting chaired. Non-employee directors are also reimbursed for out-of-pocket expenses.

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Apollo Group, Inc. Share Based Compensation Plans.  Through 2003, the Second Amended and Restated Director Stock Plan (“DSP”) provided for an automatic option grant on September 1 of each year to each of the Company’s non-employee directors to purchase shares of the Company’s Apollo Group Class A common stock at an exercise price per share equal to the fair market value of such stock on the grant date. The Company currently has two share based compensation plans under which non-employee directors may be granted options: the Apollo Group, Inc. Long-Term Incentive Plan (“LTIP”) and the Apollo Group, Inc. Amended and Restated 2000 Stock Incentive Plan (“2SIP”). Under both the LTIP and the 2SIP, the Company may grant non-qualified stock options, incentive stock options, stock appreciation rights and other share based awards in the Company’s Apollo Group Class A common stock to certain officers, key employees, or directors of the Company. On September 10, 2005, each of the following non-employee Board members was granted an option to purchase 20,250 shares of Apollo Group Class A common stock with an exercise price of $76.76 per share, the fair market value per share of such common stock on the grant date: John M. Blair, Dino J. DeConcini, Hedy F. Govenar and John R. Norton. Mr. Norton has since resigned from his positions with the Company. Each such option vested six months and one day after the grant date upon the non-employee director’s continuation on the Board through such date. No additional options have been granted to non-employee board members subsequent to September 10, 2005.

Executive Compensation

The following table discloses the annual and long-term compensation earned by our President (Principal Executive Officer), the four other most highly compensated executive officers for the fiscal year ended August 31, 2006, our former Chief Executive Officer who served in such capacity for a portion of such fiscal year and two other former executive officers who terminated employment during such fiscal year for services rendered in all capacities for the fiscal years ended August 31, 2006, 2005 and 2004. Such individuals will be hereinafter referred to as our “Named Executive Officers.”

									Long-Term
			Annual Compensation						Compensation Awards
							Other Annual		APOL Securities		All Other
Name and Principal Position	Year		Salary		Bonus(1)		Compensation(2)		Underlying Options		Compensation(3)
Dr. John G. Sperling Founder, Acting Executive Chairman of the Board and Director		2006	$	650,000	$	212,500	$	83,877		100,000	$	—
		2005		450,000		—		69,249		—		—
		2004		450,000		—		108,511		120,250		—
Kenda B. Gonzales(4) Former Chief Financial Officer and Treasurer		2006	$	355,599	$	112,500	$	—		160,000	$	4,500
		2005		323,714		196,875		—		—		4,200
		2004		280,000		200,000		—		100,000		3,900
Brian E. Mueller President and Director		2006	$	368,325	$	232,000	$	—		240,000	$	4,500
		2005		203,300		355,500		—		100,000		4,200
		2004		203,300		177,300		—		107,656		3,900
Terri C. Bishop Senior Vice President and Chief Communications Officer		2006	$	306,261	$	75,500	$	—		74,000	$	4,500
		2005		306,261		50,000		—		5,000		4,200
		2004		306,261		50,000		—		5,000		3,900
John R. Kline Chief Administrative Officer		2006	$	181,459	$	96,101	$	—		65,000	$	4,181
		2005		166,333		88,350		—		20,000		4,200
		2004		109,333		73,500		—		26,914		3,900
Former Officers:
Todd S. Nelson(4) Former Chairman of the Board, Chief Executive Officer, and President		2006	$	281,250	$	—	$	89,535		320,000	$	32,255,657
		2005		750,000		599,422		181,217		—		—
		2004		750,000		4,462,500		176,855		807,656		—
Laura Palmer Noone(4) Former President, The University of Phoenix, Inc.		2006	$	249,229	$	100,000	$	—		20,000	$	111,167
		2005		261,478		106,000		—		—		4,200
		2004		250,000		120,000		—		45,000		3,900
Robert A. Carroll(4) Former Chief Information Officer		2006	$	114,973	$	23,672	$	—		15,000	$	275,735
		2005		237,930		78,672		—		—		4,200
		2004		225,000		63,281		—		35,000		3,900

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(1)	Represents cash bonuses earned for the indicated fiscal years.
(2)	Other annual compensation amounts shown consist principally of the perquisites of the use of Company-provided automobiles and the Company’s payment for personal tax consulting services. During the year ended August 31, 2006, Dr. Sperling received $31,912 in value from the use of Company-provided automobiles, including Company-provided fuel, and $51,965 in personal tax consulting services, and Mr. Nelson received $19,524 in value from the use of a Company-provided automobile, including Company-provided fuel, and $3,425 in personal tax consulting services. In addition, Mr. Nelson received $66,585 in value from the use of an aircraft for personal travel. For the year ended August 31, 2006, the Company accrued $677,385 with respect to its deferred compensation arrangement for Dr. Sperling; see Item 11, “Agreements Regarding Employment, Change of Control and Termination of Employment” for more information.
(3)	Other compensation amounts shown consist principally of matching contributions made by the Company on each Named Executive Officer’s behalf to Apollo Group, Inc.’s Savings and Investment Plan in the indicated fiscal years. For Mr. Nelson, Dr. Palmer Noone and Mr. Carroll, other compensation includes gross severance pay of $32,085,881, $106,667 and $275,159, respectively. In addition, for Mr. Nelson, other compensation includes the transfer of title of the Company-provided automobile to Mr. Nelson, valued at $169,775. See “Employment and Deferred Compensation Agreements and Termination of Employment” below.
(4)	Effective November 1, 2006, Ms. Gonzales resigned from the Company. Effective January 11, 2006, Mr. Nelson resigned from the Company. Effective June 30, 2006, Ms. Palmer Noone resigned from the Company. Effective January 31, 2006, Mr. Carroll resigned from the Company.

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The following table discloses options granted to our Named Executive Officers for the fiscal year ended August 31, 2006:

Option Grants to Purchase Apollo Group Class A Common Stock In the Last Fiscal Year

	Option Grants in Fiscal Year 2006
				Percent of									Potential Realizable
				Total Options									Value at Assumed
	Number of			Granted to									Annual Rates of
	Securities			Employees									Stock Price
	Underlying			Excluding			Exercise						Appreciation for
	Options			Directors in			Price Per			Expiration			Option Term(7)
Name	Granted			Fiscal Year			Share			Date			5%		10%
Dr. John G. Sperling		100,000			2.64	%	$	51.330	(3)		6/23/2016	(4)	$	3,228,116	$	8,180,680
Kenda B. Gonzales(1)		50,000	(1)		1.32	%		63.790			11/1/2015	(5)(6)		2,005,859		5,083,242
		110,000	(1)		2.90	%		51.330			6/23/2016	(4)		3,550,928		8,998,748
Brian E. Mueller		40,000			1.06	%		63.790	(3)		11/1/2015	(5)		1,604,688		4,066,593
		200,000			5.27	%		51.330	(3)		6/23/2016	(4)		6,456,232		16,361,360
Terri C. Bishop		4,000			0.11	%		63.790	(3)		11/1/2015	(5)		160,469		406,659
		70,000			1.85	%		51.330	(3)		6/23/2016	(4)		2,259,681		5,726,476
John R. Kline		15,000			0.40	%		63.790	(3)		11/1/2015	(5)		601,758		1,524,972
		50,000			1.32	%		51.330	(3)		6/23/2016	(4)		1,614,058		4,090,340
Former Officers:
Todd S. Nelson(2)		320,000	(2)		8.44	%		63.790			11/1/2015	(2)(5)		12,837,500		32,532,746
Laura Palmer Noone(1)		20,000	(1)		0.53	%		63.790			11/1/2015	(5)		802,344		2,033,297
Robert A. Carroll(1)		15,000	(1)		0.40	%		63.790			11/1/2015	(5)		601,758		1,524,972

(1)	Effective January 31, 2006, Mr. Carroll resigned from the Company. Effective June 30, 2006, Ms. Palmer Noone resigned from the Company. Effective November 1, 2006, Ms. Gonzales resigned from the Company. For information concerning the effect such resignation had on their outstanding options, see footnotes (3) and (4) to the table below entitled “Aggregate Option Exercises in Fiscal Year 2006 and Option Values as of August 31, 2006.”
(2)	Effective January 11, 2006, Mr. Nelson’s employment with the Company was terminated. For information concerning the effect of such resignation upon his outstanding options, see footnote (3) to the table below entitled “Aggregate Option Exercises in Fiscal Year 2006 and Option Values as of August 31, 2006.”
(3)	In December 2006, Messrs. Sperling, Mueller and Kline, and Ms. Bishop made elections in accordance with Section 409A of the Internal Revenue Code. As such, the Company will increase the strike price of their options to the fair market value of the Company’s stock on the revised measurement date (if applicable) determined for each option for financial accounting purposes. These changes to the exercise prices are not reflected in the table above. See Note 3, “Restatement of Consolidated Financial Statements,” to Item 8, Financial Statements and Supplementary Data.”
(4)	Unless otherwise canceled or expired, each of these options will vest as follows: 25% of each option will vest and become exercisable upon the optionee’s continued employment with the Company through February 28, 2007 and an additional 25% of each option will vest and become exercisable upon the optionee’s completion of each additional year of employment after February 28, 2007, through February 28, 2010. Each of these options also has potential accelerated vesting provisions based on the financial performance of the Company.
(5)	Unless otherwise canceled or expired, each of these options will vest as follows: 25% of each option will vest and become exercisable upon the optionee’s continued employment with the Company through August 31, 2006 and an additional 25% of each option will vest and become exercisable upon the optionee’s completion of each additional year of employment after August 31, 2006, through August 31, 2009. See footnote (1) for more information regarding Messrs. Nelson and Carroll and Mmes. Gonzales and Palmer Noone.
(6)	In December 2006, Ms. Gonzales made an election in accordance with Section 409A of the Internal Revenue Code. Pursuant to such election, her options will not be exercisable in calendar year 2006 and will expire on the

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earlier of (i) December 31, 2007 or (ii) the earliest contractual stated expiration term. For Ms. Gonzales’ in-the-money options at the end of the normal three month post-employment exercise period, the Company has authorized a series of successive 30-day extensions to the exercise period for such options, but not to extend beyond 30 days from the date the Company becomes current with its SEC filing requirements. See Note 3, “Restatement of Consolidated Financial Statements,” to Item 8, Financial Statements and Supplementary Data.

(7)

The 5% and 10% assumed rates of appreciation are prescribed by the rules and regulations of the SEC and do not represent the Company’s estimate or projection of the future trading prices of the Company’s common stock. The calculations assume annual compounding and continued retention of the options or the underlying common stock for the full year option term. Unless the market price of the common stock actually appreciates over the option term, no value will be realized by the optionee from these option grants. Actual gains, if any, on option exercises are dependent on numerous factors, including, without limitation, the future performance of the Company, overall business and market conditions, and the optionee’s continued employment throughout the vesting period and the option term. None of those factors are reflected in the calculations.

Aggregated Option Exercises in Fiscal Year 2006 and Option Values as of August 31, 2006

The following table provides information concerning the exercise of options by our Named Executive Officers during the 2006 fiscal year and the unexercised options held by them at the end of such fiscal year.

Apollo Group Class A Common Stock

					Number of Securities					Value of Unexercised
	Shares				Underlying Unexercised					In-the-Money Options at
	Acquired		Value		Options at Fiscal Year-End					Fiscal Year-End(2)
Name	on Exercise		Realized(1)		Exercisable		Unexercisable			Exercisable			Unexercisable
Dr. John G. Sperling		281,250	$	14,203,434		1,330,867		100,000		$	37,945,976	(5)	$	—
Kenda B. Gonzales(3)		—		—		430,935		172,500	(3)(4)		11,502,369			—
Brian E. Mueller		—		—		186,720		306,914			849,189	(5)		—
Terri C. Bishop		—		—		18,650		75,500			86,033	(5)		—
John R. Kline		—		—		30,584		77,978			—	(5)		—
Former Officers:
Todd S. Nelson(3)		—		—		—		—	(3)		—			—
Laura Palmer Noone(3)		214,409		11,538,903		104,676		—	(3)		1,448,802			—
Robert A. Carroll(3)		170,568		7,493,661		—		—	(3)		—			—

(1)	Represents the value realized upon exercise calculated by multiplying the number of options exercised by the difference between the actual stock trading price on the date of exercise and the exercise price.
(2)	The “Value of Unexercised In-the-Money Options at Fiscal Year-End” is determined by multiplying the number of unexercised options, calculated on a grant-by-grant basis, by the amount by which the closing price of a share of the Company’s Class A common stock as of August 31, 2006 ($50.21) exceeded the exercise price per share in effect for each option. The actual value, if any, that will be realized upon the exercise of an option will depend upon the amount by which the market price of the Company’s Class A common stock on the date that the option is exercised exceeds the strike price per share.
(3)	Effective January 11, 2006 Mr. Nelson resigned from the Company and as part of his Separation Agreement with the Company, all of his outstanding options were canceled. Effective January 31, 2006, Mr. Carroll resigned from the Company, and in connection therewith 50,000 of Mr. Carroll’s options were canceled or expired in accordance with their terms. Effective June 30, 2006, Ms. Palmer Noone resigned from the Company, and in connection therewith 30,000 of Ms. Noone’s options were canceled. Effective November 1, 2006, Ms. Gonzales resigned from the Company, and in connection therewith 260,000 options were canceled or expired in accordance with their terms. Ms. Gonzales’ in-the-money options at the end of the normal three month post-employment exercise period were not canceled. For more information, see footnote (4).
(4)	In December 2006, Ms. Gonzales made an election in accordance with Section 409A of the Internal Revenue Code. As such her options will not be exercisable in calendar year 2006 and will expire on the earlier of

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(i) December 31, 2007 or (ii) the earliest contractual stated expiration term. For Ms. Gonzales’ in-the-money options at the end of the normal three month post-employment exercise period, the Company has authorized a series of sucessive 30-day extensions for the exercise period of such options, but not to extend beyond 30 days from the date the Company becomes current with its SEC filing requirements. See Note 3 — Restatement in Item 8 of this Form 10-K.

(5)

In December 2006, Messrs. Sperling, Mueller and Kline, and Ms. Bishop made an election in accordance with Section 409A of the Internal Revenue Code. As such, the Company will increase the strike price of their options to the fair market value of the Company’s stock on the revised measurement date (if applicable) determined for each such option for financial accounting purposes. See Note 3 -Restatement in Item 8 of this Form 10-K.

The number of securities underlying unexercised options and the value of unexercised in-the-money options includes options to purchase Apollo Group Class A common stock issued in conjunction with the conversion of UPX Online common stock to Apollo Group Class A common stock.

Agreements Regarding Employment, Change of Control and Termination of Employment

In December 1993, we entered into an employment agreement and deferred compensation agreement with Dr. John G. Sperling, our founder. The initial term of the employment agreement was for four years and expired on December 31, 1997. However, the employment agreement automatically renews for additional one-year periods thereafter. Under the terms of the employment agreement, Dr. Sperling received an annual salary of $450,000 for 2006, 2005 and 2004. Effective March 1, 2006, the Compensation Committee of the Board of Directors authorized the increase of Dr. Sperling’s annual salary to $850,000. This salary is subject to annual review by the Compensation Committee. We may terminate the employment agreement only for cause, and Dr. Sperling may terminate the employment agreement at any time upon 30 days written notice. Pursuant to the deferred compensation agreement, Dr. Sperling will, upon his termination of employment with the Company, receive a lifetime annuity equal to his highest annual rate of base salary for any of the last three calendar years preceding the calendar year in which his employment terminates. The annuity will be payable in equal monthly installments each year. Had Dr. Sperling terminated employment on August 31, 2006, his lifetime annuity under the plan would be $850,000 per year. In addition, upon Dr. Sperling’s death, his designated beneficiary will be paid an amount equal to three times his highest annual rate of base salary in effect for any of the three calendar years during the three-year period immediately preceding the calendar year in which his employment terminates. Such death benefit will be payable in 36 equal monthly installments, with the first such installment due on the first day of the month following the month of Dr. Sperling’s death.

On January 11, 2006, Todd S. Nelson, former Chief Executive Officer and President (the “Former CEO”), resigned as a director and an officer of the Company. As part of his Separation Agreement dated January 11, 2006, the Company paid the Former CEO $32.3 million ($18.0 million after-tax) on January 26, 2006, which was primarily in exchange for the cancellation of all of his outstanding vested and unvested stock options. The Former CEO was also required to convert his 2,085 shares of outstanding Apollo Group Class B common stock to Apollo Group Class A common stock. The Former CEO was also given title to his Company vehicle.

On January 31, 2006, Robert A. Carroll resigned as Chief Information Officer of the Company. On January 31, 2006, the Company entered into a Separation Agreement and General Release and Waiver of Claims with Mr. Carroll in exchange for a severance payment to Mr. Carroll of twelve months salary and 12 months of COBRA premiums, or $275,159 in the aggregate. In addition, as part of a February 14, 2006 Supplemental Agreement, the Company will provide Mr. Carroll tuition education benefits until 36 months from his date of separation.

On June 30, 2006, Laura Palmer Noone resigned as President of UPX. On May 25, 2006, the Company entered into a Separation Agreement and General Release and Waiver of Claims with Ms. Palmer Noone for her separation from employment on June 30, 2006, pursuant to which Ms. Palmer Noone received a severance payment of four months salary, or $106,667 in the aggregate. In addition, Ms. Palmer Noone was appointed President Emeritus for UPX and continued her eligibility to teach for UPX.

On November 1, 2006, Kenda Gonzales resigned as Chief Financial Officer and Treasurer of the Company.

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On November 8, 2006, Daniel Bachus resigned as Chief Accounting Officer and Controller of the Company. On January 20, 2007, Mr. Bachus entered into a Separation Agreement and General Release and Waiver of Claims with the Company dated January 20, 2007. The Company made a payment of $22,969 to Mr. Bachus on February 9, 2007.

On November 14, 2006, Apollo Group engaged FTI to provide the services of both Joseph L. D’Amico as Chief Financial Officer and other finance personnel. Mr. D’Amico is a Managing Director of FTI. For Mr. D’Amico’s services, Apollo Group pays FTI a total of $130,000 per month, which includes $5,000 as an allowance for Mr. D’Amico’s non-travel related costs. Apollo Group pays for the services of other finance personnel on an hourly basis plus expenses.

On February 13, 2007, we entered into a consulting agreement effective December 15, 2007 with Brian L. Swartz. On February 6, 2007, Mr. Swartz was appointed our Vice President, Corporate Controller and Chief Accounting Officer. The term of this consulting agreement extends through June 30, 2007. Mr. Swartz receives monthly payments of $55,000.

On March 31, 2007, we entered into an employment agreement with Gregory W. Cappelli, pursuant to which he is to be employed as Executive Vice President, Global Strategy. The employment agreement has an initial term of four years measured from Mr. Cappelli’s start date of April 2, 2007 and will be subject to successive one-year renewals thereafter, unless either party provides timely notice of non-renewal. During the term of the employment agreement, Mr. Cappelli will be entitled to an annual rate of base salary of not less than $500,000 and a target bonus not less than 100% of such base salary. Mr. Cappelli will also be entitled to the following equity compensation awards:

(i) Initial Stock Option Grant. On the third business day following the Company’s filing of all periodic reports required under the Securities Exchange Act of 1934 to make the Company current in its reporting obligations for the 2006 and 2007 fiscal years (the “Full Compliance Date”), Mr. Cappelli will be granted a stock option for 1,000,000 shares of Class A common stock with an exercise price equal to the closing price per share on the grant date and a maximum term of six years (the “Initial Option Grant”).

(ii) Fiscal Year 2008 Equalization Grant. Upon the later of the third business day following the Full Compliance Date or the first business day of the Company’s 2008 fiscal year, Mr. Cappelli will become eligible for a supplemental stock option grant (the “Equalization Grant”) in the event the exercise price of the Initial Option Grant is greater than the closing price per share of the Company’s Class A common stock on March 30, 2007. The actual number of shares subject to the Equalization Grant (if any) will be determined pursuant to the formula which takes into account both that price differential and the difference between the actual Black-Scholes-Merton value of the Initial Option Grant and the Black-Scholes-Merton value which would have resulted had that option been granted on March 30, 2007.

(iii) Restricted Stock Unit Award. Upon the later of the third business day following the Full Compliance Date or the first business day of the Company’s 2008 fiscal year, Mr. Cappelli will be granted restricted stock units covering that number of shares of the Company’s Class A common stock determined by dividing $5,000,000 by the closing price of the Class A common stock on March 30, 2007. Each restricted stock unit will represent the right to receive one share of such Class A common stock upon the vesting of that unit.

The Initial Option Grant, any Equalization Grant and the restricted stock unit award will each vest in a series of four successive equal annual installments upon Mr. Cappelli’s completion of each year of employment with the Company over the four-year period measured from his April 2, 2007 start date. Each award will be subject to accelerated vesting in whole or in part in connection with certain changes in control of the Company or termination of Mr. Cappelli’s employment under certain prescribed circumstances.

Should Mr. Cappelli’s employment be terminated by the Company without cause or should he resign for good reason or should he terminate employment in connection with the Company’s decision not to renew his employment agreement, then he will become entitled to the following severance benefits, contingent upon his delivery of a general release to the Company:

(i) a cash amount equal to two times his annual base salary and target bonus, payable over the one-year measured from his termination date;

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(ii) 100% vesting of his restricted stock unit award and accelerated vesting of the Initial Option Grant and any Equalization Grant to the extent of the greater of (A) 50% of the then unvested portion of each such grant or (B) the portion of each such grant which would have vested had he completed an additional 12 months of employment with the Company prior to his termination date; and

(iii) continued health care coverage under the Company’s group health plan at the Company’s expense for a period not to exceed 18 months.

Mr. Cappelli will also be entitled to such severance benefits if he resigns for any reason within a 30-day period beginning six months after the closing of a change in control of the Company.

Should such a change in control of the Company occur within the first two years of Mr. Cappelli’s employment, then he will be entitled to a full tax gross-up with respect to any excise tax imposed under IRC Section 4999 on any payments or benefits he receives in connection with such change in control (including any accelerated vesting of his equity awards) which are deemed to constitute parachute payments under IRC Section 280G.

For the one-year period following his termination of employment, Mr. Cappelli will be subject to certain non-compete and non-solicitation covenants.

We do not have employment agreements with any of our other executive officers.

Pursuant to the terms of the Company’s 2SIP, each outstanding award under such plan will vest in full on an accelerated basis in the event of certain changes in control of the Company, including an acquisition of the Company by merger or asset sale or the acquisition of 50% or more of the Company’s outstanding Class A common stock.

Compensation and Management Committee Interlocks and Insider Participation

Throughout fiscal year 2006, Mr. Norton and Mr. Blair served on the Compensation Committee of our Board of Directors. During fiscal year 2007, Mr. Norton and Mr. Blair were replaced by K. Sue Redman, Dino J. DeConcini and George A. Zimmer as Compensation Committee members. None of the members of our Compensation Committee during our fiscal year ended August 31, 2006:

•  was an officer or employee of Apollo or any of its businesses;

•  was formerly an officer of Apollo or any of its businesses; or

•  had any relationship requiring disclosure by us under Item 404 of Regulation S-K.

Additionally, during 2006, none of our executive officers or directors served as a member of the Board of Directors, or any Compensation Committee thereof, or any other entity such that the relationship would require disclosure by us under Item 404 of Regulation S-K.

Audit Committee Report

The Audit Committee, operating under its written charter, has (1) reviewed and discussed the audited financial statements of the Company as of and for the year ended August 31, 2006, with management of the Company; (2) discussed with the Company’s independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61, “Communications with Audit Committees” (“SAS 61”), and Statement on Auditing Standards No. 90, “Audit Committee Communications” (“SAS 90”); (3) received and reviewed the written disclosures and the letter from its independent registered public accounting firm required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees; and (4) discussed with its independent registered public accounting firm, the independent registered public accounting firm’s independence.

This report is submitted by the Audit Committee.

K. Sue Redman, Chairperson
Dino J. DeConcini
James R. Reis

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Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 31, 2007. Except as otherwise indicated, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares, except to the extent that authority is shared by spouses under applicable law or as otherwise noted below.

	Apollo					Apollo
	Group Class A		Percent			Group Class B		Percent
Name and Address of Beneficial Owner	Common Stock		Owned			Common Stock		Owned
Directors and Officers:
Dr. John G. Sperling		21,695,615		12.1	%(1)		243,081		51.2	%
Peter V. Sperling		13,926,757		7.8	%(2)		232,068		48.8	%
Kenda B. Gonzales		343,435		*	(3)
Brian E. Mueller		238,047		*	(4)
Terri C. Bishop		37,834		*	(5)
John R. Kline		44,240		*	(6)
Todd S. Nelson		—		*	(7)
Laura Palmer Noone		3,838		*	(8)
Robert A. Carroll		—		*	(9)
John M. Blair		69,750		*	(10)
Dino J. DeConcini		103,179		*	(11)
Hedy F. Govenar		125,268		*	(12)
K. Sue Redman		—		*
James R. Reis		—		*
George A. Zimmer		—		*
All Executive Officers and Directors (20 persons)		35,550,478		19.8	%(13)
Greater than 5% Holders:
FMC Corp.		22,797,764		12.7	%(14)
AllianceBernstein L.P.		9,538,129		5.3	%(15)
Total Shares Outstanding		179,113,696		100.0	%(16)		475,149		100.0	%

*	Represents beneficial ownership of less than 1%.
(1)	Includes (a) 1,357,339 shares held by the John Sperling 1994 Irrevocable Trust, for which Dr. Sperling and Mr. Sperling are the co-trustees (also included in the shares being reported as beneficially owned by Mr. Sperling); (b) 2,348,886 shares held by The Aurora Foundation, for which Dr. Sperling is the trustee; (c) 1,355,867 shares that Dr. Sperling has the right to acquire within 60 days of the date of the table set forth above; (d) 243,080 shares that the John Sperling Voting Stock Trust has the right to acquire at any time, subject to certain limitations under the Shareholder Agreement as amended, upon conversion of its Class B common stock, for which Dr. Sperling is the trustee; and (e) one share that Dr. Sperling has the right to acquire at any time upon conversion of his share of Class B common stock. Of the shares held by Dr. Sperling, 500,000 shares are subject to a forward sale agreement maturing April 24, 2009. Of the shares held by the Aurora Foundation, 100,000 shares are subject to a forward sale agreement maturing April 24, 2009.
(2)	Includes (a) 1,357,339 shares held by the John Sperling 1994 Irrevocable Trust, for which Dr. Sperling and Mr. Sperling are the co-trustees (also included in the shares being reported as beneficially owned by Dr. Sperling); (b) 596,961 shares that Mr. Sperling has the right to acquire within 60 days of the date of the table set forth above; (c) 232,067 shares that the Peter Sperling Voting Stock Trust has the right to acquire at any time, subject to certain limitations under the Shareholder Agreement as amended, upon conversion of its Class B common stock, for which Mr. Sperling is the trustee; and (d) one share that Mr. Sperling has the right

159

	to acquire at any time upon conversion of his share of Class B common stock. Of the shares held by Mr. Sperling, 250,000 shares are subject to a forward sale agreement maturing November 5, 2007; 500,000 shares are subject to a forward sale agreement maturing January 2, 2008; 250,000 shares are subject to a forward sale agreement maturing January 31, 2008; 500,000 shares are subject to a forward sale agreement maturing April 11, 2008; 500,000 shares are subject to a forward sale agreement maturing April 25, 2008; 500,000 shares are subject to a forward sale agreement maturing July 28, 2008; 315,000 shares are subject to a forward sale agreement maturing January 20, 2009; and 500,000 shares are subject to a forward sale agreement maturing April 24, 2009.
(3)	Includes 343,435 shares that Ms. Gonzales has the right to acquire within 60 days of the date of the table set forth above. Effective November 1, 2006, Ms. Gonzales resigned from the Company.
(4)	Includes 236,720 shares that Mr. Mueller has the right to acquire within 60 days of the date of the table set forth above.
(5)	Includes 1,684 shares held by a living trust and 36,150 shares that Ms. Bishop has the right to acquire within 60 days of the date of the table set forth above.
(6)	Includes 43,084 shares that Mr. Kline has the right to acquire within 60 days of the date of the table set forth above.
(7)	Effective January 11, 2006, Mr. Nelson resigned from the Company.
(8)	Effective June 30, 2006, Ms. Palmer-Noone resigned from the Company.
(9)	Effective January 31, 2006, Mr. Carroll resigned from the Company.
(10)	Includes 69,750 shares that Mr. Blair has the right to acquire within 60 days of the date of the table set forth above.
(11)	Includes 103,021 shares that Mr. DeConcini has the right to acquire within 60 days of the date of the table set forth above.
(12)	Includes 2,362 shares held by the Governmental Advocates Money Pension Plan and Trust, for which Ms. Govenar is trustee and beneficiary, and 122,906 shares that Ms. Govenar has the right to acquire within 60 days of the date of the table set forth above.
(13)	Includes 3,682,454 shares that all Directors and Executive Officers as a group have the right to acquire within 60 days of the date of the table set forth above.
(14)	Based on Form 13G/A filed February 14, 2007, which includes the number of shares as of December 31, 2006. The address of FMC Corp. is 1 Federal Street, Boston, Massachusetts 02109.
(15)	Based on Form 13G filed February 13, 2007, which includes the number of shares as of December 31, 2006. The address of AllianceBernstein L.P. is 1345 Avenue of the Americas, 38th Floor, New York, New York 10105-0096.
(16)	Includes 6,403,399 shares that all directors and employees of the Company have the right to acquire within 60 days of the date of the table set forth above.

160

The address of each of the listed shareholders, unless noted otherwise, is in care of Apollo Group, Inc., 4615 East Elwood Street, Phoenix, Arizona 85040. The number of shares beneficially owned by each entity, director or executive officer is determined under the rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, an entity or person is deemed a “beneficial owner” of a security if it, he or she has or shares the power to vote or direct the voting of such security or the power to dispose or direct the disposition of such security. An entity or person is also deemed to be a beneficial owner of any securities which that entity or person has the right to acquire beneficial ownership of within 60 days of March 31, 2007 or May 30, 2007. Unless otherwise indicated, each person has sole investment and voting power, or shares such powers with his or her spouse, with respect to the shares set forth in the following table.

Equity Compensation Plan Information

Equity Compensation Plans Approved by Shareholders

The following table sets forth, for each of our equity compensation plans, the number of outstanding option grants and the number of shares remaining available for issuance as of August 31, 2006, for our Apollo Group Class A common stock:

					(c)
					Number of Securities Remaining
	(a)				Available for Future Issuance
	Number of Securities to be		(b)		Under Stock Option Plans
	Issued Upon Exercise of		Weighted-average		(excluding securities reflected in
	Outstanding Options		Exercise Price of		column (a))
Plan category	(thousands)		Outstanding Options		(thousands)
Equity compensation plans approved by security holders		9,324	$	44.96		2,786
Equity compensation plans not approved by security holders		—		—		—
Total		9,324	$	44.96		2,786

We have four share based compensation plans: the Apollo Group, Inc. Second Amended and Restated Director Stock Plan (“DSP”), the Apollo Group, Inc. Long-Term Incentive Plan (“LTIP”), the Apollo Group, Inc. Amended and Restated 2000 Stock Incentive Plan (“2SIP”) and the Apollo Group, Inc. Third Amended and Restated 1994 Employee Stock Purchase Plan (“Purchase Plan”). All four of these plans have received the necessary shareholder approval.

The DSP provided for an annual grant to our non-employee directors of options to purchase shares of our Apollo Group Class A common stock on September 1 of each year through 2003. No additional options are available for issuance under this plan.

Under the LTIP, we could grant non-qualified stock options, incentive stock options, stock appreciation rights and other share based awards in our Apollo Group Class A common stock to certain officers, key employees, or directors of us. Most of the options granted under the LTIP vest at 25% per year over four years. The vesting can be accelerated for certain groups of employees if certain financial or operational goals are met.

Under the 2SIP, we may grant non-qualified stock options, incentive stock options, stock appreciation rights and other share based awards in our Apollo Group Class A common stock to certain officers, key employees, or directors of us. Prior to the conversion of UPX Online common stock to Apollo Group Class A common stock we had the ability to also grant non-qualified stock options, incentive stock options, stock appreciation rights and other share based awards for UPX Online common stock under the 2SIP. Any unexercised UPX Online options outstanding as of August 27, 2004, were converted to options to purchase Apollo Group Class A common stock. Most of the options granted under the 2SIP vest 25% per year over four years. The vesting may be accelerated for certain groups of employees if certain financial or operational goals are met.

The Purchase Plan allows our employees to purchase shares of Apollo Group Class A common stock at quarterly intervals through periodic payroll deductions at a price per share equal to 95% of the fair market value on the purchase date. Prior to the amendment and restatement of the Purchase Plan on October 1, 2005, the Apollo

161

Group, Inc. Second Amended and Restated 1994 Employee Stock Purchase Plan (“Second Purchase Plan”) allowed our employees to purchase shares of the Company’s Apollo Group Class A common stock and, during the period it was outstanding, UPX Online common stock, at a purchase price per share, in general, that was 85% of the lower of (1) the fair market value (as defined in the Second Purchase Plan) on the enrollment date into the respective quarterly offering period or (2) the fair market value on the purchase date.

Equity Compensation Plans Not Approved by Shareholders

We currently do not have any equity compensation plans that have not received the necessary shareholder approval.

Item 13 — Certain Relationships and Related Transactions

See Note 9 of our financial statement included in Part II, Item 8, which is incorporated by reference in this Part III, Item 13.

Both the son and sister-in-law of Joseph N. Mildenhall, Chief Information Officer of the Company, are employees of the Company and earn annual salaries of approximately $52,000 and $28,000, respectively. They also have been awarded bonuses and option grants consistent with bonuses and grants provided to other Company employees of the same level with similar responsibilities.

Item 14 — Principal Independent Registered Public Accounting Firm Fees and Services

The following is a summary of the fees billed to us by Deloitte & Touche LLP (“Deloitte”) for professional services rendered for the years ended August 31, 2006 and 2005:

Fee Category	2006		2005
Audit fees:
— SEC filings and subsidiary standalone financial statements	$	3,297,000	$	1,082,000
— Compliance and regulatory audits		317,000		300,000
Audit-related fees		22,000		34,000
Tax fees		344,000		274,000
Total fees	$	3,980,000	$	1,690,000

Audit Fees.  2006 and 2005 fees consist of fees billed for professional services rendered for the audit of the Company’s consolidated financial statements, internal controls over financial reporting, review of interim consolidated financial statements and services performed in connection with statutory and regulatory filings. The increase in 2006 primarily relates to the additional fees associated with the Restatement of the Company’s financial statements.

Audit-Related Fees.  Consists of fees billed for assurance-related services, including audit work paper access by the U.S. Department of Education.

Tax Fees.  Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and international tax compliance, tax audit defense, mergers and acquisitions and international tax planning.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm.  The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. The independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval and the fees for the services performed to date.

162

The Audit Committee has determined that the provision of the foregoing services and the related fees are compatible with maintaining Deloitte’s independence.

PART IV

Item 15 —  Exhibits and Financial Statement Schedules

(a)   The following documents are filed as part of this Annual Report on Form 10-K:

1. Financial Statements filed as part of this report

Index to Consolidated Financial Statements	Page
Consolidated Balance Sheets		75
Consolidated Statements of Income		76
Consolidated Statements of Comprehensive Income		77
Consolidated Statements of Changes in Shareholders’ Equity		78
Consolidated Statements of Cash Flows		80
Notes to Consolidated Financial Statements		81
Reports of Independent Registered Public Accounting Firm		144

2. Financial Statement Schedules

All financial statement schedules have been omitted since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and Notes thereto.

3. Exhibits

Index to Exhibits

				Incorporated by Reference
Exhibit						Exhibit
Number			Exhibit Description	Form	File No.	Number	Filing Date
	2	.1	Asset Purchase Agreement between National Endowment for Financial Education, (R) College for Financial Planning, Inc., as assignee of Apollo Online, Inc., as Buyer, and Apollo Group, Inc. dated August 21, 1997	S-3	No. 333-35465	10	September 11, 1997
	2	.2	Assignment and Amendment of Asset Purchase Agreement between National Endowment for Financial Education, Inc., the College for Financial Planning, Inc., Apollo Online, Inc., and Apollo Group, Inc. dated September 23, 1997	S-3/A	No. 333-35465	10.2	September 23, 1997
	3	.1	Amended and Restated Articles of Incorporation of Apollo Group, Inc.	Proxy Statement	No. 000-25232	Annex B	August 1, 2000
	3	.2	Amended and Restated Bylaws of Apollo Group, Inc.	10-Q	No. 000-25232	3.2	April 10, 2006
	10	.1	Long-Term Incentive Plan of Apollo Group, Inc.*	S-1	No. 33-83804	10.3
	10	.2	Amended and Restated Savings and Investment Plan of Apollo Group, Inc.*	10-Q	No. 000-25232	10.4	January 14, 2002
	10	.3	Third Amended and Restated 1994 Employee Stock Purchase Plan of Apollo Group, Inc.*	10-K		10.5	November 14, 2005
	10	.4	Amended and Restated 2000 Stock Incentive Plan of Apollo Group, Inc.*
	10	.5	Employment Agreement between Apollo Group, Inc. and John G. Sperling*	S-1	No. 33-83804	10.6

163

				Incorporated by Reference
Exhibit						Exhibit
Number			Exhibit Description	Form	File No.	Number	Filing Date
	10	.6	Deferred Compensation Agreement between Apollo Group, Inc. and John G. Sperling*	S-1	No. 33-83804	10.7
	10	.7a	Shareholder Agreement among Apollo Group, Inc. and holders of Apollo Group Class B common stock dated September 7, 1994	S-1	No. 33-83804	10.10
	10	.7b	Amendment to Shareholder Agreement among Apollo Group, Inc. and holders of Apollo Group Class B common stock dated May 25, 2001	10-K		10.10b	November 28, 2001
	10	.7c	Amendment to Shareholder Agreement among Apollo Group, Inc. and holders of Apollo Group Class B common stock dated May 8, 2007
	10	.8	Agreement of Purchase and Sale of Assets of Western International University dated June 30, 1995 (without schedules and exhibits)	10-K		10.11	October 27, 1995
	10	.9	Purchase and Sale Agreement dated October 10, 1995	10-K		10.12	October 25, 1996
	10	.12	Independent Contractor Agreement between Apollo Group, Inc. and Governmental Advocates, Inc. dated June 1, 2006
	10	.13	Promissory Note from Hermes Onetouch, L.L.C. dated December 14, 2001	10-Q		10.14	April 12, 2002
	10	.13a	Corrected Promissory Note from Hermes Onetouch, L.L.C. dated December 14, 2001
	10	.14	Contract for Construction between Apollo Development Corporation and Sundt Construction, Inc. dated June 18, 2004
	10	.15	Separation Agreement between Apollo Group, Inc. and Todd Nelson dated January 11, 2006	8-K	No. 000-25232	10.1	January 12, 2006
	10	.16	Engagement Letter Agreement between Apollo Group, Inc. and FTI Consulting, Inc. dated November 14, 2006*
	10	.17	Consulting Agreement between Apollo Group, Inc. and Brian L. Swartz dated February 13, 2007*
	10	.18	Employment Agreement between Apollo Group, Inc. and Gregory W. Cappelli dated March 31, 2007*
	21		List of Subsidiaries
	23	.1	Consent of Independent Registered Public Accounting Firm
	31	.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted, Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32	.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted, Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Indicates a management contract or compensation plan.

164

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Phoenix, State of Arizona, on May 21, 2007.

APOLLO GROUP, INC.
An Arizona Corporation

By:  /s/  Brian E. Mueller

Brian E. Mueller

President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

Signature	Title	Date
/s/  John G. Sperling John G. Sperling	Founder, Acting Executive Chairman of the Board and Director	May 21, 2007
/s/  Brian E. Mueller Brian E. Mueller	President and Director (Principal Executive Officer)	May 21, 2007
/s/  Joseph L. D’Amico Joseph L. D’Amico	Chief Financial Officer (Principal Financial Officer)	May 21, 2007
/s/  Brian L. Swartz Brian L. Swartz	Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer)	May 21, 2007
/s/  Peter V. Sperling Peter V. Sperling	Senior Vice President, Secretary and Director	May 21, 2007
/s/  John M. Blair John M. Blair	Director	May 21, 2007
/s/  Dino J. DeConcini Dino J. DeConcini	Director	May 21 2007
/s/  Hedy F. Govenar Hedy F. Govenar	Director	May 21, 2007
/s/  K. Sue Redman K. Sue Redman	Director	May 21, 2007

165

Signature	Title	Date
/s/  James R. Reis James R. Reis	Director	May 21, 2007
/s/  George A. Zimmer George A. Zimmer	Director	May 21, 2007

166

Index to Exhibits

				Incorporated by Reference
Exhibit						Exhibit
Number			Exhibit Description	Form	File No.	Number	Filing Date
	2	.1	Asset Purchase Agreement between National Endowment for Financial Education, (R) College for Financial Planning, Inc., as assignee of Apollo Online, Inc., as Buyer, and Apollo Group, Inc. dated August 21, 1997	S-3	No. 333-35465	10	September 11, 1997
	2	.2	Assignment and Amendment of Asset Purchase Agreement between National Endowment for Financial Education, Inc., the College for Financial Planning, Inc., Apollo Online, Inc., and Apollo Group, Inc. dated September 23, 1997	S-3/A	No. 333-35465	10.2	September 23, 1997
	3	.1	Amended and Restated Articles of Incorporation of Apollo Group, Inc.	Proxy Statement	No. 000-25232	Annex B	August 1, 2000
	3	.2	Amended and Restated Bylaws of Apollo Group, Inc.	10-Q	No. 000-25232	3.2	April 10, 2006
	10	.1	Long-Term Incentive Plan of Apollo Group, Inc.*	S-1	No. 33-83804	10.3
	10	.2	Amended and Restated Savings and Investment Plan of Apollo Group, Inc.*	10-Q	No. 000-25232	10.4	January 14, 2002
	10	.3	Third Amended and Restated 1994 Employee Stock Purchase Plan of Apollo Group, Inc.*	10-K		10.5	November 14, 2005
	10	.4	Amended and Restated 2000 Stock Incentive Plan of Apollo Group, Inc.*
	10	.5	Employment Agreement between Apollo Group, Inc. and John G. Sperling*	S-1	No. 33-83804	10.6
	10	.6	Deferred Compensation Agreement between Apollo Group, Inc. and John G. Sperling*	S-1	No. 33-83804	10.7
	10	.7a	Shareholder Agreement among Apollo Group, Inc. and holders of Apollo Group Class B common stock dated September 7, 1994	S-1	No. 33-83804	10.10
	10	.7b	Amendment to Shareholder Agreement among Apollo Group, Inc. and holders of Apollo Group Class B common stock dated May 25, 2001	10-K		10.10b	November 28, 2001
	10	.7c	Amendment to Shareholder Agreement among Apollo Group, Inc. and holders of Apollo Group Class B common stock dated May 8, 2007
	10	.8	Agreement of Purchase and Sale of Assets of Western International University dated June 30, 1995 (without schedules and exhibits)	10-K		10.11	October 27, 1995
	10	.9	Purchase and Sale Agreement dated October 10, 1995	10-K		10.12	October 25, 1996
	10	.12	Independent Contractor Agreement between Apollo Group, Inc. and Governmental Advocates, Inc. dated June 1, 2006
	10	.13	Promissory Note from Hermes Onetouch, L.L.C. dated December 14, 2001	10-Q		10.14	April 12, 2002
	10	.13a	Corrected Promissory Note from Hermes Onetouch, L.L.C. dated December 14, 2001
	10	.14	Contract for Construction between Apollo Development Corporation and Sundt Construction, Inc. dated June 18, 2004
	10	.15	Separation Agreement between Apollo Group, Inc. and Todd Nelson dated January 11, 2006	8-K	No. 000-25232	10.1	January 12, 2006
	10	.16	Engagement Letter Agreement between Apollo Group, Inc. and FTI Consulting, Inc. dated November 14, 2006*

				Incorporated by Reference
Exhibit						Exhibit
Number			Exhibit Description	Form	File No.	Number	Filing Date
	10	.17	Consulting Agreement between Apollo Group, Inc. and Brian L. Swartz dated February 13, 2007*
	10	.18	Employment Agreement between Apollo Group, Inc. and Gregory W. Cappelli dated March 31, 2007*
	21		List of Subsidiaries
	23	.1	Consent of Independent Registered Public Accounting Firm
	31	.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted, Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32	.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted, Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Indicates a management contract or compensation plan.

EX-10.4

Exhibit 10.4

APOLLO GROUP, INC.

AMENDED AND RESTATED
2000 STOCK INCENTIVE PLAN

ARTICLE 1

PURPOSE

     1.1 GENERAL. The Apollo Group, Inc. 2000 Stock Incentive Plan (the “Plan”) was previously approved by the Board and the Company’s shareholders. The Plan’s purpose is to promote the success and enhance the value of Apollo Group, Inc. (the “Company”) by linking the personal interests of its directors, employees, officers, and executives of, and consultants and advisors to, the Company to those of Company shareholders and by providing such individuals with an incentive for outstanding performance in order to generate superior returns to shareholders of the Company. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of directors, employees, officers, and executives of, and consultants and advisors to, the Company upon whose judgment, interest, and special effort the successful conduct of the Company’s operation is largely dependent.

ARTICLE 2

EFFECTIVE DATE

     2.1 EFFECTIVE DATE. The Plan was originally effective as of August 29, 2000 (the “Effective Date”). The effective date of the amended and restated Plan is March 23, 2007.

ARTICLE 3

DEFINITIONS AND CONSTRUCTION

     3.1 DEFINITIONS. When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase shall generally be given the meaning ascribed to it in this Section or in Sections 1.1 or 2.1 unless a clearly different meaning is required by the context. The following words and phrases shall have the following meanings:

          (a) “Award” means any Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, Performance Share Award, or Performance-Based Award granted to a Participant under the Plan.

          (b) “Award Agreement” means any written agreement, contract, or other instrument or document evidencing an Award.

          (c) “Board” means the Board of Directors of the Company.

          (d) “Cause” means (except as otherwise provided in an Award Agreement) if the Committee, in its reasonable and good faith discretion, determines that the employee, consultant, or advisor (i) fails to substantially perform his duties (other than as a result of Disability), after the Board or the executive to which the Participant reports delivers to the Participant a written demand for substantial performance that specifically identifies the manner in which the Participant has not substantially performed his duties; (ii) engages in willful misconduct or gross negligence that is materially injurious to the Company or a Subsidiary; (iii) breaches his duty of loyalty to the Company or a Subsidiary; (iv) unauthorized removal from the premises of the Company or a Subsidiary of a document (of any media or form) relating to the Company or a Subsidiary or the customers of the Company or a Subsidiary; or (v) has committed a felony or a serious crime involving moral turpitude.

          (e) “Change of Control” means and includes each of the following (except as otherwise provided in an Award Agreement):

               (1) there shall be consummated any consolidation or merger of the Company in which the Company is not the continuing or surviving entity, or pursuant to which Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company’s Stock immediately prior to the merger have the same proportionate ownership of beneficial interest of common stock or interests of the surviving entity immediately after the merger;

               (2) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of assets aggregating more than 80% of the assets of the Company;

               (3) the shareholders of the Company shall approve any plan or proposal for liquidation or dissolution of the Company;

               (4) any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act), other than (A) an employee benefit plan of the Company or any Subsidiary or any entity holding shares of capital stock of the Company for or pursuant to the terms of any such employee benefit plan in its role as an agent or trustee for such plan, or (B) any affiliate of the Company as of the Effective Date becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 50% or more of the Stock; or

               (5) during any two-year period, individuals who at the beginning of the period do not constitute a majority of the Board at the end of such period, unless the appointment or the nomination for election by the Company’s shareholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.

          (f) “Code” means the Internal Revenue Code of 1986, as amended.

          (g) “Committee” means the committee of the Board described in Article 4.

          (h) “Covered Employee” means an Employee who is a “covered employee” within the meaning of Section 162(m) of the Code.

-2-

          (i) “Disability” shall mean any illness or other physical or mental condition of a Participant which renders the Participant incapable of performing his customary and usual duties for the Company, or any medically determinable illness or other physical or mental condition resulting from a bodily injury, disease, or mental disorder that in the judgment of the Committee is permanent and continuous in nature. The Committee may require such medical or other evidence as it deems necessary to judge the nature and permanency of the Participant’s condition.

          (j) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          (k) “Fair Market Value” means, as of any relevant date, the closing price of the Stock on that date as reported on the Nasdaq Global Market (or on any other national securities exchange on which the Stock is at the time listed for trading) or, if no closing price is reported for that date, the closing price per share of Stock on the next preceding date for which a closing price was reported.

          (l) “Incentive Stock Option” means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto.

          (m) “Non-Employee Director” means a member of the Board who qualifies as a “NonEmployee Director” as defined in Rule 16b-3 (b)(3) of the Exchange Act, or any successor definition adopted by the Board.

          (n) “Non-Qualified Stock Option” means an Option that is not intended to be an Incentive Stock Option.

          (o) “Option” means a right granted to a Participant under Article 7 of the Plan to purchase Stock at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option.

          (p) “Participant” means a person who, as a director, employee, officer, or executive of, or consultant or advisor providing services to, the Company or any Subsidiary, has been granted an Award under the Plan.

          (q) “Performance-Based Awards” means the Performance Share Awards, Restricted Stock Awards and Restricted Stock Unit Awards granted to selected Covered Employees pursuant to Articles 9, 10 and 11, but which are subject to the terms and conditions set forth in Article 12. All Performance-Based Awards are intended to qualify as “performance-based compensation” under Section 162(m) of the Code.

          (r) “Performance Criteria” means the criteria that the Committee selects for purposes of establishing the Performance Goals for a Participant for a Performance Period. The Performance Criteria that will be used to establish Performance Goals are limited to the following: pre- or after-tax net earnings, sales growth, operating earnings, operating cash flows, return on net assets, return on stockholders’ equity, return on assets, return on capital, Stock price growth, stockholder returns, gross or net profit margin, earnings per share, price per share of Stock, and market share, any of which may be measured either in absolute terms or as compared to any incremental increase or as compared to results of a peer group. The Committee

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shall, within the time prescribed by Section 162(m) of the Code, define in an objective fashion the manner of calculating the Performance Criteria it selects to use for such Performance Period for such Participant.

          (s) “Performance Goals” means, for a Performance Period, the goals established in writing by the Committee for the Performance Period based upon the Performance Criteria. Depending on the Performance Criteria used to establish such Performance Goals the Performance Goals may be expressed in terms of overall Company performance or the performance of a division, business unit, or an individual. The Committee, in its discretion, may, within the time prescribed by Section 162(m) of the Code, adjust or modify the calculation of Performance Goals for such Performance Period in order to prevent the dilution or enlargement of the rights of Participants (i) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event, or development, or (ii) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions.

          (t) “Performance Period” means the one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to, and the payment of, a Performance-Based Award.

          (u) “Performance Share” means a right granted to a Participant under Article 9, to receive cash, Stock, or other Awards, the payment of which is contingent upon achieving certain Performance Goals established by the Committee.

          (v) “Plan” means the Apollo Group, Inc. 2000 Stock Incentive Plan, as amended and restated.

          (w) “Restricted Stock Award” means Stock granted to a Participant under Article 10 that is subject to certain restrictions and to risk of forfeiture.

          (x) “Restricted Stock Unit Award” means restricted stock units awarded to a Participant under Article 11 which will entitle the Participant to receive the shares of Stock underlying such Award upon the attainment of designated performance objectives (which may, but need not, include one or more Performance Goals) or the satisfaction of specified employment or service requirements or upon the expiration of a designated time period following the vesting of such Award.

          (y) “Stock” means Apollo Education Group Class A common stock and such other securities of the Company that may be substituted for such stock, pursuant to Article 14.

          (z) “Stock Appreciation Right” or “SAR” means a right granted to a Participant under Article 8 to receive a payment equal to the difference between the Fair Market Value of a share of Stock as of the date of exercise of the SAR over the grant price of the SAR, all as determined pursuant to Article 8.

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          (aa) “Subsidiary” means any corporation or other entity of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company.

ARTICLE 4

ADMINISTRATION

     4.1 COMMITTEE. The Plan shall be administered solely and exclusively by a Committee appointed by, and serving at the discretion of, the Board. The Committee shall consist of at least three (3) members, each of whom shall qualify as (i) a Non-Employee Director) and (ii) an “outside director” under Code Section 162(m) and the regulations issued thereunder.

     4.2 ACTION BY THE COMMITTEE. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present, and acts approved in writing by a majority of the Committee in lieu of a meeting, shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Subsidiary, the Company’s independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan.

     4.3 AUTHORITY OF COMMITTEE. Subject to any specific designation in the Plan, the Committee has the exclusive power, authority and discretion to:

          (a) Designate Participants to receive Awards;

          (b) Determine the type or types of Awards to be granted to each Participant;

          (c) Determine the number of Awards to be granted and the number of shares of Stock to which an Award will relate;

          (d) Determine the terms and conditions of any Award granted under the Plan including but not limited to, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, based in each case on such considerations as the Committee in its sole discretion determines; provided, however, that the Committee shall not have the authority to accelerate the vesting or waive the forfeiture of any Performance-Based Awards;

          (e) Amend, modify, or terminate any outstanding Award, with the Participant’s consent unless the Committee has the authority to amend, modify, or terminate an Award without the Participant’s consent under any other provision of the Plan.

          (f) Determine whether, to what extent, and under what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered;

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          (g) Prescribe the form of each Award Agreement, which need not be identical for each Participant;

          (h) Decide all other matters that must be determined in connection with an Award;

          (i) Establish, adopt, or revise any rules and regulations as it may deem necessary or advisable to administer the Plan; and

          (j) Make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan.

     4.4 DECISIONS BINDING. The Committee’s interpretation of the Plan, any Awards granted under the Plan, any Award Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties.

ARTICLE 5

SHARES SUBJECT TO THE PLAN

     5.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 13.1, the aggregate number of shares of Stock reserved and available for grant under the Plan shall be 14,079,228 (which number takes into account all stock splits from the Effective Date through March 23, 2007 and after the conversion of the University of Phoenix Online common stock into the Stock).

     5.2 LAPSED AWARDS. To the extent that an Award terminates, expires, or lapses for any reason, any shares of Stock subject to the Award will again be available for the grant of an Award under the Plan.

     5.3 STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market.

     5.4 LIMITATION ON NUMBER OF SHARES SUBJECT TO AWARDS. Notwithstanding any provision in the Plan to the contrary, and subject to the adjustment in Section 14.1, the maximum aggregate number of shares of Stock with respect to one or more Awards that may be granted to any one Participant during the Company’s fiscal year shall be one million (1,000,000).

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ARTICLE 6

ELIGIBILITY AND PARTICIPATION

     6.1 ELIGIBILITY.

          (a) GENERAL. Persons eligible to participate in this Plan include all directors, employees, officers, and executives of, and consultants and advisors to, the Company or a Subsidiary, as determined by the Committee.

          (b) FOREIGN PARTICIPANTS. In order to assure the viability of Awards granted to Participants employed in foreign countries, the Committee may provide for such special terms as it may consider necessary or appropriate to accommodate differences in local law, tax policy, or custom. Moreover, the Committee may approve such supplements to, or amendments, restatements, or alternative versions of the Plan as it may consider necessary or appropriate for such purposes without thereby affecting the terms of the Plan as in effect for any other purpose; provided, however, that no such supplements, amendments, restatements, or alternative versions shall increase the share limitations contained in Section 5.1 of the Plan.

     6.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may, from time to time, select from among all eligible individuals, those to whom Awards shall be granted and shall determine the nature and amount of each Award. No individual shall have any right to be granted an Award under this Plan.

ARTICLE 7

STOCK OPTIONS

     7.1 GENERAL. The Committee is authorized to grant Options to Participants on the following terms and conditions:

          (a) EXERCISE PRICE. The exercise price per share of Stock under an Option shall be determined by the Committee and set forth in the Award Agreement; provided, however, that in no event shall the exercise price per share for any Option be less than the Fair Market Value per share of Stock on the actual grant date of that Option.

          (b) TIME AND CONDITIONS OF EXERCISE. The Committee shall determine the time or times at which an Option may be exercised in whole or in part. The Committee shall also determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised. Unless otherwise provided in an Award Agreement, an Option will lapse immediately if a Participant’s employment or services are terminated for Cause.

          (c) PAYMENT. The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation, cash, promissory note, shares of Stock (through actual tender or by attestation), or other property (including broker-assisted “cashless exercise” arrangements), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants.

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          (d) EVIDENCE OF GRANT. All Options shall be evidenced by a written Award Agreement between the Company and the Participant. The Award Agreement shall include such additional provisions as may be specified by the Committee.

     7.2 INCENTIVE STOCK OPTIONS. Incentive Stock Options shall be granted only to employees and the terms of any Incentive Stock Options granted under the Plan must comply with the following additional rules:

          (a) EXERCISE PRICE. The exercise price per share of Stock shall be set by the Committee, provided that the exercise price for any Incentive Stock Option may not be less than the Fair Market Value as of the date of the grant.

          (b) EXERCISE. In no event may any Incentive Stock Option be exercisable for more than ten years from the date of its grant.

          (c) LAPSE OF OPTION. An Incentive Stock Option shall lapse under the following circumstances.

               (1) The Incentive Stock Option shall lapse ten years from the date it is granted, unless an earlier time is set in the Award Agreement.

               (2) The Incentive Stock Option shall lapse upon termination of employment for Cause or for any other reason, other than the Participant’s death or Disability, unless otherwise provided in the Award Agreement.

               (3) If the Participant terminates employment on account of Disability or death before the Option lapses pursuant to paragraph (1) or (2) above, the Incentive Stock Option shall lapse, unless it is previously exercised, on the earlier of (i) the date on which the Option would have lapsed had the Participant not become Disabled or lived and had his employment status (i.e., whether the Participant was employed by the Company on the date of his Disability or death or had previously terminated employment) remained unchanged; or (ii) 12 months after the date of the Participant’s termination of employment on account of Disability or death. Upon the Participant’s Disability or death, any Incentive Stock Options exercisable at the Participant’s Disability or death may be exercised by the Participant’s legal representative or representatives, by the person or persons entitled to do so under the Participant’s last will and testament, or, if the Participant fails to make testamentary disposition of such Incentive Stock Option or dies intestate, by the person or persons entitled to receive the Incentive Stock Option under the applicable laws of descent and distribution.

          (d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market Value (determined as of the time an Award is made) of all shares of Stock with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed $100,000.00 or such other limitation as imposed by Section 422(d) of the Code, or any successor provision. To the extent that Incentive Stock Options are first exercisable by a Participant in excess of such limitation, the excess shall be considered Non-Qualified Stock Options.

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          (e) TEN PERCENT OWNERS. An Incentive Stock Option shall be granted to any individual who, at the date of grant, owns stock possessing more than ten percent of the total combined voting power of all classes of Stock of the Company only if such Option is granted at a price that is not less than 110% of Fair Market Value on the date of grant and the Option is exercisable for no more than five years from the date of grant.

          (f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an Incentive Stock Option may be made pursuant to this Plan after the tenth anniversary of the Effective Date.

          (g) RIGHT TO EXERCISE. During a Participant’s lifetime, an Incentive Stock Option may be exercised only by the Participant.

ARTICLE 8

STOCK APPRECIATION RIGHTS

     8.1 GRANT OF SARS. The Committee is authorized to grant SARs to Participants on the following terms and conditions:

          (a) RIGHT TO PAYMENT. Upon the exercise of a Stock Appreciation Right, the Participant to whom it is granted has the right to receive the excess, if any, of:

               (1) The Fair Market Value of a share of Stock on the date of exercise; over

               (2) The exercise price per share of the Stock Appreciation Right as determined by the Committee, which shall in no event be less than the Fair Market Value per share of Stock on the actual grant date of that Stock Appreciation Right.

          (b) OTHER TERMS. All awards of Stock Appreciation Rights shall be evidenced by an Award Agreement. The terms, methods of exercise, methods of settlement, form of consideration payable in settlement, and any other terms and conditions of any Stock Appreciation Right shall be determined by the Committee at the time of the grant of the Award and shall be reflected in the Award Agreement.

ARTICLE 9

PERFORMANCE SHARES

     9.1 GRANT OF PERFORMANCE SHARES. The Committee is authorized to grant Performance Shares to Participants on such terms and conditions as may be selected by the Committee. The Committee shall have the complete discretion to determine the number of Performance Shares granted to each Participant. All Awards of Performance Shares shall be evidenced by an Award Agreement.

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     9.2 RIGHT TO PAYMENT. A grant of Performance Shares gives the Participant rights, valued as determined by the Committee, and payable to, or exercisable by, the Participant to whom the Performance Shares are granted, in whole or in part, as the Committee shall establish at grant or thereafter. The Committee shall set performance goals and other terms or conditions to payment of the Performance Shares in its discretion which, depending on the extent to which they are met, will determine the number and value of Performance Shares that will be paid to the Participant.

     9.3 OTHER TERMS. Performance Shares may be payable in cash, Stock, or other property, and have such other terms and conditions as determined by the Committee and reflected in the Award Agreement.

ARTICLE 10

RESTRICTED STOCK AWARDS

     10.1 GRANT OF RESTRICTED STOCK. The Committee is authorized to make Awards of Restricted Stock to Participants in such amounts and subject to such terms and conditions as determined by the Committee. All Awards of Restricted Stock shall be evidenced by a Restricted Stock Award Agreement.

     10.2 ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock). These restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise, as the Committee determines at the time of the grant of the Award or thereafter.

     10.3 FORFEITURE. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon termination of employment during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited, provided, however, that the Committee may provide in any Restricted Stock Award Agreement that restrictions or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part restrictions or forfeiture conditions relating to Restricted Stock.

     10.4 CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine, if certificates representing shares of Restricted Stock are registered in the name of the Participant, certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company may, at its discretion, retain physical possession of the certificate until such time as all applicable restrictions lapse.

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ARTICLE 11

RESTRICTED STOCK UNIT AWARDS

     11.1 GRANT OF RESTRICTED STOCK UNIT AWARDS. The Committee is authorized to grant Restricted Stock Unit Awards to Participants on such terms and conditions as may be selected by the Committee. The Committee shall have the complete discretion to determine the number of restricted stock units subject to each such Award. All Restricted Stock Unit Awards shall be evidenced by an Award Agreement.

     11.2 VESTING AND ISSUANCE PROVISIONS.

          (a) Shares of Stock issued pursuant to Restricted Stock Unit Awards may, in the discretion of the Committee, entitle the Participants to receive the shares of Stock underlying those Awards upon the attainment of designated performance objectives (which may, but need not, include one or more Performance Goals) or the satisfaction of specified employment or service requirements or upon the expiration of a designated time period or the occurrence of a designated event following the vesting of the Award , including (without limitation) a deferred distribution date following the termination of the Participant’s employment or service. The vesting and issuance provisions applicable to each Restricted Stock Unit Award shall be set forth in the Award Agreement.

          (b) The Committee shall also have the discretionary authority, consistent with Code Section 162(m), to structure one or more Restricted Stock Unit Awards so that the shares of Common Stock subject to those Awards shall vest upon the achievement of pre-established corporate performance objectives based on one or more Performance Goals and measured over the performance period specified by the Committee at the time of the Award.

          (c) The Participant shall not have any stockholder rights with respect to the shares of Stock subject to a Restricted Stock Unit Award until that Award vests and the shares of Stock are actually issued thereunder. However, dividend-equivalent units may be paid or credited, either in cash or in actual or phantom shares of Stock, on outstanding Restricted Stock Unit Awards, subject to such terms and conditions as the Committee may deem appropriate.

          (d) Outstanding Restricted Stock Unit Awards shall automatically terminate, and no shares of Stock shall actually be issued in satisfaction of those Awards, if the performance goals or employment or service requirements established for those Awards are not attained or satisfied. The Committee, however, shall have the discretionary authority to issue vested shares of Common Stock under one or more outstanding Restricted Stock Unit Awards as to which the designated performance goals or employment or service requirements have not been attained or satisfied. However, no vesting requirements tied to the attainment of Performance Goals may be waived with respect to Awards which were intended, at the time those Awards were made, to qualify as performance-based compensation under Code Section 162(m), except as otherwise provided in Section 11.2(e) or Section 13.8.

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          (e) Each Restricted Stock Unit Award outstanding at the time of a Change in Control shall vest at that time, and the shares of Stock subject to those restricted stock units shall be issued as soon as administratively practicable following the closing of the Change in Control transaction, subject to the Company’s collection of all applicable withholding taxes, or shall otherwise be converted into the right to receive the same consideration per share of Stock payable to the actual holders of the Stock in consummation of the Changer in Control and distributed at the same time as those stockholder payments. Such automatic vesting of the Restricted Stock Unit Awards shall occur pursuant to this Section 11.(e), even though such acceleration may result in their loss of performance-based status under Code Section 162(m).

ARTICLE 12

PERFORMANCE-BASED AWARDS

     12.1 PURPOSE. The purpose of this Article 12 is to provide the Committee the ability to qualify the Performance Share Awards under Article 9, the Restricted Stock Awards under Article 10 and the Restricted Stock Unit Awards under Article 11 as “performance-based compensation” under Section 162(m) of the Code. If the Committee, in its discretion, decides to grant a Performance-Based Award to a Covered Employee, the provisions of this Article 12 shall control over any contrary provision contained in Articles 9, 10 or 11.

     12.2 APPLICABILITY. This Article 12 shall apply only to those Covered Employees selected by the Committee to receive Performance-Based Awards. The Committee may, in its discretion, grant Restricted Stock Awards, Performance Share Awards or Restricted Stock Unit Awards to Covered Employees that do not satisfy the requirements of this Article 12. The designation of a Covered Employee as a Participant for a Performance Period shall not in any manner entitle the Participant to receive an Award for the period. Moreover, designation of a Covered Employee as a Participant for a particular Performance Period shall not require designation of such Covered Employee as a Participant in any subsequent Performance Period and designation of one Covered Employee as a Participant shall not require designation of any other Covered Employees as a Participant in such period or in any other period.

     12.3 DISCRETION OF COMMITTEE WITH RESPECT TO PERFORMANCE AWARDS. With regard to a particular Performance Period, the Committee shall have full discretion to select the length of such Performance Period, the type of Performance-Based Awards to be issued, the kind and/or level of the Performance Goal, and whether the Performance Goal is to apply to the Company, a Subsidiary or any division or business unit thereof.

     12.4 PAYMENT OF PERFORMANCE AWARDS. Unless otherwise provided in the relevant Award Agreement, a Participant must be employed by the Company or a Subsidiary on the last day of the Performance Period to be eligible for a Performance Award for such Performance Period. Furthermore, a Participant shall be eligible to receive payment under a Performance-Based Award for a Performance Period only if the Performance Goals for such

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period are achieved. In determining the actual size of an individual Performance-Based Award, the Committee may reduce or eliminate the amount of the Performance-Based Award earned for the Performance Period, if in its sole and absolute discretion, such reduction or elimination is appropriate.

     12.5 MAXIMUM AWARD PAYABLE. The aggregate maximum Performance-Based Award payable to any one Participant under the Plan for Performance Period is one million (1,000,000) shares of Stock. In the event the Performance-Based Award is paid in cash, such maximum Performance-Based Award shall be determined by multiplying one million (1,000,000) by the Fair Market Value of one share of the applicable Stock as of the date of grant of the Performance-Based Award.

ARTICLE 13

PROVISIONS APPLICABLE TO AWARDS

     13.1 STAND-ALONE AND TANDEM AWARDS. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone, in addition to, or in tandem with, any other Award granted under the Plan. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards.

     13.2 EXCHANGE PROVISIONS. The Committee may at any time offer to exchange or buy out any previously granted Award for a payment in cash, Stock, or another Award, based on the terms and conditions the Committee determines and communicates to the Participant at the time the offer is made.

     13.3 TERM OF AWARD. The term of each Award shall be for the period as determined by the Committee, provided that in no event shall the term of any Incentive Stock Option or a Stock Appreciation Right granted in tandem with the Incentive Stock Option exceed a period of ten years from the date of its grant.

     13.4 FORM OF PAYMENT FOR AWARDS. Subject to the terms of the Plan and any applicable law or Award Agreement, payments or transfers to be made by the Company or a Subsidiary on the grant or exercise of an Award may be made in such forms as the Committee determines at or after the time of grant, including without limitation, cash, promissory note, Stock, other Awards, or other property, or any combination, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case determined in accordance with rules adopted by and at the discretion of, the Committee

     13.5 LIMITS ON TRANSFER. No right or interest of a Participant in any Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or a Subsidiary. Except as otherwise provided by the Committee, no Award shall be assignable or transferable by a Participant other than by will or the laws of descent and distribution.

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     13.6 BENEFICIARIES. Notwithstanding Section 13.5, a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant’s death. A beneficiary, legal guardian, legal representative, or other person claiming any rights under the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If the Participant is married, a designation of a person other than the Participant’s spouse as his beneficiary with respect to more than 50% of the Participant’s interest in the Award shall not be effective without the written consent of the Participant’s spouse. If no beneficiary has been designated or survives the Participant, payment shall be made to the person entitled thereto under the Participant’s will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee.

     13.7 STOCK CERTIFICATES. All Stock certificates delivered under the Plan are subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with Federal or state securities laws, rules and regulations and the rules of any national securities exchange or automated quotation system on with the Stock is listed, quoted, or traded. The Committee may place legends on any Stock certificate to reference restrictions applicable to the Stock.

     13.8 ACCELERATION UPON A CHANGE OF CONTROL. If a Change of Control occurs, all outstanding Options, Stock Appreciation Rights, and other Awards that relate to the grant of Stock shall become fully exercisable and all restrictions on such outstanding Awards shall lapse. Shares subject to outstanding Restricted Stock Unit Awards or Performance Share Awards shall vest and become immediately issuable at the closing of such Change in Control (or shall otherwise be converted into the right to receive the same consideration per share of Stock payable to the actual holders of the Stock in consummation of the Changer in Control and distributed at the same time as those stockholder payments). To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options. Upon, or in anticipation of, such an event, the Committee may cause every Award outstanding hereunder to terminate at a specific time in the future and shall give each Participant the right to exercise such Awards during a period of time as the Committee, in its sole and absolute discretion, shall determine.

ARTICLE 14

CHANGES IN CAPITAL STRUCTURE

     14.1 GENERAL. In the event stock dividend is declared upon the Stock, the number of shares of Stock then subject to each Award shall be increased proportionately, and the exercise price or issue price per share (if any) in effect for that Award shall also be equitably adjusted to reflect such stock dividend: provided, however, that that the aggregate exercise price or issue price shall remain the same. Should any change be made to the outstanding Stock by reason of any stock split or split-up, recapitalization, combination of shares, exchange of shares, spin-off transaction, extraordinary dividend or distribution or other change affecting the

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outstanding Stock as a class effected without the Company’s receipt of consideration, or should there occur any merger, consolidation or other reorganization, then equitable adjustments shall be made by the Committee to the number and/or class of securities subject to each Award and the exercise price or issue per share (if any) in effect for that Award in such manner as the Committee deems appropriate to preclude the dilution or enlargement of rights under such Award, and such adjustments shall be final, binding and conclusive; provided, however, that in the event of a Change of Control, the adjustments (if any) shall be made solely in accordance with the applicable provisions of Section 13.8 the Plan governing Change of Control transactions. Notwithstanding the above, the conversion of any convertible securities of the Company shall not be deemed to have been “effected without the Company’s receipt of consideration.

ARTICLE 15

AMENDMENT, MODIFICATION, AND TERMINATION

     15.1 AMENDMENT, MODIFICATION, AND TERMINATION. With the approval of the Board, at any time and from time to time, the Committee may terminate, amend or modify the Plan; provided, however, that to the extent necessary and desirable to comply with any applicable law, regulation, or stock exchange rule, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required.

     15.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant.

ARTICLE 16

GENERAL PROVISIONS

     16.1 NO RIGHTS TO AWARDS. No Participant, employee, or other person shall have any claim to be granted any Award under the Plan, and neither the Company nor the Committee is obligated to treat Participants, employees, and other persons uniformly.

     16.2 NO SHAREHOLDER RIGHTS. No Award gives the Participant any of the rights of a shareholder of the Company unless and until shares of Stock are in fact issued to such person in connection with such Award.

     16.3 WITHHOLDING. The Company or any Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including the Participant’s FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of this Plan. With the Committee’s consent, a Participant may elect to have the Company withhold from the Stock that would otherwise be received upon the exercise of any Option or Stock Appreciation Right or the issuance of Stock pursuant to any vested Restricted Stock Unit Award, a number of shares of Stock having a Fair Market Value equal to the minimum statutory amount necessary to

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satisfy the Participant’s applicable federal, state, local and foreign income and employment tax withholding obligations with respect to such exercise or issuance.

     16.4 NO RIGHT TO EMPLOYMENT OR SERVICES. Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant’s employment or services at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Subsidiary.

     16.5 UNFUNDED STATUS OF AWARDS. The Plan is intended to be an “unfunded” plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Subsidiary.

     16.6 INDEMNIFICATION. To the extent allowable under applicable law, each member of the Committee or of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure to act under the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her provided he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

     16.7 RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary.

     16.8 EXPENSES. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries.

     16.9 TITLES AND HEADINGS. The titles and headings of the Sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.

     16.10 FRACTIONAL SHARES. No fractional shares of stock shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up or down as appropriate.

     16.11 SECURITIES LAW COMPLIANCE. With respect to any person who is, on the relevant date, obligated to file reports under Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan or action by the Committee

-16-

fails to so comply, it shall be void to the extent permitted by law and voidable as deemed advisable by the Committee.

     16.12 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to make payment of awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by government agencies as may be required. The Company shall be under no obligation to register under the Securities Act of 1933, as amended, any of the shares of Stock paid under the Plan. If the shares paid under the Plan may in certain circumstances be exempt from registration under the Securities Act of 1933, as amended, the Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption.

     16.13 GOVERNING LAW. The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of Arizona.

-17-

EX-10.7C

Exhibit 10.7c

AMENDMENT TO SHAREHOLDER AGREEMENT

     This Amendment to Shareholder Agreement is made as of May 8, 2007 by and among John G. Sperling, Peter V. Sperling, the John Sperling Voting Stock Trust, and the Peter Sperling Voting Stock Trust (each a “Shareholder” and collectively the “Shareholders”) and Apollo Group, Inc. (the “Company”).

     Whereas, the Shareholders and the Company are parties to a Shareholders Agreement dated as of September 7, 1994, as previously amended as of May 25, 2001 and June 23, 2006 (the “Agreement”); the other parties to the Agreement (William H. Gibbs, John D. Murphy, Todd Nelson, James W. Hoggatt, and Jerry F. Noble) no longer own any of the Class B Common Stock of the Company; and the Shareholders wish to further amend the Agreement;

     Now, therefore, it is agreed:

     1. Section 5 of the Agreement is amended in its entirety to read:

     “5. Transfer to a Trust. Notwithstanding the provisions of Section 1 or Section 7 hereof, a Shareholder may transfer Shares to a trust created by the Shareholder (“Shareholder Trust”), provided that such a Shareholder Trust enters into an agreement with the Company acknowledging the existence of this Agreement and agreeing that any disposition of the Shares by the Shareholder Trust (including any transfers to beneficiaries) will be made in compliance with the terms and conditions of this Agreement. All of the trustee(s) of a Shareholder Trust must be either (1) a Shareholder, (2) Terri Bishop, (3) Darby Shupp, or (4) a person or persons approved by the Board of Directors of the Company. The Shares so transferred shall not be converted into shares of the Company’s Class A Common Stock as a result of such transfer.”

     2. Section 16 of the Agreement is amended in its entirety to read:

     “16. Shareholder Defined. In addition to John G. Sperling, Peter V. Sperling, the John Sperling Voting Stock Trust, and the Peter Sperling Voting Stock Trust, the term Shareholder as used herein shall also include (i) any person, his successors and assigns, and any corporation, partnership, joint venture, association, or other entity, whether or not such individual or entity is a Shareholder as of the date hereof, who acquires any Shares from any Shareholder, directly or indirectly, by any means whatsoever in a transaction permitted by this Agreement, or (ii) any person or entity who acquires Shares from the Company and who agrees (and whose spouse consents, if necessary) to become a party to and be bound by the terms of this Agreement, but any Shareholder who no longer owns any Shares shall not be entitled to any of the benefits of this Agreement.”

     3. Peter V. Sperling represents and warrants that his shares of Class B Common Stock are his sole and separate property.

     4. The Agreement, as hereby amended, is confirmed.

     In witness whereof, the parties have executed this document as of the date stated above.

Shareholders:

  John G. Sperling

  Peter V. Sperling

The Company:

APOLLO GROUP, INC.

By:

JOHN SPERLING VOTING STOCK TRUST
By:
	John G. Sperling, Trustee
By:
	Peter V. Sperling, Trustee
By:
	Darby Shupp, Trustee
By:
	Terri Bishop, Trustee

PETER SPERLING VOTING STOCK TRUST
By:
	Peter V. Sperling, Trustee

EX-10.12

                                                                   Exhibit 10.12

                           (APOLLO GROUP, INC. LOGO)
                                APOLLO GROUP INC.

                              UNIVERSITY OF PHOENIX
                     INSTITUTE FOR PROFESSIONAL DEVELOPMENT
                         COLLEGE FOR FINANCIAL PLANNING
                        WESTERN INTERNATIONAL UNIVERSITY

                               LOBBYIST AGREEMENT

     This service agreement ("Agreement") is entered into by and between APOLLO
GROUP, INC, ("Apollo") an Arizona corporation and parent company of University
of Phoenix ("UOP"), with its principal place of business at 4615 E. Elwood,
Phoenix, AZ 85040, and GOVERNMENTAL ADVOCATES, INC. ("Firm"), with its principal
place of business at 1127 ELEVENTH STREET, SUITE #400, SACRAMENTO, CALIFORNIA,
95814.

PURPOSE OF AGREEMENT. The purpose of this Agreement is to state the terms and
conditions under which Firm will provide the LOBBYIST SERVICES ("Services")
included in this Agreement to Apollo, and as listed in the Scope of Services,
attached hereto, and incorporated as part of the Agreement.

     1.   SERVICES. Firm agrees to perform the Services and warrants that each
          of its employees, agents or Firms assigned to provide Services under
          this Agreement to Apollo shall have the proper skill, training and
          background so as to be able to perform in a competent and professional
          manner, that all Services will be so performed and performed in a
          manner compatible with Apollo's business operations, and that Firm
          shall cause the Services to be performed in accordance with the Scope
          of Services and generally accepted industry practices. Firm agrees to
          comply with all laws, registration or any other requirements of any
          governing body overseeing such Services as performed in this
          Agreement, including but not limited to, the compliance requirements
          and governmental entities outlined in the Scope of Services.

     2.   TERM OF AGREEMENT. The Term of this Agreement shall commence on JUNE
          1, 2006, and shall continue in full force for one (1) year unless
          otherwise terminated as provided herein. This Agreement may be renewed
          for an additional period(s) upon written mutual agreement of both
          parties.

     3.   PAYMENT. Compensation for Services performed under this Agreement will
          be as outlined in the Scope of Services. Payment terms will be net
          thirty (30) days upon receipt of Firm invoice, with all payments made
          in arrears. Upon termination of this Agreement, payments under this
          paragraph shall cease; provided, however, that Firm will be entitled
          to payments for periods or partials that occurred prior to the date of
          termination and for which Firm has not yet been paid.

     4.   TERMINATION. This Agreement may be terminated without cause, by either
          party with a 30 day written notice to the other party. This Agreement
          may be terminated immediately by Apollo upon any breach hereof or
          violation of the law by the Firm. Upon termination of the Agreement,
          Firm shall return to Apollo all records, notes, data, memoranda and
          materials of any nature that are in Firm's possession or under Firm's
          control and that are Apollo's property or relate to Apollo's business.

     5.   RELATIONSHIP. The parties understand that Firm is an independent
          contractor with respect to Apollo and not an employee of Apollo.
          Apollo shall not provide fringe benefits, including health insurance
          benefits, paid vacation, or any other employee benefit, for the
          benefit of Firm or any agents, employees or contractors of Firm. As an
          independent contractor, Firm shall pay all taxes imposed and other
          liabilities incurred as an independent contractor. This Agreement is
          neither intended to nor will it be construed as, creating any other
          relationship, including one of employment, joint venture or agency.

                             4615 East Elwood Street
                             Phoenix, Arizona 85040


                                                                               1



     6.   NON COMPETE. For the term of this Agreement the Firm shall not
          represent any entity that would be in direct competition with Apollo,
          nor shall the Firm represent any entity that would have an interest in
          conflict with the best interest of Apollo without the approval of
          Apollo. The Firm shall immediately disclose potential conflicts of
          interest.

     7.   OWNERSHIP OF PRODUCTS, REPORTS, ETC: Any and all products, reports,
          etc. developed by the Firm in whole or in part which are utilized, or
          accepted by Apollo because of the relationship between the Firm and
          Apollo, and any and all intellectual, property rights, including
          copyrights in the products, reports, etc., shall become the exclusive
          property of Apollo.

     8.   INSURANCE. Firm acknowledges Firm's obligation to obtain appropriate
          insurance coverage for the benefit of Firm (and Firm's employees, if
          any). Firm waives any rights to recovery from Apollo for any injuries
          that Firm (and/or Firm's employees) may sustain while performing
          services under this Agreement and that are a result of the negligence
          of Firm or Firm's employees. Firm agrees to provide Apollo with
          necessary documentation, including certificates of insurance,
          evidencing the required coverage, if requested.

     9.   CONFIDENTIAL INFORMATION. "Confidential Information" means any
          information, whether or not owned by or developed by Apollo, which is
          not generally known and which Firm may obtain through direct or
          indirect contact with Apollo. Such Confidential Information includes,
          but is not limited to: business records and plans, marketing
          strategies, cost, discounts, product design information, technical
          information, business affairs, financial reports, customer lists,
          student information, and other proprietary information.

          Confidential Information does not include information that Firm can
          show, by clear and convincing evidence, to be:

          1)   In the public domain.

          2)   Rightfully received from a third party without any obligation of
               confidentiality.

          3)   Rightfully known to Firm without any limitations on use or
               disclosure prior to its receipt from Apollo.

          4)   Independently developed by Firm without use of or reference to
               the Confidential Information by persons who had no access to the
               Confidential Information.

          PROTECTION OF CONFIDENTIAL INFORMATION. Firm understands and
          acknowledges that the Confidential Information has been developed or
          obtained by Apollo through the investment of significant time, effort
          and expense, and that the Confidential Information is a valuable,
          special, and unique asset of Apollo which provides a significant
          market advantage, and needs to be protected from improper disclosure.
          Firm shall hold the Confidential Information of Apollo in strictest
          secrecy and not disclose or make any use thereof except for the
          performance of this Agreement. Firm shall not cause or permit the
          disclosure of Confidential Information in any form to any person
          without the prior written consent of Apollo. Firm shall cause all
          persons who obtain access to such Confidential Information, directly
          or indirectly, through Firm to abide by the confidentiality provisions
          of this Agreement. The obligations of this paragraph will remain in
          effect until which time all Confidential Information is no longer
          confidential, as defined above, through no act, breach, or omission of
          Firm.

     10.  INDEMNIFICATION. Apollo shall not be liable for any negligent,
          intentional or fraudulent acts of Firm or its agents. Firm hereby
          agrees to indemnify and hold Apollo harmless from all claims, losses,
          expenses, fees (including attorney fees), costs, and judgments that
          may be asserted against Apollo that result, directly or indirectly,
          from the acts or omissions of Firm, Firm's employees and Firm's
          agents, including without limitation any infringement of third party
          rights or violation or breach of confidentiality as stated herein. The
          indemnification provisions shall survive termination of this
          Agreement.


                                                                               2



     11.  GOVERNING LAW. This Agreement shall be governed by and construed in
          accordance with the laws of the State of Arizona and the United States
          of America without reference to conflict of laws principles. The
          Superior Court of Maricopa County and/or the United States District
          Court for the District of Arizona shall have exclusive jurisdiction
          and venue over all controversies in connection with this Agreement,
          and each party irrevocably consents to such exclusive and personal
          jurisdiction and venue.

     12.  ENTIRE AGREEMENT. This Agreement constitutes the final, complete, and
          exclusive statement of the terms of the agreement between the parties
          regarding its subject matter and supersedes any prior and
          contemporaneous offers, negotiations, and understandings, whether oral
          or written, between the parties.

     13.  SEVERABILITY. If any provision of this Agreement is held by any court
          or other tribunal to be invalid or unenforceable for any reason, the
          remaining provisions shall continue to be valid and enforceable. If
          any court or other tribunal finds that any provision of this Agreement
          is invalid or enforceable, but that by limiting such provision it
          would become valid and enforceable, then such provision shall be
          deemed to be written, construed, and enforced as so limited.

     14.  WAIVER OF CONTRACTUAL RIGHT. The failure of either party to strictly
          enforce any provision of this Agreement shall not be construed as a
          waiver or limitation of that party's right to enforce and compel
          strict compliance with every provision of this Agreement.

     15.  AMENDMENT AND ASSIGNMENT. This Agreement may not be changed, modified,
          altered, or amended in any respect without the mutual written consent
          by authorized Firms of both parties. This Agreement may not be
          assigned by Firm or otherwise transferred, in whole or in part, by
          Firm without the prior written consent of Apollo.

     16.  CORPORATE AUTHORITY. Each individual executing this Agreement on
          behalf of a corporation represents and warrants that he/she is duly
          authorized to execute and deliver this Agreement on behalf of said
          corporation and that this Agreement is binding upon said corporation
          in accordance with its terms.

     17.  SURVIVAL OF OBLIGATIONS. The parties' rights and obligations, which by
          their nature would continue beyond the expiration or termination of
          this Agreement, including but not limited to Confidential Information,
          shall survive such expiration or termination of this Agreement.

     18.  TERMS/CONDITIONS. All terms and conditions of this Agreement shall be
          binding upon and shall inure to the benefit of the parties to this
          Agreement and their respective successors and permitted assigns, as
          well as their respective subsidiaries, affiliates, parent companies,
          and other entities controlling or controlled by the respective
          parties.

     19.  NOTICE. Any notice required or permitted under this Agreement must be
          sent by registered or certified mail, return receipt requested and
          shall be deemed given when received by the individuals set forth
          below. Only the authorized Firms of the parties may amend or waive
          processes of this Agreement.

          IF for Apollo Group, Inc.:   IF for Firm:
          Laura P. Noone, Senior VP    Hedy Govenar
          4615 E. Elwood St            1127 - 11th Street, Suite #400
          Phoenix, AZ 85040            Sacramento, California 95814

          Such address may be changed from time to time by either party by
          providing written notice to the other in the manner set forth above.


                                                                               3



IN WITNESS WHEREOF, The parties have executed this Agreement as of the date
first above written.


/s/ Laura P. Noone                      /s/ Illegible
- -------------------------------------   ----------------------------------------
Apollo Signature                        Firm Signature


Laura P. Noone, Senior VP               /s/ Illegible
                                        ----------------------------------------
                                        Firm Printed Name/Title

5-11-06                                 5-17-06
Date                                    Date

                                        94-2701026
                                        Social Security or Federal Tax ID #


                                                                               4



ATTACHMENT A

                                SCOPE OF SERVICES

SERVICES

Firm shall provide strategic advice on matters concerning legislation,
regulations, public policy, electoral politics and any other topic of concern to
Apollo related to state government in the state of CALIFORNIA. All Services
performed by the Firm for Apollo under this Agreement shall be timely done.

COMPENSATION AND PAYMENT

For Services performed under this Agreement, Apollo shall pay the Firm the sum
of $10,000.00 PER MONTH. Agreement also includes reimbursement of fees/expenses
incurred on the behalf of Apollo if applicable.

COMPLIANCE - REQUIRED FOR EACH CONTRACT BUT STATE OF REGISTRATION WILL VARY

During the term of this Agreement, Firm agrees to formally register as a
legislative and executive branch lobbyist with the CALIFORNIA Secretary of
State, and further agrees to at all times abide by the laws of the state of
CALIFORNIA governing lobbyists and to inform Apollo of any legal obligations
Apollo may have under the laws of the state of CALIFORNIA.


                                                                               5

EX-10.13A

Exhibit 10.13a

PROMISSORY NOTE

$11,888,484.00 Phoenix, Arizona December 14, 2001

     FOR VALUE RECEIVED, Hermes Onetouch, L.L.C. and John G. Sperling, jointly and severally (the “Makers”), hereby promise to pay to the order of Apollo Group, Inc., an Arizona corporation, (the “Payee”), on the “Maturity Date” (as defined herein) at such place as Payee may designate in writing from time to time, in lawful money of the United States of America the principal sum of Eleven Million Eight Hundred Eighty-eight Thousand Four Hundred Eighty-four and No/100 Dollars ($11,888,484.00).

     Interest on the unpaid principal balance of this Note shall accrue at the rate of six percent (6%) per annum from the date hereof and shall be added to principal annually and paid at the Maturity Date of this Note. Notwithstanding the previous sentence, however, in the event of early payoff of this Note, accrued interest shall be added to the outstanding principal balance for that period of time between the most recent anniversary date and the early payoff date, as the case may be.

     The Maturity Date of this Note shall be the earlier of (i) the anniversary date of this Note in the year 2021, or (ii) nine (9) months after the death of John G. Sperling.

     Makers may prepay the whole or any part of this Note from time to time without premium or penalty.

     Makers hereby waive presentment, demand, and notice of any kind in connection with the enforcement or collection of this Note.

     If this Note is not paid when due, the Makers promise to pay all costs of enforcement and collection and preparation therefor, including but not limited to, reasonable attorneys’ fees, whether or not any action or proceeding is brought to enforce the provisions hereof, including, without limitation, all such costs incurred in connection with any bankruptcy, receivership, or other court proceedings (whether at the trial or appellate level).

     This Note is governed by the laws of the State of Arizona.

     This Note shall be binding on the Makers and the successors and assigns of either of them.

     IN WITNESS WHEREOF, Makers have caused this Note to be executed as of the day and year first above written.

Hermes Onetouch, L.L.C.

/s/   John G. Sperling
By:  John G. Sperling

/s/   John G. Sperling
John G. Sperling

EX-10.14

                                                                   Exhibit 10.14

                   AIA DOCUMENT A121/CMc AND AGC DOCUMENT 565

                       STANDARD FORM OF AGREEMENT BETWEEN
                         OWNER AND CONSTRUCTION MANAGER

                     where the Construction Manager is also
                                 THE CONTRACTOR

                                  1991 EDITION

The 1997 Edition of AIA Document 201, General Conditions of the Contract for
Construction, is referred to herein.

AGREEMENT

made as of the 18th day of June in the year of 2004

BETWEEN the Owner:              Apollo Development Corporation
                                4615 E. Elwood Street
                                Phoenix, AZ 85040

and the Construction Manager:   Sundt Construction, Inc.
                                1501 W. Fountainhead Pkwy, Ste. 600
                                Tempe, AZ 85282

The Project is: UNIVERSITY OF PHOENIX ONLINE CAMPUS AT RIVERPOINT

The Architect is: CARPENTER SELLERS ASSOCIATES/SMITHGROUP JOINTLY

The Owner and Construction Manager agree as set forth below.


                                        1



                                    ARTICLE 1

                               GENERAL PROVISIONS

1.1  RELATIONSHIP OF PARTIES

The Construction Manager accepts the relationship of trust and confidence
established with the Owner by this Agreement, and covenants with the Owner to
furnish the Construction Manager's reasonable skill and judgment and to
cooperate with the Architect in furthering the interests of the Owner. The
Construction Manager shall furnish construction administration and management
services and use the Construction Manager's best efforts to perform the Project
in an expeditious and economical manner consistent with interests of the Owner.
The Owner shall endeavor to promote harmony and cooperation among the Owner,
Architect, Construction Manager and other persons or entities employed by the
Owner for the Project.

1.2  GENERAL CONDITIONS

For the Construction Phase, the General Conditions of the Contract shall be the
1997 Edition of AIA Document A201, General Conditions of the Contract for
Construction, which is incorporated herein by reference. For the Preconstruction
Phase, or in the event that the Preconstruction and Construction Phases proceed
concurrently, AIA Document A201 shall apply to the Preconstruction Phase only as
specifically provided in this Agreement. The term "Contractor" as used in AIA
Document A201 shall mean the Construction Manager.

                                    ARTICLE 2

                     CONSTRUCTION MANAGER'S RESPONSIBILITIES

The Construction Manager shall perform the services described in this Article.
The services to be provided under Paragraphs 2.1 and 2.2 constitute the
Preconstruction Phase services. If the Owner and Construction Manager agree,
after consultation with the Architect, the Construction Phase may commence
before the Preconstruction Phase is completed, in which case both phases shall
proceed concurrently.

2.1  PRECONSTRUCTION PHASE

2.1.1 PRELIMINARY EVALUATION

The Construction Manager shall provide a preliminary evaluation of the Owner's
program and Project budget requirements, each in terms of the other.

2.1.2 CONSULTATION

The Construction Manager with the Architect shall jointly schedule and attend
regular meetings with the Owner and Architect. The Construction Manager shall
consult with the Owner and Architect regarding site use and improvements, and
the selection of materials, building systems and equipment. The Construction
Manager shall provide recommendations on construction feasibility; actions
designed to minimize adverse effects of labor or material shortages, time
requirements for procurement, installation and construction completion; and
factors related to construction cost including estimates of alternative designs
or materials, preliminary budgets and possible economies.


                                        2



2.1.3 PRELIMINARY PROJECT SCHEDULE

When Project requirements described in Subparagraph 3.1.1 have been sufficiently
identified, the Construction Manager shall prepare, and periodically update, a
preliminary Project schedule for the Architect's review and the Owner's
approval. The Construction Manager shall obtain the Architect's approval of the
portion of the preliminary Project schedule relating to the performance of the
Architect's services. The Construction Manager shall coordinate and integrate
the preliminary Project schedule with the services and activities of the Owner,
Architect and Construction Manager. As design proceeds, the preliminary Project
schedule shall be updated to indicate proposed activity sequences and durations,
milestone dates for receipt and approval of pertinent information, submittal of
a Guaranteed Maximum Price proposal, preparation and processing of shop drawings
and samples, delivery of materials or equipment requiring long-lead time
procurement, Owner's occupancy requirements showing portions of the Project
having occupancy priority, and proposed date of Substantial Completion. If
preliminary Project schedule update indicate the previously approved schedules
may not be met, the Construction Manager shall make appropriate recommendations
to the Owner and Architect.

2.1.4 PHASED CONSTRUCTION

The Construction Manager shall make recommendations to the Owner and Architect
regarding the phased issuance of Drawings and Specifications to facilitate
phased construction of the Work, if such phased construction is appropriate for
the Project, taking into consideration such factors as economies, time of
performance, availability of labor and materials, and provisions for temporary
facilities.

2.1.5 PRELIMINARY COST ESTIMATES

2.1.5.1 When the Owner has sufficiently identified the Project requirements and
the Architect has prepared other basic design criteria, the Construction Manager
shall prepare for the review of the Architect and approval of the Owner, a
preliminary cost estimate utilizing area, volume or similar conceptual
estimating techniques.

2.1.5.2 When Schematic Design Documents have been prepared by the Architect and
approved by the Owner, the Construction Manager shall prepare for the review of
the Architect and approval of the Owner, a more detailed estimate with
supporting data. During the preparation of the Design Development Documents, the
Construction Manager shall update and refine this estimate at appropriate
intervals agreed to by the Owner, Architect and Construction Manager.

2.1.5.3 When Design Development Documents have been prepared by the Architect
and approved by the Owner, the Construction Manager shall prepare a detailed
estimate with supporting data for review by the Architect and approval by the
Owner. During the preparation of the Construction Documents, the Construction
Manager shall update and refine this estimate at appropriate intervals agreed to
by the Owner, Architect and Construction Manager.

2.1.5.4 If any estimate submitted to the Owner exceeds previously approved
estimates or the Owner's budget, the Construction Manager shall make appropriate
recommendations to the Owner and Architect.

2.1.6 SUBCONTRACTORS AND SUPPLIERS

The Construction Manager shall seek to develop subcontractor interest in the
Project and shall furnish to the Owner and Architect for their information a
list of possible subcontractors, including suppliers who are to furnish
materials or equipment fabricated to a special design, from whom proposals will
be requested for each principal portion of the Work. The Architect will promptly
reply in writing to the Construction Manager if the Architect or Owner know of
any objection to such subcontractor or supplier. The receipt of such list shall
not require the Owner or Architect to investigate the qualifications of proposed
subcontractors or suppliers, nor shall it waive the right of the Owner or
Architect later to object to or reject any proposed subcontractor or supplier.


                                        3



2.1.7 LONG-LEAD TIME ITEMS

The Construction Manager shall recommend to the Owner and Architect a schedule
for procurement of long-lead time items which will constitute part of the Work
as required to meet the Project schedule. If such long-lead time items are
procured by the Owner, they shall be procured on terms and conditions acceptable
to the Construction Manager. Upon the Owner's acceptance of the Construction
Manager's Guaranteed Maximum Price proposal, all contracts for such items shall
be assigned by the Owner to the Construction Manager, who shall accept
responsibility for such items as if procured by the Construction Manager. The
Construction Manager shall expedite the delivery of long-lead time items.

2.1.8 EXTENT OF RESPONSIBILITY

The Construction Manager does not warrant or guarantee estimates and schedules
except as may be included as part of the Guaranteed Maximum Price. The
recommendations and advice of the Construction Manager concerning design
alternatives shall be subject to the review and approval of the Owner and the
Owner's professional consultants. It is not the Construction Manager's
responsibility to ascertain that the Drawings and Specifications are in
accordance with applicable laws, statutes, ordinances, building codes, rules and
regulations. However, if the Construction Manager recognizes that portions of
the Drawings and Specifications are at variance therewith, the Construction
Manager shall promptly notify the Architect and Owner in writing.

2.1.9 EQUAL EMPLOYMENT OPPORTUNITY AND AFFIRMATIVE ACTION

The Construction Manager shall comply with applicable laws, regulations and
special requirements of the Contract Documents regarding equal employment
opportunity and affirmative action programs.

2.2  GUARANTEED MAXIMUM PRICE PROPOSAL AND CONTRACT TIME

2.2.1 When the Drawings and Specifications are sufficiently complete, the
Construction Manager shall propose a Guaranteed Maximum Price, which shall be
the sum of the estimated Cost of the Work and the Construction Manager's Fee.

2.2.2 As the Drawings and Specifications may not be finished at the time the
Guaranteed Maximum Price proposal is prepared, the Construction Manager shall
provide in the Guaranteed Maximum Price for further development of the Drawings
and Specifications by the Architect that is consistent with the Contract
Documents and reasonably inferable therefrom. Such further development does not
include such things as changes in scope, systems, kinds and quality of
materials, finishes or equipment, all of which, if required, shall be
incorporated by Change Order.

2.2.3 The estimated Cost of the Work shall include the Construction Manager's
contingency, a sum established by the Construction Manager for the Construction
Manager's exclusive use to cover costs arising under Subparagraph 2.2.2 and
other costs which are properly reimbursable as Cost of the Work but not the
basis for a Change Order as described in the following paragraph.

THE CONSTRUCTION MANAGER'S CONTINGENCY IS AVAILABLE TO THE CONSTRUCTION MANAGER
TO COVER ITEMS NOT OTHERWISE RECOVERABLE BY CHANGE ORDER. ALL COST ASSOCIATED
WITH THE REFINEMENT OF DESIGN DETAILS WITHIN THE SCOPE OF WORK AND WITHIN THE
STANDARDS OF QUALITY AND QUANTITY ON WHICH THE GUARANTEED MAXIMUM PRICE IS
BASED, COSTS DUE TO LABOR DISPUTES, COSTS DUE TO OVERRUNS IN THE PERFORMANCE OF
WORK WITH CONSTRUCTION MANAGER'S OWN PERSONNEL, INCREASE IN BID OR NEGOTIATED
SUBCONTRACTS OR PURCHASE ORDER AGREEMENTS, CORRECTIVE WORK, LABOR DISPUTES
WITHIN MANUFACTURING OR TRANSPORTATION INDUSTRIES CAUSING DELAYS IN RECEIPT OF
MATERIALS OR EQUIPMENT NOT THE FAULT OF THE CONSTRUCTION MANAGER, LOST TIME DUE
TO ACTS BEYOND THE CONTROL OF THE CONSTRUCTION MANAGER AND FIXED JOBSITE COSTS


                                        4



DUE TO THESE DELAYS ARE RECOVERABLE FROM THE CONSTRUCTION MANAGER'S CONTINGENCY.
THE CONSTRUCTION MANAGER'S CONTINGENCY IS NOT AVAILABLE FOR OWNER INCREASES IN
ALLOWANCES, CHANGES IN THE SCOPE OF WORK OR DESIGN CHANGES.

2.2.4 BASIS OF GUARANTEED MAXIMUM PRICE

The Construction Manager shall include with the Guaranteed Maximum Price
proposal a written statement of its basis, which shall include:

     .1   A list of Drawings and Specifications, including all addenda thereto
          and Conditions of the Contract, which were used in preparation of the
          Guaranteed Maximum Price proposal.

     .2   A list of allowances and a statement of their basis.

     .3   A list of the clarifications and assumptions made by the Construction
          Manager in the preparation of the Guaranteed Maximum Price proposal to
          supplement the information contained in the Drawings and
          Specifications.

     .4   The proposed Guaranteed Maximum Price, including a statement of the
          estimated cost organized by trade categories, allowances, contingency,
          and other items and the fee that comprise the Guaranteed Maximum
          Price.

     .5   The Date of Substantial Completion upon which the proposed Guaranteed
          Maximum Price is based, and a schedule of the Construction Documents
          issuance dates upon which the date of Substantial Completion is based.

2.2.5 The Construction Manager shall meet with the Owner and Architect to review
the Guaranteed Maximum Price proposal and the written statement of its basis. In
the event that the Owner or Architect discovers any inconsistencies or
inaccuracies in the information presented, they shall promptly notify the
Construction Manager, who shall make appropriate adjustments to the Guaranteed
Maximum Price proposal, its basis or both.

2.2.6 Unless the Owner accepts the Guaranteed Maximum Price proposal in writing
on or before the date specified in the proposal for such acceptance and so
notifies the Construction Manager, the Guaranteed Maximum Price proposal shall
not be effective without written acceptance by the Construction Manager.

2.2.7 Prior to the Owner's acceptance of the Construction Manager's Guaranteed
Maximum Price proposal and issuance of a Notice to Proceed, the Construction
Manager shall not incur any cost to be reimbursed as part of the Cost of the
Work, except as the Owner may specifically authorize in writing.

2.2.8 Upon acceptance by the Owner of the Guaranteed Maximum Price proposal, the
Guaranteed Maximum Price and its basis shall be set forth in Amendment No. 1.
The Guaranteed Maximum Price shall be subject to additions and deductions by a
change in the Work as provided in the Contract Documents and the date of
Substantial Completion shall be subject to adjustment as provided in the
Contract Documents.

2.2.9 The Owner shall authorize and cause the Architect to revise the Drawings
and Specifications to the extent necessary to reflect the agreed-upon
assumptions and clarifications contained in Amendment No. 1. Such revised
Drawings and Specifications shall be furnished to the Construction Manager in
accordance with schedules agreed to by the Owner Architect and Construction
Manager. The Construction Manager shall promptly notify the Architect and Owner
if such revised Drawings and Specifications are inconsistent with the agreed
upon assumptions and clarifications.

2.2.10 The Guaranteed Maximum Price shall include in the Cost of the Work only
those taxes which are enacted at the time the Guaranteed Maximum Price is
established.

2.3  CONSTRUCTION PHASE

2.3.1 GENERAL


                                        5



2.3.1.1 The Construction Phase shall commence on the earlier of:

     (1)  the Owner's acceptance of the Construction Manager's Guaranteed
          Maximum Price proposal and issuance of a Notice to Proceed, or

     (2)  the Owner's first authorization to the Construction Manager to:

               (a)  award a subcontract, or

               (b)  undertake construction Work with the Construction Manager's
                    own forces, or

               (c)  issue a purchase order for materials or equipment required
                    by the Work.

2.3.2 ADMINISTRATION

2.3.2.1 Those portions of the Work that the Construction Manager does not
customarily perform with the Construction Manager's own personnel shall be
performed under subcontracts or by other appropriate agreements with the
Construction Manager. The Construction Manager shall obtain bids from
Subcontractors and from suppliers for materials or equipment fabricated to a
special design for the Work from the list previously reviewed and, after
analyzing such bids, shall deliver such bids to the Owner and Architect. The
Owner shall then determine, with the advice of the Construction Manager and
subject to the reasonable objection of the Architect, which bids will be
accepted. The Owner may designate specific persons or entities from whom the
Construction Manager shall obtain bids; however, if the Guaranteed Maximum Price
has been established, the Owner may not prohibit the Construction Manager from
obtaining bids from other qualified bidders. The Construction Manager shall not
be required to contract with anyone to whom the Construction Manager had
reasonable objection.

2.3.2.2 If the Guaranteed Maximum Price has been established and a specific
bidder among those whose bids are delivered by the Construction Manager to the
Owner and Architect (1) is recommended to Owner by the Construction Manager; (2)
is qualified to perform that portion of the Work; (3) has submitted a bid which
conforms to the requirements of the Contract Documents without reservations or
exception, but the Owner requires that another bid be accepted, then the
Construction Manager may require that a change in the Work be issued to adjust
Contract Time and the Guaranteed Maximum Price by the difference between the bid
of the person or entity recommended to the Owner by the Construction Manager and
the amount of the subcontract or other agreement actually signed with the person
or entity designated by the Owner.

2.3.2.3 Subcontracts and agreements with suppliers furnishing materials or
equipment fabricated to a special design shall conform to the payment provisions
of Subparagraphs 7.1.8 and 7.1.9 and shall not be awarded on the basis of cost
plus a fee without prior consent of the Owner.

2.3.2.4 The Construction Manager shall schedule and conduct meetings at which
the Owner, Architect, Construction Manager and appropriate Subcontractors can
discuss the status of the Work. The Construction Manager shall prepare and
promptly distribute meeting minutes.

2.3.2.5 Promptly after the Owner's acceptance of the Guaranteed Maximum Price
proposal, the Construction Manager shall prepare a schedule in accordance with
Paragraph 3.10 of AIA Document A201, including the Owner's occupancy
requirements.

2.3.2.6 The Construction Manager shall provide monthly written reports to the
Owner and Architect on the progress of the entire Work. The Construction Manager
shall maintain a daily log containing a record of weather, Subcontractors
working on the site, number of workers, Work accomplished, problems encountered
and other similar relevant data as the Owner may reasonably require. The log
shall be available to the Owner and Architect.

2.3.2.7 The Construction Manager shall develop a system of cost control for the
Work, including regular monitoring of actual costs for activities in progress
and estimates for uncompleted tasks and proposed changes. The Construction
Manager shall identify variances between actual and estimated costs and report
the variances to the Owner and Architect at


                                        6


regular intervals.

2.4  PROFESSIONAL SERVICES

The Construction Manager shall not be required to provide professional services
which constitute the practice of architecture or engineering, unless such
services are specifically required by the Contract Documents for a portion of
the Work or unless the Construction Manager has specifically agreed in writing
to provide such services. In such event, the Construction Manager shall cause
such services to be performed by appropriately licensed professionals and
Construction Manager shall have no liability for any defects or deficiencies in
the Contract Documents.

2.5 UNSAFE MATERIALS

In addition to the provisions of Paragraph 10.1 in AIA Document A201, if
reasonable precautions will be inadequate to prevent foreseeable bodily injury
or death to persons resulting from a material or substance encountered but not
created on the site by the Construction Manager, the Construction Manager shall,
upon recognizing the condition, immediately stop Work in the affected area and
report the condition to the Owner and Architect in writing. The Owner,
Construction Manager and Architect shall then proceed in the same manner
described in Subparagraph 10.1.2 of AIA Document A201. The Owner shall be
responsible for obtaining the services of a licensed laboratory to verify the
presence or absence of the material or substance reported by the Construction
Manager and, in the event such material or substance is found to be present, to
verify that it has been rendered harmless. Unless otherwise required by the
Contract Documents, the Owner shall furnish in writing to the Construction
Manager and Architect the names and qualifications of persons or entities who
are to perform tests verifying the presence or absence of such material or
substance or who are to perform the task of removal or safe containment of such
material or substance. The Construction Manager and Architect will promptly
reply to the Owner in writing stating whether or not either has reasonable
objection to the persons or entities proposed by the Owner. If either the
Construction Manager or Architect has an objection to a person or entity
proposed by the Owner, the Owner shall propose another to whom the Construction
Manager and Architect have no reasonable objection.

                                    ARTICLE 3

                            OWNER'S RESPONSIBILITIES

3.1 INFORMATION AND SERVICES

3.1.1 The Owner shall provide full information in a timely manner regarding the
requirements of the Project, including a program which sets forth the Owner's
objectives, constraints and criteria, including space requirements and
relationships, flexibility and expandability requirements, special equipment and
systems, and site requirements.

3.1.2 The Owner, upon written request from the Construction Manager, shall
furnish evidence of Project financing prior to the start of the Construction
Phase and from time to time thereafter as the Construction Manager may request.
If the Contract Sum at any time is expected to exceed $5 million and the project
is located in California, Owner shall at all times thereafter comply with
California Civil Code Section 3110.5 without the Construction Manager first
requesting such evidence of compliance. Furnishing of such evidence shall be a
condition precedent to commencement or continuation of the Work.

3.1.3 The Owner shall establish and update an overall budget for the Project,
based on consultation with the Construction Manager and Architect, which shall
include contingencies for changes in the Work and other costs which are the
responsibility of the Owner.


                                       7



3.1.4 STRUCTURAL AND ENVIRONMENTAL TEST, SURVEYS AND REPORTS

In the Preconstruction Phase, the Owner shall furnish the following with
reasonable promptness and at the Owner's expense, and the Construction Manager
shall be entitled to rely upon the accuracy of any such information, reports,
surveys, drawings and tests described in Clauses 3.1.4.1 through 3.1.4.4. except
to the extent that the Construction Manager knows of any inaccuracy.

3.1.4.1 Reports, surveys, drawings and tests concerning the conditions of the
site which are required by law.

3.1.4.2 Surveys describing physical characteristics, legal limitations and
utility location for the site of the Project and a written legal description of
the site. The surveys and legal information shall include as applicable, grades
and lines of streets, alleys, pavements and adjoining property and structures;
adjacent drainage; rights-of-way, restrictions, easements, encroachments,
zoning, deed restrictions, boundaries and contours of the site; locations,
dimensions and necessary data pertaining to existing buildings, other
improvements and trees; and information concerning available utility services
and lines, both public and private, above and below grade, including inverts and
depths. All information on the survey shall be referenced to a project
benchmark.

3.1.4.3 The services of geotechnical engineers when such services are requested
by the Construction Manager. Such services may include but are not limited to
test borings, test pits, determinations of soil bearing values, percolation
tests, evaluations of hazardous materials, ground corrosion and resistivity
test, including necessary operations for anticipating subsoil condition, with
reports and appropriate professional recommendations.

3.1.4.4 Structural, mechanical, chemical, air and water pollution tests, tests
for hazardous materials, and other laboratory and environmental tests,
inspections and reports which are required by law.

3.1.4.5 The services of other consultants when such services are reasonably
required by the scope of the Project and are requested by the Construction
Manager.

3.2  OWNER'S DESIGNATED REPRESENTATIVE

The Owner shall designate in writing a representative who shall have express
authority to bind the Owner with respect to all matters requiring the Owner's
approval or authorization. This representative shall have the authority to make
decisions on behalf of the Owner concerning estimates and schedules,
construction budgets, and changes in the Work, and shall render such decisions
promptly and furnish information expeditiously, so as to avoid unreasonable
delay in the services or Work of the Construction Manager. THE OWNER DESIGNATES
RICK MASON OR WILLIAM B. SWIRTZ AS ITS AUTHORIZED REPRESENTATIVE.

3.3  ARCHITECT

The Owner shall retain the Architect to provide the Basic Services, including
normal structural, mechanical and electrical engineering services, other than
cost estimating services, described in the edition of AIA Document B141 current
as of the date of this Agreement. The Owner shall authorize and cause the
Architect to provide those additional services described in AIA Document B141
current as of the date of this Agreement. The Owner shall authorize and cause
the Architect to provide those Additional Services described in AIA Document
B141 requested by the Construction Manager which must necessarily be provided by
the Architect for the Preconstruction and Construction Phases of the Work. Such
services shall be provided in accordance with time schedules agreed to by the
Owner, Architect and Construction Manager. Upon request of the Construction
Manager, the Owner shall furnish to the Construction Manager a copy of the
Owner's Agreement with the Architect, from which compensation provisions may be
deleted.


                                       8



3.4  LEGAL REQUIREMENTS

The Owner shall determine and advise the Architect and Construction Manager of
any special legal requirements relating specifically to the Project which differ
from those generally applicable to construction in the jurisdiction of the
Project. The Owner shall furnish such legal services as are necessary to provide
the information and devices required under Paragraph 3.1.

                                    ARTICLE 4

          COMPENSATION AND PAYMENTS FOR PRECONSTRUCTION PHASE SERVICES

The Owner shall compensate and make payments to the Construction Manager for
Preconstruction Phase services as follows:

4.1  COMPENSATION

4.1.1 For the services described in Paragraphs 2.1 and 2.2 the Construction
Manager's compensation shall be calculated as follows:

(State basis of compensation, whether a stipulated sum, multiple of Personnel
Expense, actual cost. etc. Include a statement of reimbursable cost items as
applicable.)

COMPENSATION FOR PRECONSTRUCTION PHASE SERVICES SHALL CONSIST OF:

     -    REIMBURSEMENT OF PERSONNEL EXPENSE AS DEFINED BY ARTICLE 6 NOT TO
          EXCEED $178,893.00

4.1.2 Compensation for Preconstruction Phase services shall be equitably
adjusted if such services extend beyond a period of 9 consecutive months from
the date of this Agreement or if the originally contemplated scope of services
is significantly modified.

4.1.3 If compensation is based on a multiple of Personnel Expense, Personnel
Expense is defined as the salaries of the Construction Manager's personnel
engaged in the Project and the portion of the cost of their mandatory and
customary contributions and benefits related thereto, such as employment taxes
and other statutory employee benefits, insurance, sick leave, holidays,
vacations, pensions and similar contributions and benefits as defined in
paragraph 6.1.2.

4.2  PAYMENTS

4.2.1 Payments shall be made monthly following presentation of the Construction
Manager's invoice and, where applicable, shall be in proportion to services
performed.

4.2.2 Payments are due and payable FOURTEEN (14) days from the date the
Construction Manager's invoice is received by the Owner. Amounts unpaid after
the date on which payment is due shall bear interest at the rate entered below,
or in the absence thereof, at the legal rate prevailing from time to time at the
place where the Project is located.

(Insert rate of interest agreed upon.) PRIME PLUS TWO PERCENT (2%).


                                       9


(Usury laws and requirements under the Federal Truth in Lending Act, similar
state and local consumer credit laws and other regulations at the Owner's and
Construction Manager's principal places of business, the location of the Project
and elsewhere may affect the validity of this provision. Legal advise should be
obtained with respect to deletions or modifications, and also regarding
requirements such as written disclosures or waivers.)

                                    ARTICLE 5

                  COMPENSATION FOR CONSTRUCTION PHASE SERVICES

The Owner shall compensate the Construction Manager for Construction Phase
services as follows:

5.1  COMPENSATION

5.1.1 For the Construction Manager's performance of the Work as described in
paragraph 2.3, the Owner shall pay the construction Manager in current funds the
Contract Sum consisting of the cost of the Work as defined in Article 7 and the
Construction Manager's Fee determined as follows:

(State a lump sum, percentage of actual Cost of the Work or other provision for
determining the Construction Manager's Fee, and explain how the Construction
Manager's Fee is to be adjusted for changes in the Work.)

Compensation for Construction phase services shall consist of:

     -    Fee of Two and One-Half percent ( 2.50 %) of the estimated Cost of
          the Work. The Construction Manager's Fee shall become a Fixed fee at
          the time of acceptance of the Guaranteed Maximum Price by the Owner.

Such fee shall be paid as follows:

          Fifteen percent (15%) shall be paid to the Contractor in the First
          Application For Payment and the remaining Eighty-five percent (85%)
          shall be paid in proportionate increments to the monthly Application
          For Payment submitted (see Article 7).

Compensation for changes in the Work shall consist of:

     -    Fee Two and One-Half percent ( 2.50 %) of the increased cost of the
          changes in the Work.

Compensation for trade work performed by Construction Manager's personnel shall
consist of:

     -    Fee of Twelve percent (12%) of the cost of the trade work.

5.2  GUARANTEED MAXIMUM PRICE

5.2.1 The sum of the Cost of the Work and the Construction Manager's Fee are
guaranteed by the Construction Manager not to exceed the amount provided in
Amendment No. 1, subject to additions and deductions by changes in the Work as
provided in the Contract Documents. Such maximum sum as adjusted by approved
changes in the Work is referred to in the Contract Documents as the Guaranteed
Maximum Price. Costs which would cause the Guaranteed Maximum Price to be
exceeded shall be paid by the Construction Manager without reimbursement by the
Owner.

(Insert specific provisions if the Construction Manager is to participate in any
savings.)

Upon completion of the project, if the actual Cost of the Work, including fees
paid in accordance with Articles 4


                                       10



and 5, is less than the Guaranteed Maximum Price, as provided and adjusted by
Change Orders, all savings shall be:

     -    Returned in full to the Owner, 100 percent (100%).

5.3  CHANGES IN THE WORK

5.3.1 Adjustments to the Guaranteed Maximum Price on account of changes in the
Work subsequent to the execution of Amendment No. 1 may be determined by any of
the methods listed in Subparagraph 7.3.3 of AIA Document A201.

5.3.2 In calculating adjustments to subcontracts (except those awarded with the
Owner's prior consent on the basis of cost plus a fee), the terms "cost" and
"fee" as used in Clause 7.3.3.3 of AIA Document A201 and the terms "costs" and
"a reasonable allowance for overhead and profit" as used in Subparagraph 7,3.6
of AIA Document A201 shall have the meanings assigned to them in that document
and shall not be modified by this Article 5. Adjustments to subcontracts awarded
with the Owner's prior consent on the basis of cost plus a fee shall be
calculated in accordance with the terms of those subcontracts.

5.3.3 In calculating adjustments to the Contract, the terms "cost" and "costs"
as used in the above-referenced provisions of AIA Document A201 shall mean the
Cost of the Work as defined in Article 6 of this Agreement and the terms "and a
reasonable allowance for overhead and profit" shall mean the Construction
Manager's Fee as defined in Subparagraph 5.1.1 of this Agreement.

5.3.4 If no specific provision is made in Subparagraph 5.1.1 for adjustment of
the Construction Manager's Fee in the case of changes in the Work, or if the
extent of such changes is such, in the aggregate that application of the
adjustment provisions of Subparagraph 5.1.1 will cause substantial inequity to
the Owner or Construction Manager, the Construction Manager's Fee shall be
equitably adjusted on the basis of the fee established for the original Work.

5.3.5 The Construction Manager has included 15 days of weather related delays
within his project schedule as defined by Article II, Contract Time, of
Amendment No. 1 to the Agreement. If the project experiences additional weather
related delays beyond the defined amount of 15 days, the Construction Manager
shall be entitled to a commensurate extension of time and reimbursement of costs
associated with the delay including general conditions, overhead, profit, etc.

5.4 Damages. (Insert only if the Owner insists on a damage paragraph. Due to the
negative impact damages inflict upon team building, administration of the
project, loss of focus on original objectives, etc., we urge owners to delete
damages and create incentives if they want to influence behavior. If they insist
on damages, the following paragraphs should be utilized).


                                       11



                                    ARTICLE 6

                     COST OF THE WORK FOR CONSTRUCTION PHASE

6.1 COSTS TO BE REIMBURSED

6.1.1 The term "Cost of the Work" shall mean costs necessarily incurred by the
Construction Manager in the proper performance of the Work. Such costs shall be
at rates not higher than those customarily paid at the place of the Project
except with prior consent of the Owner. The Cost of the Work shall include only
the items set forth in this Article 6.

6.1.2 LABOR COSTS

     .1   Wages of construction workers directly employed by the Construction
          Manager to perform the construction of the Work at the site or, with
          the Owner's agreement, at off-site workshops.

     .2   Wages or salaries of the Construction Manager's supervisory and
          administrative personnel when stationed at the site with the Owner's
          agreement, and employees stationed at the main or branch office
          directly involved in the support of the project.

          (If it is intended that the wages or salaries of certain personnel
          stationed at the Construction Manager's principal office or offices
          other than the site office shall be included in the Cost of the Work,
          such personnel shall be identified below.)

     .3   Wages and salaries of the Construction Manager's supervisory or
          administrative personnel engaged, at factories, workshops or on the
          road, in expediting the production or transportation of materials or
          equipment required for the Work, but only for that portion of their
          time required for the Work.

     .4   Costs paid or incurred by the Construction Manager for taxes,
          insurance, contributions, assessments and benefits required by law or
          collective bargaining agreements, and, for personnel not covered by
          such agreements, customary benefits such as sick leave, medical and
          health benefits, training, drug testing, and pensions, provided that
          such costs are based on wages and salaries included in the Cost of the
          Work under Clauses 6.1.2.1 through 6.1.2.3. Holidays and vacations are
          excluded from payroll taxes and fringe benefits and shall be billed
          directly to the project and considered reimbursable under the terms of
          this Agreement.

     .5   Wages, salaries, payroll taxes, insurance and fringe benefits, as
          defined in Paragraphs 6.1.1, 6.1.2, 6.1.3.and 6.1.4 above, shall be
          reimbursed in accordance with Appendix A, Personnel Reimbursement
          Schedule.

6.1.3 SUBCONTRACT COSTS

Payments made by the Construction Manager to Subcontractors in accordance with
the requirements of the subcontracts.

6.1.4 COSTS OF MATERIALS AND EQUIPMENT INCORPORATED IN THE COMPLETED
CONSTRUCTION

     .1   Costs, including transportation, of materials and equipment
          incorporated or to be incorporated in the completed construction.

     .2   Costs of materials described in the preceding Clause 6.1.4.1 in excess
          of those actually installed but required to provide reasonable
          allowance for waste and for spoilage. Unused excess materials, if any,
          shall be handed over to the Owner at the completion of the Work, or at
          the Owner's option, shall be sold


                                       12


          by the Construction Manager; amounts realized, if any, from such sales
          shall be credited to the Owner as a deduction from the Cost of the
          Work.

6.1.5 COSTS OF OTHER MATERIALS AND EQUIPMENT, TEMPORARY FACILITIES AND RELATED
ITEMS

     .1   Costs, including transportation, installation, maintenance,
          dismantling and removal of materials, supplies, temporary facilities,
          machinery, equipment, and hand tools not customarily owned by the
          construction workers, which are provided by the Construction Manager
          at the site and fully consumed in the performance of the Work; and
          cost less salvage value on such items if not fully consumed, whether
          sold to others or retained by the Construction Manager. Cost for items
          previously used by the Construction Manager shall mean fair market
          value.

     .2   Rental charges for temporary facilities, machinery, equipment, and
          hand tools not customarily owned by the construction workers, which
          are provided by the Construction Manager at the site, whether rented
          from the Construction Manager or others, and costs of transportation,
          installation, minor repairs and replacements, dismantling and removal
          thereof. Rates and quantities of equipment rented shall be subject to
          fair market rates or shall be reimbursed in accordance with Appendix
          B, Equipment Reimbursement Schedule.

     .3   Costs of removal of debris from the site.

     .4   Reproductions costs, costs of telegrams, facsimile transmissions and
          long-distance telephone calls, postage and express delivery charges,
          telephone service at the site and reasonable petty cash expenses of
          the site office.

     .5   That portion of the reasonable travel and subsistence expenses of the
          Construction Manager's personnel incurred while traveling in discharge
          of duties connected with the Work.

6.1.6 MISCELLANEOUS COSTS

     .1   That portion directly attributable to this Contract of premiums for
          insurance and bonds. (If charges for self insurance are to be
          included, specify the basis of reimbursement.)

          SUBCONTRACTOR DEFAULT INSURANCE SHALL BE REIMBURSED AT THE FIXED RATE
          OF 1.25% OF THE TOTAL SUBCONTRACT AMOUNT.

          SUBCONTRACTOR GENERAL LIABILITY INSURANCE (Z-10) SHALL BE REIMBURSED
          AT 1.25% OF THE SUBCONTRACTED AMOUNT.

          LIABILITY INSURANCE PREMIUMS SHALL BE REIMBURSED AT THE FIXED RATE OF
          1.10 PERCENT (1.10%) OF THE GUARANTEED MAXIMUM PRICE.

     .2   Sales, use or similar taxes imposed by a governmental authority which
          are related to the Work and for which the Construction Manager is
          liable.

     .3   Fees and assessments for the building permit and for other permits,
          licenses and inspections for which the Construction Manager is
          required by the Contract Documents to pay.

     .4   Fees of testing laboratories for tests required by the Contract
          Documents, except those related to nonconforming Work other than that
          for which payment is permitted by Clause 6.1.8.2.

     .5   Royalties and license fees paid for the use of particular design,
          process or product required by the Contract Documents; the cost of
          defending suits or claims for infringement of patent or other
          intellectual property rights arising from such requirement by the
          Contract Documents; payments made in accordance with legal judgments
          against the Construction Manager resulting from such suits or claims
          and payments of settlements made with the Owner's consent; provided,
          however, that such costs of legal defenses, judgments and settlements
          shall not be included in the calculation of the Construction Manager's
          Fee or the Guaranteed Maximum Price and provided that such royalties,
          fees and costs are not excluded by the last sentence of Subparagraph
          3.17.1 of AIA Document A201 or other provisions of the Contract


                                       13



          Documents.

     .6   Costs related to the Work for safety, OSHA, EEO, and other regulatory
          reporting as well as project time, personnel and data records and
          reports shall be reimbursed at the fixed rate of $1200/month.

     .7   Deposits lost for causes other than the Construction Manager's
          negligence or failure to fulfill a specific responsibility to the
          Owner set forth in this Agreement.

     .8   Legal, mediation and arbitration costs, other than those arising from
          disputes between the Owner and Construction Manager, reasonably
          incurred by the Construction Manager in the performance of the Work
          and with the Owner's written permission, which permission shall not be
          unreasonably withheld.

     .9   Expenses incurred in accordance with the Construction Manager's
          standard personnel policy for relocation and temporary living
          allowance of personnel required for the Work, in case it is necessary
          to relocate such personnel from distant locations.

6.1.7 OTHER COSTS

     .1   Other costs incurred in the performance of the Work if and to the
          extent approved in advance in writing by the Owner;

6.1.8 EMERGENCIES AND REPAIRS TO DAMAGED OR NONCONFORMING WORK

The Cost of the Work shall also include costs described in Subparagraph 6.1.1
which are incurred by the Construction Manager:

     .1   In taking action to prevent threatened damage, injury or loss in case
          of an emergency affecting the safety of persons and property, as
          provided in Paragraph 10.3 of AIA Document A201.

     .2   In repairing or correcting damaged or nonconforming Work executed by
          the Construction Manager or the Construction Manager's Subcontractors
          Or suppliers, provided that such damaged or nonconforming Work was not
          caused by the intentional negligence or gross failure to fulfill a
          specific responsibility to the Owner set forth in the Agreement of the
          Construction Manager or the Construction Manager's foremen, engineers
          or superintendents, or other supervisory, administrative or managerial
          personnel of the Construction Manager, or the gross failure of the
          Construction Manager's personnel to supervise adequately the Work of
          the Subcontractors or suppliers, and only to the extent that the cost
          of repair or correction is not recoverable by the Construction Manager
          from insurance, Subcontractors or suppliers.

6.1.9 The costs described in Subparagraphs 6.1.1 through 6.1.8 shall be included
in the Cost of the Work notwithstanding any provision of AIA Document A201 or
other Conditions of the Contract which may require the Construction Manger to
pay such costs, unless such costs are excluded by the provisions of Paragraph
6.2.

6.2  COSTS NOT TO BE REIMBURSED

     .1   Salaries and other compensation of the Construction Manager's
          personnel stationed at the Construction Manager's principal office or
          offices other than the site office, except as specifically provided in
          Clauses 6.1.2.2, 6.1.2.3, 6.1.2.4 and 6.1.2.5.

     .2   Expenses of the Construction Manager's principal office and offices
          other than the site office except as specifically provided in
          Paragraph 6.1.

     .3   Overhead and general expenses, except as may be expressly included in
          Paragraph 6.1.

     .4   The Construction Manager's capital expenses, including interest on the
          Construction Manager's capital employed for die Work.

     .5   Rental costs of machinery and equipment, except as specifically
          provided in subparagraph 6.1.5.2.

     .6   Except as provided in Clause 6.1.8.2, costs due to the intentional
          negligence of the Construction Manager or the gross failure of the
          Construction Manager to fulfill a specific responsibility to the Owner
          set forth in this Agreement.

     .7   Costs incurred in the performance of Preconstruction Phase Services
          except as defined by Article 4.


                                       14



     .8   Except as provided in Clause 6.1.7.1, any cost not specifically and
          expressly described in Paragraph 6.1.

     .9   Costs which would cause the Guaranteed Maximum Price to be exceeded.

6.3  DISCOUNTS, REBATES AND REFUNDS

6.3.1 Cash discounts obtained on payments made by the Construction Manager shall
accrue to the Owner if (1) before making the payment, the Construction Manager
included them in an Application for Payment and received payment therefore from
the Owner, or (2) the Owner has deposited funds with the Construction Manager
With which to make payments; otherwise, cash discounts shall accrue to the
Construction Manager. Trade discounts, rebates, refunds and amounts received
from sales of surplus materials and equipment shall accrue to the Owner, and the
Construction Manager shall make provisions so that they can be secured.

6.3.2 Amounts which accrue to the Owner in accordance with the provisions of
Subparagraph 6.3.1 shall be credited to the Owner as a deduction from the Cost
of the Work.

6.4  ACCOUNTING RECORDS

6.4.1 The Construction Manager shall keep full and detailed accounts and
exercise such controls as may be necessary for proper financial management under
this Contract; the accounting and control systems shall be in accordance with
generally accepted accounting methods (GAAP). The Owner and the Owner's
accountants shall be afforded access to the Construction Manager's records,
books, correspondence, instructions, drawings, receipts, subcontracts, purchase
orders, vouchers, memoranda and other data relating to this Project, and the
Construction Manager shall preserve these for a period of three years after
final payments, or for such longer period as may be required by law.

                                    ARTICLE 7

                               CONSTRUCTION PHASE

7.1  PROGRESS PAYMENTS

7.1.1 Based upon Applications for Payment submitted to the Owner by the
Construction Manager, the Owner shall make progress payments on account of
the contract Sum to the Construction Manager as provided below and elsewhere in
the Contract Documents.

7.1.2 The period covered by each Application for Payment shall be one calendar
month ending on the last day of the month, or as follows:

7.1.3 Provided an Application for Payment is received by the Owner not later
than the first (1st) day of a month, the Owner shall make payment to the
Construction Manager not later than the fourteenth (14th) day of the same month.
If an Application for Payment is received by the Owner after the application
date fixed above, payment shall be made by the Owner not later than fourteenth
(14) days after the Owner receives the Application for Payment.


                                       15


7.1.5 Each Application for Payment shall be based upon the most recent schedule
of values submitted by the Construction Manager in accordance with the Contract
Documents. The schedule of values shall allocate the entire Guaranteed Maximum
Price among the various portions of the Work, except that the Construction
Manager's Fee shall be shown as a single separate item. The schedule of values
shall be prepared in such form and supported by such data to substantiate its
accuracy as the Owner may require. This schedule, unless objected to by
the Owner shall be used as a basis for reviewing the Construction
Manager's Applications for Payment.

7.1.6 Applications for Payment shall show the percentage completion of each
portion of the Work as of the end of the period covered by the Application for
Payment. The percentage completion shall be the lesser of (1) the percentage of
that portion of the Work which has actually been completed or (2) the percentage
obtained by dividing (a) the expense which' has actually been incurred by the
Construction Manager on account of that portion of the Work for which the
Construction Manager has made or intends to make actual payment prior to the
next Application for Payment by (b) the share of the Guaranteed Maximum Price
allocated to that portion of the Work in the schedule of values.

7.1.7 Subject to other provisions of the Contract Documents, the amount of each
progress payment shall be computed as follows:

     .1   Take that portion of the Guaranteed Maximum Price properly allocable
          to completed Work as determined by multiplying the percentage
          completion of each portion of the Work by the share of the Guaranteed
          Maximum Price allocated to that portion of the Work in the schedule of
          values. Pending final determination of cost to the Owner of changes in
          the Work, amounts not in dispute may be included as provided in
          Subparagraph 7.3.7 of AIA Document A201, even though the Guaranteed
          Maximum Price has not yet been adjusted by Change Order.

     .2   Add that portion of the Guaranteed Maximum Price properly allocable to
          materials and equipment delivered and suitably stored at the site for
          subsequent incorporation in the Work or, if approved in advance by the
          Owner, suitably stored off the site at a location agreed upon in
          writing.

     .3   Add the Construction Manager's Fee, less retainage in accordance with
          PARAGRAPH 7.1.8. The Construction Manager's Fee shall be computed upon
          the Cost of the Work described in the two preceding Clauses at the
          rate stated in Subparagraph 5.1.1 or, if the Construction Manager's
          fee is stated as a fixed sum in that Subparagraph, shall be an amount
          which bears the same ratio to that fixed-sum Fee as the Cost of the
          Work in the two preceding Clauses bears to a reasonable estimate of
          the probable Cost of the Work upon its completion.

     .4   Subtract the aggregate of previous payments made by the Owner.

     .5   Subtract the shortfall, if any, indicated by the Construction Manager
          in the documentation required by Subparagraph 7.1.4 to substantiate
          prior Applications for Payment, or resulting from errors subsequently
          discovered by the Owner's accountants in such documentation.

     .6   Subtract amounts, if any, for which the Owner has withheld or
          nullified an Application of Payment as provided in Paragraph 9.5 of
          AIA Document A201.

7.1.8 Except with the Owner's prior approval, payments to Subcontractors and the
Construction Manager shall be subject to the following retention terms:

     .1   Retention in the amount of Ten Percent (10%) shall be withheld from
          each Subcontractor Progress Payment until their portion of the Work is
          Fifty Percent (50%) complete. Once the Subcontractor's portion of the
          Work is Fifty Percent (50%) complete, should their work be on schedule
          and in


                                       16



          compliance with the Contract Documents, no additional retention shall
          be withheld. Once each Subcontractor has completed their portion of
          the Work and their work has been accepted by the Owner, final
          retention on said Subcontractor may be released subject to Owner's
          approval. All remaining retention shall be released in accordance with
          Paragraph 7.2 of this Agreement.

     .2   Retention shall be withheld from the Construction Manager in
          accordance with the terms listed above for trade work performed by his
          own personnel. Retention shall not be withheld from the Construction
          Manager for payment of General Conditions, Fee, Purchase Order
          Agreements, allowances, taxes and direct pass through items; i.e.:
          bonds, insurance, permits, etc.

     .3   In lieu of retainage, the Construction Manager shall furnish
          certificates of deposit under the control of the Owner and the
          interest on such certificates shall accrue to the Construction
          Manager.

The Owner and the Construction Manager shall agree upon a mutually acceptable
procedure for review and approval of payments and retention for subcontracts.

7.1.9 Except with the Owner's prior approval, the Construction Manager shall not
make advance payments to suppliers for materials or equipment which have not
been delivered and stored at the site.

7.1.10 In taking action on the Construction Manager's Applications for Payment,
the Architect shall be entitled to rely on the accuracy and completeness of the
information furnished by the Construction Manager and shall not be deemed to
represent that the Architect has made a detailed examination, audit or
arithmetic verification of the documentation submitted in accordance with
Subparagraph 7.1.4 or other supporting data; that the Architect has made
exhaustive or continuous on-site inspections or that the Architect has made
examinations to ascertain how or for what purposes the Construction Manager has
used amounts previously paid on account of the Contract. Such examinations,
audits and verifications, if required by the Owner, will be performed by the
Owner's accountants acting in the sole interest of the Owner.

7.1.11 Thirty-five (35) days after Substantial Completion, any unpaid balance
plus the remaining retention will be paid to the Construction Manager. Should
minor items remain to be completed, the Construction Manager and the Owner or
Architect shall list such items and the Construction Manager's written
acceptance of such list shall constitute his unconditional promise to complete
said items within a reasonable time thereafter. The Owner may retain a sum equal
to one hundred fifty percent (150%) of the estimated cost of completing
unfinished items on such list. Thereafter, Owner shall pay to the Construction
Manager monthly the amount retained for incomplete items as each of said items
is completed.

7.2  FINAL PAYMENT

7.2.1 Final payment shall be made by the Owner to the Construction Manager when
(1) the Contract has been fully performed by the Construction Manager except for
the Construction Manager's responsibility to correct nonconforming Work, as
provided in Subparagraph 12.2.2 of AIA Document A201, and to satisfy other
requirements, if any, which necessarily survive final payment; (2) a final
Application for Payment and a final accounting for the Cost of the Work has been
submitted by the Construction Manager and reviewed by the Owner's accountants;
and (3) a final Application for Payment has then been issued by the Construction
Manager; such final payment shall be made by the Owner not more than 30 days
after the issuance of the Construction Manager's final Application for Payment,
or as follows:

7.2.2 The amount of the final payment shall be calculated as follows:

     .1   Take the sum of the Cost of the Work substantiated by the Construction
          Manager's final accounting and the Construction Manager's Fee; but not
          more than the Guaranteed Maximum Price.


                                       17



     .2   Subtract amounts, if any, for which the Owner withholds, in whole or
          in part, a final Application for Payment as provided in Subparagraph
          9.5.1 of AIA Document A201 or other provisions of the Contract
          Documents.

     .3   Subtract the aggregate of previous payments made by the Owner.

If the aggregate of previous payments made by the Owner exceeds the amount due
the Construction Manager, the Construction Manager shall reimburse the
difference to the Owner.

7.2.3 The Owner's accountants will review and report in writing on the
Construction Manager's final accounting within 30 days after delivery of the
final accounting to the Owner by the Construction Manager. Based upon
such Cost of the Work as the Owner's accountants report to be substantiated by
the Construction Manager's final accounting, and provided the other conditions
of Subparagraph 7.2.1 have been met, the Owner will, within seven days after
receipt of the written report of the Owner's accountants, either issue payment
to the Construction Manager, or notify the Construction Manager in writing of
the Owner's reasons for withholding payment as provided in Subparagraph 9.5.1 of
AIA Document A201. The time periods stated in this Paragraph 7.2 supersede those
stated in Subparagraph 9.4.1 of AIA Document A201.

7.2.4 If the Owner's accountants report the Cost of the Work as substantiated by
the Construction Manager's final accounting to be less than claimed by the
Construction Manager, the Construction Manager shall be entitled to proceed in
accordance with Article 9. Unless agreed to otherwise, a demand for mediation or
arbitration of the disputed amount shall be made by the Construction Manager
within 60 days after the Construction Manager's receipt of a copy of the Owner's
reason for withholding payment. Failure to make such demand within this 60-day
period shall result in the substantiated amount reported by the Owner's
accountants becoming binding on the Construction Manage. Upon receipt of a final
resolution of the disputed amount, the Owner shall pay the Construction Manager
the amount certified in the Construction Manager's final Application for Payment
revised to reflect the final resolution.

7.2.5 If, subsequent to final payment and at the Owner's request, the
Construction Manager incurs costs described in Paragraph 6.1 and not excluded by
Paragraph 6.2 (1) to correct nonconforming Work, or (2) arising from the
resolution of disputes, the Owner shall reimburse the Construction Manager such
costs and the Construction Manager's fee, if any, related thereto on the same
basis as if such costs had been incurred prior to final payment, but not in
excess of the Guaranteed Maximum Price. If the Construction Manager has
participated in savings, the amount of such savings shall be recalculated and
appropriate credit given to the Owner in determining the net amount to be paid
by the Owner to the Construction Manager.

                                    ARTICLE 8

                               INSURANCE AND BONDS

8.1  INSURANCE REQUIRED OF THE CONSTRUCTION MANAGER

During both phases of the Project, the Construction Manager shall purchase and
maintain insurance as set forth in Paragraph 11.1 of AIA Document A201-1997.
Such insurance shall be written for not less than the following limits, or
greater if required by law:

8.1.1 Workers' Compensation and Employers' Liability meeting statutory limits
mandated by State and Federal laws. If (1) limits in excess of those required by
statute are to be provided or (2) the employer is not statutorily bound to
obtain such insurance coverage or (3) additional coverages are required,
additional coverages and limits for such insurance shall be as follows:


                                       18



8.1.2 Commercial General Liability including coverage for Premises-Operations,
Independent Contractors' Protective, Products-Completed Operations, Contractual
Liability, Personal Injury, and Broad Form Property Damage (including coverage
for Explosion, Collapse and Underground hazards):

          
$1,000,000   Each Occurrence
$2,000,000   General Aggregate
$1,000,000   Personal and Advertising Injury
$2,000,000   Products-Completed Operations Aggregate



     .1   The policy shall be endorsed to have the General Aggregate apply to
          this Project only.

     .2   Products and Completed Operations insurance shall be maintained for
          the statute of repose for latent defects in construction of the state
          in which the project is located after either 90 days following
          Substantial completion or final payment, whichever is earlier.

     .3   The Contractual Liability insurance shall include coverage sufficient
          to meet the obligations in AIA Document A201-1997 under Paragraph
          3.18.

     .4   The Owner shall be an additional insured during and the period of time
          required by 8.1.2.2 or until such additional insured protection is no
          longer commercially available, whichever is shorter, with the
          insurance maintained by the Contractor acting as primary coverage and
          any insurance maintained by the Owner shall be excess and
          non-contributory.

8.1.3 Automobile Liability (owned, non-owned and hired vehicles) for bodily
injury and property damage:

          
$1,000,000   Each Accident



8.1.4 Umbrella/Excess Liability

           
$25,000,000   Each Occurrence
$25,000,000   General Aggregate
$25,000,000   Personal and Advertising Injury
$25,000,000   Products-Completed Operations Aggregate



8.1.5 Other coverage:

     "ALL-RISK" PROPERTY INSURANCE INCLUDING EARTHQUAKE, FLOOD, STORED MATERIALS
     AND MATERIAL IN TRANSIT, INCLUDING WAIVERS OF SUBROGATION, AS SET FORTH IN
     PARAGRAPH 11 OF AIA DOCUMENT 201-1997. EARTHQUAKE AND FLOOD INSURANCE MAY
     BE PROVIDED WITH LIMITS OF COVERAGE THAT ARE LESS THAN THE CONTRACT AMOUNT.
     IF THE PROJECT IS LOCATED IN FLOOD PRONE AREAS (AREAS LOCATED WITHIN THE
     100 YEAR FLOOD PLAIN AS DESIGNATED BY THE U.S. ARMY CORPS OF ENGINEERS OR
     SIMILAR AGENCY) SUNDT'S POLICY WILL NOT PROVIDE FLOOD COVERAGE IN ANY
     AMOUNT. IN THE STATES OF ALASKA, ARKANSAS, CALIFORNIA, HAWAII OR WASHINGTON
     SUNDT'S POLICY WILL NOT PROVIDE EARTHQUAKE -COVERAGE IN ANY AMOUNT. IF
     OWNER WANTS HIGHER EARTHQUAKE AND FLOOD LIMITS THAN PROVIDED BY SUNDT'S
     POLICY OR COVERAGE FOR EXCLUDED EARTHQUAKE AND FLOOD, OWNER SHALL NOTIFY
     SUNDT IN WRITING OF THE COVERAGE REQUESTED AND SUNDT SHALL MAKE ITS BEST
     EFFORT TO PROVIDE SUCH COVERAGE AS A COST OF THE WORK. IF COVERAGE IS NOT
     COMMERCIALLY AVAILABLE, AFFORDABLE OR REQUESTED BY OWNER, OWNER SHALL
     RELEASE, DEFEND, HOLD HARMLESS AND INDEMNIFY SUNDT FROM ALL DAMAGES AND
     COSTS RESULTING FROM SUCH UNINSURED OR UNDER INSURED EARTHQUAKE, FLOOD OR
     WINDSTORM LOSSES. ALL DEDUCTIBLES AND COINSURANCE PENALTIES ARE TO BE PAID
     BY THE OWNER. THE OWNER AND ALL TIERS OF SUBCONTRACTORS SHALL BE INSUREDS
     UNDER SUNDT'S BUILDERS RISK COVERAGE.

(If Umbrella Liability coverage is required over the primary insurance or
retention, insert the coverage limits. Commercial General Liability and
Automobile Liability limits may be attained by individual policies or by a
combination of primary policies and Umbrella and/or Liability policies.)


                                       19



8.2  INSURANCE REQUIRED OF THE OWNER

During both phases of the Project, the Owner shall purchase and maintain
liability insurance as set forth in Paragraphs 11.2 of AIA Document A201-1997.

(If not a blanket policy, list the objects to be insured.)

8.3  PERFORMANCE AND PAYMENT BOND

8.3.1 The Construction Manager shall not furnish bonds covering faithful
performance of the Contract and payment of obligations arising thereunder. Bonds
may be obtained through the Construction Manager's usual source and the cost
thereof shall be included in the Cost of the Work. The amount of each bond shall
be equal to ___ percent (___%) of the Contract Sum.

8.3.2 The Construction Manager shall deliver the required bonds to the Owner at
least three days before the commencement of any Work at the Project site.

                                    ARTICLE 9

                            MISCELLANEOUS PROVISIONS

9.1  DISPUTE RESOLUTION FOR THE PRECONSTRUCTION PHASE

9.1.1 Claims, disputes or other matters in question between the parties to this
Agreement which arise prior to the commencement of the Construction Phase or
which relate solely to the Preconstruction Phase services of the Construction
Manager or to the Owner's obligations to the Construction Manager during the
Preconstruction Phase, shall be resolved as follows:

THE PARTIES SHALL ENDEAVOR TO SETTLE THE DISPUTE FIRST THROUGH DIRECT
NEGOTIATION OF THE PRINCIPALS AUTHORIZED TO RESOLVE SUCH CLAIMS, DISPUTES, OR
OTHER MATTERS:

     OWNER'S PRINCIPAL: RICK MASON

     ARCHITECT'S PRINCIPAL: RICK SELLERS AND CHARLES CRAIN

     CONSTRUCTION MANAGER'S PRINCIPAL: MARTIN HEDLUND

9.1.2 IF DIRECT NEGOTIATION IS UNSUCCESSFUL, THE PARTIES SHALL ENDEAVOR TO
SETTLE THE DISPUTE THROUGH MEDIATION. Any mediation conducted pursuant to this
Paragraph 9.1 shall be held in accordance with the Construction Industry
Mediation Rules of the American Arbitration Association currently in effect,
unless the parties mutually agree otherwise. Demand for mediation shall be filed
in writing with the other party to this Agreement and with the American
Arbitration Association. Any demand for mediation shall be made within a
reasonable time after the claim, dispute or other matter in question has arisen
AND NEGOTIATION OF THE PRINCIPALS HAS FAILED TO RESOLVE THE ISSUE AS DESCRIBED
IN PARA. 9.1.1. In no event shall the demand for mediation be made after the
date when institution of legal or equitable proceedings based upon such claim,
dispute or other matter in question would be barred by the applicable statute of
limitations.

9.1.3 Any claim, dispute or other matter in question not resolved by mediation
shall be decided by arbitration in accordance with the Construction Industry
Arbitration Rules of the American Arbitration Association currently in effect
unless parties


                                       20



mutually agree otherwise. NOTWITHSTANDING ANY CONSTRUCTION INDUSTRY ARBITRATION
RULE CURRENTLY IN EFFECT, ANY ARBITRATOR SHALL HAVE NO POWER TO IGNORE ANY
PROVISION OF THIS AGREEMENT, TO RETAIN ANY EXPERT, TO ORDER DISCOVERY,
PRODUCTION OF RECORDS OR DOCUMENTS, ISSUE SUBPOENAS OR ORDER DEPOSITIONS OR
RESPONSES TO INTERROGATORIES WITHOUT THE PRIOR WRITTEN CONSENT OF THE PARTIES.

9.1.4 Demand for arbitration shall be filed in writing with the other party to
this Agreement and with the American Arbitration Association. A demand for
arbitration may be made IF MEDIATION HAS FAILED TO RESOLVE THE DISPUTE and shall
be made within a reasonable time after the claim, dispute or other matter in
question has arisen. In no event shall the demand for arbitration be made after
the date when institution of legal or equitable proceedings based upon such
claim, dispute or other matter in question would be barred by the applicable
statute of limitations.

9.1.6 The award rendered by the arbitrator or arbitrators shall be final, and
judgment may be entered upon it in accordance with applicable law in any court
having jurisdiction thereof. In no event may any arbitrator award any party
consequential or indirect damages.

9.2  DISPUTE RESOLUTION FOR THE CONSTRUCTION PHASE

9.2.1 Any other claim, dispute or other matter in question arising out of or
related to this Agreement or breach thereof shall be settled in accordance with
Article 9 of this Agreement, except that in addition to and prior to
arbitration, the parties shall endeavor to settle disputes by mediation in
accordance with the Construction Industry Mediation Rules of the American
Arbitration Association currently in effect unless the parties mutually agree
otherwise. Any mediation arising under this Paragraph shall be conducted in
accordance with the provisions of Subparagraphs 9.1.2 and 9.1.3

9.3  OTHER PROVISIONS

9.3.1 Unless otherwise noted, the terms used in this Agreement shall have the
same meaning as those in the 1997 Edition of AIA Document A201, General
Conditions of the Contract for Construction.

9.3.2 EXTENT OF CONTRACT

This Contract, which includes this Agreement and the other documents
incorporated herein by reference, represents the entire and integrated agreement
between the Owner and Construction Manager and supersedes all prior
negotiations, representations or agreements, either written or oral. This
Agreement may be amended only by written instrument signed by both the Owner and
Construction Manager. If anything in any document incorporated into this
Agreement is


                                       21


inconsistent with this Agreement, this Agreement shall govern.

9.3.3 OWNERSHIP AND USE OF DOCUMENTS

The Drawings, Specifications and other documents prepared by the Architect, and
copies thereof furnished to the Construction Manager, are for use solely with
respect to this Project. They are not to be used by the Construction Manager,
Subcontractors, Sub-subcontractors or suppliers on other projects, or for
additions to this Project outside the scope of the Work, without the specific
written consent of the Owner and Architect. The Construction Manager,
Subcontractors, Sub-subcontractors and suppliers are granted a limited license
to use and reproduce applicable portions of the Drawings, Specifications and
other documents prepared by the Architect appropriate to and for use in the
execution of their Work under the Contract Documents.

9.3.4 GOVERNING LAW

The Contract shall be governed by the law of the place where the Project is
located.

9.3.5 ASSIGNMENT

The Owner and Construction Manager respectively bind themselves, their partners,
successors, assigns and legal representatives to the other party hereto and to
partners, successors, assigns and legal representatives of such other party in
respect to covenants, agreements and obligations contained in the Contract
Documents. Neither party to the Contract shall assign the Contract as a whole
without written consent of the other. If either party attempts to make such an
assignment without such consent, the party shall nevertheless remain legally
responsible for all obligations under the Contract. Notwithstanding the
foregoing, in the event of a sale or transfer of a portion or all of the Project
to a different Owner, such purchasers, transferees or assigns shall have no
rights or remedies of any kind or nature against Construction Manager and all
provisions of this Agreement inconsistent therewith are void and of no force and
effect.

                                   ARTICLE 10

                            TERMINATION OR SUSPENSION

10.1 TERMINATION PRIOR TO ESTABLISHING GUARANTEED MAXIMUM PRICE

10.1.1 Prior to execution by both parties of Amendment No. 1 establishing the
Guaranteed Maximum Price, the Owner may terminate this Contract at any time
without cause, and the Construction Manager may terminate this Contract for any
of the reasons described in Subparagraph 14.1.1 of AIA Document A201.

10.1.2 If the Owner or Construction Manager terminates this Contract pursuant to
this Paragraph 10.1 prior to commencement of the Construction Phase, the
Construction Manager shall be equitably compensated for Preconstruction Phase
services performed prior to receipt of notice of termination; provided, however,
that the compensation of such services shall not exceed the compensation set
forth in Subparagraph 4.1.1.

10.1.3 If the Owner or Construction Manager terminates this Contract pursuant to
this Paragraph 10.1 after commencement of the Construction Phase, the
Construction Manager shall, in addition to the compensation provided in
Subparagraph 10.1.2, be paid an amount calculated as follows:

     .1   Take the Cost of the Work incurred by the Construction Manager.

     .2   Add the Construction Manager's Fee computed upon the Cost of the work
          to the date of termination at


                                       22



          the rate stated in Paragraph 5.1 or, if the Construction Manager's Fee
          is stated as a fixed sum in that Paragraph, an amount which bears the
          same ratio to the fixed-sum Fee as the Cost of Work at the time of
          termination bears to a reasonable estimate of the probable Cost of the
          Work upon its completion.

     .3   Subtract the aggregate of previous payments made by the Owner on
          account of the Construction Phase.

The Owner shall also pay the Construction Manager fair compensation, either by
purchase or rental at the election of the Owner, for any equipment owned by the
Construction Manager which the Owner elects to retain and which is not otherwise
included in the Cost of the Work under Clause 10.1.3.1. To the extent that the
Owner elects to take legal assignment of subcontracts and purchase orders
(including rental agreements), the Construction Manager shall, as a condition of
receiving the payments referred to in this Article 10, execute and deliver all
such papers and take all such steps, including the legal assignment of such
subcontracts and other contractual rights of the Construction Manager, as the
Owner may require for the purpose of fully vesting in the Owner the rights and
benefits of the Construction Manager under such subcontracts or purchase orders.

Subcontracts, purchase orders and rental agreements entered into by the
Construction Manager with the Owner's written approval prior to the execution of
Amendment No. 1 shall contain provisions permitting assignment to the Owner as
described above. If the Owner accepts such assignment, the Owner shall reimburse
or indemnify the Construction Manager with respect to all costs arising under
the subcontract, purchase order or rental agreement except those which would not
have been reimbursable as Cost of the work if the contract had not been
terminated. If the Owner elects not to accept the assignment of any subcontract,
purchase order or rental agreement which would have constituted a Cost of the
Work had this agreement not been terminated, the Construction Manager shall
terminate such subcontract, purchase order or rental agreement and the Owner
shall pay the Construction Manager the costs necessarily incurred by the
Construction Manager by reason of such termination.

10.2 TERMINATION SUBSEQUENT TO ESTABLISHING GUARANTEED MAXIMUM PRICE

Subsequent to execution by both parties of Amendment No. 1, the Contract may be
terminated as provided in Article 14 of AIA Document A201.

10.2.1 In the event of termination by the Owner for cause, the amount payable to
the Construction Manager pursuant to Subparagraph 14.1.2 of AIA Document A201
shall not exceed the amount the Construction Manager would have been entitled to
receive pursuant to Subparagraphs 10.1.2 and 10.1.3 of this Agreement.

10.2.2 In the event of termination by the Construction Manager or by the Owner
for convenience, the amount to be paid to the Construction Manager under
Subparagraph 14.1.2 of AIA Document A201 shall not exceed the amount the
Construction Manager would be entitled to receive under Subparagraphs 10.1.2 or
10.1.3 above, except that the Construction Manager's Fee shall be calculated as
if the Work had been fully completed by the Construction Manager, including a
reasonable estimate of the Cost of the Work for Work not actually completed.

10.3 SUSPENSION

The Work may be suspended by the Owner as provided in Article 14 of AIA Document
A201; in such case, the Guaranteed Maximum Price, if established, shall be
increased as provided in Subparagraph 14.3.2 of AIA Document A201 except that
the term cost of performance of the Contract in that Subparagraph shall be
understood to mean the Cost of the Work and the term profit shall be understood
to mean the Construction Manager's Fee as described in Subparagraphs 5.1.1 and
5.3.4 of this Agreement.


                                       23



and 5.3.4 of this Agreement.

                                   ARTICLE 11
                          OTHER CONDITIONS AND SERVICES

This Agreement entered into as of the day and year first written above.

OWNER                                   CONSTRUCTION MANAGER:


By: /s/ William B. Swirtz               By: /s/ Illegible
    ---------------------------------       ------------------------------------

Date: 6.22.04                           Date: June 18, 2004
Attest:                                 Attest: Illegible
        -----------------------------


APPROVED


/s/ RICK MASON                          6/22/04
- -------------------------------------   DATE
INITIALS
RICK MASON
DIRECTOR OF CONSTRUCTION
APOLLO DEVELOPMENT CORP.


                                       24


                                                          AIA DOCUMENT A201-1997

General Conditions of the Contract for Construction (April 2003)

TABLE OF ARTICLES

1.   GENERAL PROVISIONS

2.   OWNER

3.   CONTRACTOR

4.   ADMINSTRATION OF THE CONTRACT

5.   SUBCONTRACTORS

6.   CONSTRUCTION BY OWNER OR BY SEPARATE CONTRACTORS

7.   CHANGES IN THE WORK

8.   TIME

9.   PAYMENTS AND COMPLETION

10.  PROTECTION OF PERSONS AND PROPERTY

11.  INSURANCE AND BONDS

12.  UNCOVERING AND CORRECTION OF WORK

13.  MISCELLANEOUS PROVISIONS

14.  TERMINATION OR SUSPENSION OF THE CONTRACT

1997 EDITION
REVISION APRIL 2003

     CAUTION: You should use an original AIA document with the AIA logo printed
     in red. An original assures that changes will not be obscured as may occur
     when documents are reproduced.

Copyright 1911, 1915, 1918, 1925, 1937, 1951, 1958, 1961, 1963, 1966, 1967,
1970, 1976, 1987, (C)1997 by The American Institute of Architects. Fifteenth
Edition. Reproduction of the material herein or substantial quotation of its
provisions without written permission of the AIA violates the copyright laws of
the United States and will subject the violator to legal prosecution.

WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT
THE VIOLATOR TO LEGAL PROSECUTION.


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ARTICLE 1 GENERAL PROVISIONS

     1.1  BASIC DEFINITIONS

     1.1.1 THE CONTRACT DOCUMENTS

     Precedence of the Contract Documents is as follows: The Agreement between
     Owner and Contractor (hereinafter the Agreement), Conditions of the
     Contract (General, Supplementary and other Conditions), Drawings,
     Specifications, Addenda issued prior to execution of the Contract, other
     documents listed in the Agreement and Modifications issued after execution
     of the Contract. A Modification is (1) a written amendment to the Contract
     signed by both parties, (2) a Change Order, (3) a Construction Change
     Directive or (4) a written order for a minor change in the Work issued by
     the Architect. Unless specifically enumerated in the Agreement, the
     Contract Documents do not include other documents such as bidding
     requirements (advertisement or invitation to bid, Instruction to Bidders,
     sample forms, the Contractor's bid or portions of Addenda relating to
     bidding requirements.

     1.1.2 THE CONTRACT

     The Contract Documents form the Contract for Construction. The Contract
     represents the entire and integrated agreement between the parties hereto
     and supersedes prior negotiations, representations or agreements, either
     written or oral. The Contract may be amended or modified only by a
     Modification. The Contract Documents shall not be construed to create a
     contractual relationship of any kind (1) between the Architect and
     Contractor, (2) between the Owner and a Subcontractor or Sub-Subcontractor,
     (3) between the Owner and Architect or (4) between any persons or entities
     other than the Owner and Contractor. The Architect shall, however, be
     entitled to performance and enforcement of obligations under the Contract
     intended to facilitate performance of the Architect's duties.

     1.1.3 THE WORK

     The term "Work" means the construction and services required by the
     Contract Documents, whether completed or partially completed, and includes
     all other labor, materials, equipment and services provided or to be
     provided by the Contractor to fulfill the Contractor's obligations. The
     Work may constitute the whole or a part of the Project.

     1.1.4 THE PROJECT

     The Project is the total construction of which the Work performed under the
     Contract Documents may be the whole or a part and which may include
     construction by the Owner or by separate contractors.

     1.1.5 THE DRAWINGS

     The Drawings are the graphic and pictorial portions of the Contract
     Documents showing the design, location and dimensions of the Work,
     generally including plans, elevations, sections, details, schedules and
     diagrams.

     1.1.6 THE SPECIFICATIONS

     The Specifications are that portion of the Contract Documents consisting of
     the written requirements for materials, equipment, systems, standards and
     workmanship for the Work, and performance of related services.

     1.1.7 THE PROJECT MANUAL

     The Project Manual is a volume assembled for the Work which may include the
     bidding requirements, sample forms, Conditions of the Contract and
     Specifications.

     1.2  CORRELATION AND INTENT OF THE CONTRACT DOCUMENTS

     1.2.1 The intent of the Contract Documents is to include all items
     necessary for the proper execution and completion of the Work by the
     Contractor. The Contract Documents are complementary, and what is required
     by one shall be as binding as if required by all; performance by the
     Contractor shall be required only to the extent consistent with the
     Contract Documents and reasonably inferable from them as being necessary to
     produce the indicated results.

     1.2.2 Organization of the Specifications into divisions, sections and
     articles, and arrangement of Drawings shall not control the Contractor in
     dividing the Work among Subcontractors or in establishing the extent of the
     Work to be performed by any trade.

     1.2.3 Unless otherwise stated in the Contract Documents, words which have
     well-known technical or construction industry meanings are used in the
     Contract Documents in accordance with such recognized meanings.

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     1.3  CAPITALIZATION

     1.3.1 Terms capitalized in these General Conditions include those which are
     (1) specifically defined, (2) the titles of numbered articles and
     identified references to Paragraphs. Subparagraphs and Clauses in the
     document or (3) the titles of other documents published by the American
     Institute of Architects.

     1.4  INTERPRETATION

     1.4.1 In the interest of brevity the Contract Documents frequently omit
     modifying words such as "all" and "any" and articles such as "the" and
     "an," but the fact that a modifier or an article is absent from one
     statement and appears in another is not intended to affect the
     interpretation of either statement.

     1.5  EXECUTION OF CONTRACT DOCUMENTS

     1.5.1 The Contract Documents shall be signed by the Owner and Contractor.
     If either the Owner or Contractor or both do not sign all the Contract
     Documents, the Architect shall identify such unsigned Documents upon
     request.

     1.5.2 Execution of the Contract by the Contractor is a representation that
     the Contractor has visited the site, become generally familiar with local
     conditions under which the Work is to be performed and correlated personal
     observations with requirements of the Contract Documents.

     1.6  OWNERSHIP AND USE OF DRAWINGS, SPECIFICATIONS AND OTHER INSTRUMENTS OF
          SERVICE

     1.6.1 The Drawings, Specifications and other documents, including those in
     electronic form, prepared by the Architect and the Architect's consultants
     are Instruments of Service through which the Work to be executed by the
     Contractor is described. The Contractor may retain one record set. Neither
     the Contractor nor any Subcontractor, Sub-subcontractor or material or
     equipment supplier shall own or claim a copyright in the Drawings,
     Specifications and other documents prepared by the Architect or the
     Architect's consultants, and unless otherwise indicated the Architect and
     the Architect's consultants shall be deemed the authors of them and will
     retain all common law, statutory and other reserved rights, in addition to
     the copyrights. All copies of Instruments of Service, except the
     Contractor's record set, shall be returned or suitably accounted for to the
     Architect, on request, upon completion of the Work. The Drawings,
     Specifications and other documents prepared by the Architect and the
     Architect's consultants, and copies thereof furnished to the Contractor are
     for use solely with respect to this Project. They are not be used by the
     Contractor or any Subcontractor, Sub-subcontractor or material or equipment
     supplier on other projects or for additions to this Project outside the
     scope of the Work without the specific written consent of the Owner,
     Architect and the Architect's consultants. The Contractor, Subcontractors,
     Sub-subcontractors and material or equipment suppliers are authorized to
     use and reproduce applicable portions of the Drawings, Specifications and
     other documents prepared by the Architect and the Architect's consultants
     appropriate to and for use in the execution of their Work under the
     Contract Documents. All copies made under this authorization shall bear the
     statutory copyright notice, if any, shown on the Drawings, Specifications
     and other documents prepared by the Architect and the Architect's
     consultants. Submittal or distribution to meet official regulatory
     requirements or for other purposes in connection with this Project is not
     to be construed as publication in derogation of the Architect's or
     Architect's consultants' copyrights or other reserved rights.

ARTICLE 2 OWNER

     2.1  GENERAL

     2.1.1 The Owner is the person or entity identified as such in the Agreement
     and is referred to throughout the Contract Documents as if singular in
     number. The Owner shall designate in writing a representative who shall
     have express authority to bind the Owner with respect to all matters
     requiring the Owner's approval or authorization. Except as otherwise
     provided in Subparagraph 4.2.1, the Architect does not have such authority.
     The term "Owner" means the Owner or the Owner's authorized representative.

     2.1.2 The Owner shall furnish to the Contractor within fifteen days after
     receipt of a written request, information necessary and relevant for the
     Contractor to evaluate, give notice of or enforce mechanic's lien rights.
     Such information shall include a correct statement of the record legal
     title to the property on which the Project is located, usually referred to
     as the site, and the Owner's interest therein.

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     2.2  INFORMATION AND SERVICES REQUIRED OF THE OWNER

     2.2.1 The Owner shall, at the written request of the Contractor, prior to
     commencement of the Work and thereafter, furnish to the Contractor
     reasonable evidence that financial arrangements have been made to fulfill
     the Owner's obligations under the Contract. Furnishing of such evidence
     shall be a condition precedent to commencement or continuation of the Work.
     After such evidence has been furnished, the Owner shall not materially vary
     such financial arrangements without prior notice to the Contractor.

     2.2.1.1. To the extent applicable from time to time, Owner shall fully
     comply with California Civil Code Section 3110.5. If Owner is not in
     compliance, Construction Manager upon seven days written notice to Owner,
     may suspend work until such time as Owner fully complies with California
     Civil Code Section 3110.5. If Owner fails to fully comply within 15 days of
     receipt of Construction Manager's written notice, Construction Manager may
     upon seven days written notice to Owner, terminate the Contract and recover
     from Owner pursuant to Subparagraph 14.1.3.

     2.2.2 Except for permits and fees, including those required under
     Subparagraph 3.7.1, which are the responsibility of the Contractor under
     the Contract Documents, the Owner shall secure and pay for necessary
     approvals, easements, assessments and charges required for construction,
     use or occupancy of permanent structures or for permanent changes in
     existing facilities.

     2.2.3 The Owner shall furnish surveys describing physical characteristics,
     legal limitations and utility locations for the site of the Project, and a
     legal description of the site. The Contractor shall be entitled to rely on
     the accuracy of information furnished by the Owner but shall exercise
     proper precautions relating to the safe performance of the Work.

     2.2.4 Information or services required of the Owner by the Contract
     Documents shall be furnished by the Owner with reasonable promptness. Any
     other information or services relevant to the Contractor's performance of
     the Work under the Owner's control shall be furnished by the Owner after
     receipt from the Contractor of a written request for such information or
     services.

     2.2.5 Unless otherwise provided in the Contract Documents, the Contractor
     will be furnished, free of charge, such copies of Drawings and Project
     Manuals as are reasonably necessary for execution of the Work.

     2.3  OWNER'S RIGHT TO STOP THE WORK

     2.3.1 If the Contractor fails to correct Work which is not in accordance
     with the requirements of the Contract Documents as required by Paragraph
     12.2 or persistently fails to carry out Work in accordance with the
     Contract Documents, the Owner may issue a written order to the Contractor
     to stop the Work, or any portion thereof, until the cause for such order
     has been eliminated; however, the right of the Owner to stop the Work shall
     not give rise to a duty on the part of the Owner to exercise this right for
     the benefit of the Contractor or any other person or entity, except to the
     extent required by Subparagraph 6.1.3.

     2.4  OWNER'S RIGHT TO CARRY OUT THE WORK

     2.4.1 If the Contractor defaults or neglects to carry out the Work in
     accordance with the Contract Documents and fails within a seven-day period
     after receipt of written notice from the Owner to commence and continue
     correction of such default or neglect with diligence and promptness, the
     Owner may after such seven-day period give the Contractor a second written
     notice to correct such deficiencies within a three-day period. If the
     Contractor within such three-day period after receipt of such second notice
     fails to commence and continue to correct any deficiencies, the Owner may,
     without prejudice to other remedies the Owner may have, correct such
     deficiencies. In such case an appropriate Change Order shall be issued
     deducting from payments then or thereafter due the Contractor the
     reasonable cost of correcting such deficiencies, including Owner's expenses
     and compensation for the Architect's additional services made necessary by
     such default, neglect or failure. Such action by the Owner and amounts
     charged to the Contractor are both subject to prior approval of the
     Architect. If payments then or thereafter due the Contractor are not
     sufficient to cover such amounts, the Contractor shall pay the difference
     to the Owner.

ARTICLE 3 CONTRACTOR

     3.1  GENERAL

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     3.1.1 The Contractor is the person or entity identified as such in the
     Agreement and is referred to throughout the Contract Documents as if
     singular in number. The term "Contractor" means the Contractor or the
     Contractor's authorized representative.

     3.1.2 The Contractor shall perform the Work in accordance with the Contract
     Documents.

     3.1.3 The Contractor shall not be relieved of obligations to perform the
     Work in accordance with the Contract Documents either by activities or
     duties of the Architect in the Architect's administration of the Contract,
     or by tests, inspections or approvals required or performed by persons
     other than the Contractor.

     3.2  REVIEW OF CONTRACT DOCUMENTS AND FIELD CONDITIONS BY CONTRACTOR

     3.2.1 Since the Contract Documents are complementary, before starting each
     portion of the Work, the Contractor shall carefully study and compare the
     various Drawings and other Contract Documents relative to that portion of
     the Work, as well as the information furnished by the Owner pursuant to
     Subparagraph 2.2.3, shall take field measurements of any existing
     conditions related to that portion of the Work and shall observe any
     conditions at the site affecting it. These obligations are for the purpose
     of facilitating construction by the Contractor and are not for the purpose
     of discovering errors, omissions, or inconsistencies in the Contract
     Documents; however, any errors, inconsistencies or omissions discovered by
     the Contractor shall be reported promptly to the Architect as a request for
     information in such form as the Architect may require.

     3.2.2 Any design errors or omissions noted by the Contractor during this
     review shall be reported promptly to the Architect, but it is recognized
     that the Contractor's review is made in the Contractor's capacity as a
     contractor and not as a licensed design professional unless otherwise
     specifically provided in the Contract Documents. The Contractor is not
     required to ascertain that the Contract Documents are in accordance with
     applicable laws, statutes, ordinances, building codes, and rules and
     regulations, but any nonconformity discovered by or made known to the
     Contractor shall be reported promptly to the Architect.

     3.2.3 If the Contractor believes that additional cost or time is involved
     because of clarifications or instructions issued by the Architect in
     response to the Contractor's notices or requests for information pursuant
     to Subparagraphs 3.2.1 and 3.2.2, the Contractor shall make Claims as
     provided in Subparagraphs 4.3.6 and 4.3.7. If the Contractor fails to
     perform the obligations of Subparagraph 3.2.1 and 3.2.2, the Contractor
     shall pay such costs and damages to the Owner as would have been avoided if
     the Contractor had performed such obligations. The Contractor shall not be
     liable to the Owner or Architect for damages resulting from errors,
     inconsistencies or omissions in the Contract Documents or for differences
     between field measurements or conditions and the Contract Documents unless
     the Contractor recognized such error, inconsistency, omission or difference
     and knowingly failed to report it to the Architect.

     3.3  SUPERVISION AND CONSTRUCTION PROCEDURES

     3.3.1 The Contractor shall supervise and direct the Work, using the
     Contractor's best skill and attention. The Contractor shall be solely
     responsible for and have control over construction, means, methods,
     techniques, sequences and procedures and for coordinating all portions of
     the Work under the Contract, unless the Contract Documents give other
     specific instructions concerning these matters. If the Contract Documents
     give specific instructions concerning construction means, methods,
     techniques, sequences or procedures, the Contractor shall evaluate the
     jobsite safety thereof and, except as stated below, shall be fully and
     solely responsible for the jobsite safety of such means, methods,
     techniques, sequences or procedures. If the Contractor determines that such
     means, methods, techniques, sequences or procedures may not be safe, the
     Contractor shall give timely written notice to the Owner and Architect and
     shall not proceed with that portion of the Work without further written
     instructions from the Architect. If the Contractor is then instructed to
     proceed with the required means, methods, techniques, sequences or
     procedures without acceptance of changes proposed by the Contractor, the
     Owner shall be solely responsible for any resulting loss or damage.

     3.3.2 The Contractor shall be responsible to the Owner for acts and
     omissions of the Contractor's employees, Subcontractors and their agents
     and employees, and other persons or entities performing portions of the
     Work for or on behalf of the Contractor or any of its Subcontractor's.

     3.3.3 The Contractor shall be responsible for inspection of portions of
     Work already performed to determine that such portions are in proper
     condition to receive subsequent Work.

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     3.4  LABOR AND MATERIALS

     3.4.1 Unless otherwise provided in the Contract Documents, the Contractor
     shall provide and pay for labor materials equipment, tools, construction
     equipment and machinery, water, heat, utilities, transportation, and other
     facilities and services necessary for proper execution and completion of
     the Work, whether temporary or permanent and whether or not incorporated or
     to be incorporated in the Work.

     3.4.2 The Contractor may make substitutions only with the consent of the
     Owner, after evaluation by the Architect and in accordance with a Change
     Order.

     3.4.3 The Contractor shall enforce strict discipline and good order among
     the Contractor's employees and other persons carrying out the Contract. The
     Contractor shall not permit employment of unfit persons or persons not
     skilled in tasks assigned to them.

     3.5  WARRANTY

     3.5.1 The Contractor warrants to the 0wner and Architect that materials and
     equipment furnished under the Contract will be of good quality and new
     unless otherwise required or permitted by the Contract Documents that the
     Work will be free from defects not inherent in the quality required or
     permitted, and that the Work will conform to the requirements of the
     Contract Documents. Work not conforming to these requirements, including
     substitutions not properly approved and authorized may be considered
     defective. The Contractor's warranty excludes remedy for damage or defect
     caused by abuse modifications not executed by the Contractor, improper or
     insufficient maintenance, improper operation or normal wear and tear and
     normal usage. If required by the Architect, the Contractor shall furnish
     satisfactory evidence as to the kind and quality of materials and
     equipment.

     3.6  TAXES

     3.6.1 The Contractor shall pay sales, consumer, use and similar taxes for
     the Work provided by the Contractor which are legally enacted when bids are
     received or negotiations concluded, whether or not yet effective or merely
     scheduled to

     3.7  PERMITS, FEES AND NOTICES

     3.7.1 Unless otherwise provided in the Contract Documents, the Contractor
     shall secure and pay for the building permit and other permits and
     governmental fees, licenses and inspections necessary for proper execution
     and completion and completion of the Work which are customarily secured
     after execution of the Contract and which are legally required when bids
     are received or negotiations concluded.

     3.7.2 The Contractor shall comply with and give notices required by laws,
     ordinances, rules, regulations and lawful orders of public authorities
     applicable to performance of the Work.

     3.7.3 It is not the Contractor's responsibility to ascertain that the
     Contract Documents are in accordance with applicable laws statutes
     ordinances, building codes, and rules and regulations. However, if the
     Contractor observes that portions of the Contract Documents are at variance
     therewith, the Contractor shall promptly notify the Architect and Owner in
     writing, and necessary changes shall be accomplished by appropriate
     Modification.

     3.7.4 If the Contractor performs Work knowing it to be contrary to laws,
     ordinances, building codes, and rules and regulations without such notice
     to the Architect and Owner, the Contractor shall assume appropriate
     responsibility for such Work and shall bear the costs attributable to
     correction.

     3.8  ALLOWANCES

     3.8.1 The Contractor shall include in the Contract Sum all allowances
     stated in the Contract Documents. Items covered by allowances shall be
     supplied for such amounts and by such persons or entities as the Owner may
     direct but the Contractor shall not be required to employ persons or
     entities to whom the Contractor has reasonable objection.

     3.8.2 Unless otherwise provided in the Contract Documents:

          .1   allowances shall cover the cost of the Contractor of materials
               and equipment delivered at the site, less applicable trade
               discounts.

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          .2   Contractor's costs for unloading and handling at the site, labor,
               installation costs, and other expenses contemplated for stated
               allowance amounts shall be included in the allowances;

          .3   whenever costs are more than or less than allowances, the
               Contract Sum shall be adjusted accordingly by Change Order. The
               amount of the Change Order shall reflect (1) the difference
               between actual costs and the allowances under Clause 3.8.2.1 and
               (2) changes in Contractor's costs under Clause 3.8.2.2,and an
               adjustment of fee in accordance with the Agreement.

     3.8.3 Materials and equipment under an allowance shall be selected by the
     Owner in sufficient time to avoid delay in the Work.

     3.9  SUPERINTENDENT

     3.9.1 The Contractor shall employ a competent superintendent and necessary
     assistants who shall be in attendance at the Project site during
     performance of the Work. The superintendent shall represent the Contractor,
     and communications given to the superintendent shall be as binding as if
     given to the Contractor. Important communications shall be confirmed in
     writing. Other communications shall be similarly confirmed on written
     request in each case.

     3.10 CONTRACTOR'S CONSTRUCTION SCHEDULES

     3.10.1 The Contractor, promptly after being awarded the Contract, shall
     prepare and submit for the Owner's and Architect's information a
     Contractor's construction schedule for the Work. The schedule shall not
     exceed time limits current under the Contract Documents, shall be revised
     at appropriate intervals as required by the conditions of the Work and
     Project, shall be related to the entire Project to the extent required by
     the Contract Documents, and shall provide for expeditious and practicable
     execution of the Work.

     3.10.2 The Contractor shall prepare and keep current, for the Architect's
     approval, a schedule of submittals which is coordinated with the
     Contractor's construction schedule and allows the Architect reasonable time
     to review submittals.

     3.10.3 The Contractor shall perform the Work in general accordance with the
     most recent schedules submitted to the Owner and Architect.

     3.11 DOCUMENTS AND SAMPLES AT THE SITE

     3.11.1 The Contractor sha11 maintain at the site for the Owner one record
     copy of the Drawings, Specifications Addenda, Change Orders and other
     Modifications, in good order and marked currently to record field changes
     and selections made during construction, and one record copy of approved
     Shop Drawings, Product Data, Samples and similar required submittals. These
     shall be available to the Architect and shall be delivered to the Architect
     for submittal to the Owner upon completion of the Work.

     3.12 SHOP DRAWINGS, PRODUCT DATA AND SAMPLES

     3.12.1 Shop Drawings are drawings, diagrams, schedules and other data
     specially prepared for the Work by the Contractor or a Subcontractor,
     Sub-subcontractor, manufacturer, supplier or distributor to illustrate some
     portion of the Work.

     3.12.2 Product Data are illustrations, standard schedules, performance
     charts, instructions, brochures, diagrams and other information furnished
     by the Contractor to illustrate materials or equipment for some portion of
     the Work.

     3.12.3 Samples are physical examples which illustrate materials, equipment
     or workmanship and establish standards by which the Work will be judged.

     3.12.4 Shop Drawing, Product Data, Samples and similar submittals are not
     Contract Documents. The purpose of their submittal is to demonstrate for
     those portions of the Work for which submittals are required by the
     Contract Documents the way by which the Contractor proposes to conform to
     the information given and the design concept expressed in the Contract
     Documents. Review by the Architect is subject to the limitations of
     Subparagraph 4.2.7 Informational submittals upon which the Architect is not
     expected to take responsive action may be so identified in the Contract
     Documents. Submittals which are not required by the Contract Documents may
     be returned by the Architect without action.

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     3.12.5 The Contractor shall review for compliance with the Contract
     Documents, and submit to the Architect Shop Drawings, Product Data, Samples
     and similar submittals required by the Contract Documents with reasonable
     promptness and in such sequence as to cause no delay in the Work or in the
     activities of the Owner or of separate contractors. Submittals which are
     not marked as reviewed for compliance with the Contract Documents may be
     returned by the Architect without action.

     3.12.6 By submitting Shop Drawings, Product Data, Samples and similar
     submittals, the Contractor represents that the Contractor has determined
     and verified materials, field measurements and field construction criteria
     related thereto, or will do so, and has checked and coordinated the
     information contained within such submittals with the requirements of the
     Work and of the Contract Documents.

     3.12.7 The Contractor shall perform no portion of the Work for which the
     Contract Documents require submittal and review of Shop Drawings, Product
     Data, Samples or similar submittals until the respective submittal has been
     approved by the Architect.

     3.12.8 The Work shall be in accordance with approved submittals except that
     the Contractor shall not be relieved of responsibility for deviations from
     requirements of the Contract Documents by the Architect's approval of Shop
     Drawings, Product Data, Samples or similar submittals unless the Contractor
     has specifically informed the Architect in writing of such deviation at the
     time of submittal and (1) the Architect has given written approval to the
     specific deviation as a minor change in the Work, or (2) a Change Order or
     Construction Change Directive has been issued authorizing the deviation.
     The Contractor shall not be relieved of responsibility for errors or
     omissions in Shop Drawings, Product Data, Samples or similar submittals by
     the Architect's approval thereof.

     3.12.9 The Contractor shall direct specific attention, in writing or on
     resubmitted Shop Drawings, Product Data Samples or similar submittals, to
     revisions other than those requested by the Architect on previous
     submittals. In the absence of such written notice the Architect's approval
     of a resubmission shall not apply to such revisions.

     3.12.10 The Contractor shall not be required to provide professional
     services which constitute the practice of architecture or engineering
     unless such services are specifically required by the Contract Documents
     for a portion of the Work or unless the Contractor needs to provide such
     services in order to carry out the Contractor's responsibilities for
     construction means, methods, techniques, sequences and procedures. The
     Contractor shall not be required to provide professional services in
     violation of applicable law. If professional design services or
     certifications by a design professional related to systems, materials or
     equipment are specifically required of the Contractor by the Contract
     Documents, the Owner and the Architect will specify all performance and
     design criteria that such services must satisfy. The Contractor shall cause
     such services or certifications to be provided by a properly licensed
     design professional, whose signature and seal shall appear on all drawings,
     calculations, specifications, certifications, Shop Drawings and other
     submittals prepared by such professional. Shop Drawings and other
     submittals related to the Work designed or certified by such professional,
     if prepared by others, shall bear such professional's written approval when
     submitted to the Architect. The Owner and the Architect shall be entitled
     to rely upon the adequacy, accuracy and completeness of the services,
     certifications or approvals performed by such design professionals,
     provided the Owner and Architect have specified to the Contractor all
     performance and design criteria that such services must satisfy. Pursuant
     to this Subparagraph 3.12.10, the Architect will review, approve or take
     other appropriate action on submittals only for the limited purpose of
     checking for conformance with information given and the design concept
     expressed in the Contract Documents. The Contractor shall not be
     responsible for the adequacy of the performance or design criteria required
     by the Contract Documents.

     3.13 USE OF SITE

     3.13.1 The Contractor shall confine operations at the site to areas
     permitted by law, ordinances, permits and the Contract Documents and shall
     not unreasonably encumber the site with material or equipment.

     3.14 CUTTING AND PATCHING

     3.14.1 The Contractor shall be responsible for cutting, fitting or patching
     required to complete the Work or to make its parts fit together properly.

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     3.14.2 The Contractor shall not damage or endanger a portion of the Work or
     fully or partially completed construction of the Owner or separate
     contractors by cutting, patching or otherwise altering such construction,
     or by excavation. The Contractor shall not cut or otherwise alter such
     construction by the Owner or a separate contractor except with written
     consent of the Owner and of such separate contractor; such consent shall
     not be unreasonably withheld. The Contractor shall not unreasonably
     withhold from the Owner or a separate contractor the Contractor's consent
     to cutting or otherwise altering the Work.

     3.15 CLEANING UP

     3.15.1 The Contractor shall keep the premises and surrounding area free
     form accumulation of waste materials or rubbish caused by operations under
     the Contract. At completion of the Work, the Contractor shall remove from
     and about the Project waste materials, rubbish, the Contractor's tools,
     construction equipment, machinery and surplus materials.

     3.15.2 If the Contractor fails to clean up as provided in the Contract
     Documents, the Owner may do so and the cost thereof shall be charged to the
     Contractor.

     3.16 ACCESS TO WORK

     3.16.1 The Contractor shall provide the Owner and Architect access to the
     Work in preparation and progress wherever located.

     3.17 ROYALTIES, PATENTS AND COPYRIGHTS

     3.17.1 The Contractor shall pay all royalties and license fees. The
     Contractor shall defend suits or claims for infringement of copyrights and
     patent rights and shall hold the Owner and the Architect harmless from loss
     on account thereof, but shall not be responsible for such defense or loss
     when a particular design, process or product of a particular manufacturer
     or manufacturers is required by the Contract Documents or where the
     copyright violations are contained in Drawings, Specifications or other
     documents prepared by the Owner or Architect. However, if the Contractor
     has reason to believe that the required design, process or product is an
     infringement of a copyright or a patent, the Contractor shall be
     responsible for such loss unless such information is promptly furnished to
     the Architect.

     3.18 INDEMNIFICATION

     3.18.1 To the fullest extent permitted by law and to the extent claims,
     damages, losses or expenses are not covered by Project Management
     Protective Liability insurance purchased by the Contractor in accordance
     with Paragraph 11.3, the Contractor shall indemnify and hold harmless the
     Owner, Architect, Architect's consultants, and agents and employees of any
     of them from and against claims, damages, losses and expenses, including,
     but not limited to attorneys' fees arising out of or resulting from
     performance of the Work, provided that such claim, damage, loss or expense
     is attributable to bodily injury, sickness, disease or death, or to injury
     to or destruction of tangible property (other than the Work itself), but
     only to the extent caused by the negligent acts or omissions of the
     Contractor, a Subcontractor anyone directly or indirectly employed by them
     or anyone for whose acts they may be liable, regardless of whether or not
     such claim, damage, loss or expense is caused in part by a party
     indemnified hereunder. Such obligation shall not be construed to negate,
     abridge, or reduce other rights or obligations of indemnity which would
     otherwise exist as to a party or person described in this Paragraph 3.18.

     3.18.2 In claims against any person or entity indemnified under this
     Paragraph 3.18 by an employee of the Contractor a Subcontractor, anyone
     directly or indirectly employed by them or anyone for whose acts they may
     be liable, the indemnification obligation under Subparagraph 3.18.1 shall
     not be limited by a limitation on amount or type of damages compensation or
     benefits payable by or for the Contractor or a Subcontractor under workers'
     compensation acts disability benefit acts or other employee benefit acts.

ARTICLE 4 ADMINISTRATION OF THE CONTRACT

     4.1 ARCHITECT

     4.1.1 The Architect is the person lawfully licensed to practice
     architecture or an entity lawfully practicing architecture identified as
     such in the Agreement and is referred to throughout the Contract Documents
     as if singular in number. The term "Architect" means the Architect or the
     Architect's authorized representative.

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     4.1.2 Duties, responsibilities and limitations of authority of the
     Architect as set forth in the Contract Documents shall not be restricted,
     modified or extended without written consent of the Owner, Contractor and
     Architect. Consent shall not be unreasonably withheld.

     4.1.3 If the employment of the Architect is terminated, the Owner shall
     employ a new Architect against whom the Contractor has no reasonable
     objection and whose status under the Contract Documents shall be that of
     the former Architect.

     4.2 ARCHITECT'S ADMINISTRATION OF THE CONTRACT

     4.2.1 The Architect will provide administration of the Contract as
     described in the Contract Documents, and will be an Owner's representative
     (1) during construction, (2) until final payment is due and (3) with the
     Owner's concurrence, from time to time during the one-year period for
     correction of Work described in Paragraph 12.2. The Architect will have
     authority to act on behalf of the Owner only to the extent provided in the
     Contract Documents, unless otherwise modified in writing in accordance with
     other provisions of the Contract.

     4.2.2 The Architect, as a representative of the Owner, will visit the site
     at intervals appropriate to the stage of the Contractor's operations (1) to
     become generally familiar with and to keep the Owner informed about the
     progress and quality of the portion of the Work completed, (2) to endeavor
     to guard the Owner against defects and deficiencies in the Work, and (3) to
     determine in general if the Work is being performed in a manner indicating
     that the Work, when fully completed, will be in accordance with the
     Contract Documents. However, the Architect will not be required to make
     exhaustive or continuous on-site inspections to check the quality or
     quantity of the Work. The Architect will neither have control over or
     charge of, nor be responsible for, the construction means, methods,
     techniques, sequences or procedures, or for the safety precautions and
     programs in connection with the Work, since these are solely the
     Contractor's rights and responsibilities under the Contract Documents,
     except as provided in Subparagraph 3.3.1.

     4.2.3 The Architect will not be responsible for the Contractor's failure to
     perform the Work in accordance with the requirements of the Contract
     Documents. The Architect will not have control over or charge of and will
     not be responsible for acts or omissions of the Contractor, Subcontractors,
     or their agents or employees, or any other persons or entities performing
     portions of the Work.

     4.2.4 Communications Facilitating Contract Administration. Except as
     otherwise provided in the Contract Documents or when direct communications
     have been specifically authorized, the Owner and Contractor shall endeavor
     to communicate with each other through the Architect about matters arising
     out of or relating to the Contract Communications by and with the
     Architect's consultants shall be through the Architect. Communications by
     and with Subcontractors and material suppliers shall be through the
     Contractor. Communications by and with separate contractors shall be
     through the Owner.

     4.2.5 Based on the Architect's evaluations of the Contractor's Applications
     for Payment, the Architect will review and certify the amounts due the
     Contractor and will issue Certificates for Payment in such amounts.

     4.2.6 The Architect will have authority to reject Work that does not
     conform to the Contract Documents. Whenever the Architect considers it
     necessary or advisable, the Architect will have authority to require
     inspection or testing of the Work in accordance with Subparagraphs 13.5.2
     and 13.5.3, whether or not such Work is fabricated, installed or completed.
     However, neither this authority of the Architect nor a decision made in
     good faith either to exercise or not to exercise such authority shall give
     rise to a duty or responsibility of the Architect to the Contractor,
     Subcontractors, material and equipment suppliers, their agents or
     employees, or other persons or entities performing portions of the Work.

     4 2.7 The Architect will review and approve or take other appropriate
     action upon the Contractor's submittals such as Shop Drawings, Product Data
     and Samples, but only for the limited purpose of checking for conformance
     with information given and the design concept expressed in the Contract
     Documents. The Architect's action will be taken with such reasonable
     promptness as to cause no delay in the Work or in the activities of the
     Owner, Contractor or separate contractors, while allowing sufficient time
     in the Architect's professional judgment to permit adequate review. Review
     of such submittals is not conducted for the purpose of determining the
     accuracy and completeness of other details such as dimensions and
     quantities, or for substantiating instructions for installation or
     performance of equipment

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     or systems, all of which remain the responsibility of the Contractor as
     required by the Contract Documents. The Architect's review of the
     Contractor's submittals shall not relieve the Contractor of the obligations
     under Paragraphs 3.3, 3.5 and 3.12. The Architect's review shall not
     constitute approval of safety precautions or, unless otherwise
     specifically' stated by the Architect, of any construction means, methods,
     techniques, sequences or procedures. The Architect's approval of a specific
     item shall not indicate approval of an assembly of which the item is a
     component.

     4.2.8 The Architect will prepare Change Orders and Construction Change
     Directives, and may authorize minor changes in the Work as provided in
     Paragraph 7.4.

     4.2.9 The Architect will conduct inspections to determine the date or dates
     of Substantial Completion and the date of final completion, will receive
     and forward to the Owner, for the Owner's review and records, written
     warranties and related documents required by the Contract and assembled by
     the Contractor, and will issue a final Certificate for Payment upon
     compliance with the requirements of the Contract Documents.

     4.2.10 If the Owner and Architect agree, the Architect will provide one or
     more project representatives to assist in carrying out the Architect's
     responsibilities at the site. The duties, responsibilities and limitations
     of authority of such project representatives shall be as set forth in an
     exhibit to be incorporated in the Contract Documents.

     4.2.11 The Architect will interpret and decide matters concerning
     performance under, and requirements of, the Contract Documents on written
     request of either the Owner or Contractor. The Architect's response to such
     requests will be made in writing within any time limits agreed upon or
     otherwise with reasonable promptness. If no agreement is made concerning
     the time within which interpretations required of the Architect shall be
     furnished in compliance with this Paragraph 4.2, then delay shall not be
     recognized on account of failure by the Architect to furnish such
     interpretations until 15 days after written request is made for them.

     4 2.12 Interpretations and decisions of the Architect will be consistent
     with the intent of and reasonably inferable from the Contract Documents and
     will be in writing or in the form of drawings. When making such
     interpretations and initial decisions, the Architect will endeavor to
     secure faithful performance by both Owner and Contractor, will not show
     partiality to either and will not be liable for results of interpretations
     or decisions so rendered in good faith.

     4.2.13 The Architect's decisions on matters relating to aesthetic effect
     will be final if consistent with the intent expressed in the Contract
     Documents.

     4.3 CLAIMS AND DISPUTES

     4.3.1 Definition. A Claim is a demand or assertion by one of the parties
     seeking, as a matter of right, adjustment or interpretation of Contract
     terms, payment of money, extension of time or other relief with respect to
     the terms of the Contract. The term "Claim" also includes other disputes
     and matters in question between the Owner and Contractor arising out of or
     relating to the Contract. Claims must be initiated by written notice. The
     responsibility to substantiate Claims shall rest with the party making the
     Claim.

     4.3.2 Time Limits on Claims. Claims by either party must be initiated
     within 21 days after occurrence of the event giving rise to such Claim or
     within 21 days after the claimant first recognizes the condition giving
     rise to the Claim whichever is later. Claims must be initiated by written
     notice to the Architect and the other party.

     4.3.3 Continuing Contract Performance. Pending final resolution of a Claim
     except as otherwise agreed in writing or as provided in Subparagraph 9.7.1
     and Article 14, the Contractor shall proceed diligently with performance of
     the Contract and the Owner shall continue to make payments in accordance
     with the Contract Documents, including 50% of the cost of the disputed Work
     pending resolution in accordance with the terms and processes defined in
     the "Dispute Resolution" articles of the Agreement with the Owner..

     4.3.4 Claims for Concealed or Unknown Conditions. If conditions are
     encountered at the site which are (1) subsurface or otherwise concealed
     physical conditions which differ materially from those indicated in the
     Contract Documents or (2) unknown physical conditions of an unusual nature,
     which differ materially from those ordinarily found to exist and generally
     recognized as inherent in construction activities of the character provided
     for in the Contract Documents, then notice by the observing party shall be
     given to the other party promptly before conditions are disturbed

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     and in no event later than 21 days after first observance of the
     conditions. The Architect will promptly investigate such conditions and, if
     they differ materially and cause an increase or decrease in the
     Contractor's cost of, or time required for, performance of any part of the
     Work, will recommend an equitable adjustment in the Contract Sum or
     Contract Time, or both. If the Architect determines that the conditions at
     the site are not materially different from those indicated in the Contract
     Documents and that no change in the terms of the Contract is justified, the
     Architect shall so notify the Owner and Contractor in writing, stating the
     reasons. Claims by either party in opposition to such determination must be
     made within 21 days after the Architect has given notice of the decision.
     If the conditions encountered are materially different, the Contract Sum
     and Contract Time shall be equitably adjusted, but if the Owner and
     Contractor cannot agree on an adjustment in the Contract Sum or Contract
     Time, the adjustment shall be referred to the Architect for initial
     determination, subject to further proceedings pursuant to Paragraph 4.4.

     4.3.5 Claims for Additional Cost. If the Contractor wishes to make Claim
     for an increase in the Contract Sum, written notice as provided herein
     shall be given before proceeding to execute the Work. Prior notice is not
     required for Claims relating to an emergency endangering life or property
     arising under Paragraph 10.6.

     4.3.6 If the Contractor believes additional cost is involved for reasons
     including but not limited to (1) a written interpretation from the
     Architect, (2) an order by the Owner to stop the Work where the Contractor
     was not at fault, (3) a written order for a minor change in the Work issued
     by the Architect, (4) failure of payment by the Owner, (5) termination of
     the Contract by the Owner, (6) Owner's suspension or (7) other reasonable
     grounds, Claim shall be filed in accordance with this Paragraph 4.3.

     4.3.7 CLAIMS FOR ADDITIONAL TIME

     4.3.7.1 If the Contractor wishes to make Claim for an increase in the
     Contract Time, written notice as provided herein shall be given. The
     Contractor's Claim shall include an estimate of cost and of probable effect
     of delay on progress of the Work. In the case of a continuing delay only
     one Claim is necessary.

     4.3.7.2 If adverse weather conditions are the basis for a Claim for
     additional time, such Claim shall be documented by data substantiating that
     weather conditions were abnormal for the period of time, could not have
     been reasonably anticipated and had an adverse effect on the scheduled
     construction.

     4.3.8 Injury or Damage to Person or Property. If either party to the
     Contract suffers injury or damage to person or property because of an act
     or omission of the other party, or of others for whose acts such party is
     legally responsible, written notice of such injury or damage, whether or
     not insured, shall be given to the other party within a reasonable time not
     exceeding 21 days after discovery. The notice shall provide sufficient
     detail to enable the other party to investigate the matter.

     4.3.9 If unit prices are stated in the Contract Documents or subsequently
     agreed upon, and if quantities originally contemplated are materially
     changed in a proposed Change Order or Construction Change Directive so that
     application of such unit prices to quantities of Work proposed will cause
     substantial inequity to the Owner or Contractor the applicable unit prices
     shall be equitably adjusted. '

     4.3.10 Claims for Consequential Damages. The Contractor and Owner waive
     Claims against each other for consequential damages arising out of or
     relating to this Contract. This mutual waiver includes:

          .1   damages incurred by the Owner for rental expenses, for losses of
               use, income, profit, financing, business and reputation, and for
               loss of management or employee productivity or of the services of
               such person; and

          .2   damages incurred by the Contractor for principal office expenses,
               including the compensation of personnel stationed there, for
               losses of financing, business and reputation, and for loss of
               profit except anticipated profit arising directly from the Work.

     This mutual waiver is applicable, without limitation, to all consequential
     damages due to either party's termination in accordance with Article 14.
     Nothing contained in this Subparagraph 4.3.10 shall be deemed to preclude
     an award of liquidated direct damages, when applicable, in accordance with
     the requirements of the Contract Documents.

     4.4 RESOLUTION OF CLAIMS AND DISPUTES

     4.4.1 Resolution of claims and disputes shall be in accordance with the
     terms and processes defined in the "Dispute Resolution" articles of the
     Agreement with the Owner.

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     4.5 MEDIATION

     4.5.1 MEDIATION SHALL BE IN ACCORDANCE WITH THE TERMS AND PROCESSES DEFINED
     IN THE "DISPUTE RESOLUTION" ARTICLES OF THE AGREEMENT WITH THE OWNER.

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     4.6 ARBITRATION

     4.6.1 ARBITRATION SHALL BE IN ACCORDANCE WITH THE TERMS AND PROCESSED
     DEFINED IN THE "DISPUTE RESOLUTION" ARTICLES OF THE AGREEMENT WITH THE
     OWNER.

ARTICLE 5 SUBCONTRACTORS

     5.1 DEFINITIONS

     5.1.1 A Subcontractor is a person or entity who has a direct contract with
     the Contractor to perform a portion of the Work at the site. The term
     "Subcontractor" is referred to throughout the Contract Documents as if
     singular in number and means a Subcontractor or an authorized
     representative of the Subcontractor. The term "Subcontractor" does not
     include a separate contractor or subcontractors of a separate contractor.

     5.1.2 A Sub-Subcontractor is a person or entity who has a direct or
     indirect contract with a Subcontractor to perform a portion of the Work at
     the site. The term "Sub-subcontractor" is referred to throughout the
     Contract Documents as if singular in number and means a Sub-subcontractor
     or an authorized representative of the Sub-subcontractor.

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     5.2 AWARD OF SUBCONTRACTS AND OTHER CONTRACTS FOR PORTIONS OF THE WORK

     5.2.1 Unless otherwise stated in the Contract Documents or the bidding
     requirements, the Contractor, as soon as practicable after award of the
     Contract, shall furnish in writing to the Owner through the Architect the
     names of persons or entities (including those who are to furnish materials
     or equipment fabricated to a special design) proposed for each principal
     portion of the Work. The Architect will promptly reply to the Contractor in
     writing stating whether or not the Owner or the Architect, after due
     investigation, has reasonable objection to any such proposed person or
     entity. Failure of the Owner or Architect to reply promptly shall
     constitute notice of no reasonable objection.

     5.2.2 The Contractor shall not contract with a proposed person or entity to
     whom the Owner or Architect has made reasonable and timely objection. The
     Contractor shall not be required to contract with anyone to whom the
     Contractor has made reasonable objection.

     5.2.3 If the Owner or Architect has reasonable objection to a person or
     entity proposed by the Contractor, the Contractor shall propose another to
     whom the Owner or Architect has no reasonable objection. If the proposed
     but rejected Subcontractor was reasonably capable of performing the Work,
     the Contract Sum and Contract Time shall be increased or decreased by the
     difference, if any, occasioned by such change, and an appropriate Change
     Order shall be issued before commencement of the substitute Subcontractor's
     Work. However, no increase in the Contract Sum or Contract Time shall be
     allowed for such change unless the Contractor has acted promptly and
     responsively in submitting names as required.

     5.2.4 The Contractor shall not change a Subcontractor, person or entity
     previously selected if the Owner or Architect makes reasonable objection to
     such substitute.

     5.3 SUBCONTRACTUAL RELATIONS

     5.3.1 By appropriate agreement, written where legally required for
     validity, the Contractor shall require each Subcontractor, to the extent of
     the Work to be performed by the Subcontractor, to be bound to the
     Contractor by terms of the Contract Documents, and to assume toward the
     Contractor all the obligations and responsibilities including the
     responsibility for safety of the Subcontractor's Work, which the
     Contractor, by these Documents, assumes toward the Owner and Architect.
     Each subcontract agreement shall preserve and protect the rights of the
     Owner and Architect under the Contract Documents with respect to the Work
     to be performed by the Subcontractor so that subcontracting thereof will
     not prejudice such rights, and shall allow to the Subcontractor, unless
     specifically provided otherwise in the subcontract agreement, the benefit
     of all rights, remedies and redress against the Contractor that the
     Contractor, by the Contract Documents, has against the Owner. Where
     appropriate, the Contractor shall require each Subcontractor to enter into
     similar agreements with Sub-subcontractors. The Contractor shall make
     available to each proposed Subcontractor, prior to the execution of the
     subcontract agreement, copies of the Contract Documents to which the
     Subcontractor will be bound, and, upon written request of the
     Subcontractor, identify to the Subcontractor terms and conditions of the
     proposed subcontract agreement which may be at variance with the Contract
     Documents. Subcontractors will similarly make copies of applicable portions
     of such documents available to their respective proposed
     Sub-subcontractors.

     5.4 CONTINGENT ASSIGNMENT OF SUBCONTRACTS

     5.4.1 Each subcontract agreement for a portion of the Work is assigned by
     the Contractor to the Owner provided that:

          .1   assignment is effective only after termination of the Contract by
               the Owner for cause pursuant to Paragraph 14.2 and only for those
               subcontract agreements which the Owner accepts by notifying the
               Subcontractor and Contractor in writing; and

          .2   assignment is subject to the prior rights of the surety, if any,
               obligated under bond relating to the Contract.

     5.4.2 Upon such assignment, if the Work has been suspended for more than 30
     days, the Subcontractor's compensation shall be equitably adjusted for
     increases in cost resulting from the suspension.

ARTICLE 6 CONSTRUCTION BY OWNER OR BY SEPARATE CONTRACTORS

     6.1 OWNER'S RIGHT TO PERFORM CONSTRUCTION AND TO AWARD SEPARATE CONTRACTS

     6.1.1 The Owner reserves the right to perform construction or operations
     related to the Project with the Owner's own forces, and to award separate
     contracts in connection with other portions of the Project or other
     construction or operations on the site under Conditions of the Contract
     identical or substantially similar to these including those portions

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     related to insurance and waiver of subrogation. If the Contractor claims
     that delay or additional cost is involved because of such action by the
     Owner, the Contractor shall make such Claim as provided in Paragraph 4.3.

     6.1.2 When separate contracts are awarded for different portions of the
     Project or other construction or operations on the site, the term
     "Contractor" in the Contract Documents in each case shall mean the
     Contractor who executes each separate Owner-Contractor Agreement.

     6.1.3 The Owner shall provide for coordination of the activities of the
     Owner's own forces and of each separate contractor with the Work of the
     Contractor, who shall cooperate with them. The Contractor shall participate
     with other separate contractors and the Owner in reviewing their
     construction schedules when directed to do so. The Contractor shall make
     any revisions to the construction schedule deemed necessary after a joint
     review and mutual agreement. The construction schedules shall then
     constitute the schedules to be used by the Contractor, separate contractors
     and the Owner until subsequently revised.

     6.1.4 Unless otherwise provided in the Contract Documents, when the Owner
     performs construction or operations related to the Project with the Owner's
     own forces, the Owner shall be deemed to be subject to the same obligations
     and to have the same rights which apply to the Contractor under the
     Conditions of the Contract, including, without excluding others, those
     stated in Article 3, this Article 6 and Articles 10, 11 and 12.

     6.2 MUTUAL RESPONSIBILITY

     6.2.1 The Contractor shall afford the Owner and separate contractors
     reasonable opportunity for introduction and storage of their materials and
     equipment and performance of their activities, and shall connect and
     coordinate the Contractor's construction and operations with theirs as
     required by the Contract Documents.

     6.2.2 If part of the Contractor's Work depends for proper execution or
     results upon construction or operations by the Owner or a separate
     contractor, the Contractor shall, prior to proceeding with that portion of
     the Work, promptly report to the Architect apparent discrepancies or
     defects in such other construction that would render it unsuitable for such
     proper execution and results. Failure of the Contractor so to report shall
     constitute an acknowledgment that the Owner's or separate contractor's
     completed or partially completed construction is fit and proper to receive
     the Contractor's Work, except as to defects not then reasonably
     discoverable.

     6.2.3 The Owner shall be reimbursed by the Contractor for costs incurred by
     the Owner which are payable to a separate contractor because of delays,
     improperly timed activities or defective construction of the Contractor.
     The Owner shall responsible to the Contractor for costs incurred by the
     Contractor because of delays, improperly timed activities, damage to the
     Work or defective construction of a separate contractor.

     6.2.4 The Contractor shall promptly remedy damage wrongfully caused by the
     Contractor to completed or partially completed construction or to property
     of the Owner or separate contractors as provided in Subparagraph 10.2.5.

     6.2.5 The Owner and each separate contractor shall have the same
     responsibilities for cutting and patching as are described for the
     Contractor in Subparagraph 3.14.

     6.3 OWNER'S RIGHT TO CLEAN UP

     6.3.1 If a dispute arises among the Contractor, separate contractors and
     the Owner as to the responsibility under their respective contracts for
     maintaining the premises and surrounding area free from waste materials and
     rubbish, the Owner may clean up and the Architect will allocate the cost
     among those responsible.

ARTICLE 7 CHANGES IN THE WORK

     7.1 GENERAL

     7.1.1 Changes in the Work may be accomplished after execution of the
     Contract, and without invalidating the Contract, by Change Order,
     Construction Change Directive or order for a minor change in the Work,
     subject to the limitations stated in this Article 7 and elsewhere in the
     Contract Documents.

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     7.1.2 A Change Order shall be based upon agreement among the Owner,
     Contractor and Architect; a Construction Change Directive requires
     agreement by the Owner and Architect and may or may not be agreed to by the
     Contractor; an order for a minor change in the Work may be issued by the
     Architect alone.

     7.1.3 Changes in the Work shall be performed under applicable provisions of
     the Contract Documents, and the Contractor shall proceed promptly, unless
     otherwise provided in the Change Order, Construction Change Directive or
     order for a minor change in the Work.

     7.2 CHANGE ORDERS

     7.2.1 A Change Order is a written instrument prepared by the Architect and
     signed by the Owner, Contractor and Architect, stating their agreement upon
     all of the following:

          .1   change in the Work;

          .2   the amount of the adjustment, if any in the Contract Sum; and

          .3   the extent of the adjustment, if any, in the Contract Time.

     7.2.2 Methods used in determining adjustments to the Contract Sum may
     include those listed in Subparagraph 7.3.3.

     7.3 CONSTRUCTION CHANGE DIRECTIVES

     7.3.1 A Construction Change Directive is a written order prepared by the
     Architect and signed by the Owner and Architect, directing a change in the
     Work prior to agreement on adjustment, if any, in the Contract Sum or
     Contract Time, or both. The Owner may by Construction Change Directive,
     without invalidating the Contract, order changes in the Work within the
     general scope of the Contract consisting of additions, deletions o other
     revisions, the Contract Sum and Contract time being adjusted accordingly.

     7.3.2 A Construction Change Directive shall be used in the absence of total
     agreement on the terms of a Change Order.

     7.3.3 If the Construction Change Directive provides for an adjustment to
     the Contract Sum, the adjustment shall be based on one of the following
     methods:

          .1   mutual acceptance of a lump sum properly itemized and supported
               by sufficient substantiating data to permit evaluation;

          .2   unit prices stated in the Contract Documents or subsequently
               agreed upon;

          .3   cost to be determined in a manner agreed upon by the parties and
               a mutually acceptable fixed or percentage fee; or

          .4   as provided in Subparagraph 7.3.6.

     7.3.4 Upon receipt of a Construction Change Directive, the Contractor shall
     promptly proceed with the change in the Work involved and advise the
     Architect of the Contractor's agreement or disagreement with the method, if
     any provided in the Construction Change Directive for determining the
     proposed adjustment in the Contract Sum or Contract Time.

     7.3.5 A Construction Change Directive signed by the Contractor indicates
     the agreement of the Contractor therewith including adjustment in Contract
     Sum and Contract Time or the method for determining them. Such agreement
     shall be effective immediately and shall be recorded as a Change Order.

     7.3.6 If the Contractor does not respond promptly or disagrees with the
     method for adjustment in the Contract Sum the method and the adjustment
     shall be determined by the Architect on the basis of reasonable
     expenditures and savings of those performing the Work attributable to the
     change, including, in case of an increase in the Contract Sum, a reasonable
     allowance for overhead and profit. In such case, and also under Clause
     7.3.3.3, the Contractor shall keep and present, in such form as the
     Architect may prescribe, an itemized accounting together with appropriate
     supporting data Unless otherwise provided in the Contract Documents, costs
     for the purposes of this Subparagraph 7.3.6 shall be limited to the
     following:

          .1   costs of labor, including social security, old age and
               unemployment insurance, fringe benefits required by agreement or
               custom, and workers' compensation insurance;

          .2   costs of materials, supplies and equipment, including cost of
               transportation, whether incorporated or consumed;

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          .3   rental costs of machinery and equipment, exclusive of hand tools,
               whether rented from the Contractor or others;

          .4   costs of premiums for all bonds and insurance, permit fees, and
               sales, use or similar taxes related to the Work; and

          .5   additional costs of supervision and field office personnel
               directly attributable to the change.

     7.3.7 The amount of credit to be allowed by the Contractor to the Owner for
     a deletion or change which results in a net decrease in the Contract Sum
     shall be actual net cost as confirmed by the Architect. When both additions
     and credits covering related Work or substitutions are involved in a
     change, the allowance for overhead and profit shall be figured on the basis
     of net increase, if any, with respect to that change.

     7.3.8 Pending final determination of the total cost of a Construction
     Change Directive to the Owner, amounts not in dispute for such changes in
     the Work shall be included in Applications for Payment accompanied by a
     Change Order indicating the parties' agreement with part or all of such
     costs. For any portion of such cost that remains in dispute, the Architect
     will make an interim determination for purposes of monthly certification
     for payment for those costs. That determination of cost shall adjust the
     Contract Sum on the same basis as a Change Order, subject to the right of
     either party to disagree and assert a claim in accordance with Article 4.

     7.3.9 When the Owner and Contractor agree with the determination made by
     the Architect concerning the adjustments in the Contract Sum and Contract
     Time, or otherwise reach agreement upon the adjustments, such agreement
     shall be effective immediately and shall be recorded by preparation and
     execution of an appropriate Change Order.

     7.4 MINOR CHANGES IN THE WORK

     7.4.1 The Architect will have authority to order minor changes in the Work
     not involving adjustment in the Contract Sum or extension of the Contract
     Time and not inconsistent with the intent of the Contract Documents. Such
     changes shall be effected by written order and shall be binding on the
     Owner and Contractor. The Contractor shall carry out such written orders
     promptly.

ARTICLE 8 TIME

     8.1 DEFINITIONS

     8.1.1 Unless otherwise provided, Contract Time is the period of time,
     including authorized adjustments, allotted in the Contract Documents for
     Substantial Completion of the Work.

     8.1.2 The date of commencement of the Work is the date established in the
     Agreement.

     8.1.3 The date of Substantial Completion is the date certified by the
     Architect in accordance with Paragraph 9.8.

     8.1.4 The term "day" as used in the Contract Documents shall mean calendar
     day unless otherwise specifically defined.

     8.2 PROGRESS AND COMPLETION

     8.2.1 Time limits stated in the Contract Documents are of the essence of
     the Contract. By executing the Agreement the Contractor confirms that the
     Contract Time is a reasonable period for performing the Work.

     8.2.2 The Contractor shall not knowingly, except by agreement or
     instruction of the Owner in writing, prematurely commence operations on the
     site or elsewhere prior to the effective date of insurance required by
     Article 11 to be furnished by the Contractor and Owner. The date of
     commencement of the Work shall not be changed by the effective date of such
     insurance. Unless the date of commencement is established by the Contract
     Documents or a notice to proceed given by the Owner, the Contractor shall
     notify the Owner in writing not less than five days or other agreed period
     before commencing the Work to permit the timely filing of mortgages,
     mechanic's liens and other security interests.

     8.2.3 The Contractor shall proceed expeditiously with adequate forces and
     shall achieve Substantial Completion within the Contract Time.

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     8.2.4 If the Owner requires or causes the Contractor to accelerate the
     Schedule of the Work or to change the sequence in which the Work shall be
     performed, and such acceleration or change requires the Contractor to
     incorporate materials or equipment in the Work before measures can be
     undertaken by the Contractor to protect such Work, the Contractor shall
     give prompt written notice of such to the Owner. Thereafter, should the
     Owner direct the Contractor to proceed in the absence of appropriate
     measures to protect the Work, the Owner (1) waives claims for any damages
     resulting therefrom, and (2) shall defend, indemnify and hold harmless the
     Contractor, its Subcontractors and Sub-subcontractors and the agents,
     officers, directors and employees of each of them, from and against any and
     all direct claims, damages, losses, costs and expenses, including but not
     limited to attorneys' fees, losses, costs and expenses incurred in
     connection with any testing, remediation, and dispute resolution process,
     arising out of or relating to the Owner's acceleration of the Schedule of
     the Work or change in the sequence of the Work.

     8.3  DELAYS AND EXTENSIONS OF TIME

     8.3.1 If the Contractor is delayed at a time in the commencement or
     progress of the Work by an act or neglect of the Owner or Architect, or of
     an employee of either, or of a separate contractor employed by the Owner,
     or by changes ordered in the Work, or by labor disputes, fire, unusual
     delay in deliveries, unavoidable casualties or other causes beyond the
     Contractor's control, or by delay authorized by the Owner pending mediation
     and arbitration, or by other causes then the Contract Time shall be
     extended by Change Order for such reasonable time as the Architect, Owner
     and Contractor may determine.

     8.3.2 Claims relating to time shall be made in accordance with applicable
     provisions of Paragraph 4.3.

     8.3.3 This Paragraph 8.3 does not preclude recovery of damages for delay by
     either party under other provisions of the Contract Documents.

ARTICLE 9 PAYMENTS AND COMPLETION

     9.1  CONTRACT SUM

     9.1.1 The Contract Sum is stated in the Agreement and, including authorized
     adjustments, is the total amount payable by the Owner to the Contractor for
     performance of the Work under the Contract Documents.

     9.2  SCHEDULE OF VALUES

     9.2.1 Before the first Application for Payments, the Contractor shall
     submit to the Owner a schedule of values allocated to various portions of
     the Work, prepared in such form and supported by such data to substantiate
     its accuracy as the Owner may require. This schedule, unless objected to by
     the Owner, shall be used as a basis for reviewing the Contractor's
     Applications for Payment.

     9.3  APPLICATIONS FOR PAYMENT (REFER TO OWNER'S AGREEMENT)

     9.3.1 At least ten days before the date established for each progress
     payment, the Contractor shall submit to the Owner an itemized Application
     for Payment for operations completed in accordance with the schedule of
     values. Such application shall be notarized, if required, and supported by
     such data substantiating the Contractor's right to payment as the Owner may
     require.

     9.3.1.1 As provided in Subparagraph 7.3.8, such applications may include
     requests for payment on account of changes in the Work which have been
     properly authorized by Construction Change Directives, or by interim
     determinations of the Architect, but not yet included in Change Orders.

     9.3.1.2 Such applications may not include requests for payment for portions
     of the Work for which the Contractor does not intend to pay to a
     Subcontractor or material supplier, unless such Work has been performed by
     others whom the Contractor intends to pay.

     9.3.2 Unless otherwise provided in the Contract Documents, payments shall
     be made on account of materials and equipment delivered and suitably stored
     at the site for subsequent incorporation in the Work. If approved in
     advance by the Owner, payment may similarly be made for materials and
     equipment suitably stored off the site at a location agreed upon in
     writing. Payment for materials and equipment stored on or off the site
     shall be conditioned upon compliance by

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     the Contractor with procedures satisfactory to the Owner to establish the
     Owner's title to such materials and equipment or otherwise protect the
     Owner's interest, and shall include the costs of applicable insurance,
     storage and transportation to the site for such materials and equipment
     stored off the site.

     9.3.3 The Contractor warrants that title to all Work covered by an
     Application for Payment will pass to the Owner no later than the time of
     payment. The Contractor further warrants that upon submittal of an
     Application for Payment all Work for which Certificates of Payment have
     been previously issued and payments received from the Owner shall, to the
     best of the Contractor's knowledge, information and belief, be free and
     clear of liens, claims, security interests or encumbrances in favor of the
     Contractor, Subcontractors, material suppliers, or other persons or
     entities making a claim by reason of having provided labor, materials and
     equipment relating to the Work.

     9.4  CERTIFICATES FOR PAYMENT (REFER TO OWNER'S AGREEMENT)

     9.4.1 The Owner will, within seven days after receipt of the Contractor's
     Application for Payment, either issue payment, or notify the Contractor in
     writing of the Owner's reasons for Withholding payment in whole or in part
     as provided in Subparagraph 9.5.1.

     9.4.2 The issuance of a Certificate for Payment will constitute a
     representation by the Architect to the Owner, based on the Architect's
     evaluation of the Work and the data comprising the Application for Payment,
     that the Work has progressed to the point indicated and that, to the best
     of the Architect's knowledge, information and belief, the quality of the
     Work is in accordance with the Contract Documents. The foregoing
     representations are subject to an evaluation of the Work for conformance
     with the Contract Documents upon Substantial Completion, to results of
     subsequent tests and inspections, to correction of minor deviations from
     the Contract Documents prior to completion and to specific qualifications
     expressed by the Architect. The issuance of a Certificate for Payment will
     further constitute a representation that the Contractor is entitled to
     payment in the amount certified. However, the issuance of a Certificate for
     Payment will not be a representation that the Architect has (1) made
     exhaustive or continuous on-site inspections to check the quality or
     quantity of the Work, (2) reviewed construction means, methods, techniques,
     sequences or procedures, (3) reviewed copies of requisitions received from
     Subcontractors and material suppliers and other data requested by the Owner
     to substantiate the Contractor's right to payment, or (4) made examination
     to ascertain how or for what purpose the Contractor has used money
     previously paid on account of the Contract Sum.

     9.5  DECISIONS TO WITHHOLD CERTIFICATION (REFER TO OWNER'S AGREEMENT)

     9.5.1 The Owner may withhold payment in whole or in part, to the extent
     reasonably necessary to protect the Owner, if in the Owner's opinion the
     representations to the Owner required by Subparagraph 9.4.2 cannot be made.
     If the Owner is unable to certify payment in the amount of the Application,
     the Owner will notify the Contractor as provided in Subparagraph 9.4.1. If
     the Contractor and Owner cannot agree on a revised amount, the Owner will
     promptly issue payment for the amount for which the Owner is able to make
     such representations. The Owner may also withhold payment or, because of
     subsequently discovered evidence, may nullify the whole or a part of an
     application for Payment previously issued, to such extent as may be
     necessary in the Owner's opinion to protect the Owner from loss for which
     the Contractor is responsible, including loss resulting from acts and
     omissions described in Subparagraph 3.3.2, because of

          .1   defective Work not remedied;

          .2   third party claims filed or reasonable evidence indicating
               probably filing of such claims unless security acceptable to the
               Owner is provided by the Contractor;

          .3   failure of the Contractor to make payments properly to
               Subcontractors or for labor, materials or equipment;

          .4   reasonable evidence that the Work cannot be completed for the
               unpaid balance of the Contract Sum;

          .5   damage to the Owner or another contractor;

          .6   reasonable evidence that the Work will not be completed within
               the Contract Time, and that the unpaid balance would not be
               adequate to cover actual or liquidated damages for the
               anticipated delay; or

          .7   persistent failure to carry out the Work in accordance with the
               Contract Documents.

     9.5.2 When the above reasons for withholding certification are removed,
     certification will be made for amounts previously withheld.

     9.6  PROGRESS PAYMENTS (REFER TO OWNER'S AGREEMENT)

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     9.6.1 The Owner shall make payment in the manner and within the time
     provided in the Contract Documents, and shall so notify the Architect.

     9.6.2 The Contractor shall promptly pay each Subcontractor, upon receipt of
     payment from the Owner, out of the amount paid to the Contractor on account
     of such Subcontractor's portion of the Work, the amount to which said
     Subcontractor is entitled, reflecting percentages actually retained from
     payments to the Contractor on account of such Subcontractor's portion of
     the Work. The Contractor shall, by appropriate agreement with each
     Subcontractor, require each Subcontractor to make payments to
     Sub-subcontractors in a similar manner.

     9.6.3 The Architect will, on request, furnish to a Subcontractor, if
     practicable, information regarding percentages of completion or amounts
     applied for by the Contractor and action taken thereon by the Owner on
     account of portions of the Work done by such Subcontractor.

     9.6.4 Neither the Owner nor Architect shall have an obligation to pay or to
     see the payment of money to a Subcontractor except as may otherwise be
     required by law.

     9.6.5 Payment to material suppliers shall be treated in a manner similar to
     that provided in Subparagraph 9.6.2, 9.6.3 and 9.6.4.

     9.6.6 A Certificate for Payment, a progress payment, or partial or entire
     use or occupancy of the Project by the Owner shall not constitute
     acceptance of Work not in accordance with the Contract Documents

     9.6.7 Unless the Contractor provides the Owner with a payment bond in the
     full penal sum of the Contract Sum, payments received by the Contractor for
     Work properly performed by Subcontractors and suppliers shall be held by
     the Contractor for those Subcontractors or suppliers who performed Work or
     furnished materials, or both, under contract with the Contractor for which
     payment was made by the Owner. Nothing contained herein shall require money
     to be placed in a separate account and not commingled with money of the
     Contractor, shall create any fiduciary liability or tort liability on the
     part of the Contractor for breach of trust or shall entitle any person or
     entity to an award of punitive damages against the Contractor for breach of
     the requirements of this provision.

     9.7  FAILURE OF PAYMENT

     9.7.1 If the Owner does not pay the Contractor within seven days after the
     date established in the Contract Documents the amount certified in the
     Application for Payment or awarded by arbitration, then the Contractor may,
     upon seven additional days' written notice to the Owner, stop the Work
     until payment of the amount owing has been received. The Contract Time
     shall be extended appropriately and the Contract Sum shall be increased by
     the amount of the Contractor's reasonable costs of shut-down, delay and
     start-up, plus interest as provided for in the Contract Documents.

     9.8  SUBSTANTIAL COMPLETION

     9.8.1 Substantial Completion is the stage in the progress of the Work when
     the Work or designated portion thereof is sufficiently complete in
     accordance with the Contract Documents so that the Owner can occupy or
     utilize the Work for its intended use.

     9.8.2 When the Contractor considers that the Work, or a portion thereof
     which the Owner agrees to accept separately, is substantially complete, the
     Contractor shall prepare and submit to the Architect a comprehensive list
     of items to be completed or corrected prior to final payment. Failure to
     include an item on such list does not alter the responsibility of the
     Contractor to complete all Work in accordance with the Contract Documents.

     9.8.3 Upon receipt of the Contractor's list, the Architect will make an
     inspection to determine whether the Work or designated portion thereof is
     substantially complete. If the Architect's inspection discloses any item,
     whether or not included on the Contractor's list, which is not sufficiently
     complete in accordance with the Contract Documents so that the Owner can
     occupy or utilize the Work or designated portion thereof for its intended
     use, the Contractor shall, before issuance of the Certificate of
     Substantial Completion, complete or correct such item upon notification by
     the Architect.

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     In such case, the Contractor shall then submit a request for another
     inspection by the Architect to determine Substantial Completion.

     9.8.4 When the Work or designated portion thereof is substantially
     complete, the Architect will prepare a Certificate of Substantial
     Completion which shall establish the date of Substantial Completion, shall
     establish responsibilities of the Owner and Contractor for security,
     maintenance, heat, utilities, damage to the Work and insurance, and shall
     fix the time within which the Contractor shall finish all items on the list
     accompanying the Certificate. Warranties required by the Contract Documents
     shall commence on the date of Substantial Completion of the Work or
     designated portion thereof unless otherwise provided in the Certificate of
     Substantial Completion.

     9.8.5 The Certificate of Substantial Completion shall be submitted to the
     Owner and Contractor for their written acceptance of responsibilities
     assigned to them in such Certificate. Upon such acceptance and consent of
     surety, if any, the Owner shall make payment of retainage applying to such
     Work or designated portion thereof. Such payment shall be adjusted for Work
     that is incomplete or not in accordance with the requirements of the
     Contract Documents.

     9.8.6 UPON OCCUPANCY OF THE WORK, THE OWNER SHALL ASSUME SOLE
     RESPONSIBILITY TO OPERATE AND MAINTAIN THE WORK PROPERLY, AND WAIVES ANY
     CLAIMS BY THE OWNER AGAINST THE CONTRACTOR, ITS SUBCONTRACTORS AND
     SUB-SUBCONTRACTORS AND THE AGENTS, OFFICERS, DIRECTORS AND EMPLOYEES OF
     EACH OF THEM, FOR ANY DAMAGES RESULTING FROM IMPROPER OPERATION AND
     MAINTENANCE, INCLUDING BUT NOT LIMITED TO DAMAGES ARISING FROM MOLD AND
     OTHER MICROBIAL CONDITIONS.

     9.9 PARTIAL OCCUPANCY OR USE

     9.9.1 The Owner may occupy or use any completed or partially completed
     portion of the Work at any stage when such portion is designated by
     separate agreement with the Contractor, provided such occupancy or use is
     consented to by the insurer as required under Clause 11.4.1.5 and
     authorized by public authorities having jurisdiction over the Work. Such
     partial occupancy or use may commence whether or not the portion is
     substantially complete, provided the Owner and Contractor have accepted in
     writing the responsibilities assigned to each of them for payments,
     retainage, if any, security, maintenance, heat, utilities, damage to the
     Work and insurance, and have agreed in writing concerning the period for
     correction of the Work and commencement of warranties required by the
     Contract Documents. When the Contractor considers a portion substantially
     complete, the Contractor shall prepare and submit a list to the Architect
     as provided under Subparagraph 9.8.2. Consent of the Contractor to partial
     occupancy or use shall not be unreasonably withheld. The stage of the
     progress of the Work shall be determined by written agreement between the
     Owner and Contractor or, if no agreement is reached, by decision of the
     Architect.

     9.9.2 Immediately prior to such partial occupancy or use, the Owner,
     Contractor and Architect shall jointly inspect the area to be occupied or
     portion of the Work to be used in order to determine and record the
     condition of the Work.

     9.9.3 Unless otherwise agreed upon, partial occupancy or use of a portion
     or portions of the Work shall not constitute acceptance of Work not
     complying with the requirements of the Contract Documents.

     9.10 FINAL COMPLETION AND FINAL PAYMENT (REFER TO OWNER'S AGREEMENT)

     9.10.1 Upon receipt of written notice that the Work is ready for final
     inspection and acceptance and upon receipt of a final Application for
     Payment, the OWNER will promptly make such inspection and, when the OWNER
     finds the Work acceptable under the Contract Documents and the Contract
     fully performed, the OWNER will promptly REVIEW a final APPLICATION
     for Payment stating that to the best of the OWNER'S knowledge, information
     and belief, and on the basis of the OWNER'S on-site visits and inspections
     the Work has been completed in accordance with terms and conditions of the
     Contract Documents and that the entire balance found to be due the
     Contractor and noted in the final APPLICATION is due and payable. The
     CONTRACTOR'S final APPLICATION for Payment will constitute a further
     representation that conditions listed in Subparagraph 9.10.2 as precedent
     to the Contractor's being entitled to final payment have been fulfilled.

     9.10.2 Neither final payment nor any remaining retained percentage shall
     become due until the Contractor submits to the OWNER (1) an affidavit that
     payrolls, bills for materials and equipment, and other indebtedness
     connected with the Work for which the Owner or the Owner's property might
     be responsible or encumbered (less amounts withheld by Owner) have been
     paid or otherwise satisfied, (2) a certificate evidencing that insurance
     required by the Contract

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     Documents to remain in force after final payment is currently in effect and
     will not be canceled or allowed to expire until at least 30 days' prior
     written notice has been given to the Owner, (3) a written statement that
     the Contractor knows of no substantial reason that the insurance will not
     be renewable to cover the period required by the Contract Documents, (4)
     consent of surety, if any, to final payment and (5), if required by the
     Owner, other data establishing payment or satisfaction of obligations, such
     as receipts, releases and waivers of liens, claims, security interests or
     encumbrances arising out of the Contract, to the extent and in such form as
     may be designated by the Owner. If a Subcontractor refuses to furnish a
     release or waiver required by the Owner, the Contractor may furnish a bond
     satisfactory to the Owner to indemnify the Owner against such lien. If such
     lien remains unsatisfied after payments are made, the Contractor shall
     refund to the Owner all money that the Owner may be compelled to pay in
     discharging such lien, including all costs and reasonable attorneys' fees.

     9.10.3 If, after Substantial Completion of the Work, final completion
     thereof is materially delayed through no fault of the Contractor or by
     issuance of Change Orders affecting final completion, the Owner shall, upon
     application by the Contractor, and without terminating the Contract, make
     payment of the balance due for that portion of the Work fully completed and
     accepted. If the remaining balance for Work not fully completed or
     corrected is less than retainage stipulated in the Contract Documents, and
     if bonds have been furnished, the written consent of surety to payment of
     the balance due for that portion of the Work fully completed and accepted
     shall be submitted by the Contractor to the OWNER prior to certification of
     such payment. Such payment shall be made under terms and conditions
     governing final payment, except that it shall not constitute a waiver of
     claims.

     9.10.4 The making of final payment shall constitute a waiver of Claims by
     the Owner except those arising from:

          .1   liens, Claims, security interests or encumbrances arising out of
               the Contract and unsettled;

          .2   failure of the Work to comply with the requirements of the
               Contract Documents; or

          .3   terms of special warranties required by the Contract Documents.

     9.10.5 Acceptance of final payment by the Contractor, a Subcontractor or
     material supplier shall constitute a waiver of claims by that payee except
     those previously made in writing and identified by that payee as unsettled
     at the time of final Application for Payment.

ARTICLE 10 PROTECTION OF PERSONS AND PROPERTY

     10.1 SAFETY PRECAUTIONS AND PROGRAMS

     10.1.1 The Contractor shall be responsible for initiating, maintaining and
     supervising all safety precautions and programs in connection with the
     performance of the Contract.

     10.2 SAFETY OF PERSONS AND PROPERTY

     10.2.1 The Contractor shall take reasonable precautions for safety of, and
     shall provide reasonable protection to prevent damage, injury or loss to:

          .1   employees on the Work and other persons who may be affected
               thereby;

          .2   the Work and materials and equipment to be incorporated therein,
               whether in storage on or off the site, under care, custody or
               control of the Contractor or the Contractor's Subcontractors or
               Sub-subcontractors; and

          .3   other property at the site or adjacent thereto, such as trees,
               shrubs, lawns, walks, pavements, roadways, structures and
               utilities not designated for removal, relocation or replacement
               in the course of construction.

     10.2.2 The Contractor shall give notices and comply with applicable laws,
     ordinances, rules, regulations and lawful orders of public authorities
     bearing on safety of persons or property or their protection from damage,
     injury or loss.

     10.2.3 The Contractor shall erect and maintain, as required by existing
     conditions and performance of the Contract, reasonable safeguards for
     safety and protection, including posting danger signs and other warnings
     against hazards, promulgating safety regulations and notifying owners and
     users of adjacent sites and utilities.

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     10.2.4 When use or storage of explosives or other hazardous materials or
     equipment or unusual methods are necessary for execution of the Work, the
     Contractor shall exercise utmost care and carry on such activities under
     supervision of properly qualified personnel.

     10.2.5 The Contractor shall promptly remedy damage and loss (other than
     damage or loss insured under property insurance required by the Contract
     Documents) to property referred to in Clauses 10.2.1.2 and 10.2.1.3 caused
     in whole or in part by the Contractor, a Subcontractor, a
     Sub-subcontractor, or anyone directly or indirectly employed by any of
     them, or by anyone for whose acts they may be liable and for which the
     Contractor is responsible under Clauses 10.2.1.2 and 10.2.1.3, except
     damage or loss attributable to acts or omissions of the Owner or Architect
     or anyone directly or indirectly employed by either of them, or by anyone
     for whose acts either of them may be liable, and not attributable to the
     fault or negligence of the Contractor. The foregoing obligations of the
     Contractor are in addition to the Contractor's obligations under Paragraph
     3.18.

     10.2.6 The Contractor shall designate a responsible member of the
     Contractor's organization at the site whose duty shall be the prevention of
     accidents. This person shall be the Contractor's superintendent unless
     otherwise designated by the Contractor in writing to the Owner and
     Architect.

     10.2.7 The Contractor shall not load or permit any part of the construction
     or site to be loaded so as to endanger its safety.

     10.3 HAZARDOUS MATERIALS

     10.3.1 If reasonable precautions will be inadequate to prevent
     CONTAMINATION OF THE WORK OR foreseeable bodily injury or death to persons
     resulting from a material or substance, including but not limited to MOLD,
     MILDEW, FUNGI OR OTHER SIMILAR MICROBIAL CONDITIONS, asbestos or
     polychlorinated biphenyl (PCB), encountered on the site by the Contractor,
     the Contractor shall, upon recognizing the condition, immediately stop Work
     in the affected area and report the condition to the Owner and Architect in
     writing.

     10.3.2 The Owner shall obtain the services of a licensed laboratory to
     verify the presence or absence of the material or substance reported by the
     Contractor and, in the event such material or substance is found to be
     present, to verify that it has been rendered harmless. Unless otherwise
     required by the Contract Documents, the Owner shall furnish in writing to
     the Contractor and Architect the names and qualifications of persons or
     entities who are to perform tests verifying the presence or absence of such
     material or substance or who are to perform the task of removal or safe
     containment of such material or substance. The Contractor and the Architect
     will promptly reply to the Owner in writing stating whether or not either
     has reasonable objection to the persons or entities proposed by the Owner.
     If either the Contractor or Architect has an objection to a person or
     entity proposed by the Owner, the Owner shall propose another to whom the
     Contractor and the Architect have no reasonable objection. When the
     material or substance has been rendered harmless, the Work in the affected
     area shall resume upon written agreement of the Owner and Contractor. The
     Contract Time shall be extended appropriately and the Contract Sum shall be
     increased in the amount of the Contractor's reasonable additional costs of
     shut-down, delay and start-up, which adjustments shall be accomplished as
     provided in Article 7.

     10.3.3 To the fullest extent permitted by law, the Owner shall indemnify
     and hold harmless the Contractor, Subcontractors, Architect, Architect's
     consultants and agents and employees of any of them from and against
     claims, damages, losses and expenses, including but not limited to
     attorneys' fees, arising out of or resulting from performance of the Work
     in the affected area if in fact the material or substance CONTAMINATES THE
     WORK OR presents the risk of bodily injury or death as described in
     Subparagraph 10.3.1 and has not been rendered harmless, provided that such
     claim, damage, loss or expense is attributable to bodily injury, sickness,
     disease or death, or to injury to or destruction of tangible property
     (other than the Work itself) INCLUDING BUT NOT LIMITED TO THE EXISTENCE,
     DEVELOPMENT OR GROWTH OF MOLD, MILDEW, FUNGI OR OTHER MICROBIAL CONDITIONS
     and provided that such damage, loss or expense is not due to the sole
     negligence of a party seeking indemnity.

     10.4 The Owner shall not be responsible under Paragraph 10.3 for materials
     and substances brought to the site by the Contractor unless such materials
     or substances were required by the Contract Documents.

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     10.5 If, without negligence on the part of the Contractor, the Contractor
     is held liable for the cost of remediation of a hazardous material or
     substance solely by reason of performing Work as required by the Contract
     Documents, the Owner shall indemnify the Contractor for all cost and
     expense thereby incurred.

     10.6 EMERGENCIES

     10.6.1 In an emergency affecting safety of persons or property, the
     Contractor shall act, at the Contractor's discretion to prevent threatened
     damage, injury or loss. Additional compensation or extension of time
     claimed by the Contractor or account of an emergency shall be determined as
     provided in Paragraph 4.3 and Article 7.

ARTICLE 11 INSURANCE AND BONDS

     11.1 CONTRACTOR'S LIABILITY INSURANCE

     11.1.1 The Contractor shall purchase from and maintain in a company or
     companies lawfully authorized to do business in the jurisdiction in which
     the Project is located such insurance as will protect the Contractor from
     claims set forth below which may arise out of or result from the
     Contractor's operations under the Contract and for which the Contractor may
     be legally liable, whether such operations be by the Contractor or by a
     Subcontractor or by anyone directly or indirectly employed by any of them,
     or by anyone for whose acts any of them may be liable:

          .1   claims under workers' compensation, disability benefit and other
               similar employee benefit acts which are applicable to the Work to
               be performed;

          .2   claims for damages because of bodily injury, occupational
               sickness or disease, or death of the Contractor's employees;

          .3   claims for damages because of bodily injury, sickness or disease,
               or death of any person other than the Contractor's employees;

          .4   claims for damages insured by usual personal injury liability
               coverage;

          .5   claims for damages, other than to the Work itself, because of
               injury to or destruction of tangible property including loss of
               use resulting therefrom;

          .6   claims for damages because of bodily injury, death of a person or
               property damage arising out of ownership, maintenance or use of a
               motor vehicle;

          .7   claims for bodily injury or property damage arising out of
               completed operations; and

          .8   claims involving contractual liability insurance applicable to
               the Contractor's obligations under Paragraph 3.18.

     11.1.2 The insurance required by Subparagraph 11.1.1 shall be written for
     not less than limits of liability specified in the Contract Documents or
     required by law, whichever coverage is greater. Coverages, whether written
     on an occurrence or claims-made basis, shall be maintained without
     interruption from date of commencement of the Work until date of final
     payment and termination of any coverage required to be maintained after
     final payment. OWNER AND OTHERS REQUIRED BY WRITTEN CONTRACT SHALL BE
     ADDITIONAL INSUREDS ON A PRIMARY AND NON CONTRIBUTORY BASIS ON CONTRACTOR'S
     COMMERCIAL GENERAL LIABILITY COVERAGE WHICH SHALL ALSO INCLUDE A WAIVER OF
     SUBROGATION IN FAVOR OF THE ADDITIONAL INSUREDS.

     11.1.3 Certificates of insurance acceptable to the Owner shall be filed
     with the Owner prior to commencement of the Work. These certificates and
     the insurance policies required by this Paragraph 11.1 shall contain a
     provision that coverages afforded under the policies will not be canceled
     or allowed to expire until at least 30 days' prior written notice has been
     given to the Owner. If any of the foregoing insurance coverages are
     required to remain in force after final payment and are reasonably
     available, an additional certificate evidencing continuation of such
     coverage shall be submitted with the final Application for Payment as
     required by Subparagraph 9.10.2.

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     11.1.4 CONTRACTOR SHALL USE ITS SUBCONTRACTOR GENERAL LIABILITY ROLLING
     WRAP-UP INSURANCE PROGRAM, Z-10, WHICH PROVIDES ADDITIONAL INSURED
     INCLUDING COMPLETED OPERATIONS COVERAGE, PRIMARY AND NON CONTRIBUTORY AND
     AGGREGATE PER PROJECT ENDORSEMENTS IN FAVOR OF THE OWNER AND CONTRACTOR.
     THE LIMITS OF LIABILITY SHALL BE $10,000,000 EACH OCCURRENCE, $10,000,000
     GENERAL AGGREGATE AND $10,000,000 PRODUCTS COMPLETED OPERATIONS AGGREGATE.
     COMPLETED OPERATIONS COVERAGE SHALL BE FOR A PERIOD OF 10 YEARS FOLLOWING
     SUBSTANTIAL COMPLETION. THE COST OF THE Z-10 INSURANCE SHALL BE BILLED AS A
     COST OF THE WORK.

     11.2 OWNER'S LIABILITY INSURANCE

     11.2.1 The Owner shall be responsible for purchasing and maintaining the
     Owner's usual liability insurance.

     11.3 PROPERTY INSURANCE

     11.3.1 Unless otherwise provided, the Owner shall purchase and maintain, in
     a company or companies lawfully authorized to do business in the
     jurisdiction in which the Project is located, property insurance written on
     a builder's risk "all-risk" or equivalent policy form in the amount of the
     initial Contract Sum, plus value of subsequent Contract modifications and
     cost of materials supplied or installed by others, comprising total value
     for the entire Project at the site on a replacement cost basis without
     optional deductibles. Such property insurance shall be maintained unless
     otherwise provided in the Contract Documents or otherwise agreed in writing
     by all persons and entities who are beneficiaries of such insurance, until
     final payment has been made as provided in Paragraph 9.10 or until no
     person or entity other than the Owner has an insurable interest in the
     property required by this Paragraph 11.4 to be covered, whichever is later.
     This insurance shall include interests of the Owner, the Contractor,
     Subcontractors and Sub-subcontractors in the Project.

     11.3.1.1 Property insurance shall be on an "all risk" or equivalent policy
     form and shall include, without limitation, insurance against the perils of
     fire (with extended coverage) and physical loss or damage including without
     duplication of coverage, theft, vandalism, malicious mischief, collapse,
     earthquake, flood, WATER DAMAGE, STORED MATERIAL, MATERIAL IN TRANSIT,
     windstorm, falsework, testing and startup, temporary buildings and debris
     removal including demolition occasioned by enforcement of any applicable
     legal requirements, and shall cover reasonable compensation for Architect's
     and Contractor's services and expenses required as a result of such insured
     loss.

     11.3.1.2 If the property insurance requires deductibles, the Owner shall
     pay costs not covered because of such deductibles.

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     11.3.1.3 This property insurance shall cover portions of the Work stored
     off the site, and also portions of the Work in transit.

     11.3.1.4 Partial occupancy or use in accordance with Paragraph 9.9 shall
     not commence until the insurance company or companies providing property
     insurance have consented to such partial occupancy or use by endorsement or
     otherwise. The Owner and the Contractor shall take reasonable steps to
     obtain consent of the insurance company or companies and shall, without
     mutual written consent, take no action with respect to partial occupancy or
     use that would cause cancellation, lapse or reduction of insurance.

     11.3.2 BOILER AND MACHINERY INSURANCE. The Owner shall purchase and
     maintain boiler and machinery insurance required by the Contract Documents
     or by law, which shall specifically cover such insured objects during
     installation and until final acceptance by the Owner; this insurance shall
     include interests of the Owner, Contractor, Subcontractors and
     Sub-subcontractors in the Work, and the Owner and Contractor shall be named
     insured.

     11.3.3 LOSS OF USE OF INSURANCE. The Owner, at the Owner's option, may
     purchase and maintain such insurance as will insure the Owner against loss
     of use of the Owner's property due to fire or other hazards, however
     caused. The Owner waives all rights of action against the Contractor for
     loss of use of the Owner's property, including consequential losses due to
     fire or other hazards however caused.

     11.3.4 If during the Project construction period the Owner insures
     properties, real or personal or both, at or adjacent to the site by
     property insurance under policies separate from those insuring the Project,
     or if after final payment property insurance is to be provided on the
     completed Project through a policy or policies other than those insuring
     the Project during the construction period, the Owner shall waive all
     rights in accordance with the terms of Subparagraph 11.4.7 for damages
     caused by fire or other causes of loss covered by this separate property
     insurance. All separate policies shall provide this waiver of subrogation
     by endorsement or otherwise.

     11.3.5 Before an exposure to loss may occur, CONTRACTOR shall file with the
     OWNER a CERTIFICATE OF INSURANCE that includes insurance coverages required
     by this Paragraph 11.4. Each CERTIFICATE shall contain a provision that the
     policy will not be canceled or allowed to expire, and that its limits will
     not be reduced, until at least 30 days' prior written notice has been given
     to the OWNER.

     11.3.6 WAIVERS OF SUBROGATION. The Owner and Contractor waive all rights
     against (1) each other and any of then subcontractors, sub-subcontractors,
     agents and employees, each of the other, and (2) the Architect, Architect's
     consultants, separate contractors described in Article 6, if any, and any
     of their subcontractors, sub-subcontractors, agents and employees, for
     damages caused by fire or other causes of loss to the extent covered by
     property insurance obtained pursuant to this Paragraph 11.4, or other
     property insurance applicable to the Work, except such rights as they have
     to proceeds of such insurance held by the Owner as fiduciary. The Owner or
     Contractor, as appropriate, shall require of the Architect, Architect's
     consultants, separate contractors described in Article 6, if any, and the
     subcontractors, sub-subcontractors, agents and employees of any of them, by
     appropriate agreements, written where legally required for validity,
     similar waivers each in favor of other parties enumerated herein. The
     policies shall provide such waivers of subrogation by endorsement or
     otherwise. A waiver of subrogation shall be effective as to a person or
     entity even though that person or entity would otherwise have a duty of
     indemnification, contractual or otherwise, did not pay the insurance
     premium directly or indirectly, and whether or not the person or entity had
     an insurable interest in the property damaged.

     11.3.7 A loss insured under CONTRACTOR'S property insurance shall be
     adjusted by the CONTRACTOR and made payable to the Owner and Contractor for
     the benefit of the insureds, as their interests may appear, subject to
     requirements of any applicable mortgagee clause and of Subparagraph
     11.4.10. The Contractor shall pay Subcontractors their just shares of
     insurance proceeds received by the Contractor, and by

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     appropriate agreements, written where legally required for validity, shall
     require Subcontractors to make payments to their Sub-subcontractors in
     similar manner.

     11.3.8 If required in writing by a party in interest, the Owner and
     Contractor shall upon occurrence of an insured loss, give bond for proper
     performance of the Owner's and Contractor's duties. The cost of required
     bonds shall be charged against proceeds received. The Owner and Contractor
     shall deposit in a separate account proceeds so received, which the Owner
     and Contractor shall distribute in accordance with such agreement as the
     parties in interest may reach, or in accordance with an arbitration award
     in which case the procedure shall be as provided in Paragraph 4.6. If after
     such loss no other special agreement is made and unless the Owner
     terminates the Contract for convenience, and to the extent funds are
     available replacement of damaged property shall be performed by the
     Contractor after notification of a Change in the Work in accordance with
     Article 7.

     11.3.9 The Owner-Contractor shall have power to adjust and settle a loss
     with insurers unless one of the parties in interest shall object in writing
     within five days after occurrence of loss to the Owner's Contractor's
     exercise of this power; if such objection is made, the dispute shall be
     resolved as provided in Paragraphs 4.5 and 4.6. The Owner-Contractor shall,
     in the case of arbitration, make settlement with insurers in accordance
     with directions of the arbitrators. If distribution of insurance proceeds
     by arbitration is required the arbitrators will direct such distribution.

     11.3.10 Owner agrees to release, defend, hold harmless and indemnify
     Contractor from all damages and costs including deductible expense which
     (1) arise from terrorist attacks, domestic or foreign, and (2) to the
     extent set forth in Subparagraph 10.3.3 material or substance, including
     mold, mildew, fungi or other microbial conditions, whether or not such
     loss, damage or costs are covered by any insurance maintained or purchased
     by Owner or Contractor Such damages and costs shall include but are not
     limited to: the Work itself, architect's fees, loss resulting from laws or
     ordinances, pollution clean up expenses, "soft costs", and delay in opening
     expenses. Owner agrees that Contractor shall not be obligated to continue
     performance or complete the project or the Work until funds sufficient to
     cover the cost of repair or replacement of the Work damaged by perils,
     insured or not, are placed in escrow and available for the benefit of and
     to pay, Contractor and it's subcontractors, and their suppliers for all
     costs incurred in their repair, replacement and completion of the Work. The
     placement of such funds in escrow and the execution of a contract Change
     Order mutually acceptable to Contractor and Owner adjusting the Contract
     Sum and Contract Time shall be an express condition precedent to
     Contractor's obligation to repair, replace or complete the Work.

     11.4 PERFORMANCE BOND AND PAYMENT BOND

     11.4.1 The 0wner Shall have right to require to Contractor to furnish bonds
     covering faithful performance of the Contract and payment of obligations
     arising thereunder as stipulated in bidding requirements or specifically
     required in the Contract Documents on the date of execution of the
     Contract.

     11.4.2 Upon the request of any person or entity appearing to be a potential
     beneficiary of bonds covering payment of obligations arising under the
     Contract, the Contractor shall promptly furnish a copy of the bonds or
     shall permit a copy to be made.

ARTICLE 12 UNCOVERING AND CORRECTION OF WORK

     12.1 UNCOVERING OF WORK

     12.1.1 If a portion of the Work is covered contrary to the Architect's
     request or to requirements specifically expressed in fee Contract
     Documents, it must, if required in writing by the Architect, be uncovered
     for the Architect's examination and be replaced at the Contractor's expense
     without change in the Contract Time.

     12.1.2 If a portion of the Work has been covered which the Architect has
     not specifically requested to examine prior to its being covered, the
     Architect may request to see such Work and it shall be uncovered by the
     Contractor If such Work is in accordance with the Contract Documents, costs
     of uncovering and replacement shall, by appropriate Change Order be at the
     Owner's expense. If such Work is not in accordance with the Contract
     Documents, correction shall be at the Contractor's expense unless the
     condition was caused by the Owner or a separate contractor in which event
     the Owner shall be responsible for payment of such costs.

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     12.2 CORRECTION OF WORK

     12.2.1 BEFORE OR AFTER SUBSTANTIAL COMPLETION

     12.2.1.1 The Contractor shall promptly correct Work rejected by the
     Architect or failing to conform to the requirements of the Contract
     Documents, whether discovered before or after Substantial Completion and
     whether or not fabricated installed or completed. Costs of correcting such
     rejected Work, including additional testing and inspections and
     compensation for the Architect's services and expenses made necessary
     thereby, shall be at the Contractor's expense.

     12.2.2 AFTER SUBSTANTIAL COMPLETION

     12.2.2.1 In addition to the Contractor's obligations under Paragraph 3.5,
     if, within one year after the date of Substantial Completion of the Work or
     designated portion thereof or after the date for commencement of warranties
     established under Subparagraph 9.9.1, or by terms of an applicable special
     warranty required by the Contract Documents, any of the Work is found to be
     not in accordance with the requirements of the Contract Documents, the
     Contractor shall correct it promptly after receipt of written notice from
     the Owner to do so unless the Owner has previously given the Contractor a
     written acceptance of such condition. The Owner shall give such notice
     promptly after discovery of the condition During the one-year period for
     correction of Work, if the Owner fails to notify the Contractor and give
     the Contractor an opportunity to make the correction, the Owner waives the
     rights to require correction by the Contractor and to make a claim for
     breach of warranty. If the Contractor fails to correct nonconforming Work
     within a reasonable time during that period after receipt of notice from
     the Owner or Architect, the Owner may correct it in accordance with
     Paragraph 2.4.

     12.2.2.2 The one-year period for correction of Work shall be extended with
     respect to portions of Work first performed after Substantial Completion by
     the period of time between Substantial Completion and the actual
     performance of the Work.

     12.2.2.3 The one-year period for correction of Work shall not be extended
     by corrective Work performed by the Contractor pursuant to this Paragraph
     12.2.

     12.2.3 The Contractor shall remove from the site portions of the Work which
     are not in accordance with the requirements of the Contract Documents and
     are neither corrected by the Contractor nor accepted by the Owner.

     12.2.4 The Contractor shall bear the cost of correcting destroyed or
     damaged construction, whether completed or partially completed, of the
     Owner or separate contractors caused by the Contractor's correction or
     removal of Work which is not in accordance with the requirements of the
     Contract Documents.

     12.2.5 Nothing contained in this Paragraph 12.2 shall be construed to
     establish a period of limitation with respect to other obligations which
     the Contractor might have under the Contract Documents. Establishment of
     the one-year period for correction of Work as described in Subparagraph
     12.2.2 relates only to the specific obligation of the Contractor to correct
     the Work, and has no relationship to the time within which the obligation
     to comply with the Contract Documents may be sought to be enforced, nor to
     the time within which proceedings may be commenced to establish the
     Contractor's liability with respect to the Contractor's obligations other
     than specifically to correct the Work.

     12.3 ACCEPTANCE OF NONCOMFORMING WORK

     12.3.1 If the Owner prefers to accept Work which is not in accordance with
     the requirements of the Contract Documents, the Owner may do so instead of
     requiring its removal and correction, in which case the Contract Sum will
     be reduced as appropriate and equitable. Such adjustment shall be effected
     whether or not final payment has been made.

ARTICLE 13 MISCELLANEOUS PROVISIONS

     13.1 GOVERNING LAW

     13.1.1 The Contract shall be governed by the law of the place where the
     Project is located.

     13.2 SUCCESSORS AND ASSIGNS

     13.2.1 The Owner and Contractor respectively bind themselves, their
     partners, successors, assigns and legal representatives to the other party
     hereto and to partners, successors, assigns and legal representatives of
     such other party in respect to covenants, agreements and obligations
     contained in the Contract Documents. Except as provided in Subparagraph
     13.2.2, neither party to the Contract shall assign the Contract as a whole
     without written consent of the

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     other. If either party attempts to make such an assignment without such
     consent, that party shall nevertheless remain legally responsible for all
     obligations under the Contract.

     13.2.2 The Owner may, without consent of the Contractor, assign the
     Contract to an institutional lender providing construction financing for
     the Project. In such event, the lender shall assume the Owner's rights and
     obligations under the Contract Documents. The Contractor shall execute all
     consents reasonably required to facilitate such assignment.

     13.3 WRITTEN NOTICE

     13.3.1 Written notice shall be deemed to have been duly served if delivered
     in person to the individual or a member of the firm or entity or to an
     officer of the corporation for which it was intended, or if delivered at or
     sent by registered or certified mail to the last business address known to
     the party giving notice.

     13.4 RIGHTS AND REMEDIES

     13.4.1 Duties and obligations imposed by the Contract Documents and rights
     and remedies available thereunder shall be in addition to and not a
     limitation of duties, obligations, rights and remedies otherwise imposed or
     available by law.

     13.4.2 No action or failure to act by the Owner, Architect or Contractor
     shall constitute a waiver of a right or duty afforded them under the
     Contract, nor shall such action or failure to act constitute approval of or
     acquiescence in a breach thereunder, except as may be specifically agreed
     in writing.

     13.5 TESTS AND INSPECTIONS

     13.5.1 Tests, inspections and approvals of portions of the Work required by
     the Contract Documents or by laws, ordinances, rules, regulations or orders
     of public authorities having jurisdiction shall be made at an appropriate
     time. Unless otherwise provided, the Contractor shall make arrangements for
     such tests, inspections and approvals with an independent testing
     laboratory or entity acceptable to the Owner, or with the appropriate
     public authority, and shall bear all related costs of tests, inspections
     and approvals. The Contractor shall give the Architect timely notice of
     when and where tests and inspections are to be made so that the Architect
     may be present for such procedures. The Owner shall bear costs of tests,
     inspections or approvals which do not become requirements until after bids
     are received or negotiations concluded.

     13.5.2 If the Architect, Owner or public authorities having jurisdiction
     determine that portions of the Work require additional testing, inspection
     or approval not included under Subparagraph 13.5.1, the Architect will,
     upon written authorization from the Owner, instruct the Contractor to make
     arrangements for such additional testing, inspection or approval by an
     entity acceptable to the Owner, and the Contractor shall give timely notice
     to the Architect of when and where tests and inspections are to be made so
     that the Architect may be present for such procedures. Such costs except as
     provided in Subparagraph 13.5.3, shall be at the Owner's expense.

     13.5.3 If such procedures for testing, inspection or approval under
     Subparagraph 13.5.1 and 13.5.2 reveal failure of the portions of the Work
     to comply with requirements established-by the Contract Documents, all
     costs made necessary by such failure including those of repeated procedures
     and compensation for the Architect's services and expenses shall be at the
     Contractor's expense.

     13.5.4 Required certificates of testing, inspections or approval shall,
     unless otherwise required by the Contract Documents, be secured by the
     Contractor and promptly delivered to the Architect.

     13.5.5 If the Architect is to observe tests, inspections or approvals
     required by the Contract Documents, the Architect will do so promptly and,
     where practicable, at the normal place of testing.

     13.5.6 Tests or inspections conducted pursuant to the Contract Documents
     shall be made promptly to avoid unreasonable delay in the Work.

     13.6 INTEREST

     13.6.1 Payments due and unpaid under the Contract Documents shall bear
     interest from the date payment is due at such rate as the parties may agree
     upon in writing or, in the absence thereof, at the legal rate prevailing
     from time to time at the place where the Project is located.

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     13.7 COMMENCEMENT OF STATUTORY LIMITATION PERIOD

     13.7.1 As between the Owner and Contractor:

          .1   BEFORE SUBSTANTIAL COMPLETION. As to acts or failures to act
               occurring prior to the relevant date of Substantial Completion,
               any applicable statute of limitations shall commence to run and
               any alleged cause of action shall be deemed to have accrued in
               any and all events not later than such date of Substantial
               Completion;

          .2   BETWEEN SUBSTANTIAL COMPLETION AND FINAL CERTIFICATE FOR PAYMENT.
               As to acts or failures to act occurring subsequent to the
               relevant date of Substantial Completion and prior to issuance of
               the final Certificate for Payment, any applicable statute of
               limitations shall commence to ran and any alleged cause of action
               shall be deemed to have accrued in any and all events not later
               than the date of issuance of the final Certificate of Payment;
               and

          .3   AFTER FINAL CERTIFICATE FOR PAYMENT. As to acts or failures to
               act occurring after the relevant date of issuance of the final
               Certificate for Payment, any applicable statute of limitations
               shall commence to run and any alleged cause of action shall be
               deemed to have accrued in any and all events not later than the
               date of any act or failure to act by the Contractor pursuant to
               any Warranty provided under Paragraph 3.5, the date of any
               correction of the Work or failure to correct the Work by the
               Contractor under Paragraph 12.2, or the date of actual commission
               of any other act or failure to perform any duty or obligation by
               the Contractor or Owner, whichever occurs last.

ARTICLE 14 TERMINATION OR SUSPENSION OF THE CONTRACT

     14.1 TERMINATION BY THE CONTRACTOR

     14.1.1 The Contractor may terminate the Contract if the Work is stopped for
     a period of 30 consecutive days through no act or fault of the Contractor
     or a Subcontractor, Sub-subcontractor or their agents or employees or any
     other persons or entities performing portions of the Work under direct or
     indirect contract with the Contractor, for any of the following reasons:

          .1   issuance of an order of a court or other public authority having
               jurisdiction which requires all Work to be stopped;

          .2   an act of government, such as a declaration of national emergency
               which requires all Work to be stopped;

          .3   because the Owner has not made payment within the time stated in
               the Contract Documents; AND HAS NOT NOTIFIED THE CONTRACTOR OF
               THE REASON FOR WITHHOLDING PAYMENT AS PROVIDED IN SUBPARAGRAPH
               9.4.1 OR

          .4   the Owner has failed to furnish to the Contractor promptly, upon
               the Contractor's request, reasonable evidence as required by
               Subparagraph 2.2.1.

     14.1.2 The Contractor may terminate the Contract if, through no act or
     fault of the Contractor or a Subcontractor, Sub-subcontractor, or their
     agents or employees or any other persons or entities performing portions of
     the Work under direct or indirect contract with the Contractor, repeated
     suspensions, delays or interruptions of the entire Work by the Owner as
     described in Paragraph 14.3 constitute in the aggregate more than 100
     percent of the total number of days scheduled for completion, or 120 days
     in any 365-day period, whichever is less.

     14.1.3 If one of the reasons described in Subparagraph 14.1.1 or 14.1.2
     exists, the Contractor may, upon seven days' written notice to the Owner
     and Architect, terminate the Contract and recover from the Owner payment
     for Work executed and for proven loss with respect to materials, equipment,
     tools, and construction equipment and machinery including ALL overhead,
     profit and damages.

     14.1.4 If the Work is stopped for a period of 60 consecutive days through
     no act or fault of the Contractor or a Subcontractor or their agents or
     employees or any other persons performing portions of the Work under
     contract with the Contractor because the Owner has persistently failed to
     fulfill the Owner's obligations under the Contract Documents with respect
     to matters important to the progress of the Work, the Contractor may, upon
     seven additional days' written notice to the Owner and the Architect,
     terminate the Contract and recover from the Owner as provided in
     Subparagraph 14.1.3.

     14.2 TERMINATION BY THE OWNER FOR CAUSE

     14.2.1 The Owner may terminate the Contract if the Contractor:

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          .1   persistently or repeatedly refuses or fails to supply enough
               properly skilled workers or proper materials;

          .2   fails to make payment to Subcontractors for materials or labor in
               accordance with the respective agreements between the Contractor
               and the Subcontractors;

          .3   persistently disregards laws, ordinances, or rules, regulations
               or orders of a public authority having jurisdiction; or

          .4   otherwise is guilty of substantial breach of a provision of the
               Contract Documents.

     14.2.2 When any of the above reasons exist, the Owner, upon certification
     by the Architect that sufficient cause exists to justify such action, may
     without prejudice to any other rights or remedies of the Owner and after
     giving the Contractor and the Contractor's surety, if any, seven days'
     written notice, terminate employment of the Contractor and may, subject to
     any prior rights of the surety:

          .1   take possession of the site and of all materials, equipment,
               tools, and construction equipment and machinery thereon owned by
               the Contractor;

          .2   accept assignment of subcontracts pursuant to Paragraph 5.4; and

          .3   finish the Work by whatever reasonable method the Owner may deem
               expedient. Upon request of the Contractor, the Owner shall
               furnish to the Contractor a detailed accounting of the costs
               incurred by the Owner in finishing the Work.

     14.2.3 When the Owner terminates the Contract for one of the reasons stated
     in Subparagraph 14.2.1, the Contractor shall not be entitled to receive
     further payment until the Work is finished.

     14.2.4 If the unpaid balance of the Contract Sum exceeds costs of
     finishing the Work, including compensation for the Architect's services and
     expenses made necessary thereby, and other damages incurred by the Owner
     and not expressly waived, such excess shall be paid to the Contractor. If
     such costs and damages exceed the unpaid balance, the Contractor or Owner,
     as the case may be, shall be certified by the Architect, upon application,
     and this obligation for payment shall survive termination of the Contract.

     14.3 SUSPENSION BY THE OWNER FOR CONVENIENCE

     14.3.1 The Owner may, without cause, order the Contractor in writing to
     suspend, delay or interrupt the Work in whole or in part for such period of
     time as the Owner may determine.

     14.3.2 The Contract Sum and Contract Time shall be adjusted for increases
     in the cost and time caused by suspension, delay or interruption as
     described in Subparagraph 14.3.1. Adjustment of the Contract Sum shall
     include profit. No adjustment shall be made to the extent:

          .1   that performance is, was or would have been so suspended, delayed
               or interrupted by another cause for which the Contractor is
               responsible; or

          .2   that an equitable adjustment is made or denied under another
               provision of the Contract.

     14.4 TERMINATION BY THE OWNER FOR CONVENIENCE

     14.4.1 The Owner may, at any time, terminate the Contract for the Owner's
     convenience and without cause.

     14.4.2 Upon receipt of written notice from the Owner of such termination
     for the Owner's convenience, the Contractor shall:

          .1   cease operations as directed by the Owner in the notice;

          .2   take actions necessary, or that the Owner may direct, for the
               protection and preservation of the Work; and

          .3   except for Work directed to be performed prior to the effective
               date of termination stated in the notice, terminate all existing
               subcontracts and purchase orders and enter into no further
               subcontracts and purchase orders.

     14.4.3 In case of such termination for the Owner's convenience, the
     Contractor shall be entitled to receive payment for Work executed, and
     costs incurred by reason of such termination, along with overhead and
     profit on the Work not executed.

WARNING: UNLICENSED PHOTOCOPYING VIOLATES U.S. COPYRIGHT LAWS AND WILL SUBJECT
THE VIOLATOR TO LEGAL PROSECUTION.


                                                                              32



                                  (SUNDT LOGO)

                                      SUNDT
                               CONSTRUCTION, INC.

December 13,2005

Mr. Rick Mason
Apollo Development
4615 East Elwood
Phoenix, Arizona 85040

RE:  RIVERPOINT CENTER (FORMERLY UNIVERSITY OF PHOENIX ONLINE CAMPUS AT
     RIVERPOINT) BUILDING & TENANT IMPROVEMENT GUARANTEED MAXIMUM PRICE
     AMENDMENT #2

Dear Rick,

It is our pleasure to present to you our Guaranteed Maximum Price proposal in
the incremental amount of $28,448,880 for the Building & Tenant Improvement
scope of work for the Riverpoint Center. Together with Amendment #1, Amendment
#2 now completes the scope of work for Riverpoint Center based on the documents
received thus far. The total project GMP is now a combined $107,669,619.

This proposal is based upon the following items:

     I.   GMP Summary (CSI Budget Reconciliation)

     II.  GMP Scope Assumptions and Clarifications

     III. List of Documents

     IV.  Project Schedule

     V.   Allowance Items

We thank you for your kind consideration and assure you we will do everything
possible to make this a successful project.

Respectfully Submitted,

SUNDT CONSTRUCTION, INC.


/s/ Martin Hedlund
- -------------------------------------
Martin Hedlund PE, CPC
Project Director

                           We Make Projects Work.(sm)

  1501 W.FOUNTAINHEAD PARKWAY - SUITE 600 - TEMPE, AZ (85282) - (480)293.3000 -
                        FAX (480)293.3079 - WWW.SUNDT.COM

           DALLAS - NOVATO - PHOENIX - SACRAMENTO - SAN DIEGO - TUCSON

CONTRACTOR   AZ: ROC068012-A    ROC068014-L-09 ROC078799-L-37 ROC076101-L-11
LICENSES         ROC068013-B-01 ROC078088-L-04 ROC076561-L-39 ROC067653-B
             CA: 453175-A, B, C-8, C-10 418833-A-B 511371-A-B
             NV: 22067-A-B


                          AMENDMENT NO. 2 TO AGREEMENT
                     BETWEEN OWNER AND CONSTRUCTION MANAGER

Pursuant to Paragraph 2.2. of the Agreement, dated June 18, 2004 between Apollo
Development Corporation (Owner) and Sundt Construction, Inc. (Construction
Manager), for the Site Work and Structure of Riverpoint Center, formerly known
as the University of Phoenix Online Campus at Riverpoint (the Project), the
Owner and Construction Manager establish a Guaranteed Maximum Price and Contract
Time for the Work as set forth below.

                                    ARTICLE 1
                            GUARANTEED MAXIMUM PRICE

The Construction Manager's Guaranteed Maximum Price for the Work, including the
estimated Cost of the Work as defined in Article 6 and the Construction
Manager's Fee as defined in Article 5, is Dollars ($28,448,880).

This Price is for the performance of the Work in accordance with the Contract
Documents listed and attached to this Amendment and marked Exhibits A through G
as follows:

Exhibit A   GMP Summary (CSI Budget Reconciliation) on which the Guaranteed
            Maximum Price is based, pages one through seven, dated December 13,
            2005.

Exhibit B   Assumptions and clarifications made in preparing the Guaranteed
            Maximum Price, dated December 13, 2005.

Exhibit C   Drawings, Specifications, addenda and General, Supplementary and
            other Conditions of the Contract on which the Guaranteed Maximum
            Price is based, dated December 13, 2005.

Exhibit D   Master project schedule.

Exhibit E   Alternate prices (not applicable).

Exhibit F   Unit prices (not applicable).

Exhibit G   Allowance items, page 1 dated December 13, 2005.

                                                                APPROVED

                                                         [Illegible]   12/22/05
                                                          INITIALS       DATE
                                                               RICK MASON
                                                        DIRECTOR OF CONSTRUCTION
                                                        APOLLO DEVELOPMENT CORP.

                                   ARTICLE II
                                  CONTRACT TIME

The date of Substantial Completion established by this Amendment is June 11,
2007.

OWNER:                                  CONSTRUCTION MANAGER:


By: /s/ William B. Swirtz               By: /s/ David S. Crawford
    ---------------------------------       ------------------------------------
Date:                                   Date: 12/13/05
      -------------------------------
Attest:                                 Attest: Illegible
        -----------------------------



GMP Amendment #2

                                                                
PROJECT:      Riverpoint Center                      CHANGE ORDER NO.:   TWO (2)
              4025 S. Riverpoint Parkway
              Phoenix, AZ 85040                      DATE:               December 13, 2005

                                                     ORDER NO:

CONTRACTOR:   SUNDT CONSTRUCTION. INC.               CONTRACT DATE:      6/18/2004
              1501 W. Fountainhead Pkwy, Suite 600
              Tempe, AZ 85282                        CONTRACT FOR:       Building & Tenant Improvements
                                                                         Riverpoint Center
                                                                         JOB NO.: 120571



THE CONTRACT (Form AIA A121/CMC-1991) BETWEEN APOLLO DEVELOPMENT CORPORATION AND
SUNDT CONSTRUCTION, INC. DATED JUNE 18, 2004 IS HEREBY AMENDED AS FOLLOWS:

                                                                             
   BUILDING AND TENANT IMPROVEMENT GMP PER GMP AMENDMENT NO. 2 DATED 12/09/05
   INCLUDING TERMS & CLARIFICATIONS CONTAINED THEREIN:                          $ 28,448,880.00

   THE SUBSTANTIAL COMPLETION DATE IS BASED ON THE GRADING AND DRAINAGE
   PERMIT RECEIVED ON 10/21/05, THE BUILDING PERMIT RECEIVED ON 11/15/05 AND
   THE NOTICE TO PROCEED LETTER DATED 6/1/05 AND APPROVED ON 6/15/05.

TOTAL CONTRACT CHANGE ORDER                                                     $ 28,448,880.00
THE ORIGINAL GUARANTEED MAXIMUM PRICE WAS                                       $          0 00
NET CHANGE OF PREVIOUS AUTHORIZED CHANGE ORDERS                                 $ 79,220,739.00
THE GUARANTEED MAXIMUM PRICE PRIOR TO THIS CHANGE ORDER WAS                     $ 79,220,739.00
THE GUARANTEED MAXIMUM PRICE WILL BE INCREASED BY THIS CHANGE ORDER IN
   THE AMOUNT OF                                                                  28,448,880.00
THE NEW GUARANTEED MAXIMUM PRICE INCLUDING THIS CHANGE ORDER WILL BE            $107,669,619.00



THE DATE OF SUBSTANTIAL COMPLETION OF THE PROJECT AS OF THIS CHANGE ORDER
IS JUNE 11, 2007.

OWNER
APOLLO DEVELOPMENT CORPORATION
4615 EAST ELWOOD
PHOENIX, AZ 85040


By: /s/ William B. Swirtz
    ---------------------------------
    William B. Swirtz
DATE:
      -------------------------------

CONTRACTOR:
SUNDT CONSTRUCTION, INC.
P.O. BOX 20687
PHOENIX, ARIZONA 85036

                                                                APPROVED
By: /s/ David S. Crawford
    ---------------------------------                    [Illegible]   12/22/05
    David S. Crawford                                     INITIALS       DATE
                                                               RICK MASON
Date: 12/13/05                                          DIRECTOR OF CONSTRUCTION
                                                        APOLLO DEVELOPMENT CORP.

DISTRIBUTION: OWNER                CONTRACTOR                              FIELD

EX-10.16

                                                                   Exhibit 10.16

(FTI PALLADIUM PARTNERS LOGO)                             FTI Palladium Partners
(Illegible)                                               (Illegible)

November 14, 2005

Mr. Brian Mueller
President
Apollo Group, Inc.
4615 East Elwood Street
Phoenix, AZ 85040

Dear Mr. Mueller:

1.   INTRODUCTION

     This letter confirms the engagement of FTI Palladium Partners, a division
     of FTI Consulting, Inc. and its wholly owned subsidiaries (collectively
     referred as FTI) by Apollo Group, Inc. ("you", "your" or "Apollo Group" or
     the "Company") to provide certain employees to the Company to assist it
     with the services described below (the "Engagement"). This letter of
     engagement and the related supporting schedules constitute the engagement
     contract (the "Engagement Contract") pursuant to which the Services will be
     provided.

2.   SCOPE OF SERVICES

     To the extent requested by you. FTI will provided the following individuals
     to work with you and your team in connection with the services (the
     "Services") outlined below:

     -    Provide the services of Joseph L. D'Amico (D'Amico") to serve as the
          interim chief financial officer (the "CFO") of the Company, reporting
          directly to the President and Chief Executive officer. In the capacity
          of interim CFO, D'Amico will enjoy the same full and free access to
          the Board of Directors and its Committees as other members of the
          senior management of Apollo Group as specified in the Corporate
          Governance Guidelines of the Board of Directors and, to the extent
          determined by the Board of Directors from time to time, will be
          granted the right to attend and participate (but not vote) in the
          meetings of the Company's Board of Directors, or its Committees, as an
          observer (it being understood that the Board of Directors of the
          Company may from time to time meet in "executive session" or otherwise
          ask that certain or all non-directors not attend such meeting or a
          portion thereof) (such role referred to as "Board observer");

     -    Provide oversight and consultation by Greg Rayburn, FTI, Palladium
          Partners founder and practice leader, on specific issues as determined
          by the Company and


                                       -1-



     -    To the extent determined by mutual agreement of you and D'Amico,
          provide the services of other temporary employees (the "Temporary
          Employees") to support D'Amico in his role as CFO and in the
          accomplishment of the following specific aspects of the Service in
          coordination with the Company's senior management and assigned
          permanent employees:

          1.   Lead the Company's efforts to determine the appropriate
               accounting for stock options given the results of the recent
               investigation and restate the financial statements for required
               periods.

          2.   Lead the Company's efforts to determine and minimize to the
               extent possible the tax impacts of the stock option dating issue;

          3.   Lead the Company's efforts to catch up on all filing requirements
               of the NASDAC and SEC;

          4.   Lead the Company's efforts hire a permanent CFO;

          5.   Work with management to insure that the books and records are
               compliant in all respects and to insure that the Company is
               responsive to third party auditors and facilitates completion of
               the audit process;

          6.   Work with management to further identify and implement both
               short-term and long-term process improvement and control
               initiatives within the finance organization;

          7.   Work with management on any acquisitions that may be
               contemplated;

          8.   Assist in the communication with investors, vendors, regulators
               as required;

          9.   Oversee the day-to-day and month-end-functions of the accounting
               organization and

          10.  Assist as appropriate in any treasury activities;

          11.  Assist in the preparation and analysis of operating and financial
               budgets for future periods;

          12.  Assist management, if required, in the development of and
               Implementation of cash management strategies, tactics and
               processes;

          13.  Assist management, if required, with the development of a revised
               business plan, and such other related forecasts as appropriate
               and

          14.  Provide such other similar services as may be requested by the
               Board of Directors or President;


                                       -2-



     We will keep you informed as to our staffing and will not add additional
     Temporary Employees to the assignment without first obtaining your consent
     that such additional resources are required and do not duplicate the
     activities of other employees or professionals. Moreover, we will attempt
     to utilize Company personnel to fulfill such roles and will take such steps
     as may be necessary to avoid duplication with the Company's other
     professionals. Furthermore, we will obtain your consent as to the areas of
     responsibility being filled by all Temporary Employees and will adjust the
     staffing level upwards or downwards as you direct.

     Based upon our understanding of the situation and the importance of getting
     the restatement done as quickly as possible, we contemplate needing at
     lease two (maybe 3) substantially full time Temporary Employees to assist
     D'Amico to manage specific aspects of the restatement process as well as
     the part time, specific expertise to address issues such as taxes. D'Amico
     will lay out a specific plan next week to review with you so you understand
     why these individuals are needed and his strategy for getting the project
     done quickly and efficiently.

     In addition to these specific services, we understand that at your request
     and to the extent appropriate, such Temporary Employees may be asked to
     participate in meetings and discussions with the Company, its lenders,
     other constituencies and their respective professionals.

     The Services of the Temporary Employees may be performed by FTI or by any
     subsidiary of FTI, as FTI shall determine in consultation with the Company.
     FTI may also provide, with the prior approval of the Company, non-officer
     Services through agents or independent contractors. References herein to
     FTI and its employees shall be deemed to apply also, unless the context
     shall otherwise indicate, to employees of each such subsidiary and to any
     such agents or independent contractors and their employees. Prior to
     providing services hereunder, each Temporary Employees, FTI subsidiary,
     agents, independent contractor and employee thereof shall execute a
     confidentiality agreement similar to the Confidentiality Agreement (as
     defined in Section 4). Additionally, each Temporary Employee and FTI or FTI
     Subsidiary employee, agent, or independent contractor assigned to the
     Services for the Company shall also agree to abide by the terms and
     conditions of all policies and procedures of the Company, including without
     limitation the Company's Business Conduct Policy, Corporate Governance
     Guidelines, Code of Ethics and Whistleblower Policy.

3.   NO ASSURANCE ON FINANCIAL DATA

     Because of the time and scope limitations implicit in the Engagement, the
     depth of our analyses and verification of the data is significantly
     limited. We understand that our Temporary Employees are not being requested
     to perform and audit or to apply generally accepted auditing standards or
     procedures. We further understand that all of our professionals are
     entitled, except in the event that it is unreasonable to do so, to rely on
     the accuracy and validity of the data disclosed to us or supplied to us by
     the Company's officers, directors, employees and agents. We will not be
     under any obligation to update data submitted to us or extend our
     activities beyond the scope set.


                                       -3-


     forth herein, unless we agree to do so upon your specific request. Further,
     due to the factors referenced in this paragraph, any periodic oral and/or
     written reports provided by us will not provide assurances concerning the
     integrity of the information used in our analyses an on which our findings
     and advice to you may be based.

4.   Privileged and Confidential Information and Work Product

     The Company acknowledges that all advice (written or oral) given by the
     Temporary Employees to the Company in Connection with the Engagement is
     intended solely for the benefit and use of the Company (limited to the
     Board of Directors and management) and we understand that the Company has
     agreed to treat any advice received from us, whether orally or in writing,
     confidential and, except as provided in this Engagement Contract, will not
     publish, distribute or disclose in any manner any advice developed by or
     received from us without our prior written approval (except to the
     Company's respective officers, directors employees, attorneys, advisors,
     lenders, or prospective tender and person who have a need to know such
     information in order to perform services under this Engagement Contract.
     Such approval shall not be unreasonably withhold, Our approval is not
     needed if (a) the advice sought its required to be disclosed by law or the
     rules of the NASDAQ Market or any stock exchange upon which the Company's
     stock is listed or by an order binding on the Company or us, issued by a
     court having competent jurisdiction over the Company or us, as applicable
     (unless such order specifies that the advice to be disclosed is to be
     placed under seal) provided however that the Company shall provide FTI with
     prompt written notice of such requirement, (b) such information is
     otherwise publicly available (c) the disclosure is of information in the
     possession of the Company prior to this Engagement or is independently
     developed by the Company, or (d) the disclosure is of information acquired
     from a third party who, to the Company's knowledge owes no obligation of
     confidence with respect to such information.

     We agree that all non-public, confidential or proprietary information
     ("information") that is received by us from the Company or the Company's
     accountants or outside counsel in connection with this engagement will be
     subject to the separate Confidentiality Agreement dated as of November
     ____, 2006 (the "Confidentiality Agreement") between FTI and the Company.

5.   Fees

     Our agreed upon compensation for the services to be rendered pursuant to
     this letter agreement is set forth on Schedule I. FTI will also bill for
     reasonable allocated and direct expenses as set forth on Schedule I. For
     D'Amico only, we will bill you $5,000 per month as an allowance for costs
     in lieu of hotel, transportation and meals. The Company will also pay for
     D'Amico's round trip first class (or upgraded) air travel from Chicago to
     Phoenix except when D'Amico stays over any weekend in Scottsdals and does
     not return to Chicago.

     We will require a retainer (the "Retainer") of $200,000 due upon the
     execution of this.


                                       -4-




     Engagement Contract. We will further submit to the Company monthly invoices
     (or more frequently at FTI's discretion) for services rendered and expenses
     incurred by additional temporary employees, which are due within 15
     business days of receipt. Upon the conclusion of this engagement, the
     Retainer either will be returned to the Company upon payment in full of all
     of our outstanding Invoices or, in our sole discretion, applied to any
     outstanding invoice.

     It is understood that if employees of FTI are required to testify at any
     administrative or judicial proceeding relating to this matter (whether
     during the term of this letter agreement or after termination), FTI will be
     compensated by the Company at the regular hourly rates for each such
     employee, in effect at the time, (except that during the term of this
     letter agreement any compensation for such activities by Temporary Employee
     assigned full time to the Company shall be subsumed by the monthly
     compensation rate being invoiced to the Company) and reimbursed for
     reasonable out-of-pocket expensed (including counsel fees).

     The Company agrees to promptly notify FTI if it extends (or solicits the
     possible interest in receiving) an offer of employment to a principal or
     employee of FTI involved in this Engagement and agrees that it will pay FTI
     a cash fee, upon hiring equal to 150% of the aggregate first year's
     annualized compensation, including any guaranteed or target bonus to be
     paid to FTI's former principal or employee that the Company or any of its
     subsidiaries or affiliates hires at any time up to one year subsequent to
     the date of the final invoice rendered by FTI with respect to this
     Engagement.

6.   Conflicts of Interests

     Based on the list of interested parties (the "Potentially Interested
     Parties") provided by you, we have undertaken a limited review of our
     records to determine FTI's professional relationships with the Company and
     its significant parties-in-interest. From the results of such review, we
     are not aware of any conflicts of interests or relationships that would
     preclude us from performing the above Services for you.

     As you know however, we are a large consulting firm with numerous offices
     throughout the United States. We are regularly engaged by new clients,
     which may include one or more of the Potentially interested Parties. We
     will not accept an engagement that directly conflicts with this Engagement
     without your prior written consent.

7.   Indemnification/ Limitation of Liability

     The Company agrees to indemnify, hold harmless and defend FTI against any
     and all losses, claims, damages, liabilities, penalties, judgments, awards,
     amounts, paid in settlement, reasonable out-of-pocket costs, fees, expenses
     and disbursements including, without limitation, the reasonable
     out-of-pocket costs, fees, expenses and disbursements, as and when incurred
     of investigating preparing or defending any action, suit proceeding or
     investigation (whether or not in connection with proceedings


                                       -5-



     or litigation in which FTI is a party), directly or indirectly caused by,
     relating to, based upon, arising out of or in connection with the
     engagement of FTI by the Company or any services rendered pursuant to such
     engagement; provided that the Company will not be responsible for payment
     of indemnification amounts hereunder (and any indemnified person shall
     reimburse the Company for indemnification amounts already paid) that are
     determined by a final judgment of all court of competent jurisdiction to
     have resulted from an indemnified person's bad faith, self dealing, gross
     negligence or willful misconduct. These indemnification provisions extend
     to the officers, directors, principals, members, managers, stockholders,
     employees, representatives, agents and counsel of FTI and shall survive the
     termination or expiration of the engagement. The contract rights to
     indemnification conferred in this paragraph shall not be exclusive of any
     other right that nay indemnified person may have or hereafter acquire under
     any statute, agreement, order of a bankruptcy court of pursuant to any
     directors and officers liability, insurance policy (including any such
     policy identified in Schedule I). The Company shall also reimburse any
     indemnified person for all reasonable out-of-pocket expense incurred in
     connection with enforcing such indemnified person's rights under this
     letter agreement.

     In addition to the above indemnification, FTI personnel serving as
     employees of the Company will be entitled to the benefit of the most
     favorable indemnities provided by the Company to its officers and
     directors, whether under the Company's by-laws, certificate of
     incorporation, by contract or otherwise.

     The Company agrees that it will specifically include and cover D'Amico (and
     any other employee of FTI who, at the request of the Board of Directors of
     the Company, FTI agrees will serve as an officer of the Company) under the
     Company's policies for directors' and officers' insurance. This Company
     agrees to also maintain insurance coverage for D'Amico for a period of not
     less than two (2) years following the date of termination of such FTI
     employee's services hereunder. If such coverage is not provided by the
     Company, then FTI shall have the right to terminate this letter agreement
     upon notice to the Company. The provisions of this section 7 are in the
     nature of contractual obligation and no change in applicable law or the
     Company's charter, by-laws or other organizational documents or policies
     shall affect any of Mr. D'Amico's rights hereunder. The obligations of the
     parties as reflected herein shall survive the termination of the
     Engagement.

     The parties intend that an independent contractor relationship will be
     created by this letter agreement. As an independent contractor, FTI will
     have complete and exclusive charge of the management and operation of its
     business, including hiring and paying the wages and other compensation of
     all its employees and agents, and paying all bills, expenses and other
     charges incurred or payable with respect to the operation of its business.
     None of FTI's employees serving as a Temporary Employee, including D'Amico
     in his capacity as CFO of the Company, will be entitled to receive from the
     Company any salary, bonus, compensation, vacation pay, sick leave,
     retirement, pension or social security benefits, workers compensation,
     disability, unemployment insurance benefits or any other Company employees
     benefits. FTI will be responsible


                                       -6-


     for all employment, withholding, income and other taxes incurred in
     connection with the operation and conduct of its business (including those
     related to D'Amico and the Temporary Employees).

     The Company acknowledges and agrees that FTI shall have no liability as a
     result of your retention of FTI, the execution and delivery of this
     Engagement Contract, the provision of services or other matters relating to
     or arising from this Engagement Contract, other than liabilities that shall
     have been determined by final non-appealable order of a court of competent
     jurisdiction to have resulted from the gross negligence or willful
     misconduct of FTI or its employees. Without limiting the generality of the
     foregoing, in no event shall FTI be liable for consequential, indirect or
     punitive damages, damages for lost profits or opportunities or other like
     damages or claims of any kind. In no event shall FTI's liability under this
     Engagement Contract exceed the total amount of professional fees paid by
     you to FTI under this Engagement Contract.

8.   WAIVER OF JURY TRIAL/DISPUTE RESOLUTION

     The Company agrees that neither it nor any of its assignees or successors
     shall (a) seek a jury trial in any lawsuit, proceeding, counterclaim or any
     other action based upon or arising out or in connection with the engagement
     of FTI by the Company or any services rendered pursuant to such engagement
     or (b) seek to consolidate any such action with any other action in which a
     jury trial cannot be or has not been waived. The provisions of this
     paragraph have been fully discussed by the Company and FTI and shall be
     subject to no exceptions.

9.   TERM OF ENGAGEMENT

     This letter agreement shall be effective as of the date hereof and shall
     continue in effect until termination or completion of our engagement
     hereunder. Either you or we may terminate this letter agreement and our
     engagement any time upon the giving of at least ten (10) business days
     prior written notice to the other party or immediately by either party for
     Cause or upon a material breach of this Agreement by the other party
     Termination shall not affect our right to receive payment for services
     performed reimbursement for reasonable out-of-pocket expenses properly
     incurred (in accordance with the terms of this letter agreement), except in
     the event of a termination by the Company for Cause or due to a material
     breach by FTI of this Agreement, or the Company's obligations under section
     7 herein. In the event of termination, other than by the Company for Cause
     or material breach by FTI, prior to the end of a calendar month, you agree
     to pay us a pro rata portion of any set monthly compensation based upon the
     number of days elapsed in the month up to the effective time of
     termination.


                                       -7-



     For purposes of this Engagement Contract, "Cause" shall mean if (i) any of
     the offices or directors of the Company or the officers, directors,
     principals or other management level employees of FTI is convicted of,
     admits guilt in a written document filed with a court of competent
     jurisdiction to, or enters a plea of nolo contendere to, an allegation of
     fraud, embezzlement, misappropriation or any felony, (ii) any of the
     officers of the Company willfully disobeys a lawful direction of the Board
     of Directors; or (iii) a material breach of any of FTI's or the Company's
     material obligations under this Engagement Contract which is not cured
     within thirty (30) days of the written notice to breaching party describing
     in reasonable detail the nature of the alleged breach.

     If any provision of this Engagement Contract shall be invalid or
     unenforceable, in whole or in part, then such provision shall be deemed to
     be modified or restricted to the extent and in the manner necessary to
     render the same valid and enforceable, or shall be deemed excluded from
     this letter agreement, as the case may require, and this letter agreement
     shall be construed and enforced to the maximum extent permitted by law as
     if such provision had been originally incorporated herein as so modified or
     as if such provision had not been originally incorporated herein, as
     applicable.

     This Engagement Contract and each related confidentiality agreement
     constitute the entire understanding between the parties with respect to the
     subject matter and supercede all prior written and oral proposals,
     understandings, agreements and/or representation, all of which are merged
     herein. Any amendment or modification of this letter agreement shall be in
     writing and executed by each of the parties hereto.

10.  GOVERNING LAW AND JURISDICTION

     This Engagement Agreement shall be governed by and construed and enforced
     in accordance with the laws of the State of New York. The Courts of New
     York shall have exclusive jurisdiction in relation of any claim, dispute or
     difference concerning the Engagement Agreement and any matter arising from
     it. The parties hereto irrevocably waive any right they may have to object
     to any action being brought in these Courts, to claim that the action has
     been brought to an inconvenient forum or to claim that those Courts do not
     have jurisdiction.

11.  NOTICE

     All notices required or permitted to be delivered under this Engagement
     Contract shall be sent, if to us, to the address set forth above, to the
     attention of Eric Miller, and if to you to the address for you set forth
     above, to the attention of your General Counsel, or such other name or
     address as may be given in writing to the other party. All notices under
     the Engagement Contract shall be sufficient if delivered by facsimile or
     overnight mail. Any notice shall be deemed to the given only upon actual
     receipt.

12.  CONTINUATION OF TERMS

     The terms of the Engagement Contract that by their context are intended to
     be performed after termination or expiration of this Engagement Contract,
     including but not

                                       -8-



     limited to, section 4 and section 7, are intended to survive such
     termination or expiration and shall continue to bind all parties.

13.  CITATION OF ENGAGEMENT

     Notwithstanding anything to the contrary contained herein, after the
     engagement of FTI becomes a matter of public record, we shall have the
     right to disclose our retention by the Company or the successful completion
     of its services hereunder in marketing or promotional materials placed by
     FTI, at its own expenses, in financial and other newspapers or otherwise.

                   REMAINDER OF PAGE INTENTIONALLY LEFT BLANK


                                       -9-


We look forward to working with you on this matter. Please sign and return a
copy of this letter signifying your agreement with the terms and provisions
herein. If you have any questions, please contact Greg Rayburn at 336-407-4857
(cell) or D'Amico at 917-992-1266 (cell)

Very truly yours,

FTI Consulting, Inc.


By: /s/ Joseph L. D'Amico
    ---------------------------------
    Joseph L. D'Amico
    Senior Managing Director

Date:
      ------------------------------


Agreed by: Apollo Group, Inc.


By:
    ---------------------------------
    Brian Mueller
    President

Date:
      -------------------------------


By:
    ---------------------------------
    John G. Sperling
    Chairman

Date:
      -------------------------------


                                      -10-



                                                                      SCHEDULE 1

                            Compensation Requirements

FTT will be paid a monthly fee in the amount of $125,000 on the first business
day of each month for the full-time engagement of Joe D'Amico in the performance
of the Services Fees in connection with this Engagement for the additional
Temporary Employees will be based upon the time spent in providing the Services,
multiplied by our standard hourly rates, which are eligible for an agreed upon
discount, are summarized as follows:

                                    Per Hour

                           
Senior Managing Director      $595-655
Director / Managing Director  $435-590
Associates / Consuitants      $215-405
Administrative                $ 95-176



As deemed appropriate and necessary and in accordance with the Engagement
Contract, in addition to the Temporary Employees, experts or individuals from
FTI's specialty service areas, including but not limited to tax and/or insurance
consulting, may be called upon to perform specific advising form time to time.
Fees for these individuals will be based upon their time reasonably spent in
providing those specialty services, multiplied by their hourly rates.

Hourly rates are subject to periodic adjustment. We will notify you of any such
changes to our rates. Note that we do not provide any assurance regarding the
outcome of our work and our fees will not be contingent on the results of such
work. In addition to the fees outlined above, FTI will also bill for reasonable
allocated and direct expenses which are likely to be incurred on your behalf
during this Engagement. Allocated expenses include the cost of items which are
not billed directly to the engagement, including administrative support and
other overhead expenses that are not billed through as direct reimbursable
expenses, and are calculated at 6.0% if FTI's standard professional rates,
Direct expenses include reasonable and customary out-of-pocket, expenses which
are billed directly to the Engagement such as certain telephone, overnight mail,
messenger travel meals, accommodations and other expenses specifically related
to an Engagement.

Performance Fee

We expect that our services will be of substantial value to Apollo and such
value may exceed the contractual fees charged by FTI. The Company may, in the
sole discretion of the Chairman and President, subject to the approval of the
Board of Directors or any of its Committees, pay FTI a peroformance fee in an
amount they determine should any such fee


                                      -11-



be warranted. The performance fee, if any, can be paid in each or freely
tradable and unrestricted Apollo common stock.


                                      -12-

EX-10.17

Exhibit 10.17

CONSULTING AGREEMENT

     THIS CONSULTING AGREEMENT (this “Agreement”) made this 13^th day of February 2007, by and between Apollo Group, Inc, an Arizona Corporation, (the “Company”), and Brian L. Swartz having a mailing address at 6355 East Osborn Road, Scottsdale, Arizona 85251 (“the Consultant”).

1. Engagement. Effective as of December 15, 2006, (the “Effective Date”) the Company has engaged Consultant as an independent contractor to assist the Company’s Senior Management in financial and accounting related projects. The Consultant’s work will be prioritized by the Company’s CFO and will require travel as necessary to the Company’s various locations outside of Phoenix. As part of his consulting services pursuant to this Agreement, Consultant may be required to perform duties on a temporary basis as the Company’s chief accounting officer. In such capacity, Consultant will have officer responsibilities and will be designated an officer under Section 16 of the Securities Exchange Act. However, Consultant shall at all time remain an independent consultant with respect to the duties performed pursuant to this Agreement. The Consultant shall devote 100% of his working time to the Company during this contract term, but the Consultant shall not be subject to the control or direction of the Company with respect to the method or manner by which he performs the duties required of him pursuant to this Agreement, but shall be responsible for completing all assigned tasks and duties within the time frame established by the Company.

2. Compensation. Consultant shall be paid $55,000 per month. The Company will pay the Consultant in arrears two (2) times a month on the 15th and the last day of each month. For any partial months worked, the Consultant’s daily rate shall be calculated as 1/20^th of the monthly retainer above. In addition, Consultant shall be reimbursed for all reasonable travel, entertainment and other business expenses, in accordance with policies established by the Company. Other than as provided in this Paragraph 2, and Paragraph 6, the Consultant shall not be entitled to any other compensation, benefits or payments from the Company

3. Term; Termination. The term of this Agreement shall not exceed six months, unless otherwise extended by mutual agreement, measured from the Effective Date. This Agreement may be terminated at any time during that six-month period by the Company by giving 60 days advance notice, but in no event shall this Agreement expire prior to April 30, 2007. In the event this Agreement is terminated by the Company prior to April 30, 2007 without the consent of the Consultant, the Consultant shall be entitled to the amounts due under this Agreement through April 30, 2007, unless such termination is due to the Consultant’s willful misconduct.

4. Compliance. In performing services hereunder, Consultant shall comply with all applicable laws and regulations and with all written policies and procedures of the Company.

5. Independent Contractor. Consultant shall at all times serve as an independent contractor and not as an employee of the Company. It is the express intention of the parties to this Agreement that the Consultant is an independent contractor, and the Consultant shall be classified by the Company as such for all employee benefit and other employee purposes, and he

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shall not be treated as, or hold himself out as, an employee, agent, joint venturer, or partner of the Company. Accordingly, nothing in this Agreement shall be interpreted or construed as creating or establishing an employment relationship between the Company and the Consultant. Without limiting the generality of the foregoing, Consultant hereby agrees and confirms that his compensation as a consultant pursuant to this Agreement takes into account the fact that he shall not be entitled to participate in any employee benefit plans, policies or programs of the Company or any of its affiliates, including (without limitation) group insurance or health benefit plans, workers’ compensation, disability insurance, vacation, sick pay, profit-sharing, stock options, stock purchase or other stock-based compensation plans, retirement benefits or 401(k) plan participation. Consultant shall be solely responsible for paying any and all federal, state and local taxes, including but not limited to self-employment taxes, or payments which may be due incident to payments made by the Company for services rendered under this Agreement.

6. Indemnification. For any duties the Consultant performs pursuant to this Agreement, including (without limitation) duties performed in his capacity as an officer of the Company, he shall be entitled to indemnification in accordance with the terms of the Indemnification Agreement in the form attached hereto as Exhibit A.

7. Confidential Information. Consultant shall hold all Confidential Information (as defined below) in strict confidence and not disclose any Confidential Information except as expressly provided herein and shall not use any Confidential Information for his own benefit or otherwise against the best interests of the Company or any of its Affiliates during the term of this Agreement or thereafter. If Consultant shall be required by subpoena or similar government order or other legal process (“Legal Process”) to disclose any Confidential Information, then Consultant shall provide the Company with prompt written notice of such requirement and cooperate if requested with the Company in efforts to resist disclosure or to obtain a protective order or similar remedy. Subject to the foregoing, if Confidential Information is required by Legal Process to be disclosed, then Consultant may disclose such Confidential Information but shall not disclose any Confidential Information for a reasonable period of time, unless compelled under imminent threat of penalty, sanction, contempt citation or other violation of law, in order to allow the Company time to resist disclosure or to obtain a protective order or similar remedy. If Consultant discloses any Confidential Information, then Consultant shall disclose only that portion of the Confidential Information which, in the opinion of counsel, is required by such Legal Process to be disclosed. Upon termination of this Agreement, Consultant shall return to the Company all Confidential Information in tangible form (including but not limited to electronic files) in his possession.

     As used herein, “Confidential Information” shall mean any information regarding the Company and/or its affiliates (whether written, oral or otherwise), received or obtained before, on or after the date hereof, which the Company or its affiliates do not make generally publicly available, including but not limited to product design, specification or other technical information, manufacturing or other process information, financial information, customer information, general business information, or market information, whether or not marked or designated as “Confidential,” “Proprietary” or the like, in any form, including electronic or optical data storage and retrieval mechanisms, and including all forms of communication, including but not limited to physical demonstrations, in-person conversations and telephone conversations, email and other means of information transfer such as facility tours, regardless of

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whether any such information is protected by applicable trade secret or similar laws, and including any work product of Consultant. The term “Confidential Information” shall not include information which: (i) is or becomes generally available to the public other than as a result of the disclosure by Consultant or another person bound by a confidentiality agreement with, or other legal or fiduciary or other obligation of secrecy or confidentiality to, the Company or another party with respect to such information; or (ii) becomes available to Consultant from a source other than the Company or any of its directors, officers, employees, agents, affiliates, representatives, or advisors, provided that such source is not bound by a confidentiality agreement with, or other legal or fiduciary or other obligation of secrecy or confidentiality to, the Company or another party with respect to such information.

8. Not Used.

9. Copyrights. All material produced by Consultant relating to the Company or its business during or subsequent to the term of this Agreement, whether produced by Consultant alone or with others and whether or not produced on the Company’s premises or otherwise, shall be considered work made for hire and the property of the Company (“Company Copyrights”). Consultant shall execute and deliver such documentation as may be requested by the Company to evidence its ownership of all Company Copyrights. Consultant shall also execute and deliver such documentation and provide the Company, at the Company’s expense, all proper assistance to secure for the Company and maintain for the Company’s benefit all copyrights, including any registrations and any extensions or renewals thereof, on all Company Copyrights, including any translations.

10. Not Used.

11. Use and Disclosure of Ideas, Etc. Consultant shall not use or disclose to the Company any subject matter in the course of performing this Agreement, including ideas, processes, designs and methods, unless he has the right to so use or disclose.

12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona and the United States without regard to the conflicts of law principles thereof. (b) This Agreement supersedes any and all other agreements, either oral or written, between the parties hereto with respect to the subject matter hereof and contains all of the covenants and agreements between the parties with respect to the subject matter hereof. (c) The provisions of Paragraphs 4 through 12 of this Agreement shall survive its termination. (d) This Agreement may not be altered, amended or modified except by written instrument signed by the parties hereto. (e) Neither party shall be deemed the drafter of this Agreement and it shall not be construed or interpreted in favor of or against either party. (f) Section headings are for the convenience of the parties only and shall not be used in interpreting this Agreement. (g) If any provision of this Agreement shall be found by a court of competent jurisdiction to be unenforceable in any respect, then (i) the court shall revise such provision the least amount necessary in order to make it enforceable, and (ii) the enforceability of any other provision of this Agreement shall not be affected thereby. (h) Consultant may not assign this Agreement. The Company may assign with the Consultant permission this Agreement to any affiliate of the Company.

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective on the date first indicated above.

CONSULTANT

/s/ Brian L. Swartz
Brian L. Swartz

APOLLO GROUP, INC.

/s/ Joseph L. D’Amico

Printed Name: Joseph L. D’Amico

Title: Chief Financial Officer

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INDEMNIFICATION AGREEMENT

     This Indemnification Agreement (“Agreement”) is dated 13^th of February, 2007, and is by and between Apollo Group, Inc., an Arizona corporation (the “Corporation”) and the undersigned consultant and, from time to time, officer of the Corporation (“Consultant”).

     WHEREAS, Consultant proposes to serve as an independent contractor to the Corporation and may from time to time serve as an officer of the Corporation, as that term is defined in A.R.S. § 10-850.5; and

     WHEREAS, pursuant to the Corporation’s Bylaws and A.R.S. § 10-856, an officer may be indemnified to the maximum extent permitted by Arizona law;

     NOW, THEREFORE, in consideration of Consultant’s service as an independent contractor and an officer, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows.

     1. Definitions. For purposes of this Agreement, the following definitions shall apply:

          (a) “Expenses” means all costs and expenses, including attorney fees, reasonably related to a Proceeding;

          (b) “Liability” means the obligation to pay a judgment, settlement, penalty, or fine, including an excise tax assessed with respect to an employee benefit plan, or reasonable Expenses incurred with respect to a Proceeding, and includes obligations and Expenses that have not yet been paid but that have been or may be incurred; and

          (c) “Proceeding” means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal.

     2. Indemnification of Consultant. The Corporation shall indemnify Consultant to the maximum extent permitted by Arizona law. Without limiting the foregoing and subject to Section 4 below, the Corporation shall indemnify Consultant against any Liability incurred with respect to any Proceeding or claim arising from the status of Consultant as an individual who is or was an officer of the Corporation or who is or was serving at the Corporation’s request with respect to any subsidiary, affiliate, or employee benefit plan of the Corporation. The foregoing indemnification is expressly intended to, and shall, apply to any and all such Liability and Expenses arising on or after the date Consultant became an officer of the Corporation, even if prior to the date hereof. The term of this Agreement shall be perpetual.

     3. Changes in Law. Notwithstanding any other provision of this Agreement, any modification to the Corporation’s Articles of Incorporation or Bylaws from and after the date of this Agreement shall not impair, impede, or limit the rights of Consultant under this Agreement. In the event of any change after the date of this Agreement to any applicable law, statute, or rule that expands the right of an Arizona corporation to indemnify an officer, or a former officer, such changes shall be, ipso facto within the purview of Consultant’s rights and the Corporation’s

1

obligations under this Agreement. In the event of any change in applicable law, statute, or rule that narrows the right of an Arizona corporation to indemnify an officer, or a former officer, the rights and obligations of the parties hereunder shall be modified only to the extent such law, statute, or rule requires that any such modification be applied in a retroactive manner.

     4. Limitations on Indemnification. No indemnity pursuant to Section 2 hereof shall be paid by the Corporation with respect to any Liability:

          (a) in connection with a proceeding by or in the right of the Corporation other than for reasonable expenses incurred in connection with the proceeding; or

          (b) arising out of conduct that constitutes: (i) receipt by Consultant of a financial benefit to which Consultant is not entitled; (ii) an intentional infliction of harm on the Corporation or its shareholders; or (iii) an intentional violation of criminal law.

     5. Advancement of Expenses. The Corporation shall pay Consultant’s reasonable Expenses in advance of a final disposition of any Proceeding if Consultant furnishes the Corporation with a written undertaking executed personally, or on Consultant’s behalf, to repay the advance if it is ultimately determined that Consultant was not entitled to indemnification under Arizona law; provided, however, that the Corporation shall not provide the advancement of Expenses described herein if a court of competent jurisdiction has determined before payment that Consultant is not entitled to such advancement of Expenses under Arizona law and a court of competent jurisdiction does not otherwise authorize payment. The undertaking required by this paragraph shall be the unlimited general obligation of Consultant but need not be secured and shall be accepted by the Corporation without reference to Consultant’s financial ability to make repayment. The Corporation shall not delay payment of Expenses under this Section for more than 60 days after a request is made unless ordered to do so by a court of competent jurisdiction.

     6. Notification and Defense of Claim. Consultant agrees promptly to notify Corporation in writing upon being served with any summons, citation, subpoena, complaint, indictment, information, or other document relating to any proceeding or matter that may be subject to indemnification or advancement of Expenses covered under this Agreement. With respect to any such matter:

          (a) The Corporation will be entitled to participate therein at its own expense;

          (b) Except as otherwise provided below, to the extent that it may wish, the Corporation jointly with any other indemnifying party may assume the defense thereof, with counsel reasonably satisfactory to Consultant. After notice from the Corporation to Consultant of its election so to assume the defense thereof, the Corporation will not be liable to Consultant for any legal or other expenses subsequently incurred by Consultant in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Consultant shall have the right to employ counsel in such action, suit, or proceeding, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Consultant unless (i) the employment of counsel by Consultant has been authorized by the Corporation, (ii) Consultant shall have reasonably concluded that there may be a material conflict of interest between the Corporation and Consultant in the conduct of the defense of such action, or (iii) the Corporation shall not in fact

2

have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be borne by the Corporation. The Corporation shall not be entitled to assume the defense of any action, suit, or proceeding brought by or on behalf of the Corporation or as to which Consultant shall have made the determination provided for in (ii) above. In the event Consultant makes the determination (ii) above, Consultant shall select counsel to defend said interests.

          (c) The Corporation shall not be obligated to indemnify Consultant under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Corporation shall not settle any action or claim in any manner which would impose any penalty or limitation on Consultant without Consultant’s written consent. Neither the Corporation nor Consultant will unreasonably withhold its or his consent to any settlement proposed by the other of any matter for which indemnity is provided hereunder.

     7. Notices. All notices, requests, demands, and other communications under this Agreement shall be in writing and shall be effective when received as follows:

          (a) If to Consultant, at the address indicated on the signature page of this Agreement or such other address as Consultant shall provide to the Corporation, and

          (b) If to the Corporation: Apollo Group, Inc., 4615 E. Elwood St., Phoenix, AZ 85040, Attn: President, or to such other address as may have been furnished to Consultant by the Corporation.

     8. Governing Law and Severability. This Agreement is pursuant to, and subject to, Arizona law. If any provision of this Agreement is determined to be invalid, illegal, or unenforceable for any reason, such invalidity, illegality, or unenforceability shall not affect the validity or enforceability of any other provision hereof. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify Consultant to the fullest extent permitted by any applicable portion of this Agreement that shall not have been invalidated, or under any applicable law, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. If Consultant is entitled under any provision of this Agreement to indemnification by the Corporation for some or any portion of any Expenses or Liability but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify Consultant for that portion of such Expenses or Liability for which Consultant is entitled to be indemnified.

     9. Contribution. The parties acknowledge and agree that, in the event that Consultant is not entitled to indemnification pursuant to the terms of this Agreement, the Corporation shall contribute to any Liability with respect to which Consultant would otherwise have been entitled to indemnification under this Agreement, in such proportion as is appropriate to reflect the relative economic interest of the Corporation on one hand, and Consultant in the other, as to the matters giving rise to such indemnification claims, as well as the relative fault of the Corporation and Consultant with respect to such matters, and any other relevant equitable considerations.

     10. Benefit. This Agreement shall inure to the benefit of Consultant and his or her heirs, personal representatives, and estate.

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     11. Attorney Fees. In any contested action arising out of this Agreement, the court may award the successful party attorney fees.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement.

Apollo Group, Inc.

By: /s/ Joseph L. D’Amico
 

Title: CFO

/s/ Brian Swartz
Consultant

Address: Brian Swartz
 
6355 E. Osborn Rd
 
Scottsdale, AZ 85251
 

4 EX-10.18 9 p73880exv10w18.htm EX-10.18

Exhibit 10.18

EMPLOYMENT AGREEMENT

          THIS AGREEMENT is entered into, effective this 31 day of March, 2007, by and between Apollo Group, Inc. (the “Company”), and Gregory Cappelli (the “Executive”) (hereinafter collectively referred to as “the parties”).

          WHEREAS, the Company has determined that it is in the best interests of the Company and its shareholders to employ the Executive as described herein;

          WHEREAS, the Company desires to employ the Executive and to enter into an agreement embodying the terms of such employment; and

          WHEREAS, the Executive desires to enter into this Agreement and to accept such employment;

          NOW, THEREFORE, in consideration of the foregoing and the respective agreements of the parties contained herein, the parties hereby agree as follows:

     1. Term. The initial term of employment under this Agreement will be for the period commencing on April 2, 2007 (the “Commencement Date”) and ending on the fourth anniversary of the Commencement Date (the “Initial Term”); provided, however, that thereafter this Agreement will be automatically renewed from year to year, unless either the Company or the Executive will have given written notice to the other at least sixty (60) calendar days prior thereto that the term of this Agreement will not be so renewed (a “Notice of Non-Renewal”).

     2. Employment.

     (a) Position. The Executive will be employed as, and hold the title of, Executive Vice President, Global Strategy, and have primary responsibility for substantially expanding the Company’s global operations and enhancing the marketability of those operations. The Executive shall also function as Assistant to the Chair of the Board of Directors and shall, in that capacity, provide the Chair with the advice and operational skills necessary to deal with the investment community and carry out acquisitions, divestitures and capital transactions. The Executive will be given the authority needed to perform the duties and undertake the responsibilities assigned to his position. The Executive will be a member of the Chair’s Cabinet and shall be substantially involved in the Company’s major strategic decisions, as appropriate. The Executive will have the authority to hire appropriate personnel as may be needed to carry out his duties. The Executive will report to the Executive Chair of the Board of Directors. Should Dr. John Sperling cease for any reason to serve in such position, the Executive shall thereafter report directly to either the Executive Chair of the Board or the Company’s Chief Executive Officer, whichever of the two assumes the executive authority exercised by Dr. Sperling.

     (b) Obligations. The Executive shall devote his full business time and attention to the business and affairs of the Company. During the term of this Agreement, the Executive shall not engage in any other employment, service or consulting activity without the prior written approval of the Company’s Board of Directors. The foregoing, however, shall not preclude the Executive from (i) serving on any corporate, civic or charitable boards or committees on which the Executive is serving on the Commencement Date, provided those positions are listed in attached Schedule I, or on which he commences service following the Commencement Date with the prior written approval of the Board of Directors or (ii) managing personal investments, so long as such clause (i) and (ii) activities do not interfere with the performance of the Executive’s responsibilities hereunder.

     3. Base Salary and Bonus.

     (a) Base Salary. The Company agrees to pay or cause to be paid to the Executive an annual base salary at the rate of $500,000, less applicable withholding. This base salary will be subject to annual review and may be increased from time to time by the Compensation Committee of the Board of Directors (the “Compensation Committee”) upon consideration of such factors as the Executive’s responsibilities, compensation of similar executives within the Company and in other companies, performance of the Executive, and other pertinent factors. The Executive’s annual rate of base salary, as it may be increased from time to time, will be hereinafter referred to as the “Base Salary”. Such Base Salary will be payable in accordance with the Company’s customary practices applicable to its executives.

     (b) Bonus. For each fiscal year completed during the Term, the Executive will be eligible to receive an annual cash bonus (“Annual Bonus”) based upon individual and Company performance goals that are established in good faith by the Compensation Committee and that are reasonable in comparison to the individual and Company performance goals the Compensation Committee sets for the Company’s other executive officers, provided that the Executive’s target Annual Bonus will be no less than 100% of his Base Salary (the “Target Bonus”). The dollar amount of the Executive’s Target Bonus for fiscal year 2007 shall be prorated based on the portion of such year during which the Executive is employed by the Company.

     4. Equity Compensation Awards. In addition to the grants below, the Executive will be eligible during the Term for grants of equity compensation awards in accordance with the Company’s policies, as in effect from time to time. The grants below will be issued pursuant and subject to the terms of the Company’s 2000 Stock Incentive Plan, as amended and restated effective as of August 28, 2004 and as subsequently amended to expressly provide for the grant of restricted stock units (the “Incentive Plan”) and to the award agreements evidencing the grants, except that in the event of any conflict between the terms of the Incentive Plan or the award agreements and this Agreement, the terms of this Agreement will control:

     (a) Initial Stock Option Grant. On the third business day following the filing of all reports under the Securities and Exchange Act of 1934 required to make the Company current in its reporting obligations for the 2006 and 2007 fiscal years (the “Full Compliance Date”), the Executive will be granted stock options for 1,000,000 shares of Class A common stock with an exercise price equal to the closing selling price per share on the grant date and a maximum term of six (6) years (the “Initial Option Grant”).

     (b) Fiscal Year 2008 Equalization Grant. Upon the later of the third business day following the Full Compliance Date or the first business day of the Company’s 2008 fiscal year, the Executive will be granted stock options for that number of shares of Class A common stock (if any) determined pursuant to the formula provided in Exhibit A hereto. Any such option grant will have an exercise price equal to the closing selling price per share on the grant date and a maximum term of six (6) years (the “Equalization Grant”).

     (c) Fiscal Year 2008 Restricted Stock Unit Award. Upon the later of the third business day following the Full Compliance Date or the first business day of the Company’s 2008 fiscal year, the Executive will be granted restricted stock units covering that number of shares of the Company’s Class A common stock (rounded to next whole share) determined by dividing five million dollars ($5,000,000) by the closing price of the Class A common stock on the last trading day prior to the Commencement Date (the “Initial RSU Award’). Each restricted stock unit will represent the right to receive one share of such Class A common stock upon the vesting of that unit, subject to the Company’s collection of all applicable withholding taxes.

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     (d) Vesting. The Initial Option Grant and any Equalization Grant will vest and become exercisable in a series of four successive equal annual installments upon the Executive’s completion of each year of employment with the Company over the four-year period measured from the Commencement Date (regardless of the actual grant date), and those grants will be subject to the vesting acceleration provisions set forth in Sections 8 and 11 of this Agreement. One-quarter of the total number of shares underlying the Initial RSU Award will vest and become immediately issuable, subject to the Company’s collection of the applicable withholding taxes, upon the Executive’s completion of each year of employment with the Company over the four-year period measured from the Commencement Date (regardless of the actual grant date). In addition, the Initial RSU Award will be subject to the vesting acceleration provisions of Sections 8 and 11 of this Agreement.

     (e) Shares to Be Registered; Stock Certificates. All shares issued to the Executive pursuant to his exercise of the Initial Option Grant and any Equalization Grant and the vesting of the Initial RSU Award will be registered under an appropriate and effective registration statement under the Securities Act of 1933, as amended (the “1933 Act”).

     (f) The Company represents and warrants that this Agreement, the grants described in subsections (a), (b), and (c) above, and the terms of those grants have been authorized and approved by the Compensation Committee.

     (g) If, because of a delay in the Full Compliance Date, the grants described in subsections (a), (b) and (c) of this Section 4 are not made prior to the expiration of the six-month period measured from the Commencement Date, then the Executive shall be paid a special cash bonus in the amount of one million dollars ($1,000,000), subject to the Company’s collection of all applicable withholding taxes. In addition, the vesting schedule for the Initial Option Grant, any Equalization Grant and the Initial RSU Award shall, at such time as those grants are made, be accelerated so that each of those grants shall vest in a series of three successive equal annual installments upon the Executive’s completion of each year of employment with the Company over the three-year period measured from the Commencement Date (regardless of the actual grant date), and those grants will also be subject to the vesting acceleration provisions set forth in Sections 8 and 11 of this Agreement.

     (h) If, because of a delay in the Full Compliance Date, the grants described in subsections (a), (b) and (c) of this Section 4 are not made prior to the expiration of the twelve-month period measured from the Commencement Date, then the Executive shall be entitled to resign from the Company at any time within the succeeding thirty days and receive the following severance payments, subject to the Company’s collection of all applicable withholding taxes, provided the Executive executes and delivers to the Company a general release in the form of attached Exhibit B which becomes effective and enforceable under applicable law and complies with the restricted covenants set forth in Section 10 of this Agreement:

          (i) a lump sum cash payment in the amount of seven million dollars ($7,000,000), and

          (ii) a lump sum cash amount (if any) determined by multiplying (A) the amount (if any) by which the closing price per share of the Company’s Class A common stock on the expiration date of the twelve-month period measured from the Commencement Date (or if such date is not a business day, the immediately preceding business day) exceeds the closing price per share of such Class A common stock on the last trading day prior to the Commencement Date by (B) 500,000.

          Such severance payments shall be in lieu of any and all termination compensation under Section 8 of this Agreement.

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     5. Emplovee Benefits. Provided he otherwise satisfies any applicable eligibility requirements for participation, the Executive will be entitled to participate in the welfare, retirement, perquisite, and fringe benefit plans, practices, and programs maintained by the Company and made available to senior executives generally and as may be in effect from time to time. The Executive’s participation in any such plans, practices and programs for which he satisfies the applicable eligibility requirements will be on the same basis and terms as are applicable to senior executives of the Company generally.

     6. Other Benefits.

     (a) Expenses. Subject to applicable Company policies, including (without limitation) the timely submission of appropriate documentation and expense reports, the Executive will be entitled to receive prompt reimbursement of all expenses reasonably incurred by him in connection with the performance of his duties hereunder or for promoting, pursuing, or otherwise furthering the business or interests of the Company.

     (b) Office and Facilities. The Executive will be provided with appropriate offices in Chicago, Illinois and with such secretarial and other support facilities as are commensurate with the Executive’s status with the Company and adequate for the performance of his duties hereunder.

     (c) Vacation. During the Term, the Executive will be eligible for paid vacation in accordance with the Company’s policies, as may be in effect from time to time, for its senior executives generally; provided, however, that the Executive will be eligible for no less than four weeks of paid vacation per year.

     7. Termination. Except for a Notice of Non-Renewal, as described in Section 1, the Executive’s employment hereunder may only be terminated in accordance with the following terms and conditions:

     (a) Termination by the Company without Cause. The Company will be entitled to terminate the Executive’s employment at any time by delivering a Notice of Termination to the Executive pursuant to Section 7(e); provided, however, that any termination of the Executive’s employment for Cause shall be governed by the provisions of Section 7(b).

     (b) Termination by the Company for Cause.

          (i) The Company may terminate the Executive’s employment hereunder for “Cause” (as defined below) by delivering to him a Notice of Termination. For purposes of the foregoing, any of the following shall constitute grounds for terminating the Executive’s employment for Cause: (A) the Executive’s pleading “guilty” or “no contest” to, or his conviction of, a felony or any crime involving moral turpitude, (B) his commission of any act of fraud or any act of personal dishonesty involving the property or assets of the Company intended to result in substantial financial enrichment to the Executive, (C) a material breach by the Executive of one or more of his obligations under Section 9 of this Agreement or his Proprietary Information and Inventions Agreement with the Company, (D) a material breach by the Executive of any of his other obligations under this Agreement or any other agreement with the Company, (E) the Executive’s commission of a material violation of Company policy which would result in an employment termination if committed by any other employee of the Company or his gross misconduct, (F) the Executive’s material dereliction of the major duties, functions and responsibilities of his executive position (other than a failure resulting from the Executive’s incapacity due to physical or mental illness), (G) a material breach by the Executive of any of the Executive’s fiduciary obligations as an officer of the Company or (H) the Executive’s willful and knowing participation in the preparation or

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release of false or materially misleading financial statements relating to the Company’s operations and financial condition or his willful and knowing submission of any false or erroneous certification required of him under the Sarbanes-Oxley Act of 2002 or any securities exchange on which shares of the Company’s Class A common stock are at the time listed for trading. However, prior to any termination of the Executive’s employment for Cause based on any of the reasons specified in clauses (C) through (F) and the delivery of a Notice of Termination in connection therewith, the Company shall give written notice to the Executive of the actions or omissions deemed to constitute the grounds for such a termination for Cause, and the Executive shall have a period of not less than sixty (60) calendar days after the receipt of such notice in which to cure the specified default in his performance and thereby avoid a Notice of Termination under this subsection (b)(i).

          (ii) In the event the Executive is provided with a Notice of Termination under subsection (b)(i), the Notice of Termination shall specify a Termination Date that is no earlier than the third business day following the date of the Notice of Termination, and the Executive will have three (3) business days following the date of such Notice of Termination to submit a written request to the Board for a meeting to review the circumstances of his termination. If the Executive timely submits such a written request to the Board, the Board or a committee of the Board shall set a meeting whereby the Executive, together with his counsel, shall be permitted to present any mitigating circumstances or other information as to why he should not be terminated for Cause and the Executive’s Termination Date shall be delayed until such meeting has occurred. Such meeting will be held, at the Executive’s option, either on a mutually agreeable date prior to the Termination Date specified in the Notice of Termination or on a mutually agreeable date within fifteen (15) calendar days after his timely written notice to the Company requesting such a meeting. Within five (5) business days after such meeting, the Board or committee of the Board, as applicable, shall deliver written notice to the Executive of its final determination and, if the termination decision is upheld, the final actual Termination Date. During the period following the date of the Notice of Termination until the Termination Date or other resolution of the matter, the Company shall have the option to place the Executive on an unpaid leave of absence. The rights under this subsection will not be deemed to prejudice the Executive’s other rights and remedies in any way or give rise to any waiver, estoppel, or other defense or bar. Without limiting the foregoing sentence and for purposes of clarification, the failure by the Executive to request a meeting under this subsection, to participate in a meeting that has been requested, or to present any evidence or argument will not prevent the Executive from making any claim against the Company, from seeking any legal or equitable remedy, or from putting forward any evidence or argument at any judicial or arbitral hearing.

     (c) Termination by the Executive. The Executive may terminate his employment hereunder for “Good Reason” by delivering to the Company (1) a Preliminary Notice of Good Reason (as defined below) no later than one hundred and twenty (120) calendar days following the act or omission which the Executive sets forth in such notice as grounds for a Good Reason termination, and (2) not earlier than fourteen (14) calendar days after the delivery of such Preliminary Notice or (if later) the third business day following the Company’s failure to take appropriate remedial action within the applicable sixty (60)- day cure period provided below to the Company following the receipt of such the Preliminary Notice, a Notice of Termination. For purposes of this Agreement, “Good Reason” means:

          (i) a material reduction in the scope of the Executive’s duties, responsibilities or authority;

          (ii) the repeated assignment to the Executive of duties materially inconsistent with the Executive’s positions, duties, authority or responsibilities, or a materially adverse change in Executive’s reporting requirements as set forth in Section 2(a) hereof or an adverse change to his title set forth in Section 2(a) hereof: provided however, that none of the following shall constitute Good Reason: (A) the occasional assignment of duties that are inconsistent with Section 2(a) hereof, (B) a change in the

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Executive’s reporting requirements so that he is required to report to the Executive Chair of the Board or the Company’s Chief Executive Officer, whichever of the two assumes the executive authority exercised by Dr. Sperling as contemplated in Section 2(a) hereof, or (C) any change in the Executive’s title which does not affect his status as one of the five (5) highest ranking officers of the Company;

          (iii) a relocation of the Executive’s principal place of employment other than in Chicago, Illinois; provided, however that travel to other locations as reasonably required to carry out the Executive’s duties and responsibilities hereunder and travel from time to time to the Company’s headquarters as reasonably requested by the Company shall not be a basis for a termination for Good Reason; or

          (iv) a material breach by the Company of any of its obligations under this Agreement.

     In no event will any acts or omissions of the Company which are not the result of bad faith and which are cured within sixty (60) days after receipt of written notice from the Executive identifying in reasonable detail the acts or omissions constituting “Good Reason” (a “Preliminary Notice of Good Reason”) be deemed to constitute grounds for a Good Reason resignation. A Preliminary Notice of Good Reason will not, by itself, constitute a Notice of Termination.

     A ten percent (10%) or less aggregate reduction in the Executive’s base salary and Target Bonus shall not constitute Good Reason if substantially all of the other executive officers of the Company are subject to the same aggregate reduction to their base salary and target bonuses.

     (d) Termination due to the Executive’s Death or Disability. This Agreement will terminate upon the death of the Executive. The Company may terminate the Executive’s employment hereunder if he is unable to perform, with or without reasonable accommodation, the principal duties and responsibilities of his position with the Company for a period of six (6) consecutive months or more by reason of any physical or mental injury or impairment; provided, however, that in the event the Executive is at the time covered under any long-term disability benefit program in effect for the Company’s executive officers or employees, such termination of the Executive’s employment shall not occur prior to the date he first becomes eligible to receive benefits under such program. The termination of the Executive’s employment under such circumstances shall, for purposes of this Agreement, constitute a termination for “Disability.”

     (e) Notice of Termination. Any purported termination for Cause by the Company or for Good Reason by the Executive will be communicated by a written Notice of Termination to the other at least three (3) business days prior to the Termination Date (as defined below). For purposes of this Agreement, a “Notice of Termination” will mean a notice which indicates the specific termination provision in this Agreement relied upon and will, with respect to a termination for Cause or Good Reason, set forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination of the Executive’s employment under the provision so indicated. Any termination by the Company under this Section 7 other than for Cause or by the Executive without Good Reason will be communicated by a written Notice of Termination to the other party fourteen (14) calendar days prior to the Termination Date. However, the Company may elect to pay the Executive in lieu of fourteen (14) calendar days’ written notice. For purposes of this Agreement, no such purported termination of employment pursuant to this Section 7 will be effective without such Notice of Termination.

     (f) Termination Date. “Termination Date” will mean in the case of the Executive’s death, the date of death; in the case of non-renewal of the Agreement pursuant to Section 1, the date the Term of the Agreement expires; and in all other cases, the date specified in the Notice of Termination.

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     8. Compensation Upon Termination.

     (a) If the Executive’s employment is terminated by the Company for Cause or by reason of the Executive’s death or Disability, or if the Executive provides a Notice of Non-Renewal or gives a written notice of resignation without Good Reason, the Company’s sole obligations hereunder will be to pay the Executive or his estate the following amounts earned hereunder but not paid as of the Termination Date: (i) Base Salary, (ii) reimbursement for any and all monies advanced or expenses incurred pursuant to Section 6(a) through the Termination Date, provided the Executive has submitted appropriate documentation for such expenses, and (iii) the amount of the Executive’s accrued but unpaid vacation time (together, these amounts will be referred to as the “Accrued Obligations”). In addition to the Accrued Obligations, in the event the Executive’s employment terminates by reason of death or Disability, the Executive or his estate will be paid his Target Bonus, pro-rated for his actual period of service during the fiscal year in which such termination of employment occurs. Furthermore, if the Executive’s employment terminates as a result of his death, then any unvested stock options, restricted stock, restricted stock units, or other equity granted to the Executive that would have otherwise been vested on the date of his death had the vesting schedule for each of those grants been in the form of successive equal monthly installments over the applicable vesting period will immediately vest. The Executive’s entitlement to any other benefits will be determined in accordance with the Company’s employee benefit plans then in effect.

     (b) If the Executive’s employment is terminated by the Company for any reason other than for Cause or by the Executive for Good Reason, or if the Company provides a Notice of Non-Renewal, the Executive will, in addition to the Accrued Obligations, be entitled to the following compensation and benefits from the Company, provided and only if he (i) executes and delivers to the Company a general release (substantially in the form of attached Exhibit B) which becomes effective and enforceable in accordance with applicable law and (ii) complies with the restrictive covenants set forth in Section 10:

          (i) an amount equal to the product of (A) two and (B) the sum of the Executive’s Base Salary and Target Bonus at the time of the Notice of Termination, to be paid in equal increments, in accordance with the Company’s normal payroll practices, over the one-year measured from the Termination Date;

          (ii) one hundred percent vesting of the Initial RSU Award and accelerated vesting of the Initial Option Grant and any Equalization Grant to the extent of the greater of (A) fifty percent of the then unvested portion of each such grant or (B) the portion of each such grant which would have vested had the Executive completed an additional twelve (12) months of employment with the Company prior to the Termination Date; provided, however, that in the event the Initial RSU Award and the Initial Option Grant and any Equalization Grant have not been made at such time, then a cash amount, payable in equal increments contemporaneously with the payments under subparagraph (i) above, equal to (A) five million dollars ($5,000,000) plus (B) an amount (if any) determined by multiplying (1) the amount (if any) by which the closing price per share of the Company’s Class A common stock on the Termination Date (or if such date is not a business day, the immediately preceding business day) exceeds the closing price per share of such Class A common stock on the last trading day prior to the Commencement Date by (2) 500,000.

          (iii) provided the Executive and/or his dependents are eligible and timely elect to continue their healthcare coverage under the Company’s group health plan pursuant to their rights under COBRA, continued coverage under such plan at the Company’s expense until the earliest of (A) the end of the eighteen (18)-month period measured from the Termination Date, (B) the date that the Executive and/or his eligible dependents are no longer eligible for COBRA coverage and (C) the date that the

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Executive becomes eligible for such coverage under the health plan of any new employer (the Executive agrees to provide the Company with written notice of such eligibility within ten calendar days); and

          (iv) the Executive’s entitlement to any other benefits will be determined in accordance with the Company’s employee benefit plans then in effect.

     (c) The Executive shall have the right to resign, for any reason or no reason, at any time within the thirty (30) day period beginning six (6) months after the closing of a Change in Control (as defined in Section 11) and to receive, in connection with such resignation, the same severance benefits to which he would be entitled under Section 8(b) above had such resignation been for Good Reason; provided, however, that the Executive’s entitlement to severance benefits under this Section 8(c) shall be conditioned upon (i) his execution and delivery to the Company of a general release (substantially in the form of attached Exhibit B) which becomes effective and enforceable in accordance with applicable law and (ii) his compliance with the restrictive covenants set forth in Section 10 of this Agreement.

     (d) The Executive will not be required to mitigate the amount of any payment provided for in this Section 8 by seeking other employment or otherwise, and no such payment or benefit will be eliminated, offset or reduced by the amount of any compensation provided to the Executive in any subsequent employment.

     9. Confidentiality.

     (a) The Executive hereby acknowledges that the Company may, from time to time during the Term, disclose to the Executive confidential information pertaining to the Company’s business, strategic plans, technology or financial affairs. All information, data and know-how, whether or not in writing, of a private or confidential nature concerning the Company’s trade secrets, processes, systems, marketing strategies and future marketing plans, student enrollment lists, prospective course offerings, finances and financial reports, employee and faculty member information and other organizational information (collectively, “Proprietary Information”) is and shall remain the sole and exclusive property of the Company and shall not be used or disclosed by the Executive except to the extent necessary to perform his duties and responsibilities under this Agreement. All tangible manifestations of such Proprietary Information (whether written, printed or otherwise reproduced) shall be returned by the Executive upon the termination of his employment hereunder, and the Executive shall not retain any copies or excerpts of the returned items. The foregoing restrictions on the use, disclosure and disposition of the Company’s Proprietary Information shall also apply to the Executive’s use, disclosure and disposition of any confidential information relating to the business or affairs of the Company’s faculty, students and employees.

     (b) The Executive shall on the Commencement Date execute and deliver to the Company the standard form Proprietary Information and Inventions Agreement, as attached as Exhibit C to this Agreement. The Executive shall, throughout the term of this Agreement and thereafter, remain subject to the terms and conditions of such Proprietary Information and Inventions Agreement.

     (c) The Executive shall not, in connection with his duties and responsibilities hereunder, improperly use or disclose any trade secrets or proprietary and confidential information of any former employer or other person or entity.

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     10. Restrictive Covenants. At all times during the Executive’s employment with the Company, and for a period of one (1) year after the termination of his employment with the Company (the “Restriction Period”), regardless of the reason or cause for such termination, the Executive shall comply with the following restrictions:

     (a) The Executive shall not directly or indirectly encourage or solicit any employee, faculty member, consultant or independent contractor to leave the employment or service of the Company (or any affiliated company) for any reason or interfere in any other manner with any employment or service relationships at the time existing between the Company (or any affiliated company) and its employees, faculty members, consultants and independent contractors.

     (b) The Executive shall not directly or indirectly solicit any vendor, supplier, licensor, licensee or other business affiliate of the Company (or any affiliated company) or directly or indirectly induce any such person to terminate its existing business relationship with the Company (or affiliated company) or interfere in any other manner with any existing business relationship between the Company (or any affiliated company) and any such vendor, supplier, licensor, licensee or other business affiliate.

     (c) The Executive shall not, on his own or as an employee, agent, promoter, consultant, advisor, independent contractor, general partner, officer, director, investor, lender or guarantor or in any other capacity, directly or indirectly:

          (i) conduct, engage in, be connected with, have any interest in, or assist any person or entity engaged in, any business, whether in the United States, any possession of the United States or any foreign country or territory, that competes with any of the businesses or programs conducted by the Company in the education industry during the period of his employment with the Company (hereafter collectively referred to as the “Businesses”); or

          (ii) permit his name to be used in connection with a business which is competitive or substantially similar to the Businesses.

     Notwithstanding the foregoing: (i) the Executive may own, directly or indirectly, solely as an investment, up to one percent (1%) of any class of publicly traded securities of any business that is competitive or substantially similar to the Business and (ii) the Executive’s employment with any investment banking firm, private equity fund, hedge fund or similar investment fund following the termination of his employment with the Company shall not be deemed a breach of his restrictive covenant under this Section 10(c), even though the Executive may be engaged in investment decisions pertaining to the education industry.

     11. Change in Control. For purposes of this Agreement, “Change in Control” shall have the same meaning assigned to such term under the Incentive Plan, and upon the occurrence of such Change in Control, any unvested stock options, restricted stock, restricted stock units, or other equity granted to the Executive and outstanding at that time shall vest on an accelerated basis to the same extent as all other outstanding awards under the Incentive Plan held by individuals who are executive officers of the Company at that time.

     12. Gross-Up Payment. The provisions of this Section 12 shall only be in force and effect for the twenty-four (24)-month period measured from the Commencement Date and shall automatically become null and void upon the expiration of that twenty-four (24)-month period:

     (a) In the event it will be determined that any payment or distribution of any type to or for the benefit of the Executive, by the Company, any of its affiliates, any Person who acquires ownership or effective control of the Company or ownership of a substantial portion of the Company’s assets (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and the

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regulations thereunder--a “Change in Control Event”) or any affiliate of such Person, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the “Total Payments”), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the “Excise Tax”), then the Executive will be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments.

     (b) All determinations as to whether any of the Total Payments are “parachute payments” (within the meaning of Section 280G of the Code), whether a Gross-Up Payment is required, the amount of such Gross-Up Payment, and any amounts relevant to the last sentence of the paragraph above, will be made by an independent registered public accounting firm selected by the Company from among the largest four accounting firms in the United States (the “Accounting Firm”). The Accounting Firm selected by the Company will not have an ongoing audit or consulting relationship with the Company at the time it is selected. The Accounting Firm will provide its determination (the “Determination”), together with detailed supporting calculations regarding the amount of any Gross-Up Payment and any other relevant matter, both to the Company and the Executive within ten (10) business days after the effective date of the Change in Control or such earlier time as is requested by the Company or the Executive (if the Executive reasonably believes that any of the Total Payments may be subject to the Excise Tax). Any determination by the Accounting Firm will be binding upon The Company and the Executive. As a result of uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the Company should have made Gross-Up Payments (“Underpayment”), or that Gross-Up Payments will have been made by the Company which should not have been made (“Overpayments”). In either such event, the Accounting Firm will determine the amount of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount of such Underpayment will be promptly paid by the Company to or for the benefit of the Executive. In the case of an Overpayment, the Executive will, at the direction and expense of the Company, take such steps as are reasonably necessary (including the filing of returns and claims for refund), follow reasonable instructions from, and procedures established by, the Company, and otherwise reasonably cooperate with the Company to correct such Overpayment. In addition, should the Company decide to contest any assessment by the Internal Revenue Service of a Code Section 4999 excise tax on one or more items comprising the Total Payments, the Executive will comply with all reasonable actions requested by the Company in connection with such proceedings, but shall not be required to incur any out-of-pocket costs in so doing.

     13. Benefit Limitation. The provisions of this Section 13 shall automatically come into force and effect upon the expiration of the twenty-four (24)-month period measured from the Commencement Date:

     (a) In the event it is determined that the Total Payments would otherwise exceed the amount that could be received by the Executive without the imposition of an excise tax under Section 4999 of the Code (the “Safe Harbor Amount”), then the Total Payments shall be reduced to the extent, and only to the extent, necessary to assure that their aggregate present value, as determined in accordance the applicable provisions of Code Section 280G and the regulations thereunder, does not exceed the greater of the following dollar amounts (the “Benefit Limit”):

(A) The Safe Harbor Amount, or

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(B) the greatest after-tax amount payable to the Executive after taking into account any excise tax imposed under Code Section 4999 on the Total Payments.

     All determinations under this Section 13 shall be made by the Accounting Firm. However, in determining whether such Benefit Limit is exceeded, the Accounting Firm shall make a reasonable determination of the value to be assigned to the restrictive covenants in effect for the Executive pursuant to Section 10 of the Agreement, and the amount of his potential parachute payment under Code Section 280G shall reduced by the value of those restrictive covenants to the extent consistent with Code Section 280G and the regulations thereunder.

     14. Section 409A. Certain payments contemplated by this Agreement may be “deferred compensation” for purposes of Section 409A of the Code. Accordingly, the following provisions shall be in effect for purposes of avoiding or mitigating any adverse tax consequences to the Executive under Code Section 409A.

     (a) It is the intent of the parties that the provisions of this Agreement comply with all applicable requirements of Code Section 409A. Accordingly, to the extent any provisions of this Agreement would otherwise contravene one or more requirements or limitations of Code Section 409A, then the Company and the Executive shall, within the remedial amendment period provided under the regulations issued under Code Section 409A, effect through mutual agreement the appropriate amendments to those provisions which are necessary in order to bring the provisions of this Agreement into compliance with Section 409A: provided such amendments shall not reduce the dollar amount of any such item of deferred compensation or adversely affect the vesting provisions applicable to such item or otherwise reduce the present value of that item. If any federal legislation is enacted during the term of this Agreement which imposes a dollar limit on deferred compensation, then the Executive will cooperate with the Company in restructuring any items of compensation under this Agreement that are deemed to be deferred compensation subject to such limitation; provided such restructuring shall not reduce the dollar amount of any such item or adversely affect the vesting provisions applicable to such item or otherwise reduce the present value of that item.

     (b) Notwithstanding any provision to the contrary in this Agreement, no payments or benefits to which the Executive becomes entitled under Section 4(h) or Section 8 of this Agreement shall be made or paid to the Executive prior to the earlier of (i) the expiration of the six (6)-month period measured from the date of his “separation from service” with the Company (as such term is defined in Treasury Regulations issued under Code Section 409A) or (ii) the date of his death, if the Executive is deemed at the time of such separation from service a “key employee” within the meaning of that term under Code Section 416(i) and such delayed commencement is otherwise required in order to avoid a prohibited distribution under Code Section 409A(a)(2). Upon the expiration of the applicable Code Section 409A(a)(2) deferral period, all payments deferred pursuant to this subsection 14(b) shall be paid in a lump sum to the Executive, and any remaining payments due under this Agreement shall be paid in accordance with the normal payment dates specified for them herein.

     (c) Should the Executive comply with the provisions of subsections 14(a) and 14(b) above but nevertheless incur the 20% penalty tax imposed under Section 409A with respect to one or more payments or benefits provided to him under this Agreement, then the Executive will be entitled to receive an additional payment (the “409A Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any tax imposed upon the 409A Gross-Up Payment, the Executive retains an amount of the 409A Gross-Up Payment equal to the 20% tax imposed upon the Executive’s deferred compensation.

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     15. Legal Fees. Within fourteen (14) calendar days of this Agreement becoming effective, the Company will reimburse the Executive for his legal fees incurred in connection with the Agreement’s preparation and negotiation, up to a maximum dollar amount of $35,000.00.

     16. Indemnification. The Executive shall be covered by any policy of liability insurance which the Company maintains during the Term for its officers and directors (“D&O Insurance”), to the maximum extent of such coverage provided any other executive officer of the Company. The Company agrees to provide the Executive with information about all D&O Insurance maintained during the Term, including proof that such insurance is in place and the terms of coverage, upon the Executive’s reasonable request. In addition to any rights the Executive may have under such D&O Insurance, applicable law, or the articles of incorporation and bylaws of the Company and except as may be prohibited by applicable law, the Company agrees to indemnify, defend, and hold the Executive harmless from and against any and all claims and/or liability arising from, as a result of, or in connection with the Executive’s employment by the Company or any outside appointments and offices held at the Company’s request, except to the extent such claims or liability are attributable to the Executive’s gross negligence or willful misconduct.

     17. Injunctive Relief. The Executive expressly agrees that the covenants set forth in Sections 9 and 10 of this Agreement are reasonable and necessary to protect the Company and its legitimate business interests, and to prevent the unauthorized dissemination of Proprietary Information to competitors of the Company. The Executive also agrees that the Company will be irreparably harmed and that damages alone cannot adequately compensate the Company if there is a violation of Section 9 or 10 of this Agreement by the Executive, and that injunctive relief against the Executive is essential for the protection of the Company. Therefore, in the event of any such breach, it is agreed that, in addition to any other remedies available, the Company shall be entitled as a matter of right to injunctive relief in any court of competent jurisdiction, plus attorneys’ fees actually incurred for the securing of such relief.

     18. Survival of Certain Provisions. The provisions of Sections 4(h), 8, 9, 10, 12, 13, 14, 16, 17, 19,21, 22, 25 and 26 will survive any termination of this Agreement.

     19. Withholdings. Any compensation and/or benefits provided to the Executive by the Company shall be subject to the Company’s collection of all applicable payroll deductions and applicable withholding and payroll taxes.

     20. Successors and Assigns. This Agreement will be binding upon and will inure to the benefit of the Company, its successors and assigns, and the Company will require any successor or assign to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. The term “the Company” as used herein will include any such successors and assigns to the Company’s business and/or assets. The term “successors and assigns” as used herein will mean a corporation or other entity acquiring or otherwise succeeding to, directly or indirectly, all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. This Agreement will inure to the benefit of and be enforceable by the Executive’s legal personal representative.

     21. Arbitration. Except as otherwise provided in Section 17, any controversy or claim between the Company or any of its affiliates and the Executive arising out of or relating to this Agreement or its termination or any other dispute between the parties, whether arising in tort, contract, or pursuant to a statute, regulation, or ordinance now in existence or which may in the future be enacted or recognized will be settled and determined by a single arbitrator whose award will be accepted as final and binding upon the parties. The arbitration shall be conducted in Chicago, Illinois and in accordance with the American Arbitration Association (“AAA”) Employment Arbitration Rules in effect at the time such

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arbitration is properly initiated. To the extent that any of the AAA rules or anything in the Agreement conflicts with any arbitration procedures required by applicable law, the arbitration procedures required by applicable law shall govern. The costs of the arbitration, including administrative fees and fees charged by the arbitrator, will be borne by the Company. Each party will bear its or his own travel expenses and attorneys’ fees: provided, however that the arbitrator (i) shall award attorneys’ fees to the Executive with respect to any claim for breach of this Agreement on which he is the prevailing party and may award attorneys’ fees to the Executive as otherwise allowed by law and (ii) shall award attorneys’ fees to the Company with respect to any claim brought under Section 17 on which it is the prevailing party and may award attorneys’ fees to the Company with respect to any other claim on which it is the prevailing party and it is determined by the arbitrator that such claim by the Executive was frivolous in that it presented no colorable arguments for recovery; but the maximum amount of attorneys’ fees that may be awarded to the Company other than with respect to any claim brought under Section 17 shall not exceed one hundred thousand dollars ($100,000). The arbitration shall be instead of any civil litigation; and the Executive hereby waives any right to a jury trial. The arbitrator’s decision shall be final and binding to the fullest extent permitted by law and enforceable by any court having jurisdiction thereof. In any situation in which emergency injunctive relief may be necessary, either party may seek such relief from a court until such time as the arbitrator is able to address the matter covered by this Section 21. Both parties agree that the state and federal courts located in Chicago, Illinois, will be the sole venue for any such action involving emergency injunctive relief, and the parties submit to personal jurisdiction in these courts for this purpose. Judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction thereof.

     22. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) will be in writing and will be deemed to have been given when personally delivered or on the third business day following mailing if sent by registered or certified mail, return receipt requested, postage prepaid, or upon receipt if overnight delivery service is used, addressed as follows:

To the Executive:

Gregory Cappelli
1046 Jackson Ave.
River Forest, Illinois 60305

With a copy to:

Russell Shapiro
Peter Donati
Levenfeld Pearlstein, LLC
2 N. LaSalle, Suite 1300
Chicago, Illinois 60602

To the Company:

Apollo Group, Inc
4615 East Elwood Street
Phoenix, AZ 85040
Attention: General Counsel

With a copy to:

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John Hartigan
Morgan Lewis & Bockius LLP
300 South Grand Avenue
Los Angeles, CA 90071

     23. Miscellaneous. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representation, oral or otherwise, express or implied, with respect to the subject matter hereof has been made by either party which is not expressly set forth in this Agreement.

     24. Counterparts. This Agreement may be executed in several counterparts, each of which will be deemed an original and all of which will constitute but one and the same instrument. An electronic facsimile of a signature, when delivered by the signing party to the non-signing party, will have the same force and effect as an original.

     25. Governing Law. This Agreement will be governed by and construed and enforced in accordance with the laws of the State of Arizona without giving effect to the conflict of law principles thereof.

     26. Severability. If any provision of this Agreement as applied to any party or to any circumstance should be adjudged by a court of competent jurisdiction (or determined by the arbitrator) to be void or unenforceable for any reason, the invalidity of that provision shall in no way affect (to the maximum extent permissible by law) the application of such provision under circumstances different from those adjudicated by the court or determined by the arbitrator, the application of any other provision of this Agreement, or the enforceability or invalidity of this Agreement as a whole. Should any provision of this Agreement become or be deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then such provision shall be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision will be stricken, and the remainder of this Agreement shall continue in full force and effect.

     27. Entire Agreement. This Agreement, together with the Proprietary Information and Inventions Agreement referred to in Section 9 and the documentation for the equity grants referred to in Section 4, shall constitute the entire agreement between the parties hereto with respect to the subject matter hereof and shall supersede all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof.

          IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written.

14

Exhibit A

Calculation of Equalization Grant

If the exercise price per share of the Initial Stock Option Grant described in Section 4(a) is greater than the closing price per share of the Class A common stock on the last trading day prior to the Commencement Date, then as described in Section 4(b) the Executive will be granted additional options for Class A shares with an exercise price equal to the closing price on the grant date and with an aggregate Black-Scholes value calculated as of that grant date equal to the amount determined pursuant to the following formula:

     X = (A+ (B-C)) -D, where

     X is the Black-Scholes value of the additional option (if any) to be granted to the Executive.

     A is what the Black Scholes value of the Executive’s 1,000,000-share option would have been had that option been granted on the last trading day prior to the Commencement Date with an exercise price per share equal to the closing selling price per share of the Class A common stock on that date.

     B is the aggregate exercise price in effect for the actual 1,000,000-share grant actually made to the Executive.

     C is the aggregate exercise price that would have been in effect had the Executive received the 1,000,000 share option grant on the last trading day prior to the Commencement Date with an exercise price per share equal to the closing selling price of the Class A common stock on that date.

     D is the Black-Scholes value of the actual 1,000,000-share grant made to the Executive, as measured as of the actual grant date.

The actual number of shares purchasable under the additional option will be determined by dividing the amount obtained from the foregoing formula by the Black-Scholes value per option share, as calculated as of the actual grant date. The additional option (if any) will also vest and become exercisable in a series of 4 successive equal annual installments upon the Executive’s completion of each year of employment with the Company over the 4-year period measured from the Commencement Date. Accordingly, the initial installment of this additional option may vest over a shorter period than the one- year anniversary of its actual grant date.

15

EXHIBIT B

FORM OF GENERAL RELEASE

GENERAL RELEASE

          This AGREEMENT is made as of                     , 200_, by and between Gregory Cappelli (“Executive”), and Apollo Group, Inc. (the “Company”).

          In consideration for the severance benefits offered by the Company to Executive pursuant to Section 8 of his Employment Agreement with the Company dated                     , 2007 (the “Employment Agreement”), Executive agree as follows:

     1. Termination of Employment. Executive acknowledges that his employment with the Company is terminated effective                      (the “Termination Date”), and he agrees that he will not apply for or seek re-employment with the Company, its parent companies, subsidiaries and affiliates after that date. Executive agrees that he has received and reviewed his final paycheck and he has received all wages and accrued but unpaid vacation pay earned by him through the Termination Date.

     2. Waiver and Release.

          (a) Except as set forth in Section 2(b), which identifies claims expressly excluded from this release, Executive hereby releases the Company, all affiliated companies, and their respective officers, directors, agents, employees, stockholders, successors and assigns from any and all claims, liabilities, demands, causes of action, costs, expenses, attorney fees, damages, indemnities and obligations of every kind and nature, in law, equity or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed, arising from or relating to Executive’s employment with the Company and the termination of that employment, including (without limitation): claims of wrongful discharge, emotional distress, defamation, fraud, breach of contract, breach of the covenant of good faith and fair dealing, discrimination claims based on sex, age, race, national origin, disability or any other basis under Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act of 1967, as amended (“ADEA”), the Americans with Disability Act, the Employee Retirement Income Security Act, as amended, the Equal Pay Act of 1963, as amended, and any similar law of any state or governmental entity, any contract claims, tort claims and wage or benefit claims, including (without limitation) claims for salary, bonuses, commissions, equity awards (including stock grants, stock options and restricted stock units), vesting acceleration, vacation pay, fringe benefits, severance pay or any other form of compensation.

     (a) The only claims that Executive is not waiving and releasing under this Agreement are claims he may have for (1) unemployment, state disability, worker’s compensation, and/or paid family leave insurance benefits pursuant to the terms of applicable state law; (2) continuation of existing participation in Company-sponsored group health benefit plans under the federal law known as “COBRA” and/or under an applicable state law counterpart(s); (3) any benefits entitlements that are vested and unpaid as of his termination date pursuant to the terms of a Company-sponsored benefit plan; (4) any benefits to which he is entitled pursuant to Section 8 of the Employment Agreement or his rights to indemnification pursuant to Section 16 of the Employment Agreement, (5) violation of any federal state or local statutory and/or public policy right or entitlement that, by applicable law, is not waivable; and (6) any wrongful act or omission occurring after the date he executes this Agreement. In addition, nothing in this Agreement prevents or prohibits Executive from filing a claim with the Equal Employment Opportunity Commission (EEOC) or any other government agency that is responsible for enforcing a law on behalf of the government and deems such claims not waivable. However, because Executive is

hereby waiving and releasing all claims “for monetary damages and any other form of personal relief” (per Section 3(a) above), he may only seek and receive non-personal forms of relief from the EEOC and similar government agencies.

          (b) Executive represents that he has not filed any complaints, charges, claims, grievances, or lawsuits against the Company and/or any related persons with any local, state or federal agency or court, or with any other forum.

          (c) Executive acknowledges that he may discover facts different from or in addition to those he now knows or believes to be true with respect to the claims, demands, causes of action, obligations, damages, and liabilities of any nature whatsoever that are the subject of this Agreement, and he expressly agrees to assume the risk of the possible discovery of additional or different facts, and agrees that this Agreement shall be and remain in effect in all respects regardless of such additional or different facts. Executive expressly acknowledges that this Agreement is intended to include, and does include in its effect, without limitation, all claims which Executive does not know or suspect to exist in his favor against the Company and/or any related persons at the moment of execution thereof, and that this Agreement expressly contemplates extinguishing all such claims.

          (d) Executive understands and agrees that the Company has no obligation to provide him with any severance benefits under the Employment Agreement unless he executes this Agreement. Executive also understands that he has received or will receive, regardless of the execution of this Agreement, all wages owed to him, together with any accrued but unpaid vacation pay, less applicable withholdings and deductions, earned through the Termination Date.

          (e) This Agreement is binding on Executive, his heirs, legal representatives and assigns.

     1. Entire Agreement. This Agreement and the Employment Agreement constitute the entire understanding and agreement between Executive and the Company in connection with the matters described, and replaces and cancels all previous agreements and commitments, whether spoken or written, with respect to such matters. Nothing in this Agreement supersedes or replaces any of Executive’s obligations under his Employment Agreement that survive termination, including, but not limited to (i) his (and the Company’s) agreement to arbitrate disputes, (ii) his restrictive covenants under Section 10 of the Employment Agreement and (iii) his obligations under Section 9 of the Employment Agreement, his existing Proprietary Information Inventions Agreement with the Company and any other obligations not to use or disclose Company confidential and/or proprietary information.

     2. Modification in Writing. No oral agreement, statement, promise, commitment or representation shall alter or terminate the provisions of this Agreement. This Agreement cannot be changed or modified except by written agreement signed by Executive and authorized representatives of the Company.

     3. Governing Law: Jurisdiction. This Agreement shall be governed by and enforced in accordance with the laws of the State of Arizona.

     4. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable.

19

     5. No Admission of Liability. This Agreement does not constitute an admission of any unlawful discriminatory acts or liability of any kind by the Company or anyone acting under their supervision or on their behalf. This Agreement may not be used or introduced as evidence in any legal proceeding, except to enforce or challenge its terms.

     6. Acknowledgements. Executive is advised to consult with an attorney of his choice prior to executing this Agreement. By signing below, Executive acknowledges and certifies that he:

          (a) has read and understands all of the terms of this Agreement and is not relying on any representations or statements, written or oral, not set forth in this Agreement;

          (b) has been provided a consideration period of twenty-one calendar days within which to decide whether he will execute this Agreement and that no one hurried him into executing this Agreement;

          (c) is signing this Agreement knowingly and voluntarily; and

          (d) has the right to revoke this Agreement within seven (7) days after signing it, by providing written notice of revocation via certified mail to the Company to the address specified in the Employment Agreement. Executive’s written notice of revocation must be postmarked on or before the end of the eighth (8th) calendar day after he has timely signed this Agreement. This deadline will be extended to the next business day should it fall on a Saturday, Sunday or holiday recognized by the U.S. Postal Service.

     Because of the revocation period, the Company’s obligations under this Agreement shall not become effective or enforceable until the eighth (8th) calendar day after the date Executive signs this Agreement provided he has delivered it to the Company without modification and not revoked it (the “Effective Date”).

I HAVE READ, UNDERSTAND AND VOLUNTARILY ACCEPT AND AGREE TO THE ABOVE TERMS

GREGORY CAPPELLI

	Date:                     , 20
Signature

20

EXHIBIT C

FORM OF PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT

PROPRIETARY INFORMATION AND INVENTIONS
AGREEMENT

This Proprietary Information and Inventions Agreement (“PIIA”) confirms certain terms of my employment with The Apollo Group (the “Company”), is a condition of my employment, and is a material part of the consideration for my employment by the Company. The headings contained in this PIIA are for convenience only, have no legal significance, and are not intended to change or limit this PIIA in any matter whatsoever.

     A. Definitions

          1. The “Company”

          As used in this PIIA, the “Company” refers to The Apollo Group, each of its subsidiaries, affiliated and parent companies, and successors and assigns. I recognize and agree that my obligations under this PIIA and all terms of this PIIA apply to me regardless of whether I am employed by or provide services to The Apollo Group, any subsidiary, affiliate or parent companies of The Apollo Group.

          2. “Proprietary Information”

          I understand that the Company possesses and will possess Proprietary Information which is important to its business. For purposes of this PIIA, “Proprietary Information” is information that was or will be developed, created, or discovered by or on behalf of the Company, or which became or will become known by, or was or is conveyed to the Company, which has commercial value in the Company’s business. “Proprietary Information” includes information concerning the organization, business and finances of the Company or of any third party which the Company is under an obligation to keep confidential that is maintained by the Company as confidential, including (without limitation):

          a. the Company’s Lead List which is comprised of prospective students who meet the admission requirements of the Company;

          b. data and information on current and prospective corporate accounts, including, but not limited to, the identity of the corporate accounts, the decision makers or decision influencers, the buying criteria of the accounts and programs for those accounts;

          c. the management process, training materials, scripts, programs and preferred responses to features and benefits provided to employees;

          d. the certification training materials and processes for the certification of the Company’s Student Advisors (known as the ACU online learning system program), including, but not limited to, the tests taken, materials provided and course work;

          e. the information and data contained in the Company’s enrollment data system, all monthly enrollment reports;

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          f. salary, terms of employment, tenure and performance review information on the faculty members and other employees of the Company, all business models and financial information, data and materials of the Company not otherwise available to the general public through the Company’s Annual Report or otherwise;

          g. all market research or works for hire materials, including, but not limited to, industry data, demographics, company profiles and/or specific consumer behavior information, all monthly financial, statistical and operational information and reports including but not limited to the “Yellow Book”, and all other information concerning enrollment by campus, profit and loss per campus and the terms of any lease;

          h. all monthly financial statements, including, but not limited to, the “Board Book”;

          i. all internally developed source code, including, but not limited to, modifications to existing source codes for student information systems (such as Galaxy, Campus Tracking, OSIRIS and eCampus), academic systems (such as rEsource and OnLine Learning System (OLS), proprietary modifications to packaged applications (such as PeopleSoft, Oracle Financials and ADP HRizon) and all future internally developed source code.

          I understand and agree that my employment creates a relationship of confidence and trust between the Company and me with respect to Proprietary Information.

          3. “Company Documents and Materials”

          I understand that the Company possesses or will possess “Company Documents and Materials” which are important to its business. For purposes of this PIIA, “Company Documents and Materials” are documents or other media or tangible items that contain or embody Proprietary Information or any other information concerning the business, operations or plans of the Company, whether such documents, media or items have been prepared by me or by others.

          “Company Documents and Materials” include (without limitation) blueprints, drawings, photographs, charts, graphs, notebooks, customer lists, computer disks, tapes, computer hard drives, floppy disks, CD ROMS, or printouts, sound recordings and other printed, typewritten or handwritten documents, sample products, prototypes and models and any information recorded in any other form whatsoever. “Company Documents and Materials” also include copies of any of the foregoing.

     B. Assignment of Rights

          All Proprietary Information and all patents, patent rights, copyrights, trade secret rights, trademark rights and other rights (including, without limitation, intellectual property rights) anywhere in the world in connection therewith is and shall be the sole property of the Company. I hereby assign to the Company any and all rights, title and interest I may have or acquire in such Proprietary Information.

Page 2 of 8

          At all times, both during my employment by the Company and after its termination, I will keep in confidence and trust and will not use or disclose any Proprietary Information or anything relating to it without the prior written consent of an officer of the Company, except as may be necessary in the ordinary course of performing my duties to the Company.

     C. Maintenance and Return of Companv Documents and Materials

          I agree to make and maintain adequate and current written records, in a form specified by the Company, of all inventions, trade secrets and works of authorship assigned or to be assigned to the Company pursuant to this PIIA. All Company Documents and Materials are and shall be the sole property of the Company.

          I agree that during my employment by the Company, I will not remove any Company Documents and Materials from the business premises of the Company or deliver any Company Documents and Materials to any person or entity outside the Company, except in connection with performing the duties of my employment. I further agree that, immediately upon the termination of my employment by me or by the Company for any reason, or during my employment if so requested by the Company, I will return all Company Documents and Materials, apparatus, equipment and other physical property, or any reproduction of such property, excepting only (i) my personal copies of records relating to my compensation; (ii) my personal copies of any materials previously distributed generally to stockholders of the Company; and (iii) my copy of this PIIA.

     D. Disclosure of Inventions to the Company

          I will promptly disclose in writing to the Chair of the Company’s Board of Directors or to such other person designated by the Board all “Inventions,” which includes (without limitation) all software programs or subroutines, source or object code, algorithms, improvements, inventions, works of authorship, trade secrets, technology, designs, formulas, ideas, processes, techniques, know-how and data, whether or not patentable, made or discovered or conceived or reduced to practice or developed by me, either alone or jointly with others, during the term of my employment.

          I will also disclose to the Chair of the Company’s Board of Directors or to such other person designated by the Board all Inventions made, discovered, conceived, reduced to practice, or developed by me within six (6) months after the termination of my employment with the Company which resulted, in whole or in part, from my prior employment by the Company. Such disclosures shall be received by the Company in confidence (to the extent such Inventions are not assigned to the Company pursuant to Section (E) below) and do not extend the assignment made in Section (E) below.

          Notwithstanding any other provision of this Agreement to the contrary, this Agreement does not obligate me to assign to the Company any of my rights in an invention for which no equipment, supplies, facility, or trade secret information of the Company was used and

Page 3 of 8

which was developed entirely on my own time, unless (a) the invention relates (i) directly to the business of the Company, or (ii) to the Company’s actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by me for the Company.

     E. Right to New Ideas

          1. Assignment of Inventions to the Company

          I agree that all Inventions that I make, discover, conceive, reduce to practice or develop (in whole or in part, either alone or jointly with others) during my employment shall be the sole property of the Company to the maximum extent permitted by applicable law. However, any inventions that I make, discover, conceive, reduce to practice or develop (in whole or in part, either alone or jointly with others) during my employment shall not be the sole property of the Company so long as such inventions have been developed entirely on my own time without using any of the Company’s equipment, supplies, facilities or Proprietary Information, unless such inventions constitute Inventions for purposes of this Agreement because:

          a. they relate at the time of conception or reduction to practice of the invention to the Company’s business, or actual or demonstrably anticipated research or development of the Company, or

          b. they result from any work I performed for the Company.

          2. Works Made for Hire

          The Company shall be the sole owner of all patents, patent rights, copyrights, trade secret rights, trademark rights and all other intellectual property or other rights in connection with Inventions. I further acknowledge and agree that such Inventions, including (without limitation) any computer programs, programming documentation, and other works of authorship, are “works made for hire” for purposes of the Company’s rights under copyright laws. I hereby assign to the Company any and all rights, title and interest I may have or acquire in such Inventions. If in the course of my employment with the Company, I incorporate into a Company product, service or process a prior Invention owned by me or in which I have interest, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, sublicensable, worldwide license to make, have made, modify, use, market, sell and distribute such prior Invention as part of or in connection with such product, service or process.

          3. Cooperation

          I agree to perform, during and after my employment, all acts deemed necessary or desirable by the Company to permit and assist it, at the Company’s expense, in further evidencing and perfecting the assignments made to the Company under this PIIA and in obtaining, maintaining, defending and enforcing patents, patent rights, copyrights, trademark rights, trade secret rights or any other rights in connection with such Inventions and improvements thereto in any and all countries. Such acts may include (without limitation) execution of documents and assistance or cooperation in legal proceedings. I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents, as my agents and attorney-in-fact to act for and on my behalf and instead of me, to execute and file any

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documents, applications or related findings and to do all other lawfully permitted acts to further the purposes set forth above in this Subsection 3, including (without limitation) the perfection of assignment and the prosecution and issuance of patents, patent applications, copyright applications and registrations, trademark applications and registrations or other rights in connection with such Inventions and improvements thereto with the same legal force and effect as if executed by me.

          4. Assignment or Waiver of Moral Rights

          Any assignment of copyright hereunder (and any ownership of a copyright as a work made for hire) includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as “moral rights” (collectively “Moral Rights”). To the extent such Moral Rights cannot be assigned under applicable law and to the extent the following is allowed by the laws in the various countries where Moral Rights exist, I hereby waive such Moral Rights and consent to any action of the Company that would violate such Moral Rights in the absence of such consent.

          5. List of Inventions

          I have attached hereto as Appendix A a complete list of all inventions or improvements to which I claim ownership and that I desire to remove from the operation of this PIIA (except for the license granted in Section (E)(2) above), and I acknowledge and agree that such list is complete. If no such list is attached to this PIIA, I represent that I have no such inventions or improvements at the time of signing this PIIA.

     F. Company Authorization for Publication

          Prior to my submitting or disclosing for possible publication or dissemination outside the Company any material prepared by me that incorporates information that concerns the Company’s business or anticipated research, I agree to deliver a copy of such material to an officer of the Company for his or her review. Within twenty (20) days following such submission, the Company agrees to notify me in writing whether the Company believes such material contains any Proprietary Information or Inventions, and I agree to make such deletions and revisions as are reasonably requested by the Company to protect its Proprietary Information and Inventions. I further agree to obtain the written consent of the Company prior to any review of such material by persons outside the Company.

     G. Restrictive Covenants

          At all times during my employment with the Company, and for a period of one (1) year thereafter, I shall not directly or indirectly encourage or solicit any employee, faculty member, consultant or independent contractor to leave the employment or service of the Company for any reason or interfere in any other manner with such relationships at the time existing between the Company and its employees, faculty members, consultants and independent contractors.

          At all times during my employment with the Company, and for a period of one (1) year thereafter, I shall also be bound by and comply with the restrictive covenants set forth in

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Section 10 of my March 31, 2007 Employment Agreement with the Company (the “Employment Agreement”).

     H. Former Employer’s and Others’ Information

          I represent that my performance of all the terms of this PIIA does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired or developed by me in confidence or in trust prior to my employment by the Company.

          I agree that I will not disclose to the Company, or use in the performance of my duties and responsibilities as an employee of the Company, any trade secrets or confidential or proprietary information or material belonging to any previous employers or other person or entity.

     I. Reformation and Severability

          I agree that if any provision, or portion of a provision, of this Agreement is deemed unenforceable by reason of the scope, extent or duration of its coverage, then such provision shall be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable. Should any provision, or portion of a provision, of this Agreement be deemed unenforceable for any other reason, such unenforceability will not affect any other provision, or portion of a provision, of this Agreement and this Agreement shall be construed as if such unenforceable provision, or portion of provision, had never been contained herein.

     J. Authorization for Post-Termination Notification of Obligations Under PIIA

          I hereby authorize the Company to notify any person or entity with whom I become employed, or to whom I provide services, following the termination of my employment with the Company of my ongoing obligations under this PIIA.

     K. Entire Agreement

          This PIIA and the Employment Agreement set forth the entire agreement and understanding between the Company and me relating to the subject matters covered therein, and this PIIA and the Employee Agreement merge, cancel, supersede and replace all prior discussions between us, including (without limitation) any and all statements, representations, negotiations, promises or agreements relating to the subject matters covered by this PIIA and the Employment Agreement that may have been made by any officer, employee or representative of the Company.

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I HAVE READ THIS PIIA CAREFULLY, AND I UNDERSTAND AND ACCEPT THE OBLIGATIONS THAT IT IMPOSES UPON ME WITHOUT RESERVATION.

I SIGN THIS PIIA FREELY AND VOLUNTARILY, WITHOUT COERCION OR DURESS.

Date: April 11, 2007	Employee Signature

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APPENDIX A

1. The following is a complete list of all Inventions or improvements relevant to the subject matter of my employment by the Company that have been made or discovered or conceived or first reduced to practice by me or jointly with others prior to my employment by the Company that I desire to remove from the operation of the Company’s Proprietary Information and Inventions Agreement (“PIIA”), except for the license granted in-section (E)(2) of the PIIA:

þ No inventions or improvements.

o See below:

o See           (#) additional sheets attached.

2. I propose to bring to my employment the following materials and documents of a former other person/entity:

þ No materials or documents

o See below:

o See           (#) additional sheet(s) attached:

Date: April 11, 2007

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SCHEDULE I

LIST OF EXISTING BOARD MEMBERSHIPS

Everybody Wins! (charity)

Dominican University School of Business

EXHIBIT C

FORM OF PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT

SCHEDULE I

LIST OF EXISTING BOARD MEMBERSHIPS

Everybody Wins! (charity)

Dominican University School of Business

EX-10.18

exv10w18

EX-21

EXHIBIT 21

LIST OF SUBSIDIARIES

Name	State or Other Jurisdiction of Incorporation
Apollo Development Corporation	Arizona
Apollo Education Corporation	Arizona
Apollo Group China, LLC	Arizona
Apollo Investments, Inc.	Arizona
Apollo NB Holding Company	Arizona
Apollo Online, Inc.	Arizona
Apollo Publishing & Learning Technologies, Inc.	Arizona
Apollo University & Graduate Institute	Arizona
The College for Financial Planning Institutes Corporation	Arizona
Insight Schools, Inc.	Oregon
Institute for Professional Development, Inc.	California
University of Phoenix, Inc.	Arizona
Western International University, Inc.	Arizona

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-46834, 33-88984, 33-87638, 33-88482 and 33-63429 on Form S-8 of (i) our report dated May 21, 2007 relating to the consolidated financial statements of Apollo Group, Inc. and subsidiaries (which report expresses an unqualified opinion and includes explanatory paragraphs relating to the restatement of the consolidated financial statements as discussed in Note 3 to the consolidated financial statements and the Company’s adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, as discussed in Note 2 to the consolidated financial statements), and (ii) our report dated May 21, 2007 on internal control over financial reporting (which report expresses an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of material weaknesses) appearing in this Annual Report on Form 10-K of Apollo Group, Inc. and subsidiaries for the fiscal year ended August 31, 2006.

/s/ DELOITTE & TOUCHE LLP

Phoenix, Arizona
May 21, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Brian E. Mueller, certify that:

     1. I have reviewed this Form 10-K of Apollo Group, Inc. (the “registrant”);

     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 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 and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s independent registered public accounting firm and the audit committee of 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: May 21, 2007

/s/ Brian E. Mueller

Brian E. Mueller

President

(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Joseph L. D’Amico, certify that:

     1. I have reviewed this Form 10-K of Apollo Group, Inc. (the “registrant”);

     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 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 and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s independent registered public accounting firm and the audit committee of 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: May 21, 2007

/s/ Joseph L. D’Amico

Joseph L. D’Amico

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)

In connection with the Annual Report of Apollo Group, Inc. (the “Company”) on Form 10-K for the fiscal year ended August 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian E. Mueller, President of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that to my knowledge:

(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.

Date: May 21, 2007

/s/ Brian E. Mueller

Brian E. Mueller

President

(Principal Executive Officer)

A signed original of this written statement required by Section 906 has been provided to Apollo Group, Inc. and will be retained by Apollo Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)

In connection with the Annual Report of Apollo Group, Inc. (the “Company”) on Form 10-K for the fiscal year ended August 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph L. D’Amico, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that to my knowledge:

(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.

Date: May 21, 2007

/s/ Joseph L. D’Amico

Joseph L. D’Amico

Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Apollo Group, Inc. and will be retained by Apollo Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.