APOLLO GROUP INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended February 29, 2004

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

Commission file number: 0-25232

APOLLO GROUP, INC.

(Exact name of registrant as specified in its charter)


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

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

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

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.


YES x		NO 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

AT APRIL 7, 2004, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:


Apollo Education Group Class A common stock, no par value		176,093,000 Shares
Apollo Education Group Class B common stock, no par value		477,000 Shares
University of Phoenix Online common stock, no par value		16,005,000 Shares

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements - Apollo Group, Inc.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET


	February 29,			August 31,
(Dollars in thousands)	2004			2003
	(Unaudited)
Assets:
Current assets
Cash and cash equivalents	$	461,597		$	416,452
Restricted cash		178,365			147,616
Marketable securities		286,181			235,962
Receivables, net		132,199			123,728
Deferred tax assets, net		10,093			9,098
Income taxes receivable					842
Other current assets		17,829			16,545

Total current assets		1,086,264			950,243
Property and equipment, net		153,953			119,057
Marketable securities		313,700			245,772
Cost in excess of fair value of assets purchased, net		37,096			37,096
Deferred tax assets, net		4,032			1,155
Other assets (includes receivable from related party of $13,464 and $13,107 at February 29, 2004 and August 31, 2003, respectively)		26,927			24,881

Total assets	$	1,621,972		$	1,378,204

Liabilities and Shareholders’ Equity:
Current liabilities
Current portion of long-term liabilities	$	3,231		$	3,231
Accounts payable		28,562			29,314
Accrued liabilities		60,470			49,525
Income taxes payable		3,422
Student deposits and current portion of deferred revenue		302,779			253,153

Total current liabilities		398,464			335,223
Deferred tuition revenue, less current portion		659			942
Long-term liabilities, less current portion		15,521			15,114

Total liabilities		414,644			351,279

Commitments and contingencies
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued
Apollo Education Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 175,988,000 and 175,286,000 issued and outstanding at February 29, 2004 and August 31, 2003, respectively		103			103
Apollo Education Group Class B voting common stock, no par value, 3,000,000 shares authorized; 477,000 issued and outstanding at February 29, 2004 and August 31, 2003		1			1
University of Phoenix Online nonvoting common stock, no par value, 400,000,000 shares authorized; 15,960,000 and 15,659,000 issued and outstanding at February 29, 2004 and August 31, 2003, respectively
Additional paid-in capital		338,070			293,650
Apollo Education Group Class A treasury stock, at cost, 1,402,000 and 2,103,000 shares at February 29, 2004 and August 31, 2003, respectively		(31,166	)		(27,100	)
University of Phoenix Online treasury stock, at cost, 253,000 and 86,000 shares at February 29, 2004 and August 31, 2003, respectively		(17,175	)		(4,601	)
Retained earnings		917,970			765,196
Accumulated other comprehensive loss		(475	)		(324	)

Total shareholders’ equity		1,207,328			1,026,925

Total liabilities and shareholders’ equity	$	1,621,972		$	1,378,204

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

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS


	For the Three Months Ended				For the Six Months Ended
	February 29,		February 28,		February 29,		February 28,
(In thousands, except per share amounts)	2004		2003		2004		2003
			(Unaudited)
Revenues:
Tuition and other, net	$	396,862	$	295,181	$	808,671	$	604,078

Costs and expenses:
Instructional costs and services		181,104		143,249		355,991		285,352
Selling and promotional		87,390		64,485		169,029		124,811
General and administrative		20,087		16,702		40,695		32,849

		288,581		224,436		565,715		443,012

Income from operations		108,281		70,745		242,956		161,066
Interest income, net		4,574		3,509		8,731		7,043

Income before income taxes		112,855		74,254		251,687		168,109
Provision for income taxes		44,352		28,568		98,913		65,734

Net income	$	68,503	$	45,686	$	152,774	$	102,375

Net income attributed to:
Apollo Education Group common stock	$	63,044	$	42,607	$	141,399	$	96,377

University of Phoenix Online common stock	$	5,459	$	3,079	$	11,375	$	5,998

Earnings per share attributed to:
Apollo Education Group common stock :
Basic net income per share	$	0.36	$	0.24	$	0.80	$	0.55

Diluted net income per share	$	0.35	$	0.24	$	0.79	$	0.54

Basic weighted average shares outstanding		176,279		174,829		176,188		174,469

Diluted weighted average shares outstanding		178,924		177,309		178,825		177,096

University of Phoenix Online common stock:
Basic net income per share	$	0.34	$	0.20	$	0.72	$	0.41

Diluted net income per share	$	0.32	$	0.19	$	0.66	$	0.37

Basic weighted average shares outstanding		15,907		15,064		15,882		14,774

Diluted weighted average shares outstanding		17,149		16,395		17,167		16,190

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

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS


	For the Six Months Ended
	February 29,			February 28,
(In thousands)	2004			2003
	(Unaudited)
Cash flows provided by (used for) operating activities:
Net income	$	152,774		$	102,375
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		21,241			19,128
Amortization of investment premiums		3,026			2,574
Provision for uncollectible accounts		13,788			10,774
Deferred income taxes		(3,872	)		(2,291	)
Tax benefits of stock options exercised		28,395			28,281
Increase in assets:
Restricted cash		(30,749	)		(23,732	)
Receivables		(22,259	)		(24,370	)
Other assets		(1,747	)		(593	)
Increase in liabilities:
Accounts payable and accrued liabilities		13,615			6,816
Student deposits and deferred revenue		49,343			30,532
Other liabilities		1,787			1,642

Net cash provided by operating activities		225,342			151,136

Cash flows provided by (used for) investing activities:
Net additions to property and equipment		(28,224	)		(29,240	)
Purchase of land and buildings related to future Online expansion		(28,428	)
Purchase of marketable securities		(255,635	)		(162,945	)
Maturities of marketable securities		134,462			138,417
Purchase of other assets		(1,606	)		(1,332	)

Net cash used for investing activities		(179,431	)		(55,100	)

Cash flows provided by (used for) financing activities:
Purchase of Apollo Education Group Class A common stock		(20,843	)		(4,068	)
Issuance of Apollo Education Group Class A common stock		26,476			19,047
Purchase of University of Phoenix Online common stock		(17,175	)		(2,012	)
Issuance of University of Phoenix Online common stock		10,927			9,321
Payments on long-term liabilities					(100	)

Net cash provided by (used for) financing activities		(615	)		22,188

Currency translation loss		(151	)		(135	)

Net increase in cash and cash equivalents		45,145			118,089
Cash and cash equivalents at beginning of period		416,452			295,237

Cash and cash equivalents at end of period	$	461,597		$	413,326

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

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

Note 1. Nature of Operations

Apollo Group, Inc. (“Apollo” or the “Company”), through its wholly-owned subsidiaries, The University of Phoenix, Inc. (“University of Phoenix”), Institute for Professional Development (“IPD”), The College for Financial Planning Institutes Corporation (the “College”), and Western International University, Inc. (“WIU”), has been providing higher education to working adults for over 25 years.

University of Phoenix is a regionally accredited, private institution of higher education offering associates, bachelors, masters, and doctoral degree programs in business, criminal justice, education, health care, human services, information technology, management, and nursing. University of Phoenix has 50 physical campuses and 91 learning centers located in Arizona, Arkansas, 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 is accredited by The Higher Learning Commission (“HLC”) and is a member of the North Central Association of Colleges and Schools.

IPD provides program development and management services under long-term contracts to 22 regionally accredited private colleges and universities. IPD currently operates at 22 campuses and 31 learning centers in 22 states.

The College, located in Denver, Colorado, provides financial planning education programs, as well as regionally accredited graduate degree programs in financial planning, financial analysis, and finance.

WIU, which is accredited by HLC, currently offers undergraduate and graduate degree programs in Phoenix, Chandler, Scottsdale, and Fort Huachuca, Arizona.

On March 24, 2000, the Board of Directors of Apollo authorized the issuance of a new class of stock called University of Phoenix Online common stock, that is intended to reflect the separate performance of University of Phoenix Online, a division of University of Phoenix. Apollo’s other businesses and its retained interest in University of Phoenix Online are referred to as “Apollo Education Group.” On October 3, 2000, an offering of 5,750,000 shares of University of Phoenix Online common stock was completed at a price of $14.00 per share. At the time of the offering this stock represented a 10.8% interest in that business with Apollo Education Group retaining the remaining 89.2% interest in University of Phoenix Online. This percentage has decreased to 85.6% at February 29, 2004, due to the issuance of shares related to the exercise of University of Phoenix Online stock options and the issuance of shares of University of Phoenix Online common stock as part of the Apollo Group, Inc. Employee Stock Purchase Plan, partially offset by the repurchase of shares of University of Phoenix Online common stock.

This financial information reflects all adjustments, consisting only of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Unless otherwise noted, references to 2004 and 2003 refer to the periods ended February 29, 2004, and February 28, 2003, respectively.

Note 2. Significant Accounting Policies

Basis of presentation

The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the fiscal year ended August 31, 2003, included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The results of operations for the three-month and six-month periods ended February 29, 2004, are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

Principles of consolidation

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

Cash and cash equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Restricted cash

The U.S. Department of Education requires that Title IV Program funds collected in advance of student billings be kept in a separate cash or cash equivalent account until the students are billed for that portion of their program. In addition, all Title IV Program funds received by the Company through electronic funds transfer are subject to certain holding period restrictions. These funds generally remain in these separate accounts for an average of 60-75 days from date of receipt. Restricted cash is excluded from cash and cash equivalents in the Consolidated Statement of Cash Flows until the cash is transferred from these restricted accounts to the Company’s operating accounts. The Company’s restricted cash is invested primarily in U.S. government sponsored enterprises and auction market preferred stock with maturities of ninety days or less.

Investments

Investments in marketable securities such as municipal bonds and U.S. government sponsored enterprises are stated at amortized cost, which approximates fair value. It is the Company’s intention to hold its marketable securities until maturity. Investments in other long-term investments are carried at cost and are included in other assets in the Consolidated Balance Sheet.

Property and equipment

Property and equipment is recorded at cost less accumulated depreciation. The Company capitalizes the cost of software used for internal operations once technological feasibility of the software has been demonstrated. Such costs consist primarily of custom-developed and packaged software and the direct labor costs of internally developed software. Depreciation is provided on all furniture, equipment, and related software using the straight-line method over the estimated useful lives of the related assets which range from three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets. Maintenance and repairs are expensed as incurred.

Revenues, receivables, and related liabilities

Approximately 95% of the Company’s tuition and other net revenues during the six months ended February 29, 2004, consist of tuition revenues. Tuition revenue is recognized on a weekly basis, pro rata over the period of instruction. Tuition and other net revenues also include commissions from the sale of textbooks and other education-related products, rEsource fees, application fees, other student fees, and other income. Tuition and other net revenues vary from period to period based on several factors that include: 1) the aggregate number of students attending classes; 2) the number of classes held during the period; and 3) the weighted average tuition price per credit hour (weighted by program and location). University of Phoenix tuition revenues currently represent 95% of consolidated tuition revenues. IPD tuition revenues consist of the contractual share of tuition revenues from students enrolled in related programs at its client institutions. IPD’s contracts with its respective client institutions generally have terms of five to ten years with provisions for renewal.

The Company’s educational programs range in length from one-day seminars to degree programs lasting up to four years. Students in the Company’s degree programs generally enroll in a program of study that encompasses a series of five to six-week courses that are taken consecutively over the length of the program. Students are billed on a course-by-course basis when the student first attends a session, resulting in the recording of a receivable from the student and deferred tuition revenue in the amount of the billing. The related revenue for each course, including that portion of tuition revenues to which the Company is entitled under the terms of its revenue-sharing contracts with IPD client institutions, is recognized on a pro rata basis over the period of instruction for each course. Fees for rEsource, the Company’s online delivery method for course materials, are also recognized on a pro rata basis over the period of instruction. Application fee revenue and related costs are deferred and recognized on a pro rata basis over the period of the program. Seminars, continuing education programs, and many of the College’s non-degree programs are usually billed in one installment with the related revenue also recognized on a pro rata basis over the period of instruction.

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Estimates are used in determining the allowance for doubtful accounts and are based on the Company’s historical collection experience, current trends, and a percentage of the Company’s accounts receivable by aging category. In determining these percentages, the Company looks at historical write-offs of its receivables. A significant change in the aging of the Company’s accounts receivable balances would have an effect on the allowance for doubtful accounts balance. The Company’s accounts receivable are written-off once the account is deemed to be uncollectible. This typically occurs once it has exhausted all efforts to collect the account which includes collection attempts by company employees and outside collection agencies.

Tuition and other revenues are shown net of discounts relating to a variety of promotional programs. Such discounts totaled $13.3 million (3.2% of gross revenues) and $7.9 million (2.6% of gross revenues) in the three months ended February 29, 2004, and February 28, 2003, respectively, and $26.4 million (3.2% of gross revenues) and $15.7 million (2.5% of gross revenues) in the six months ended February 29, 2004, and February 28, 2003, respectively.

Many of the Company’s students participate in government sponsored financial aid programs under Title IV of the Higher Education Act of 1965, as amended. These financial aid programs generally consist of guaranteed student loans and direct grants to students. Guaranteed student loans are issued directly to the student by external financial institutions, to whom the student is obligated, and are non-recourse to the Company.

Student deposits consist of payments made in advance of billings. As the student is billed, the student deposit is applied against the resulting student receivable.

Cost in excess of fair value of assets purchased

At February 29, 2004, and February 28, 2003, the Company’s cost in excess of fair value of assets purchased (i.e. goodwill) related primarily to the acquisition of certain assets of the College and WIU. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). SFAS No. 142, among other things, discontinues the requirement that goodwill resulting from purchase business combinations be amortized to expense over the related estimated useful life. Under this guidance, goodwill balances are subjected to an impairment analysis on an annual basis or whenever events or circumstances indicate that the estimated fair value is less than the related carrying value.

SFAS No. 142 requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

The Company has identified its various reporting units which consist of its wholly-owned subsidiaries University of Phoenix, IPD, the College, and WIU. The Company has selected August 31 as the date on which it will perform its annual goodwill impairment test. The Company performed its annual impairment test as of August 31, 2003, and concluded that no impairment charge was required.

Fair value of financial instruments

The carrying amount reported in the Consolidated Balance Sheet for cash and cash equivalents, restricted cash, marketable securities, accounts receivable, accounts payable, accrued liabilities, and student deposits and deferred revenue approximate fair value because of the short-term nature of these financial instruments.

Earnings per share

The Company presents basic and diluted earnings per share for Apollo Education Group common stock and University of Phoenix Online common stock using the two-class method. The two-class method is an earnings allocation formula that determines the earnings per share for Apollo Education Group common stock and University of Phoenix Online common stock according to participation rights in undistributed earnings.

Basic earnings per share for Apollo Education Group common stock is calculated by dividing Apollo Education Group earnings (including its retained interest in University of Phoenix Online earnings) by the weighted average number of shares of Apollo Education Group Class A and Class B common stock outstanding. Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of options issuable under Apollo Group, Inc. incentive plans, exclusive of options granted with respect to University of Phoenix Online common stock.

Basic earnings per share for University of Phoenix Online common stock is calculated by dividing University of Phoenix Online earnings (excluding Apollo Education Group’s retained interest in University of Phoenix Online earnings) by the weighted average number of shares of University of Phoenix Online common stock outstanding. Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of options with respect to University of Phoenix Online common stock.

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

Deferred rental payments and deposits

The Company records rent expense using the straight-line method over the term of the lease agreement. Accordingly, deferred rental liabilities are provided for lease agreements that specify scheduled rent increases over the lease term. Rental deposits are provided for lease agreements that specify payments in advance or scheduled rent decreases over the lease term.

Selling and promotional costs

Selling and promotional costs consist primarily of compensation for enrollment advisors and corporate marketing, advertising costs, production of marketing materials, and other costs related to selling and promotional functions. The Company expenses selling and promotional costs as incurred.

Start-up costs

Costs related to the start-up of new campuses and learning centers are expensed as incurred.

Stock-based compensation

At February 29, 2004, the Company has four stock-based employee compensation plans, which are described more fully in Note 10 in the “Notes to Consolidated Financial Statements” for the year ended August 31, 2003, included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for those plans. Stock-based employee compensation expense is not reflected in the Consolidated Statement of Operations as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), to stock-based employee compensation is as follows, in thousands, except per share amounts:


	For the Three Months Ended						For the Six Months Ended
	February 29,			February 28,			February 29,			February 28,
	2004			2003			2004			2003
				(Unaudited)
Apollo Education Group
Net income, as reported	$	63,044		$	42,607		$	141,399		$	96,377
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(4,125	)		(3,559	)		(7,088	)		(6,307	)

Pro forma net income	$	58,919		$	39,048		$	134,311		$	90,070
Earnings per share:
Basic - as reported	$	0.36		$	0.24		$	0.80		$	0.55
Basic - pro forma	$	0.33		$	0.22		$	0.76		$	0.52
Diluted - as reported	$	0.35		$	0.24		$	0.79		$	0.54
Diluted - pro forma	$	0.33		$	0.22		$	0.75		$	0.51
University of Phoenix Online
Net income, as reported	$	5,459		$	3,079		$	11,375		$	5,998
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(171	)		(119	)		(280	)		(190	)

Pro forma net income	$	5,288		$	2,960		$	11,095		$	5,808
Earnings per share:
Basic - as reported	$	0.34		$	0.20		$	0.72		$	0.41
Basic - pro forma	$	0.33		$	0.20		$	0.70		$	0.39
Diluted - as reported	$	0.32		$	0.19		$	0.66		$	0.37
Diluted - pro forma	$	0.31		$	0.17		$	0.65		$	0.35

The effects of applying SFAS No. 123 in the above pro forma disclosures are not necessarily indicative of future amounts. The fair value of each option grant was estimated on the date of grant using the Black-Scholes method with the following weighted-average assumptions for grants for the three months ended February 29, 2004, and February 28, 2003, respectively, for Apollo Education Group: 1) dividend yield of 0.0% in both periods; 2) expected volatility of 31.1% and 44.0%; 3) risk-free interest rates of 2.6% and 2.8%; and 4) expected lives of 2.7 and 3.5 years and for University of Phoenix Online for the three months ended February 28, 2003: 1) dividend yield of 0.0%; 2) expected volatility of 50.0%; 3) risk-free interest rates of 2.8%; and 4) expected lives of 4.2 years. No University of Phoenix stock options were granted in the three months ended February 29, 2004.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes method with the following weighted-average assumptions for grants for the six months ended February 29, 2004, and February 28, 2003, respectively, for Apollo Education Group: 1) dividend yield of 0.0% in both periods; 2) expected volatility of 35.9% and 43.9%; 3) risk-free interest rates of 3.2% and 3.2%; and 4) expected lives of 3.3 and 3.3 years and for University of Phoenix Online: 1) dividend yield of 0.0% in both periods; 2) expected volatility of 40.0% and 56.0%; 3) risk-free interest rates of 3.3% and 3.1%; and 4) expected lives of 3.4 and 3.0 years.

Segment information

The Company’s operations are aggregated into a single reportable operating segment based upon their similar economic and operating characteristics. The Company’s educational operations are conducted in similar markets and produce similar economic results. These operations provide higher education programs for working adults. The Company’s operations are also subject to a similar regulatory environment, which includes licensing and accreditation.

Use of estimates

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

Recent accounting pronouncements

In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN No. 45”). FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 also expands the disclosures required to be made by a guarantor about its obligations under certain guarantees that it has issued. Initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified. The disclosure requirements are effective immediately. The adoption of FIN No. 45 did not have a material effect on the Company’s financial condition or results of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN No. 46”). FIN No. 46 requires that companies that control another entity through interests other than voting interests should consolidate the controlled entity. FIN No. 46 applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. For those arrangements entered into prior to February 1, 2003, the provisions of FIN No. 46 were required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. However, in October 2003, the FASB deferred the effective date of FIN No. 46 to the end of the first interim or annual period ending after December 15, 2003, for those arrangements entered into prior to February 1, 2003. The related disclosure requirements are effective immediately. The adoption of FIN No. 46 did not have a material effect on the Company’s financial condition or results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“SFAS No. 150”). SFAS No. 150 established standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, and must be applied prospectively by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The adoption of SFAS No. 150 did not have a material effect on the Company’s financial condition or results of operations.

Note 3. Balance Sheet Components

Marketable securities consist of the following, in thousands:


	February 29,				August 31,
	2004				2003
			(Unaudited)
	Estimated		Amortized		Estimated		Amortized
Type	Market		Cost		Market		Cost
Classified as current:
Municipal bonds	$	200,328	$	200,024	$	155,182	$	155,014
U.S. government sponsored enterprises		2,684		2,672		4,940		4,902
Auction rate preferred stock		47,475		47,475		24,550		24,550
Corporate obligations		36,000		36,010		51,515		51,496

Total current marketable securities		286,487		286,181		236,187		235,962

Classified as non current:
Municipal bonds due in 1-5 years		202,162		200,899		163,737		163,747
U.S. government sponsored enterprises		65,392		65,466		24,415		25,250
Auction rate preferred stock		38,600		38,598		42,075		42,075
Corporate obligations		8,812		8,737		14,587		14,700

Total non current marketable securities		314,966		313,700		244,814		245,772

Total marketable securities	$	601,453	$	599,881	$	481,001	$	481,734

Receivables consist of the following, in thousands:


	February 29,			August 31,
	2004			2003
	(Unaudited)
Trade receivables	$	139,642		$	131,045
Interest receivable		5,013			3,564

		144,655			134,609
Less allowance for doubtful accounts		(12,456	)		(10,881	)

Total receivables, net	$	132,199		$	123,728

Bad debt expense was $7.1 million and $4.7 million for the three months ended February 29, 2004, and February 28, 2003, respectively, and $13.8 million and $10.8 million for the six months ended February 29, 2004, and February 28, 2003, respectively. Write-offs, net of recoveries, were $7.2 million and $3.8 million for the three months ended February 29, 2004, and February 28, 2003, respectively, and $12.2 million and $7.6 million for the six months ended February 29, 2004, and February 28, 2003, respectively.

Property and equipment consist of the following, in thousands:


	February 29,			August 31,
	2004			2003
	(Unaudited)
Furniture and equipment	$	196,260		$	179,588
Software		56,731			52,712
Leasehold improvements		51,986			46,902
Land and buildings		28,543			115

		333,520			279,317
Less accumulated depreciation and amortization		(179,567	)		(160,260	)

Property and equipment, net	$	153,953		$	119,057

Depreciation and amortization expense was $10.8 million and $10.1 million for the three months ended February 29, 2004, and February 28, 2003, respectively, and $21.8 million and $19.6 million for the six months ended February 29, 2004, and February 28, 2003, respectively.

Cost in excess of fair value of assets purchased consist of the following, in thousands:


	February 29,			August 31,
	2004			2003
	(Unaudited)
Cost in excess of fair value of assets purchased	$	42,581		$	42,581
Less accumulated amortization		(5,485	)		(5,485	)

Total cost in excess of fair value of assets purchased, net	$	37,096		$	37,096

As was previously discussed, the Company adopted SFAS No. 142 effective September 1, 2001, and discontinued the amortization of goodwill as of that date.

Accrued liabilities consist of the following, in thousands:


	February 29,		August 31,
	2004		2003
	(Unaudited)
Salaries, wages, and benefits	$	25,555	$	23,543
Other accrued liabilities		34,915		25,982

Total accrued liabilities	$	60,470	$	49,525

Student deposits and current portion of deferred revenue consist of the following, in thousands:


	February 29,		August 31,
	2004		2003
	(Unaudited)
Student deposits	$	202,556	$	163,453
Current portion of deferred tuition revenue		86,030		77,605
Application fee revenue		9,021		7,551
Other deferred revenue		5,172		4,544

Total student deposits and current portion of deferred revenue	$	302,779	$	253,153

Note 4. Short-Term Borrowings

At February 29, 2004, the Company had no outstanding borrowings on its $10.0 million line of credit. Borrowings under the line of credit bear interest at LIBOR plus .75% or prime at the Company’s election. Any amounts borrowed under the line are payable upon its termination in February 2006.

Note 5. Long-Term Liabilities

Long-term liabilities consist of the following, in thousands:


	February 29,			August 31,
	2004			2003
	(Unaudited)
Deferred compensation discounted at 7.5%	$	1,318		$	1,284
Deferred rent		11,658			9,905
Deferred gain on sale-leasebacks and other contracts		5,688			7,068
Other long-term liabilities		88			88

Total long-term liabilities		18,752			18,345
Less current portion		(3,231	)		(3,231	)

Total long-term liabilities, net	$	15,521		$	15,114

Note 6. Common Stock

The Board of Directors of Apollo has authorized a program allocating up to $300.0 million in Company funds to repurchase shares of Apollo Education Group Class A common stock and University of Phoenix Online common stock. As of February 29, 2004, the Company had repurchased approximately 10,573,000 shares of Apollo Education Group Class A common stock at a total cost of approximately $136.2 million and 795,000 shares of University of Phoenix Online common stock at a total cost of approximately $31.1 million.

Note 7. Earnings Per Share

Earnings attributable to different classes of the Company’s common stock are as follows, in thousands:


	For the Three Months Ended				For the Six Months Ended
	February 29,		February 28,		February 29,		February 28,
	2004		2003		2004		2003
			(Unaudited)
Apollo Education Group	$	63,044	$	42,607	$	141,399	$	96,377
University of Phoenix Online		5,459		3,079		11,375		5,998

Net income	$	68,503	$	45,686	$	152,774	$	102,375

The earnings attributable to University of Phoenix Online common stock represent the portion of the earnings of University of Phoenix Online attributed to the shares of University of Phoenix Online common stock outstanding excluding Apollo Education Group’s retained interest in University of Phoenix Online. At the date of the issuance of the University of Phoenix Online common stock, Apollo Education Group retained an 89.2% interest in University of Phoenix Online. This percentage has decreased to 85.6% at February 29, 2004, due to the issuance of shares related to the exercise of University of Phoenix Online stock options and the issuance of shares of University of Phoenix Online common stock as part of the Apollo Group, Inc. Employee Stock Purchase Plan partially offset by the repurchase of shares of University of Phoenix Online common stock.

A reconciliation of the basic and diluted earnings per share computations for Apollo Education Group Class A and Class B common stock is as follows, in thousands, except per share amounts:


	For the Three Months Ended
	February 29,						February 28,
	2004						2003
			Weighted						Weighted
			Average		Per Share				Average		Per Share
	Income		Shares		Amount		Income		Shares		Amount
					(Unaudited)
Basic net income per share	$	63,044		176,279	$	0.36	$	42,607		174,829	$	0.24
Effect of dilutive securities:
Stock options				2,645						2,480

Diluted net income per share	$	63,044		178,924	$	0.35	$	42,607		177,309	$	0.24


	For the Six Months Ended
	February 29,						February 28,
	2004						2003
			Weighted						Weighted
			Average		Per Share				Average		Per Share
	Income		Shares		Amount		Income		Shares		Amount
					(Unaudited)
Basic net income per share	$	141,399		176,188	$	0.80	$	96,377		174,469	$	0.55
Effect of dilutive securities:
Stock options				2,637						2,627

Diluted net income per share	$	141,399		178,825	$	0.79	$	96,377		177,096	$	0.54

Basic earnings per share for Apollo Education Group common stock for the three and six months ended February 29, 2004, and February 28, 2003, were computed by dividing Apollo Education Group earnings (including its retained interest in University of Phoenix Online earnings) by the weighted average number of Apollo Education Group common stock shares outstanding during the respective periods. Diluted earnings per share were calculated similarly, except that the dilutive effect of the assumed exercise of options issued under Apollo Group, Inc. incentive plans, exclusive of options granted and shares issued with respect to University of Phoenix Online common stock, is included.

A reconciliation of the basic and diluted earnings per share computations for University of Phoenix Online common stock is as follows, in thousands, except per share amounts:


	For the Three Months Ended
	February 29,						February 28,
	2004						2003
			Weighted						Weighted
			Average		Per Share				Average		Per Share
	Income		Shares		Amount		Income		Shares		Amount
	(Unaudited)
Basic net income per share	$	5,459		15,907	$	0.34	$	3,079		15,064	$	0.20
Effect of dilutive securities:
Stock options				1,242						1,331

Diluted net income per share	$	5,459		17,149	$	0.32	$	3,079		16,395	$	0.19


	For the Six Months Ended
	February 29,						February 28,
	2004						2003
			Weighted						Weighted
			Average		Per Share				Average		Per Share
	Income		Shares		Amount		Income		Shares		Amount
	(Unaudited)
Basic net income per share	$	11,375		15,882	$	0.72	$	5,998		14,774	$	0.41
Effect of dilutive securities:
Stock options				1,285						1,416

Diluted net income per share	$	11,375		17,167	$	0.66	$	5,998		16,190	$	0.37

Basic earnings per share for University of Phoenix Online common stock for the three and six months ended February 29, 2004, and February 28, 2003, were computed by dividing University of Phoenix Online earnings (excluding Apollo Education Group’s retained interest in University of Phoenix Online earnings) by the number of shares of University of Phoenix Online common stock outstanding during the respective periods. Diluted earnings per share were calculated similarly, except that the dilutive effect of the assumed exercise of options issued under Apollo Group, Inc. incentive plans with respect to University of Phoenix Online common stock, is included.

Note 8. Commitments and Contingencies

The U.S. Department of Education Office of the Inspector General (“OIG”) audited the administration of the federal student financial assistance programs in connection with educational programs provided pursuant to contractual arrangements between IPD and certain of its client institutions. In audit reports issued to eight client institutions, the OIG asserted that the client institutions violated the statutory prohibition on the use of incentive payments for recruiting by paying IPD a percentage of tuition revenue. The reports further suggest that IPD paid its employees in a manner that included incentive-based compensation even though IPD based its compensation plans for recruiters on factors or qualities that were not solely related to the success in securing enrollments. Additionally, the audit reports question the client institutions’ interpretation of the “12-hour rule.” Although both IPD and the client institutions believe that the matters in question do not relate to student program or institutional eligibility and, therefore, believe a repayment of federal funds is not appropriate, the OIG has recommended to the U.S. Department of Education that the client institutions be required to return to lenders all loan funds disbursed. IPD is currently in active negotiations with the U.S. Department of Education to eliminate or settle the issues raised in the audit reports. Although the Company believes that the OIG’s audits of certain IPD client institutions will be resolved without any material effect on its financial position, results of operations, or cash flows, and without any material change in IPD’s business strategy, as with any program review or audit, no assurance can be given as to the final outcome as the matters are not yet resolved.

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 the Company 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 the Company failed to pay overtime. In July 2003, the Court denied the plaintiffs’ motion to certify a class. The parties nonetheless have negotiated a settlement on a class-wide basis. The settlement has been preliminarily approved by the Court and the final approval by the Court is scheduled to occur in July 2004. 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 the Company’s business, financial position, results of operations, or cash flows.

On August 29, 2003, the Company was notified that a qui tam action had been filed against it 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 was subsequently granted with leave to amend the complaint. Subsequently, a second amended complaint was filed on or about March 3, 2004. A motion to dismiss this amended complaint was filed on or about March 22, 2004, and is presently pending before the Court. 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 the Company’s 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 the Company 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 the Company failed to pay overtime. An initial status conference has occurred and the parties are now in the process of discovery. 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 the Company’s business, financial position, results of operations, or cash flows.

In November 2002, two former enrollment advisors at University of Phoenix Online filed an administrative claim with the Wage & Hour Division of the Department of Labor that they were incorrectly classified as exempt employees and therefore owed unpaid overtime. The Wage & Hour Division conducted an investigation, but issued no determination. The matter was then transferred to the Department of Labor, Office of the Solicitor, which asserted that unpaid overtime was due to all enrollment advisors employed at University of Phoenix Online after November 2001. The parties have agreed to attempt to reach a negotiated resolution of these claims. While the outcome of this matter is currently not determinable, management does not expect the results of this matter will have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

The Company is 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 its consolidated financial position, results of operations, or cash flows.

Note 9. Consolidating Statement of Operations Data

The following schedules present statement of operations data for Apollo Education Group, University of Phoenix Online, and Apollo Group, Inc. We have presented this information to illustrate the respective operating results of Apollo Education Group and University of Phoenix Online, including the impact of the inter-group license fee and inter-group allocated expenses, and how the operating results of those groups relate to the consolidated operating results of Apollo Group, Inc.

Since its inception, the Company has financed University of Phoenix Online’s operations internally and has not incurred any related third-party debt. All of its cash receipts and disbursements are processed by the Company on University of Phoenix Online’s behalf. All amounts were settled through the funds allocated to/from Apollo Education Group component of University of Phoenix Online’s divisional net worth. Whenever University of Phoenix Online generated cash from operations, that cash was deemed to be transferred to Apollo Education Group and was accounted for as a return of capital. Whenever University of Phoenix Online had a cash need, that cash was deemed to be transferred from Apollo Education Group and was accounted for as a capital contribution. As a result of this policy, no inter-group interest income or expense was reflected in the Consolidating Statement of Operations for the periods prior to the offering.

Upon the completion of the offering, the net proceeds of the offering of $72.8 million were transferred to University of Phoenix Online and accounted for as a capital contribution. Subsequently, the difference between cash receipts and cash outlays attributable to University of Phoenix Online have been accounted for as a revolving credit advance from University of Phoenix Online to Apollo Education Group (to the extent this difference was not transferred to University of Phoenix Online) requiring the reflection of interest expense by Apollo Education Group and interest income by University of Phoenix Online at the rate of interest determined by the Board of Directors.


	For the Three Months Ended
	February 29,										February 28,
	2004										2003
	Apollo			University of							Apollo			University of
	Education			Phoenix					Apollo		Education			Phoenix					Apollo
(In thousands)	Group			Online		Eliminations			Group, Inc.		Group			Online		Eliminations			Group, Inc.
	(Unaudited)
Revenues:
Tuition and other, net(1)	$	212,796		$	184,066	$	—		$	396,862	$	178,205		$	116,976	$	—		$	295,181
Inter-group license fee revenue(2)		7,363					(7,363	)		—		4,679					(4,679	)		—

		220,159			184,066		(7,363	)		396,862		182,884			116,976		(4,679	)		295,181

Costs and expenses:
Instructional costs and services
External expenses(3)		127,200			53,904					181,104		106,631			36,618					143,249
Inter-group allocated expenses(4)		(9,398	)		9,398					—		(6,311	)		6,311					—
Inter-group license fee expense(2)					7,363		(7,363	)		—					4,679		(4,679	)		—
Selling and promotional
External expenses(3)		44,695			42,695					87,390		37,681			26,804					64,485
Inter-group allocated expenses(4)		(389	)		389					—		(251	)		251					—
General and administrative
External expenses(3)		20,087								20,087		16,702								16,702
Inter-group allocated expenses(4)		(8,712	)		8,712					—		(6,171	)		6,171					—

		173,483			122,461		(7,363	)		288,581		148,281			80,834		(4,679	)		224,436

Income from operations		46,676			61,605		—			108,281		34,603			36,142		—			70,745
Interest income, net		3,036			1,538					4,574		2,511			998					3,509

Income before income taxes		49,712			63,143		—			112,855		37,114			37,140		—			74,254
Provision for income taxes(5)		19,221			25,131					44,352		13,786			14,782					28,568

Net income	$	30,491		$	38,012	$	—		$	68,503	$	23,328		$	22,358	$	—		$	45,686


	For the Six Months Ended
	February 29,										February 28,
	2004										2003
	Apollo			University of							Apollo			University of
	Education			Phoenix					Apollo		Education			Phoenix					Apollo
(In thousands)	Group			Online		Eliminations			Group, Inc.		Group			Online		Eliminations			Group, Inc.
	(Unaudited)
Revenues:
Tuition and other, net(1)	$	446,851		$	361,820	$	—		$	808,671	$	376,911		$	227,167	$	—		$	604,078
Inter-group license fee revenue(2)		14,473					(14,473	)		—		9,087					(9,087	)		—

		461,324			361,820		(14,473	)		808,671		385,998			227,167		(9,087	)		604,078

Costs and expenses:
Instructional costs and services
External expenses(3)		252,468			103,523					355,991		215,979			69,373					285,352
Inter-group allocated expenses(4)		(18,400	)		18,400					—		(12,099	)		12,099					—
Inter-group license fee expense(2)					14,473		(14,473	)		—					9,087		(9,087	)		—
Selling and promotional
External expenses(3)		90,173			78,856					169,029		72,007			52,804					124,811
Inter-group allocated expenses(4)		(715	)		715					—		(476	)		476					—
General and administrative
External expenses(3)		40,695								40,695		32,849								32,849
Inter-group allocated expenses(4)		(17,184	)		17,184					—		(11,678	)		11,678					—

		347,037			233,151		(14,473	)		565,715		296,582			155,517		(9,087	)		443,012

Income from operations		114,287			128,669		—			242,956		89,416			71,650		—			161,066
Interest income, net		5,764			2,967					8,731		5,023			2,020					7,043

Income before income taxes		120,051			131,636		—			251,687		94,439			73,670		—			168,109
Provision for income taxes(5)		46,522			52,391					98,913		36,413			29,321					65,734

Net income	$	73,529		$	79,245	$	—		$	152,774	$	58,026		$	44,349	$	—		$	102,375

(1) Tuition and other revenues are shown net of discounts from a variety of promotional programs and represent amounts earned from students of Apollo Education Group and University of Phoenix Online, respectively. There are no tuition or other net revenues that have been allocated between Apollo Education Group and University of Phoenix Online.

(2) Apollo Group, Inc. charges University of Phoenix Online a license fee equal to 4% of University of Phoenix Online’s net revenues for the use of curriculum, trademarks, and copyrights owned by Apollo Group, Inc. and its subsidiaries. The license fee, which is included in University of Phoenix Online’s instructional costs and services, totaled $7.4 million and $4.7 million for the three months ended February 29, 2004, and February 28, 2003, respectively, and $14.5 million and $9.1 million for the six months ended February 29, 2004, and February 28, 2003, respectively. The inter-group license fee revenue of Apollo Education Group eliminates against the inter-group license fee expense of University of Phoenix Online in consolidation at the Apollo Group, Inc. level.

(3) External expenses represent costs incurred directly by Apollo Education Group and University of Phoenix Online and do not include any inter-group allocations.

(4) Certain costs incurred by Apollo Group, Inc. and University of Phoenix including legal, accounting, corporate office, and centralized student services costs, have been allocated to University of Phoenix Online on the basis of its revenues in relation to those of Apollo Group, Inc. and University of Phoenix. The allocation of such expenses to University of Phoenix Online was as follows, in thousands:


	For the Three Months Ended				For the Six Months Ended
	February 29,		February 28,		February 29,		February 28,
	2004		2003		2004		2003
			(Unaudited)
Instructional costs and services	$	9,398	$	6,311	$	18,400	$	12,099
Selling and promotional		389		251		715		476
General and administrative		8,712		6,171		17,184		11,678

	$	18,499	$	12,733	$	36,299	$	24,253

(5) University of Phoenix Online’s results, along with other divisions of University of Phoenix, are included in the Apollo Group, Inc. consolidated federal income tax return. State taxes are paid based upon apportioned taxable income or loss of Apollo Group, Inc., with the exception of certain state taxes that are based upon an apportionment of University of Phoenix taxable income or loss. The provision for income taxes included in the accompanying consolidating statement of operations data has been calculated on a separate company basis.

Independent Accountants’ Report

To the Board of Directors and
Shareholders of Apollo Group, Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Apollo Group, Inc. and its subsidiaries (the “Company”) as of February 29, 2004, and the related condensed consolidated statements of operations and of comprehensive income for the three-month and six-month periods then ended and of cash flows for the six-month period then ended. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements as of February 29, 2004, and for the three-month and six-month periods then ended for them to be in conformity with accounting principles generally accepted in the United States of America.

The accompanying condensed financial information as of August 31, 2003, and for the three-month and six-month periods ended February 28, 2003, were not audited or reviewed by us and, accordingly, we do not express an opinion or any other form of assurance on them.

Deloitte & Touche LLP
Phoenix, Arizona
April 12, 2004

PART I – FINANCIAL INFORMATION

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.

The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” and the consolidated financial statements and related notes of Apollo Group, Inc. for the fiscal year ended August 31, 2003, included in our Form 10-K as filed with the Securities and Exchange Commission, as well as in conjunction with the consolidated financial statements and related notes of Apollo Group, Inc. for the three-month and six-month periods ended February 29, 2004, included in Item 1.

This Form 10-Q, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” contains forward-looking statements. The words “believes,” “expects,” “anticipates,” “estimates,” “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. Forward-looking statements in this Form 10-Q and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” include, but are not limited to, statements such as: 1) although we believe that the OIG’s audits of certain Institute for Professional Development’s client institutions will be resolved without any material effect on our financial position, results of operations, or cash flows, and without any material change in Institute for Professional Development’s business strategy, as with any program review or audit, no assurance can be given as to the final outcome as the matters are not yet resolved; 2) 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; 3) total purchases of property and equipment for the year ended August 31, 2004, excluding the land and buildings for University of Phoenix Online, are expected to range from $55.0 to $60.0 million; 4) we anticipate that these seasonal trends in the second and fourth quarters will continue in the future; and 5) 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. These forward-looking statements are based on our estimates, projections, beliefs, and assumptions and speak only as of the date made and are not guarantees of future performance.

Future events and actual results could differ materially from those set forth in the forward-looking statements as a result of many factors. Statements in this Form 10-Q, including “Notes to Consolidated Financial Statements” and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” describe factors, among others, that could contribute to or cause such differences. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements include, without limitation: 1) new or revised interpretations of regulatory requirements; 2) changes in or new interpretations of applicable laws, rules, and regulations; 3) failure to maintain or renew required regulatory approvals, accreditation, or state authorizations by University of Phoenix or certain Institute for Professional Development client institutions; 4) failure to obtain authorizations from states in which University of Phoenix does not currently provide degree programs; 5) failure to obtain approval from The Higher Learning Commission for University of Phoenix to operate in new states; 6) our ability to continue to attract and retain students; 7) our ability to successfully defend litigation claims; 8) our ability to protect our intellectual property and proprietary rights; 9) our ability to recruit and retain key personnel; 10) our ability to successfully manage economic conditions, including stock market volatility; and 11) other factors set forth in this Form 10-Q. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will prove to be accurate. 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. You are advised, however, to consult any further disclosures we make in our reports filed with the Securities and Exchange Commission.

OVERVIEW

Apollo Group, Inc. has been providing higher education to working adults for over 25 years. We operate through our subsidiaries, University of Phoenix, Institute for Professional Development, The College for Financial Planning, and Western International University. We currently offer our programs and services at 75 campuses and 125 learning centers in 38 states, Puerto Rico, and Vancouver, British Columbia. Our combined degree enrollment at February 29, 2004, was approximately 227,800. University of Phoenix is our largest subsidiary with its tuition revenues currently representing approximately 95% of consolidated tuition revenues.

University of Phoenix had degree enrollments of approximately 201,400 adult students at February 29, 2004. University of Phoenix has successfully replicated its teaching/learning model while maintaining educational quality at 50 physical campuses and 91 learning centers in 29 states, Puerto Rico, and Vancouver, British Columbia. University of Phoenix plans to continue increasing its student base by growing existing locations and by opening new 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. University of Phoenix currently plans on opening 7-9 new campuses during 2004. In the first six months of 2004, four new University of Phoenix campuses were opened. University of Phoenix also offers its educational programs worldwide through University of Phoenix Online, its computerized educational delivery system. We plan to continue expanding our distance education programs and services. We will also 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.

We believe that the international market for our services is a major growth opportunity. The United States is the most common destination for international students studying abroad. We believe that more working adult students would opt for a U.S. education that does not involve living in the U.S. because they could do so without leaving their employment and incurring the high travel and living costs and stringent visa requirements associated with studying abroad. Our belief is supported by the fact that University of Phoenix Online has students located in more than 100 countries. In addition, many U.S. residents live and work in foreign countries and could benefit from the opportunity to continue their education while abroad. We will continue to conduct market and operations research in various foreign countries where we believe there might be a demand for our programs.

Our future success is highly dependent on our ability to obtain, maintain, or renew required regulatory approvals, accreditation, or state authorizations. We are subject to extensive private, federal, and state regulation. The Higher Education Act of 1965, as amended, 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

• 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 programs compliance as part of their accreditation evaluations under the Higher Education Act.

Our 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. The loss of accreditation would significantly reduce demand for our programs as it would prohibit us from offering degrees and credits that are recognized and accepted by employers, other higher education institutions, and governmental entities. It would also render us ineligible to participate in federal financial aid programs.

The Higher Education Act of 1965 and the related regulations adopted by the U.S. Department of Education also impose numerous requirements with which institutions participating in the Title IV programs must comply. 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. The failure to comply with any of the Title IV requirements could result in adverse action by the U.S. Department of Education against us, including the termination of Title IV eligibility, the imposition of fines, or the imposition of liabilities by the U.S. Department of Education. In the 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 client institution percentages are estimated to be similar to those at University of Phoenix. Institute for Professional Development client institutions administer their own Title IV programs. The loss of Title IV eligibility would significantly reduce demand for our programs.

Our institutions are required to have authorization to operate as degree-granting institutions in each state where they physically provide education programs. 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. The failure to obtain authorization to operate in new states or to add new programs/locations would adversely effect our ability to expand our business.

CRITICAL ACCOUNTING POLICIES

Securities and Exchange Commission Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 2 of the “Notes to Consolidated Financial Statements” of Apollo Group, Inc. included in this Form 10-Q includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The following is a brief discussion of the more critical accounting policies and methods used by us.

Revenue recognition

Approximately 95% of our tuition and other net revenues during the first six months of 2004 consist of tuition revenues. Tuition revenue is recognized on a weekly basis, pro rata over the period of instruction. Our tuition and other net revenues also include commissions from the sale of textbooks and other education-related products, rEsource fees, application fees, other student fees, and other income. Our tuition and other net revenues vary from period to period based on several factors that include: 1) the aggregate number of students attending classes; 2) the number of classes held during the period; and 3) the weighted average tuition price per credit hour (weighted by program and location). University of Phoenix tuition revenues currently represent 95% of consolidated tuition revenues. Institute for Professional Development tuition revenues consist of the contractual share of tuition revenues from students enrolled in related programs at its client institutions. Institute for Professional Development’s contracts with its respective client institutions generally have terms of five to ten years with provisions for renewal.

Our educational programs range in length from one-day seminars to degree programs lasting up to four years. Students in our degree programs generally enroll in a program of study that encompasses a series of five to six-week courses that are taken consecutively over the length of the program. Students are billed on a course-by-course basis when the student first attends a session, resulting in the recording of a receivable from the student and deferred tuition revenue in the amount of the billing. The related revenue for each course, including that portion of tuition revenues to which we are entitled under the terms of our revenue-sharing contracts with Institute for Professional Development client institutions, is recognized on a pro rata basis over the period of instruction for each course. Fees for rEsource, our online delivery method for course materials, are also recognized on a pro rata basis over the period of instruction. Application fee revenue and related costs are deferred and recognized on a pro rata basis over the period of the program. Seminars, continuing education programs, and many of the College for Financial Planning’s non-degree programs are usually billed in one installment with the related revenue also recognized on a pro rata basis over the period of instruction.

Allowance for doubtful accounts

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Estimates are used in determining our allowance for doubtful accounts and are based on our historical collection experience, current trends, and a percentage of our accounts receivable by aging category. In determining these percentages, we look at historical write-offs of our receivables. A significant change in the aging of our accounts receivable balances would have an effect on the allowance for doubtful

accounts balance. Our accounts receivable are written-off once the account is deemed to be uncollectible. This typically occurs once we have exhausted all efforts to collect the account which includes collection attempts by company employees and outside collection agencies.

Income taxes

Our effective tax rates differ from the statutory rate primarily due to state taxes and the tax impact of tax-exempt interest income. The effective tax rate was 39.3% in both the first and second quarters of 2004. Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax laws or interpretations thereof. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Loss contingencies

We are subject to the possibility of various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.

Impairment of intangible assets

Our intangible assets primarily consist of approximately $37.1 million in unamortized cost in excess of fair value of assets purchased (i.e. goodwill) resulting from our acquisitions of Western International University and the College for Financial Planning. Intangible assets, including cost in excess of fair value of assets purchased, are reviewed for impairment on an annual basis or whenever events or circumstances indicate that the estimated fair value is less than the related carrying value. The carrying value of cost in excess of fair value of assets purchased is assessed for any permanent impairment by evaluating the operating performance and using valuation techniques such as future discounted cash flows of the underlying businesses. In assessing the recoverability of our goodwill and other intangibles we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record non-cash impairment charges for these assets not previously recorded. The Company has selected August 31 as the date on which it will perform its annual goodwill impairment test. The Company performed its annual impairment test as of August 31, 2003, and concluded that no impairment charge was required.

RESULTS OF OPERATIONS

We categorize our expenses as instructional costs and services, selling and promotional, and general and administrative. Instructional costs and services at University of Phoenix, Western International University, and the College for Financial Planning consist primarily of costs related to the delivery and administration of our educational programs and include faculty compensation, administrative salaries for departments that provide service directly to the students, financial aid processing costs, the costs of educational materials sold, facility leases and other occupancy costs, bad debt expense, and depreciation and amortization of property and equipment. University of Phoenix and Western International University faculty members are contracted for one course offering at a time. All classroom facilities are leased or, in some cases, are provided by the students’ employers at no charge to us. Instructional costs and services at Institute for Professional Development consist primarily of program administration, student services, and classroom lease expense. Most of the other instructional costs for Institute for Professional Development-assisted programs, including faculty, financial aid processing, and other administrative salaries, are the responsibility of its client institutions. Costs related to the start-up of new campuses and learning centers are expensed as incurred.

Selling and promotional costs consist primarily of compensation for enrollment advisors and corporate marketing, advertising costs, production of marketing materials, and other costs related to selling and promotional functions. We expense selling and promotional costs as incurred.

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

The following table sets forth our consolidated statement of operations data expressed as a percentage of tuition and other net revenues for the periods indicated:


	Three Months Ended						Six Months Ended
	February 29,			February 28,			February 29,			February 28,
	2004			2003			2004			2003
	(Unaudited)
Revenues:
Tuition and other, net		100.0	%		100.0	%		100.0	%		100.0	%

Costs and expenses:
Instructional costs and services		45.6			48.5			44.1			47.2
Selling and promotional		22.0			21.8			20.9			20.7
General and administrative		5.1			5.7			5.0			5.4

		72.7			76.0			70.0			73.3

Income from operations		27.3			24.0			30.0			26.7
Interest income, net		1.2			1.2			1.1			1.1

Income before income taxes		28.5			25.2			31.1			27.8
Provision for income taxes		11.2			9.7			12.2			10.9

Net income		17.3	%		15.5	%		18.9	%		16.9	%

THREE MONTHS ENDED FEBRUARY 29, 2004, COMPARED WITH THREE MONTHS ENDED FEBRUARY 28, 2003

Tuition and other net revenues increased by 34.4% to $396.9 million in the three months ended February 29, 2004, from $295.2 million in February 28, 2003, primarily due to a 28.8% increase in average full-time equivalent degree student enrollments and tuition price increases averaging four to six percent (depending on the geographic area and program) at University of Phoenix. Most of our University of Phoenix campuses, which include their respective learning centers, had increases in net revenues and average full-time equivalent degree student enrollments from the three months ended February 28, 2003, to the three months ended February 29, 2004.

Tuition and other net revenues for the three months ended February 29, 2004, and February 28, 2003, consist primarily of $372.2 million and $277.3 million, respectively, of net tuition revenues from students enrolled in degree programs and $2.3 million and $2.5 million, respectively, of net tuition revenues from students enrolled in non-degree programs.

Instructional costs and services increased by 26.4% to $181.1 million in the three months ended February 29, 2004, from $143.2 million in the three months ended February 28, 2003, due primarily to increases in direct costs necessary to support the increase in degree student enrollments such as employee compensation and related expenses, faculty compensation, classroom lease expenses, and financial aid processing costs which increased $14.7 million, $6.3 million, $3.3 million, and $2.7 million, respectively. Instructional costs and services as a percentage of tuition and other net revenues decreased to 45.6% in the three months ended February 29, 2004, from 48.5% in the three months ended February 28, 2003, due primarily to greater tuition and other net revenues being spread over the fixed costs related to centralized student services. We may not be able to leverage our recurring costs to the same extent as we face increased costs related to our expansion into new geographic markets.

Selling and promotional expenses increased by 35.5% to $87.4 million in the three months ended February 29, 2004, from $64.5 million in the three months ended February 28, 2003, due primarily to an increase in enrollment advisors’ compensation and related expenses of $11.2 million as a result of the addition of new enrollment advisors, additional advertising expenditures of $8.1 million, and small increases in various other costs. Selling and promotional expenses as a percentage of tuition and other net revenues increased to 22.0% in the three months ended February 29, 2004, from 21.8% in the three months ended February 28, 2003, as a result of an increase in the cost of enrollment advisors as a percentage of revenue of 0.6% partially offset by greater tuition and other net revenues being spread over a proportionately lower increase in the other selling and promotional expenses.

General and administrative expenses increased by 20.3% to $20.1 million in the three months ended February 29, 2004, from $16.7 million in the three months ended February 28, 2003, due primarily to increased employee compensation and related expenses of $1.4 million and small increases in various other costs. General and administrative expenses as a percentage of tuition and other net revenues decreased to 5.1% in the three months ended February 29, 2004, from 5.7% in the three months ended February 28, 2003, due primarily to greater tuition and other net revenues being spread over the fixed costs related to various centralized functions such as information services, corporate accounting, and human resources.

Net interest income increased to $4.6 million in the three months ended February 29, 2004, from $3.5 million in the three months ended February 28, 2003. This increase was attributable to the increase in cash equivalents and marketable securities between periods primarily as a result of the investment of cash flows from operations. Interest expense was $37,000 and $105,000 in the three months ended February 29, 2004, and February 28, 2003, respectively.

Our effective income tax rate increased to 39.3% in the three months ended February 29, 2004, from 38.5% in the three months ended February 28, 2003, primarily due to a refund of state income taxes received during the three months ended February 28, 2003.

SIX MONTHS ENDED FEBRUARY 29, 2004, COMPARED WITH SIX MONTHS ENDED FEBRUARY 28, 2003

Tuition and other net revenues increased by 33.9% to $808.7 million in the six months ended February 29, 2004, from $604.1 million in February 28, 2003, primarily due to a 28.0% increase in average full-time equivalent degree student enrollments and tuition price increases averaging four to six percent (depending on the geographic area and program) at University of Phoenix. Most of our University of Phoenix campuses, which include their respective learning centers, had increases in net revenues and average full-time equivalent degree student enrollments from the six months ended February 28, 2003, to the six months ended February 29, 2004.

Tuition and other net revenues for the six months ended February 29, 2004, and February 28, 2003, consist primarily of $759.8 million and $568.7 million, respectively, of net tuition revenues from students enrolled in degree programs and $4.4 million and $5.1 million, respectively, of net tuition revenues from students enrolled in non-degree programs.

Instructional costs and services increased by 24.8% to $356.0 million in the six months ended February 29, 2004, from $285.4 million in the six months ended February 28, 2003, due primarily to direct costs necessary to support the increase in degree student enrollments such as employee compensation and related expenses, faculty compensation, classroom lease expenses, and financial aid processing costs which increased $29.1 million, $12.7 million, $6.9 million, and $5.5 million, respectively. Instructional costs and services as a percentage of tuition and other net revenues decreased to 44.1% in the six months ended February 29, 2004, from 47.2% in the six months ended February 28, 2003, due primarily to greater tuition and other net revenues being spread over the fixed costs related to centralized student services. We may not be able to leverage our recurring costs to the same extent as we face increased costs related to our expansion into new geographic markets.

Selling and promotional expenses increased by 35.4% to $169.0 million in the six months ended February 29, 2004, from $124.8 million in the six months ended February 28, 2003, due primarily to an increase in enrollment advisors’ compensation and related expenses of $22.6 million as a result of the addition of new enrollment advisors, additional advertising expenditures of $14.3 million, and small increases in various other costs. Selling and promotional expenses as a percentage of tuition and other net revenues increased to 20.9% in the six months ended February 29, 2004, from 20.7% in the six months ended February 28, 2003, as a result of the increase in the cost of enrollment advisors as a percentage of revenue of 0.8% partially offset by greater tuition and other net revenues being spread over a proportionately lower increase in the other selling and promotional expenses.

General and administrative expenses increased by 23.9% to $40.7 million in the six months ended February 29, 2004, from $32.8 million in the six months ended February 28, 2003, due primarily to increased employee compensation and related expenses of $3.4 million and small increases in various other costs. General and administrative expenses as a percentage of tuition and other net revenues decreased to 5.0% in the six months ended February 29, 2004, from 5.4% in the six months ended February 28, 2003, due primarily to greater tuition and other net revenues being spread over the fixed costs related to various centralized functions such as information services, corporate accounting, and human resources.

Net interest income increased to $8.7 million in the six months ended February 29, 2004, from $7.0 million in the six months ended February 28, 2003. This increase was attributable to the increase in cash equivalents and marketable securities between periods primarily as a result of the investment of cash flows from operations. Interest expense was $40,000 and $210,000 in the six months ended February 29, 2004, and February 28, 2003, respectively.

Our effective income tax rate increased to 39.3% in the six months ended February 29, 2004, from 39.1% in the six months ended February 28, 2003, primarily as a result of a refund of state income taxes received during the six months ended February 28, 2003.

SEASONALITY IN RESULTS OF OPERATIONS

We experience seasonality in our results of operations primarily as a result of changes in the level of student enrollments. While we enroll students throughout the year, second quarter (December through February) average full-time equivalent degree student enrollments and related revenues generally are lower than other quarters due to seasonal breaks in December and January. Second quarter costs and expenses historically increase as a percentage of tuition and other net revenues as a result of certain fixed costs not significantly affected by the seasonal second quarter declines in net revenues.

We experience a seasonal increase in new enrollments in August of each year when most other colleges and universities begin their fall semesters. As a result, instructional costs and services and selling and promotional expenses historically increase as a percentage of tuition and other net revenues in the fourth quarter due to increased costs in preparation for the August peak enrollments.

We anticipate that these seasonal trends in the second and fourth quarters will continue in the future.

LIQUIDITY AND CAPITAL RESOURCES

The following sections discuss the effects of changes in our balance sheets, cash flows, and commitments and contingencies on our liquidity and capital resources.

Balance sheet and cash flows

Cash and cash equivalents and marketable securities. Cash and cash equivalents and marketable securities were $1.06 billion as of February 29, 2004, an increase of $163.3 million or 18.2% from $898.2 million at August 31, 2003. The increase was primarily a result of cash provided by operating activities of $225.3 million and cash provided by the issuance of Apollo Education Group Class A common stock and University of Phoenix Online common stock of $26.5 million and $10.9 million, respectively, related to employee stock option exercises and employee stock purchases partially offset by the repurchase of Apollo Education Group Class A common stock and University of Phoenix Online common stock of $20.8 million and $17.2 million, respectively, and capital expenditures of $56.7 million.

Capital expenditures. Capital expenditures increased to $56.7 million during the six months ended February 29, 2004, primarily due to the purchase of land and two buildings totaling $28.4 million for future University of Phoenix Online expansion. Excluding the cost of the land and buildings purchased for future University of Phoenix Online expansion, capital expenditures decreased slightly to $28.2 million for the six months ended February 29, 2004, from $29.2 million for the six months ended February 28, 2003. Total purchases of property and equipment for the year ended August 31, 2004, excluding the land and buildings for University of Phoenix Online, are expected to range from $55.0 to $60.0 million. These expenditures will primarily be related to new campuses and learning centers and increases in normal recurring capital expenditures due to the overall increase in student and employee levels resulting from the growth in the business.

We expect that cash provided by operating activities may fluctuate in future periods as a result of several factors, including fluctuations in our operating results, accounts receivable collections, and the timing of tax and other payments.

Restricted cash. The U.S. Department of Education requires that Title IV Program funds collected in advance of student billings be kept in a separate cash or cash equivalent account until the students are billed for that portion of their program. In addition, all Title IV Program funds received by us through electronic funds transfer are subject to certain holding period restrictions. These funds generally remain in these separate accounts for an average of 60 to 75 days from receipt. As of February 29, 2004, we had approximately $178.4 million in these separate accounts, which are reflected in the Consolidated Balance Sheet as restricted cash, to comply with these requirements. These restrictions on cash have not affected our ability to fund daily operations.

Accounts receivable, net. Accounts receivable, net was $132.2 million and $123.7 million as of February 29, 2004, and August 31, 2003, respectively. Days sales outstanding (“DSO”) in receivables, net as of February 29, 2004, and August 31, 2003, were 31 days and 34 days, respectively. Our accounts receivable and DSO are primarily affected by collections performance. Improved collections performance will result in reduced DSO.

Commitments and contingencies

Leases. We currently lease the majority 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.

Contingencies. The U.S. Department of Education Office of the Inspector General (“OIG”) audited the administration of the federal student financial assistance programs in connection with educational programs provided pursuant to contractual arrangements between Institute for Professional Development and certain of its client institutions. In audit reports issued to eight client institutions, the OIG asserted that the client institutions violated the statutory prohibition on the use of incentive payments for recruiting by paying Institute for Professional Development a percentage of tuition revenue. The reports further suggest that Institute for Professional Development paid its employees in a manner that included incentive-based compensation even though Institute for Professional Development based its compensation plans for recruiters on factors or qualities that were not solely related to the success in securing enrollments. Additionally, the audit reports question the client institutions’ interpretation of the “12-hour rule.” Although both Institute for Professional Development and the client institutions believe that the matters in question do not

relate to student program or institutional eligibility and, therefore, believe a repayment of federal funds is not appropriate, the OIG has recommended to the U.S. Department of Education that the client institutions be required to return to lenders all loan funds disbursed. Institute for Professional Development is currently in active negotiations with the U.S. Department of Education to eliminate or settle the issues raised in the audit reports. Although we believe that the OIG’s audits of certain Institute for Professional Development’s client institutions will be resolved without any material effect on our financial position, results of operations, or cash flows, and without any material change in Institute for Professional Development’s business strategy, as with any program review or audit, no assurance can be given as to the final outcome as the matters are not yet resolved.

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.

Stock repurchase program

Our Board of Directors has authorized a program allocating up to $300.0 million of our funds to repurchase shares of Apollo Education Group Class A common stock and University of Phoenix Online common stock. As of February 29, 2004, the Company had repurchased approximately 10,573,000 shares of Apollo Education Group Class A common stock at a total cost of approximately $136.2 million and 795,000 shares of University of Phoenix Online common stock at a total cost of approximately $31.1 million.

Liquidity and capital resource requirements

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

At February 29, 2004, we had no outstanding borrowings on our $10.0 million line of credit. Borrowings under the line of credit bear interest at LIBOR plus .75% or prime at our election. The line of credit is renewable annually, and any amounts borrowed under the line are payable upon its termination in February 2006.

On March 24, 2000, our Board of Directors authorized the issuance of a new class of stock called University of Phoenix Online common stock, that is intended to reflect the separate performance of University of Phoenix Online, a division of University of Phoenix. Our other businesses and our retained interest in University of Phoenix Online are referred to as “Apollo Education Group.” On October 3, 2000, an offering of 5,750,000 shares of University of Phoenix Online common stock was completed at a price of $14.00 per share. At the time of the offering this stock represented a 10.8% interest in that business with Apollo Education Group retaining the remaining 89.2% interest in University of Phoenix Online. This percentage has decreased to 85.6% at February 29, 2004, due to the issuance of shares related to the exercise of University of Phoenix Online stock options and the issuance of shares of University of Phoenix Online common stock as part of the Apollo Group, Inc. Employee Stock Purchase Plan partially offset by the repurchase of shares of University of Phoenix Online common stock.

RECENT ACCOUNTING PRONOUNCEMENTS

IMPACT OF INFLATION

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

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Our portfolio of marketable securities includes numerous issuers, varying types of securities, and varying maturities. We intend to hold these securities to maturity. The fair value of our portfolio of marketable securities would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due primarily to the short-term nature of the portfolio. We do not hold or issue derivative financial instruments.

Item 4 — 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, as of the end of our most recently completed fiscal quarter, our disclosure controls and procedures were effective to ensure that information is gathered, analyzed, and disclosed on a timely basis.

There were no significant changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings


Item 2. Changes in Securities and Use of Proceeds		Not Applicable


Item 3. Defaults Upon Senior Securities		Not Applicable

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

On January 21, 2004, our Class B common stock shareholders acted by unanimous written consent in lieu of an annual meeting. Pursuant to the unanimous written consent, the Class B shareholders elected as Class II directors, to hold office until the 2007 annual meeting of shareholders: John R. Norton III and Hedy F. Govenar.


Item 5. Other Information		Not Applicable

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:


EXHIBIT 10.1m		Eleventh Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank National Association dated March 30, 2004

EXHIBIT 15.1		Letter in Lieu of Consent

EXHIBIT 15.2		Letter in Lieu of Consent

EXHIBIT 31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

EXHIBIT 31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

EXHIBIT 32.1		Certification of Chief Executive Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EXHIBIT 32.2		Certification of Chief Financial Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EXHIBIT 99.1		Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online

(b) Reports on Form 8-K

During the second quarter of 2004, we filed two reports on Form 8-K. Information regarding the items reported on are as follows:


Date Filed	Item Number	Description
December 18, 2003	Items 7 and 9*	On December 18, 2003, we announced our results of operations for our first quarter ended November 30, 2003

January 21, 2004	Item 4	On January 21, 2004, we announced a change in our certifying accountant

* Pursuant to Securities and Exchange Commission Release No. 33-8216, the information required to be furnished under Item 12 was furnished under Item 9.


		APOLLO GROUP, INC. (Registrant)
Date: April 13, 2004
		By: /s/ Kenda B. Gonzales

		Kenda B. Gonzales Chief Financial Officer, Secretary, and Treasurer

		By: /s/ Daniel E. Bachus

		Daniel E. Bachus Chief Accounting Officer and Controller

		By: /s/ Todd S. Nelson

		Todd S. Nelson President and Chief Executive Officer

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	PAGE
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements		1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.		19
Item 3. Quantitative and Qualitative Disclosures about Market Risk		28
Item 4. Controls and Procedures		28

PART II – OTHER INFORMATION

Item 1. Legal Proceedings		29
Item 2. Changes in Securities and Use of Proceeds		29
Item 3. Defaults Upon Senior Securities		29
Item 4. Submission of Matters to a Vote of Security Holders		30
Item 5. Other Information		30
Item 6. Exhibits and Reports on Form 8-K		30

SIGNATURES		31

EXHIBIT INDEX		32
EX-10.1M
EX-15.1
EX-15.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99.1

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

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

	•		state higher education regulatory bodies.

	•		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.


Exhibit Number		Description of Exhibit
10.1m		Eleventh Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank National Association dated March 30, 2004

15.1		Letter in Lieu of Consent

15.2		Letter in Lieu of Consent

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002

32.1		Certification of Chief Executive Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.1		Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online