Back to GetFilings.com

Table of Contents

UNITED STATES

FORM 10-K

(Mark One)

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For the fiscal year ended: August 31, 2003

OR

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For the transition period from           to           

Commission file number: 0-25232

APOLLO GROUP, INC.

4615 East Elwood Street, Phoenix, Arizona 85040

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

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

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

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No o

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

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act).    Yes x    No o 

     No shares of the Company’s Apollo Education Group Class B common stock, its voting stock, are held by non-affiliates. The holders of the Company’s Apollo Education Group Class A common stock are not entitled to any voting rights. The aggregate market value of Apollo Education Group Class A common stock held by non-affiliates as of February 28, 2003, was approximately $8.1 billion. The holders of the Company’s University of Phoenix Online common stock are not entitled to any voting rights. The aggregate market value of University of Phoenix Online common stock held by non-affiliates as of February 28, 2003, was approximately $568.1 million.

     The number of shares outstanding for each of the registrant’s classes of common stock, as of November 17, 2003, is as follows:

Documents Incorporated By Reference

     Portions of the registrant’s Annual Report to Shareholders for the year ended August 31, 2003 are incorporated herein by reference into Part II. With the exception of those portions which are expressly incorporated by reference in this Annual Report on Form 10-K, the Apollo Group, Inc. 2003 Annual Report is not deemed filed as part of this report.

Table of Contents

APOLLO GROUP, INC. AND SUBSIDIARIES

FORM 10-K

INDEX

Table of Contents

PART I

Item 1 — Business

Overview

      This Annual Report on Form 10-K, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online” which are incorporated by reference from our 2003 Annual Report, contain forward-looking statements regarding future events and future results of Apollo Group 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. Words such as “believes,” “expects,” “anticipates,” “estimates,” “targets,” “goals,” “projects,” “intends,” “plans,” and other similar statements of expectations identify forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Future events and actual results could differ materially from those set forth in the forward-looking statements as a result of many factors. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Form 10-K, including those set forth in Item 1 under the sections titled “Regulatory Environment,” “Accreditation,” “Federal Financial Aid Programs,” and “State Authorization,” and those factors set forth in other reports that we file with the Securities and Exchange Commission. 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.

      Apollo Group, Inc. has been providing higher education to working adults for over 25 years. We operate through our subsidiaries, The University of Phoenix, Inc., Institute for Professional Development, The College for Financial Planning Institutes Corporation, and Western International University, Inc. The consolidated enrollment in our educational programs would make us the largest private institution of higher education in the United States. We currently offer our programs and services at 71 campuses and 121 learning centers in 37 states, Puerto Rico, and Vancouver, British Columbia. Our combined degree enrollment increased to approximately 200,100 at August 31, 2003 from approximately 86,800 at August 31, 1999.

      University of Phoenix had degree enrollments of approximately 174,900 adult students at August 31, 2003, is accredited by The Higher Learning Commission, and has been a member of the North Central Association of Colleges and Schools since 1978. University of Phoenix has successfully replicated its teaching/learning model while maintaining educational quality at 46 physical campuses and 87 learning centers in Arizona, California, Colorado, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, Puerto Rico, and Vancouver, British Columbia. University of Phoenix also offers its educational programs worldwide through University of Phoenix Online, its computerized educational delivery system. University of Phoenix has customized computer programs for student tracking, marketing, faculty recruitment and training, and academic quality management. These computer programs are intended to provide uniformity among University of Phoenix’s campuses and learning centers which enhances University of Phoenix’s ability to expand into new markets while still maintaining academic quality. Currently, approximately 50% of University of Phoenix’s students receive some level of tuition assistance from their employers.

      Institute for Professional Development provides program development and management consulting services to regionally accredited private colleges and universities (client institutions) who are interested in expanding or developing their programs for working adults. These services typically include degree program design, curriculum development, market research, student recruitment, and performing accounting and administrative services. Institute for Professional Development provides these services to regionally accredited private colleges and universities at 22 campuses and 31 learning centers in 22 states in exchange for a contractual share of the tuition revenues generated from these programs. Institute for Professional Develop-

1

Table of Contents

	•	are interested in developing or expanding off-campus degree programs for working adults;
	•	recognize that working adults require a different teaching/ learning model than the 18 to 24 year old student;
	•	desire to increase enrollments with a limited investment in institutional capital; and
	•	recognize the unmet educational needs of the working adult students in their market.

      Approximately 22,300 degree-seeking students are currently enrolled in Institute for Professional Development assisted programs.

      The College for Financial Planning provides financial planning education programs, including the Certified Financial Planner Professional Education Program. The College for Financial Planning also offers some of its non-degree programs at University of Phoenix campuses.

      Western International University currently offers graduate and undergraduate degree programs to approximately 2,000 students in Phoenix, Chandler, Scottsdale, and Fort Huachuca, Arizona.

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

      Our fiscal year is from September 1 to August 31. Unless otherwise stated, references to the years 2003, 2002, and 2001 relate to the fiscal years ended August 31, 2003, 2002, and 2001, respectively.

Industry Background

      The adult 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 $280 billion industry. According to the U.S. Department of Education, over 5.9 million, or 39% of all students enrolled in higher education programs are over the age of 24. This number is projected to reach 6.6 million in 2007 and 6.9 million in 2012. The market for adult education should continue to increase as working adults seek additional education and training to update and improve their skills, to enhance their earnings potential, and to keep pace with the rapidly expanding knowledge-based economy.

      Many working adults are seeking accredited degree programs that provide flexibility to accommodate the fixed schedules and time commitments associated with their professional and personal obligations. Our format enables working adult students to attend classes and complete coursework on a more convenient schedule. Many universities and emerging technology-based education and training companies currently do not effectively address the unique requirements of working adult students due to the following specific constraints:

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

	•	a high percentage of full-time tenured faculty with doctoral degrees;
	•	fully-configured library facilities and related full-time staff;

2

Table of Contents

	•	dormitories, student unions, and other significant plant assets to support the needs of younger students; and
	•	an emphasis on research and the related staff and facilities.

	•	The majority of accredited colleges and universities continue to provide the bulk of their educational programming from September to mid-December and from mid-January to May. As a result, most full-time faculty members only teach during that limited period of time. While this structure serves the needs of the full-time 18 to 24 year old student, it limits the educational opportunity for working adults who must delay their education for up to five months during these spring, summer, and winter breaks.
	•	Traditional universities and colleges are also limited in their ability to market to or provide the necessary customer service for working adult students because it requires the development of additional administrative and enrollment infrastructure. University of Phoenix maintains a single-minded focus on serving the needs of working adult students.

      We believe that our track record for enrollment and revenue growth is attributable to our offering a comprehensive service combining educational content, teaching resources, and customer service with a format that is accessible and easy to use for students and corporate clients.

Our Offerings

      We believe that our more than 25-year history as a provider of higher education for working adults enables us to provide our students with an effective education and responsive customer service. Our expertise in designing curriculum, recruiting and training faculty, monitoring academic quality, and providing a high level of support services to students allows us to offer the following:

	•	Accredited Degree Programs. We currently offer 18 degree programs in business, education, information technology, criminal justice, and nursing. The University of Phoenix is accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools. This regional accreditor or one of the other regional accrediting associations accredit the client institutions of the Institute for Professional Development. This accreditation enables us to grant Associates, Bachelors, Masters, and Doctoral degrees, while also providing students with access to federal financial aid programs.
	•	Experienced Faculty Resources. While substantially all of our faculty are working professionals, we require each member of our faculty to possess either a Masters or Doctoral degree and to have five years of recent professional experience in a field related to the subject they teach. We have well-developed methods for hiring and training our faculty, which include peer reviews of newly hired instructors by other members of the faculty, training in grading and instructing students, and a teaching mentorship with a more experienced faculty member. Our classes are designed to be small, with an average of one instructor for every fifteen students. Faculty members are also required to be accessible to students by maintaining office hours.
	•	Current and Relevant Standardized Programs. We use content experts selected from our approximately 17,100 faculty to design our curriculum. This enables us to offer current and relevant standardized programs to our students. We also utilize an institution-wide system to assess the educational outcomes of our students and improve the quality of our curriculum and instructional model. This system evaluates the cognitive and affective skills of our students upon registration and upon conclusion of the program and also surveys students two years after graduation in order to assess the quality of the education they received.
	•	Benefits to Employers. The employers of our students often provide input to faculty members in designing curriculum, and class projects are typically based on issues relevant to the companies that employ our students. Our classes are taught by practitioner faculty members who emphasize the skills desired by employers. In addition, the time flexibility provided by our classes further benefits employers since it avoids conflict with their employees’ work schedules. A recent survey by University of Phoenix

3

Table of Contents

		showed that approximately 50% of its students receive some level of tuition assistance from their employers.

Strategy

      Our objective is to be the leading provider of accessible, high quality education for working adults and a preferred provider of workplace training to their employers. We are managed as a for-profit corporation in a higher education industry served principally by not-for-profit providers. By design, we treat our adult students as our primary customers and the employers that provide tuition assistance to their employees through tuition reimbursement plans or direct bill arrangements as our secondary customers. We plan to implement the following strategic initiatives to accomplish this objective:

      Establish New University of Phoenix Campuses and Learning Centers. University of Phoenix plans to continue the addition of campuses and learning centers throughout the United States and Canada. New locations are selected based on an analysis of various factors, including the population of working adults in the area, the number of local employers and their educational reimbursement policies, and the availability of similar programs offered by other institutions. Campuses consist of classroom and administrative facilities with full student and administrative services. Learning centers differ from campuses in that they consist primarily of classroom facilities with limited on-site administrative staff.

      The timing related to the establishment of new locations and the expansion of programs may vary depending on regulatory requirements and market conditions.

      Establish New Institute for Professional Development Relationships. Institute for Professional Development plans to enter into additional long-term contracts with private colleges and universities in proximity to metropolitan areas throughout the United States.

      Expand Educational Programs. We will continue to respond to the changing educational needs of working adults and their employers by introducing new undergraduate and graduate degree programs as well as training programs. To its degree offerings, University of Phoenix has recently added Doctor of Business Administration, Doctor of Education in Educational Leadership, and Doctor of Health Administration and a specialization in Finance to its Bachelor of Science in Business. To its certificate programs, University of Phoenix has recently added Special Education and Call Center Professional certificates and graduate certificates in Accounting, Marketing, and Human Resource Management. We believe that expanding our program offerings will help us improve our market position as a provider of higher education and training for working adults. We currently have a full-time staff of approximately 55 people involved in our centralized curriculum development process. Potential additions to our current offerings include:

	•	new degree programs, such as a Bachelor of Science in Education, a Bachelor of Science in Security, a Master of Management — International, a Master of Science in Public Safety and Security, and a Master of Social Work;
	•	new specializations in Public Administration and Retail Management to the Bachelor of Science in Business, a specialization in software engineering to the Bachelor of Science in Information Technology, and a specialization in school counseling to the Master of Counseling;
	•	a certificate in Nursing/Health Care Education; and
	•	content area courses for teachers in Math, English, Science, and Social Studies to address the mandates of the “No Child Left Behind” program.

      Expand Access to Programs. We plan to continue expanding our distance education programs and services. Enrollments in distance education degree programs have increased to approximately 80,100 in 2003 from approximately 10,700 in 1999. University of Phoenix Online courses and programs are available via the Internet 24 hours a day, 7 days a week.

      International Expansion. We believe that the international market for our services is a major growth opportunity. The U.S. is the most common destination for international students studying abroad. We believe

4

Table of Contents

      Effective September 2002, Western International University entered into an agreement with Apollo International, Inc. that allows for Western International University’s educational offerings to be made available in India. Apollo International, Inc. will manage the relationship with the entities in India that are offering the Western International University programs while Western International University maintains the educational content and the quality of the programs. In April 2003, Western International University entered into an agreement with CIBT Canadian Institute of Business and Technology Corp. and CIBT School of Business (“CIBT”) that allows for Western International University’s educational offerings to be made available in Beijing, China starting in 2004. CIBT will manage the operational component of the program in China while Western International University will maintain the educational content and quality of the programs.

      We will continue to monitor and assess the feasibility of expanding our educational programs to other international markets through similar licensing agreements. Currently we do not plan to independently open facilities outside of North America.

Teaching/Learning Model-Degree Programs

      Our teaching/learning model used by University of Phoenix and Institute for Professional Development client institutions was designed specifically to meet the educational needs of working adults. This model is structured to enable students who are employed full-time to earn their degrees and still meet their personal and professional responsibilities. Students attend weekly classes, averaging 15 students in size, and also meet weekly as part of a three to five person learning team. Learning team sessions are an integral part of each course. They facilitate in-depth review of and reflection on course materials. Members work together to complete assigned group projects, and develop communication and teamwork skills. Courses are designed to facilitate the application of knowledge and skills to the workplace and are taught by faculty members who possess advanced degrees and have professional experience in business, industry, government, or other professions. In this way, faculty members are able to share their professional knowledge and skills with the students.

      Components of our teaching/learning model include:

5

Table of Contents

		matter in which they seek to instruct. To help promote quality delivery of the curriculum, all faculty members are required to:
		• complete an initial assessment conducted by staff and faculty;
		• receive training in grading, facilitation of the teaching/learning model, and oversight of learning team activities;
		• complete a mentorship with an experienced faculty mentor; and
		• receive ongoing performance evaluations by students, peer faculty, and staff, which are used to establish developmental plans to improve individual faculty performance and to determine continued eligibility of faculty members to provide instruction.
An Active Learning Environment		Courses are designed to encourage and facilitate collaboration between students and interaction with the instructor. The curriculum requires a high level of student participation for purposes of enhancing learning and increasing the student’s ability to work as part of a team.
Library and Other Learning Resource Services		Students and faculty members are provided with electronic and other learning resources for their information and research needs. Students can access these services directly through the Internet or with the help of a Learning Resource Services research librarian.
Sequential Enrollment		Students enroll in and complete classes sequentially, rather than concurrently. This permits working adults to focus their attentions and resources on one subject at a time, and creates a better balance between learning and ongoing personal and professional responsibilities.
Academic Quality		We have an Academic Quality Management System designed to maintain and improve the quality of programs and academic and student services. This system includes the Adult Learning Outcomes Assessment, which seeks to measure student growth in both the cognitive (subject matter) and affective (educational, personal, and professional values) skills.

6

Table of Contents

Structural Components of Teaching/ Learning Model

      While adults over the age of 24 comprise approximately 39% of all higher education enrollments in the United States, the mission of most accredited four-year colleges and universities is to serve 18 to 24 year-old students and conduct research. University of Phoenix and Institute for Professional Development client institutions acknowledge the differences in educational needs between older and younger students and provide programs and services that allow working adults to earn their degrees without major disruption to their personal and professional lives.

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

      The facilitating elements of our teaching/learning model include:

      The College for Financial Planning currently offers text-based self-study programs for students preparing for the Certified Financial Planner designation and for students seeking further education in financial services, including Master of Science degrees in Financial Planning, Financial Analysis, and Finance. The College for Financial Planning has modularized the learning content for these programs to position them for alternative delivery formats, including but not limited to classroom and online modalities. With the exception of the Masters degrees, these same programs are offered in a classroom-based format through University of Phoenix campuses as well as independent classroom providers and we also offer them through Internet online-based formats. Most of the College for Financial Planning’s students are employed, and approximately 82% have a bachelors degree or higher. The College for Financial Planning’s programs are developed internally by 13 full-

7

Table of Contents

      Western International University’s teaching/learning model has similar characteristics to the teaching/ learning model used by University of Phoenix and Institute for Professional Development client institutions, including the use of part-time practitioner faculty, standardized curriculum, computerized learning resources, and leased facilities. However, Western International University provides educational programs in two-month sessions and, while its students are primarily working adults, Western International University also serves international and domestic students who are between the ages of 18 and 24. Western International University’s faculty consists of 15 full-time faculty and 279 part-time faculty. Western International University’s faculty are working professionals and possess earned Masters or Doctoral degrees and participate in a selection and training process that is similar to that at University of Phoenix.

8

Table of Contents

Degree Programs and Services

9

Table of Contents

      University of Phoenix also offers professional education programs, including continuing education for teachers, custom training, environmental training, and many programs leading to certification in the areas of business, technology, and nursing.

      Undergraduate students may demonstrate and document college level learning gained from experience through an assessment by faculty members, according to the guidelines of the Council for Adult and Experiential Learning, for the potential award of credit. The average number of credits awarded to the approximately 2,650 University of Phoenix undergraduate students who utilized the process in 2003 was approximately 6 credits of the 120 required to graduate. The Council for Adult and Experiential Learning reports that over 1,500 regionally accredited colleges and universities currently accept credits awarded for college level learning gained through experience.

      Institute for Professional Development Services. The Institute for Professional Development’s contracts with its client institutions are individually negotiated and the actual services may vary from one client institution to another. Services to its client institutions may include:

	•	conducting market research;
	•	assisting with curriculum development;
	•	developing and executing marketing strategies;
	•	marketing and recruiting of students;
	•	performing student accounting and account receivable management;
	•	recommending operational and administrative infrastructures;
	•	offering faculty development and training;
	•	developing and implementing financial accounting and academic quality management systems;
	•	assessing the future needs of adult students;
	•	assisting in developing additional degree programs suitable for the adult higher education market;
	•	assisting in seeking approval from the respective regional accrediting association for new programs; and
	•	training of adult program staff.

      In consideration for its services, the Institute for Professional Development receives a contractual share of revenues, which are negotiated with each client institution.

      In order to facilitate the sharing of information related to the operations of their respective programs, the Institute for Professional Development, its client institutions, and University of Phoenix formed the Consortium for the Advancement of Adult Higher Education. This consortium shares best practices in adult higher education. Conference topics include outcomes assessment, educational technology, leadership and continuous process improvement.

10

Table of Contents

      Institute for Professional Development client institutions offer the following programs with our assistance:

      The Institute for Professional Development assisted programs also include a limited number of general education courses, certificate programs, and areas of specialization.

      College for Financial Planning Programs. The College for Financial Planning currently offers Master of Science degree programs with majors in Financial Planning, Financial Analysis, and Finance. The Financial Planning major focuses on the fundamentals of financial planning and meets the educational requirement of the CFP Board of Standards, Inc. for taking the CFP National Board Examination. The Financial Analysis major incorporates the CFA Body of Knowledge learning objectives offered by the Association for Investment Management and Research and helps prepare students for the CFA Examinations.

      The College for Financial Planning currently offers the following certification programs:

	•	Accredited Asset Management Specialist
	•	Registered Paraplanner
	•	Chartered Mutual Fund Counselor
	•	Chartered Retirement Plans Specialist
	•	Chartered Retirement Planning Counselor

11

Table of Contents

      Western International University Programs. Western International University currently offers the following degree programs:

	•	Associate of Arts
	•	Bachelor of Arts in Behavioral Science
	•	Bachelor of Arts in Human Resource Management
	•	Bachelor of Science in Accounting
	•	Bachelor of Science in Business

	•	Areas of Specialization

	•	E-Commerce
	•	Finance
	•	Human Resources Management
	•	Marketing

	•	Bachelor of Science in Business Administration
	•	Bachelor of Science in Information Technology
	•	Bachelor of Science in International Business
	•	Bachelor of Science in Management
	•	Master of Business Administration in Finance
	•	Master of Business Administration in International Business
	•	Master of Business Administration in Information Technology
	•	Master of Business Administration in Management
	•	Master of Business Administration in Marketing
	•	Master of Science in Information Technology
	•	Master of Science in Information Systems Engineering

      Western International University also offers professional studies programs in Accountancy, Certified Financial Planner Certification Education Program, and the Graduate Certificate in Human Resource Management.

Distance Education

      At August 31, 2003, there were approximately 80,100 degree seeking students utilizing our distance education delivery systems, approximately 99% of whom are enrolled at University of Phoenix Online. Our distance education components consist primarily of the following:

      University of Phoenix Online. University of Phoenix Online has developed its system to be easily accessible and familiar to most students. All the student needs to participate in University of Phoenix Online’s classes is a Pentium-class personal computer, a 56.6K modem, and an Internet service provider.

      Each Online class adheres to a set framework thus providing procedural instructional consistency. Prior to the beginning of each class, each student either orders textbooks online from a third party or pays a fee to access rEsource, our online delivery method for course materials. Every class consists of a series of eight newsgroups. The main newsgroup is designated for class discussion, there is an assignments newsgroup to which students submit their assignments, a chat newsgroup for students to discuss non-content related topics, a course materials newsgroup that houses the syllabus and lectures for the class, and four newsgroups which function as forums for the Learning Team assignments.

      Each week, the instructor posts a lecture to the classroom course materials newsgroup. Students log on and read the lecture or print the lecture to read at their convenience. Throughout the week, students participate in class discussions, based on the class content for that week, which is actively facilitated by the instructor. Both the instructor and students are expected to substantively engage in content discussions five out of seven days each class week. In addition to the class participation requirement, students are also expected to complete individual assignments and to work within a small group of 3-5 students on a specific Learning Team assignment. The Learning Team component of the University of Phoenix model not only emphasizes the content focus for the course, but also the importance for successful professionals to acquire team process skills.

12

Table of Contents

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

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

Acquisition Strategy

      We periodically evaluate opportunities to acquire businesses and facilities. In evaluating such opportunities, management considers, among other factors, location, demographics, price, the availability of financing on acceptable terms, competitive factors, and the opportunity to improve operating performance through the implementation of our operating strategies. We have no current commitments with regard to potential acquisitions.

Customers/ Students

      The following is a breakdown of our students by the level of program they are seeking, at August 31, 2003:

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

      Based on student surveys of incoming students in the first half of 2003, the average age of University of Phoenix’s students is in the mid-thirties, approximately 56% are women and 44% are men. We believe that the demographics of students enrolled in Institute for Professional Development assisted programs are similar to those of University of Phoenix. The approximate age percentage distribution of incoming University of Phoenix students is as follows:

      Based on student surveys, the average age of students at the College for Financial Planning is 37, with 79% falling in the age range of 26-50, approximately 36% are women and 64% are men. Most of the College for Financial Planning’s students are employed, and approximately 82% have obtained a bachelors degree or higher.

13

Table of Contents

      Institute for Professional Development client institutions have historically consisted of small private colleges; however, the Institute for Professional Development also targets larger institutions of higher education that are in need of marketing, prior learning assessment, and curriculum consulting. The Institute for Professional Development understands that to develop and manage educational programs for working adult students effectively, these potential client institutions require both capital and operational expertise. In response to these requirements, the Institute for Professional Development provides the start-up capital, the curriculum development expertise, and the ongoing management in support of the client institutions’ provision of quality programs for working adult students.

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

      University of Phoenix Online was granted two overseas military contracts in 2003. They allow University of Phoenix Online to offer graduate degree programs to U.S. military personnel on-site at military bases in Europe, Asia, and the Pacific Rim.

Marketing

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

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

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

	•	mailing a postage paid reply card or envelope;
	•	calling us at a specific 1-800 number; or
	•	directing the potential student to one of our specific URL addresses on the Internet that are used to track individual marketing campaigns for reach and effectiveness.

      Re-Marketing. Re-marketing efforts include both direct mail and e-mail sent to existing leads in our database. Re-marketing is a very successful part of our marketing campaign because of our growing database of “qualified” prospects.

      Referrals. Based on our recent estimates, approximately 50% of our new students are referred by their employers, co-workers, current students, alumni, family, and friends.

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

Competition

      The higher education market is highly fragmented and competitive with no private or public institution enjoying a significant market share. We compete primarily with four-year and two-year degree-granting public and private regionally accredited colleges and universities. Many of these colleges and universities enroll working adults in addition to the traditional 18 to 24 year old students. We expect that these colleges and

14

Table of Contents

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

	•	the ability to provide easy and convenient access to programs and classes;
	•	reliable and high-quality products and services;
	•	qualified and experienced faculty;
	•	cost of the program;
	•	reputation of programs, classes, and services; and
	•	the time necessary to earn a degree.

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

      The Institute for Professional Development faces competition from other entities offering higher education curriculum development and management services for adult education programs. The majority of the Institute for Professional Development’s current competitors provide short-term, pre-packaged curriculum or turn-key programs.

Employees

      At August 31, 2003, we had the following numbers of employees:

      We consider our relations with our employees to be good.

Regulatory Environment

      The Higher Education Act of 1965 and the related regulations govern all higher education institutions participating in Title IV programs. The Higher Education Act mandates specific additional regulatory responsibilities for each of the following components:

	•	the accrediting agencies recognized by the U.S. Department of Education;
	•	the federal government through the U.S. Department of Education; and

15

Table of Contents

	•	state higher education regulatory bodies.

      All higher education institutions participating in Title IV programs must be accredited by an association recognized by the U.S. Department of Education. The U.S. Department of Education reviews all participating institutions for compliance with all applicable standards and regulations under the Higher Education Act. Accrediting associations are required to include the monitoring of Title IV program compliance as part of their accreditation evaluations under the Higher Education Act.

      New or revised interpretations of regulatory requirements could have a material adverse effect on us. In addition, changes in or new interpretations of applicable laws, rules, or regulations could have a material adverse effect on the accreditation, authorization to operate in various states, permissible activities, and costs of doing business of University of Phoenix, Western International University, and one or more of the Institute for Professional Development client institutions. The failure to maintain or renew any required regulatory approvals, accreditation or state authorizations by University of Phoenix or certain of the Institute for Professional Development client institutions could have a material adverse effect on us.

Accreditation

      University of Phoenix, Western International University, College for Financial Planning, and the Institute for Professional Development client institutions are covered by regional accreditation which provides the following:

	•	recognition and acceptance by employers, other higher education institutions, and governmental entities of the degrees and credits earned by students;
	•	qualification to participate in Title IV programs; and
	•	qualification for authorization in certain states.

      Regional accreditation is accepted nationally as the basis for the recognition of earned credit and degrees for academic purposes, employment, professional licensure, and, in some states, for authorization to operate as a degree-granting institution. Under the terms of a reciprocity agreement among the six senior regional accrediting associations, representatives of each region in which a regionally accredited institution operates participate in the evaluations for reaffirmation of accreditation. The achievement of University of Phoenix and Western International University missions require them to employ academically qualified practitioner faculty that are able to integrate academic theory with current workplace practice.

      University of Phoenix was granted accreditation by The Higher Learning Commission in 1978. University of Phoenix’s accreditation was reaffirmed in 1982, 1987, 1992, and 1997. A comprehensive evaluation visit by The Higher Learning Commission was conducted in 2002 and accreditation was reaffirmed.

      Institute for Professional Development assisted programs offered by its client institutions are evaluated by the client institutions’ respective regional accrediting associations either as part of a reaffirmation visit or focused evaluation visit. Current Institute for Professional Development client institutions are accredited by The Higher Learning Commission, Middle States, New England, Southern, or Western regional accrediting associations.

      The College for Financial Planning graduate degree program is accredited by The Higher Learning Commission and the Accrediting Commission of the Distance Education and Training Council. The Higher Learning Commission reaffirmed the accreditation of the graduate degree program in August 1999, and their next reaffirmation visit is scheduled for May 2004.

      Western International University was accredited by The Higher Learning Commission prior to the acquisition by us, and the accreditation was reaffirmed in 1998. Western International University’s next reaffirmation visit will occur in Spring 2005.

      The withdrawal of accreditation from University of Phoenix would have a material, adverse effect on us.

16

Table of Contents

      All accrediting agencies recognized by the U.S. Department of Education are required to include the monitoring of Title IV program compliance in their evaluations of accredited institutions. As a result, all regionally accredited institutions, including University of Phoenix, Western International University, and the Institute for Professional Development client institutions, will be subject to a Title IV program compliance review as part of accreditation visits.

      University of Phoenix’s Bachelor of Science in Nursing program received program accreditation from the National League for Nursing Accrediting Commission in 1989. The Master of Science in Nursing program earned the National League for Nursing Accrediting Commission accreditation in 1996. In July 2000, both the Bachelor of Science in Nursing and the Master of Science in Nursing programs received eight year accreditation status from the National League for Nursing Accreditation Commission.

      University of Phoenix’s Community Counseling program, Master of Counseling in Community Counseling degree, received initial accreditation for its Phoenix and Tucson campuses from the Council for Accreditation of Counseling and Related Educational Programs in 1995 and 2002. The next reaffirmation visit is expected in 2010.

      University of Phoenix received approval from The Higher Learning Commission to offer its first doctoral level program in 1998. The first students were enrolled in the Doctor of Management degree beginning in 1999. Additionally, in 2002 University of Phoenix received approval from The Higher Learning Commission to offer three new doctoral programs: Doctor of Business Administration, Doctor of Educational Leadership, and Doctor of Health Administration. All of the Doctorate programs are offered via distance learning technology with annual two-week residencies in Phoenix throughout the program.

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

	The Higher Learning Commission
	30 North LaSalle Street, Suite 2400
	Chicago, IL 60602-2504
	(312) 263-0456
	National League for Nursing Accrediting Commission
	61 Broadway
	New York, NY 10006
	(800) 669-1656
	Counseling Association Council for Accreditation of Counseling and
	Related Educational Programs
	5999 Stevenson Avenue, 4th floor
	Alexandria, VA 22304
	(800) 347-6647
	Accrediting Commission of the Distance Education and Training Council
	1601 18th Street, NW
	Washington, D.C. 20009-2529
	(202) 234-5100

Federal Financial Aid Programs

      Students at University of Phoenix, Western International University, and Institute for Professional Development client institutions may receive federal financial aid under the Title IV programs. The College for Financial Planning does not participate in Title IV programs because most of its students are enrolled in non-degree programs. In the fiscal year ended August 31, 2003, University of Phoenix and Western International University derived approximately 62% and 49%, respectively, of their net revenues from students who participated in Title IV programs. The Institute for Professional Development percentages are estimated to be

17

Table of Contents

	•	University of Phoenix, Western International University, and Institute for Professional Development client institutions are accredited by an accrediting agency recognized by the U.S. Department of Education;
	•	the U.S. Department of Education has certified University of Phoenix’s, Western International University’s, and Institute for Professional Development client institutions’ eligibility to participate in the Title IV programs; and
	•	University of Phoenix, Western International University, and Institute for Professional Development client institutions have applicable state authorization to operate.

      The U.S. Department of Education issues regulations based on the laws included in the Higher Education Act (“HEA”) of 1965, as amended. The HEA has been extended to September 30, 2004. Changes in the law occur during the Congressional reauthorization process, with final regulations issued after that time. The reauthorization process could amend existing requirements, or implement new requirements.

      The following material provisions of the Title IV regulations, and their related calculations, apply to University of Phoenix, Western International University, and Institute for Professional Development client institutions:

      Limits on Title IV Program Funds. The Title IV regulations define the types of educational programs offered by an institution that qualify for Title IV program funds. For students enrolled in qualified programs, the Title IV regulations place limits on the amount of Title IV program funds that a student is eligible to receive in any one academic year as defined by the U.S. Department of Education.

      An academic year must consist of at least 30 weeks of instructional time and a minimum of 24 credit hours. Most of our degree programs meet the academic year minimum definition of 30 weeks of instructional time and 24 credit hours and, therefore, qualify for Title IV program funds. The programs that do not qualify for Title IV program funds consist primarily of certificate, corporate training, and continuing professional education programs. These programs are paid for directly by the students or their employers.

      Authorizations for New Locations. University of Phoenix, Western International University, the College for Financial Planning, and Institute for Professional Development client institutions are required to have authorization to operate as degree-granting institutions in each state where they physically provide educational programs. Certain states accept accreditation as evidence of meeting minimum state standards for authorization. Other states require separate evaluations for authorization. Depending on the state, the addition of a degree program not offered previously or the addition of a new location must be included in the institution’s accreditation and be approved by the appropriate state authorization agency. University of Phoenix, Western International University, the College for Financial Planning, and Institute for Professional Development client institutions are currently authorized to operate in all states in which they have physical locations. If University of Phoenix is unable to obtain authorization to operate in certain new states, it may have a material adverse effect on our ability to expand University of Phoenix’s business.

      Although The Higher Learning Commission does not require University of Phoenix to obtain their prior approval before they are permitted to expand into new areas in North America and the Netherlands, they do however require prior approval before they can expand into foreign countries outside of North America and the Netherlands. If University of Phoenix is unable to obtain The Higher Learning Commission’s approval for future geographic expansion, it may have a material, adverse effect on our ability to expand University of Phoenix’s business. In addition, The Higher Learning Commission requires Western International University and the College for Financial Planning to obtain their prior approval before they are permitted to expand into new states or foreign countries.

      Restricted Cash. The U.S. Department of Education places restrictions on excess Title IV program funds collected for unbilled tuition and fees transferred to us through electronic funds transfer. If an institution

18

Table of Contents

      Standards of Financial Responsibility. Pursuant to the Title IV regulations, as revised, each eligible higher education institution must satisfy the minimum standard established for three tests which assess the financial condition of the institution at the end of the institution’s fiscal year. The tests provide three individual scores which must then satisfy a composite score standard. The maximum composite score is 3.0. If the institution achieves a composite score of at least 1.5, it is considered financially responsible. A composite score from 1.0 to 1.4 is considered financially responsible, subject to additional monitoring, and the institution may continue to participate as a financially responsible institution for up to three years. An institution that does not achieve a satisfactory composite score will fall under alternative standards. At August 31, 2003, University of Phoenix’s and Western International University’s composite scores were both 3.0.

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

      The “90/10 Rule”. A requirement of the Higher Education Act, commonly referred to as the “90/10 Rule,” applies only to for-profit institutions of higher education, which includes University of Phoenix and Western International University but not Institute for Professional Development client institutions. Under this rule, for-profit institutions will be ineligible to participate in Title IV programs if the amount of Title IV program funds used by the students or institution to satisfy tuition, fees, and other costs incurred by the students exceeds 90% of the institution’s cash-basis revenues from eligible programs. University of Phoenix’s and Western International University’s percentages were 62% and 49%, respectively, at August 31, 2003. University of Phoenix and Western International University are required to calculate this percentage at the end of each fiscal year.

      Student Loan Defaults. Eligible institutions must maintain a student loan cohort default rate of less than 25% for three consecutive years. In 2001, the most recent U.S. Department of Education cohort default rate reporting period, the national cohort default rate average for all proprietary higher education institutions was 9.0%. University of Phoenix and Western International University students’ cohort default rates for the Federal Family Education Loans for 2001 as reported by the U.S. Department of Education were 5.8% and 4.0%, respectively. Institute for Professional Development client institutions cohort default rates for 2001 ranged from 0.7% to 12.2% with a median cohort default rate of 2.7%.

      Compensation of Representatives. Title IV regulations prohibit an institution from providing any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruitment, admission, or financial aid awarding activity. We believe that our current method of compensating enrollment advisors and financial aid staff complies with the Title IV regulations.

      Eligibility and Certification Procedures. The Higher Education Act specifies the manner in which the U.S. Department of Education reviews institutions for eligibility and certification to participate in Title IV programs. Every educational institution involved in Title IV programs must be certified to participate, and is required to periodically renew this certification. University of Phoenix was recertified in June 2003 and its current certification for the Title IV programs expires in June 2007. Western International University was recertified in October 2003 and its current certification for the Title IV programs expires in June 2009.

19

Table of Contents

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

      Restrictions on Distance Education Programs. The Title IV regulations provide for differing restrictions on the number of course offerings and students that can be enrolled via distance education depending on the nature of the institution’s program offerings. For institutions whose eligible degree offerings equal or exceed their eligible certificate offerings, the Title IV regulations stipulate that an institution is not eligible to participate in the Title IV programs if; 1) more than 50% of its courses are offered via correspondence courses, or 2) 50% of its courses are offered via distance education (the combination of correspondence and telecommunication offerings). The University of Phoenix provides more degree programs than certificate programs thus the volume of students enrolled via distance education will not impact eligibility status as long as the University of Phoenix maintains more residential courses than distance education courses. The University of Phoenix had 35% of its courses offered through distance education during 2003.

      Change of Ownership or Control. A change of our ownership or control, depending on the type of change, may have significant regulatory consequences for University of Phoenix and Western International University. Such a change of ownership or control could trigger recertification by the U.S. Department of Education, reauthorization by state licensing agencies, or the evaluation of the accreditation by The Higher Learning Commission.

      The U.S. Department of Education has adopted the change of ownership and control standards used by the federal securities laws for institutions owned by publicly-held corporations. Upon a change of ownership and control sufficient to require us to file a Form 8-K with the Securities and Exchange Commission, University of Phoenix and Western International University would cease to be eligible to participate in Title IV programs until recertified by the U.S. Department of Education. Under some circumstances, the U.S. Department of Education may continue the institution’s participation in the Title IV programs on a temporary basis pending completion of the change in ownership approval process. This recertification would not be required, however, if the transfer of ownership and control was made upon a person’s retirement or death and was made either to a member of the person’s immediate family or to a person with an ownership interest in us who had been involved in our management for at least two years preceding the transfer. In addition, some states where we are presently licensed have requirements governing change of ownership or control.

      Moreover, we are required to report any material change in stock ownership. In the event of a material change in stock ownership, The Higher Learning Commission may seek to evaluate the effect of such a change of stock ownership on University of Phoenix’s, the College for Financial Planning’s, and Western International University’s continuing operations.

      If University of Phoenix is not re-certified by the U.S. Department of Education, does not obtain reauthorization from the necessary state agencies, or has its accreditation withdrawn as a consequence of any change in ownership or control, it would have a material adverse effect on us.

State Authorization

      University of Phoenix is authorized to operate in all 28 states where it has a physical presence. University of Phoenix has held these authorizations for periods ranging from less than one year to over twenty-five years. We have been approved to operate in the states of Arkansas and New Jersey and are scheduled to begin classes in 2004. Applications for approval to operate in New York, Connecticut, Minnesota, Iowa, Wyoming, and Kentucky have been submitted and are awaiting approval.

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

20

Table of Contents

      University of Phoenix is registered and accredited by British Columbia’s Private Post-Secondary Education Commission. University of Phoenix has also received approval to operate in Alberta, Canada.

      Institute for Professional Development client institutions possess authorization to operate in all states in which they offer educational programs, which are subject to renewal. The College for Financial Planning is currently authorized to operate in Colorado and does not require authorization for its self-study programs that are offered worldwide. Western International University is currently authorized to operate in Arizona.

      Some states assert authority to regulate all degree-granting institutions if their educational programs are available to their residents, whether or not the institutions maintain a physical presence within those states. University of Phoenix has obtained or is in the process of obtaining licensure in those states and we do not believe this will materially affect University of Phoenix Online’s operating activities.

Admissions Standards

      To gain admission to University of Phoenix’s, Western International University’s, and Institute for Professional Development client institutions’ undergraduate programs, students generally must have a high school diploma or General Equivalency Diploma and satisfy certain minimum grade point average, employment, and age requirements. Additional requirements may apply to individual programs. Students already in undergraduate programs may petition to be admitted on provisional status if they do not meet certain admission requirements.

      To gain admission to University of Phoenix’s, Western International University’s, and Institute for Professional Development client institutions’ graduate programs, students generally must have an undergraduate degree from a regionally accredited college or university and satisfy minimum grade point average, work experience, and employment requirements. Additional requirements may apply to individual programs. Students in graduate programs may petition to be admitted on provisional status if they do not meet certain admission requirements.

Tax Reform Act of 1997 and Tax Relief Act of 2001

      In August 1997, Congress passed the Tax Reform Act of 1997 that added several new tax credits and incentives for students and extended benefits associated with the educational assistance program. The Hope Scholarship Credit provides up to a $1,500 tax credit per year per eligible student for tuition expenses in the first two years of postsecondary education in a degree or certificate program. In 2003, The Lifetime Learning Credit provides up to a $2,000 tax credit per year per taxpayer return for tuition expenses for all postsecondary education, including graduate studies. For 2003, both of these credits are phased out for taxpayers with modified adjusted gross income between $41,000 and $51,000 ($83,000 and $103,000 for joint returns) and are subject to other restrictions and limitations. The Tax Reform Act of 1997 also provides for the deduction of interest from gross income on education loans and limited educational IRAs for children under the age of 18. These deductions are also subject to adjusted gross income limitations and other restrictions. These new provisions became effective for 1998 individual tax returns.

      In June 2001, Congress passed the Tax Relief Act of 2001 that provided even more educational tax incentives. The major enhancements include: increased contribution limits to Coverdell Education Savings Accounts (formerly Education IRAs); tax-free withdrawals from Section 529 Qualified Tuition Programs; employer-provided graduate education assistance; and expansion of the student loan interest deduction. In addition, an above-the-line deduction is now allowed for qualified higher education expenses paid by a taxpayer on behalf of the taxpayer, spouse, or dependent. In 2003, taxpayers with adjusted gross income that does not exceed $65,000 ($130,000 for joint returns) may claim an above-the-line maximum deduction of $3,000 of qualified higher education expenses. In 2004 and 2005, taxpayers with adjusted gross income that does not exceed $65,000 ($130,000 for joint returns) may claim an above-the-line maximum deduction of $4,000 while taxpayers with adjusted gross income that does not exceed $80,000 ($160,000 for joint returns) are limited to a $2,000 deduction. Taxpayers may not claim the new deduction and a Hope or Lifetime Learning Credit in the same year with respect to the same student.

21

Table of Contents

Employer Tuition Assistance

      Many of our students receive some form of tuition assistance from their employers. The Internal Revenue Code defines situations where this tuition assistance qualifies as a deductible business expense when adequately documented by the employer and employee. The Internal Revenue Code also provides a safe-harbor provision for an exclusion from wages of up to $5,250 of tuition reimbursement per year per student under the Educational Assistance Program. The percentage of University of Phoenix students with access to employer tuition assistance was approximately 50% in 2003.

Locations

      University of Phoenix currently has 46 physical campuses and 87 learning centers located in Arizona, California, Colorado, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Louisiana, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, Puerto Rico, and Vancouver, British Columbia. University of Phoenix also offers its educational programs worldwide through University of Phoenix Online, its computerized delivery system.

      The Institute for Professional Development currently operates at 22 campuses and 31 learning centers in California, Connecticut, Delaware, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Virginia, and Wisconsin.

      The College for Financial Planning’s operations are located near Denver, Colorado.

      Western International University’s main campus is located in Phoenix, Arizona. Additionally, Western International University operates three learning centers in Arizona.

Other Matters

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

Item 2 — Properties

      We lease all of our administrative and educational facilities. In some cases, classes are held in the facilities of the students’ employers at no charge to us. Leases generally range from five to ten years with one to two renewal options for extended terms. We also lease space from time-to-time on a short-term basis in order to provide specific courses or programs. The lease on our corporate headquarters, which includes the University of Phoenix, Phoenix Main Campus, was renewed in 2001 for 10 years and will expire on December 31, 2011. As of August 31, 2003, we leased approximately 4.3 million square feet.

      We evaluate current utilization of the educational facilities and projected enrollment growth to determine facility needs. We anticipate that an additional 700,000 square feet will be leased in 2004.

Item 3 — Legal Proceedings

      On approximately December 19, 2001, a class action complaint was filed in the Superior Court of the State of California for the County of Solano, captioned Davis et. al. v. Apollo Group, Inc. et. al., Case No. FCS018663. Plaintiffs, one current and two former enrollment advisors with University of Phoenix, filed this class action on behalf of themselves and current and former enrollment advisors employed by us in the State of California and seek certification as a class, monetary damages in unspecified amounts, and injunctive relief. Plaintiffs allege that during their employment, they and other enrollment advisors worked in excess of 8 hours per day or 40 hours per week, and contend that we failed to pay overtime. In July 2003, the Court

22

Table of Contents

      On August 29, 2003 we were notified that a qui tam action had been filed against us in the United States District Court for the Eastern District of California by two current employees on behalf of themselves and the federal government. A qui tam action is a civil lawsuit brought by one or more individuals (a qui tam “relator”) for an alleged submission to the federal government of a false claim for payment. A qui tam action is always filed under seal and remains under seal until the U.S. Department of Justice decides whether to intervene in the litigation. When the 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 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 University of Phoenix 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 University of Phoenix improperly compensates its employees. On or about October 20, 2003 a motion to dismiss the action was filed and is currently pending. While the outcome of this legal proceeding is currently not determinable, management does not expect the results of this action will have a material adverse effect on our business, financial position, results of operations, or cash flows.

      On approximately September 26, 2003, a class action complaint was filed in the Superior Court of the State of California for the County of Orange, captioned Bryan Sanders et. al. v. University of Phoenix, Inc. et. al., Case No. 03CC00430. Plaintiff, a former academic advisor with University of Phoenix, filed this class action on behalf of himself and current and former academic advisors employed by us in the State of California and seek certification as a class, monetary damages in unspecified amounts, and injunctive relief. Plaintiff alleges that during his employment, he and other academic advisors worked in excess of 8 hours per day or 40 hours per week, and contend that we failed to pay overtime. While the outcome of this legal proceeding is currently not determinable, management does not expect the results of this action will have a material adverse effect on our business, financial position, results of operations, or cash flows.

      We are subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

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

      None.

23

Table of Contents

PART II

Item 5 — Market for Registrant’s Common Equity and Related Stockholder Matters

      There is no established public trading market for our Apollo Education Group Class B common stock, and all shares of our Apollo Education Group Class B common stock are beneficially owned by affiliates. Our Apollo Education Group Class A common stock trades on the Nasdaq National Market under the symbol “APOL” and our University of Phoenix Online common stock trades on the Nasdaq National Market under the symbol “UOPX.” The holders of our Apollo Education Group Class A common stock and our University of Phoenix Online common stock are not entitled to any voting rights.

      The table below sets forth the high and low bid prices for our Apollo Education Group Class A common stock as reported by the Nasdaq National Market. All prices for periods prior to the 3-for-2 stock split in April 2002 have been restated to reflect the effect of the stock split.

      The table below sets forth the high and low bid prices for our University of Phoenix Online common stock as reported by the Nasdaq National Market. All prices for periods prior to the 4-for-3 stock split in April 2002 have been restated to reflect the effect of the stock split.

      These over-the-counter market quotations may reflect inter-dealer prices without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.

      At November 6, 2003 there were approximately 294 holders of record of Apollo Education Group Class A and 5 holders of record of Apollo Education Group Class B common stock, and approximately 31 holders of record of shares of University of Phoenix Online common stock. We estimate that, when you include shareholders whose shares are held in nominee accounts by brokers, there were approximately 94,000 holders of our Apollo Education Group Class A common stock and approximately 17,400 holders of University of Phoenix Online common stock.

      We have never paid cash dividends on our common stock. We are permitted to pay dividends exclusively on our Apollo Education Group Class A and Apollo Education Group Class B common stock, exclusively on

24

Table of Contents

Item 6 — Selected Consolidated Financial Data

      Information relating to this item appears under the captions “Selected Consolidated Financial Information of Apollo Group, Inc.” on page 15 of the 2003 Annual Report for Apollo Group, Inc. and “Selected Financial Information of University of Phoenix Online” on page 39 of that report, and such information is incorporated herein by reference in accordance with General Instruction G(2) of Form 10-K. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Financial Statements and related Notes for Apollo Group, Inc. and University of Phoenix Online.

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

      Information relating to this item appears under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” on pages 15 through 21 of the 2003 Annual Report for Apollo Group, Inc. and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online” on pages 39 through 42 of that report, and such information is incorporated herein by reference in accordance with General Instruction G(2) of Form 10-K. This information should be read in conjunction with the Financial Statements and related Notes for Apollo Group, Inc. and University of Phoenix Online.

Item 7a — Quantitative and Qualitative Disclosures about Market Risk

      Information relating to this item appears under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” on page 21 of the 2003 Annual Report for Apollo Group, Inc., and such information is incorporated herein by reference in accordance with General Instruction G(2) of Form 10-K.

Item 8 — Financial Statements and Supplementary Data

      Information relating to this item appears on pages 22 through 24 of the 2003 Annual Report for Apollo Group, Inc. and pages 43 through 44 of that report for University of Phoenix Online, and such information is incorporated herein by reference in accordance with General Instruction G(2) of Form 10-K. Other financial statements and schedules required under Regulation S-X promulgated under the Securities Act of 1933 are identified in Item 14 hereof and are incorporated herein by reference.

Item 9 — Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

      None.

Item 9a — Controls and Procedures

      Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e), promulgated under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report.

25

Table of Contents

PART III

Item 10 — Directors and Executive Officers of the Registrant

      Our Board of Directors is currently divided into three classes, having staggered terms of three years each and are elected by the holders of our Apollo Education Group Class B common stock.

      Our Class I directors, consisting of John G. Sperling, Ph.D. and Dino J. DeConcini, will stand for reelection at our 2006 Annual Meeting. Our Class II directors, consisting of John R. Norton III and Hedy F. Govenar will stand for reelection at our 2004 Annual Meeting. Our Class III directors, consisting of Todd S. Nelson, Peter V. Sperling, and John Blair will stand for reelection at our 2005 Annual Meeting.

      The following sets forth information as of October 31, 2003 concerning our directors and executive officers:

      John G. Sperling, Ph.D., is the founder and Chairman of the Board of Directors of Apollo Group, Inc. Dr. Sperling was also President of Apollo Group, Inc. from its inception until February 1998 and Chief Executive Officer of Apollo Group, Inc. until August 2001. Prior to his involvement with Apollo Group, Inc., from 1961 to 1973, Dr. Sperling was a professor of Humanities at San Jose State University where he was the Director of the Right to Read Project and the Director of the NSF Cooperative College-School Science Program in Economics. At various times from 1955 to 1961, Dr. Sperling was a member of the faculty at the University of Maryland, Ohio State University, and Northern Illinois University. Dr. Sperling received his Ph.D. from Cambridge University, an M.A. from the University of California at Berkeley, and a B.A. from Reed College. Dr. Sperling is the father of Peter V. Sperling.

      Todd S. Nelson has been with Apollo Group, Inc. since 1987. Mr. Nelson has been the Chief Executive Officer of Apollo Group, Inc. since August 2001 and the President of Apollo Group, Inc. since February 1998. Mr. Nelson was Vice President of Apollo Group, Inc. from 1994 to February 1998 and the Executive Vice President of University of Phoenix from 1989 to February 1998. From 1987 to 1989, Mr. Nelson was the Director of University of Phoenix’s Utah campus. From 1985 to 1987, Mr. Nelson was the General Manager at Amembal and Isom, a management training company. From 1984 to 1985, Mr. Nelson was a General Manager for Vickers & Company, a diversified holding company. From 1983 to 1984, Mr. Nelson was a Marketing Director at Summa Corporation, a recreational properties company. Mr. Nelson received an M.B.A. from the University of Nevada at Las Vegas and a B.S. from Brigham Young University. Mr. Nelson was a member of the faculty at University of Nevada at Las Vegas from 1983 to 1984.

      Peter V. Sperling has been with Apollo Group, Inc. since 1983. Mr. Sperling has been a Senior Vice President since June 1998. Mr. Sperling was the Vice President of Administration from 1992 to June 1998 and was the Secretary and Treasurer of Apollo Group, Inc. from 1988 to January 2003. From 1987 to 1992, Mr. Sperling was the Director of Operations at Apollo Education Corporation. From 1983 to 1987,

26

Table of Contents

      Laura Palmer Noone, J.D., Ph.D., has been with University of Phoenix since 1987. Dr. Palmer Noone has served as President of University of Phoenix since September 2000. From 1994 to 2000 she was the Provost and Senior Vice President for Academic Affairs, and from 1991 to 1994, she was Director of Academic Affairs at University of Phoenix, Phoenix campus. Prior to that, she was Judge Pro Tem at the City of Chandler, and an Attorney at Law in general civil practice emphasizing business representation and civil litigation. She has also served as adjunct faculty at Grand Canyon University and Chandler-Gilbert Community College. Dr. Palmer Noone currently serves as a member of the Arizona State Board for Private Postsecondary Education and as a Board Member for the American Council on Education. Dr. Palmer Noone also serves on the National Advisory Committee on Institutional Quality and Integrity. Dr. Palmer Noone received her Ph.D. from the Union Institute, her J.D. and her M.B.A. from the University of Iowa, and her B.B.A. from the University of Dubuque.

      Kenda B. Gonzales has been with Apollo Group, Inc. since October 1998. Ms. Gonzales has been the Chief Financial Officer of Apollo Group, Inc. since October 1998 and the Secretary and Treasurer of Apollo Group, Inc. since January 2003. Prior to joining Apollo Group, Inc., Ms. Gonzales was the Senior Executive Vice President and Chief Financial Officer of UDC Homes, Inc., a home building corporation. From 1985 to 1996, Ms. Gonzales was the Senior Vice President and Chief Financial Officer of Continental Homes Holding Corp., a home building corporation. Ms. Gonzales began her career as a Certified Public Accountant with Peat, Marwick, Mitchell and Company and is a graduate of the University of Oklahoma with a Bachelor of Accountancy.

      Daniel E. Bachus has been with Apollo Group, Inc. since August 2000. Mr. Bachus is the Chief Accounting Officer and Controller of Apollo Group, Inc. From 1992 to 2000, Mr. Bachus was employed by Deloitte & Touche LLP, most recently as an Audit Senior Manager. Mr. Bachus received his B.S. in Accountancy from the University of Arizona and is a Certified Public Accountant.

      Robert A. Carroll has been serving as Chief Information Officer for Apollo Group, Inc. since July 1998. Prior to joining Apollo Group, Inc., he was the Director of Systems Engineering for North America Sales at Informix Software, Inc., a leading provider of relational database management software. He worked at Informix from 1993 to 1998 in roles of increasing responsibility within the Systems Engineering organization. Mr. Carroll worked for Golden Coast Environmental Services in Irvine, CA from 1987 to 1993. He served as Vice President of Sales and Information Technology delivering management software and consulting to municipalities throughout the United States and Canada. Mr. Carroll received his bachelor’s degree in Information and Computer Science from the University of California, Irvine and is currently enrolled in the Masters of Business Administration program with the University of Phoenix.

      John Blair has been a director of Apollo Group, Inc. since September 2000 and is Chairman of the Audit Committee and a member of the Compensation Committee of the Board of Directors of Apollo Group, Inc. In addition, he served from 1982 to September 2000 as a director of Western International University, Inc., a wholly-owned subsidiary of Apollo Group, Inc. Mr. Blair was the Chief Operating Officer of Integrated Information Systems, Inc., a provider of integrated Internet solutions, from May 1999 through December 2000. In 1984, Mr. Blair founded J. Blair Consulting, an independent consulting business that provides management counsel to individuals and organizations in the areas of strategic planning, product planning, organizational diagnosis, management development, and strategies for leveraging business value through technology and continues to be active in this professional services firm. Mr. Blair earned a B.S. in Engineering from Purdue University and a Master of Arts in Organizational Management from University of Phoenix.

      Dino J. DeConcini has been a director of Apollo Group, Inc. since 1981 and is currently a member of the Audit Committee of the Board of Directors of Apollo Group, Inc. From 2000 to 2002, Mr. DeConcini was the Director of Financial Education at Consumer Federation of America. From 1995 to 2000, Mr. DeConcini was the Executive Director, Savings Bonds Marketing Office, U.S. Department of the Treasury. From 1979 to 1995, Mr. DeConcini was a shareholder and employee in DeConcini, McDonald, Brammer, Yetwin and Lacy,

27

Table of Contents

      Hedy F. Govenar has been a director of Apollo Group, Inc. since March 1997. Ms. Govenar is founder and President of Governmental Advocates, Inc., a lobbying and political consulting firm in Sacramento, California. An active lobbyist with the firm since 1979, she represents a variety of corporate and trade association clients. From 1989 to 1999, Ms. Govenar served as a Commissioner on the California Film Commission as an appointee of the California State Assembly. Ms. Govenar received an M.A. from California State University and a B.A. from University of California at Los Angeles.

      John R. Norton III has been a director of Apollo Group, Inc. since March 1997 and is Chairman of the Compensation Committee and a member of the Audit Committee of the Board of Directors of Apollo Group, Inc. Mr. Norton founded the J. R. Norton Company, an agricultural producer, in 1955 engaged in diversified agriculture including crop production and cattle feeding. He served as the Deputy Secretary of the U.S. Department of Agriculture in 1985 and 1986. Mr. Norton is also on the Board of Directors of Shamrock Foods, Inc., a foodservice distributor and dairy. He attended Stanford University and the University of Arizona where he received a B.S. in Agriculture in 1950.

Committees of the Board of Directors

      The Board of Directors has two principal committees: (1) an Audit Committee comprised of John Blair (Chairperson), Dino J. DeConcini, and John R. Norton III and (2) a Compensation Committee comprised of John R. Norton III (Chairperson) and John Blair.

Meetings of the Board of Directors and its Committees

      During the year ended August 31, 2003, the Board of Directors met on four occasions. All of the directors attended 100% of the Board of Directors meetings and meetings of each of the committees on which he or she served.

      Compensation Committee. The Compensation Committee of our Board of Directors, which met one time during 2003, reviews all aspects of compensation of executive officers and determines or makes recommendations on such matters to the full Board of Directors. Each of the members of this committee is an “independent director” as defined in Rule 4200 of the Marketplace Rules of the National Association of Securities Dealers, Inc., and an “outside director” as defined in Section 162(m) of the Internal Revenue Code. The report of the Compensation Committee for 2003 is set forth in Item 11.

      Audit Committee. The Company has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. John Blair, Dino J. DeConcini, and John R. Norton III are the members of our audit committee. The Audit Committee is responsible for reviewing the financial information which will be provided to shareholders and others, the systems of internal controls, which management and the Board of Directors have established, the performance and selection of independent auditors, and our audit and financial reporting processes. This committee held four meetings during the last fiscal year. The Board of Directors has determined that Mr. Blair and Mr. Norton are “audit committee financial experts” as defined in Item 401(h) of Regulation S-K. Each of the members of this committee is an “independent director” as defined in Rule 4200 of the Marketplace Rules of the National Association of Securities Dealers, Inc. The Report of the Audit Committee for 2003 is set forth in Item 11.

      Other Committees. We are a Controlled Company as defined in Rule 4350(c) of the Marketplace Rules of the National Association of Securities Dealers, Inc. since more than 50% of the voting power of us is held by the John Sperling Voting Stock Trust dated January 31, 1995. Therefore, we do not maintain a standing nominating committee or other committee performing similar functions.

28

Table of Contents

      Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, as well as persons who own more than 10% of a registered class of our equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in beneficial ownership. Directors, executive officers, and greater than 10% shareholders are required by Securities and Exchange Commission regulation to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of the copies of such forms furnished to us, or written representations that no Forms 5 were required, we believe that during the fiscal year ended August 31, 2003, our directors and officers complied with all Section 16(a) filing requirements with the following exceptions:

      John Sperling was required to file a Form 4 by April 3, 2003 to report the sale of Apollo Education Group Class A common stock. This transaction was reported on April 8, 2003.

      Code of Ethics. We have adopted a code of ethics that applies to our principal executive officers and all members of our finance department, including the principal financial officer and principal accounting officer. This code of ethics is filed herewith as Exhibit 14.

Item 11 — Executive Compensation

Director Compensation

      Fees. In 2003, our non-employee directors received a $24,000 annual retainer and $2,000 for each board meeting attended. In addition, members of the Audit Committee received $2,000 for each Audit Committee meeting attended and members of the Compensation Committee receive $1,000 for each Compensation Committee meeting attended. Committee chairmen also received an additional $1,000 for each Audit Committee meeting and $500 for the Compensation Committee meeting. Non-employee directors are also reimbursed for out-of-pocket expenses.

      Apollo Group, Inc. Amended and Restated Director Stock Plan. The Board of Directors has adopted the Apollo Group, Inc. Amended and Restated Director Stock Plan (“Director Plan”) to attract and retain independent directors. Under the amended Director Plan, up to 925,000 shares of Apollo Education Group Class A common stock and up to 100,000 shares of University of Phoenix Online common stock may be available for grant of awards. Options granted under the amended Director Plan are fully vested six months and one day after the date of grant and are exercisable in full thereafter until the date that is ten years after the date of grant. The exercise price per share under the amended Director Plan is equal to the fair market value of such shares upon the date of grant. Under the amended Director Plan, each non-employee director automatically receives a grant of options to purchase 20,250 shares of Apollo Education Group Class A common stock on September 1 of each year through 2003.

29

Table of Contents

Executive Compensation

      The following table discloses the annual and long-term compensation earned for services rendered in all capacities by our Chief Executive Officer and the four other most highly compensated executive officers for 2003:

SUMMARY COMPENSATION TABLE

      The following tables disclose options granted by us to our Chief Executive Officer and the four other most highly compensated executive officers for 2003:

Option Grants to Purchase Apollo Education Group Class A Common Stock

30

Table of Contents

Option Grants to Purchase University of Phoenix Online Common Stock

31

Table of Contents

Aggregated Option Exercises in Fiscal Year 2003 and Option Values

      The following tables disclose the number of shares received from the exercise of our options, the value received therefrom, and the number and value of in-the-money and out-of-the-money options held by our Chief Executive Officer and the four other most highly compensated officers for 2003:

Apollo Education Group Class A Common Stock

University of Phoenix Online Common Stock