UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended November 30, 2001
OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-25232

APOLLO GROUP, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

Yes      No

AT JANUARY 7, 2002, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:

Apollo Education Group Class A common stock, no par
Apollo Education Group Class B common stock, no par
University of Phoenix Online common stock, no par 114,642,000 Shares
484,000 Shares
9,647,000 Shares

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
	Item 1 – Financial Statements
	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3 – Quantitative and Qualitative Disclosures about Market Risk
PART II – OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX-10.4
EX-15.1
EX-99

APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX

	PAGE
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements		1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3. Quantitative and Qualitative Disclosures about Market Risk		14
PART II – OTHER INFORMATION
Item 1. Legal Proceedings		15
Item 2. Changes in Securities and Use of Proceeds		15
Item 3. Defaults Upon Senior Securities		15
Item 4. Submission of Matters to a Vote of Security Holders		15
Item 5. Other Information		15
Item 6. Exhibits and Reports on Form 8-K		15
SIGNATURES		16
EXHIBIT INDEX		17
EXHIBIT 10.4 – Amended and Restated Apollo Group, Inc. Savings and Investment Plan
EXHIBIT 15.1 – Letter on Unaudited Interim Financial Information
EXHIBIT 99 – University of Phoenix Online Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements — Apollo Group, Inc.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

		November 30,			August 31,
		2001			2001
		(Unaudited)
(Dollars in thousands)
Assets:
Current assets
	Cash and cash equivalents	$	166,394		$	145,933
	Restricted cash		74,708			57,896
	Marketable securities		179,028			170,866
	Receivables, net		93,624			92,179
	Deferred tax assets, net		8,371			7,822
	Other current assets		12,956			12,355
Total current assets			535,081			487,051
Property and equipment, net			100,499			102,624
Marketable securities			37,494			27,239
Cost in excess of fair value of assets purchased, net			37,096			37,096
Deferred tax assets, net			3,587			3,180
Other assets			22,659			23,153
Total assets		$	736,416		$	680,343
Liabilities and Shareholders’ Equity:
Current liabilities
	Current portion of long-term liabilities	$	388		$	408
	Accounts payable		13,633			16,846
	Accrued liabilities		32,407			30,524
	Income taxes payable		16,432			7,096
	Student deposits and current portion of deferred revenue		138,734			127,326
Total current liabilities			201,594			182,200
Deferred tuition revenue, less current portion			1,345			1,409
Long-term liabilities, less current portion			15,226			14,849
Total liabilities			218,165			198,458
Commitments and contingencies
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued
Apollo Education Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 114,398,000 and 114,237,000 issued and outstanding at November 30, 2001 and August 31, 2001, respectively			103			103
Apollo Education Group Class B voting common stock, no par value, 3,000,000 shares authorized; 484,000 issued and outstanding at November 30, 2001 and August 31, 2001			1			1
University of Phoenix Online nonvoting common stock, no par value, 400,000,000 shares authorized; 9,531,000 and 9,447,000 issued and outstanding at November 30, 2001 and August 31, 2001, respectively
Additional paid-in capital			194,017			185,424
Apollo Education Group Class A treasury stock, at cost, 3,698,000 and 3,859,000 shares at November 30, 2001 and August 31, 2001, respectively			(59,531	)		(60,761	)
University of Phoenix Online treasury stock, at cost, 260,000 shares at November 30, 2001			(6,460	)
Retained earnings			389,995			357,036
Accumulated other comprehensive income			126			82
Total shareholders’ equity			518,251			481,885
Total liabilities and shareholders’ equity		$	736,416		$	680,343

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

1

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS

		For the Three Months Ended
		November 30,
		2001		2000
		(Unaudited)
(In thousands, except per share amounts)
Revenues:
	Tuition and other, net	$	228,179	$	177,073
Costs and expenses:
	Instructional costs and services		116,760		95,235
	Selling and promotional		45,419		31,008
	General and administrative		14,654		11,986
			176,833		138,229
Income from operations			51,346		38,844
Interest income, net			3,043		3,168
Income before income taxes			54,389		42,012
Provision for income taxes			21,430		17,183
Net income		$	32,959	$	24,829
Net income attributed to:
	Apollo Education Group common stock	$	31,668	$	24,439
	University of Phoenix Online common stock	$	1,291	$	390
Earnings per share attributed to:
Apollo Education Group common stock:
	Basic net income per share	$	0.28	$	0.22
	Diluted net income per share	$	0.27	$	0.21
	Basic weighted average shares outstanding		114,765		113,634
	Diluted weighted average shares outstanding		116,604		115,209
University of Phoenix Online common stock:
	Basic net income per share	$	0.14	$	0.05
	Diluted net income per share	$	0.12	$	0.04
	Basic weighted average shares outstanding		9,556		8,625
	Diluted weighted average shares outstanding		10,936		9,720

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

2

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

		For the Three Months Ended
		November 30,
		2001		2000
		(Unaudited)
(In thousands)
Net income		$	32,959	$	24,829
Other comprehensive income, net of income taxes:
	Currency translation gain		44		90
Comprehensive income		$	33,003	$	24,919

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

3

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

				For the Three Months Ended
				November 30,
				2001			2000
				(Unaudited)
(In thousands)
Cash flows provided by (used for) operating activities:
	Net income			$	32,959		$	24,829
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			8,569			7,593
		Amortization of investment (discounts) premiums			302			(117	)
		Provision for uncollectible accounts			4,995			2,863
		Deferred income taxes			(956	)		(387	)
		Tax benefits of stock options exercised			4,511			6,085
		Increase in assets:
			Restricted cash		(16,812	)		(8,765	)
			Receivables		(6,440	)		(1,695	)
			Other assets		(66	)		(1,205	)
		Increase in liabilities:
			Accounts payable and accrued liabilities		8,006			11,669
			Student deposits and deferred revenue		11,344			4,636
			Other liabilities		563			541
Net cash provided by operating activities					46,975			46,047
Cash flows provided by (used for) investing activities:
	Net additions to property and equipment				(6,223	)		(8,917	)
	Purchase of marketable securities				(72,392	)		(70,158	)
	Maturities of marketable securities				53,673			14,756
	Purchase of other assets				(368	)		(246	)
	Proceeds from sale of land							593
Net cash used for investing activities					(25,310	)		(63,972	)
Cash flows provided by (used for) financing activities:
	Purchase of Apollo Education Group Class A common stock				(2,438	)
	Issuance of Apollo Education Group Class A common stock				4,649			7,691
	Purchase of University of Phoenix Online common stock				(6,833	)
	Issuance of University of Phoenix Online common stock				3,474			74,086
	Payments on long-term debt				(100	)		(100	)
Net cash provided by (used for) financing activities					(1,248	)		81,677
Currency translation gain					44			90
Net increase in cash and cash equivalents					20,461			63,842
Cash and cash equivalents at beginning of period					145,933			59,912
Cash and cash equivalents at end of period				$	166,394		$	123,754

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

4

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

1.     The interim consolidated financial statements include the accounts of Apollo Group, Inc. (“Apollo” or the “Company”) and its wholly-owned subsidiaries, which include The University of Phoenix, Inc. (“University of Phoenix”), Institute for Professional Development (“IPD”), Western International University, Inc. (“WIU”), and The College for Financial Planning Institutes Corporation (the “College”). This financial information reflects all adjustments, consisting only of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Unless otherwise noted, references to 2002 and 2001 refer to the periods ended November 30, 2001 and 2000, respectively.

On March 24, 2000, the Board of Directors of Apollo authorized the issuance of a new class of stock called University of Phoenix Online common stock, that is intended to reflect the separate performance of University of Phoenix Online, a division of University of Phoenix. Apollo’s other businesses and its retained interest in University of Phoenix Online are referred to as “Apollo Education Group.” On October 3, 2000, an offering of 5,750,000 shares of University of Phoenix Online common stock was completed at a price of $14.00 per share. At the time of the offering this stock represented a 10.8% interest in that business with Apollo Education Group retaining an 89.2% interest in University of Phoenix Online.

2.     The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the fiscal year ended August 31, 2001 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The results of operations for the three-month period ended November 30, 2001 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

3.     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 include licensing and accreditation.

4.     On January 10, 2001, the Company’s Board of Directors authorized a 3-for-2 stock split of its Apollo Education Group Class A and Class B common stock to be affected in the form of a stock dividend. All Apollo Education Group common stock amounts and earnings per share figures for periods prior to the stock split have been restated to reflect the effect of the stock split.

On June 29, 2001, the Company’s Board of Directors authorized a 3-for-2 stock split of its University of Phoenix Online common stock to be affected in the form of a stock dividend. All University of Phoenix Online common stock amounts and earnings per share figures for periods prior to the stock split have been restated to reflect the effect of the stock split.

5.     Earnings attributable to different classes of the Company’s common stock are as follows:

	For the Three Months Ended
	November 30,
	2001		2000
	(Unaudited)
(In thousands)
Apollo Education Group	$	31,668	$	24,439
University of Phoenix Online		1,291		390
Net income	$	32,959	$	24,829

The earnings attributable to University of Phoenix Online common stock represent the portion of the earnings of University of Phoenix Online attributed to the shares of University of Phoenix Online common stock outstanding excluding Apollo Education Group’s retained interest in the University of Phoenix Online. At the date of the issuance of the University of Phoenix Online common stock, Apollo Education Group retained an 89.2% interest in University of Phoenix Online. This percentage has decreased to 88.2% at November 30, 2001 due to the issuance of shares of University of Phoenix Online common stock as part of the Apollo Group, Inc. Employee Stock Purchase Plan and the issuance of shares related to the exercise of University of Phoenix Online stock options partially offset by the repurchase of shares of University of Phoenix Online common stock.

5

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

		For the Three Months Ended November 30,
		2001						2000
				Weighted Average		Per Share				Weighted Average		Per Share
		Income		Shares		Amount		Income		Shares		Amount
		(Unaudited)						(Unaudited)
(In thousands, except per share amounts)
Basic net income per share		$	31,668		114,765	$	0.28	$	24,439		113,634	$	0.22
Effect of dilutive securities:
	Stock options				1,839						1,575
Diluted net income per share		$	31,668		116,604	$	0.27	$	24,439		115,209	$	0.21

Basic earnings per share for Apollo Education Group common stock for the three months ended November 30, 2001 and 2000 were computed by dividing Apollo Education Group earnings (including its retained interest in University of Phoenix Online earnings) by the weighted average number of Apollo Education Group common stock shares outstanding during the respective periods. Diluted earnings per share was calculated similarly, except that it included the dilutive effect of the assumed exercise of options issuable under Apollo Group, Inc. incentive plans, exclusive of options granted and shares issued with respect to University of Phoenix Online common stock.

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

		For the Three Months Ended November 30,
		2001						2000
				Weighted Average		Per Share				Weighted Average		Per Share
		Income		Shares		Amount		Income		Shares		Amount
		(Unaudited)						(Unaudited)
(In thousands, except per share amounts)
Basic net income per share		$	1,291		9,556	$	0.14	$	390		8,625	$	0.05
Effect of dilutive securities:
	Stock options				1,380						1,095
Diluted net income per share		$	1,291		10,936	$	0.12	$	390		9,720	$	0.04

Basic earnings per share of University of Phoenix Online common stock for the three months ended November 30, 2001 and 2000 were computed by dividing University of Phoenix Online earnings (excluding Apollo Education Group’s retained interest in University of Phoenix Online earnings) by the number of shares of University of Phoenix Online common stock outstanding during the respective periods. Diluted earnings per share was calculated similarly, except that it included the dilutive effect of the assumed exercise of options issuable under Apollo Group, Inc. incentive plans with respect to University of Phoenix Online common stock.

6.     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.

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

6

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

		Three Months Ended November 30, 2001
		Apollo Education			University of					Apollo
		Group			Phoenix Online		Eliminations			Group, Inc.
		(Unaudited)
(In thousands)
Revenues:
Tuition and other, net(1)		$	163,839		$	64,340	$	—		$	228,179
Inter-group license fee revenue(2)			2,574					(2,574	)		—
			166,413			64,340		(2,574	)		228,179
Costs and expenses:
Instructional costs and services
	External expenses(3)		95,331			21,429					116,760
	Inter-group allocated expenses(4)		(3,545	)		3,545					—
	Inter-group license fee expense(2)					2,574		(2,574	)		—
Selling and promotional
	External expenses(3)		29,928			15,491					45,419
	Inter-group allocated expenses(4)		(149	)		149					—
General and administrative
	External expenses(3)		14,654								14,654
	Inter-group allocated expenses(4)		(3,831	)		3,831					—
			132,388			47,019		(2,574	)		176,833
Income from operations			34,025			17,321		—			51,346
Interest income, net			2,193			850					3,043
Income before income taxes			36,218			18,171		—			54,389
Provision for income taxes(5)			14,207			7,223					21,430
Net income		$	22,011		$	10,948	$	—		$	32,959

[Additional columns below]

[Continued from above table, first column(s) repeated]

		Three Months Ended November 30, 2000
		Apollo Education			University of
		Group			Phoenix Online		Eliminations			Apollo Group, Inc.
		(Unaudited)
(In thousands)
Revenues:
Tuition and other, net(1)		$	142,986		$	34,087	$	—		$	177,073
Inter-group license fee revenue(2)			1,363					(1,363	)		—
			144,349			34,087		(1,363	)		177,073
Costs and expenses:
Instructional costs and services
	External expenses(3)		83,245			11,990					95,235
	Inter-group allocated expenses(4)		(2,293	)		2,293					—
	Inter-group license fee expense(2)					1,363		(1,363	)		—
Selling and promotional
	External expenses(3)		23,598			7,410					31,008
	Inter-group allocated expenses(4)		(192	)		192					—
General and administrative
	External expenses(3)		11,986								11,986
	Inter-group allocated expenses(4)		(2,099	)		2,099					—
			114,245			25,347		(1,363	)		138,229
Income from operations			30,104			8,740		—			38,844
Interest income, net			2,474			694					3,168
Income before income taxes			32,578			9,434		—			42,012
Provision for income taxes(5)			13,325			3,858					17,183
Net income		$	19,253		$	5,576	$	—		$	24,829

(1)	Tuition and other revenues are shown net of discounts from a variety of promotional programs and represent amounts earned from students of Apollo Education Group and University of Phoenix Online, respectively. There are no tuition or other net revenues that have been allocated between Apollo Education Group and University of Phoenix Online.
(2)	Apollo Group, Inc. charges University of Phoenix Online a license fee equal to 4% of University of Phoenix Online’s net revenues for the use of curriculum, trademarks, and copyrights owned by Apollo Group, Inc. and its subsidiaries. The license fee, which is included in University of Phoenix Online’s instructional costs and services, totaled $2.6 million and $1.4 million for the three months ended November 30, 2001 and 2000, respectively. The inter-group license fee revenue of Apollo Education Group eliminates against the inter-group license fee expense of University of Phoenix Online in consolidation at the Apollo Group, Inc. level.
(3)	External expenses represent costs incurred directly by Apollo Education Group and University of Phoenix Online and do not include any inter-group allocations.
(4)	Certain costs incurred by Apollo Group, Inc. and 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:

	Three Months Ended
	November 30,
	2001		2000
	(Unaudited)
(In thousands)
Instructional costs and services	$	3,545	$	2,293
Selling and promotional		149		192
General and administrative		3,831		2,099
	$	7,525	$	4,584

7

(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 The University of Phoenix, Inc. 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.

7.     The U.S. Department of Education Office of the Inspector General (“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. In audit reports issued to four client institutions, the OIG asserted that the client institutions violated the statutory prohibition on the use of incentive payments for recruiting by paying IPD a percentage of tuition revenue. The reports further suggest that IPD paid its employees in a manner that included incentive-based compensation even though IPD based its compensation plans for recruiters on factors or qualities that were not solely related to the success in securing enrollments. Additionally, the audit reports question the client institutions’ interpretation of the “12-hour rule.” Although both IPD and the client institutions believe that the matters in question do not relate to student program, or institutional eligibility and therefore believe a repayment of federal funds is not appropriate, the OIG has recommended to the U.S. Department of Education that the client institutions be required to return to lenders all loan funds disbursed. The institutions, with IPD’s assistance, will work with the U.S. Department of Education to eliminate or settle the issues raised in the audit reports.

During 2001, IPD recorded a charge of $5.1 million (including $1.4 million recorded in the first quarter of 2001), to provide for its share of the estimated settlement obligation relating to all of its client institutions under audit. Our calculation of the estimated settlement obligation, which is reflected in instructional costs and services in the accompanying consolidated statement of operations, was based on information available to us and our previous experience with respect to such settlements.

Although we believe that the OIG’s audits of IPD’s client institutions will be resolved without any material effect on our financial position, results of operations, or cash flows, and without any material change in IPD’s business strategy, as with any program review or audit, no assurance can be given as to the final outcome as the matters are not yet resolved.

8.     The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS No. 141”), and No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). SFAS No. 141 eliminates the use of the pooling-of-interests method of accounting for business combinations and requires all acquisitions to be accounted for using the purchase method. SFAS No. 142, among other things, discontinues the requirement that goodwill resulting from purchase business combinations be amortized to expense over the related estimated useful life. Under the new guidance, goodwill balances are subjected to impairment analysis on an annual basis or whenever events or circumstances indicate that the estimated fair value is less than the related carrying value. As of November 30, 2001, the Company had approximately $37.1 million in unamortized cost in excess of fair value of assets purchased (i.e. goodwill) resulting from its acquisitions of WIU and the College.

The Company is required to adopt SFAS No. 142 effective September 1, 2002, but elected to adopt the new standard effective September 1, 2001. The Company recognized $0.3 million of goodwill amortization expense in the first quarter of 2001 and such amortization is no longer required under SFAS No. 142.

SFAS No. 142 requires a two-step impairment test for all goodwill balances. Under the Standard’s transitional rules, we are required to complete the first step of the impairment test by February 28, 2002 using carrying and fair value information as of September 1, 2001. If an impairment is indicated by that test, the second step of the test must be completed by August 31, 2002. If an impairment is indicated by the second test, it would be recorded as the effect of a change in accounting principle as of September 1, 2001 requiring restatement of prior interim financial information. We are in the process of completing the first step of our transitional impairment test and do not believe that adoption of SFAS No. 142 will have a material impact on our financial condition, results of operations or cash flows.

9.     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. The Company accounted for its investment in IDL, which is included in other assets in the consolidated balance sheet as of November 30, 2001, under the cost method. Hermes, which owned a 30% interest in IDL as of November 30, 2001, is currently owned by Dr. John G. Sperling, the Chairman of Apollo.

On December 14, 2001, Hermes acquired the Company’s investment in IDL in exchange for a promissory note in the principal amount of $11.9 million, which represented the related carrying value and approximated the related fair value as of that date. The promissory note accrues interest at an annual rate of six percent and is due at the earlier of December 14, 2021 or nine months after Dr. Sperling’s death.

8

Review by Independent Accountants

         The financial information as of November 30, 2001, and for the three-month period then ended, included in Part I pursuant to Rule 10-01 of Regulation S-X, has been reviewed by PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”), our independent accountants, in accordance with standards established by the American Institute of Certified Public Accountants. PricewaterhouseCoopers’ report is included in this quarterly report.

         PricewaterhouseCoopers does not carry out any significant or additional audit tests beyond those that would have been necessary if its report had not been included in this quarterly report. Accordingly, such report is not a “report” or “part of a registration statement” within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of Section 11 of such Act do not apply.

9

Report of Independent Accountants

The Board of Directors and
Shareholders of Apollo Group, Inc.:

We have reviewed the accompanying consolidated balance sheet of Apollo Group, Inc. and its subsidiaries as of November 30, 2001, and the related consolidated statements of operations and of comprehensive income for each of the three-month periods ended November 30, 2001 and November 30, 2000 and the consolidated statement of cash flows for the three-month periods ended November 30, 2001 and November 30, 2000. These financial statements are the responsibility of Apollo Group, Inc.’s management.

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

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of August 31, 2001, and the related consolidated statements of operations, of comprehensive income, of changes in shareholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated September 28, 2001 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of August 31, 2001, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
December 17, 2001

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

         The following information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc. and the consolidated financial statements and related notes of Apollo Group, Inc. for the fiscal year ended August 31, 2001 included in our Form 10-K as filed with the Securities and Exchange Commission, as well as in conjunction with the consolidated financial statements and related notes of Apollo Group, Inc. for the three-month period ended November 30, 2001 included in Item 1.

         This Form 10-Q, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” contains forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Forward-looking statements in this Form 10-Q and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” include, but are not limited to, statements such as: 1) total purchases of property and equipment for us for the year ended August 31, 2002, are expected to range from $45.0 to $50.0 million; 2) we anticipate the seasonal trends in the second and fourth quarters will continue in the future; 3) although we believe the OIG’s audits of IPD’s client institutions will be resolved without any material effect on our financial position, results of operations, or cash flows, and without any material change in IPD’s business strategy, as with any program review or audit, no assurance can be given as to the final outcome as the matters are not yet resolved; and 4) we are in the process of completing the first step of our transitional impairment test and do not believe that adoption of SFAS No. 142 will have a material impact on our financial condition, results of operations or cash flows.

         Future events and actual results could differ materially from those set forth in the forward-looking statements as a result of many factors. Statements in this Form 10-Q, including “Notes to Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.,” describe factors, among others, that could contribute to or cause such differences. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements include, without limitation: 1) new or revised interpretations of regulatory requirements; 2) changes in or new interpretations of 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 approval from The Higher Learning Commission for University of Phoenix to operate in new states; 6) changes in student enrollment; and 7) other factors set forth in this Form 10-Q. These forward-looking statements are based on our estimates, projections, beliefs, and assumptions and speak only as of the date made and are not guarantees of future performance. 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.

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:

		Three Months Ended
		November 30,
		2001			2000
		(Unaudited)
Revenues:
	Tuition and other, net		100.0	%		100.0	%
Costs and expenses:
	Instructional costs and services		51.2			53.8
	Selling and promotional		19.9			17.5
	General and administrative		6.4			6.8
			77.5			78.1
Income from operations			22.5			21.9
Interest income, net			1.3			1.8
Income before income taxes			23.8			23.7
Less provision for income taxes			9.4			9.7
Net income			14.4	%		14.0	%

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THREE MONTHS ENDED NOVEMBER 30, 2001 COMPARED WITH THREE MONTHS ENDED NOVEMBER 30, 2000

         Tuition and other net revenues increased by 28.9% to $228.2 million in the three months ended November 30, 2001 from $177.1 million in the three months ended November 30, 2000 due primarily to a 25.8% increase in average full-time equivalent degree student enrollments and tuition price increases averaging four to six percent (depending on the geographic area and program) at University of Phoenix. Most of our University of Phoenix campuses, which include their respective learning centers, had increases in net revenues and average full-time equivalent degree student enrollments from the three months ended November 30, 2000 to the three months ended November 30, 2001.

         Tuition and other net revenues for the three months ended November 30, 2001 and 2000 consists primarily of $215.6 million and $160.8 million, respectively, of net tuition revenues from students enrolled in degree programs and $2.9 million and $4.2 million, respectively, of net tuition revenues from students enrolled in non-degree programs.

         Instructional costs and services increased by 22.6% to $116.8 million in the three months ended November 30, 2001 from $95.2 million in the three months ended November 30, 2000 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 decreased to 51.2% in the three months ended November 30, 2001 from 53.8% in the three months ended November 30, 2000 due primarily to greater tuition and other net revenues being spread over the fixed costs related to centralized student services and the $1.4 million reserve taken in the first quarter of 2001 related to the IPD client institutions’ audit by the OIG. We may not be able to leverage our recurring costs to the same extent as we face increased costs related to the expansion into new geographic markets.

         Selling and promotional expenses increased by 46.5% to $45.4 million in the three months ended November 30, 2001 from $31.0 million in the three months ended November 30, 2000 due primarily to additional advertising and marketing expenditures and additional enrollment counselors. These expenses as a percentage of tuition and other net revenues increased to 19.9% in the three months ended November 30, 2001 from 17.5% in the three months ended November 30, 2000 due to increased advertising expenditures and additional enrollment counselors primarily related to University of Phoenix Online and new University of Phoenix campuses.

         General and administrative expenses increased by 22.2% to $14.7 million in the three months ended November 30, 2001 from $12.0 million in the three months ended November 30, 2000 due primarily to increased employee expenses related primarily to information services and depreciation related to the implementation of information support systems and a $1.0 million contribution to the Twin Towers Fund. General and administrative expenses as a percentage of tuition and other net revenues decreased to 6.4% in the three months ended November 30, 2001 from 6.8% in the three months ended November 30, 2000 due primarily to greater tuition and other net revenues being spread over the fixed costs related to various centralized functions such as information services, corporate accounting, and human resources.

         Net interest income was $3.0 million and $3.2 million in the three months ended November 30, 2001 and 2000, respectively. Interest expense was $89,000 and $111,000 for the three months ended November 30, 2001 and 2000, respectively.

         Our effective tax rate decreased to 39.4% in the three months ended November 30, 2001 from 40.9% in the three months ended November 30, 2000. This change is primarily the result of the impact of tax-exempt interest income.

         Net income increased to $33.0 million in the three months ended November 30, 2001 from $24.8 million in the three months ended November 30, 2000 due primarily to increased enrollments, increased tuition rates, improved utilization of instructional costs and services and general and administrative costs, and a reduction in our effective tax rate.

SEASONALITY IN RESULTS OF OPERATIONS

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

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

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

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LIQUIDITY AND CAPITAL RESOURCES

         Net cash provided by operating activities increased to $47.0 million in the three months ended November 30, 2001 from $46.0 million in the three months ended November 30, 2000. The increase resulted primarily from increased net income and a larger increase in student deposits and deferred revenue partially offset by a larger increase in restricted cash and receivables.

         Capital expenditures decreased to $6.2 million during the three months ended November 30, 2001 compared to $8.9 million in the three months ended November 30, 2000. Total purchases of property and equipment for the year ended August 31, 2002 are expected to range from $45.0 to $50.0 million. These expenditures will primarily be related to new campuses and learning centers and increases in normal recurring capital expenditures due to the overall increase in student and employee levels resulting from the growth in the business.

         At November 30, 2001, we had no outstanding borrowings on our $10.0 million line of credit. Borrowings under the line of credit bear interest at LIBOR plus .75% or prime at our election. The line of credit is renewable annually, and any amounts borrowed under the line are payable upon its termination in February 2003.

         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 and University of Phoenix Online common stock. As of November 30, 2001, we had repurchased approximately 6,705,000 shares of Apollo Education Group Class A common stock at a total cost of approximately $107.2 million and approximately 275,000 shares of University of Phoenix Online common stock at a total cost of approximately $6.8 million.

         On March 24, 2000, our Board of Directors authorized the issuance of a new class of stock called University of Phoenix Online common stock, that is intended to reflect the separate performance of University of Phoenix Online, a division of University of Phoenix. Our other businesses and our retained interest in University of Phoenix Online are referred to as “Apollo Education Group.” On October 3, 2000, an offering of 5,750,000 shares of University of Phoenix Online common stock was completed at a price of $14.00 per share. At the time of the offering this stock represented a 10.8% interest in that business with Apollo Education Group retaining 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 to 75 days from receipt. As of November 30, 2001, we had approximately $74.7 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 U.S. Department of Education Office of the Inspector General (“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. In audit reports issued to four client institutions, the OIG asserted that the client institutions violated the statutory prohibition on the use of incentive payments for recruiting by paying IPD a percentage of tuition revenue. The reports further suggest that IPD paid its employees in a manner that included incentive-based compensation even though IPD based its compensation plans for recruiters on factors or qualities that were not solely related to the success in securing enrollments. Additionally, the audit reports question the client institutions’ interpretation of the “12-hour rule.” Although both IPD and the client institutions believe that the matters in question do not relate to student program, or institutional eligibility and therefore believe a repayment of federal funds is not appropriate, the OIG has recommended to the U.S. Department of Education that the client institutions be required to return to lenders all loan funds disbursed. The institutions, with IPD’s assistance, will work with the U.S. Department of Education to eliminate or settle the issues raised in the audit reports.

         During 2001, IPD recorded a charge of $5.1 million (including $1.4 million recorded in the first quarter of 2001), to provide for its share of the estimated settlement obligation relating to all of its client institutions under audit. Our calculation of the estimated settlement obligation, which is reflected in instructional costs and services in the accompanying consolidated statement of operations, was based on information available to us and our previous experience with respect to such settlements.

         Although we believe that the OIG’s audits of IPD’s client institutions will be resolved without any material effect on our financial position, results of operations, or cash flows, and without any material change in IPD’s business strategy, as with any program review or audit, no assurance can be given as to the final outcome as the matters are not yet resolved.

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NEW ACCOUNTING PRONOUNCEMENTS

         The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS No. 141”), and No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). SFAS No. 141 eliminates the use of the pooling-of-interests method of accounting for business combinations and requires all acquisitions to be accounted for using the purchase method. SFAS No. 142, among other things, discontinues the requirement that goodwill resulting from purchase business combinations be amortized to expense over the related estimated useful life. Under the new guidance, goodwill balances are subjected to impairment analysis on an annual basis or whenever events or circumstances indicate that the estimated fair value is less than the related carrying value. As of November 30, 2001, the Company had approximately $37.1 million in unamortized cost in excess of fair value of assets purchased (i.e. goodwill) resulting from its acquisitions of WIU and the College.

         The Company is required to adopt SFAS No. 142 effective September 1, 2002, but elected to adopt the new standard effective September 1, 2001. The Company recognized $0.3 million of goodwill amortization expense in the first quarter of 2001 and such amortization is no longer required under SFAS No. 142.

         SFAS No. 142 requires a two-step impairment test for all goodwill balances. Under the Standard’s transitional rules, we are required to complete the first step of the impairment test by February 28, 2002 using carrying and fair value information as of September 1, 2001. If an impairment is indicated by that test, the second step of the test must be completed by August 31, 2002. If an impairment is indicated by the second test, it would be recorded as the effect of a change in accounting principle as of September 1, 2001 requiring restatement of prior interim financial information. We are in the process of completing the first step of our transitional impairment test and do not believe that adoption of SFAS No. 142 will have a material impact on our financial condition, results of operations or cash flows.

IMPACT OF INFLATION

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

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

         Our portfolio of marketable securities includes numerous issuers, varying types of securities and 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.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings	Not Applicable
Item 2. Changes in Securities and Use of Proceeds	Not Applicable
Item 3. Defaults Upon Senior Securities	Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders	Not Applicable
Item 5. Other Information	Not Applicable
Item 6. Exhibits and Reports on Form 8-K

         (a)  Exhibits:

Exhibit 10.4	Amended and Restated Apollo Group, Inc. Savings and Investment Plan
Exhibit 15.1	Letter on Unaudited Interim Financial Information
Exhibit 99	University of Phoenix Online Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations

         (b)  Reports on Form 8-K

No reports on Form 8-K were filed during the three months ended November 30, 2001.

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SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	APOLLO GROUP, INC. (Registrant)
Date: January 14, 2002
	By:   /s/ Kenda B. Gonzales Kenda B. Gonzales Chief Financial Officer
	By:   /s/ Daniel E. Bachus Daniel E. Bachus Chief Accounting Officer and Controller
	By:   /s/ Todd S. Nelson Todd S. Nelson President and Chief Executive Officer

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APOLLO GROUP, INC. AND SUBSIDIARIES

EXHIBIT INDEX

		PAGE
10.4	Amended and Restated Apollo Group, Inc. Savings and Investment Plan	Filed herewith
15.1	Letter on Unaudited Interim Financial Information	Filed herewith
99	University of Phoenix Online Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations	Filed herewith

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