10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: August 31, 2000

OR

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to                

Commission file number: 0-25232

APOLLO GROUP, INC.

(Exact name of registrant as specified in its charter)

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

4615 East Elwood Street, Phoenix, Arizona 85040

(Address of principal executive offices, including zip code)

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

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

None
(Title of each class) None
(Name of each exchange on which registered)

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

Apollo Education Group Class A common stock, no par

University of Phoenix Online common stock, no par

(Title of class)

     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  [   ] 

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

     No shares of the Company’s Apollo Education Group Class B Common Stock, its voting stock, are held by non-affiliates. The holders of the Company’s Apollo Education Group Class A Common Stock are not entitled to any voting rights. Aggregate market value of Apollo Education Group Class A Common Stock held by non-affiliates as of November 15, 2000, was approximately $1.9 billion. The holders of the Company’s University of Phoenix Online Common Stock are not entitled to any voting rights. Aggregate market value of University of Phoenix Online Common Stock held by non-affiliates as of November 15, 2000, was approximately $167 million. The number of shares outstanding for each of the registrant’s classes of common stock, as of November 15, 2000, is as follows:

Apollo Education Group Class A common stock, no par	75,561,000 Shares
Apollo Education Group Class B common stock, no par	512,000 Shares
University of Phoenix Online common stock, no par	5,750,000 Shares

Documents Incorporated by Reference

     Portions of the registrant’s Annual Report to Shareholders for the year ended August 31, 2000 are incorporated herein by reference into Part II. With the exception of those portions which are expressly incorporated by reference in this Annual Report on Form 10-K, the Apollo Group, Inc. 2000 Annual Report is not deemed filed as part of this report.

APOLLO GROUP, INC. AND SUBSIDIARIES

FORM 10-K

INDEX

		Page
PART I
Item  1.	Business		1
Item  2.	Properties		21
Item  3.	Legal Proceedings		21
Item  4.	Submission of Matters to a Vote of Security Holders		21
PART II
Item  5.	Market for Registrant’s Common Equity and Related Stockholder Matters		22
Item  6.	Selected Consolidated Financial Data		22
Item  7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item  7a.	Quantitative and Qualitative Disclosures about Market Risk		23
Item  8.	Financial Statements and Supplementary Data		23
Item  9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		23
PART III
Item  10.	Directors and Executive Officers of the Registrant		24
Item  11.	Executive Compensation		27
Item  12.	Security Ownership of Certain Beneficial Owners and Management		33
Item  13.	Certain Relationships and Related Transactions		34
PART IV
Item  14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		35
SIGNATURES			38

PART I

Item 1 — Business

Overview

      Apollo Group, Inc. has been providing higher education to working adults for over 25 years. We operate through our subsidiaries, the University of Phoenix, Inc., the Institute for Professional Development, the College for Financial Planning Institutes Corporation, Western International University, Inc., and Apollo Learning Group, Inc. The consolidated enrollment in our educational programs would make us the largest private institution of higher education in the United States. We currently offer our programs and services at 55 campuses and 98 learning centers in 35 states, Puerto Rico, and Vancouver, British Columbia. Our combined degree enrollment increased to approximately 100,900 at August 31, 2000 from approximately 46,900 at August 31, 1996.

      University of Phoenix had degree enrollments of over 80,000 adult students at August 31, 2000, has been accredited by the Commission on Institutions of Higher Education of the North Central Association of Colleges and Schools since 1978 and has successfully replicated its teaching/ learning model while maintaining educational quality at 30 physical campuses and 69 learning centers in Arizona, California, Colorado, Florida, Hawaii, Louisiana, Maryland, Michigan, Missouri, Nevada, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Utah, Washington, Puerto Rico, and Vancouver, British Columbia. University of Phoenix also offers its educational programs worldwide through University of Phoenix Online, its computerized educational delivery system. University of Phoenix has customized computer programs for student tracking, marketing, faculty recruitment and training, and academic quality management. These computer programs are intended to provide uniformity among University of Phoenix’s campuses and learning centers which enhances University of Phoenix’s ability to expand into new markets while still maintaining academic quality. Currently, approximately 54% of University of Phoenix’s students receive some level of tuition assistance from their employers.

      Apollo Learning Group was established in 1997 to focus on education opportunities in information technology for enhancing the skills of information technology professionals. Apollo Learning Group curriculum includes courses for the administration of computer networks, internetworking, and customized technical training. Apollo Learning Group’s curriculum is currently available at 25 University of Phoenix locations, with a total of 44 computer labs, offering Authorized Academic Training Programs to deliver Microsoft Official Curriculum. These campuses offer lab-based computer courses to prepare students for Microsoft Certified Systems Engineer exams.

      The Institute for Professional Development provides program development and management services to regionally accredited private colleges and universities (client institutions) who are interested in expanding or developing their programs for working adults. These services typically include degree program development, curriculum development, market research, student recruitment, and performing accounting and administrative services. The Institute for Professional Development provides these services to regionally accredited private colleges and universities at 22 campuses and 27 learning centers in 22 states in exchange for a contractual share of the tuition revenues generated from these programs. The Institute for Professional Development’s contracts with its client institutions generally range in length from five to ten years with provisions for renewal. The Institute for Professional Development places a priority on institutions that:

•  are interested in developing or expanding off-campus degree programs for working adults;

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

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

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

      Approximately 18,600 degree-seeking students are currently enrolled in Institute for Professional Development assisted programs.

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      The College for Financial Planning provides financial planning education programs, including the Certified Financial Planner Professional Education Program. The College for Financial Planning began offering some of its non-degree programs at University of Phoenix campuses in 1999.

      Western International University currently offers graduate and undergraduate degree programs to approximately 1,400 students in Phoenix, Fort Huachuca, and Chandler, Arizona.

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

• Apollo Group	http://www.apollogrp.edu
• University of Phoenix	http://www.phoenix.edu
• University of Phoenix Online	http://www.online.phoenix.edu
• Institute for Professional Development	http://www.ipd.org
• Western International University	http://www.wintu.edu
• College for Financial Planning	http://www.fp.edu
• Apollo Learning Group	http://www.mcse.com

      Our fiscal year is from September 1 to August 31. Unless otherwise stated, references to the years 2000, 1999, and 1998 relate to the fiscal years ended August 31, 2000, 1999, and 1998, respectively.

      This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relating to future plans, expectations, events, or performances involve risks and uncertainties and a number of factors could affect the validity of such forward-looking statements, including those set forth in Item 1 of this Form 10-K under the sections “Regulatory Environment,” “Accreditation,” “Federal Financial Aid Programs”, and “State Authorization.”

Industry Background

      The adult education market is a significant and growing component of the post-secondary education market, which is estimated by the U.S. Department of Education to be a more than $200 billion industry. The U.S. Department of Education estimated that for 1998, adults over the age of 24 comprised approximately 6.1 million, or 39.2%, of the students enrolled in higher education programs. The U.S. Census Bureau estimates that approximately 76% of students over the age of 24 work while attending school. The market for adult education should continue to increase as working adults seek additional education and training to update and improve their skills, to enhance their earnings potential, and to keep pace with the rapidly expanding knowledge-based economy.

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

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

•  a high percentage of full-time tenured faculty with doctoral degrees;

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

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

•  an emphasis on research and the related staff and facilities.

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•  The majority of accredited colleges and universities continue to provide the bulk of their educational programming from September to mid-December and from mid-January to May. As a result, most full-time faculty members only teach during that limited period of time. While this structure serves the needs of the full-time 18 to 24 year old student, it limits the educational opportunity for working adults who must delay their education for up to five months during these spring, summer, and winter breaks.

•  Traditional universities and colleges are also limited in their ability to market to or provide the necessary customer service for working adult students because it requires the development of additional administrative and enrollment infrastructure. University of Phoenix maintains a single-minded focus on serving the needs of working adult students.

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

Our Offerings

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

•  Accredited Degree Programs. We currently offer 15 degree programs in business, education, information technology, and nursing that are accredited by the Commission on Institutions of Higher Education of the North Central Association of Colleges and Schools or the regional accrediting associations of the Institute for Professional Development client institutions. This accreditation enables us to grant Associates, Bachelors, Masters, and Doctoral degrees, while also providing students with access to federal financial aid programs.

•  Experienced Faculty Resources. While substantially all of our faculty are working professionals, we require each member of our faculty to possess either a Masters or Doctoral degree and to have five years of recent professional experience in a field related to the subject they teach. We have well-developed methods for hiring and training our faculty, which include peer reviews of newly hired instructors by other members of the faculty, training in grading and instructing students, and a teaching internship with a more experienced faculty member. Our classes are designed to be small, with an average of one instructor for every fifteen students. Faculty members are also required to be accessible to students by maintaining office hours.

•  Current and Relevant Standardized Programs. We use content experts selected from our over 11,700 faculty to design our curriculum. This enables us to offer current and relevant standardized programs to our students. We also utilize an institution-wide system to assess the educational outcomes of our students and improve the quality of our curriculum and instructional model. This system evaluates the cognitive and affective skills of our students upon registration and upon conclusion of the program and also surveys students two years after graduation in order to assess the quality of the education they received.

•  Benefits to Employers. The employers of our students often provide input to faculty members in designing curriculum, and class projects are typically based on issues relevant to the companies that employ our students. Our classes are taught by a practitioner faculty that emphasizes the skills desired by employers. In addition, the time flexibility provided by our classes further benefits employers since it avoids conflict with their employees’ work schedules. A recent survey by University of Phoenix showed that approximately 54% of its students receive some level of tuition assistance from their employers.

Strategy

      Our objective is to become the leading provider of accessible, high quality education for working adults and a preferred provider of workplace training to their employers. We are managed as a for-profit corporation

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in a higher education industry served principally by not-for-profit providers. By design, we treat our adult students as our primary customers and the employers that provide tuition assistance to their employees through tuition reimbursement plans or direct bill arrangements as our secondary customers. We will implement the following strategic initiatives to accomplish this objective:

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

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

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

      Expand Educational Programs. We will continue to respond to the changing educational needs of working adults and their employers by introducing new undergraduate and graduate degree programs as well as training programs. University of Phoenix has recently added the Bachelor of Science in Business Management to its degree offerings. We believe that expanding our program offerings will help us improve our market position as a provider of higher education and training for working adults. We currently have a full-time staff of over 48 persons involved in our centralized curriculum development process. Potential additions to our current offerings include:

•  new degree programs, such as Criminal Justice;

•  certificate programs, such as Psychopharmacology and e-Education;

•  continuing education targeted at working professionals, such as Certified Public Accountants;

•  professional certification, such as Leadership & Supervision and Certified in Web; and

•  training programs, such as information technology and general management training.

      Expand Access to Programs. We plan to continue expanding our distance education programs and services. Enrollments in distance education degree programs, primarily University of Phoenix Online, have increased to approximately 16,000 in 2000 from approximately 3,700 in 1996. University of Phoenix Online courses and programs are available via the Internet 24 hours a day, 7 days a week and can be accessed using basic technology, such as a Pentium-class personal computer, a 28.8K modem, and an Internet service provider, which enhances the accessibility of and the potential market for University of Phoenix Online programs.

      International Expansion. We believe that the international market for our services is a major growth opportunity. The U.S. is the most common destination for international students studying abroad. We believe 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 over 70 countries despite having used only limited advertising. In addition, many U.S. residents live and work in foreign countries and would 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. Additionally, we plan to offer the University of Phoenix educational model at physical campuses in international markets pursuant to agreements with Apollo International, Inc. as described in Item 13. The first offering under these agreements was started in the Netherlands in September 1999, where we are currently servicing 45 students. We will

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

Teaching/Learning Model-Degree Programs

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

      Our teaching/learning model consists of:

Curriculum	The curriculum is designed to integrate academic theory and professional practice and their application to the workplace. The curriculum provides for the achievement of specified educational outcomes that are based on the input from faculty, students, and students’ employers. The standardized curriculum for each degree program is also designed to provide students with specified levels of knowledge and skills.
Faculty	Faculty applicants must possess an earned Masters or Doctoral degree from a regionally accredited institution, and have a minimum of five years recent professional experience in a field related to the subject matter in which they seek to instruct. To help promote quality delivery of the curriculum, all faculty members are required to:
	•  complete an initial assessment conducted by staff and faculty;
	•  receive training in grading, facilitation of the teaching/learning model, and oversight of study group activities;
	•  serve an internship with an experienced faculty mentor; and
	•  receive ongoing performance evaluations by students, peer faculty, and staff, which are used to establish developmental plans to improve individual faculty performance and to determine continued eligibility of faculty members to provide instruction.
Interactive Learning	Classes are designed to combine individual and group interaction between and among students and the instructor. The curriculum requires a high level of student participation for purposes of increasing the student’s ability to work as part of a team.
Learning Resource Services	Students and faculty members are provided with electronic and other learning resources for their information and research needs. Students can access these services directly through the Internet or with the help of a LRS research librarian.
Sequential Enrollment	Students enroll in and complete classes sequentially, rather than concurrently, thereby allowing full-time working adults to focus their attention and resources on one subject at a time. This provides a better balance between learning and ongoing personal and professional responsibilities.

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Academic Quality We have an Academic Quality Management System designed to maintain and improve the quality of programs and academic and student services. This system includes the Adult Learning Outcomes Assessment, which seeks to measure student growth in both the cognitive (subject matter) and affective (educational, personal, and professional values) skills.

Structural Components of Teaching/Learning Model

      While adults over the age of 25 comprise approximately 40% of all higher education enrollments in the United States, the mission of most accredited four-year colleges and universities is to serve 18 to 24 year-old students and conduct research. University of Phoenix and Institute for Professional Development client institutions acknowledge the differences in educational needs between older and younger students and provide programs and services that allow working adults to earn their degrees without major disruption to their personal and professional lives.

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

      The structural components of our teaching/learning model include:

Accessibility	Professional programs that can be accessed through a variety of delivery modes (e.g., campus-based or electronically delivered) that make the educational programs accessible regardless of where the students work and live.
Instructional Costs	While the majority of the faculty at most accredited colleges and universities are employed full-time, most of the University of Phoenix and Institute for Professional Development client institutions’ faculty are part-time. All faculty are academically qualified, are professionally employed, and are contracted for instructional services on a course-by-course basis.
Facility Costs	We lease our campus and learning center facilities and rent additional classroom space on a short-term basis to accommodate growth in enrollments.
Employed Students	Substantially all of University of Phoenix’s students are employed full-time. The average student has been employed for 12 years. This minimizes the need for capital-intensive facilities and services like dormitories, student unions, food services, personal and employment counseling, health care, sports, and entertainment.
Employer Support	We develop relationships with key employers for purposes of recruiting students and responding to specific employer needs. This allows us to remain sensitive to the needs and perceptions of employers, while helping both to generate and sustain diverse sources of revenues. Approximately 54% of University of Phoenix’s students currently receive some level of tuition assistance from their employers; approximately 44% receive at least half of their tuition and approximately 21% receive full tuition assistance. These percentages are higher for students in the business, management, and information technology programs.

      The College for Financial Planning currently offers text-based self-study programs for students preparing for the Certified Financial Planner designation and other financial-related designations, including a Master of

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Science in Financial Planning. The College for Financial Planning recently modularized the learning content for these programs to position them for alternative delivery formats, including but not limited to classroom and online modalities. These same programs are offered in a classroom-based format through University of Phoenix campuses and we also plan to offer them through Internet or online-based formats. Most of the College for Financial Planning’s students are employed, and over 77% have four or more years of college education. The College for Financial Planning’s programs are developed internally by approximately 14 full-time faculty. These programs are primarily self-study, non-degree programs that require little or no faculty involvement in the actual delivery of the programs.

      Western International University’s teaching/learning model has similar characteristics to the teaching/learning model used by University of Phoenix and Institute for Professional Development client institutions, including the use of part-time practitioner faculty, standardized curriculum, computerized learning resources, and leased facilities. However, Western International University provides educational programs in two-month sessions and does not focus exclusively on working adult students. Western International University’s faculty consists of approximately 8 full-time faculty and 200 part-time faculty. Western International University’s practitioner faculty are working professionals and possess earned Masters or Doctoral degrees and participate in a selection and training process that is similar to that at University of Phoenix.

Degree Programs and Services

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

•  Associate of Arts in General Studies

•  Bachelor of Arts in Management

•  Bachelor of Science in Business

           —  Areas of Specialization

                •  Accounting

                •  Administration

                •  E-business

                •  Management

                •  Marketing

                •  Project Management

•  Bachelor of Science in Business Administration

•  Bachelor of Science in Nursing

•  Bachelor of Science in Human Services

•  Bachelor of Science in Health Care Services

           —  Area of Specialization

                •  Management

•  Bachelor of Science in Information Technology

•  Master of Arts in Education

           —  Areas of Specialization

                •  Administration and Supervision

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                •  Curriculum and Instruction

                •  Curriculum and Technology

                •  Diverse Learner

                •  E-education

                •  Early Childhood

                •  Educational Counseling

                •  Educational Management

                •  English as a Second Language

                •  Management of Education Programs

                •  Special Education

                •  Technology

•  Master of Arts in Organizational Management

•  Master of Business Administration

           —  Areas of Specialization

                •  Accounting

                •  Administration

                •  E-business

                •  Global Management

                •  Health Care Management

                •  Technology Management

•  Master of Counseling

           —  Areas of Specialization

                •  Community Counseling

                •  Marriage and Family Therapy

                •  Mental Health Counseling

                •  Marriage, Family and Child Counseling

•  Master of Science in Nursing

           —  Areas of Specialization

                •  Women’s Health Care Nurse Practitioner

                •  Family Nurse Practitioner

•  Master of Science in Computer Information Systems

•  Doctor of Management

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

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      Undergraduate students may demonstrate and document college level learning gained from experience through an assessment by faculty members, according to the guidelines of the Council for Adult and Experiential Learning, for the potential award of credit. The average number of credits awarded to the approximately 2,700 University of Phoenix undergraduate students who utilized the process in 2000 was approximately 10 credits of the 120 required to graduate. The Council for Adult and Experiential Learning reports that over 1,100 regionally accredited colleges and universities currently accept credits awarded for college level learning gained through experience.

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

•  conducting market research;

•  assisting with curriculum development;

•  developing and executing marketing strategies;

•  marketing and recruiting of students;

•  establishing operational and administrative infrastructures;

•  training of faculty;

•  developing and implementing financial accounting and academic quality management systems;

•  assessing the future needs of adult students;

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

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

•  training of adult program staff.

      In consideration for its services, the Institute for Professional Development receives a contractual share of tuition revenues, which are negotiated with each client institution, from students enrolled in Institute for Professional Development assisted programs.

      In order to facilitate the sharing of information related to the operations of their respective programs, the Institute for Professional Development, its client institutions, and University of Phoenix formed the Consortium for the Advancement of Adult Higher Education. This consortium meets annually to address issues such as the recruitment and training of part-time, professionally employed faculty, employer input in the curriculum development process, assessment of the learning outcomes of adult students, and regulatory issues affecting the operation of programs for working adult students.

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

	Number of
Degree Programs	Client Institutions
Associate in Business Management		1
Associate of Arts		1
Associate of Arts in Business		4
Associate of Arts in Leadership Studies		1
Associate of Arts in Liberal Arts — Business Emphasis		1
Associate of Science		1
Associate of Science in Business		10
Bachelor of Arts in Business		2
Bachelor of Arts in Management		1
Bachelor of Business Administration		8
Bachelor of Science in Accounting		2
Bachelor of Science in Business Administration		10
Bachelor of Science in Business Information Systems		1
Bachelor of Science in Management		10
Bachelor of Science in Management Information Systems		2
Bachelor of Science in Management of Information Technology		1
Bachelor of Science in Nursing		2
Master of Business Administration		12
Master of Business Administration — Health Care Executives		1
Master of Business Administration — Online		1
Master of Management		2
Master of Science in Management		6
Master of Science in Management — Information Technology		1
Master of Science in Management — Leadership		1
Master of Science in Management — Marketing		1
Master of Science in Nursing		1

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

      College for Financial Planning Programs. The College for Financial Planning currently offers a Master of Science degree with a concentration in Financial Planning and the following non-degree programs:

•  Accredited Asset Management Specialist

•  Certified Financial Planner Professional Education Program

•  Chartered Mutual Fund Counselor

•  Foundations in Financial Planning

•  Chartered Retirement Plans Specialist

•  Chartered Retirement Planning Counselor

•  Accredited Tax Advisor

•  Accredited Tax Preparer

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

•  Associate of Arts

•  Bachelor of Science

—  Areas of Specialization

•  Accounting

•  Business Administration

•  Finance

•  Information Technology

•  International Business

•  Management

•  Marketing

•  Bachelor of Arts

—  Areas of Specialization

•  Administration of Justice

•  Behavioral Science

•  Master of Business Administration

—  Areas of Specialization

•  Finance

•  Information Technology

•  International Business

•  Management

•  Marketing

•  Master of Public Administration

•  Master of Science

—  Areas of Specialization

•  Information Technology

•  Information Systems Engineering

      Western International University also offers a limited number of business-related certificate programs.

Distance Education

      At August 31, 2000, there were approximately 16,400 degree seeking students utilizing our distance education delivery systems, approximately 98% of whom are enrolled at University of Phoenix Online. Our distance education components consist primarily of the following:

      University of Phoenix Online. University of Phoenix Online has developed its system to be easily accessible and familiar to most students. All the student needs to participate in University of Phoenix Online’s classes is a Pentium-class personal computer, a 28.8K modem, and an Internet service provider.

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      Each student orders textbooks online from a third party prior to the beginning of each class. The student logs into his or her particular class using a password. Prior to the class starting, the instructor posts a syllabus that the student can download and use as a guide. In addition, the student can download the biographies of the other students and the instructor.

      Each week, the instructor posts a lecture on the classroom discussion board. Students log on and read the lecture or print the lecture to read at their convenience. On average, University of Phoenix Online has nine students per class, who are divided into learning teams of three or four students to work on projects together. Throughout the week, students participate in a group discussion, based on the class content for that week, which is facilitated by the instructor. There are separate conferences set up for learning team projects and individual submission of class assignments. Instructors log on and read comments posted by students, respond to them, and assign grades for their learning team projects. Instructors also give students weekly feedback on class participation. Both students and instructors are required to log on at least five days a week to participate in the classes. In addition, faculty members are required to maintain online office hours. Students are graded on a combination of participation, work product, and examinations.

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

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

Acquisition Strategy

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

Customers/ Students

      The following is a breakdown of our students by the level of program they are seeking, at August 31, 2000:

		Number of		Percentage of
		Students		Students
Degree Programs
	Bachelors		65,500		64.9	%
	Masters		29,300		29.0
	Associates		6,000		6.0
	Doctoral		100		0.1
Total Degree Students			100,900		100.0	%

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

      Based on student surveys of incoming students in the first half of fiscal 2000, the average age of University of Phoenix’s students is in the mid-thirties, approximately 54% are women and 46% are men, and the average annual household income is $61,000. Approximately 69% of University of Phoenix’s students have been employed on a full-time basis for nine years or more. We believe that the demographics of students enrolled in Institute for Professional Development assisted programs are similar to those of University of

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Phoenix. The approximate age percentage distribution of incoming University of Phoenix students is as follows:

	Percentage of
Age	Students
25 and under		11	%
26 to 33		39
34 to 45		38
46 and over		12
		100	%

      Based on student surveys, the average age of students at the College for Financial Planning is in the mid-thirties, approximately 31% are women and 69% are men. Most of the College for Financial Planning’s students are employed, and over 77% have four or more years of college education.

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

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

Marketing

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

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

•  mailing a business reply card;

•  faxing a business reply card;

•  calling us at a specific 1-800 number; or

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

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

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

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      Referrals. Based on our recent estimates, approximately 55% of our new students are referred by their employers, co-workers, current students, alumni, family, and friends.

      Print and Broadcast. We rely on print and broadcast advertising primarily to build brand recognition. We plan to begin advertising in trade magazines, particularly in those that specialize in fields that require skills taught by us.

Competition

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

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

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

•  reliable and high-quality products and services;

•  qualified and experienced faculty;

•  cost of the program;

•  reputation of programs, classes, and services; and

•  the time necessary to earn a degree.

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

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

Employees

      At October 31, 2000, we had the following numbers of employees:

	Full-Time		Part-Time		Faculty			Total
Apollo		325		13		—			338	(1)
University of Phoenix		3,039		105		11,386	(2)		14,530
Institute for Professional Development		292		12		—	(3)		304
College for Financial Planning		87		5		23	(4)		115
Western International University		66		12		329	(2)		407
Apollo Learning Group		16		—		—			16
Total		3,825		147		11,738			15,710

(1)	Consists primarily of employees in executive administration, information systems, corporate accounting, financial aid, and human resources.
(2)	Consists primarily of part-time faculty contracted on a course-by-course basis.

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(3)	Faculty teaching Institute for Professional Development assisted programs are employed by Institute for Professional Development client institutions.
(4)	Consists primarily of faculty involved in curriculum development and the instructional design process.

      We consider our relations with our employees to be good.

Regulatory Environment

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

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

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

•  state higher education regulatory bodies.

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

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

Accreditation

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

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

•  qualification to participate in Title IV programs; and

•  qualification for authorization in certain states.

      University of Phoenix was granted accreditation by the North Central Association of Colleges and Schools in 1978. University of Phoenix’s accreditation was reaffirmed in 1982, 1987, 1992, and 1997. The next North Central Association of Colleges and Schools reaffirmation visit is expected to begin in 2002.

      Institute for Professional Development assisted programs offered by its client institutions are evaluated by the client institutions’ respective regional accrediting associations either as part of a reaffirmation visit or focused evaluation visit. Current Institute for Professional Development client institutions are accredited by the North Central Association of Colleges and Schools, Middle States, New England, or Southern regional accrediting associations.

      The College for Financial Planning graduate degree program is accredited by the North Central Association of Colleges and Schools and the Accrediting Commission of the Distance Education and Training Council. The North Central Association of Colleges and Schools reaffirmed the accreditation of the graduate degree program in August 1999, and their next reaffirmation visit is expected in 2003-04. The Accrediting

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Commission of the Distance Education and Training Council plans to schedule a focus-visit for the College for Financial Planning in 2000.

      Western International University was accredited by the North Central Association of Colleges and Schools prior to the acquisition by us, and the accreditation was reaffirmed in 1998. Western International University’s next reaffirmation visit is expected to begin in 2004-05.

      The withdrawal of accreditation from University of Phoenix or certain Institute for Professional Development client institutions would have a material, adverse effect on us.

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

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

      University of Phoenix’s Bachelor of Science in Nursing program received program accreditation from the National League for Nursing Accrediting Commission in 1989. The accreditation was reaffirmed in October 1995. The Master of Science in Nursing program earned the National League for Nursing Accrediting Commission accreditation in 1996. In July 2000, both the Bachelor of Science in Nursing and the Master of Science in Nursing programs received eight year accreditation status from the National League for Nursing Accreditation Commission.

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

      University of Phoenix received approval from the North Central Association of Colleges and Schools to offer its first doctoral level program in 1998. The first students were enrolled in the Doctor of Management degree beginning in 1999. The Doctor of Management degree is offered via distance learning technology with annual two-week residencies in Phoenix throughout the program. The program is limited to a total of 60 new students per year.

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

North Central Association of Colleges and Schools Commission on Institutions of Higher Education

30 North LaSalle Street, Suite 2400

Chicago, IL 60602-2504

(312) 263-0456

National League for Nursing Accrediting Commission

61 Broadway, 33rd Floor

New York, NY 10006

(800) 669-1656

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American Counseling Association Council for Accreditation of Counseling and

Related Educational Programs

5999 Stevenson Avenue

Alexandria, VA 22304

(703) 823-9800

Accrediting Commission of the Distance Education and Training Council

1601 18th Street, NW

Washington, D.C. 20009-2529

(202) 234-5100

Federal Financial Aid Programs

      Students at University of Phoenix, Western International University, and Institute for Professional Development client institutions may receive federal financial aid under the Title IV programs. The College for Financial Planning does not participate in Title IV programs because most of its students are enrolled in non-degree programs. In the fiscal year ended August 31, 2000, University of Phoenix and Western International University derived approximately 49% and 33% of their net revenues from students who participated in Title IV programs, respectively. The Institute for Professional Development percentages are estimated to be similar to those at University of Phoenix. The respective Institute for Professional Development client institutions administer their own Title IV programs. Our students may receive Title IV funds because:

•  University of Phoenix, Western International University, and Institute for Professional Development client institutions are accredited by an accrediting agency recognized by the U.S. Department of Education;

•  the U.S. Department of Education has certified University of Phoenix’s, Western International University’s, and Institute for Professional Development client institutions’ eligibility to participate in the Title IV programs; and

•  University of Phoenix, Western International University, and Institute for Professional Development client institutions have applicable state authorization to operate.

      The U.S. Department of Education has issued regulations, the most recent of which became effective on July 1, 2000, that amend some provisions of the Title IV programs. The following material provisions of the Title IV regulations, and their related calculations, apply to University of Phoenix, Western International University, and Institute for Professional Development client institutions:

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

      For undergraduate programs, an academic year must consist of at least 30 weeks of instructional time to include a minimum of 360 hours of instructional time and a minimum of 24 credit hours. The Title IV regulations define a week of instruction as the equivalent of 12 hours of regularly scheduled instruction, examinations, or preparation for examinations (the “12-hour Rule”). Most of our degree programs meet this 360 hour minimum and, therefore, qualify for Title IV program funds. The programs that do not qualify for Title IV program funds consist primarily of certificate, corporate training, and continuing professional education programs. These programs are paid for directly by the students or their employers.

      Authorizations for New Locations. University of Phoenix, Western International University, the College for Financial Planning, and Institute for Professional Development client institutions are required to have authorization to operate as degree-granting institutions in each state where they physically provide educational programs. Certain states accept accreditation as evidence of meeting minimum state standards for authorization. Other states, including California, require separate evaluations for authorization. Depending on the state, the addition of a degree program not offered previously or the addition of a new location must be included in

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the institution’s accreditation and be approved by the appropriate state authorization agency. University of Phoenix, Western International University, the College for Financial Planning, and Institute for Professional Development client institutions are currently authorized to operate in all states in which they have physical locations. If University of Phoenix is unable to obtain authorization to operate in certain new states, it may have a material adverse effect on our ability to expand University of Phoenix’s business.

      In addition, the North Central Association of Colleges and Schools requires University of Phoenix, Western International University, and the College for Financial Planning to obtain their prior approval before these companies are permitted to expand into new states or foreign countries. If University of Phoenix is unable to obtain North Central Association of Colleges and Schools’ approval for any future geographic expansion, it may have a material, adverse effect on our ability to expand University of Phoenix’s business.

      Restricted Cash. The U.S. Department of Education places restrictions on Title IV program funds collected for unbilled tuition and funds transferred to us through electronic funds transfer. In some circumstances, an institution is required to submit an irrevocable letter of credit to the U.S. Department of Education in an amount equal to at least 25% of the total dollar amount of refunds paid by the institution in its most recent fiscal year. We have established letters of credit of $5.8 million for University of Phoenix and $70,000 for Western International University.

      Standards of Financial Responsibility. Pursuant to the Title IV regulations, as revised, each eligible higher education institution must satisfy the minimum standard established for three tests which assess the financial condition of the institution at the end of the institution’s fiscal year. The tests provide three individual scores which must then satisfy a composite score standard. The maximum composite score is 3.0. If the institution achieves a composite score of at least 1.5, it is considered financially responsible. A composite score from 1.0 to 1.4 is considered financially responsible, subject to additional monitoring, and the institution may continue to participate as a financially responsible institution for up to three years. An institution that does not achieve a satisfactory composite score will fall under alternative standards. At August 31, 2000, University of Phoenix’s composite score was 2.6 and Western International University’s composite score was 3.0.

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

      The “90/10 Rule”. A requirement of the Higher Education Act, commonly referred to as the “90/10 Rule,” applies only to for-profit institutions of higher education, which includes University of Phoenix and Western International University but not Institute for Professional Development client institutions. Under this rule, for-profit institutions will be ineligible to participate in Title IV programs if the amount of Title IV program funds used by the students or institution to satisfy tuition, fees, and other costs incurred by the students exceeds 90% of the institution’s cash-basis revenues from eligible programs. University of Phoenix’s and Western International University’s percentages were 49% and 33%, respectively, at August 31, 2000. University of Phoenix and Western International University are required to calculate this percentage at the end of each fiscal year.

      Student Loan Defaults. Eligible institutions must maintain a student loan cohort default rate of less than 25% for three consecutive years. In 1998, the most recent U.S. Department of Education cohort default rate reporting period, the national cohort default rate average for all higher education institutions was 6.9%. University of Phoenix and Western International University students’ cohort default rates for the Federal Family Education Loans for fiscal 1998 as reported by the U.S. Department of Education were 4.1% and 5.9%, respectively. Institute for Professional Development client institution students’ cohort default rates for fiscal 1998 ranged from 1.2% to 12.8% with a median cohort default rate of 4.7%.

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

      Eligibility and Certification Procedures. The Higher Education Act specifies the manner in which the U.S. Department of Education reviews institutions for eligibility and certification to participate in Title IV programs. University of Phoenix’s eligibility to participate in Title IV programs expires in June 2003. Western International University’s eligibility to participate in Title IV programs was renewed by the U.S. Department of Education in September 1999 for a four-year period.

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

      Restrictions on Distance Education Programs. Distance education courses are deemed to be correspondence courses by the Title IV regulations if more than 50% of the courses offered at the institution are offered through distance education. The regulations of the U.S. Department of Education specify that an institution is not eligible to participate in Title IV programs if 50% or more of its courses are correspondence courses, or if 50% or more of its regular students are enrolled in the institution’s correspondence courses. University of Phoenix, the Institute for Professional Development, and Western International University do not plan to exceed this 50% level.

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

      For publicly traded corporations, a change of ownership and control occurs when a change in ownership or control occurs which is sufficient to require the company to file a Form 8-K with the Securities and Exchange Commission. Furthermore, recently promulgated U.S. Department of Education rules provide that, effective July 1, 2001, a change of ownership and control occurs when a controlling shareholder who holds or controls through agreement both 25 percent or more of the total outstanding voting stock of the company and more shares of voting stock than any other shareholder ceases to be a controlling shareholder. Current U.S. Department of Education rules further state that a change in ownership and control otherwise triggering the recertification requirement does not include a transfer of ownership and control upon the retirement or death of the owner to either a member of the person’s immediate family or to a person with an ownership interest in the Company who has been involved in its management for at least two years preceding the transfer. Upon a change in ownership and control, University of Phoenix and Western International University would cease to be eligible to participate in Title IV Programs until recertified by U.S. Department of Education.

      In addition, some states where we are presently licensed have requirements governing change of ownership or control. Currently, Arizona and California would require University of Phoenix and Western International University, as applicable, to be reauthorized upon a 20% change in ownership and a 25% change in control. These states require a new application to be filed for state licensing if such a change of ownership or control occurs. Washington has a similar reauthorization requirement triggered by a change of ownership, but provides that a temporary certificate of authorization may be issued pending the reauthorization process.

      Moreover, we are required to report any material change in stock ownership. At that time, the North Central Association of Colleges and Schools may seek to evaluate the effect of such a change of stock ownership on University of Phoenix’s, the College for Financial Planning’s, and Western International University’s continuing operations.

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

State Authorization

      University of Phoenix is authorized to operate in all 18 states where there is a physical presence. University of Phoenix has held these authorizations for periods ranging from less than one year to twenty-two years. Applications for approval to operate in New York and Georgia have been submitted and are awaiting approval.

      All regionally accredited institutions, including University of Phoenix, are required to be evaluated separately for authorization to operate in Puerto Rico. University of Phoenix was granted its most recent authorization in Puerto Rico in December 1995 for a period of five years. University of Phoenix has submitted, on a timely basis, an application for renewal and is currently awaiting approval of this application.

      University of Phoenix is registered with British Columbia’s Private Post-Secondary Education Commission and has begun the process to obtain accreditation through the province of British Columbia. The University of Phoenix received approval to operate in Alberta, Canada.

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

      Some states assert authority to regulate all degree-granting institutions if their educational programs are available to their residents, whether or not the institutions maintain a physical presence within those states. If a state were to establish grounds for asserting authority over online learning, University of Phoenix Online may be required to obtain authorization for, or restrict access to, its programs available in those states.

Admissions Standards

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

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

Tax Reform Act of 1997

      In August 1997, Congress passed the Tax Reform Act of 1997 that added several new tax credits and incentives for students and extended benefits associated with the educational assistance program. The Hope Scholarship Credit provides up to $1,500 tax credit per year per eligible student for tuition expenses in the first two years of postsecondary education in a degree or certificate program. The Lifetime Learning Credit provides up to $1,000 tax credit per year per taxpayer return for tuition expenses for all postsecondary education, including graduate studies. Both of these credits are phased out for taxpayers with modified adjusted gross income between $40,000 and $50,000 ($80,000 and $100,000 for joint returns) and are subject to other restrictions and limitations. The Tax Reform Act of 1997 also provides for the deduction of interest from gross income on education loans and limited educational IRA’s for children under the age of 18. These

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deductions are also subject to adjusted gross income limitations and other restrictions. These new provisions became effective for 1998 individual tax returns.

Employer Tuition Assistance

      Many of our students receive some form of tuition assistance from their employers. The Internal Revenue Code, defines situations where this tuition assistance qualifies as a deductible business expense when adequately documented by the employer and employee. The Internal Revenue Code also provides a safe-harbor provision for an exclusion from wages of up to $5,250 of tuition reimbursement per year per student under the Educational Assistance Program. The Educational Assistance Program provision does not apply to graduate level programs and expires in December 2001. Employers or employees may still continue to deduct such tuition assistance where it qualifies as a deductible business expense and is adequately documented. The percentage of incoming University of Phoenix students with access to employer tuition assistance was 54% in 2000.

Locations

      University of Phoenix currently has 30 physical campuses and 69 learning centers located in Arizona, California, Colorado, Florida, Hawaii, Louisiana, Maryland, Michigan, Missouri, Nevada, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Utah, Washington, Puerto Rico, and Vancouver, British Columbia. University of Phoenix also offers its educational programs worldwide through University of Phoenix Online, its computerized delivery system.

      The Institute for Professional Development currently operates at 22 campuses and 27 learning centers in Connecticut, Delaware, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, and Wisconsin.

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

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

Item 2 — Properties

      We lease all of our administrative and educational facilities. In some cases, classes are held in the facilities of the students’ employers at no charge to us. Leases generally range from five to seven years; however, we attempt to secure longer leases if it is advantageous to do so. We also lease space from time-to-time on a short-term basis in order to provide specific courses or programs. The lease on our corporate headquarters, which includes the University of Phoenix, Phoenix Main Campus, expires on August 31, 2003. As of August 31, 2000, we leased approximately 3.0 million square feet.

      We evaluate current utilization of the educational facilities and projected enrollment growth to determine facility needs. We anticipate that an additional 700,000 square feet will be leased in 2001.

Item 3 — Legal Proceedings

      We are not engaged in any legal proceedings that we believe would have a material effect on our financial position or operating results.

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

      On August 29, 2000, we held a special meeting of the shareholders to consider the following proposals:

•  Proposal to amend and restate our articles of incorporation to create a new class of common stock called University of Phoenix Online common stock;

•  Proposal to adopt the new Apollo Group, Inc. 2000 Stock Incentive Plan;

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•  Proposals to amend and restate the Apollo Group, Inc. 1994 Employee Stock Purchase Plan; and

•  Proposal to amend and restate the Apollo Group, Inc. Director Stock Plan.

These were all approved.

PART II

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

      There is no established public trading market for our Apollo Education Group Class B common stock, and all shares of our Apollo Education Group Class B common stock are beneficially owned by our executive officers. Our Apollo Education Group Class A common stock trades on the Nasdaq-Amex National Market under the symbol “APOL” and our University of Phoenix Online common stock trades on the Nasdaq-Amex National Market under the symbol “UOPX”. The holders of our Apollo Education Group Class A common stock and our University of Phoenix Online common stock are not entitled to any voting rights. The table below sets forth the high and low bid prices for our Apollo Education Group Class A common stock as reported by the Nasdaq-Amex National Market.

	High		Low
Fiscal 1999
First Quarter	$	39.25	$	20.50
Second Quarter		36.25		22.13
Third Quarter		34.25		20.13
Fourth Quarter		31.13		21.50
Fiscal 2000
First Quarter	$	27.81	$	17.56
Second Quarter		29.63		18.38
Third Quarter		30.19		19.75
Fourth Quarter		42.63		26.63

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

      At October 31, 2000 there were approximately 200 holders of record of Apollo Education Group Class A and 4 holders of record of Apollo Education Group Class B common stock, and approximately 2 holders of record of shares of University of Phoenix Online common stock. We estimate that, when you include shareholders whose shares are held in nominee accounts by brokers, there were approximately 16,900 total holders of our Apollo Education Group Class A common stock and approximately 1,400 total holders of University of Phoenix Online common stock.

      We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the near future. It is the current policy of our Board of Directors to retain earnings to finance the operations and expansion of our business. We are permitted to pay dividends exclusively on our Apollo Education Group Class A and Apollo Education Group Class B common stock, exclusively on University of Phoenix Online common stock, or on both, in equal or unequal amounts. Holders of our Apollo Education Group Class A common stock and Apollo Education Group Class B common stock are entitled to equal per share cash dividends to the extent declared by the Board of Directors.

Item 6 — Selected Consolidated Financial Data

      Information relating to this item appears under the captions “Selected Consolidated Information of Apollo Group, Inc.” on page 15 of the 2000 Annual Report for Apollo Group, Inc. and “Selected Financial Information of University of Phoenix Online” on page 41 of the 2000 Annual Report for University of Phoenix Online, and such information is incorporated herein by reference in accordance with General Instruction G(2)

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of Form 10-K. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Financial Statements and related Notes for Apollo Group, Inc. and University of Phoenix Online.

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

      Information relating to this item appears under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” on pages 16 through 20 of the 2000 Annual Report for Apollo Group, Inc. and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online” on pages 42 through 46 of the 2000 Annual Report for University of Phoenix Online, and such information is incorporated herein by reference in accordance with General Instruction G(2) of Form 10-K. This information should be read in conjunction with the Financial Statements and related Notes for Apollo Group, Inc. and University of Phoenix Online.

Item 7a — Quantitative and Qualitative Disclosures about Market Risk

      Information relating to this item appears under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” on page 20 of the 2000 Annual Report for Apollo Group, Inc., and such information is incorporated herein by reference in accordance with General Instruction G(2) of Form 10-K.

Item 8 — Financial Statements and Supplementary Data

      Information relating to this item appears on pages 22 through 38 of the 2000 Annual Report for Apollo Group, Inc. and pages 47 through 55 of the 2000 Annual Report for University of Phoenix Online, and such information is incorporated herein by reference in accordance with General Instruction G(2) of Form 10-K. Other financial statements and schedules required under Regulation S-X promulgated under the Securities Act of 1933 are identified in Item 14 hereof and are incorporated herein by reference.

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

      None.

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PART III

Item 10 — Directors and Executive Officers of the Registrant

      Our directors serve one year terms and are elected each year by the holders of our Apollo Education Group Class B common stock. The following sets forth information as of October 31, 2000 concerning our directors and executive officers:

Name	Age		Position
John G. Sperling, Ph.D.		79	Chairman of the Board and Chief Executive Officer
Todd S. Nelson		41	President and Director
Jerry F. Noble		58	Senior Vice President and Director
Peter V. Sperling		41	Senior Vice President, Secretary, Treasurer, and Director
Laura Palmer Noone, Ph.D.		41	President, University of Phoenix, Inc.
Anthony Digiovanni		50	President, University of Phoenix Online
Kenda B. Gonzales		43	Chief Financial Officer
Daniel E. Bachus		30	Chief Accounting Officer and Controller
John Blair		62	Director
Dino J. DeConcini		66	Director
Hedy F. Govenar		56	Director
J. Jorge Klor de Alva, J.D., Ph.D.		52	Director
John R. Norton III		71	Director
Thomas Weir		67	Director

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

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

      Jerry F. Noble has been with Apollo Group, Inc. since 1981. Mr. Noble has been a Senior Vice President of Apollo Group, Inc. since 1987 and the President of the Institute for Professional Development since 1984. From 1981 to 1987, Mr. Noble also was the controller of Apollo Group, Inc. From 1977 to 1981, Mr. Noble was the corporate accounting manager for Southwest Forest Industries, a forest products company. Mr. Noble received his M.B.A. from University of Phoenix and his B.A. from the University of Montana.

      Peter V. Sperling has been with Apollo Group, Inc. since 1983. Mr. Sperling has been a Senior Vice President since June 1998. Mr. Sperling was the Vice President of Administration from 1992 to June 1998 and

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has been the Secretary and Treasurer of Apollo Group, Inc. since 1988. From 1987 to 1992, Mr. Sperling was the Director of Operations at Apollo Education Corporation. From 1983 to 1987, Mr. Sperling was Director of Management Information Services of Apollo Group, Inc. Mr. Sperling received his M.B.A. from University of Phoenix and his B.A. from the University of California at Santa Barbara. Mr. Sperling is the son of John G. Sperling.

      Laura Palmer Noone, Ph.D., has been with University of Phoenix since 1987. Dr. Palmer Noone has served as President of the University of Phoenix since September 2000. From 1994 to 2000 she was the Provost and Senior Vice President for Academic Affairs, and from 1991 to 1994, she was Director of Academic Affairs at the University of Phoenix, Phoenix Campus. Prior to that, she was Judge Pro Tem at the City of Chandler, and an Attorney at Law in general civil practice emphasizing business representation and civil litigation. She has also served as adjunct faculty at Grand Canyon University and Chandler-Gilbert Community College. Dr. Palmer Noone currently serves as a member of the Arizona State Board for Private Postsecondary Education and as a Board of Trustee Member for the Florida Coastal School of Law.

      Anthony F. Digiovanni has been with University of Phoenix since 1989. Mr. Digiovanni has served as President of University Online since April 2000. From February 1998 to April 2000 he was Executive Vice President of University of Phoenix, and from 1992 to 1998, he was Regional Vice President of University of Phoenix’s Western Region. Prior to that, he was Campus Director for the Southern California Campus of University of Phoenix. From 1984-1989, Mr. Digiovanni was Chief Operating Officer for Abco Hardware and Builder’s Supply, a Southern California-based industrial distributor. Mr. Digiovanni received his M.B.A. from the University of Southern California and his B.B.A. from Loyola Marymount University.

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

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

      John Blair has been a director of Apollo Group, Inc. since September 2000. In addition, he has served since 1982 as a director of Western International University, Inc., a wholly owned subsidiary of Apollo Group, Inc. Mr. Blair has been the Chief Operating Officer of Integrated Information Systems, Inc., a provider of integrated Internet solutions, since May 1999. From 1984 to 1999, Mr. Blair founded and operated J. Blair Consulting, an independent consulting business that provided management counsel to individuals and organizations in the areas of strategic planning, product planning, organizational diagnosis, management development, and strategies for leveraging business value through technology. Mr. Blair earned a B.S. in Engineering from Purdue University.

      Dino J. DeConcini has been a director of Apollo Group, Inc. since 1981 and is currently a member of the Audit Committee of the Board of Directors of Apollo Group, Inc. Mr. DeConcini is currently the Director of Financial Education at Consumer Federation of America. From February 1995 to June 2000, Mr. DeConcini was the Executive Director, Savings Bonds Marketing Office, U.S. Department of the Treasury. From 1979 to 1995, Mr. DeConcini was a shareholder and employee in DeConcini, McDonald, Brammer, Yetwin and Lacy, P.C., Attorneys at Law. From 1993 to 1995, Mr. DeConcini was a Vice President and Senior Associate of Project International Associates, Inc., an international business consulting firm. From 1991 to 1993 and 1980 to 1990, Mr. DeConcini was a Vice President and partner of Paul R. Gibson & Associates, an international business consulting firm.

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

      J. Jorge Klor de Alva, J.D., Ph.D., was President of University of Phoenix and Senior Vice President of Apollo Group, Inc. from February 1998 through August 2000. On September 1, 2000, Dr. Klor de Alva became President and Chief Executive Officer of Apollo International. Dr. Klor de Alva has been a director of Apollo Group, Inc. since 1991. Dr. Klor de Alva was Vice President of Business Development of Apollo Group, Inc. from 1996 to 1998. Dr. Klor de Alva was a Professor at the University of California at Berkeley from July 1994 until July 1996. From 1989 to 1994, Dr. Klor de Alva was a Professor at Princeton University. From 1984 to 1989, Dr. Klor de Alva was the Director of the Institute for Mesoamerican Studies, and from 1982 to 1989, was an Associate Professor at the State University of New York at Albany. From 1971 to 1982, Dr. Klor de Alva served at various times as Associate Professor, Assistant Professor, or lecturer at San Jose State University and the University of California at Santa Cruz. Dr. Klor de Alva received a B.A. and J.D. from the University of California at Berkeley and a Ph.D. from the University of California at Santa Cruz.

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

      Thomas C. Weir has been a director of Apollo Group, Inc. since 1983 and is a member of the Audit and Compensation Committees of the Board of Directors of Apollo Group, Inc. During 1994, Mr. Weir became the President of Dependable Nurses, Inc., a provider of temporary nursing services, W.D. Enterprises, Inc., a financial services company, and Dependable Personnel, Inc., a provider of temporary clerical personnel. In 1996, Mr. Weir became the President of Dependable Nurses of Phoenix, Inc., a provider of temporary nursing services. In addition, Mr. Weir has been an independent financial consultant since 1990. From 1989 to 1990, Mr. Weir was President of Tucson Electric Power Company. From 1979 to 1987, Mr. Weir was Chairman and Chief Executive Officer of Home Federal Savings Loan Association, Tucson, Arizona.

Section 16(a)  Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, as well as persons who own more than 10% of a registered class of our equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in beneficial ownership. Directors, executive officers, and greater than 10% shareholders are required by Securities and Exchange Commission regulation to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of the copies of such forms furnished to us, or written representations that no Forms 5 were required, we believe that during the fiscal year ended August 31, 2000, our directors and officers complied with all Section 16(a) filing requirements with the following exceptions:

      John Norton was required to file Forms 5 to report grants of stock options made him in 1997. John Sperling, Peter Sperling, Todd Nelson, Jerry Noble, Kenda Gonzales, Jorge Klor de Alva, John Norton, and Hedy Govenar were required to file Forms 5 to report grants of stock options made to them in 1998. John Norton, and Hedy Govenar were required to file Forms 5 to report grants of stock options made to them in 1999. John Sperling, Peter Sperling, Todd Nelson, Jerry Noble, Kenda Gonzales, Jorge Klor de Alva, John Norton, and Hedy Govenar were required to file Forms 5 to report grants of stock options made to them in 2000. These Forms 5 were not filed, but instead will be filed on a Form 4 after their due date.

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Committees of the Board of Directors

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

Meetings of the Board of Directors and its Committees

      During the year ended August 31, 2000, the Board of Directors met on four occasions. All of the directors attended 100% of the Board of Directors meetings and meetings of each of the committees on which they served.

      Compensation Committee. The Compensation Committee of our Board of Directors, which met two times during 2000, reviews all aspects of compensation of executive officers and determines or makes recommendations on such matters to the full Board of Directors. The report of the Compensation Committee for 2000 is set forth in Item 11.

      Audit Committee. The Audit Committee, which met on four occasions in 2000, represents the Board of Directors in evaluating the quality of our financial reporting process and internal financial controls through consultations with our independent accountants, internal management, and the Board of Directors.

      Other Committees. We do not maintain a standing nominating committee or other committee performing similar functions.

Item 11 — Executive Compensation

Director Compensation

      Fees. In 2000, our non-employee directors received an $18,000 annual retainer, $1,500 for each board meeting attended, and $750 for each committee meeting attended. Mr. DeConcini elected not to receive any director compensation during 2000 because of his position with the U.S. Department of the Treasury. In addition, non-employee directors are reimbursed for out-of-pocket expenses. Ms. Govenar was retained by us as a consultant and received a consulting fee of $120,000 and $100,000 in 2000 and 1999, respectively.

      Apollo Group, Inc. Amended and Restated Director Stock Plan.  The Board of Directors has adopted the Apollo Group, Inc. Amended and Restated Director Stock Plan, the Director Plan, to attract and retain independent directors. Under the amended Director Plan, up to 925,000 shares of Apollo Education Group Class A common stock and up to 100,000 shares of University of Phoenix Online common stock may be available for grant of awards. Options granted under the amended Director Plan are fully vested six months and one day after the date of grant and are exercisable in full thereafter until the date that is ten years after the date of grant. The exercise price per share under the amended Director Plan is equal to the fair market value of such shares upon the date of grant. Under the amended Director Plan, each non-employee director automatically receives a grant of options to purchase 20,250 shares of Apollo Education Group Class A common stock on September 1 of each year through 2003. In addition, under the amended Director Plan each non-employee director who was on the Board of Directors on the date of the offering of University of Phoenix Online common stock received a grant of stock options to purchase 10,000 shares of University of Phoenix Online common stock on the date of such offering at the initial public offering price of $14.00 per share, which will vest and become exercisable six month and one day after the date University of Phoenix Online common stock options are granted.

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Executive Compensation

      The following table discloses the annual and long-term compensation earned for services rendered in all capacities by our Chairman of the Board and Chief Executive Officer and the four other most highly compensated executive officers for 2000, 1999, and 1998:

SUMMARY COMPENSATION TABLE

										Long-Term
				Annual						Compensation
				Compensation						Awards
								Other		Restricted		Securities
								Annual		Stock		Underlying		LTIP		All Other
				Salary		Bonus		Compensation		Awards		Options		Payouts		Compensation
Name and Principal Position		Year		($)		($)		($)(1)		($)		(#)		($)		($)(3)
John G. Sperling			2000	$	400,000	$	—	$	73,293	$	—	$	125,000	$	—	$	—
	Chairman of the Board and		1999		400,000		—		64,141		—		125,000		—		—
	Chief Executive Officer		1998		387,500		—		72,373		—		—		—		—
Todd S. Nelson			2000	$	350,000	$	262,500	$	—	$	—	$	100,000	$	—	$	—
	President		1999		350,000		262,500		—		—		100,000		—		—
			1998		247,917		200,000		—		—		—		—		—
Jorge Klor de Alva			2000	$	285,577	$	206,250	$	—	$	—	$	25,000	$	—	$	3,165
	Former Senior Vice		1999		275,000		206,250		—		—		75,000		—		3,072
	President and President of the University of Phoenix, Inc.(2)		1998		218,750		175,000		—		—		—		—		1,850
Jerry F. Noble			2000	$	250,000	$	187,500	$	—	$	—	$	10,000	$	—	$	3,165
	Senior Vice President and		1999		250,000		161,752		—		—		50,000		—		3,072
	President of Institute for Professional Development		1998		225,000		168,750		—		—		—		—		3,073
Kenda B. Gonzales			2000	$	200,000	$	142,500	$	—	$	—	$	25,000	$	—	$	3,165
	Chief Financial Officer		1999		174,359		90,000		—		—		42,000		—		—
			1998		—		—		—		—		—		—		—

(1)	Messrs. Klor de Alva, Nelson, and Noble also received certain perquisites, the value of which did not exceed the lesser of $50,000 for each person or 10% of their cash compensation. Dr.  John Sperling received perquisites primarily in the form of a company provided car, available for business and personal use, and tax consulting services.
(2)	Effective September 1, 2000, Dr. Klor de Alva resigned as Senior Vice President and President of the University of Phoenix, Inc. He still serves as an outside director.
(3)	Amounts shown consist of contributions made by us to Apollo Group, Inc.’s Savings and Investment Plan paid in fiscal years 2000, 1999, and 1998.

      The following table discloses options granted by us to our Chairman of the Board and Chief Executive Officer and the four other most highly compensated executive officers for 2000:

Option Grants In the Last Fiscal Year

	Option Grants in Fiscal Year 2000									Potential Realizable
										Value at Assumed
			Percent of							Annual Rates of
	Number of		Total Options							Stock Price
	Securities		Granted to			Exercise				Appreciation for
	Underlying		Employees			Price Per				Option Term
	Options		in Fiscal			Share		Expiration
Name	Granted		Year			($/Share)		Date		5%		10%
John G. Sperling		125,000		13.94	%	$	18.875		1/12/10	$	1,483,798	$	3,760,236
Todd S. Nelson		100,000		11.15	%		18.875		1/12/10		1,187,039		3,008,189
Jorge Klor de Alva		25,000		2.79	%		18.875		1/12/10		296,760		752,047
Jerry F. Noble		10,000		1.12	%		18.875		1/12/10		118,704		300,819
Kenda B. Gonzales		25,000		2.79	%		18.875		1/12/10		296,760		752,047

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Aggregated Option Exercises in Fiscal Year 2000 and Option Values at August 31, 2000

      The following table discloses the number of shares received from the exercise of our options, the value received therefrom, and the number and value of in-the-money and out-of-the-money options held by our Chairman of the Board and Chief Executive Officer and the four other most highly compensated officers for 2000:

					Number of Securities				Value of Unexercised
	Shares				Underlying Unexercised				In-the-Money Options at
	Acquired		Value		Options at Fiscal Year-End				Fiscal Year-End ($)
	on Exercise		Realized
Name	(#)		($)		Exercisable		Unexercisable		Exercisable		Unexercisable
John G. Sperling		—	$	—		144,604		208,333	$	4,339,875	$	3,726,555
Todd S. Nelson		—		—		194,209		166,666		6,085,281		2,981,235
Jorge Klor de Alva		—		—		64,584		—		1,498,841		—
Jerry F. Noble		154,407		3,766,738		54,802		56,666		1,786,026		905,610
Kenda B. Gonzales		—		—		8,334		58,666		182,827		1,055,985

      Employment and Deferred Compensation Agreements. In December 1993, we entered into an employment agreement and deferred compensation agreement with Dr. John G. Sperling, our Chairman of the Board and Chief Executive Officer. The term of the employment agreement was for four years and expired on December 31, 1997. The employment agreement has automatically renewed for three additional one-year periods through December 31, 2000, and will automatically renew for additional one-year periods thereafter. Under the terms of the employment agreement, Dr. Sperling received an annual salary for 1998 of $387,500 and for 1999 and 2000 of $400,000. This salary is subject to annual review by the Compensation Committee. We may terminate the employment agreement only for cause, and Dr. Sperling may terminate the employment agreement at any time upon 30 days written notice.

      The deferred compensation agreement provides that upon his termination of employment with us and until his death, Dr. Sperling shall receive monthly payments equal to one-twelfth of his highest annual base salary paid by us during any one of the three calendar years preceding the calendar year in which Dr. Sperling’s employment is terminated. In addition, upon Dr. Sperling’s death, his designated beneficiary shall be paid an amount equal to three times his highest annual base salary in 36 equal monthly installments with the first such installment due on the first day of the month following the month of Dr. Sperling’s death.

      We do not have employment agreements with any of our other executive officers.

Board Compensation Committee Report on Executive Compensation

      Our Compensation Committee (the “Committee”) is composed entirely of independent outside members of our Board of Directors. The Committee reviews and approves each of the elements of our executive compensation program related to John G. Sperling, Todd S. Nelson, J. Jorge de Alva, Peter V. Sperling, and Jerry F. Noble, (the “Senior Executives”), and periodically assesses the effectiveness and competitiveness of the program in total. In addition, the Committee administers the key provisions of the executive compensation program and reviews with our Board of Directors in detail all aspects of compensation for our Senior Executives. The Committee has furnished the following report on executive compensation:

      Overview and Philosophy. Our compensation program for Senior Executives is primarily comprised of base salary, annual bonus, and long-term incentives in the form of stock option grants. Senior Executives also participate in various other benefit plans, including medical and retirement plans, generally available to all of our employees.

      Each of the Senior Executives receives a base salary, which when aggregated with their maximum bonus amount, is intended to be competitive with similarly situated executives in comparable industries, including those companies in the peer group contained in the Stock Performance Graph. The companies surveyed had annual revenues ranging from approximately $69.1 million to $506.8 million, with an average of $235.0 million and a median of $216.8 million. This data was used to target annual cash compensation for the Senior Executives at the higher end of companies surveyed.

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      Our philosophy is to pay base salaries to the Senior Executives that enable us to attract, motivate, and retain highly qualified executives. The annual bonus program is designed to reward for performance based on financial results. Stock option grants are intended to provide substantial rewards to executives based on stock price appreciation and improved overall financial performance. The vesting of the options can be accelerated if certain profit and stock price goals are achieved.

      Base Salary. Salary increases for the Senior Executives are based on a review of the competitive data described above. We target base pay at the level required to attract and retain highly qualified executives. In determining salaries, the committee also takes into account position within us, individual experience and performance, our revenue size compared to the companies surveyed, and our specific needs particular to us.

      Annual Bonus Program. In addition to a base salary, Senior Executives were eligible to receive a bonus of up to seventy-five percent (75%) of their respective base salaries. All annual bonuses are tied to our financial performance.

      At the beginning of each fiscal year, the Committee establishes an after-tax net income goal for us and operating profit goals for our subsidiaries. The annual bonuses are calculated differently for (1) Senior Executives who also serve as executive officers of either the University of Phoenix, Inc. or the Institute for Professional Development (collectively, the “Division Executives”) and (2) Senior Executives who do not serve as executive officers of either the University of Phoenix, Inc. or the Institute for Professional Development (collectively, the “Company Executives”).

      The annual bonuses for our Company Executives are tied solely to our after-tax net income goal. If that goal is achieved, our Company Executives earn a bonus equal to fifty percent (50%) of their respective annual maximum bonus. If the after-tax net income goal is exceeded, our Company Executives earn a larger percentage of their annual bonus depending on the amount by which the after-tax net income goal is exceeded up to a maximum annual bonus equal to seventy-five percent (75%) of their respective base salaries. These goals were exceeded for 2000.

      The annual bonuses for the Division Executives are earned (1) fifty percent (50%) if their division operating profit goal is achieved, (2) an additional twenty-five percent (25%) if the after-tax income goal is achieved, and (3) up to another twenty-five percent (25%) depending on the amount by which the after-tax net income goal is exceeded up to a maximum annual bonus equal to seventy-five percent (75%) of their respective base salaries. These goals were exceeded for 2000.

      Options. We believe that it is important for Senior Executives to have an equity stake in us, and, toward this end, we make option grants to key Senior Executives from time to time under the Apollo Group, Inc. Long-Term Incentive Plan and the Apollo Group, Inc. 2000 Stock Incentive Plan. In making option awards, the Committee reviews our financial performance during the past fiscal year, the awards granted to other executives, and the individual officer’s specific role.

      Other Benefits. Senior Executives are eligible to participate in benefit programs designed for all of our full-time employees and also received certain perquisites primarily including company cars and company paid tax consulting. These programs include medical, disability and life insurance, and a qualified retirement program allowed under Section 401(k) of the Internal Revenue Code.

      Chief Executive Officer Compensation. Dr. John G. Sperling is the founder, Chief Executive Officer, and Chairman of our Board of Directors. In December 1993, we entered into an employment agreement (the “Employment Agreement”) and deferred compensation agreement (the “Deferred Compensation Agreement”) with Dr. Sperling. The Employment Agreement terminated on December 31, 1997. The Employment Agreement has automatically renewed for three additional one-year periods through December 31, 2000, and will automatically renew for additional one-year periods thereafter. The Deferred Compensation Agreement provides that upon Dr. Sperling’s termination of employment with us and until his death, Dr. Sperling shall receive monthly payments equal to one-twelfth of his highest annual base salary paid by us during any one of the three calendar years preceding the calendar year in which Dr. Sperling’s employment is terminated. In addition, upon Dr. Sperling’s death, his designated beneficiary shall be paid an amount equal to three times his

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highest annual base salary in 36 equal monthly installments with the first installment due on the first day of the month following the month of Dr. Sperling’s death.

      Dr. Sperling’s base salary and bonus are determined annually on the same basis discussed above for the Senior Executives. During fiscal year 2000, Dr. Sperling received an annual base salary of $400,000. In addition, because the after-tax net income goal for us was exceeded, Dr. Sperling was eligible for a bonus for 2000. Dr. Sperling has elected to forego this bonus in exchange for options in our Apollo Education Group Class A common stock. The amount of options to be granted will be determined at the discretion of the Committee and will be granted at fair market value and expire ten years after the grant date. The Committee does not apply a mathematical formula to determine the number of options granted, but will consider Dr. Sperling’s contribution to our performance during fiscal year 2000.

Compensation and Management Committee Interlocks and Insider Participation

      No member of our Committee during the fiscal year ended August 31, 2000, was an officer or employee of us.

COMPENSATION COMMITTEE

Thomas C. Weir

John R. Norton III

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Stock Performance Graph

      The line graph below compares the cumulative total shareholder return on our Apollo Education Group Class A common stock with the cumulative total return for the Standard & Poor’s 400 Index and an index of peer group companies selected by us for the period from August 31, 1995, through August 31, 2000. The graph assumes that the value of the investment in our Apollo Education Group Class A common stock and each index was $100 at August 31, 1995, and that all dividends paid by those companies included in the indexes were reinvested.

APOLLO GRAPH

	APOLLO GROUP, INC.		S & P MIDCAP 400		PEER GROUP
8/95		100.00		100.00		100.00
8/96		286.87		111.88		220.31
8/97		401.48		153.59		246.39
8/98		577.96		133.72		314.97
8/99		370.19		189.31		284.62
8/00		688.70		264.56		508.46

      The education peer group is composed of the publicly-traded common stock of 8 education-related companies that include Career Education Corporation (CECO), Corinthian Colleges, Inc. (COCO), DeVry Inc. (DV), Education Management Corporation (EDMC), ITT Educational Services, Inc. (ESI), Sylvan Learning Systems, Inc. (SLVN), Strayer Education, Inc. (STRA), and Whitman Education Group, Inc. (WIX).

      We believe that the education peer group is representative of the education industry in which we operate. Similar to us, all of the companies in the education peer group participate in the for-profit, post-secondary education market.

32

Item 12 — Security Ownership of Certain Beneficial Owners and Management

      The following table sets forth certain information regarding the beneficial ownership of our common stock as of October 31, 2000. Except as otherwise indicated, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares, except to the extent that authority is shared by spouses under applicable law or as otherwise noted below.

	Apollo Education					Apollo Education
Name and Address of	Group Class A					Group Class B
Beneficial Owner (1)	Common Stock		% Owned			Common Stock		% Owned
John G. Sperling		13,728,293		17.9	%(2),(3),(4),(5)		243,081		47.5	%(18)
Peter V. Sperling		13,706,634		17.9	(2),(6),(7),(8)		232,068		45.4	(19)
Jerry F. Noble		454,802		0.6	(9)		27,950		5.5
Todd S. Nelson		64,418		0.1			8,385		1.6
J. Jorge Klor de Alva		—		—			—
Thomas C. Weir		108,950		0.1	(10)		—
Hedy F. Govenar		58,800		0.1	(11)		—
John R. Norton III		61,750		0.1	(12)		—
Dino J. DeConcini		28,113		—	(13)		—
Kenda B. Gonzales		8,334		—	(14)		—
Laura Palmer Noone		20,863		—	(15)
Anthony F. Digiovanni		71,949		0.1	(16)
Daniel E. Bachus		—		—
John Blair		450		—
Total for All Directors and Executive Officers as a Group (14 persons)		27,228,316		35.5	%(17)		511,484		100.0	%

(1)	The address of each of the listed shareholders, unless noted otherwise, is in care of Apollo Group, Inc., 4615 East Elwood Street, Phoenix, Arizona 85040.
(2)	Includes 1,085,040 shares held by the John Sperling 1994 Irrevocable Trust dated April 27, 1994 for which Messrs. John and Peter Sperling are the co-trustees.
(3)	Includes 186,157 shares held by the John G. Sperling Revocable Trust dated January 31, 1995.
(4)	Includes 1,350,000 shares held by The Sperling Foundation.
(5)	Includes 144,604 shares that Dr. John Sperling has the right to acquire within 60 days of the date of the table set forth above.
(6)	Includes 290,090 shares held by the Peter V. Sperling Revocable Trust dated January 31, 1995.
(7)	Includes 111,271 shares that Mr. Peter Sperling has the right to acquire within 60 days of the date of the table set forth above.
(8)	Includes 352,000 shares that Mr. Peter Sperling has subject to a forward sale agreement that matures July 18, 2002.
(9)	Includes 54,802 shares that Mr. Noble has the right to acquire within 60 days of the date of the table set forth above.

(10)	Includes 101,250 shares that Mr. Weir has the right to acquire within 60 days of the date of the table set forth above.
(11)	Includes 57,750 shares that Ms. Govenar has the right to acquire within 60 days of the date of the table set forth above.
(12)	Includes 60,750 shares that Mr. Norton has the right to acquire within 60 days of the date of the table set forth above.
(13)	Includes 27,438 shares that Mr. DeConcini has the right to acquire within 60  days of the date of the table set forth above.

33

(14)	Includes 8,334 shares that Ms. Gonzales has the right to acquire within 60 days of the date of the table set forth above.
(15)	Includes 20,821 shares that Ms. Laura Palmer Noone has the right to acquire within 60 days of the date set forth above.
(16)	Includes 70,896 shares that Mr. Digiovanni has the right to acquire within 60  days of the date set forth above.
(17)	Includes 657,916 shares that all Directors and Executive Officers as a group have the right to acquire within 60 days of the date of the table set forth above.
(18)	Includes 243,080 shares held by the John G. Sperling Revocable Trust dated January 31, 1995.
(19)	Includes 232,067 shares held by the Peter V. Sperling Revocable Trust dated January 31, 1995.

Item 13 — Certain Relationships and Related Transactions

      On August 14, 1998, we, together with, Hughes Network Systems and Hermes Onetouch L.L.C. formed Interactive Distance Learning, Inc. for the purpose of acquiring One Touch Systems, Inc. In connection with the transaction, we, Hughes Network Systems, and Hermes Onetouch L.L.C. entered into certain agreements regarding the relationships among the parties. As contemplated in the agreements, it is anticipated that we may from time to time engage in transactions with One Touch Systems, Inc. for the provision of distance learning products and services. Currently, there are no transactions with One Touch Systems, Inc.. Hermes Onetouch L.L.C., which owns 30% of the outstanding shares of Interactive Distance Learning, Inc., is wholly-owned by Dr. John G. Sperling, our Chairman, and Peter V. Sperling, our Senior Vice President.

      Effective July 15, 1999, we entered into contracts with Apollo International, Inc. to provide educational products and services in certain locations outside of the United States, Canada, and Puerto Rico. John G. Sperling, Jorge Klor de Alva, and Todd Nelson are directors of us and also directors of Apollo International, Inc. Jorge Klor de Alva, a former Senior Vice President of Apollo Group, Inc., is the President and Chief Executive Officer of Apollo International, Inc. Shares of Apollo International, Inc. stock are beneficially owned by us (2.6% for which we have committed to pay $999,989 and have paid $499,995) and by an investment entity controlled by John G. Sperling and Peter V. Sperling, son of John G. Sperling, and a Senior Vice President and Director of Apollo Group, Inc. (26%). In addition, we have an option to acquire additional shares in Apollo International. During the fiscal year ended August 31, 2000, we received no revenue from Apollo International for educational products and services.

34

PART IV

Item 14 — Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  1.  Financial Statements

      The following consolidated financial statements of Apollo Group, Inc. and Subsidiaries, included in the Annual Report to Shareholders for the year ended August 31, 2000, are incorporated by reference from our 2000 Annual Report to Shareholders.

      Apollo Group, Inc.

•  Report of Independent Accountants

•  Consolidated Balance Sheet as of August 31, 2000 and 1999

•  Consolidated Statement of Operations for the Years Ended August 31, 2000, 1999, and 1998

•  Consolidated Statement of Comprehensive Income for the Years Ended August 31, 2000, 1999, and 1998

•  Consolidated Statement of Changes in Shareholders’ Equity for the Years Ended August 31, 2000, 1999, and 1998

•  Consolidated Statement of Cash Flows for the Years Ended August 31, 2000, 1999, and 1998

•  Notes to Consolidated Financial Statements

      University of Phoenix Online

•  Report of Independent Accountants

•  Balance Sheet as of August 31, 2000 and 1999

•  Statement of Operations for the Years Ended August 31, 2000, 1999, and 1998

•  Statement of Cash Flows for the Years Ended August 31, 2000, 1999, and 1998

•  Notes to Financial Statements

2.  Financial Statement Schedules:

      All schedules are omitted because they are not applicable or the required information is shown in the financial statements or related notes.

35

3.  Exhibits

Exhibit
Number		Description of Exhibit	Sequentially Numbered Page or Method of Filing
	2.1	Asset Purchase Agreement by and among National Endowment for Financial Education,® College for Financial Planning, Inc., as assignee of Apollo Online, Inc., as Buyer, and Apollo Group, Inc. dated August 21, 1997	Incorporated by reference to Exhibit 10.1 of our Registration Statement No. 333-35465 on Form S-3 filed September 11, 1997
	2.2	Assignment and Amendment of Asset Purchase Agreement by and among National Endowment for Financial Education, Inc. the College for Financial Planning, Inc., Apollo Online, Inc., and Apollo Group, Inc., dated September 23, 1997	Incorporated by reference to Exhibit 10.2 of our Registration Statement No. 333-35465 on Form S-3 filed September 11, 1997
	3.1	Amended Articles of Incorporation of the Company	Incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-3, dated August 31, 2000
	3.2	Amended Bylaws of the Company (As Amended Through June 1996)	Incorporated by reference to Exhibit 3.2 of the August 31, 1996 Form 10-K
	10.1a	Business Loan Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association	Incorporated by reference to Exhibit 10.1a of the November 30, 1997 Form 10-Q
	10.1b	Revolving Promissory Note between Apollo Group, Inc. and Wells Fargo Bank, National Association	Incorporated by reference to Exhibit 10.1c of the November 30, 1997 Form 10-Q
	10.1c	Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank, National	Incorporated by reference to Exhibit 10.1d of the February 28, 1998 Form 10-Q
	10.1d	Second Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association dated August 13, 1998	Incorporated by reference to Exhibit 10.1e of the February 28, 1999 Form 10-Q
	10.1e	Third Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association dated April 30, 1999	Incorporated by reference to Exhibit 10.1f of the May 31, 1999 Form 10-Q
	10.1f	Fourth Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association dated August 3, 1999	Incorporated by reference to Exhibit 10.1f of the August 31, Form 10-K
	10.1g	Fifth Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association dated November 1, 1999	Incorporated by reference to Exhibit 10.1g of the August 31, 1999 Form 10-K
	10.1h	Sixth Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association dated March 2, 2000	Incorporated by reference to Exhibit 10.1h of the Company’s Form 10-Q/ A, filed July 20, 2000
	10.2	Apollo Group, Inc. Amended and Restated Director Stock Plan	Incorporated by reference to Exhibit 10.2 of the Registration Statement on Form S-3, dated August 31, 2000
	10.3	Apollo Group, Inc. Long-Term Incentive Plan	Incorporated by reference to 10.3 of Form S-1 No. -83804
	10.4	Apollo Group, Inc. Savings and Investment Plan	Incorporated by reference to Exhibit 10.4 of the August 31 1996 Form 10-K
	10.5	Apollo Group, Inc. Amended and Restated 1994 Employee Stock Purchase Plan	Incorporated by reference to Exhibit 10.2 of the Registration Statement on Form S-3, dated August 31, 2000
	10.7	Apollo Group, Inc. 2000 Stock Incentive Plan	Incorporated by reference to Exhibit 10.1 of the Registration Statement on Form S-3, dated August 31, 2000
	10.8	Employment Agreement between Apollo Group, Inc. and John G. Sperling	Incorporated by reference to Exhibit 10.6 of Form S-1 No. 33-83804

36

Exhibit
Number		Description of Exhibit	Sequentially Numbered Page or Method of Filing
	10.9	Deferred Compensation Agreement between John G. Sperling and Apollo Group, Inc.	Incorporated by reference to Exhibit 10.7 of Form S-1 No. 33-83804
	10.10	Shareholder Agreement Dated September 7, 1994, by and between the Company and each holder of the Company’s Apollo Education Group Class B Common Stock	Incorporated by reference to Exhibit 10.10 of Form S-1 No. 33-83804
	10.11	Agreement of Purchase and Sale of Assets of Western International University dated June  30, 1995 (without schedules and exhibits	Incorporated by reference to Exhibit 10.11 of the August 31, 1995 Form 10-K
	10.12	Purchase and Sale Agreement dated October  10, 1995	Incorporated by reference to Exhibit 10.12 of the August 31, 1996 Form 10-K
	10.13	Independent Contractor Agreement between Apollo Group, Inc. and Governmental Advocates, Inc. dated June 1, 1999	Incorporated by reference to Exhibit 10.11 of the Company’s Form 10-Q/ A, filed July 20, 2000
	13	Pages 15 through 55 of Apollo Group, Inc. 2000 Annual Report to shareholders for the year ended August 31, 2000	Filed herewith
	21	List of Subsidiaries	Filed herewith
	23	Consent of Independent Accountants	Filed herewith
	27	Financial Data Schedule	Filed herewith
	99.1	Form of Agreement of Institute for Professional Development	Incorporated by reference to Exhibit 99.1 of Form S-1 No. 33-83804
	99.2	Audit Committee Charter	Filed herewith

(b)  Reports on Form 8-K

      During the last quarter of the 2000 fiscal year, we filed no reports on Form 8-K.

37

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Phoenix, State of Arizona, on November 22, 2000.

APOLLO GROUP, INC.

An Arizona Corporation

By:  /s/JOHN G. SPERLING

John G. Sperling

Chief Executive Officer and Director

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

Signature	Title	Date
/s/ JOHN G. SPERLING John G. Sperling	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	November 22, 2000
/s/ TODD S. NELSON Todd S. Nelson	President and Director	November 22, 2000
/s/ JERRY F. NOBLE Jerry F. Noble	Senior Vice President and Director	November 22, 2000
/s/ PETER V. SPERLING Peter V. Sperling	Senior Vice President, Secretary, Treasurer, and Director	November 22, 2000
/s/ KENDA B. GONZALES Kenda B. Gonzales	Chief Financial Officer (Principal Financial Officer)	November 22, 2000
/s/ DANIEL E. BACHUS Daniel E. Bachus	Chief Accounting Officer and Controller	November 22, 2000
/s/ DINO J. DECONCINI Dino J. DeConcini	Director	November 22, 2000
/s/ J. JORGE KLOR DE ALVA J. Jorge Klor de Alva	Director	November 22, 2000
/s/ THOMAS C. WEIR Thomas C. Weir	Director	November 22, 2000
/s/ JOHN R. NORTON III John R. Norton III	Director	November 22, 2000

38

Signature	Title	Date
/s/ HEDY F. GOVENAR Hedy F. Govenar	Director	November 22, 2000
/s/ JOHN BLAIR John Blair	Director	November 22, 2000

39

EXHIBIT INDEX

Exhibit
Number		Description of Exhibit	Sequentially Numbered Page or Method of Filing
	2.1	Asset Purchase Agreement by and among National Endowment for Financial Education,® College for Financial Planning, Inc., as assignee of Apollo Online, Inc., as Buyer, and Apollo Group, Inc. dated August 21, 1997	Incorporated by reference to Exhibit 10.1 of our Registration Statement No. 333-35465 on Form S-3 filed September 11, 1997
	2.2	Assignment and Amendment of Asset Purchase Agreement by and among National Endowment for Financial Education, Inc. the College for Financial Planning, Inc., Apollo Online, Inc., and Apollo Group, Inc., dated September 23, 1997	Incorporated by reference to Exhibit 10.2 of our Registration Statement No. 333-35465 on Form S-3 filed September 11, 1997
	3.1	Amended Articles of Incorporation of the Company	Incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-3, dated August 31, 2000
	3.2	Amended Bylaws of the Company (As Amended Through June 1996)	Incorporated by reference to Exhibit 3.2 of the August 31, 1996 Form 10-K
	10.1a	Business Loan Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association	Incorporated by reference to Exhibit 10.1a of the November 30, 1997 Form 10-Q
	10.1b	Revolving Promissory Note between Apollo Group, Inc. and Wells Fargo Bank, National Association	Incorporated by reference to Exhibit 10.1c of the November 30, 1997 Form 10-Q
	10.1c	Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank, National	Incorporated by reference to Exhibit 10.1d of the February 28, 1998 Form 10-Q
	10.1d	Second Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association dated August 13, 1998	Incorporated by reference to Exhibit 10.1e of the February 28, 1999 Form 10-Q
	10.1e	Third Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association dated April 30, 1999	Incorporated by reference to Exhibit 10.1f of the May 31, 1999 Form 10-Q
	10.1f	Fourth Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association dated August 3, 1999	Incorporated by reference to Exhibit 10.1f of the August 31, Form 10-K
	10.1g	Fifth Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association dated November 1, 1999	Incorporated by reference to Exhibit 10.1g of the August 31, 1999 Form 10-K
	10.1h	Sixth Modification Agreement between Apollo Group, Inc. and Wells Fargo Bank, National Association dated March 2, 2000	Incorporated by reference to Exhibit 10.1h of the Company’s Form 10-Q/ A, filed July 20, 2000
	10.2	Apollo Group, Inc. Amended and Restated Director Stock Plan	Incorporated by reference to Exhibit 10.2 of the Registration Statement on Form S-3, dated August 31, 2000
	10.3	Apollo Group, Inc. Long-Term Incentive Plan	Incorporated by reference to 10.3 of Form S-1 No. -83804
	10.4	Apollo Group, Inc. Savings and Investment Plan	Incorporated by reference to Exhibit 10.4 of the August 31 1996 Form 10-K
	10.5	Apollo Group, Inc. Amended and Restated 1994 Employee Stock Purchase Plan	Incorporated by reference to Exhibit 10.2 of the Registration Statement on Form S-3, dated August 31, 2000
	10.7	Apollo Group, Inc. 2000 Stock Incentive Plan	Incorporated by reference to Exhibit 10.1 of the Registration Statement on Form S-3, dated August 31, 2000
	10.8	Employment Agreement between Apollo Group, Inc. and John G. Sperling	Incorporated by reference to Exhibit 10.6 of Form S-1 No. 33-83804

Exhibit
Number		Description of Exhibit	Sequentially Numbered Page or Method of Filing
	10.9	Deferred Compensation Agreement between John G. Sperling and Apollo Group, Inc.	Incorporated by reference to Exhibit 10.7 of Form S-1 No. 33-83804
	10.10	Shareholder Agreement Dated September 7, 1994, by and between the Company and each holder of the Company’s Apollo Education Group Class B Common Stock	Incorporated by reference to Exhibit 10.10 of Form S-1 No. 33-83804
	10.11	Agreement of Purchase and Sale of Assets of Western International University dated June  30, 1995 (without schedules and exhibits	Incorporated by reference to Exhibit 10.11 of the August 31, 1995 Form 10-K
	10.12	Purchase and Sale Agreement dated October  10, 1995	Incorporated by reference to Exhibit 10.12 of the August 31, 1996 Form 10-K
	10.13	Independent Contractor Agreement between Apollo Group, Inc. and Governmental Advocates, Inc. dated June 1, 1999	Incorporated by reference to Exhibit 10.11 of the Company’s Form 10-Q/ A, filed July 20, 2000
	13	Pages 15 through 55 of Apollo Group, Inc. 2000 Annual Report to shareholders for the year ended August 31, 2000	Filed herewith
	21	List of Subsidiaries	Filed herewith
	23	Consent of Independent Accountants	Filed herewith
	27	Financial Data Schedule	Filed herewith
	99.1	Form of Agreement of Institute for Professional Development	Incorporated by reference to Exhibit 99.1 of Form S-1 No. 33-83804
	99.2	Audit Committee Charter	Filed herewith

EX-13

   1

                                                                      EXHIBIT 13

       SELECTED CONSOLIDATED FINANCIAL INFORMATION OF APOLLO GROUP, INC.

     The following selected financial and operating data of Apollo Group, Inc.
are qualified by reference to and should be read in conjunction with the
financial statements and the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The statement of
operations data for the years ended August 31, 2000, 1999, and 1998 and the
balance sheet data as of August 31, 2000 and 1999 are derived from the audited
consolidated financial statements of Apollo Group, Inc. Diluted net income per
share and diluted weighted average shares outstanding have been retroactively
restated for stock splits.



                                                       YEAR ENDED AUGUST 31,
                                      --------------------------------------------------------
                                        2000        1999        1998        1997        1996
                                      --------    --------    --------    --------    --------
                                              (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                       
STATEMENT OF OPERATIONS DATA:
Revenues:
  Tuition and other, net............  $609,997    $498,846    $384,877    $279,195    $211,247
                                      --------    --------    --------    --------    --------
Costs and expenses:
  Instructional costs and
     services.......................   352,874     287,582     223,525     161,996     124,664
  Selling and promotional...........    96,491      79,143      57,458      42,097      33,969
  General and administrative........    46,555      39,368      33,708      24,295      20,568
                                      --------    --------    --------    --------    --------
                                       495,920     406,093     314,691     228,388     179,201
                                      --------    --------    --------    --------    --------
Income from operations..............   114,077      92,753      70,186      50,807      32,046
Interest income, net................     6,228       5,229       6,086       4,174       2,951
                                      --------    --------    --------    --------    --------
Income before income taxes..........   120,305      97,982      76,272      54,981      34,997
Provision for income taxes..........    49,114      38,977      29,975      21,602      13,605
                                      --------    --------    --------    --------    --------
Net income..........................  $ 71,191    $ 59,005    $ 46,297    $ 33,379    $ 21,392
                                      ========    ========    ========    ========    ========
Diluted net income per share........  $   0.93    $   0.75    $   0.59    $   0.43    $   0.28
                                      ========    ========    ========    ========    ========
Diluted weighted average shares
  outstanding.......................    76,629      78,834      79,086      77,726      76,763
                                      ========    ========    ========    ========    ========




                                                             AUGUST 31,
                                      --------------------------------------------------------
                                        2000        1999        1998        1997        1996
                                      --------    --------    --------    --------    --------
                                                       (DOLLARS IN THOUSANDS)
                                                                       
BALANCE SHEET DATA:
Cash, cash equivalents, and
  restricted cash...................  $ 95,593    $ 77,332    $ 75,039    $ 78,855    $ 63,267
Marketable securities...............    64,246      39,571      45,467      41,429      13,273
                                      --------    --------    --------    --------    --------
Total cash and marketable
  securities........................  $159,839    $116,903    $120,506    $120,284    $ 76,540
                                      ========    ========    ========    ========    ========
Total assets........................  $404,790    $348,342    $305,160    $194,910    $137,850
                                      ========    ========    ========    ========    ========
Current liabilities.................  $131,089    $108,787    $ 95,574    $ 67,394    $ 54,804
Long-term liabilities...............    12,493       8,435       9,778       3,199       2,432
Shareholders' equity................   261,208     231,120     199,808     124,317      80,614
                                      --------    --------    --------    --------    --------
Total liabilities and shareholders'
  equity............................  $404,790    $348,342    $305,160    $194,910    $137,850
                                      ========    ========    ========    ========    ========
OPERATING STATISTICS:
Degree enrollments at end of year...   100,900      86,800      71,400      56,200      46,900
                                      ========    ========    ========    ========    ========
Number of locations:
  Campuses..........................        54          49          42          35          35
  Learning centers..................        96          80          71          60          49
                                      --------    --------    --------    --------    --------
Total number of locations...........       150         129         113          95          84
                                      ========    ========    ========    ========    ========


     We did not pay any cash dividends on our common stock during any of the
periods set forth in the table above.

                                        1
   2

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF APOLLO GROUP, INC.

     This Annual Report, including the "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Apollo Group, Inc." and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of University of Phoenix Online" contain 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
report include, but are not limited to, statements such as: 1) we believe that
our cash from operations along with our existing cash balances and availability
under our line of credit will be adequate to fund our capital and operating
needs for the next 12 to 18 months; 2) although we believe that the OIG audit
will be resolved without any negative impact on Institute for Professional
Development, as with any program review or audit, no assurance can be given as
to the final outcome since the matters are not yet resolved; 3) total purchases
of property and equipment for us for the year ended August 31, 2001, are
expected to range from $38.0 to $42.0 million; 4) although the analysis of the
impact of SAB No. 101 has not been completed, it is not expected to have a
material effect on our results of operations; 5) total purchases of property and
equipment for University of Phoenix Online for the year ended August 31, 2001,
are expected to range from $4.0 to $6.0 million; 6) we anticipate that seasonal
trends in the second and fourth quarters will continue in the future.

     Future events and actual results could differ materially from those set
forth in the forward-looking statements as a results of many factors. Statements
in this Annual Report, including "Notes to Consolidated Financial Statements"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," 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 other 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 the North Central
Association of Colleges and Schools' approval for University of Phoenix to
operate in new states; 6) changes in student enrollment; and 7) other factors
set forth in this Annual Report. These forward-looking statements are based on
estimates, projections, beliefs, and assumptions of us and our management and
speak only as of the date made and are not guarantees of future performance. 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.

BACKGROUND AND OVERVIEW

     Our tuition and other revenues, net of student discounts, have increased to
$610.0 million in 2000 from $211.2 million in 1996. Net income has increased to
$71.2 million in 2000 from $21.4 million in 1996. At August 31, 2000, we had
approximately 100,900 degree seeking students.

     From September 1996 through August 2000, University of Phoenix opened 14
campuses. Start-up losses for new campuses in new markets average $700,000 to
$900,000 per site. These start-up losses are incurred over a 17 to 20 month
period, at which time the enrollments at these new campuses average 200 to 300
students. Losses for establishing a learning center in a market currently served
by University of Phoenix average $200,000. Institute for Professional
Development established operations at five campuses with client institutions.
Start-up losses for new contract sites average from $300,000 to $400,000 per
site over a 21 to 24 month period.

     Approximately 93% of our tuition and other net revenues in 2000 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 sales
of textbooks and other education-related products, application fees, other
student fees, and other income. Our tuition and other net revenues vary from
period to period based on several factors

                                        2
   3

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 approximately 89% of consolidated tuition
revenues. Institute for Professional Development tuition revenues consist of the
contractual share of tuition revenues from students enrolled in 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.

     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 that 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 paid 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.

     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.

     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.

RESULTS OF OPERATIONS

     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:



                                                               YEAR ENDED AUGUST 31,
                                                              -----------------------
                                                              2000     1999     1998
                                                              -----    -----    -----
                                                                       
REVENUES:
  Tuition and other, net....................................  100.0%   100.0%   100.0%
                                                              -----    -----    -----
COSTS AND EXPENSES:
  Instructional costs and services..........................   57.8     57.6     58.1
  Selling and promotional...................................   15.8     15.9     14.9
  General and administrative................................    7.7      7.9      8.8
                                                              -----    -----    -----
                                                               81.3     81.4     81.8
                                                              -----    -----    -----
Income from operations......................................   18.7     18.6     18.2
Interest income, net........................................    1.0      1.0      1.6
                                                              -----    -----    -----
Income before income taxes..................................   19.7     19.6     19.8
Less provision for income taxes.............................    8.0      7.8      7.8
                                                              -----    -----    -----
Net income..................................................   11.7%    11.8%    12.0%
                                                              =====    =====    =====


     YEAR ENDED AUGUST 31, 2000, COMPARED WITH THE YEAR ENDED AUGUST 31, 1999

     Tuition and other net revenues increased by 22.3% to $610.0 million in 2000
from $498.8 million in 1999 primarily due to a 16.1% increase in average
full-time equivalent degree student enrollments and tuition price

                                        3
   4

increases averaging four to five 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 1999 to 2000.

     Tuition and other net revenues for the year ended August 31, 2000 and 1999,
consist primarily of $540.4 million and $442.0 million, respectively, of net
tuition revenues from students enrolled in degree programs and $29.1 million and
$24.8 million, respectively, of net tuition revenues from students enrolled in
non-degree programs.

     Instructional costs and services increased by 22.7% to $352.9 million in
2000 from $287.6 million in 1999 due primarily to the direct costs necessary to
support the increase in degree student enrollments and the $6.0 million charge
related to the U.S. Department of Education agreement. Direct costs consist
primarily of faculty compensation, related staff salaries at each respective
location, classroom lease expenses, and financial aid processing costs. These
costs as a percentage of tuition and other net revenues increased to 57.8% in
2000 from 57.6% in 1999 due to the $6.0 million charge related to the U.S.
Department of Education agreement. Excluding the $6.0 million charge,
instructional costs and services as a percentage of tuition and other net
revenues would have decreased to 56.9% in 2000 from 57.6% in 1999 due to greater
net revenues being spread over a proportionally lower increase in instructional
costs and services. We may not be able to leverage our recurring costs to the
same extent as we face increased costs related to the expansion into additional
markets.

     Selling and promotional expenses increased by 21.9% to $96.5 million in
2000 from $79.1 million in 1999 due primarily to additional advertising and
marketing. These expenses as a percentage of tuition and other net revenues
remained relatively consistent at 15.8% in 2000 from 15.9% in 1999.

     General and administrative expenses increased by 18.3% to $46.6 million in
2000 from $39.4 million in 1999 due primarily to increased employee expenses
related primarily to information services and depreciation related to the
implementation of information support systems. General and administrative
expenses as a percentage of tuition and other net revenues remained relatively
consistent at 7.7% in 2000 from 7.9% in 1999.

     Net interest income was $6.2 million and $5.2 million in 2000 and 1999,
respectively. Net interest income increased in 2000 due primarily to higher
average cash balances. Interest expense was $431,000 and $57,000 in 2000 and
1999, respectively.

     Our effective tax rate increased to 40.8% in 2000 from 39.8% in 1999. This
increase is due primarily to lower tax-exempt interest income and higher state
taxes in new tax jurisdictions.

     Net income increased to $71.2 million in 2000 from $59.0 million in 1999
due primarily to increased enrollments, increased tuition rates, and improved
utilization in selling and promotional and general and administrative costs.

     YEAR ENDED AUGUST 31, 1999, COMPARED WITH THE YEAR ENDED AUGUST 31, 1998

     Tuition and other net revenues increased by 29.6% to $498.8 million in 1999
from $384.9 million in 1998 due primarily to a 24.0% increase in average
full-time equivalent degree student enrollments, tuition price increases
averaging four to six percent (depending on the geographic area and program),
and a higher concentration of enrollments at locations that charge a higher rate
per credit hour 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 1998
to 1999.

     Tuition and other net revenues for the year ended August 31, 1999 and 1998,
consist primarily of $442.0 million and $334.2 million, respectively, of net
tuition revenues from students enrolled in degree programs and $24.8 million and
$23.1 million, respectively, of net tuition revenues from students enrolled in
non-degree programs.

     Instructional costs and services increased by 28.7% to $287.6 million in
1999 from $223.5 million in 1998 due primarily to the direct costs necessary to
support the increase in degree student enrollments. Direct costs consist
primarily of faculty compensation, related staff salaries at each respective
location, classroom lease expenses, and financial aid processing costs. These
costs as a percentage of tuition and other net revenues

                                        4
   5

decreased to 57.6% in 1999 from 58.1% in 1998 due primarily to the exclusion of
certain enrollment staff salaries and greater tuition and other net revenues
being spread over the fixed costs related to centralized student services.

     Selling and promotional expenses increased by 37.7% to $79.1 million in
1999 from $57.5 million in 1998 due primarily to the inclusion of certain
enrollment staff salaries, additional advertising and marketing related to six
new University of Phoenix campuses opened during the year, and increased
advertising and marketing for distance education. These expenses as a percentage
of net revenues increased to 15.9% in 1999 from 14.9% in 1998 due to an increase
in the number of campuses opened in new markets in the last two years and the
inclusion of certain enrollment staff salaries.

     General and administrative expenses increased by 16.8% to $39.4 million in
1999 from $33.7 million in 1998 due primarily to costs required to support the
increased number of campuses and learning centers, increased information
services expenditures, and overall increases in general and administrative
salaries. General and administrative expenses as a percentage of tuition and
other net revenues decreased to 7.9% in 1999 from 8.8% in 1998 due primarily to
higher 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 was $5.2 million and $6.1 million in 1999 and 1998,
respectively. Net interest income decreased in 1999 due primarily to lower
average cash balances as a result of stock repurchases and lower interest rates
in effect during 1999. Interest expense was $57,000 and $119,000 in 1999 and
1998, respectively.

     Our effective tax rate increased to 39.8% in 1999 from 39.3% in 1998. The
increase is due primarily to the relative impact of tax-exempt interest income
and of expenses that are non-deductible for tax purposes.

     Net income increased to $59.0 million in 1999 from $46.3 million in 1998
due primarily to increased enrollments, increased tuition rates, and improved
utilization in instructional costs and services and general and administrative
costs.

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 to February) average full-time
equivalent enrollments and related revenues generally are lower than other
quarters due to the holiday 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

     Net cash provided by operating activities increased to $118.1 million in
2000 from $75.6 million in 1999. The increase resulted primarily from increased
net income, an increase in depreciation and amortization expense, a smaller
increase in accounts receivable, and an increase in accounts payable and accrued
liabilities. The smaller increase in accounts receivable was primarily
attributable to increased efficiency of financial aid processing in 2000.

     Capital expenditures decreased to $34.8 million in 2000 from $44.7 million
in 1999 primarily due to higher expenditures in 1999 related to leasehold
improvements, as a result of more new campus openings, and due to more computer
lab installations in 1999 for our expansion of information technology programs.
Software development of our financial aid processing system and our new human
resource system also

                                        5
   6

contributed to higher capital expenditures in 1999. Total purchases of property
and equipment for the year ended August 31, 2001, are expected to range from
$38.0 to $42.0 million. These expenditures will primarily be related to new
campuses and learning centers, the continued expansion of computer labs designed
to support the information technology programs, and increases in normal
recurring capital expenditures due to the overall increase in student and
employee levels resulting from the growth in the business.

     At August 31, 2000, 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. At August 31, 2000, availability under the line
of credit was reduced by outstanding letters of credit of $5.9 million. The line
of credit is renewable annually, and any amounts borrowed under the line are
payable upon its termination in February 2002.

     Our Board of Directors authorized a program allocating up to $150 million
of our funds to repurchase shares of Apollo Education Group Class A common
stock. As of August 31, 2000, we had repurchased approximately 4,379,000 shares
at a total cost of approximately $103.2 million.

     We believe that our cash from operations along with our existing cash
balances and availability under our line of credit will be adequate to fund our
capital and operating needs for the next 12 to 18 months.

     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. This
stock represented a 10.8% interest in University of Phoenix Online with Apollo
Education Group retaining the remaining 89.2% interest in University of Phoenix
Online.

     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 60-75
days from receipt. As of August 31, 2000, we had approximately $35.7 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.

     The Title IV Regulations, as revised, require all higher education
institutions to meet a minimum composite score to be deemed financially
responsible by the U.S. Department of Education. If the minimum composite score
of 1.0 is not met, an institution would fall under alternative standards and may
lose its eligibility to participate in Title IV Programs. As of August 31, 2000,
University of Phoenix's and Western International University's composite scores
were 2.6 and 3.0, respectively. These requirements apply separately to
University of Phoenix and Western International University and to each of the
respective Institute for Professional Development client institutions, but not
to us on a consolidated basis.

     In January 1998, the U.S. Department of Education Office of the Inspector
General ("OIG") began performing an audit of University of Phoenix's
administration of the Title IV Programs. The team previously presented questions
regarding University of Phoenix's interpretation of the "12-hour rule," distance
education programs, and institutional refund obligations. University of Phoenix
reached an agreement with the U.S. Department of Education which acknowledges no
admission that there were any issues of non-compliance or errors by University
of Phoenix. To bring this audit to closure and settle all outstanding issues
prior to the final OIG report, which was issued on March 31, 2000, University of
Phoenix agreed to modify its physical campus learning team attendance log to
track the sites of learning team meetings and record the hours attended. This
modification is not expected to have a negative impact on either University of
Phoenix or its students. This modification does not require any change to
University of Phoenix Online's learning team attendance log. Part of the
agreement, dated March 27, 2000, reached with the U.S. Department of Education
requires University of Phoenix to pay the U.S. Department of Education $6.0
million as a negotiated settlement in full satisfaction of all monetary findings
arising under the final OIG audit report. This amount was reflected in
instructional

                                        6
   7

costs and services in our third quarter 2000 results. $1.5 million of this
amount was paid in 2000 with the remaining $4.5 million due in 2003.

     The OIG is currently auditing 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. To date, OIG has not issued
any draft reports. Although we believe that the OIG audits will be resolved
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 since the matters are not yet resolved. Liability to us, if
any, from the final audit results will be recorded as an expense.

IMPACT OF INFLATION

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

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.

                                        7
   8

                       REPORT OF INDEPENDENT ACCOUNTANTS

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

     In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of comprehensive income, of changes in
shareholders' equity and of cash flows present fairly, in all material respects,
the financial position of Apollo Group, Inc. and its subsidiaries at August 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended August 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of Apollo Group, Inc.'s management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP
Phoenix, Arizona
September 29, 2000

                                        8
   9

                      APOLLO GROUP, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                             (Dollars in thousands)



                                                                   AUGUST 31,
                                                              --------------------
                                                                2000        1999
                                                              --------    --------
                                                                    
ASSETS:
CURRENT ASSETS
  Cash and cash equivalents.................................  $ 59,912    $ 51,534
  Restricted cash...........................................    35,681      25,798
  Marketable securities.....................................    58,226      31,064
  Receivables, net..........................................    78,933      75,664
  Deferred tax assets, net..................................     8,267       7,346
  Other current assets......................................     5,888       6,807
                                                              --------    --------
TOTAL CURRENT ASSETS........................................   246,907     198,213
Property and equipment, net.................................    87,833      77,504
Marketable securities.......................................     6,020       8,507
Investment in IDL...........................................    11,888      10,701
Cost in excess of fair value of assets purchased, net.......    38,548      39,917
Other assets................................................    13,594      13,500
                                                              --------    --------
TOTAL ASSETS................................................  $404,790    $348,342
                                                              ========    ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES
  Current portion of long-term liabilities..................  $    450    $    300
  Accounts payable..........................................    12,960      12,105
  Accrued liabilities.......................................    22,297      14,340
  Income taxes payable......................................       365         535
  Student deposits and current portion of deferred
     revenue................................................    95,017      81,507
                                                              --------    --------
TOTAL CURRENT LIABILITIES...................................   131,089     108,787
Deferred tuition revenue, less current portion..............     1,295       2,139
Long-term liabilities, less current portion.................     9,973       4,222
Deferred tax liabilities, net...............................     1,225       2,074
                                                              --------    --------
TOTAL LIABILITIES...........................................   143,582     117,222
                                                              --------    --------
Commitments and contingencies
SHAREHOLDERS' EQUITY
  Preferred stock, no par value, 1,000,000 shares
     authorized; none issued................................
  Class A nonvoting common stock, no par value, 400,000,000
     shares authorized; 74,998,000 and 76,628,000 issued and
     outstanding at August 31, 2000 and August 31, 1999,
     respectively...........................................       103         102
  Class B voting common stock, no par value, 3,000,000
     shares authorized; 512,000 issued and outstanding at
     August 31, 2000 and August 31, 1999....................         1           1
  Additional paid-in capital................................    95,259      99,190
  Treasury stock, at cost, 4,378,000 and 1,876,000 shares at
     August 31, 2000 and August 31, 1999, respectively......   (83,353)    (46,197)
  Retained earnings.........................................   249,219     178,028
  Accumulated other comprehensive loss......................       (21)         (4)
                                                              --------    --------
TOTAL SHAREHOLDERS' EQUITY..................................   261,208     231,120
                                                              --------    --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................  $404,790    $348,342
                                                              ========    ========


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

                                        9
   10

                      APOLLO GROUP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS
                    (In thousands, except per share amounts)



                                                                  YEAR ENDED AUGUST 31,
                                                             --------------------------------
                                                               2000        1999        1998
                                                             --------    --------    --------
                                                                            
REVENUES:
  Tuition and other, net...................................  $609,997    $498,846    $384,877
                                                             --------    --------    --------
COSTS AND EXPENSES:
  Instructional costs and services.........................   352,874     287,582     223,525
  Selling and promotional..................................    96,491      79,143      57,458
  General and administrative...............................    46,555      39,368      33,708
                                                             --------    --------    --------
                                                              495,920     406,093     314,691
                                                             --------    --------    --------
Income from operations.....................................   114,077      92,753      70,186
Interest income, net.......................................     6,228       5,229       6,086
                                                             --------    --------    --------
Income before income taxes.................................   120,305      97,982      76,272
Provision for income taxes.................................    49,114      38,977      29,975
                                                             --------    --------    --------
Net income.................................................  $ 71,191    $ 59,005    $ 46,297
                                                             ========    ========    ========
Basic net income per share.................................  $   0.94    $   0.76    $   0.60
                                                             ========    ========    ========
Diluted net income per share...............................  $   0.93    $   0.75    $   0.59
                                                             ========    ========    ========
Basic weighted average shares outstanding..................    75,783      77,683      77,245
                                                             ========    ========    ========
Diluted weighted average shares outstanding................    76,629      78,834      79,086
                                                             ========    ========    ========


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

                                       10
   11

                      APOLLO GROUP, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
                                 (In thousands)



                                                                  YEAR ENDED AUGUST 31,
                                                              -----------------------------
                                                               2000       1999       1998
                                                              -------    -------    -------
                                                                           
NET INCOME..................................................  $71,191    $59,005    $46,297
Other comprehensive income, net of income taxes:
  Currency translation gain (loss)..........................      (17)       (10)         3
  Unrealized gain on security...............................        8
  Reclassification adjustment for gains included in net
     income.................................................       (8)
                                                              -------    -------    -------
Comprehensive income........................................  $71,174    $58,995    $46,300
                                                              =======    =======    =======


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

                                       11
   12

                      APOLLO GROUP, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                                 (In thousands)


                                       COMMON STOCK
                             ---------------------------------
                                 CLASS A           CLASS B
                                NONVOTING          VOTING
                             ---------------   ---------------   ADDITIONAL
                                      STATED            STATED    PAID-IN     TREASURY   RETAINED
                             SHARES   VALUE    SHARES   VALUE     CAPITAL      STOCK     EARNINGS
                             ------   ------   ------   ------   ----------   --------   --------
                                                                    
BALANCE AT AUGUST 31,
  1997.....................  50,227    $ 66     548       $1      $51,521     $     --   $ 72,726
Stock issued for College
  acquisition..............     445                                15,944
Stock issued under stock
  purchase plan............      75                                 2,457
Stock issued under stock
  option plans.............     475       1                         3,542
Exchange Class A shares for
  Class B shares...........      36             (36)
Tax benefits of stock
  options exercised........                                         7,249
3-for-2 stock split........  25,854      34                           (34)
Fractional shares paid
  out......................                                            (2)
Other comprehensive
  income...................
Net income.................                                                                46,297
                             ------    ----     ---       --      -------     --------   --------
BALANCE AT AUGUST 31,
  1998.....................  77,112     101     512        1       80,677           --    119,023
Stock issued under stock
  purchase plan............     159                                 3,374
Stock issued under stock
  option plans.............   1,233       1                         5,456
Tax benefits of stock
  options exercised........                                         9,683
Treasury stock purchase....  (1,876)                                           (46,197)
Other comprehensive
  income...................
Net income.................                                                                59,005
                             ------    ----     ---       --      -------     --------   --------
BALANCE AT AUGUST 31,
  1999.....................  76,628     102     512        1       99,190      (46,197)   178,028
Stock issued under stock
  purchase plan............     182                                  (952)       4,325
Stock issued under stock
  option plans.............     691       1                        (8,594)      15,513
Tax benefits of stock
  options exercised........                                         5,615
Treasury stock purchase....  (2,503)                                           (56,994)
Other comprehensive
  income...................
Net income.................                                                                71,191
                             ------    ----     ---       --      -------     --------   --------
BALANCE AT AUGUST 31,
  2000.....................  74,998    $103     512       $1      $95,259     $(83,353)  $249,219
                             ======    ====     ===       ==      =======     ========   ========



                              ACCUMULATED
                                 OTHER           TOTAL
                             COMPREHENSIVE   SHAREHOLDERS'
                                INCOME          EQUITY
                             -------------   -------------
                                       
BALANCE AT AUGUST 31,
  1997.....................      $  3          $124,317
Stock issued for College
  acquisition..............                      15,944
Stock issued under stock
  purchase plan............                       2,457
Stock issued under stock
  option plans.............                       3,543
Exchange Class A shares for
  Class B shares...........                          --
Tax benefits of stock
  options exercised........                       7,249
3-for-2 stock split........                          --
Fractional shares paid
  out......................                          (2)
Other comprehensive
  income...................         3                 3
Net income.................                      46,297
                                 ----          --------
BALANCE AT AUGUST 31,
  1998.....................         6           199,808
Stock issued under stock
  purchase plan............                       3,374
Stock issued under stock
  option plans.............                       5,457
Tax benefits of stock
  options exercised........                       9,683
Treasury stock purchase....                     (46,197)
Other comprehensive
  income...................       (10)              (10)
Net income.................                      59,005
                                 ----          --------
BALANCE AT AUGUST 31,
  1999.....................        (4)          231,120
Stock issued under stock
  purchase plan............                       3,373
Stock issued under stock
  option plans.............                       6,920
Tax benefits of stock
  options exercised........                       5,615
Treasury stock purchase....                     (56,994)
Other comprehensive
  income...................       (17)              (17)
Net income.................                      71,191
                                 ----          --------
BALANCE AT AUGUST 31,
  2000.....................      $(21)         $261,208
                                 ====          ========


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

                                       12
   13

                      APOLLO GROUP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (In thousands)



                                                                  YEAR ENDED AUGUST 31,
                                                             --------------------------------
                                                               2000        1999        1998
                                                             --------    --------    --------
                                                                            
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income.................................................  $ 71,191    $ 59,005    $ 46,297
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Depreciation and amortization............................    27,368      20,588      12,786
  Provision for uncollectible accounts.....................     7,785       6,906       5,479
  Deferred income taxes....................................    (1,770)       (505)     (2,599)
  Tax benefits of stock options exercised..................     5,615       9,683       7,249
  Decrease (increase) in assets:
     Restricted cash.......................................    (9,883)     (3,085)     (2,786)
     Receivables, net......................................   (11,054)    (21,288)    (29,733)
     Other assets..........................................     1,540      (5,902)     (2,491)
  Increase (decrease) in liabilities:
     Accounts payable and accrued liabilities..............     8,642      (5,022)      9,542
     Student deposits and deferred revenue.................    12,666      15,815      12,955
     Other liabilities.....................................     6,001        (633)        192
                                                             --------    --------    --------
Net cash provided by operating activities..................   118,101      75,562      56,891
                                                             --------    --------    --------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Net additions to property and equipment....................   (34,830)    (44,732)    (30,855)
Purchase of marketable securities..........................   (63,285)    (24,644)    (43,277)
Maturities of marketable securities........................    38,294      29,922      38,556
Purchase of other assets...................................    (2,894)     (3,642)     (3,685)
Proceeds from sale of land.................................       997       4,212
Investment in IDL..........................................    (1,187)        106     (10,807)
Cash paid for acquisition, net of cash acquired............                           (19,378)
                                                             --------    --------    --------
Net cash used for investing activities.....................   (62,905)    (38,778)    (69,446)
                                                             --------    --------    --------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Purchase of common stock...................................   (56,994)    (46,197)
Payments on long-term debt.................................      (100)       (200)        (50)
Issuance of common stock...................................    10,293       8,831       6,000
                                                             --------    --------    --------
Net cash provided by (used for) financing activities.......   (46,801)    (37,566)      5,950
                                                             --------    --------    --------
Currency translation gain (loss)...........................       (17)        (10)          3
                                                             --------    --------    --------
Net increase (decrease) in cash and cash equivalents.......     8,378        (792)     (6,602)
Cash and cash equivalents at beginning of year.............    51,534      52,326      58,928
                                                             --------    --------    --------
Cash and cash equivalents at end of year...................  $ 59,912    $ 51,534    $ 52,326
                                                             ========    ========    ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
  Income taxes.............................................  $ 46,635    $ 30,224    $ 24,235
  Interest.................................................  $     12    $     48    $      9


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

                                       13
   14

                      APOLLO GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  NATURE OF OPERATIONS

     Apollo Group, Inc. ("Apollo" or the "Company"), through its wholly-owned
subsidiaries, the University of Phoenix, Inc. ("UOP"), the 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.

     UOP is a regionally accredited, private institution of higher education
offering associates, bachelors, masters, and doctoral degree programs in
business, management, computer information systems, education, and health care.
UOP has 29 physical campuses and 67 learning centers located in Arizona,
California, Colorado, Florida, Hawaii, Louisiana, Maryland, Michigan, Nevada,
New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Utah, Washington, Puerto Rico,
and Vancouver, British Columbia. UOP also offers its educational programs
worldwide through University of Phoenix Online, its computerized educational
delivery system. UOP is accredited by the Commission on Institutions of Higher
Education of the North Central Association of Colleges and Schools ("NCA").

     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 27 learning centers in 22 states.

     The College, located in Denver, Colorado, was acquired in September 1997
and provides financial planning education programs, as well as a regionally
accredited graduate degree program in financial planning.

     WIU, which is accredited by NCA, currently offers undergraduate and
graduate degree programs in Phoenix, Chandler, 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 UOP. 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. 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.

     The Company's fiscal year is from September 1 to August 31. Unless
otherwise stated, references to the years 2000, 1999, and 1998 relate to the
fiscal years ended August 31, 2000, 1999, and 1998, respectively.

NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES

     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

                                       14
   15
                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

primarily in U.S. agency-backed securities and auction market preferred stock
with maturities of ninety days or less.

     INVESTMENTS.  Investments in marketable securities such as municipal bonds
and U.S. agency obligations are stated at amortized cost, which approximates
fair value. It is the Company's intention to hold its marketable securities
until maturity. Investments in joint ventures and other long-term investments
are carried at cost.

     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, except software which is depreciated over
three to five 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.  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. 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.

     Tuition and other revenues are shown net of discounts relating to a variety
of promotional programs. Such discounts totaled $8.7 million, $7.0 million, and
$6.7 million in 2000, 1999, and 1998, respectively.

     Many of the Company's students participate in government sponsored
financial aid programs under Title IV of the Higher Education Act of 1965. 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.  The Company amortizes
cost in excess of fair value of assets purchased on a straight-line method over
the estimated useful life. At August 31, 2000 and 1999, the Company's cost in
excess of fair value of assets purchased related primarily to the acquisition of
certain assets of the College and WIU, which are being amortized over 35 years
and 15 years, respectively.

     Statement of Financial Accounting Standards 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires that long-lived assets, including cost in excess of fair value of
assets purchased, be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. 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 future undiscounted cash flows of the underlying businesses.
Adjustments are made if the sum of the expected future net cash flows is less
than book value. As of August 31, 2000, there have been no impairment
adjustments recognized.

                                       15
   16
                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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.  Basic net income per share is computed using the
weighted average number of Apollo Education Group Class A and Class B common
shares outstanding during the period. Diluted net income per share is computed
using the weighted average number of Apollo Education Group Class A and Class B
common and common equivalent shares outstanding during the period. 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 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.

     Beginning in the first quarter of fiscal year 2001, the consolidated
financial statements of Apollo Group, Inc. will present 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 will be
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 common stock outstanding. Diluted
earnings per share will be calculated similarly, except that it will include the
dilutive effect of the assumed exercise of options, including the effects of
shares 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 will
be 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 will be calculated
similarly, except that it will include the dilutive effect of the assumed
exercise of options with respect to University of Phoenix Online common stock.

     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.  The Company expenses selling and
promotional costs as incurred. Selling and promotional costs include marketing
salaries, direct-response and other advertising, promotional materials, and
related marketing costs.

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

     STOCK-BASED COMPENSATION.  The Company has elected to continue to account
for its stock-based awards in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and has
provided the pro forma disclosures as required by Statement of Financial
Accounting Standards 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), for the years ended August 31, 2000, 1999, and 1998.

     NEW ACCOUNTING PRONOUNCEMENTS.  During December 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB No. 101"), which provides guidance on
the recognition, presentation, and disclosure of revenue in financial statements
filed with the Securities and Exchange Commission. The Company was originally
required to implement SAB

                                       16
   17
                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

No. 101 in the first quarter of its fiscal year ending August 31, 2001; however,
in June 2000, the Securities and Exchange Commission amended SAB No. 101 to
delay the required implementation date. As a result, we must now implement the
related guidelines in the fourth quarter of our fiscal year ending August 31,
2001. Although the analysis of the impact of SAB No. 101 has not been completed,
it is not expected to have a material effect on our results of operations.

     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.

     RECLASSIFICATIONS.  Certain amounts reported for the years ended August 31,
1999 and 1998, have been reclassified to conform to the 2000 presentation,
having no effect on net income.

NOTE 3.  ACQUISITIONS

     In September 1997, the Company acquired the assets and related business
operations of the College for Financial Planning and related divisions that
include the Institute for Wealth Management, the Institute for Retirement
Planning, the American Institute for Retirement Planners, Inc., and the
Institute for Tax Studies. The adjusted purchase price consisted of $19.4
million in cash, $15.9 million in stock, and the assumption of approximately
$11.4 million in liabilities. The excess of cost over the value of tangible
assets of $40.0 million is being amortized over 35 years.

     The acquisition was accounted for under the purchase method and,
accordingly, the results of operations related to this new subsidiary have been
included with those of the Company for periods subsequent to the date of the
acquisition. Results of operations for the College for Financial Planning prior
to the acquisition were not material in relation to the Company's operations as
a whole.

NOTE 4.  BALANCE SHEET COMPONENTS

     Marketable securities consist of the following, in thousands:



                                                   AUGUST 31, 2000              AUGUST 31, 1999
                                              -------------------------    -------------------------
                                               ESTIMATED      AMORTIZED     ESTIMATED      AMORTIZED
TYPE                                          MARKET VALUE      COST       MARKET VALUE      COST
- ----                                          ------------    ---------    ------------    ---------
                                                                               
CLASSIFIED AS CURRENT:
Municipal bonds.............................    $35,870        $35,880       $22,507        $22,497
U.S. treasury obligations...................        299            298
U.S. agency obligations.....................     18,091         18,098         7,863          7,881
Auction rate preferred stock................      3,950          3,950
Commercial paper............................                                     684            686
                                                -------        -------       -------        -------
Total current marketable securities.........     58,210         58,226        31,054         31,064
                                                -------        -------       -------        -------
Classified as noncurrent:
Municipal bonds due in 1-2 years............      5,528          5,518         8,232          8,259
U.S. agency obligations.....................        502            502           246            248
                                                -------        -------       -------        -------
Total noncurrent marketable securities......      6,030          6,020         8,478          8,507
                                                -------        -------       -------        -------
          Total marketable securities.......    $64,240        $64,246       $39,532        $39,571
                                                =======        =======       =======        =======


                                       17
   18
                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Receivables consist of the following, in thousands:



                                                                  AUGUST 31,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
                                                                   
Trade receivables...........................................  $84,093    $84,743
Interest receivable.........................................      870        533
Income tax refunds receivable...............................    1,850         32
                                                              -------    -------
                                                               86,813     85,308
Less allowance for doubtful accounts........................   (7,880)    (9,644)
                                                              -------    -------
          Total receivables, net............................  $78,933    $75,664
                                                              =======    =======


     Bad debt expense was $7.8 million, $6.9 million, and $5.5 million for 2000,
1999, and 1998, respectively. Write-offs, net of recoveries, were $9.5 million,
$3.9 million, and $3.4 million for 2000, 1999, and 1998, respectively.

     Property and equipment consist of the following, in thousands:



                                                                   AUGUST 31,
                                                              --------------------
                                                                2000        1999
                                                              --------    --------
                                                                    
Furniture and equipment.....................................  $101,752    $ 82,041
Software....................................................    23,290      19,394
Leasehold improvements......................................    25,141      16,549
Land and buildings..........................................        99         350
                                                              --------    --------
                                                               150,282     118,334
Less accumulated depreciation and amortization..............   (62,449)    (40,830)
                                                              --------    --------
          Property and equipment, net.......................  $ 87,833    $ 77,504
                                                              ========    ========


     Depreciation and amortization expense was $24.2 million, $16.5 million, and
$9.9 million for 2000, 1999, and 1998, respectively.

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



                                                                  AUGUST 31,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
                                                                   
Cost in excess of fair value of assets purchased............  $42,831    $42,831
Less accumulated amortization...............................   (4,283)    (2,914)
                                                              -------    -------
          Total cost in excess, net.........................  $38,548    $39,917
                                                              =======    =======


     Total amortization expense was $1.4 million, $1.5 million, and $1.2 million
in 2000, 1999, and 1998, respectively.

     Accrued liabilities consist of the following, in thousands:



                                                                  AUGUST 31,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
                                                                   
Salaries, wages, and benefits...............................  $13,415    $ 9,355
Other accrued liabilities...................................    8,882      4,985
                                                              -------    -------
          Total accrued liabilities.........................  $22,297    $14,340
                                                              =======    =======


                                       18
   19
                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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



                                                                  AUGUST 31,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
                                                                   
Student deposits............................................  $52,003    $44,260
Current portion of deferred tuition revenue.................   40,420     35,399
Other deferred revenue......................................    2,594      1,848
                                                              -------    -------
          Total student deposits and current portion of
            deferred revenue................................  $95,017    $81,507
                                                              =======    =======


NOTE 5.  INVESTMENT IN IDL

     In August 1998, the Company together with Hughes Network Systems and Hermes
Onetouch LLC ("Hermes") formed Interactive Distance Learning, Inc. ("IDL"), a
new corporation, to acquire One Touch Systems, a leading provider of interactive
distance learning solutions. The Company contributed $10.8 million and provided
a $1.2 million letter of credit which was paid in October 1999, in exchange for
a 19% interest in the newly formed corporation. This investment is accounted for
under the cost method of accounting. Hermes is wholly-owned by the Company's
Chairman and a Senior Vice President. It was not practical to estimate the fair
value of the Company's investment in IDL as IDL is a private Company.

NOTE 6.  SHORT-TERM BORROWINGS

     At August 31, 2000, 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. At August 31, 2000,
availability under the line of credit was reduced by outstanding letters of
credit of $5.9 million. Any amounts borrowed under the line are payable upon its
termination in February 2002. The Company's line of credit agreement prohibits
the Company from paying cash dividends or making other cash distributions
without the lender's consent.

NOTE 7.  LONG-TERM LIABILITIES

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



                                                                 AUGUST 31,
                                                              -----------------
                                                               2000       1999
                                                              -------    ------
                                                                   
Deferred compensation and note agreements discounted at 7.5%
  to 12%....................................................  $ 1,116    $1,350
Deferred rent...............................................    3,318     1,900
Department of Education settlement..........................    4,500
Other long-term liabilities.................................    1,489     1,272
                                                              -------    ------
     Total long-term liabilities............................   10,423     4,522
     Less current portion...................................     (450)     (300)
                                                              -------    ------
          Total long-term liabilities, net..................  $ 9,973    $4,222
                                                              =======    ======


     The undiscounted deferred compensation liability was $1.6 million at August
31, 2000 and 1999. The undiscounted note payable related to the WIU acquisition
was $300,000 and $400,000 at August 31, 2000 and 1999, respectively. The
discount rates for these agreements were determined at the date of each
respective agreement based on the estimated long-term rate of return on
high-quality fixed income investments with cash flows similar to the respective
agreements.

     The aggregate maturities of the long-term liabilities for each of the five
fiscal years subsequent to August 31, 2000, are as follows: 2001 -- $450;
2002 -- $568; 2003 -- $5,066; 2004 -- $597; 2005 -- $691.

                                       19
   20
                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8.  INCOME TAXES

     The related components of the income tax provision are as follows, in
thousands:



                                                            YEAR ENDED AUGUST 31,
                                                        -----------------------------
                                                         2000       1999       1998
                                                        -------    -------    -------
                                                                     
Current:
  Federal.............................................  $42,312    $32,304    $26,546
  State and other.....................................    8,572      7,178      6,028
                                                        -------    -------    -------
Total current.........................................   50,884     39,482     32,574
                                                        -------    -------    -------
Deferred:
  Federal.............................................   (1,537)      (361)    (2,004)
  State and other.....................................     (233)      (144)      (595)
                                                        -------    -------    -------
Total deferred........................................   (1,770)      (505)    (2,599)
                                                        -------    -------    -------
          Total provision for income taxes............  $49,114    $38,977    $29,975
                                                        =======    =======    =======


     The income tax provision differs from the tax that would result from
application of the statutory U.S. federal income tax rate as follows:



                                                               YEAR ENDED AUGUST 31,
                                                              -----------------------
                                                              2000     1999     1998
                                                              -----    -----    -----
                                                                       
Statutory U.S. federal income tax rate......................  35.0%    35.0%    35.0%
State income taxes, net of federal benefit..................   5.5      5.2      5.1
Other, net..................................................   0.3     (0.4)    (0.8)
                                                              ----     ----     ----
Effective income tax rate...................................  40.8%    39.8%    39.3%
                                                              ====     ====     ====


     Deferred tax assets and liabilities consist of the following, in thousands:



                                                                 AUGUST 31,
                                                              -----------------
                                                               2000       1999
                                                              -------    ------
                                                                   
GROSS DEFERRED TAX ASSETS:
Allowance for doubtful accounts.............................  $ 4,038    $4,502
Deferred tuition revenue....................................    2,068     1,299
Department of Education settlement..........................    1,924
Other.......................................................    3,477     3,124
                                                              -------    ------
          Total gross deferred tax assets...................   11,507     8,925
                                                              -------    ------
GROSS DEFERRED TAX LIABILITIES:
Depreciation and amortization of property and equipment.....    2,312     2,286
Amortization of cost in excess of fair value of assets
  purchased.................................................    1,900     1,289
Other.......................................................      253        78
                                                              -------    ------
          Total gross deferred tax liabilities..............    4,465     3,653
                                                              -------    ------
          Net deferred tax assets...........................  $ 7,042    $5,272
                                                              =======    ======


                                       20
   21
                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Net deferred tax assets are reflected in the accompanying balance sheet as
follows, in thousands:



                                                                  AUGUST 31,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
                                                                   
Current deferred tax assets, net............................  $ 8,267    $ 7,346
Noncurrent deferred tax liabilities, net....................   (1,225)    (2,074)
                                                              -------    -------
          Net deferred tax assets...........................  $ 7,042    $ 5,272
                                                              =======    =======


     In light of the Company's history of profitable operations, management has
concluded that it is more likely than not that the Company will ultimately
realize the full benefit of its deferred tax assets related to future deductible
items. Accordingly, the Company believes that a valuation allowance is not
required for its net deferred tax assets.

NOTE 9.  COMMON STOCK

     The Company's Board of Directors authorized a program allocating up to $150
million in Company funds to repurchase shares of Apollo Education Group Class A
common stock. As of August 31, 2000, the Company had repurchased approximately
4,379,000 shares at a total cost of approximately $103.2 million.

NOTE 10.  EARNINGS PER SHARE

     A reconciliation of the basic and diluted per share computations for 2000,
1999, and 1998 are as follows:



                                                            FOR THE YEAR ENDED AUGUST 31,
                               ---------------------------------------------------------------------------------------
                                          2000                          1999                          1998
                               ---------------------------   ---------------------------   ---------------------------
                                         WEIGHTED    PER               WEIGHTED    PER               WEIGHTED    PER
                                         AVERAGE    SHARE              AVERAGE    SHARE              AVERAGE    SHARE
                               INCOME     SHARES    AMOUNT   INCOME     SHARES    AMOUNT   INCOME     SHARES    AMOUNT
                               -------   --------   ------   -------   --------   ------   -------   --------   ------
                                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                                     
Basic net income per share...  $71,191    75,783    $0.94    $59,005    77,683    $0.76    $46,297    77,245    $0.60
EFFECT OF DILUTIVE
  SECURITIES:
  Stock options..............                846                         1,151                         1,841
                               -------    ------    -----    -------    ------    -----    -------    ------    -----
Diluted net income per
  share......................  $71,191    76,629    $0.93    $59,005    78,834    $0.75    $46,297    79,086    $0.59
                               =======    ======    =====    =======    ======    =====    =======    ======    =====


NOTE 11.  SEGMENT INFORMATION

     The Company's operations are aggregated into a single reportable 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.

NOTE 12.  EMPLOYEE AND DIRECTOR BENEFIT PLANS

     The Company provides various health, welfare, and disability benefits to
its full-time, salaried employees which are funded primarily by Company
contributions. The Company does not provide post-employment or post-retirement
health care and life insurance benefits to its employees.

     401(K) PLAN.  The Company sponsors a 401(k) plan which is available to all
employees who have completed one year and at least 1,000 hours of continuous
service. The Company matches 100% of the contributions from the first $10,000 of
a participant's annual pre-tax earnings. Contributions from the participant's
earnings in excess of $10,000 are matched by the Company at 18.5%. Participant
contributions

                                       21
   22
                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

are subject to certain restrictions as set forth in the Internal Revenue Code.
The Company's matching contributions totaled $2.3 million, $2.2 million, and
$1.8 million for 2000, 1999, and 1998, respectively.

     STOCK-BASED COMPENSATION PLANS.  The Company has four stock-based
compensation plans: the Apollo Group, Inc., Amended and Restated Director Stock
Plan ("Director Stock Plan"), the Apollo Group, Inc., Long-Term Incentive Plan
("LTIP"), the Apollo Group, Inc., 2000 Incentive Plan ("2000 Incentive Plan"),
and the Apollo Group, Inc., Amended and Restated 1994 Employee Stock Purchase
Plan ("Purchase Plan").

     The Director Stock Plan currently provides for an annual grant to the
Company's non-employee directors of options to purchase shares of the Company's
Apollo Education Group Class A common stock on September 1 of each year through
2003. Under the LTIP, the Company may grant options, incentive stock options,
stock appreciation rights, and other stock-based awards in the Company's Apollo
Education Group Class A common stock to certain officers, key employees, or
directors of the Company. Many of the options granted under the LTIP vest 25%
per year starting at the end of the year 2002. The vesting may be accelerated
for individual employees if the stock price reaches defined goals for at least
three trading days, and if certain profit goals, defined for groups of
individuals, are also achieved. Under the 2000 Incentive Plan, the Company may
grant options, incentive stock options, stock appreciation rights, and other
stock-based awards in the Company's Apollo Education Group Class A common stock
and shares of the Company's University of Phoenix Online common stock to certain
officers, key employees, or directors of the Company. The Purchase Plan allows
employees of the Company to purchase shares of the Company's Apollo Education
Group Class A common stock and University of Phoenix Online common stock at
quarterly intervals through periodic payroll deductions. The purchase price per
share, in general, is 85% of the lower of 1) the fair market value (as defined
in the Purchase Plan) on the enrollment date into the respective quarterly
offering period or 2) the fair market value on the purchase date.

     The Company applies APB 25 and related interpretations in accounting for
its stock-based compensation, and has adopted the disclosure-only provisions of
SFAS 123. Accordingly, no compensation cost has been recognized for these plans.
Had compensation cost for the plans been determined based on the fair value at
the grant date consistent with SFAS 123, the Company's net income, income per
share, and weighted average shares outstanding would have been as follows, in
thousands, except per share amounts:



                                                            YEAR ENDED AUGUST 31,
                                                        -----------------------------
                                                         2000       1999       1998
                                                        -------    -------    -------
                                                                     
PRO FORMA:
  Net income..........................................  $66,484    $55,395    $43,986
  Diluted income per share............................  $  0.88    $  0.71    $  0.55
  Diluted weighted average shares outstanding.........   75,783     77,634     79,889
AS REPORTED:
  Net income..........................................  $71,191    $59,005    $46,297
  Diluted income per share............................  $  0.93    $  0.75    $  0.59
  Diluted weighted average shares outstanding.........   76,629     78,834     79,086


     The effects of applying SFAS 123 in the above pro forma disclosures are not
necessarily indicative of future amounts. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes method with the following
weighted-average assumptions for grants in 2000, 1999, and 1998, respectively:
(1) dividend yield of 0.00% in all years; (2) expected volatility of 74.0%,
73.0%, and 40.0%; (3) risk-free interest rates of 6.5%, 4.5%, and 5.9%, and (4)
expected lives of 5.0, 7.5, and 5.4 years.

                                       22
   23
                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the activity related to stock options to purchase Apollo
Education Group Class A common stock granted under the Director Stock Plan, the
LTIP, and the 2000 Incentive Plan is as follows, in thousands, except per share
amounts:



                                                                           WEIGHTED
                                                                           AVERAGE
                                                                        EXERCISE PRICE
                                                              SHARES      PER SHARE
                                                              ------    --------------
                                                                  
OUTSTANDING AT AUGUST 31, 1997..............................   4,247       $ 6.453
  Granted...................................................     370        26.101
  Exercised.................................................    (694)        5.100
  Canceled..................................................     (42)       13.650
                                                              ------
OUTSTANDING AT AUGUST 31, 1998..............................   3,881         8.492
  Granted...................................................   1,171        25.981
  Exercised.................................................  (1,233)        4.426
  Canceled..................................................    (384)       10.324
                                                              ------
OUTSTANDING AT AUGUST 31, 1999..............................   3,435        15.709
  Granted...................................................     957        20.865
  Exercised.................................................    (686)        9.913
  Canceled..................................................    (143)       23.858
                                                              ------
Outstanding at August 31, 2000..............................   3,563        17.857
                                                              ======
Exercisable at August 31, 2000..............................   1,802
                                                              ======
Available for issuance at August 31, 2000...................   5,677
                                                              ======


     Stock options to purchase University of Phoenix Online common stock have
not been granted under the Director Stock Plan or the 2000 Incentive Plan as of
August 31, 2000. At August 31, 2000, there were options on 9,100,000 shares of
University of Phoenix Online common stock available for issuance.

     The following table summarizes information about the stock options to
purchase Apollo Education Group Class A common stock at August 31, 2000:



                                         OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                           -----------------------------------------------    --------------------------------
                                             CONTRACTUAL    WEIGHTED AVG.                       WEIGHTED AVG.
                               NUMBER           YEARS       EXERCISE PRICE        NUMBER        EXERCISE PRICE
RANGE OF EXERCISE PRICES    OUTSTANDING       REMAINING       PER SHARE        EXERCISABLE        PER SHARE
- ------------------------   --------------    -----------    --------------    --------------    --------------
                           (IN THOUSANDS)                                     (IN THOUSANDS)
                                                                                 
$ 1.630 to $ 5.975.......         96            4.50           $ 3.011               96            $ 3.011
$ 7.532 to $ 7.532.......      1,133            5.06           $ 7.532              921            $ 7.532
$17.000 to $23.792.......        974            8.58           $19.268              451            $19.592
$25.625 to $39.734.......      1,360            8.02           $26.488              334            $27.837
                               -----                                              -----
$ 1.630 to $39.734.......      3,563            7.14           $17.857            1,802            $14.079
                               =====                                              =====


                                       23
   24
                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 13.  COMMITMENTS AND CONTINGENCIES

     The Company is obligated under facility and equipment leases that are
classified as operating leases. Following is a schedule of future minimum lease
commitments as of August 31, 2000, in thousands:



                                                                  OPERATING LEASES
                                                              -------------------------
                                                                            EQUIPMENT &
                                                              FACILITIES       OTHER
                                                              ----------    -----------
                                                                      
2001........................................................   $ 53,368       $1,663
2002........................................................     53,827          488
2003........................................................     52,064           30
2004........................................................     42,411
2005........................................................     36,548
Thereafter..................................................     64,315
                                                               --------       ------
                                                               $302,533       $2,181
                                                               ========       ======


     Facility and equipment rent expense totaled $58.8 million, $44.8 million,
and $32.1 million for 2000, 1999, and 1998, respectively.

     In January 1998, the U.S. Department of Education Office of the Inspector
General ("OIG") began performing an audit of University of Phoenix's
administration of the Title IV Programs. The team previously presented questions
regarding our interpretation of the "12-hour rule," distance education programs,
and institutional refund obligations. We reached an agreement with the U.S.
Department of Education. The agreement acknowledges no admission that there were
any issues of non-compliance or errors by us. To bring this audit to closure and
settle all outstanding issues prior to the final OIG audit report, which was
issued on March 31, 2000, we agreed to modify University of Phoenix's learning
team attendance log to track the sites of learning team meetings and record the
hours attended. We do not expect this modification to have a negative impact on
either University of Phoenix or its students. Part of the agreement, dated March
27, 2000, reached with the U.S. Department of Education requires that we pay the
U.S. Department of Education $6.0 million as a negotiated settlement in full
satisfaction of all monetary findings arising under the final OIG audit report.
This amount was reflected in instructional costs and services in our third
quarter 2000 results. $1.5 million of this amount was paid in 2000 with the
remaining $4.5 million due in 2003.

     The OIG is currently auditing 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. To date, OIG has not issued any draft reports. Although the
Company believes that the OIG audits will be resolved 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 since the matters are not yet
resolved. Liability to the Company, if any, from the final audit results will be
recorded as an expense.

     The Company is involved in various legal proceedings occurring in the
normal course of business. The Company believes that the disposition of these
cases will not have a material adverse impact on the financial position or
results of operations of the Company.

NOTE 14.  CONSOLIDATING STATEMENT OF OPERATIONS DATA

     The following schedules present statement of operations data of 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.

                                       24
   25
                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The information presented below for Apollo Education Group excludes its
retained interest in University of Phoenix Online, which was 100% for the
periods presented. This retained interest will decline to reflect issuances of
University of Phoenix Online common stock and may be further adjusted to reflect
other events.

     Since its inception, the Company has financed University of Phoenix
Online's operations internally and has not incurred any related third-party
debt. University of Phoenix Online does not maintain a bank account; rather all
of its cash receipts and disbursements are processed by the Company on
University of Phoenix Online's behalf. Currently, all amounts are 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 generates cash from operations, that cash is deemed to be
transferred to Apollo Education Group and is accounted for as a return of
capital. Whenever University of Phoenix Online has a cash need, that cash is
deemed to be transferred from Apollo Education Group and is accounted for as a
capital contribution. As a result of this policy, the accompanying consolidating
statement of operations data do not reflect any inter-group interest income or
expense.

     The difference between the net proceeds of the University of Phoenix Online
common stock offering and outlays attributable to University of Phoenix Online
following the offering has been accounted for as a revolving credit allowance
from University of Phoenix Online to Apollo Education Group 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. Any other cash transfers accounted for as revolving credit advances
will not bear interest unless the Board of Directors determines otherwise. As a
result of this change in policy, the consolidating statement of operations data
for periods subsequent to the offering may reflect inter-group interest income
and expense. Accordingly, operating results for Apollo Education Group and
University of Phoenix Online for periods subsequent to this offering may not be
comparable to such operating results prior to this offering.

                                       25
   26

                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


                                        YEAR ENDED AUGUST 31, 2000
                             ------------------------------------------------
                              APOLLO     UNIVERSITY                   APOLLO
                             EDUCATION   OF PHOENIX                   GROUP,
                               GROUP       ONLINE     ELIMINATIONS     INC.
                             ---------   ----------   ------------   --------
                                              (IN THOUSANDS)
                                                         
REVENUES:
Tuition and other,
  net(1)...................  $507,384     $102,613      $    --      $609,997
Inter-group license fee
  revenue(2)...............     4,104                    (4,104)
                             --------     --------      -------      --------
                              511,488      102,613       (4,104)      609,997
                             ========     ========      =======      ========
COSTS AND EXPENSES:
INSTRUCTIONAL COSTS AND
  SERVICES
  External expenses(3).....   316,429       36,445                    352,874
  Inter-group allocated
     expenses(4)...........    (9,265)       9,265                         --
  Inter-group license fee
     expense(2)............                  4,104       (4,104)           --
SELLING AND PROMOTIONAL
  External expenses(3).....    80,995       15,496                     96,491
  Inter-group allocated
     expenses(4)...........      (772)         772                         --
GENERAL AND ADMINISTRATIVE
  External expenses(3).....    46,555                                  46,555
  Inter-group allocated
     expenses(4)...........    (7,248)       7,248                         --
                             --------     --------      -------      --------
                              426,694       73,330       (4,104)      495,920
                             --------     --------      -------      --------
Income from operations.....    84,794       29,283                    114,077
Interest income, net.......     6,228                                   6,228
                             --------     --------      -------      --------
Income before income
  taxes....................    91,022       29,283                    120,305
Provision for income
  taxes(5).................    37,313       11,801                     49,114
                             --------     --------      -------      --------
Net income.................  $ 53,709     $ 17,482      $    --      $ 71,191
                             ========     ========      =======      ========


                                        YEAR ENDED AUGUST 31, 1999
                             ------------------------------------------------
                              APOLLO     UNIVERSITY                   APOLLO
                             EDUCATION   OF PHOENIX                   GROUP,
                               GROUP       ONLINE     ELIMINATIONS     INC.
                             ---------   ----------   ------------   --------
                                              (IN THOUSANDS)
                                                         
REVENUES:
Tuition and other,
  net(1)...................  $429,264     $69,582       $    --      $498,846
Inter-group license fee
  revenue(2)...............     2,783                    (2,783)           --
                             --------     -------       -------      --------
                              432,047      69,582        (2,783)      498,846
                             ========     =======       =======      ========
COSTS AND EXPENSES:
INSTRUCTIONAL COSTS AND
  SERVICES
  External expenses(3).....   255,778      31,804                     287,582
  Inter-group allocated
     expenses(4)...........    (4,995)      4,995                          --
  Inter-group license fee
     expense(2)............                 2,783        (2,783)           --
SELLING AND PROMOTIONAL
  External expenses(3).....    67,828      11,315                      79,143
  Inter-group allocated
     expenses(4)...........      (201)        201                          --
GENERAL AND ADMINISTRATIVE
  External expenses(3).....    39,368                                  39,368
  Inter-group allocated
     expenses(4)...........    (5,352)      5,352                          --
                             --------     -------       -------      --------
                              352,426      56,450        (2,783)      406,093
                             --------     -------       -------      --------
Income from operations.....    79,621      13,132                      92,753
Interest income, net.......     5,229                                   5,229
                             --------     -------       -------      --------
Income before income
  taxes....................    84,850      13,132                      97,982
Provision for income
  taxes(5).................    33,654       5,323                      38,977
                             --------     -------       -------      --------
Net income.................  $ 51,196     $ 7,809       $    --      $ 59,005
                             ========     =======       =======      ========


                                        YEAR ENDED AUGUST 31, 1998
                             ------------------------------------------------
                              APOLLO     UNIVERSITY                   APOLLO
                             EDUCATION   OF PHOENIX                   GROUP,
                               GROUP       ONLINE     ELIMINATIONS     INC.
                             ---------   ----------   ------------   --------
                                              (IN THOUSANDS)
                                                         
REVENUES:
Tuition and other,
  net(1)...................  $339,796     $45,081       $    --      $384,877
Inter-group license fee
  revenue(2)...............     1,803                    (1,803)           --
                             --------     -------       -------      --------
                              341,599      45,081        (1,803)      384,877
                             ========     =======       =======      ========
COSTS AND EXPENSES:
INSTRUCTIONAL COSTS AND
  SERVICES
  External expenses(3).....   203,108      20,417                     223,525
  Inter-group allocated
     expenses(4)...........    (3,223)      3,223                          --
  Inter-group license fee
     expense(2)............                 1,803        (1,803)           --
SELLING AND PROMOTIONAL
  External expenses(3).....    49,707       7,751                      57,458
  Inter-group allocated
     expenses(4)...........      (166)        166                          --
GENERAL AND ADMINISTRATIVE
  External expenses(3).....    33,708                                  33,708
  Inter-group allocated
     expenses(4)...........    (3,960)      3,960                          --
                             --------     -------       -------      --------
                              279,174      37,320        (1,803)      314,691
                             --------     -------       -------      --------
Income from operations.....    62,425       7,761                      70,186
Interest income, net.......     6,086                                   6,086
                             --------     -------       -------      --------
Income before income
  taxes....................    68,511       7,761                      76,272
Provision for income
  taxes(5).................    26,824       3,151                      29,975
                             --------     -------       -------      --------
Net income.................  $ 41,687     $ 4,610       $    --      $ 46,297
                             ========     =======       =======      ========


                                       26
   27

                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(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 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 $4.1 million, $2.8
    million, and $1.8 million for the years ended August 31, 2000, 1999, and
    1998, 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.

    The related license policy was not in place prior to March 24, 2000;
    however, in order to prepare financial statements that include the charges
    and benefits of the types provided for under this policy, the accompanying
    consolidating statement of operations data reflect charges and benefits that
    would have applied if this policy had been in effect during the periods
    presented. Although it has no present intention to do so, Apollo Group,
    Inc.'s Board of Directors may at any time in its sole discretion modify,
    rescind, or supplement this policy.

(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 the University of Phoenix,
    Inc. 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 the
    University of Phoenix, Inc. The allocation of such expenses to University of
    Phoenix Online was as follows:



                                                    YEAR ENDED AUGUST 31,
                                                 ----------------------------
                                                  2000       1999       1998
                                                 -------    -------    ------
                                                              
Instructional costs and services...............  $ 9,265    $ 4,995    $3,223
Selling and promotional........................      772        201       166
General and administrative.....................    7,248      5,352     3,960
                                                 -------    -------    ------
                                                 $17,285    $10,548    $7,349
                                                 =======    =======    ======


    The related corporate expense allocation policy was not in place prior to
    March 24, 2000; however, in order to prepare financial statements that
    include the charges and benefits of the types provided for under this
    policy, the accompanying consolidating statement of operations data reflect
    charges and benefits that would have applied if this policy had been in
    effect during the periods presented. Although it has no present intention to
    do so, Apollo Group, Inc.'s Board of Directors may at any time in its sole
    discretion modify, rescind, or supplement this policy.

(5) University of Phoenix Online's results, along with other divisions of the
    University of Phoenix, Inc., 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.

                                       27
   28
                      APOLLO GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following table sets forth selected unaudited quarterly financial
information for each of the Company's last eight quarters.



                                              2000                                        1999
                            -----------------------------------------   -----------------------------------------
                            AUG. 31,   MAY 31,    FEB. 29,   NOV. 30,   AUG. 31,   MAY 31,    FEB. 28,   NOV. 30,
                              2000       2000       2000       1999       1999       1999       1999       1998
                            --------   --------   --------   --------   --------   --------   --------   --------
                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                                 
REVENUES:
  Tuition and other,
    net...................  $165,008   $167,591   $133,980   $143,418   $135,685   $138,107   $109,356   $115,698
                            --------   --------   --------   --------   --------   --------   --------   --------
COSTS AND EXPENSES:
  Instructional costs and
    services(1)...........    90,792     97,499     81,849     82,734     78,271     77,332     65,298     66,681
  Selling and
    promotional...........    27,944     23,695     22,293     22,559     20,585     20,465     19,253     18,840
  General and
    administrative........    12,403     11,828     10,828     11,496     11,150      9,922      9,092      9,204
                            --------   --------   --------   --------   --------   --------   --------   --------
                             131,139    133,022    114,970    116,789    110,006    107,719     93,643     94,725
                            --------   --------   --------   --------   --------   --------   --------   --------
Income from operations....    33,869     34,569     19,010     26,629     25,679     30,388     15,713     20,973
Interest income, net......     2,042      1,590      1,279      1,317      1,290      1,352      1,275      1,312
                            --------   --------   --------   --------   --------   --------   --------   --------
Income before income
  taxes...................    35,911     36,159     20,289     27,946     26,969     31,740     16,988     22,285
Provision for income
  taxes...................    14,603     15,016      8,376     11,119     10,617     12,780      6,833      8,747
                            --------   --------   --------   --------   --------   --------   --------   --------
Net income................  $ 21,308   $ 21,143   $ 11,913   $ 16,827   $ 16,352   $ 18,960   $ 10,155   $ 13,538
                            ========   ========   ========   ========   ========   ========   ========   ========
Diluted net income per
  share...................  $   0.28   $   0.28   $   0.16   $   0.22   $   0.21   $   0.24   $   0.13   $   0.17
                            ========   ========   ========   ========   ========   ========   ========   ========
Diluted weighted average
  shares outstanding......    76,418     76,126     76,478     77,495     78,068     78,914     79,195     79,159
                            ========   ========   ========   ========   ========   ========   ========   ========


- ---------------
(1) Includes the $6.0 million charge (3.6% of tuition and other net revenues)
    related to the U.S. Department of Education agreement in the May 31, 2000
    quarter.

                                       28
   29

         SELECTED FINANCIAL INFORMATION OF UNIVERSITY OF PHOENIX ONLINE

     The following selected financial and operating data are qualified by
reference to and should be read in conjunction with the financial statements of
University of Phoenix Online and the related notes, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of University of
Phoenix Online." The statement of operations data for the years ended August 31,
2000, 1999, and 1998 and the balance sheet data as of August 31, 2000 and 1999
are derived from University of Phoenix Online's audited financial statements.



                                                               YEAR ENDED AUGUST 31,
                                                     -----------------------------------------
                                                       2000       1999       1998       1997
                                                     --------    -------    -------    -------
                                                                  (IN THOUSANDS)
                                                                           
STATEMENT OF OPERATIONS DATA:
REVENUES:
  Tuition and other, net...........................  $102,613    $69,582    $45,081    $28,550
                                                     --------    -------    -------    -------
COSTS AND EXPENSES:
  Instructional costs and services.................    49,814     39,582     25,443     17,679
  Selling and promotional..........................    16,268     11,516      7,917      6,102
  General and administrative.......................     7,248      5,352      3,960      2,149
                                                     --------    -------    -------    -------
                                                       73,330     56,450     37,320     25,930
                                                     --------    -------    -------    -------
Income from operations.............................    29,283     13,132      7,761      2,620
Provision for income taxes.........................    11,801      5,323      3,151      1,078
                                                     --------    -------    -------    -------
Net income.........................................  $ 17,482    $ 7,809    $ 4,610    $ 1,542
                                                     ========    =======    =======    =======




                                                                       AUGUST 31,
                                                              -----------------------------
                                                               2000       1999       1998
                                                              -------    -------    -------
                                                                     (IN THOUSANDS)
                                                                           
BALANCE SHEET DATA:
Total assets................................................  $21,962    $14,871    $ 8,516
                                                              =======    =======    =======
Current liabilities.........................................  $15,991    $11,789    $ 9,613
Long-term liabilities.......................................      123         --         42
Divisional net worth........................................    5,848      3,082     (1,139)
                                                              -------    -------    -------
Total liabilities and divisional net worth..................  $21,962    $14,871    $ 8,516
                                                              =======    =======    =======


                                       29
   30

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS OF UNIVERSITY OF PHOENIX ONLINE

     As mentioned under "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Apollo Group Inc.," the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations of University of Phoenix Online contains forward-looking statements
relating to future plans, expectations, events, or performance that involve
risks and uncertainties. Actual results of operations could differ materially
from those anticipated in these forward-looking statements as a result of
various factors.

BACKGROUND AND OVERVIEW

     University of Phoenix Online is a provider of accessible, accredited
educational programs for working adults. It began operations in 1989 by
modifying courses developed by University of Phoenix's physical campuses for
delivery via modem to students worldwide. Today, students can log on to their
online classes via the Internet 24 hours a day, 7 days a week wherever there is
Internet accessibility using basic technology such as a Pentium-class personal
computer, a 28.8K modem, and an Internet service provider, thereby enhancing the
accessibility of and the potential market for its programs. University of
Phoenix Online currently offers 10 accredited degree programs in business,
education, information technology, and nursing. As of August 31, 2000,
University of Phoenix Online had approximately 16,000 degree students and
approximately 1,300 faculty members.

     In order to track the economic performance of University of Phoenix Online,
we have separated University of Phoenix Online, our online division, from Apollo
Education Group, which includes the rest of our businesses. University of
Phoenix Online common stock is intended to track the economic performance of
University of Phoenix Online.

     University of Phoenix Online has relied upon us to finance its operations
since inception. Therefore, University of Phoenix Online's financial position,
results of operations, and cash flows to date are not necessarily indicative of
the financial position, results of operations, and cash flows that would have
resulted had University of Phoenix Online been operating as an independent
company.

     The provision of services and other matters between University of Phoenix
Online and Apollo Education Group, including the right to use our curriculum,
trademarks, and copyrights, will be governed by corporate expense, license, and
income tax allocation policies, which are described below. These arrangements
were not in place prior to March 24, 2000. However, in order to prepare
financial statements that include charges and benefits of the types provided for
under these arrangements, the financial statements for University of Phoenix
Online reflect charges and benefits that would have applied if these inter-group
arrangements had been in effect during the periods presented.

     Although we have no present intention to do so, our Board of Directors may
rescind, modify, or add to any of these policies. While management believes that
these allocation methods are reasonable, the allocated expenses are not
necessarily indicative of, and it is not practicable for us to estimate, the
levels of expenses that would have been incurred if University of Phoenix Online
had been operating as an independent company.

     CORPORATE EXPENSES.  In order to prepare the financial statements for
University of Phoenix Online, certain costs incurred by us and University of
Phoenix, including legal, accounting, corporate office and centralized student
services costs, were allocated to University of Phoenix Online on the basis of
its revenues in relation to those of us and University of Phoenix. Management
believes the allocation methodology is fair to each group because allocations
based on revenue will not inflate or dilute the operating margin of one group in

                                       30
   31

favor of the other. The allocation of such expenses to University of Phoenix
Online was as follows, in thousands:



                                                            YEAR ENDED AUGUST 31,
                                                         ----------------------------
                                                          2000       1999       1998
                                                         -------    -------    ------
                                                                      
Instructional costs and services.......................  $ 9,265    $ 4,995    $3,223
Selling and promotional................................      772        201       166
General and administrative.............................    7,248      5,352     3,960
                                                         -------    -------    ------
                                                         $17,285    $10,548    $7,349
                                                         =======    =======    ======


     LICENSE FEE.  We charge University of Phoenix Online a license fee equal to
4% of University of Phoenix Online's net revenues for the use of our curriculum,
trademarks, and copyrights. The license fee, which is included in instructional
costs and services in University of Phoenix Online's statement of operations,
was $4.1 million, $2.8 million, and $1.8 million for the years ended August 31,
2000, 1999, and 1998, respectively.

     INCOME TAXES.  University of Phoenix Online's results, along with those of
University of Phoenix's other divisions, are included in our consolidated
federal income tax return. State taxes are paid based upon our apportioned
taxable income or loss, 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 University of Phoenix Online's
statement of operations has been calculated on a separate company basis. The
related current and deferred tax assets and liabilities are settled with
University of Phoenix at the end of each period through the divisional net worth
account.

     University of Phoenix Online's effective income tax rate differs from the
federal statutory tax rate primarily as a result of state income taxes.

     We intend, for so long as University of Phoenix Online common stock remains
outstanding, to include in our filings under the Securities Exchange Act of
1934, financial statements of University of Phoenix Online, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
University of Phoenix Online," as of the same dates and for the same periods as
our consolidated financial statements. These financial statements will be
prepared in accordance with accounting principles generally accepted in the
United States of America, and in the case of annual financial statements, will
be audited. These financial statements are not legally required under current
law or Securities and Exchange Commission regulations.

     Tuition and other revenues are shown net of discounts. University of
Phoenix Online's educational degree programs last up to four years. Students in
degree programs 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 revenue for each
course is recognized on a pro rata basis over the period of instruction.

     Instructional costs and services consist primarily of costs related to the
delivery and administration of educational programs and includes a license fee
equal to 4% of University of Phoenix Online's net revenues for the use of our
curriculum, trademarks, and copyrights. Instructional costs and services include
expenses directly attributable to University of Phoenix Online's operations,
such as faculty compensation, administrative salaries, facility leases and other
occupancy costs, bad debt expense, and depreciation and amortization of property
and equipment, and an allocation of expenses relating to centralized departments
that provide services directly to University of Phoenix Online's students. We
expect University of Phoenix Online's instructional costs and services to
increase as a result of increased student enrollments.

     Selling and promotional costs consist primarily of compensation for
enrollment advisors, advertising costs, production of marketing materials, and
other costs related to selling and promotional functions, and an allocation of
expenses relating to Apollo Education Group's centralized marketing functions.
University of Phoenix Online expects selling and promotional costs, both in
absolute dollars and as a percentage of tuition

                                       31
   32

and other net revenues, to increase significantly as it expands its marketing
efforts to increase enrollments and brand awareness.

     General and administrative costs consist of the allocation 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 University of Phoenix Online students.

RESULTS OF OPERATIONS

     The following table sets forth the statement of operations data of
University of Phoenix Online, expressed as a percentage of tuition and other net
revenues for the periods indicated:



                                                               YEAR ENDED AUGUST 31,
                                                              -----------------------
                                                              2000     1999     1998
                                                              -----    -----    -----
                                                                       
REVENUES:
  Tuition and other, net....................................  100.0%   100.0%   100.0%
                                                              -----    -----    -----
COSTS AND EXPENSES:
  Instructional costs and services..........................   48.5     56.9     56.4
  Selling and promotional...................................   15.9     16.5     17.6
  General and administrative................................    7.1      7.7      8.8
                                                              -----    -----    -----
                                                               71.5     81.1     82.8
                                                              -----    -----    -----
Income from operations......................................   28.5     18.9     17.2
Less provision for income taxes.............................   11.5      7.7      7.0
                                                              -----    -----    -----
Net income..................................................   17.0%    11.2%    10.2%
                                                              =====    =====    =====


     YEAR ENDED AUGUST 31, 2000, COMPARED WITH THE YEAR ENDED AUGUST 31, 1999

     Tuition and other net revenues increased by 47.5% to $102.6 million in 2000
from $69.6 million in 1999 due primarily to an increase in average full-time
equivalent degree student enrollments. Average full-time equivalent degree
student enrollments increased to approximately 9,500 in 2000 from approximately
7,000 in 1999.

     Instructional costs and services increased by 25.9% to $49.8 million in
2000 from $39.6 million in 1999 due primarily to the direct costs necessary to
support the increase in degree student enrollments and University of Phoenix
Online's allocation of $1.1 million of the $6.0 million charge related to the
U.S. Department of Education agreement. Direct costs consist primarily of
faculty compensation and related staff salaries. These costs as a percentage of
tuition and other net revenues decreased to 48.5% in 2000 from 56.9% in 1999 due
primarily to greater net revenues being spread over the fixed costs related to
centralized student services offset in part by the University of Phoenix
Online's allocation of $1.1 million of the $6.0 million charge related to the
U.S. Department of Education agreement. As University of Phoenix Online expands,
it may not be able to leverage its existing instructional costs and services to
the same extent.

     Selling and promotional expenses increased by 41.3% to $16.3 million in
2000 from $11.5 million in 1999 due primarily to an increase in enrollment
advisors and additional advertising and marketing. These expenses as a
percentage of tuition and other net revenues decreased to 15.9% in 2000 from
16.5% in 1999 due primarily to greater net revenues being spread over a
proportionately lower increase in selling and promotional expenses.

     General and administrative expenses increased by 35.4% to $7.2 million in
2000 from $5.4 million in 1999 due primarily to a higher revenue growth rate at
University of Phoenix Online in that period compared to Apollo Education Group
which resulted in a higher allocation of general and administrative expenses to
University of Phoenix Online. General and administrative expenses as a
percentage of tuition and other net revenues decreased to 7.1% in 2000 from 7.7%
in 1999 due primarily to greater net revenues being spread over a
proportionately lower increase in general and administrative expenses.

                                       32
   33

     The effective tax rate decreased to 40.3% in 2000 from 40.5% in 1999.

     Net income increased to $17.5 million in 2000 from $7.8 million in 1999,
due primarily to increased enrollments and improved utilization of instructional
costs and services, selling and promotional, and general and administrative
expenses.

     YEAR ENDED AUGUST 31, 1999, COMPARED WITH THE YEAR ENDED AUGUST 31, 1998

     Tuition and other net revenues increased by 54.3% to $69.6 million in 1999
from $45.1 million in 1998 due primarily to an increase in average full-time
equivalent degree student enrollments. Average full-time equivalent degree
student enrollments increased to approximately 7,000 in 1999 from approximately
4,800 in 1998.

     Instructional costs and services increased by 55.6% to $39.6 million in
1999 from $25.4 million in 1998 due primarily to the direct costs necessary to
support the increase in degree student enrollments. These costs as a percentage
of tuition and other net revenues increased to 56.9% in 1999 from 56.4% in 1998
due primarily to increased costs in anticipation of increases in degree student
enrollment.

     Selling and promotional expenses increased by 45.5% to $11.5 million in
1999 from $7.9 million in 1998 due primarily to an increase in enrollment
advisors and additional advertising and marketing. These expenses as a
percentage of tuition and other net revenues decreased to 16.5% in 1999 from
17.6% in 1998 due primarily to greater net revenues being spread over a
proportionately lower increase in selling and promotional expenses.

     General and administrative expenses increased by 35.2% to $5.4 million in
1999 from $4.0 million in 1998 due primarily to a higher revenue growth rate at
University of Phoenix Online in that period compared to Apollo Education Group
which resulted in a higher allocation of general and administrative expenses to
University of Phoenix Online. General and administrative expenses as a
percentage of tuition and other net revenues decreased to 7.7% in 1999 from 8.8%
in 1998 due primarily to greater net revenues being spread over a
proportionately lower increase in general and administrative expenses.

     The effective tax rate decreased to 40.5% in 1999 from 40.6% in 1998.

     Net income increased to $7.8 million in 1999 from $4.6 million in 1998.

QUARTERLY FLUCTUATIONS IN RESULTS OF OPERATIONS

     University of Phoenix Online may experience seasonality in its results of
operations primarily as a result of changes in the level of student enrollments.
While students are enrolled throughout the year, average enrollments and related
revenues may be lower in some quarters than others. Most expenses do not vary
directly with revenues and are difficult to adjust in the short term. As a
result, if revenues for a particular quarter are lower than another, operating
expenses may not be able to be proportionately reduced for that quarter.

LIQUIDITY AND CAPITAL RESOURCES

     University of Phoenix Online currently is able to provide for its own
capital expenditures and cash required for operations. University of Phoenix
Online does not maintain a bank account; rather, all of its cash receipts and
cash disbursements are processed by us on its behalf. Cash generated by Apollo
Education Group and University of Phoenix Online has been and will continue to
be managed centrally by us. University of Phoenix Online's liquidity could be
adversely affected by the investment decisions we make.

     Net cash provided by operating activities increased to $18.5 million in
2000 from $6.1 million in 1999. The increase resulted primarily from increased
net income, a smaller increase in accounts receivable, and an increase in
student deposits and deferred revenue. These increases were partially offset by
increased other assets. The smaller increase in accounts receivable was
primarily attributable to increased efficiency of financial aid processing in
2000.

                                       33
   34

     Capital expenditures increased to $3.7 million in 2000 from $2.6 million in
1999 due primarily to continued growth in operations. Total purchases of
property and equipment for the year ended August 31, 2001, are expected to range
from $4.0 to $6.0 million. These expenditures will primarily be related to
increases in normal recurring capital expenditures due to the overall increase
in students and employees resulting from the growth in the business.

     On March 24, 2000, the Board of Directors of Apollo Group, Inc. ("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 the University of Phoenix, Inc., a
wholly-owned subsidiary of Apollo. 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. This
stock represented a 10.8% interest in University of Phoenix Online with Apollo
Education Group retaining the remaining 89.2% interest in University of Phoenix
Online.

     We have allocated all of the net proceeds from the University of Phoenix
Online common stock offering to University of Phoenix Online. In addition,
although we have no obligation to provide funds to University of Phoenix Online
and the decision to do so is within the discretion of our Board of Directors, it
is our present intention to fund, if needed, the operations and cash flow needs
of University of Phoenix Online through fiscal 2001.

     In January 1998, the U.S. Department of Education Office of the Inspector
General ("OIG") began performing an audit of University of Phoenix's
administration of the Title IV Programs. The team previously presented questions
regarding University of Phoenix's interpretation of the "12-hour rule," distance
education programs, and institutional refund obligations. University of Phoenix
reached an agreement with the U.S. Department of Education which acknowledges no
admission that there were any issues of non-compliance or errors by University
of Phoenix. To bring this audit to closure and settle all outstanding issues
prior to the final OIG report, which was issued on March 31, 2000, University of
Phoenix agreed to modify its physical campus learning team attendance log to
track the sites of learning team meetings and record the hours attended. This
modification is not expected to have a negative impact on either University of
Phoenix or its students. This modification does not require any change to
University of Phoenix Online's learning team attendance log. Part of the
agreement, dated March 27, 2000, reached with the U.S. Department of Education
requires University of Phoenix to pay the U.S. Department of Education $6.0
million as a negotiated settlement in full satisfaction of all monetary findings
arising under the final OIG audit report. Approximately $1.1 million of this
amount was allocated to University of Phoenix Online during the third quarter of
the fiscal year ending August 31, 2000 in accordance with the corporate expense
allocation policy. This amount is reflected in University of Phoenix Online's
instructional costs and services.

                                       34
   35

                       REPORT OF INDEPENDENT ACCOUNTANTS

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

     In our opinion, the accompanying balance sheet and the related statements
of operations and of cash flows present fairly, in all material respects, the
financial position of University of Phoenix Online at August 31, 2000 and 1999,
and the results of its operations and its cash flows for each of the three years
in the period ended August 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of Apollo Group, Inc.'s management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     As described in Note 1, University of Phoenix Online is a division of the
University of Phoenix, Inc., a wholly-owned subsidiary of Apollo Group, Inc.
Accordingly, the financial statements of University of Phoenix Online should be
read in conjunction with the audited financial statements of Apollo Group, Inc.

PRICEWATERHOUSECOOPERS LLP
Phoenix, Arizona
September 29, 2000

                                       35
   36

                          UNIVERSITY OF PHOENIX ONLINE
                (A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
                A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)

                                 BALANCE SHEET
                                 (In thousands)



                                                                  AUGUST 31,
                                                              -------------------
                                                                2000       1999
                                                              --------    -------
                                                                    
ASSETS:
Current assets
  Receivables, net..........................................  $ 13,991    $11,133
  Other current assets......................................       482        147
                                                              --------    -------
Total current assets........................................    14,473     11,280
Property and equipment, net.................................     5,940      3,575
Other assets................................................     1,549         16
                                                              --------    -------
Total assets................................................  $ 21,962    $14,871
                                                              ========    =======
LIABILITIES AND DIVISIONAL NET WORTH:
Current liabilities
  Accounts payable..........................................  $    245    $   140
  Accrued liabilities.......................................     1,220      1,626
  Student deposits and deferred tuition revenue.............    14,526     10,023
                                                              --------    -------
Total current liabilities...................................    15,991     11,789
Long-term liabilities.......................................       123         --
                                                              --------    -------
Total liabilities...........................................    16,114     11,789
                                                              --------    -------
Commitments and contingencies
DIVISIONAL NET WORTH:
Funds allocated to/from Apollo Education Group..............   (23,747)    (9,031)
  Accumulated earnings......................................    29,595     12,113
                                                              --------    -------
  Total divisional net worth................................     5,848      3,082
                                                              --------    -------
Total liabilities and divisional net worth..................  $ 21,962    $14,871
                                                              ========    =======


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

                                       36
   37

                          UNIVERSITY OF PHOENIX ONLINE
                (A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
                A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)

                            STATEMENT OF OPERATIONS
                                 (In thousands)



                                                                  YEAR ENDED AUGUST 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------    -------    -------
                                                                            
REVENUES:
  Tuition and other, net....................................  $102,613    $69,582    $45,081
                                                              --------    -------    -------
COSTS AND EXPENSES:
  Instructional costs and services..........................    49,814     39,582     25,443
  Selling and promotional...................................    16,268     11,516      7,917
  General and administrative................................     7,248      5,352      3,960
                                                              --------    -------    -------
                                                                73,330     56,450     37,320
                                                              --------    -------    -------
INCOME FROM OPERATIONS......................................    29,283     13,132      7,761
Provision for income taxes..................................    11,801      5,323      3,151
                                                              --------    -------    -------
NET INCOME..................................................  $ 17,482    $ 7,809    $ 4,610
                                                              ========    =======    =======


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

                                       37
   38

                          UNIVERSITY OF PHOENIX ONLINE
                (A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
                A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)

                            STATEMENT OF CASH FLOWS
                                 (In thousands)



                                                                  YEAR ENDED AUGUST 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------    -------    -------
                                                                            
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income..................................................  $ 17,482    $ 7,809    $ 4,610
Adjustments to reconcile net income to net cash provided by
  operating activities:
Depreciation and amortization...............................     1,383        922        571
Provision for uncollectible accounts........................     2,129      2,411        784
Decrease (increase) in assets:
  Receivables, net..........................................    (4,987)    (7,001)    (3,681)
  Other assets..............................................    (1,884)      (131)        33
Increase (decrease) in liabilities:
  Accounts payable and accrued liabilities..................      (301)       (66)     1,041
  Student deposits and deferred revenue.....................     4,503      2,260      2,130
  Other liabilities.........................................       123        (60)       (17)
                                                              --------    -------    -------
Net cash provided by operating activities...................    18,448      6,144      5,471
                                                              --------    -------    -------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Net additions to property and equipment.....................    (3,732)    (2,556)      (814)
                                                              --------    -------    -------
Net cash used for investing activities......................    (3,732)    (2,556)      (814)
                                                              --------    -------    -------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Funds allocated to/from Apollo Education Group..............   (14,716)    (3,588)    (4,657)
                                                              --------    -------    -------
Net cash used for financing activities......................   (14,716)    (3,588)    (4,657)
                                                              --------    -------    -------
Net change in cash..........................................        --         --         --
Cash at beginning of year...................................        --         --         --
                                                              --------    -------    -------
Cash at end of year.........................................  $     --    $    --    $    --
                                                              ========    =======    =======


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

                                       38
   39

                          UNIVERSITY OF PHOENIX ONLINE
                (A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
                A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)

                         NOTES TO FINANCIAL STATEMENTS

NOTE 1.  NATURE OF OPERATIONS AND BASIS OF PRESENTATION

     On March 24, 2000, the Board of Directors of Apollo Group, Inc. ("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 the University of Phoenix, Inc., a
wholly-owned subsidiary of Apollo. 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. This
stock represented a 10.8% interest in University of Phoenix Online with Apollo
Education Group retaining the remaining 89.2% interest in University of Phoenix
Online.

     University of Phoenix Online is the online division of University of
Phoenix which is a regionally accredited, private institution of higher
education offering associates, bachelors, masters, and doctoral degree programs
in business, management, computer information systems, education, and health
care. University of Phoenix Online offers its educational programs worldwide
through its computerized educational delivery system. University of Phoenix is
accredited by the Commission on Institutions of Higher Education of the North
Central Association of Colleges and Schools.

     The accompanying financial statements provide financial information
regarding the underlying business of University of Phoenix Online. Even though
Apollo Group, Inc. has separated its assets, liabilities, revenues, and expenses
between Apollo Education Group and University of Phoenix Online for purposes of
tracking the economic performance of each of University of Phoenix Online and
Apollo Education Group, that separation will not change the legal title to any
assets or the responsibility for any liabilities and will not affect the rights
of creditors. Holders of University of Phoenix Online common stock are common
stockholders of Apollo Group, Inc. and are subject to all the risks associated
with an investment in Apollo Group, Inc.'s assets and liabilities. Material
financial events which may occur at Apollo Education Group may affect University
of Phoenix Online's results of operations or financial position. Accordingly,
University of Phoenix Online's financial statements should be read in
conjunction with Apollo Group, Inc.'s consolidated financial statements.

     The provision of services and other matters between University of Phoenix
Online and Apollo Education Group, including the right to use the curriculum,
trademarks, and copyrights of Apollo Group, Inc. and its subsidiaries, are
governed by corporate expense, income tax, and license allocation policies,
which are described in Note 3. Related Party Transactions. These policies were
not in place prior to March 24, 2000. However, in order to prepare financial
statements that include charges and benefits of the types provided for under
these polices, the accompanying financial statements reflect charges and
benefits that would have applied if these policies had been in effect during the
periods presented.

     University of Phoenix Online's fiscal year is from September 1 to August
31. Unless otherwise stated, references to the years 2000, 1999, and 1998 relate
to the fiscal years ended August 31, 2000, 1999, and 1998, respectively.

NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES

     PROPERTY AND EQUIPMENT.  Property and equipment is recorded at cost less
accumulated depreciation. University of Phoenix Online 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 software
using the straight-line method over the estimated useful lives of the related
assets which range from three to seven years, except software which is
depreciated over three to five years.

                                       39
   40
                          UNIVERSITY OF PHOENIX ONLINE
                (A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
                A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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.  Tuition and other revenues
are shown net of discounts relating to a variety of promotional programs.
University of Phoenix Online's educational degree programs last up to four
years. Students in degree programs 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
revenue for each course is recognized on a pro rata basis over the period of
instruction.

     Many of University of Phoenix Online's students participate in government
sponsored financial aid programs under Title IV of the Higher Education Act of
1965. 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 University of Phoenix.

     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.

     EARNINGS PER SHARE.  Earnings per share for University of Phoenix Online
has been omitted from the accompanying statement of operations since University
of Phoenix Online common stock is a class of stock of Apollo Group, Inc. and is
not part of the capital structure of University of Phoenix Online.

     Beginning in the first quarter of fiscal year 2001, the consolidated
financial statements of Apollo Group, Inc. will present 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.

     FAIR VALUE OF FINANCIAL INSTRUMENTS.  The carrying amount reported in the
balance sheet for accounts receivable, accounts payable, accrued liabilities,
and student deposits and deferred tuition revenue approximates fair value
because of the short-term nature of these financial instruments.

     SELLING AND PROMOTIONAL COSTS.  University of Phoenix Online expenses
selling and promotional costs as incurred. Selling and promotional costs include
marketing salaries, direct-response and other advertising, promotional
materials, and related marketing costs.

     NEW ACCOUNTING PRONOUNCEMENTS.  During December 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB No. 101"), which provides guidance on
the recognition, presentation, and disclosure of revenue in financial statements
filed with the Securities and Exchange Commission. University of Phoenix Online
was originally required to implement SAB No. 101 in the first quarter of its
fiscal year ending August 31, 2001; however, in June 2000, the Securities and
Exchange Commission amended SAB No. 101 to delay the required implementation
date. As a result, University of Phoenix Online must now implement the related
guideline in the fourth quarter of its fiscal year ending August 31, 2001.
Although the analysis of the impact of SAB No. 101 has not been completed, it is
not expected to have a material effect on University of Phoenix Online's results
of operations.

     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.

                                       40
   41
                          UNIVERSITY OF PHOENIX ONLINE
                (A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
                A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     COMPREHENSIVE INCOME.  Comprehensive income includes all changes in
divisional net worth during a period from non-owner sources. University of
Phoenix Online has not had any transactions, other than net income, that are
required to be reported in comprehensive income.

NOTE 3.  RELATED PARTY TRANSACTIONS

     University of Phoenix Online's financial statements reflect the application
of certain expense allocation and treasury activity policies summarized below.
Although it has no present intention to do so, the Board of Directors of Apollo
Group, Inc. may rescind, modify, or add to any of these policies. While
management believes that these allocation methods are reasonable, the allocated
expenses are not necessarily indicative of, and it is not practicable for us to
estimate, the levels of expenses that would have been incurred if University of
Phoenix Online had been operating as an independent company.

     CORPORATE EXPENSES.  In order to prepare the accompanying financial
statements, certain costs incurred by Apollo Group, Inc. and University of
Phoenix were 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:



                                                            YEAR ENDED AUGUST 31,
                                                         ----------------------------
                                                          2000       1999       1998
                                                         -------    -------    ------
                                                                      
Instructional costs and services.......................  $ 9,265    $ 4,995    $3,223
Selling and promotional................................      772        201       166
General and administrative.............................    7,248      5,352     3,960
                                                         -------    -------    ------
                                                         $17,285    $10,548    $7,349
                                                         =======    =======    ======


     LICENSE FEE.  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 instructional costs and
services in the accompanying statement of operations, was $4.1 million, $2.8
million, and $1.8 million for the years ended August 31, 2000, 1999, and 1998,
respectively.

     INCOME TAXES.  University of Phoenix Online's results, along with those of
University of Phoenix's other divisions, are included in Apollo Group, Inc.'s
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 statement of
operations has been calculated on a separate company basis. The related current
and deferred tax assets and liabilities are settled with University of Phoenix
at the end of each period through the funds allocated to/from Apollo Education
Group component of divisional net worth.

     University of Phoenix Online's effective income tax rate differs from the
federal statutory tax rate primarily as a result of state income taxes.

     TREASURY ACTIVITIES.  Since its inception, Apollo Group, Inc. has financed
University of Phoenix Online's operations internally and has not incurred any
related third party debt. University of Phoenix Online does not maintain a bank
account; rather all of its cash receipts and disbursements are processed by
Apollo Group, Inc. on University of Phoenix Online's behalf. Currently all
amounts are 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 generates cash from operations, that cash is deemed
to be transferred

                                       41
   42
                          UNIVERSITY OF PHOENIX ONLINE
                (A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
                A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

to Apollo Education Group and is accounted for as a return of capital. Whenever
University of Phoenix Online has a cash need, that cash need is deemed to be
transferred from Apollo Education Group and is accounted for as a capital
contribution. As a result of this policy, the accompanying statement of
operations does not reflect any inter-group interest income or expense.

     The difference between the net proceeds of the University of Phoenix Online
common stock offering and outlays attributable to University of Phoenix Online
following the offering has been accounted for as a revolving credit allowance
from University of Phoenix Online to Apollo Education Group 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. Any other cash transfers accounted for as revolving credit advances
will not bear interest unless the Board of Directors determines otherwise. As a
result of this change in policy, the consolidating statement of operations data
for periods subsequent to the offering may reflect inter-group interest income
and expense. Accordingly, operating results for University of Phoenix Online for
periods subsequent to this offering may not be comparable to such operating
results prior to this offering.

NOTE 4.  BALANCE SHEET COMPONENTS

     Receivables consist of the following, in thousands:



                                                                  AUGUST 31,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
                                                                   
Trade receivables...........................................  $15,717    $12,657
Less allowance for doubtful accounts........................   (1,726)    (1,524)
                                                              -------    -------
          Total receivables, net............................  $13,991    $11,133
                                                              =======    =======


     Bad debt expense was $2.1 million, $2.4 million, and $784,000 for 2000,
1999, and 1998, respectively.

     Property and equipment consist of the following, in thousands:



                                                                  AUGUST 31,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
                                                                   
Furniture and equipment.....................................  $ 6,277    $ 5,190
Software....................................................      540        507
Leasehold improvements......................................    1,632        257
                                                              -------    -------
                                                                8,449      5,954
Less accumulated depreciation and amortization..............   (2,509)    (2,379)
                                                              -------    -------
          Property and equipment, net.......................  $ 5,940    $ 3,575
                                                              =======    =======


                                       42
   43
                          UNIVERSITY OF PHOENIX ONLINE
                (A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
                A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     Depreciation and amortization expense was $1,367,000, $922,000, and
$571,000 for 2000, 1999, and 1998, respectively.

     Accrued liabilities consist of the following, in thousands:



                                                                  AUGUST 31,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
                                                                   
Salaries, wages, and benefits...............................  $ 1,046    $   981
Other accrued liabilities...................................      174        645
                                                              -------    -------
          Total accrued liabilities.........................  $ 1,220    $ 1,626
                                                              =======    =======


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



                                                                  AUGUST 31,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
                                                                   
Student deposits............................................  $ 6,123    $ 6,363
Deferred tuition revenue....................................    8,403      3,660
                                                              -------    -------
          Total student deposits and deferred tuition
            revenue.........................................  $14,526    $10,023
                                                              =======    =======


     Divisional net worth activity for the years ended August 31, is as follows,
in thousands:



                                                  FUNDS ALLOCATED   ACCUMULATED
                                                  TO/FROM APOLLO     EARNINGS
                                                  EDUCATION GROUP    (LOSSES)      TOTAL
                                                  ---------------   -----------   --------
                                                                         
BALANCE AT AUGUST 31, 1998......................     $ (5,443)        $ 4,304     $ (1,139)
  Net income....................................                        7,809        7,809
  Funds allocated to/from Apollo Education
     Group......................................       (3,588)                      (3,588)
                                                     --------         -------     --------
BALANCE AT AUGUST 31, 1999......................       (9,031)         12,113        3,082
  Net income....................................                       17,482       17,482
  Funds allocated to/from Apollo Education
     Group......................................      (14,716)                     (14,716)
                                                     --------         -------     --------
BALANCE AT AUGUST 31, 2000......................     $(23,747)        $29,595     $  5,848
                                                     ========         =======     ========


     University of Phoenix Online and Apollo Education Group had no intercompany
purchases or cash transfers for the fiscal years ended August 31, 2000 and 1999.

NOTE 5.  BENEFIT PLANS

     Employees of University of Phoenix Online are eligible to participate in
Apollo Group, Inc.'s various health, welfare, and disability benefit programs
offered to its full-time, salaried employees which are funded primarily by
Apollo Education Group contributions. Additionally, eligible employees also
participate in Apollo Group, Inc.'s 401(k) plan as well as its employee stock
option and stock purchase plans. Apollo Group, Inc. does not provide
post-employment or post-retirement health care and life insurance benefits to
University of Phoenix Online's employees.

                                       43
   44
                          UNIVERSITY OF PHOENIX ONLINE
                (A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
                A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6.  COMMITMENTS AND CONTINGENCIES

     University of Phoenix Online is obligated under facility and equipment
leases that are classified as operating leases. Following is a schedule of
future minimum lease commitments as of August 31, 2000, in thousands:



                                                                  OPERATING LEASES
                                                              -------------------------
                                                                            EQUIPMENT &
                                                              FACILITIES       OTHER
                                                              ----------    -----------
                                                                      
2001........................................................    $  903          $10
2002........................................................       967            3
2003........................................................       975
2004........................................................       984
2005........................................................       992
Thereafter..................................................     4,016
                                                                ------          ---
                                                                $8,837          $13
                                                                ======          ===


     Facility and equipment rent expense totaled $1.2 million, $1.4 million, and
$1.1 million for 2000, 1999, and 1998, respectively.

     There are no legal proceedings to which Apollo Group, Inc. is a party
pertaining to the business and operations of University of Phoenix Online, other
than those occurring in the normal course of business. Management believes that
the disposition of these cases will not have a material adverse impact on the
financial position or results of operations of Apollo Education Group or
University of Phoenix Online.

     In January 1998, the U.S. Department of Education Office of the Inspector
General ("OIG") began performing an audit of University of Phoenix's
administration of the Title IV Programs. The team previously presented questions
regarding University of Phoenix's interpretation of the "12-hour rule," distance
education programs, and institutional refund obligations. University of Phoenix
reached an agreement with the U.S. Department of Education which acknowledges no
admission that there were any issues of non-compliance or errors by University
of Phoenix. To bring this audit to closure and settle all outstanding issues
prior to the final OIG report, which was issued on March 31, 2000, University of
Phoenix agreed to modify its physical campus learning team attendance log to
track the sites of learning team meetings and record the hours attended. This
modification is not expected to have a negative impact on either University of
Phoenix or its students. This modification does not require any change to
University of Phoenix Online's learning team attendance log. Part of the
agreement, dated March 27, 2000, reached with the U.S. Department of Education
requires University of Phoenix to pay the U.S. Department of Education $6.0
million as a negotiated settlement in full satisfaction of all monetary findings
arising under the final OIG audit report. Approximately $1.1 million of this
amount was allocated to University of Phoenix Online during 2000 in accordance
with the corporate expense allocation policy and has been reflected in
University of Phoenix Online's instructional costs and services.

                                       44
   45
                          UNIVERSITY OF PHOENIX ONLINE
                (A DIVISION OF THE UNIVERSITY OF PHOENIX, INC.,
                A WHOLLY-OWNED SUBSIDIARY OF APOLLO GROUP, INC.)

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following table sets forth selected unaudited quarterly financial
information of University of Phoenix Online for each of the last eight quarters.



                                                      2000                                       1999
                                    ----------------------------------------   ----------------------------------------
                                    AUG. 31,   MAY 31,   FEB. 29,   NOV. 30,   AUG. 31,   MAY 31,   FEB. 28,   NOV. 30,
                                      2000      2000       2000       1999       1999      1999       1999       1998
                                    --------   -------   --------   --------   --------   -------   --------   --------
                                                                      (IN THOUSANDS)
                                                                                       
REVENUES:
  Tuition and other, net..........  $31,661    $28,367   $21,868    $20,717    $19,332    $19,304   $16,051    $14,895
                                    -------    -------   -------    -------    -------    -------   -------    -------
COSTS AND EXPENSES:
  Instructional costs and
    services(1)...................   13,525     14,478    11,269     10,542     11,655     10,808     8,614      8,505
  Selling and promotional.........    5,754      4,208     3,220      3,086      3,493      2,530     2,946      2,547
  General and administrative......    2,287      1,873     1,585      1,503      1,674      1,192     1,430      1,056
                                    -------    -------   -------    -------    -------    -------   -------    -------
                                     21,566     20,559    16,074     15,131     16,822     14,530    12,990     12,108
                                    -------    -------   -------    -------    -------    -------   -------    -------
Income from operations............   10,095      7,808     5,794      5,586      2,510      4,774     3,061      2,787
Provision for income taxes........    4,059      3,132     2,346      2,264      1,017      1,935     1,242      1,129
                                    -------    -------   -------    -------    -------    -------   -------    -------
Net income........................  $ 6,036    $ 4,676   $ 3,448    $ 3,322    $ 1,493    $ 2,839   $ 1,819    $ 1,658
                                    =======    =======   =======    =======    =======    =======   =======    =======


- ---------------
(1) Includes University of Phoenix Online's allocation of $1.1 million (3.9% of
    tuition and other net revenues) of the $6.0 million charge related to the
    U.S. Department of Education agreement in the May 31, 2000 quarter.

                                       45

EX-21

   1
                                   EXHIBIT 21

                              LIST OF SUBSIDIARIES



1.   The Company holds 100% of the outstanding capital stock of:

     The University of Phoenix, Inc.
     Institute for Professional Development
     Apollo Development Corporation
     Apollo Press, Inc.
     Online, Inc.
     Apollo Education Corporation
     Western International University, Inc.
     College for Financial Planning Institutes Corporation
     Apollo Learning Group, Inc.
     International Education Partners, Inc.
     Apollo Investments, Inc.

2.   The University of Phoenix, Inc. holds 100% of the outstanding capital stock
     of:

     The University of Phoenix, Inc. (Michigan)
     Apollo Canada Holding Company

3.   The College for Financial Planning Institutes Corporation holds 100% of the
     outstanding capital stock of:

     College for Financial Planning, Inc.

4.   Western International University, Inc. holds 100% of the outstanding
     capital stock of:

     W.I.U. (London) Limited

5.   Apollo Canada Holding Company holds 100% of the outstanding capital stock
     of:

     University of Phoenix, ULC

EX-23

   1
                                   Exhibit 23
                       CONSENT OF INDEPENDENT ACCOUNTANTS



We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-46834, 33-87844, 33-88982, 33-88984 and
33-63429) of Apollo Group, Inc. of our report dated September 29, 2000, relating
to the financial statements, which appears in the Annual Report to Shareholders,
which is incorporated in this Annual Report on Form 10-K.


PricewaterhouseCoopers LLP
Phoenix, Arizona
November 22, 2000

EX-27

 

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Operations and the Consolidated Balance Sheet and is
qualified in its entirety by reference to such financial statements.

<CIK> 0000929887
<NAME> APOLLO GROUP, INC.
<MULTIPLIER> 1,000

                             
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          AUG-31-2000
<PERIOD-END>                               AUG-31-2000
<CASH>                                          95,593
<SECURITIES>                                    58,226
<RECEIVABLES>                                   86,813
<ALLOWANCES>                                     7,880
<INVENTORY>                                          0
<CURRENT-ASSETS>                               246,907
<PP&E>                                         150,282
<DEPRECIATION>                                  62,449
<TOTAL-ASSETS>                                 404,790
<CURRENT-LIABILITIES>                          131,089
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                           104
<OTHER-SE>                                     261,104
<TOTAL-LIABILITY-AND-EQUITY>                   404,790
<SALES>                                              0
<TOTAL-REVENUES>                               609,997
<CGS>                                                0
<TOTAL-COSTS>                                  495,920
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                 (6)
<INCOME-PRETAX>                                120,305
<INCOME-TAX>                                    49,114
<INCOME-CONTINUING>                             71,191
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    71,191
<EPS-BASIC>                                       0.94
<EPS-DILUTED>                                     0.93


 

EX-99.2

   1
                                                                    EXHIBIT 99.2
                               Apollo Group, Inc.
                    Audit Committee of the Board of Directors

                                     CHARTER

I.       Purpose

The purpose of the Audit Committee (the "Committee") is to assist the Board of
Directors in fulfilling its oversight responsibilities with respect to the
Company's publicly reported financial information as well as its systems of
internal control relating to financial reporting, compliance with laws and
regulations, and ethical business conduct. The Committee will maintain effective
working relationships with management, the Company's internal audit department
and the Company's outside auditors and will promote continuous improvement in
the Company's policies and procedures at all levels.

II.      Composition

The Committee will be comprised of at least three qualified independent
directors all of whom meet the independence requirements of the stock exchange
on which the Company's common shares are listed. The members of the Committee
will be elected by the Board of Directors who will also designate the
Committee's Chairman.

III.     Meetings

The Committee will meet at least four times a year. In connection therewith, the
Committee will meet at least once a year with management, the director of the
internal audit department and the Company's outside auditors in separate
executive sessions to discuss any matters that the Committee deems appropriate.
Minutes of each Committee meeting will be kept and the Committee's Chairman will
provide periodic reports on its activities to the Board of Directors.

IV.      Charter

The Committee will review this charter on an annual basis and revise it as
necessary.

V.       Responsibilities

The Committee's primary responsibilities are summarized below:

Financial Statements

         -        The Committee will review the Company's quarterly and annual
                  financial statements and related press releases and filings
                  with the SEC and discuss such items with management and the
                  Company's outside auditors prior to issuance.

         -        The Committee will meet with the Company's outside auditors to
                  discuss the planned scope of their audit of the Company's
                  annual financial statements as well as the nature of
                  procedures to be performed in connection with their limited
                  reviews of the Company's interim financial information.

   2

         -        The Committee will meet with the Company's outside auditors at
                  the conclusion of their audit of the Company's annual
                  financial statements as well as at the conclusion of their
                  limited reviews of the Company's interim financial information
                  to discuss the related results of such audit or limited
                  reviews and to receive communications from the outside
                  auditors which are required in connection with such
                  engagements.

         -        The Committee will review all significant changes in the
                  Company's financial accounting and reporting policies and
                  discuss such changes with management and the Company's outside
                  auditors prior to implementation.

Title IV Programs

         -        The Committee will meet with management, the internal audit
                  director and the Company's outside auditors to discuss the
                  Company's participation in Title IV Student Financial
                  Assistance Programs of the Higher Education Act of 1965, as
                  amended (Title IV Programs).

         -        The Committee will meet with the Company's outside auditors to
                  discuss the planned scope of their attestation engagement
                  relating to the Company's compliance with the requirements of
                  the Title IV Programs.

         -        The Committee will meet with the Company's outside auditors at
                  the conclusion of their attestation engagement relating to the
                  Company's compliance with the requirements of the Title IV
                  Programs to discuss the related results including any findings
                  noted as well as management's related corrective action plans.

Internal Audit

         -        The Committee will meet periodically with the director of the
                  Company's internal audit department to review the department's
                  organizational structure, staffing levels, planned activities
                  and other related information. The Committee will also receive
                  periodic reports from the internal audit director on the
                  results of its activities.

Internal Controls

         -        The Committee will review reports prepared by management, the
                  internal audit department and the Company's outside auditors
                  with respect to the Company's system of internal controls over
                  financial reporting, including controls relating to the
                  Company's information systems, and monitor the implementation
                  of any related recommendations for improvements.

Income Tax Matters

         -        The Committee will meet at least annually with management and
                  the Company's tax advisors to discuss the Company's position
                  with respect to federal, state and foreign income tax matters.


   3

Legal Matters

         -        The Committee will meet at least annually with management and
                  the Company's general counsel to discuss the Company's
                  compliance with all relevant laws and regulations, including
                  any related internal control systems to facilitate such
                  compliance, as well as the status of any legal matters
                  effecting the Company.

Code of Ethics

         -        The Committee will annually review the Company's Code of
                  Ethical Conduct. The Committee will also receive reports from
                  management and the director of internal audit concerning any
                  related violations noted during the year.

Independent Accountants

         -        The outside auditors are accountable to the board of directors
                  and the Committee. The Committee will evaluate the performance
                  of the Company's outside auditors on an annual basis and
                  recommend to the Board of Directors that the outside auditors
                  be either retained or discharged. The Committee will also
                  review and approve the fees paid to the outside auditors in
                  connection with the annual audit of the Company's financial
                  statements as well as the limited reviews of the Company's
                  interim financial information.

         -        The Committee will review and confirm the independence of the
                  Company's outside auditors by reviewing nonaudit services
                  provided as well as the independent accountants' assertion of
                  their independence in accordance with professional standards
                  or other requirements. The Committee will be responsible for
                  ensuring that it receives a formal written statement
                  delineating all relationships between the outside auditors and
                  the Company consistent with Independence Standards Board
                  Standard 1. The Committee will actively engage in a dialogue
                  with the outside auditors with respect to any disclosed
                  relationships or services that may impact the objectivity and
                  independence of the outside auditors.