e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended May 31, 2007


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

Commission file number: 0-25232

APOLLO GROUP, INC.

(Exact name of registrant as specified in its charter)


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

4615 EAST ELWOOD STREET, PHOENIX, ARIZONA 85040
(Address of principal executive offices, including zip code)

(480) 966-5394
(Registrant’s telephone number, including area code)

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 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 Securities 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

AS OF JUNE 18, 2007, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:


Apollo Group Class A common stock, no par value		172,809,000 Shares
Apollo Group Class B common stock, no par value		475,000 Shares

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, 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. The Company undertakes 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.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


	As of
	May 31,			August 31,
($ in thousands)	2007			2006

Assets:
Current assets
Cash and cash equivalents	$	627,974		$	309,058
Restricted cash		284,993			238,267
Marketable securities, current portion		21,443			45,978
Accounts receivable, net		179,551			160,583
Deferred tax assets, net, current portion		50,962			32,622
Other current assets		20,532			16,424

Total current assets		1,185,455			802,932
Property and equipment, net		347,722			328,440
Marketable securities, less current portion		40,645			53,692
Goodwill		31,029			16,891
Deferred tax assets, net, less current portion		69,399			53,131
Other assets		26,074			27,919

Total assets	$	1,700,324		$	1,283,005


Liabilities and Shareholders’ Equity:
Current liabilities
Accounts payable	$	38,088		$	61,289
Accrued liabilities		98,411			73,513
Current portion of long-term liabilities		21,818			23,101
Income taxes payable		76,798			47,812
Student deposits		297,342			254,130
Current portion of deferred revenue		149,665			135,911

Total current liabilities		682,122			595,756
Deferred revenue, less current portion		357			384
Long-term liabilities, less current portion		73,413			82,492

Total liabilities		755,892			678,632


Commitments and contingencies (Note 7)

Shareholders’ equity
Preferred stock, no par value		—			—
Apollo Group Class A nonvoting common stock, no par value		103			103
Apollo Group Class B voting common stock, no par value		1			1
Additional paid-in capital		—			—
Apollo Group Class A treasury stock, at cost		(1,040,809	)		(1,054,046	)
Retained earnings		1,986,735			1,659,349
Accumulated other comprehensive loss		(1,598	)		(1,034	)

Total shareholders’ equity		944,432			604,373

Total liabilities and shareholders’ equity	$	1,700,324		$	1,283,005

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

APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	For the Nine Months Ended May 31,
($ in thousands)	2007			2006

Cash flows provided by (used in) operating activities:
Net income	$	305,650		$	339,122
Adjustments to reconcile net income to net cash provided by operating activities:
Share based compensation		40,766			18,052
Excess tax benefits from share based compensation		(2,290	)		(16,763	)
Depreciation and amortization		54,000			48,810
Amortization of marketable securities discount and premium, net		152			841
Provision for uncollectible accounts receivable		83,303			72,238
Deferred income taxes		(34,843	)		(9,478	)
Changes in assets and liabilities:
Accounts receivable, net		(102,271	)		(49,118	)
Other assets		(5,276	)		2,431
Accounts payable and accrued liabilities		(15,640	)		6,553
Income taxes payable		29,045			16,115
Student deposits		43,212			12,725
Deferred revenue		13,727			(8,483	)
Other liabilities		(3,073	)		4,928

Net cash provided by operating activities		406,462			437,973

Cash flows provided by (used in) investing activities:
Additions to property and equipment		(38,338	)		(43,611	)
Purchase of land and buildings related to new headquarters		(32,072	)		(35,266	)
Purchase of Insight Schools, net of cash		(15,079	)		—
Purchase of marketable securities including auction rate securities		(969,460	)		(921,952	)
Maturities of marketable securities including auction rate securities		1,008,861			1,088,052
(Increase)/decrease in restricted cash		(48,697	)		10,620
Purchase of other assets		—			(1,686	)

Net cash provided by (used in) investing activities		(94,785	)		96,157

Cash flows provided by (used in) financing activities:
Repurchase of Apollo Group Class A common stock		—			(514,931	)
Issuance of Apollo Group Class A common stock		5,278			25,691
Cash paid for cancellation of vested options		—			(6,331	)
Excess tax benefits from share based compensation		2,290			16,763

Net cash provided by (used in) financing activities		7,568			(478,808	)

Currency translation loss		(329	)		(525	)

Net increase in cash and cash equivalents		318,916			54,797
Cash and cash equivalents, beginning of period		309,058			137,184

Cash and cash equivalents, end of period	$	627,974		$	191,981


Supplemental disclosure of non-cash investing activities
Credits received for tenant improvements	$	3,406		$	11,639
Purchases of property and equipment included in accounts payable	$	5,772		$	5,340

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

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1. Basis of Presentation

The unaudited interim condensed consolidated financial statements include the accounts of Apollo Group, Inc. and its wholly-owned subsidiaries, collectively referred to herein as “Apollo Group,” “we,” “us,” “our,” or the “Company”. These unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, contain all adjustments, consisting only of normal, recurring adjustments, necessary to fairly present the financial condition, results of operations and cash flows for the periods presented.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently applied the accounting policies described in our 2006 Annual Report on Form 10-K in preparing these unaudited financial statements. For a discussion of our critical accounting policies, please refer to our 2006 Annual Report on Form 10-K filed on May 22, 2007. These unaudited interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K as filed with the SEC for the fiscal year ended August 31, 2006.

Our fiscal year is from September 1 to August 31. Unless otherwise noted, references to particular years or quarters refer to our fiscal years and the associated quarters of those fiscal years.

The results of operations for the three and nine months ended May 31, 2007 are not necessarily indicative of results to be expected for the entire fiscal year.

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. The most significant management estimate is the allowance for doubtful accounts. Actual results could differ from such estimates.

Certain prior year expenses have been reclassified between instructional costs and services and general and administrative to conform to the 2007 presentation. Certain amounts have been reclassified within the investing section of the 2006 Statement of Cash Flows to properly reflect changes in restricted cash.

Note 2. Nature of Operations

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. (“Insight”), 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 100 campuses and 159 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 (including Axia students enrolled in UPX and WIU) as of May 31, 2007, was approximately 311,100. In addition, students are enrolled in WIU, CFP and regionally accredited private colleges and universities to which IPD provides program development and management consulting services (“IPD Client Institutions”), and additional non-degreed students are enrolled in UPX. 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).

Our operations are generally subject to seasonal trends. We experience, and expect to continue to experience, seasonal fluctuations in the results of operations as a result of changes in the level of student enrollments. While we enroll 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, and third quarter (March through May) enrollments and related revenues are generally the highest of any quarter. We experience a seasonal increase in new enrollments in August of each year when most other colleges and universities begin their fall semesters.

Note 3. Accounts Receivable, net

Accounts receivable, net consist of the following as of May 31, 2007 and August 31, 2006:


	May 31,			August 31,
(In thousands)	2007			2006

Tuition accounts receivable	$	262,255		$	214,257
Less allowance for doubtful accounts		(92,129	)		(65,184	)

Net tuition accounts receivable		170,126			149,073
Insurance recovery receivable		1,286			3,331
Other receivables		8,139			8,179

Total accounts receivable, net	$	179,551		$	160,583

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

Bad debt expense is included in instructional costs and services in our condensed Consolidated Statements of Income. The following table summarizes the activity in the related allowance for doubtful accounts for the three and nine months ended May 31:


	For the Three Months Ended						For the Nine Months Ended
	May 31,						May 31,
(In thousands)	2007			2006			2007			2006

Beginning allowance for doubtful accounts balance	$	75,961		$	60,361		$	65,184		$	45,773
Charged to bad debt expense		34,368			24,489			83,303			72,238
Write-offs, net of recoveries		(18,200	)		(18,868	)		(56,358	)		(52,029	)

Ending allowance for doubtful accounts balance	$	92,129		$	65,982		$	92,129		$	65,982

Note 4. Shareholders’ Equity

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, we 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 included in general and administrative expenses and a reduction of additional paid in capital of $6.3 million in the second quarter of 2006, which represents the fair value of the canceled options.

Note 5. Earnings Per Share

Apollo Group Class A Common Stock

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


	For the Three Months Ended May 31,
	2007							2006
			Weighted							Weighted
			Average		Per Share					Average		Per Share
($ in thousands, except per share amounts)	Income		Shares		Amount			Income		Shares		Amount

Basic income per share	$	131,438		173,188	$	0.76		$	131,454		172,817	$	0.76
Effect of dilutive securities:
Stock options		—		1,432		(0.01	)		—		1,636		(0.01	)

Diluted income per share	$	131,438		174,620	$	0.75		$	131,454		174,453	$	0.75


	For the Nine Months Ended May 31,
	2007							2006
			Weighted							Weighted
			Average		Per Share					Average		Per Share
	Income		Shares		Amount			Income		Shares		Amount

Basic income per share	$	305,650		173,165	$	1.77		$	339,122		174,808	$	1.94
Effect of dilutive securities:
Stock options		—		1,423		(0.02	)		—		1,962		(0.02	)

Diluted income per share	$	305,650		174,588	$	1.75		$	339,122		176,770	$	1.92

Diluted weighted average shares outstanding include the incremental effect of shares that would be issued upon the assumed exercise of stock options. For the three months ended May 31, 2007 and 2006, approximately 5,878,000 and 3,901,000, respectively, and for the nine months ended approximately 5,601,000 and 4,006,000, respectively, of the 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 quarter or the nine months, respectively, 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.

Note 6. Share Based Compensation Plans

Stock Option Grant

On March 31, 2007, we entered into an employment contract with Mr. Gregory W. Cappelli who was appointed Executive Vice President, Global Strategy and Assistant to the Chairman. Under the terms of his employment agreement, Mr. Cappelli was granted 1,000,000 options to purchase shares of Class A common stock on May 25, 2007 at an exercise price of $48.47 which was the closing price of the stock on that day. These options are subject to a four year graded vesting schedule with one quarter of the awards vesting at each anniversary of Mr. Cappelli’s commencement of employment with Apollo Group on April 2,2007. We used the Black-Scholes-Merton option pricing model (“BSM”) to estimate the fair value of the grant using the following assumptions (for a discussion on our SFAS 123(R) assumption methodology please refer to our Annual Report on Form 10-K for the fiscal year ended August 31, 2006):


Expected volatility	32.5	%
Expected life (years)	4.5
Risk-free interest rate	4.8	%
Dividend yield	0.0	%

The fair value of the option grant was $16.8 million. This amount will be expensed over the expected vesting period using the accelerated recognition method due to the fact that the award contained a performance condition.

Also pursuant to his employment agreement, on September 4, 2007 Mr. Cappelli will receive a restricted stock unit award (“RSU”) of 113,896 shares, representing a value of $5.0 million based on a price of $43.90, the closing price of our stock on the business day preceeding his service inception date, or March 30, 2007. These RSUs will be subject to a four year graded vesting schedule with one quarter of the awards vesting at each anniversary of Mr. Cappelli’s commencement of employment with Apollo Group on April 2,2007. Also on September 4, 2007, Mr. Cappelli will receive a fiscal year 2008 equalization grant (“Equalization Grant”), whereby he will be granted options with an aggregate fair value, as determined by the BSM on the grant date, of approximately $3.0 million. The terms of the Equalization Grant will be the same as those of the option grant discussed above. Because the RSU and Equalization Grant contain a performance condition, and the service inception date of April 2, 2007, precedes the grant date of September 4, 2007, we began recognizing expense for these awards as of the service inception date.

Board of Directors Share Issuance

On May 15, 2007, holders of our Class B common stock increased the number of shares reserved for issuance under the 2000 Stock Incentive Plan (“2SIP”) by 5.0 million shares.

Stock Option Modifications

On January 12, 2007, our 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 former employees, including officers, terminated on or after November 3, 2006 to exercise options that were in-the-money as of the end of the 90 day post-termination period provided under

the 2SIP and their option agreements thereunder, beyond this 90 day period. We extended the exercise periods of these options because we were unable, during the financial statement restatement process, to sell shares of our 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 us completing our financial statement restatement process.

As a result of these modifications, we 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 former 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 Accrued Liabilities in our condensed Consolidated Balance Sheets. EITF 00-19 also requires that we 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 our condensed Consolidated Statements of Income. During the three and nine month periods ended May 31, 2007, we recorded fair value adjustments of $0.1 million of income and $2.7 million of expense, respectively. The exercise prices of the approximately 460,000 options subject to EITF 00-19 as of May 31, 2007 range between $6.50 and $41.92.

Share Based Compensation Expense

The table below outlines the effects of share based compensation included in the following costs and expenses in the condensed Consolidated Statements of Income for the three and nine months ended May 31, 2007 and 2006:


	For the Three Months Ended May 31,						For the Nine Months Ended May 31,

($ in thousands, except per share amounts)	2007			2006			2007			2006

Instructional costs and services	$	5,089		$	4,756		$	12,944		$	8,706
Selling and promotional		889			665			2,957			1,251
General and administrative		2,908			1,364			24,865			8,095

Share based compensation expense included in operating expenses		8,886			6,785			40,766			18,052
Tax effect on share based compensation		(3,520	)		(2,688	)		(16,147	)		(7,150	)

Share based compensation expense related to employee stock options, net of tax	$	5,366		$	4,097		$	24,619		$	10,902

Note 7. Commitments and Contingencies

We are 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. 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 of the potential loss is material, and we expense legal fees as incurred.

Internal Revenue Service Audit

On September 13, 2006, the Internal Revenue Service (“IRS”) commenced an audit of our U.S. federal income tax returns for the fiscal years ended August 31, 2003 through 2005 for income and deductions previously claimed by us, including deductions claimed under IRC Section 162(m). In relation to the restatement of prior period financial results for the effects of errors in accounting for stock options and other items (the “Restatement”) which is discussed in detail in the 2006 Form 10-K, certain tax deductions in 2005 and 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 $43.7 million as of May 31, 2007. 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. 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. We do 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 may result in adverse tax consequences to holders of those options under IRC Section 409A. Section 409A imposes 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 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).

As part of the offer and amendment process under IRC Section 409A, we may provide bonuses to the Section 16 Officers 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 the 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).

Non-Section 16 Officers: Section 409A prohibited us from making an offer to amend the 409A Affected Options held by employees who are not 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 until after the Annual Report on Form 10-K and all other delinquent filings were filed with the SEC. In order to avoid adverse taxation under Section 409A, any such 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. On May 22, 2007, we filed our delinquent Form 10-K and Form 10-Q’s and became current with our periodic filing requirements.

On June 13, 2007, we launched a tender offer to amend or replace eligible options held by employees who are not Section 16 officers. In order for an option to be deemed eligible for the tender offer (“Eligible Option”), the following criteria must be met:

	•		The option was granted under either the 2SIP or the Long Term Incentive Plan.

	•		The option was incorrectly priced in that the exercise price per share currently in effect for that option is based on the fair market value per share of the Company’s Class A common stock on a date earlier than the date which has now been determined to be the correct measurement date for that option for financial accounting purposes.

	•		The option was unvested as of December 31, 2004.

	•		The option is held by an individual who is, on the expiration of the offer, a current employee of the Company (or any Apollo Group subsidiary) and subject to income taxation in the United States with respect to that option (an “Eligible Optionee”).

	•		The option is outstanding on the expiration date of the offer which is July 12, 2007.

The amendment will adjust the exercise price per share currently in effect for the Eligible Option to the lower of (i) the fair market value per share of the Company’s Class A common stock on the revised measurement date determined for that option for financial accounting purposes or (ii) the closing price per share of such common stock on the date on which the option is amended. The new exercise price per share will be designated the “Adjusted Exercise Price” and will become effective on the first business day following the expiration of the offer (the “Amendment Date”). However, if the Adjusted Exercise Price as so determined would be the same or lower than the exercise price per share currently in effect for the Eligible Option, then that option will, on the Amendment Date, be canceled and immediately replaced with a new option that is exactly the same as the canceled option, including the same exercise price per share and no loss of vesting or change to the expiration date of the option term, but with a new grant date. Such cancellation and re-grant is necessary to evidence the remedial action required under Section 409A with respect to an Eligible Option whose current exercise price is not increased.

If only a portion of an outstanding option is an Eligible Option (i.e., the portion of such option that was unvested as of December 31, 2004), then only that portion may be amended or replaced pursuant to the offer. The balance of such option will not be subject to the offer and will not constitute an Eligible Option for purposes of the offer. That portion (i.e., the portion that was vested as of December 31, 2004) will retain its current exercise price and will not be subject to adverse tax consequences under Section 409A of the Internal Revenue Code.

Each Eligible Optionee whose Eligible Option is amended to increase the exercise price pursuant to the offer will become entitled to receive a special cash bonus (the “Cash Bonus”) with respect to that option. The amount of the Cash Bonus payable with respect to each Eligible Option that is amended to increase the exercise price to the Adjusted Exercise Price will be determined by multiplying (i) the amount by which the Adjusted Exercise Price exceeds the exercise price per share currently in effect for that Eligible Option by (ii) the number of shares of the Company’s Class A common stock purchasable under that option at the Adjusted Exercise Price. The Cash Bonus will be paid on our first regularly scheduled payroll date after January 1, 2008, which will not be later than January 15, 2008. Such a delayed payment is required by applicable Internal Revenue Service regulations. The payment when made will be subject to collection of all applicable withholding taxes and other amounts required to be withheld by the Company. Such Cash Bonus will be paid whether or not the employee continues to be employed by us through the payment date. The amount of such Cash Bonus cannot be determined until July 12, 2007, the expiration date of the offer and is not expected to be material.

(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 resulted in additional taxable income to the option holders. As such, we paid on behalf of or reimbursed the option holders for applicable payroll and income taxes related to the additional income, as well as provided a gross up for any tax consequences of the penalty tax and interest reimbursement it made. We recorded a pre-tax liability in the second quarter of 2007 for compensation expense under this program totaling approximately $2.6 million. In the third quarter of 2007, we recorded an additional $0.1 million. During June 2007, we made payments for substantially all of the amounts due to the IRS as well as the employee tax gross up accrued under the program.

Sale Leaseback Option

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 leaseback 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 of approximately $20.0 — $30.0 million. The gain will be deferred over the 12 year term of the lease agreement.

Naming Rights to Glendale, Arizona Sports Complex

On September 22, 2006, we 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, we were 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.

Contingencies Related to Litigation and Other Proceedings

The following is a description of pending litigation that fall outside the scope of ordinary and routine litigation incidental to our 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 compensated 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 the 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 June 11, 2007, the District Court held a hearing on UPX’s motion 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. 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.

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 Department of Justice (“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.

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 were filed on 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 Hedy F. 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. Responses of the defendants are due on July 2, 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.

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. 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 and 21D of the Exchange Act and numerous breaches of fiduciary duties. The complaint seeks damages sustained by Apollo Group 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 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

On December 22, 2005, the Office of Inspector General (“OIG”) issued an 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. On November 3, 2006, the U.S. Department of Education issued a preliminary audit determination letter (PADL) concerning UPX’s administration of the Title IV federal student aid programs regarding this matter. On June 7, 2007, UPX responded to the PADL request with results of the file review. 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 our business, financial position, results of operations, or cash flows to result from these actions.

Department of Justice Investigation

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

SEC Informal Inquiry

On June 30, 2006, we were notified by letter from the SEC of an informal inquiry and the Commission’s request for the production of documents relating to our stock option grants. We are cooperating fully with this investigation.

Nasdaq Proceeding

The Company’s Annual Report on Form 10-K for 2006 and its Quarterly Reports on Form 10-Q for the quarters ended, May 31, 2006, November 30, 2006, and February 28, 2007, were filed with the SEC on May 22, 2007, and an Amendment to the Quarterly Report on Form 10-Q/A for the quarter ended February 28, 2007, was filed with the SEC on May 25, 2007. On May 24, 2007, the Nasdaq Listing and Hearing Review Council determined that the Company demonstrated compliance with all Nasdaq Marketplace Rules and informed the Company that the Nasdaq delisting matter is now closed and the Company’s Class A Common Stock will continue to be listed on The Nasdaq Global Select Market.

Note 8. Segment Reporting

We operate exclusively in the educational industry providing higher education. Our five reportable segments are aggregated into three reportable operating segments for financial reporting purposes: the University of Phoenix, Other Schools and Corporate. The Other Schools segment includes IPD, WIU, CFP, and Insight which are not material to our overall results. The University of Phoenix and Other Schools segments are composed of educational operations conducted in similar markets and produce similar economic results. Our 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”), our 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 charges allocating all corporate support costs to each segment, 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 the UPX or Other Schools segments are included in the Corporate segment.

The accounting policies of each segment are consistent with those referred to in the summary of significant accounting policies in Note 2 of our 2006 consolidated financial statements included in our 10-K. Transactions between segments are consummated on a basis intended to reflect the market value of the underlying services and are eliminated upon consolidation.

Our 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 three months ended May 31, 2007 and 2006, no individual customer accounted for more than 10% of our consolidated revenues.

Summary financial information by reportable segment is as follows:


	For the Three Months Ended						For the Nine Months Ended
	May 31,						May 31,
($ in thousands)	2007			2006			2007			2006

Tuition and other, net
UPX	$	689,549		$	540,812		$	1,862,155		$	1,533,980
Other Schools		42,670			111,862			146,453			317,579
Corporate		1,173			723			1,263			1,061

Total tuition and other revenues, net	$	733,392		$	653,397		$	2,009,871		$	1,852,620


Income from operations:
UPX	$	205,962		$	172,816		$	490,004		$	484,559
Other Schools		7,771			29,282			26,940			82,905
Corporate/Eliminations		(10,361	)		(1,022	)		(41,791	)		(33,422	)

		203,372			201,076			475,153			534,042

Reconciling items:
Interest income and other, net		8,530			4,437			21,940			12,421

Income before income taxes	$	211,902		$	205,513		$	497,093		$	546,463

Note 9. Acquisitions

On October 20, 2006 we 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. We 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. We believe this acquisition allows us 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”, under which the initial purchase price allocation is subject to revision for a period of one year from the date of the acquisition. As a result of the acquisition, Goodwill increased by $14.1 million.

Note 10. Subsequent Events

Election of Board of Directors

On June 21, 2007, at the Annual Meeting of the holders of our Class B common stock, Gregory W. Cappelli, Dino J. DeConcini, Roy A. Herberger Jr., Brian Mueller, K. Sue Redman, James R. Reis, Dr. John G. Sperling, Peter V. Sperling and George Zimmer were elected to our Board of Directors. The Board of Directors now consists of five independent directors and four non independent directors as defined in Nasdaq MarketPlace Rule 4200.

Amendment to Articles of Incorporation

On June 14, 2007, the holders of Apollo Group Class B common stock voted to approve the Articles of Amendment to the Articles of Incorporation. The Articles of Amendment were filed with the State of Arizona on June 20, 2007.

Changes in Management

In June 2007 upon becoming an employee, we entered into an employment agreement with Joseph L. D’Amico under which he will serve as our Executive Vice President and Chief Financial Officer. Mr. D’Amico was appointed as CFO on December 8, 2006 and had been serving in such capacity as a consultant.

Share Repurchase

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. On June 22, 2007, the Board of Directors increased the authorization to repurchase up to $500 million of Apollo Group Class A common stock.

Stock Option Grants

On June 27, 2007, the Compensation Committee approved a grant of approximately 4.1 million stock options and approximately 0.3 million restricted stock units to be granted three business days after the release of our third quarter 2007 financial results.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

The following discussion is intended to help the investor understand Apollo Group, Inc., (“the Company,” “Apollo Group,” “Apollo,” “APOL,” “we,” “us,” or “our”) our operations, and our present business environment. The MD&A is provided as a supplement to—and should be read in conjunction with—our condensed unaudited 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.

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

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

	•		Results of Operations—an analysis of our results in our consolidated financial statements. We operate in one business sector—education. Except to the extent that differences between our three operating segments are material to an understanding of our business as a whole, we present the discussion in the 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 Quarterly Report on Form 10-Q, 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 the Company’s 2006 Annual Report on Form 10-K filed on May 22, 2007. 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.

Executive Summary

We have been an education provider for more than 30 years, operating University of Phoenix, Inc. (“UPX”), Institute for Professional Development (“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. We offer innovative and distinctive educational programs and services from high school through college-level at 100 campuses and 159 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 (including Axia students enrolled in UPX and WIU) as of May 31, 2007 was approximately 311,100. In addition, students are enrolled in WIU, CFP and IPD Client Institutions, and additional non-degreed students are enrolled in UPX. 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 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.

During fiscal year 2007, we experienced the following significant events:

	1.		Senior Management Changes- Ms. Kenda B. Gonzales resigned as Chief Financial Officer and Treasurer. Ms. Gonzales was replaced by Mr. Joseph L. D’Amico who was appointed Executive Vice Preseident and Chief Financial Officer. Mr. Daniel E. Bachus resigned as Chief Accounting Officer and Controller and was replaced by Mr. Brian L. Swartz, who was appointed Senior Vice President of Finance and Chief Accounting Officer. Mr. Gregory W. Cappelli was appointed Executive Vice President, Global Strategy and Assistant to the Chairman.

	2.		Enrollment and Revenue Growth While Investing in our Business for the Future- We achieved a 10.3% average quarterly Degreed Enrollment growth for the nine months ended May 31, 2007, which resulted in an 8.5% increase in revenue for the nine months ended May 31, 2007. These increases helped fund a significant portion of our investment in product development and marketing and lead generation over the same period to ensure our continued growth and viability in the future.

	3.		Financial Statement Restatement- On May 22, 2007 we filed our 2006 Form 10-K and three Form 10-Q Reports with the SEC. With these filings, we have completed the process related to our financial statement restatement. On May 24, 2007 the Nasdaq Listing and Hearing Review Council determined that the Company demonstrated compliance with all Nasdaq Marketplace Rules and informed the Company that the Nasdaq delisting matter is now closed and the Company’s Class A Common Stock will continue to be listed on The Nasdaq Global Select Market.

	4.		Naming Rights to Glendale, Arizona Sports Complex- On September 22, 2006, we 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, we were 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.

	5.		Insight Schools Acquisition- On October 20, 2006, we 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. We 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. We believe this acquisition allows us 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”, under which the initial purchase price allocation is subject to revision for a period of one year from the date of the acquisition. As a result of the acquisition, goodwill increased by $14.1 million.

Critical Accounting Policies and Estimates

Please refer to our Annual Report filed on Form 10-K for the fiscal year ended August 31, 2006 filed on May 22, 2007.

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 nine months.

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 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.

Three-Months Ended May 31, 2007 Compared to the Three-Months Ended May 31, 2006

All references to 2006 and 2007 in this section refer to the three-months ended May 31, 2006 and 2007, unless otherwise noted. The following table sets forth an analysis of our Consolidated Statements of Income for the periods indicated:

Analysis of Consolidated Statements of Income


					% of Revenues
	For the Three Months				For the Three Months
	Ended May 31,				Ended May 31,						% Change
($ in millions, except percentages)	2007		2006		2007			2006			2007 vs. 2006

Revenues:
Tuition and other, net	$	733.4	$	653.4		100.0	%		100.0	%		12.2	%

Costs and expenses:
Instructional costs and services		321.0		283.7		43.8	%		43.4	%		13.1	%
Selling and promotional		162.9		138.2		22.2	%		21.2	%		17.9	%
General and administrative		46.1		30.4		6.3	%		4.7	%		51.6	%

		530.0		452.3		72.3	%		69.2	%		17.2	%

Income from operations		203.4		201.1		27.7	%		30.8	%		1.1	%
Interest income and other, net		8.5		4.5		1.2	%		0.7	%		88.9	%

Income before income taxes		211.9		205.6		28.9	%		31.5	%		3.1	%
Provision for income taxes		80.5		74.1		11.0	%		11.3	%		8.6	%

Net income	$	131.4	$	131.5		17.9	%		20.1	%		-0.1	%

Refer to the above Analysis of Consolidated Statements of Income when reading the results of operations discussion below.

Tuition and Other, Net Revenues

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


	For the Three Months
	Ended May 31,
	2007			2006

UPX		94.0	%		82.8	%
Other Schools		5.8	%		17.1	%
Corporate		0.2	%		0.1	%

Tuition and other, net		100.0	%		100.0	%

Our tuition and other revenues, net increased by 12.2% in 2007, primarily due to a 12.2% increase in Degreed Enrollments and secondarily due to selective tuition price increases depending on geographic area and program. Our associate’s degree program has a lower price point than our other programs. Accordingly, we continued to experience negative mix shift during the quarter as our associate’s Degreed Enrollments increased 55.0% from the third quarter of 2006 and represented 31.7% of our Degreed Enrollments as of May 31, 2007 compared to 22.9% as of May 31, 2006. The negative mix shift was slightly offset by an approximate 10% tuition increase in our associate’s degree program in May 2007. We expect this tuition increase to positively impact our associate’s degree tuition rate per Degreed Enrollment prospectively.

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

Instructional Costs and Services

Instructional costs and services increased by 13.1% in 2007 versus 2006. The following table sets forth the changes in the significant components of instructional costs and services:


					% of Revenues
	For the Three Months				For the Three Months
	Ended May 31,				Ended May 31,						% Change
($ in millions)	2007		2006		2007			2006			2007 vs. 2006

Employee compensation and related expenses	$	106.1	$	97.4		14.5	%		14.9	%		8.9	%
Faculty compensation		62.7		54.8		8.5	%		8.4	%		14.4	%
Classroom lease expenses and depreciation		50.9		48.9		6.9	%		7.5	%		4.1	%
Other instructional costs and services		45.2		39.8		6.2	%		6.1	%		13.6	%
Bad debt expense		34.3		24.5		4.7	%		3.7	%		40.0	%
Financial aid processing costs		16.7		13.5		2.3	%		2.1	%		23.7	%
Share based compensation		5.1		4.8		0.7	%		0.7	%		6.3	%

Instructional costs and services	$	321.0	$	283.7		43.8	%		43.4	%		13.1	%

Instructional costs and services as a percentage of tuition and other net revenues increased in 2007 versus 2006 due primarily to increases in bad debt expense and higher employee compensation and related expenses. Bad debt expense increased as a result of higher days sales outstanding (“DSO”), (36 days as if May 31, 2007 versus 32 days as of August 31, 2006), longer receivable collection periods, and higher write-offs primarily from our associate’s degree program students. We believe the bad debt expense as a percent of revenue will remain at 4-5% for the near term. Employee compensation and related expense increased primarily to support the 12.2% increase in Degreed Enrollments.

Selling and Promotional Expenses

Selling and promotional expenses increased by 17.9% in 2007 versus 2006. The following table sets forth the changes in the significant components of selling and promotional expenses:


					% of Revenues
	For the Three Months				For the Three Months
	Ended May 31,				Ended May 31,						% Change
($ in millions)	2007		2006		2007			2006			2007 vs. 2006

Enrollment advisors’ compensation and related expenses	$	80.2	$	63.7		10.9	%		9.8	%		25.9	%
Advertising		66.7		56.9		9.1	%		8.7	%		17.2	%
Other selling and promotional expenses		15.1		16.9		2.1	%		2.5	%		-10.7	%
Share based compensation		0.9		0.7		0.1	%		0.1	%		28.6	%

Selling and promotional expenses	$	162.9	$	138.2		22.2	%		21.1	%		17.9	%

Selling and promotional expenses increased as a percentage of revenue in 2007 versus 2006 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 timeliness of lead distribution. Selling and promotional expenses also increased as a result of our continued investment in Internet-based advertising campaigns, as well as the launch of our national televised branding campaign.

General and Administrative Expenses

General and administrative expenses increased by 51.6% in 2007 versus 2006. The following table sets forth the changes in the significant components of general and administrative expenses:


					% of Revenues
	For the Three Months				For the Three Months
	Ended May 31,				Ended May 31,						% Change
($ in millions)	2007		2006		2007			2006			2007 vs. 2006

Employee compensation and related expenses	$	18.6	$	12.3		2.6	%		2.0	%		51.2	%
Share based compensation		2.9		1.4		0.4	%		0.2	%		107.1	%
Legal, audit, and corporate insurance		3.1		4.4		0.4	%		0.7	%		-29.5	%
Administrative space and depreciation		5.2		5.5		0.7	%		0.8	%		-5.5	%
Other general and administrative expenses		16.3		6.8		2.2	%		1.0	%		139.7	%

General and administrative expenses	$	46.1	$	30.4		6.3	%		4.7	%		51.6	%

Included in the 2007 amount is $7.7 million of stock option investigation and financial statement restatement costs; these costs are included in other general and administrative expenses. Excluding these costs, general and administrative expenses were relatively consistent as a percentage of revenue between 2007 and 2006 (5.2% in 2007 and 4.7% in 2006).

Interest Income and Other, Net

Net interest income and other increased by $4.0 million in 2007 versus 2006. This increase was primarily attributable to; a) higher yields earned on our cash equivalents and marketable securities as a result of higher interest rates, and 2) higher average balances in cash and cash equivalents, restricted cash and marketable securities.

Provision for Income Taxes

Our effective income tax rate increased to 38.0% in the three months ended May 31, 2007, from 36.1% in the three months ended May 31, 2006, primarily due to the benefit of statute expirations realized in 2006 associated with Internal Revenue Code Section 162(m).

Nine-Months Ended May 31, 2007 Compared to the Nine-Months Ended May 31, 2006

All references to 2006 and 2007 in this section refer to the nine-months ended May 31, 2006 and 2007, unless otherwise noted. The following table sets forth an analysis of our Consolidated Statements of Income for the periods indicated:

Analysis of Consolidated Statements of Income


					% of Revenues
	For the Nine Months				For the Nine Months
	Ended May 31,				Ended May 31,						% Change
($ in millions, except percentages)	2007		2006		2007			2006			2007 vs. 2006

Revenues:
Tuition and other, net	$	2,009.9	$	1,852.6		100.0	%		100.0	%		8.5	%

Costs and expenses:
Instructional costs and services		910.2		809.3		45.3	%		43.7	%		12.5	%
Selling and promotional		485.3		390.4		24.1	%		21.1	%		24.3	%
General and administrative		139.2		118.8		6.9	%		6.4	%		17.2	%

		1,534.7		1,318.5		76.4	%		71.2	%		16.4	%

Income from operations		475.2		534.1		23.6	%		28.8	%		-11.0	%
Interest income and other, net		21.9		12.4		1.1	%		0.7	%		76.6	%

Income before income taxes		497.1		546.5		24.7	%		29.5	%		-9.0	%
Provision for income taxes		191.4		207.4		9.5	%		11.2	%		-7.7	%

Net income	$	305.7	$	339.1		15.2	%		18.3	%		-9.8	%

Refer to the above Analysis of Consolidated Statements of Income when reading the results of operations discussion below.

Tuition and Other, Net Revenues

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


	For the Nine Months
	Ended May 31,
	2007			2006

UPX		92.6	%		82.8	%
Other Schools		7.3	%		17.1	%
Corporate		0.1	%		0.1	%

Tuition and other, net		100.0	%		100.0	%

Our tuition and other revenues, net increased by 8.5% for the nine months ended May 31, 2007 primarily due to a 10.3% increase in average quarterly Degreed Enrollments and secondarily due to selective tuition increases depending on geographic area and program. Our associate’s degree program has a lower price point than our other programs. Accordingly, we continued to experience negative mix shift in 2007 compared to 2006 as our associate’s Degreed Enrollments increased 61.1% from 2006 and represented 31.7% of our Degreed Enrollments as of May 31, 2007 compared to 22.9% as of May 31, 2006. The negative mix shift was slightly offset by an approximate 10% tuition increase in our associate’s degree program in May 2007. We expect this tuition increase to positively impact our associate’s degree tuition rate per Degreed Enrollment prospectively.

Tuition and other revenues, net at Other Schools decreased as a percentage of total revenues in 2007 due to enrollment in associate’s degree programs at Axia College of UPX. Axia College began offering these programs in September 2004 at WIU. 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 continue to decrease prospectively.

Instructional Costs and Services

Instructional costs and services increased by 12.5% in 2007 versus 2006. The following table sets forth the changes in the significant components of instructional costs and services:


					% of Revenues
	For the Nine Months				For the Nine Months
	Ended May 31,				Ended May 31,						% Change
($ in millions)	2007		2006		2007			2006			2007 vs. 2006

Employee compensation and related expenses	$	315.2	$	275.9		15.8	%		14.9	%		14.2	%
Faculty compensation		173.8		157.3		8.6	%		8.5	%		10.5	%
Classroom lease expenses and depreciation		152.8		142.7		7.6	%		7.7	%		7.1	%
Other instructional costs and services		126.3		113.5		6.3	%		6.1	%		11.3	%
Bad debt expense		83.3		72.2		4.1	%		3.9	%		15.4	%
Financial aid processing costs		45.9		39.0		2.3	%		2.1	%		17.7	%
Share based compensation		12.9		8.7		0.6	%		0.5	%		48.3	%

Instructional costs and services	$	910.2	$	809.3		45.3	%		43.7	%		12.5	%

Instructional costs and services as a percentage of tuition and other net revenues increased in 2007 versus 2006 due primarily to increases in bad debt expense and higher employee compensation and related expenses. Bad debt expense increased as a result of higher DSO’s (36 days as if May 31, 2007 versus 32 days as of August 31, 2006).longer receivable collection periods, and higher write-offs primarily from our associate’s degree program students. We believe the bad debt expense as a percent of revenue will remain at 4-5% for the near term. Employee compensation and related expense increased primarily to support the 10.3% increase in average quarterly Degreed Enrollments, as well as wage adjustments instituted in December 2005 that increased pay principally to entry-level employees.

Selling and Promotional Expenses

Selling and promotional costs and services increased by 24.3% in 2007 versus 2006. The following table sets forth the changes in the significant components of selling and promotional expenses:


					% of Revenues
	For the Nine Months				For the Nine Months
	Ended May 31,				Ended May 31,						% Change
($ in millions)	2007		2006		2007			2006			2007 vs. 2006

Enrollment advisors’ compensation and related expenses	$	235.1	$	183.1		11.7	%		9.9	%		28.4	%
Advertising		204.2		162.8		10.2	%		8.8	%		25.4	%
Other selling and promotional expenses		43.0		43.2		2.1	%		2.3	%		-0.5	%
Share based compensation		3.0		1.3		0.1	%		0.1	%		130.8	%

Selling and promotional expenses	$	485.3	$	390.4		24.1	%		21.1	%		24.3	%

Selling and promotional expenses increased as a percentage of revenue in 2007 versus 2006 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 timeliness of lead distribution. We also increased the entry-level pay for enrollment advisors in an attempt to bring in more highly qualified staff. Selling and promotional expenses also increased as a result of our continued investment in Internet-based advertising campaigns and the launch of our national televised branding campaign.

General and Administrative Expenses

General and administrative expenses increased by 17.2% in 2007 versus 2006. The following table sets forth the changes in the significant components of general and administrative expenses:


					% of Revenues
	For the Nine Months				For the Nine Months
	Ended May 31,				Ended May 31,						% Change
($ in millions)	2007		2006		2007			2006			2007 vs. 2006

Employee compensation and related expenses	$	50.4	$	64.6		2.4	%		3.5	%		-22.0	%
Share based compensation		24.9		8.1		1.2	%		0.4	%		207.4	%
Legal, audit, and corporate insurance		9.1		10.0		0.5	%		0.6	%		-9.0	%
Administrative space and depreciation		15.6		16.0		0.8	%		0.9	%		-2.5	%
Other general and administrative expenses		39.2		20.1		2.0	%		1.1	%		95.0	%

General and administrative expenses	$	139.2	$	118.8		6.9	%		6.4	%		17.2	%

Included in the above amounts are several one-time or special items, which are summarized below:


	For the Nine Months
	Ended May 31,
	2007		2006		Line item included in above
Former CEO severance	$	—	$	26.0	Employee compensation and related expenses
Stock option modifications		12.1		—	Share based compensation
Fair value adjustment for former employee stock options		2.7		—	Other general and administrative expenses
Stock option investigation/ financial statement restatement		13.0		—	Other general and administrative expenses

Subtotal	$	27.8	$	26.0

Excluding the items above, general and administrative expense was $111.4 million and $92.8 million in the nine-months ended May 31, 2007 and 2006, or 5.5% and 5.0% as a percentage of revenue, respectively. This remaining increase is primarily due to higher share based compensation expense and additional staff to support our corporate functions.

During the second quarter of 2007, our Board of Directors approved a resolution to modify the terms of certain stock option grants. These modifications allowed employees, including officers, terminated on or after November 3, 2006 to exercise their options beyond the 90 day post-termination period as provided in our stock option plans. As a result of these modifications, we were required to record a $12.1 million charge to share based compensation during the second quarter of 2007. In addition, for modified options held by employees who terminated prior to the January 12, 2007, the modifications are subject to fair value adjustments to our income statement until the awards are exercised or forfeited. We recorded $2.7 million of expense as a result of the increase in the fair value of these awards as of May 31, 2007.

Interest Income and Other, Net

Net interest income and other increased by $9.5 million in 2007 versus 2006. This increase was primarily attributable to: a) higher yields earned on our cash equivalents and marketable securities as a result of higher interest rates, and 2) higher average balances in cash and cash equivalents, restricted cash and marketable securities.

Provision for Income Taxes

Our effective income tax rate increased to 38.5% in the nine months ended May 31, 2007, from 37.9% in the nine months ended May 31, 2006, primarily due to the effect of statute expirations in 2006 associated with Internal Revenue Code Section 162(m).

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 investing in our core domestic business, completing domestic and international acquisitions, evaluating 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.

Sale Leaseback Option

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 leaseback 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 of approximately $20.0 — $30.0 million. The gain will be deferred over the 12 year term of the lease agreement.

Cash and Cash Equivalents and Marketable Securities

Cash and cash equivalents and marketable securities increased $281.4 million, or 68.8%, to $690.1 million as of May 31, 2007 from $408.7 million, as of August 31, 2006. Cash and cash equivalents and marketable securities represented 40.6% and 31.9% of our total assets as of May 31, 2007 and August 31, 2006, respectively. The increase was primarily due to the $406.5 million of cash generated from operations during the first nine months of fiscal 2007, partially offset by $70.4 million from capital expenditures and $15.1 million from the purchase of Insight Schools.

Cash Flows

Operating Activities. Operating activities provided $406.5 million in cash for the first nine months of fiscal 2007 compared to providing $438.0 million for the same period in fiscal 2006. Included below is a summary of operating cash flows:


	Nine Months Ended May 31,
($ in millions)	2007			2006

Net income	$	305.7		$	339.1
Non-cash items		141.1			113.7
Changes in certain operating assets and liabilities		(40.3	)		(14.8	)

Net cash from operating activities	$	406.5		$	438.0

Our non-cash items consisted primarily of a provision for bad debts, depreciation and amortization, share based compensation, and deferred taxes. Changes in certain operating assets and liabilities primarily consist of accounts receivable, accounts payable, accrued liabilities, student deposits and deferred revenue.

The most significant item in these operating cash flow activities is our accounts receivable. We monitor our accounts receivable through a variety of metrics, including DSO’s. We calculate our DSO based on determining average daily revenue based on a rolling twelve month analysis and divide it into the gross student accounts receivable balance as of the end of the period. We previously reported that our DSO as of February 28, 2007 was 40 days. This was inaccurately reported due to a miscalcuation; the correct DSO was 37 days. DSO has decreased to 36 days as of May 31, 2007. As of August 31, 2006, our DSO was 32 days. The increase in DSO during 2007 is primarily the result of longer receivable collection periods and higher write-offs primarily from our associate’s degree program students.

Investing Activities. Investing activities used $94.8 million in cash during the first nine months of fiscal 2007 compared to providing $96.2 million in fiscal 2006. The fiscal 2007 amount primarily includes $70.4 million for capital expenditures, of which $32.1 million related to the build out of our new corporate headquarters building in Phoenix, Arizona, and a $48.7 million increase in restricted cash due to the increase in student deposits related to Title IV funds received. Also included in the fiscal 2007 investing cash flows is $15.1 million used for the purchase of Insight Schools. The fiscal 2006 amount includes $78.9 million for capital expenditures, of which $35.3 million is related to the build out of our new corporate headquarters building in Phoenix, AZ.

Financing Activities. Financing activities provided $7.6 million of cash during fiscal 2007 compared to using $478.8 million in fiscal 2006. The 2006 amount relates primarily to repurchases of our Class A common stock, net of proceeds from stock option exercises. There were no repurchases of stock during the first nine months of fiscal 2007.

Contractual Obligations and Other Commercial Commitments

Please refer to our Annual Report filed on Form 10-K for the fiscal year ended August 31, 2006 filed on May 22, 2007.

Recent Accounting Pronouncements

Please refer to our Annual Report filed on Form 10-K for the fiscal year ended August 31, 2006 filed on May 22, 2007.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Please refer to our Annual Report filed on Form 10-K for the fiscal year ended August 31, 2006 filed on May 22, 2007.

Item 4. 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 effective to provide reasonable assurance of achieving their objectives.

Attached as exhibits to this Quarterly Report on Form 10-Q 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.

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 evaluated the effectiveness of internal control over financial reporting as of the end of our fiscal year ending 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”). In its evaluation 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.

(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 May 31, 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 $43.7 million as of May 31, 2007. 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.

Changes in Internal Control Over Financial Reporting

As of May 31, 2007, the Company believes it has made substantial progress towards remediating the material weaknesses described above relating to the Company’s internal control over financial reporting. Changes made to the Company’s internal controls over financial reporting are discussed below.

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 as discussed in our Form 10-K for the fiscal year ended August 31, 2006 filed on May 22, 2007. 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, second, and third 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 appointed its new Chief Financial Officer on December 8, 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 engaged a new stock option plan administrator.

	•		The Company is conducting a search for an experienced and well-qualified individual to serve as a General Counsel to the Company.

	•		The Company hired a new Chief Audit Executive in June 2007 who reports to the Audit Committee.

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.

	•		The Compensation Committee suspended the exercise of stock options until the Company became compliant 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 reviews and reconciliations related to equity-based compensation award activity and allowance for doubtful accounts activity, and an annual review of 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.


	PAGE
PART I – FINANCIAL INFORMATION

Special Note Regarding Forward-Looking Statements		3
Item 1. Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		27
Item 4. Controls and Procedures		27

PART II – OTHER INFORMATION

Item 1. Legal Proceedings		30
Item 1A. Risk Factors		30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3. Defaults Upon Senior Securities		30
Item 4. Submission of Matters to a Vote of Security Holders		30
Item 5. Other Information		30
Item 6. Exhibits		31
SIGNATURES		32
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-10.9
EX-10.10
EX-31.1
EX-31.2
EX-32.1
EX-32.2


Exhibit Number		Description of Exhibit

	10.1	Employment Agreement between Apollo Group, Inc. and Joseph L. D’Amico dated June 5, 2007

	10.2	Amendment to Employment Agreement between Apollo Group, Inc. and Joseph L. D’Amico dated June 15, 2007

	10.3	Amended and Restated 2000 Stock Incentive Plan

	10.4	Plan Amendment to 2000 Stock Incentive Plan

	10.5	Plan Amendment to Long-Term Incentive Plan

	10.6	Form of Stock Option Agreement for Non-Employee Board Members

	10.7	Form of Restricted Stock Unit Award for Non-Employee Board Members

	10.8	Form of Stock Option Award for Officers and Employees

	10.9	Form of Restricted Stock Unit Award for Officers

	10.10	Stock Option Agreement between Apollo Group and Gregory Cappelli

	31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of Chief 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


Date: June 28, 2007	APOLLO GROUP, INC. (Registrant)
	By:	/s/ Joseph L. D’Amico
		Joseph L. D’Amico
		Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Signatory)


	By:	/s/ Brian L. Swartz
		Brian L. Swartz
		Senior Vice President of Finance and Chief Accounting Officer (Principal Accounting Officer and Duly Authorized Signatory)

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