10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

                 For the quarterly period ended May 31, 2004

OR

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

Commission file number: 0-25232

APOLLO GROUP, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

YES x          NO o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act).

YES x          NO o

AT JULY 9, 2004, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:

Apollo Education Group Class A common stock, no par value	174,926,000 Shares
Apollo Education Group Class B common stock, no par value	477,000 Shares
University of Phoenix Online common stock, no par value	15,664,000 Shares

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 of Apollo Group, Inc.		20
Item 3. Quantitative and Qualitative Disclosures about Market Risk		28
Item 4. Controls and Procedures		28
PART II – OTHER INFORMATION
Item 1. Legal Proceedings		29
Item 2. Changes in Securities and Use of Proceeds		30
Item 3. Defaults Upon Senior Securities		30
Item 4. Submission of Matters to a Vote of Security Holders		30
Item 5. Other Information		30
Item 6. Exhibits and Reports on Form 8-K		30
SIGNATURES		32
EXHIBIT INDEX		33
EXHIBIT 15.1 – Letter in Lieu of Consent
EXHIBIT 15.2 – Letter in Lieu of Consent
EXHIBIT 31.1 – Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.2 – Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.1 – Certification of Chief Executive Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.2 – Certification of Chief Financial Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 99.1 – Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online
EX-15.1
EX-15.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99.1

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements — Apollo Group, Inc.

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

	May 31,			August 31,
	2004			2003
(Dollars in thousands)	(Unaudited)
Assets:
Current assets
Cash and cash equivalents	$	489,009		$	416,452
Restricted cash		178,533			147,616
Marketable securities		323,538			235,962
Receivables, net		136,258			123,728
Deferred tax assets, net		9,841			9,098
Income taxes receivable					842
Other current assets		20,812			16,545
Total current assets		1,157,991			950,243
Property and equipment, net		169,884			119,057
Marketable securities		351,871			245,772
Cost in excess of fair value of assets purchased, net		37,096			37,096
Deferred tax assets, net		5,698			1,155
Other assets (includes receivable from related party of $13,642 and $13,107 at May 31, 2004 and August 31, 2003, respectively)		25,821			24,881
Total assets	$	1,748,361		$	1,378,204
Liabilities and Shareholders’ Equity:
Current liabilities
Current portion of long-term liabilities	$	3,946		$	3,231
Accounts payable		34,495			29,314
Accrued liabilities		68,503			49,525
Income taxes payable		26,520
Student deposits and current portion of deferred revenue		303,712			253,153
Total current liabilities		437,176			335,223
Deferred tuition revenue, less current portion		622			942
Long-term liabilities, less current portion		15,074			15,114
Total liabilities		452,872			351,279
Commitments and contingencies
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued
Apollo Education Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 175,978,000 and 175,286,000 issued and outstanding at May 31, 2004 and August 31, 2003, respectively		103			103
Apollo Education Group Class B voting common stock, no par value, 3,000,000 shares authorized; 477,000 issued and outstanding at May 31, 2004 and August 31, 2003		1			1
University of Phoenix Online nonvoting common stock, no par value, 400,000,000 shares authorized; 15,867,000 and 15,659,000 issued and outstanding at May 31, 2004 and August 31, 2003, respectively
Additional paid-in capital		342,247			293,650
Apollo Education Group Class A treasury stock, at cost, 1,411,000 and 2,103,000 shares at May 31, 2004 and August 31, 2003, respectively		(47,759	)		(27,100	)
University of Phoenix Online treasury stock, at cost, 347,000 and 86,000 shares at May 31, 2004 and August 31, 2003, respectively		(26,016	)		(4,601	)
Retained earnings		1,027,306			765,196
Accumulated other comprehensive loss		(393	)		(324	)
Total shareholders’ equity		1,295,489			1,026,925
Total liabilities and shareholders’ equity	$	1,748,361		$	1,378,204

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				For the Nine Months Ended
	May 31,				May 31,
	2004		2003		2004		2003
(In thousands, except per share amounts)			(Unaudited)
Revenues:
Tuition and other, net	$	496,999	$	364,166	$	1,305,670	$	968,244
Costs and expenses:
Instructional costs and services		196,026		159,345		552,017		444,697
Selling and promotional		103,287		70,990		272,316		195,801
General and administrative		22,849		17,015		63,544		49,864
		322,162		247,350		887,877		690,362
Income from operations		174,837		116,816		417,793		277,882
Interest income, net		4,886		3,853		13,617		10,896
Income before income taxes		179,723		120,669		431,410		288,778
Provision for income taxes		70,387		46,412		169,300		112,146
Net income	$	109,336	$	74,257	$	262,110	$	176,632
Net income attributed to:
Apollo Education Group common stock	$	101,103	$	69,816	$	242,502	$	166,193
University of Phoenix Online common stock	$	8,233	$	4,441	$	19,608	$	10,439
Earnings per share attributed to:
Apollo Education Group common stock:
Basic net income per share	$	0.57	$	0.40	$	1.38	$	0.95
Diluted net income per share	$	0.56	$	0.39	$	1.35	$	0.94
Basic weighted average shares outstanding		176,554		175,311		176,310		174,750
Diluted weighted average shares outstanding		179,360		177,931		179,004		177,375
University of Phoenix Online common stock:
Basic net income per share	$	0.51	$	0.29	$	1.23	$	0.70
Diluted net income per share	$	0.48	$	0.27	$	1.14	$	0.64
Basic weighted average shares outstanding		15,987		15,446		15,917		14,998
Diluted weighted average shares outstanding		17,226		16,742		17,187		16,374

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					For the Nine Months Ended
	May 31,					May 31,
	2004		2003			2004			2003
(In thousands)	(Unaudited)
Net income	$	109,336	$	74,257		$	262,110		$	176,632
Other comprehensive income:
Currency translation gain (loss)		82		(340	)		(69	)		(475	)
Comprehensive income	$	109,418	$	73,917		$	262,041		$	176,157

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

3

APOLLO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

	Common Stock
											University of Phoenix
	Apollo Education Group										Online
	Class A Nonvoting					Class B Voting					Nonvoting
				Stated					Stated					Stated
	Shares			Value		Shares			Value		Shares			Value
(In thousands)
Nine Months Ended May 31, 2003 (Unaudited)
Balance at August 31, 2002		173,221			$103		484			$1		14,256			$—
Stock issued under stock purchase plans		73										94
Stock issued under stock option plans		1,859										1,307
Tax benefits of stock options exercised
Treasury stock purchases		(106	)									(65	)
Conversion of Apollo Education Group Class B common stock to Apollo Education Group Class A common stock		6					(7	)
Currency translation adjustment
Net income
Balance at May 31, 2003		175,053		$	103		477		$	1		15,592		$	—

[Additional columns below]

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

			Apollo			University
			Education			of
			Group			Phoenix					Accumulated
	Additional		Class A			Online					Other			Total
	Paid-in		Treasury			Treasury			Retained		Comprehensive			Shareholders’
	Capital		Stock			Stock			Earnings		Income			Equity
(In thousands)
Nine Months Ended May 31, 2003
Balance at August 31, 2002		$227,155		$(46,029	)		$(526	)		$518,186		$103			$698,993
Stock issued under stock purchase plans		4,433		828											5,261
Stock issued under stock option plans		11,799		20,945			2,538								35,282
Tax benefits of stock options exercised		39,730													39,730
Treasury stock purchases				(4,068	)		(2,012	)							(6,080	)
Conversion of Apollo Education Group Class B common stock to Apollo Education Group Class A common stock															—
Currency translation adjustment												(475	)		(475	)
Net income										176,632					176,632
Balance at May 31, 2003	$	283,117	$	(28,324	)	$	—		$	694,818	$	(372	)	$	949,343

	Common Stock
										University of Phoenix
	Apollo Education Group									Online
	Class A Nonvoting					Class B Voting				Nonvoting
				Stated				Stated					Stated
	Shares			Value		Shares		Value		Shares			Value
(In thousands)
Nine Months Ended May 31, 2004 (Unaudited)
Balance at August 31, 2003		175,286		$	103		477	$	1		15,659		$	—
Stock issued under stock purchase plans		57									60
Stock issued under stock option plans		1,199									593
Tax benefits of stock options exercised
Treasury stock purchases		(564	)								(445	)
Currency translation adjustment
Net income
Balance at May 31, 2004		175,978		$	103		477	$	1		15,867		$	—

[Additional columns below]

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

			Apollo			University
			Education			of
			Group			Phoenix					Accumulated
	Additional		Class A			Online					Other			Total
	Paid-in		Treasury			Treasury			Retained		Comprehensive			Shareholders’
	Capital		Stock			Stock			Earnings		Income			Equity
(In thousands)
Nine Months Ended May 31, 2004
Balance at August 31, 2003	$	293,650	$	(27,100	)	$	(4,601	)	$	765,196	$	(324	)	$	1,026,925
Stock issued under stock purchase plans		4,003		1,090			1,369								6,462
Stock issued under stock option plans		8,257		21,287			9,898								39,442
Tax benefits of stock options exercised		36,337													36,337
Treasury stock purchases				(43,036	)		(32,682	)							(75,718	)
Currency translation adjustment												(69	)		(69	)
Net income										262,110					262,110
Balance at May 31, 2004	$	342,247	$	(47,759	)	$	(26,016	)	$	1,027,306	$	(393	)	$	1,295,489

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

4

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

	For the Nine Months Ended
	May 31,
	2004			2003
(In thousands)	(Unaudited)
Cash flows provided by (used for) operating activities:
Net income	$	262,110		$	176,632
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		32,511			29,585
Amortization of investment premiums		4,640			3,858
Provision for uncollectible accounts		19,490			15,079
Deferred income taxes		(5,286	)		(1,322	)
Tax benefits of stock options exercised		36,337			39,730
Increase in assets:
Restricted cash		(30,917	)		(35,225	)
Receivables		(32,020	)		(30,841	)
Other assets		(4,190	)		(1,507	)
Increase in liabilities:
Accounts payable and accrued liabilities		50,679			5,021
Student deposits and deferred revenue		50,239			45,344
Other liabilities		2,744			2,282
Net cash provided by operating activities		386,337			248,636
Cash flows provided by (used for) investing activities:
Net additions to property and equipment		(51,655	)		(41,151	)
Purchase of land and buildings related to future Online expansion		(32,080	)
Purchase of marketable securities		(422,364	)		(324,959	)
Maturities of marketable securities		224,049			213,498
Purchase of other assets		(1,847	)		(1,757	)
Net cash used for investing activities		(283,897	)		(154,369	)
Cash flows provided by (used for) financing activities:
Purchase of Apollo Education Group Class A common stock		(43,036	)		(4,068	)
Issuance of Apollo Education Group Class A common stock		32,655			26,353
Purchase of University of Phoenix Online common stock		(32,682	)		(2,012	)
Issuance of University of Phoenix Online common stock		13,249			14,190
Payments on long-term liabilities					(4,600	)
Net cash provided by (used for) financing activities		(29,814	)		29,863
Currency translation loss		(69	)		(475	)
Net increase in cash and cash equivalents		72,557			123,655
Cash and cash equivalents at beginning of period		416,452			295,237
Cash and cash equivalents at end of period	$	489,009		$	418,892

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

5

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

Note 1. Nature of Operations

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

University of Phoenix is a regionally accredited, private institution of higher education offering associates, bachelors, masters, and doctoral degree programs in business, criminal justice, education, health care, human services, information technology, management, and nursing. University of Phoenix has 51 physical campuses and 99 learning centers located in 30 states, Puerto Rico, and Vancouver, British Columbia. University of Phoenix also offers its educational programs worldwide through University of Phoenix Online, its computerized educational delivery system. University of Phoenix is accredited by The Higher Learning Commission (“HLC”) and is a member of the North Central Association of Colleges and Schools.

IPD provides program development and management services under long-term contracts to 23 regionally accredited private colleges and universities. IPD currently operates at 23 campuses and 31 learning centers in 23 states.

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

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

On March 24, 2000, the Board of Directors of Apollo authorized the issuance of a new class of stock called University of Phoenix Online common stock, that is intended to reflect the separate performance of University of Phoenix Online, a division of University of Phoenix. Apollo’s other businesses and its retained interest in University of Phoenix Online are referred to as “Apollo Education Group.” On October 3, 2000, an offering of 5,750,000 shares of University of Phoenix Online common stock was completed at a price of $14.00 per share. At the time of the offering this stock represented a 10.8% interest in that business with Apollo Education Group retaining the remaining 89.2% interest in University of Phoenix Online. This percentage has decreased to 85.7% at May 31, 2004, due to the issuance of shares related to the exercise of University of Phoenix Online stock options and the issuance of shares of University of Phoenix Online common stock as part of the Apollo Group, Inc. Employee Stock Purchase Plan, partially offset by the repurchase of shares of University of Phoenix Online common stock.

This financial information reflects all adjustments, consisting only of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Unless otherwise noted, references to 2004 and 2003 refer to the periods ended May 31, 2004 and 2003, respectively.

Note 2. Significant Accounting Policies

Basis of presentation

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

Principles of consolidation

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

Cash and cash equivalents

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

6

Restricted cash

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

Investments

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

Property and equipment

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

Revenues, receivables, and related liabilities

Approximately 94.3% of the Company’s tuition and other net revenues during the nine months ended May 31, 2004, consist of tuition revenues. Tuition revenue is recognized on a weekly basis, pro rata over the period of instruction. Tuition and other net revenues also include rEsource fees, application fees, commissions from the sale of education-related products, other student fees, and other income. Tuition and other net revenues vary from period to period based on several factors that include: 1) the aggregate number of students attending classes; 2) the number of classes held during the period; and 3) the weighted average tuition price per credit hour (weighted by program and location). University of Phoenix tuition revenues currently represent 95.1% of consolidated tuition revenues. IPD tuition revenues consist of the contractual share of tuition revenues from students enrolled in related programs at its client institutions. IPD’s contracts with its respective client institutions generally have terms of five to ten years with provisions for renewal.

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

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

Tuition and other revenues are shown net of discounts relating to a variety of promotional programs. Such discounts totaled $15.5 million (3.0% of gross revenues) and $8.7 million (2.3% of gross revenues) in the three months ended May 31, 2004 and 2003, respectively, and $41.9 million (3.1% of gross revenues) and $24.4 million (2.5% of gross revenues) in the nine months ended May 31, 2004 and 2003, respectively.

7

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

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

Cost in excess of fair value of assets purchased

At May 31, 2004 and 2003, the Company’s cost in excess of fair value of assets purchased (i.e. goodwill) related primarily to the acquisition of certain assets of the College and WIU. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). SFAS No. 142, among other things, discontinues the requirement that goodwill resulting from purchase business combinations be amortized to expense over the related estimated useful life. Under this guidance, goodwill balances are subjected to an impairment analysis on an annual basis or whenever events or circumstances indicate that the estimated fair value is less than the related carrying value.

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

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

Fair value of financial instruments

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

Earnings per share

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

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

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

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

8

Deferred rental payments and deposits

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

Selling and promotional costs

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

Start-up costs

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

Stock-based compensation

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

	For the Three Months Ended						For the Nine Months Ended
	May 31,						May 31,
	2004			2003			2004			2003
				(Unaudited)
Apollo Education Group
Net income, as reported	$	101,103		$	69,816		$	242,502		$	166,193
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(3,784	)		(3,002	)		(10,872	)		(9,309	)
Pro forma net income	$	97,319		$	66,814		$	231,630		$	156,884
Earnings per share:
Basic — as reported	$	0.57		$	0.40		$	1.38		$	0.95
Basic — pro forma	$	0.55		$	0.38		$	1.31		$	0.90
Diluted — as reported	$	0.56		$	0.39		$	1.35		$	0.94
Diluted — pro forma	$	0.54		$	0.38		$	1.29		$	0.88
University of Phoenix Online
Net income, as reported	$	8,233		$	4,441		$	19,608		$	10,439
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(172	)		(126	)		(452	)		(316	)
Pro forma net income	$	8,061		$	4,315		$	19,156		$	10,123
Earnings per share:
Basic — as reported	$	0.51		$	0.29		$	1.23		$	0.70
Basic — pro forma	$	0.50		$	0.28		$	1.20		$	0.67
Diluted — as reported	$	0.48		$	0.27		$	1.14		$	0.64
Diluted — pro forma	$	0.47		$	0.26		$	1.12		$	0.62

9

The effects of applying SFAS No. 123 in the above pro forma disclosures are not necessarily indicative of future amounts. The fair value of each option grant was estimated on the date of grant using the Black-Scholes method with the following weighted-average assumptions for grants for Apollo Education Group:

	For the Three Months Ended						For the Nine Months Ended
	May 31,						May 31,
	2004			2003			2004			2003
Apollo Education Group
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Expected volatility		29.9	%		42.0	%		35.9	%		43.9	%
Risk-free interest rate		2.9	%		2.0	%		3.2	%		3.2	%
Expected lives (in years)		3.7			2.5			3.3			3.3
Weighted average fair value of options granted		$21.40			$14.60			$17.83			$13.83

The fair value of each option grant was estimated on the date of grant using the Black-Scholes method with the following weighted-average assumptions for grants for University of Phoenix Online:

	For the Nine Months Ended
	May 31,
	2004			2003
University of Phoenix Online
Dividend yield		0.0	%		0.0	%
Expected volatility		40.0	%		56.0	%
Risk-free interest rate		3.3	%		3.1	%
Expected lives (in years)		3.4			3.0
Weighted average fair value of options granted		$20.79			$11.29

No University of Phoenix stock options were granted in the three months ended May 31, 2004 and 2003.

Segment information

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

Use of estimates

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

Recent accounting pronouncements

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

10

Note 3. Balance Sheet Components

Marketable securities consist of the following, in thousands:

	May 31,				August 31,
	2004				2003
			(Unaudited)
	Estimated		Amortized		Estimated		Amortized
Type	Market Value		Cost		Market Value		Cost
Classified as current:
Municipal bonds	$	254,787	$	254,806	$	155,182	$	155,014
U.S. government sponsored enterprises		1,761		1,758		4,940		4,902
Auction rate preferred stock		61,975		61,974		24,550		24,550
Corporate obligations		5,000		5,000		51,515		51,496
Total current marketable securities		323,523		323,538		236,187		235,962
Classified as noncurrent:
Municipal bonds due in 1-5 years		212,678		213,876		163,737		163,747
U.S. government sponsored enterprises		81,586		83,959		24,415		25,250
Auction rate preferred stock		38,150		38,150		42,075		42,075
Corporate obligations		15,946		15,886		14,587		14,700
Total noncurrent marketable securities		348,360		351,871		244,814		245,772
Total marketable securities	$	671,883	$	675,409	$	481,001	$	481,734

Receivables consist of the following, in thousands:

	May 31,			August 31,
	2004			2003
	(Unaudited)
Trade receivables	$	141,103		$	131,045
Interest receivable		6,748			3,564
		147,851			134,609
Less allowance for doubtful accounts		(11,593	)		(10,881	)
Total receivables, net	$	136,258		$	123,728

Bad debt expense was $5.7 million and $4.3 million for the three months ended May 31, 2004 and 2003, respectively, and $19.5 million and $15.1 million for the nine months ended May 31, 2004 and 2003, respectively. Write-offs, net of recoveries, were $6.6 million and $4.9 million for the three months ended May 31, 2004 and 2003, respectively, and $18.8 million and $12.5 million for the nine months ended May 31, 2004 and 2003, respectively.

Property and equipment consist of the following, in thousands:

	May 31,			August 31,
	2004			2003
	(Unaudited)
Furniture and equipment	$	213,284		$	179,588
Software		58,291			52,712
Leasehold improvements		56,208			46,902
Land and buildings		32,214			115
		359,997			279,317
Less accumulated depreciation and amortization		(190,113	)		(160,260	)
Property and equipment, net	$	169,884		$	119,057

Depreciation and amortization expense was $11.2 million and $10.6 million for the three months ended May 31, 2004 and 2003, respectively, and $32.9 million and $30.2 million for the nine months ended May 31, 2004 and 2003, respectively.

11

Accrued liabilities consist of the following, in thousands:

	May 31,		August 31,
	2004		2003
	(Unaudited)
Salaries, wages, and benefits	$	27,532	$	23,543
Accrued advertising		13,779		7,176
Other accrued liabilities		27,192		18,806
Total accrued liabilities	$	68,503	$	49,525

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

	May 31,		August 31,
	2004		2003
	(Unaudited)
Student deposits	$	202,007	$	163,453
Current portion of deferred tuition revenue		85,588		77,605
Application fee revenue		10,340		7,551
Other deferred revenue		5,777		4,544
Total student deposits and current portion of deferred revenue	$	303,712	$	253,153

Note 4. Short-Term Borrowings

At May 31, 2004, the Company had no outstanding borrowings on its $10.0 million line of credit. Borrowings under the line of credit bear interest at LIBOR plus ..75% or prime at the Company’s election. Any amounts borrowed under the line are payable upon its termination in February 2006.

Note 5. Long-Term Liabilities

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

	May 31,			August 31,
	2004			2003
	(Unaudited)
Deferred compensation discounted at 7.5%	$	1,334		$	1,284
Deferred rent		12,599			9,905
Deferred gain on sale-leasebacks and other contracts		4,999			7,068
Other long-term liabilities		88			88
Total long-term liabilities		19,020			18,345
Less current portion		(3,946	)		(3,231	)
Total long-term liabilities, net	$	15,074		$	15,114

Note 6. Common Stock

The Board of Directors of Apollo has authorized a program allocating up to $300.0 million in Company funds to repurchase shares of Apollo Education Group Class A common stock and University of Phoenix Online common stock. As of May 31, 2004, the Company had repurchased approximately 10,823,000 shares of Apollo Education Group Class A common stock at a total cost of approximately $158.4 million and 986,000 shares of University of Phoenix Online common stock at a total cost of approximately $46.7 million. In June 2004 the Board of Directors of Apollo authorized a program allocating up to an additional $500 million in Company funds to repurchase shares of Apollo Education Group Class A common stock and University of Phoenix Online common stock. Additional shares were repurchased between June 1, 2004 and July 9, 2004 consisting of approximately 1,183,000 shares of Apollo Education Group Class A common stock at a cost of approximately $103.0 million and 233,000 shares of University of Phoenix Online common stock at a cost of approximately $20.2 million.

12

Note 7. Earnings Per Share

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

	For the Three Months Ended				For the Nine Months Ended
	May 31,				May 31,
	2004		2003		2004		2003
			(Unaudited)
Apollo Education Group	$	101,103	$	69,816	$	242,502	$	166,193
University of Phoenix Online		8,233		4,441		19,608		10,439
Net income	$	109,336	$	74,257	$	262,110	$	176,632

The earnings attributable to University of Phoenix Online common stock represent the portion of the earnings of University of Phoenix Online attributed to the shares of University of Phoenix Online common stock outstanding excluding Apollo Education Group’s retained interest in University of Phoenix Online. At the date of the issuance of the University of Phoenix Online common stock, Apollo Education Group retained an 89.2% interest in University of Phoenix Online. This percentage has decreased to 85.7% at May 31, 2004, due to the issuance of shares related to the exercise of University of Phoenix Online stock options and the issuance of shares of University of Phoenix Online common stock as part of the Apollo Group, Inc. Employee Stock Purchase Plan partially offset by the repurchase of shares of University of Phoenix Online common stock.

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

	For the Three Months Ended
					May 31,
	2004						2003
			Weighted						Weighted
			Average		Per Share				Average		Per Share
	Income		Shares		Amount		Income		Shares		Amount
					(Unaudited)
Basic net income per share	$	101,103		176,554	$	0.57	$	69,816		175,311	$	0.40
Effect of dilutive securities:
Stock options				2,806						2,620
Diluted net income per share	$	101,103		179,360	$	0.56	$	69,816		177,931	$	0.39

	For the Nine Months Ended
					May 31,
	2004						2003
			Weighted						Weighted
			Average		Per Share				Average		Per Share
	Income		Shares		Amount		Income		Shares		Amount
					(Unaudited)
Basic net income per share	$	242,502		176,310	$	1.38	$	166,193		174,750	$	0.95
Effect of dilutive securities:
Stock options				2,694						2,625
Diluted net income per share	$	242,502		179,004	$	1.35	$	166,193		177,375	$	0.94

Basic earnings per share for Apollo Education Group common stock for the three and nine months ended May 31, 2004 and 2003, were computed by dividing Apollo Education Group earnings (including its retained interest in University of Phoenix Online earnings) by the weighted average number of Apollo Education Group common stock shares outstanding during the respective periods. Diluted earnings per share were calculated similarly, except that the dilutive effect of the assumed exercise of options issued under Apollo Group, Inc. incentive plans, exclusive of options granted and shares issued with respect to University of Phoenix Online common stock, is included.

13

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

	For the Three Months Ended
					May 31,
	2004						2003
			Weighted						Weighted
			Average		Per Share				Average		Per Share
	Income		Shares		Amount		Income		Shares		Amount
					(Unaudited)
Basic net income per share	$	8,233		15,987	$	0.51	$	4,441		15,446	$	0.29
Effect of dilutive securities:
Stock options				1,239						1,296
Diluted net income per share	$	8,233		17,226	$	0.48	$	4,441		16,742	$	0.27

	For the Nine Months Ended
					May 31,
	2004						2003
			Weighted						Weighted
			Average		Per Share				Average		Per Share
	Income		Shares		Amount		Income		Shares		Amount
					(Unaudited)
Basic net income per share	$	19,608		15,917	$	1.23	$	10,439		14,998	$	0.70
Effect of dilutive securities:
Stock options				1,270						1,376
Diluted net income per share	$	19,608		17,187	$	1.14	$	10,439		16,374	$	0.64

Basic earnings per share for University of Phoenix Online common stock for the three and nine months ended May 31, 2004 and 2003, were computed by dividing University of Phoenix Online earnings (excluding Apollo Education Group’s retained interest in University of Phoenix Online earnings) by the number of shares of University of Phoenix Online common stock outstanding during the respective periods. Diluted earnings per share were calculated similarly, except that the dilutive effect of the assumed exercise of options issued under Apollo Group, Inc. incentive plans with respect to University of Phoenix Online common stock, is included.

14

Note 8. Commitments and Contingencies

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

On approximately December 19, 2001, a class action complaint was filed in the Superior Court of the State of California for the County of Solano, captioned Davis et. al. v. Apollo Group, Inc. et. al., Case No. FCS018663. Plaintiffs, one current and two former enrollment advisors with University of Phoenix, filed this class action on behalf of themselves and current and former enrollment advisors employed by the Company in the State of California and seek certification as a class, monetary damages in unspecified amounts, and injunctive relief. Plaintiffs allege that during their employment, they and other enrollment advisors worked in excess of 8 hours per day or 40 hours per week, and contend that the Company failed to pay overtime. In July 2003, the Court denied the plaintiffs’ motion to certify a class. The parties nonetheless have negotiated a settlement on a class-wide basis. The settlement has been preliminarily approved by the Court and the final approval by the Court is scheduled to occur in late July 2004. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action.

On August 29, 2003, the Company was notified that a qui tam action had been filed against it in the United States District Court for the Eastern District of California by two current employees on behalf of themselves and the federal government. A qui tam action is a civil lawsuit brought by one or more individuals (a qui tam “relator”) for an alleged submission to the federal government of a false claim for payment. A qui tam action is always filed under seal and remains under seal until the U.S. Department of Justice decides whether to intervene in the litigation. When the Government declines to intervene in a qui tam action, as it has done in this case, the relators may elect to pursue the litigation on behalf of the Government and, if they are successful, receive a portion of the federal government’s recovery. The qui tam action alleges, among other things, violations of the False Claims Act 31 U.S.C. § 3729(a)(1) and (2), by University of Phoenix for submission of a knowingly false or fraudulent claim for payment or approval, and knowingly false records or statements to get a false or fraudulent claim paid or approved in connection with federal student aid programs, and asserts that University of Phoenix improperly compensates its employees. On or about October 20, 2003, a motion to dismiss the action was filed and was subsequently granted with leave to amend the complaint. Subsequently, a second amended complaint was filed on or about March 3, 2004. A motion to dismiss this amended complaint was filed on or about March 22, 2004, and was subsequently granted with prejudice. On June 11, 2004, an appeal was filed with the United States Ninth Circuit Court of Appeals. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action.

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

In November 2002, two former enrollment advisors at University of Phoenix Online filed an administrative claim with the Wage & Hour Division of the Department of Labor that they were incorrectly classified as exempt employees and therefore owed unpaid overtime. The Wage & Hour Division conducted an investigation, but issued no determination. The matter was then transferred to the Department of Labor, Office of the Solicitor, which asserted that unpaid overtime was due to all enrollment advisors employed at University of Phoenix Online after November 2001. On June 16, 2004, the parties reached a negotiated resolution of these claims, which includes a payment of between $2 million and $3 million by the Company.

15

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

Note 9. Consolidating Statement of Operations Data

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

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

Upon the completion of the offering, the net proceeds of the offering of $72.8 million were transferred to University of Phoenix Online and accounted for as a capital contribution. Subsequently, the difference between cash receipts and cash outlays attributable to University of Phoenix Online have been accounted for as a revolving credit advance from University of Phoenix Online to Apollo Education Group 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 to the extent this difference was not transferred to University of Phoenix Online. To date, this difference has been transferred to University of Phoenix Online on a monthly basis, therefore, no intercompany interest has been recorded.

16

									For the Three Months Ended
									May 31,
	2004										2003
	Apollo			University of							Apollo			University of
	Education			Phoenix					Apollo		Education			Phoenix					Apollo
	Group			Online		Eliminations			Group, Inc.		Group			Online		Eliminations			Group, Inc.
(In thousands)									(Unaudited)
Revenues:
Tuition and other, net(1)	$	263,719		$	233,280	$	—		$	496,999	$	218,347		$	145,819	$	—		$	364,166
Inter-group license fee revenue(2)		9,331					(9,331	)		—		5,832					(5,832	)		—
		273,050			233,280		(9,331	)		496,999		224,179			145,819		(5,832	)		364,166
Costs and expenses:
Instructional costs and services
External expenses(3)		137,614			58,412					196,026		117,064			42,281					159,345
Inter-group allocated expenses(4)		(11,911	)		11,911					—		(7,445	)		7,445					—
Inter-group license fee expense(2)					9,331		(9,331	)		—					5,832		(5,832	)		—
Selling and promotional
External expenses(3)		53,375			49,912					103,287		38,757			32,233					70,990
Inter-group allocated expenses(4)		(446	)		446					—		(339	)		339					—
General and administrative
External expenses(3)		22,849								22,849		17,015								17,015
Inter-group allocated expenses(4)		(10,046	)		10,046					—		(6,312	)		6,312					—
		191,435			140,058		(9,331	)		322,162		158,740			94,442		(5,832	)		247,350
Income from operations		81,615			93,222		—			174,837		65,439			51,377		—			116,816
Interest income, net		3,213			1,673					4,886		2,611			1,242					3,853
Income before income taxes		84,828			94,895		—			179,723		68,050			52,619		—			120,669
Provision for income taxes(5)		32,619			37,768					70,387		25,470			20,942					46,412
Net income	$	52,209		$	57,127	$	—		$	109,336	$	42,580		$	31,677	$	—		$	74,257

	For the Nine Months Ended
	May 31,
	2004										2003
	Apollo			University of							Apollo			University of
	Education			Phoenix					Apollo		Education			Phoenix					Apollo
	Group			Online		Eliminations			Group, Inc.		Group			Online		Eliminations			Group, Inc.
(In thousands)									(Unaudited)
Revenues:
Tuition and other, net(1)	$	710,570		$	595,100	$	—		$	1,305,670	$	595,258		$	372,986	$	—		$	968,244
Inter-group license fee revenue(2)		23,804					(23,804	)		—		14,919					(14,919	)		—
		734,374			595,100		(23,804	)		1,305,670		610,177			372,986		(14,919	)		968,244
Costs and expenses:
Instructional costs and services
External expenses(3)		390,082			161,935					552,017		333,043			111,654					444,697
Inter-group allocated expenses(4)		(30,311	)		30,311					—		(19,544	)		19,544					—
Inter-group license fee expense(2)					23,804		(23,804	)		—					14,919		(14,919	)		—
Selling and promotional
External expenses(3)		143,548			128,768					272,316		110,764			85,037					195,801
Inter-group allocated expenses(4)		(1,161	)		1,161					—		(815	)		815					—
General and administrative
External expenses(3)		63,544								63,544		49,864								49,864
Inter-group allocated expenses(4)		(27,230	)		27,230					—		(17,990	)		17,990					—
		538,472			373,209		(23,804	)		887,877		455,322			249,959		(14,919	)		690,362
Income from operations		195,902			221,891		—			417,793		154,855			123,027		—			277,882
Interest income, net		8,977			4,640					13,617		7,634			3,262					10,896
Income before income taxes		204,879			226,531		—			431,410		162,489			126,289		—			288,778
Provision for income taxes(5)		79,141			90,159					169,300		61,883			50,263					112,146
Net income	$	125,738		$	136,372	$	—		$	262,110	$	100,606		$	76,026	$	—		$	176,632

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     (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 $9.3 million and $5.8 million for the three months ended May 31, 2004 and 2003, respectively, and $23.8 million and $14.9 million for the nine months ended May 31, 2004 and 2003, respectively. The inter-group license fee revenue of Apollo Education Group eliminates against the inter-group license fee expense of University of Phoenix Online in consolidation at the Apollo Group, Inc. level.

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

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

	For the Three Months Ended				For the Nine Months Ended
	May 31,				May 31,
	2004		2003		2004		2003
			(Unaudited)
Instructional costs and services	$	11,911	$	7,445	$	30,311	$	19,544
Selling and promotional		446		339		1,161		815
General and administrative		10,046		6,312		27,230		17,990
	$	22,403	$	14,096	$	58,702	$	38,349

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

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Report of Independent Registered Public Accounting Firm

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

We have reviewed the accompanying condensed consolidated balance sheet of Apollo Group, Inc. and its subsidiaries (the “Company”) as of May 31, 2004, and the related condensed consolidated statements of operations and of comprehensive income for the three-month and nine-month periods then ended and of statement of changes in shareholders’ equity and of cash flows for the nine-month period then ended. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements as of May 31, 2004, and for the three-month and nine-month periods then ended for them to be in conformity with accounting principles generally accepted in the United States of America.

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

Deloitte & Touche LLP
Phoenix, Arizona
July 12, 2004

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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, 2003, included in our Form 10-K as filed with the Securities and Exchange Commission, as well as in conjunction with the consolidated financial statements and related notes of Apollo Group, Inc. for the three-month and nine-month periods ended May 31, 2004, included in Item 1.

     This Form 10-Q, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” contains forward-looking statements. The words “believes,” “expects,” “anticipates,” “estimates,” “plans,” and other similar statements of expectations identify forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Forward-looking statements in this Form 10-Q and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Apollo Group, Inc.” include, but are not limited to, statements such as: 1) although we believe that the OIG’s audits of certain Institute for Professional Development’s client institutions will be resolved without any material effect on our financial position, results of operations, or cash flows, and without any material change in Institute for Professional Development’s business strategy, as with any program review or audit, no assurance can be given as to the final outcome as the matters are not yet resolved; 2) while the outcome of this legal proceeding is currently not determinable, management does not expect the results of this action will have a material adverse effect on our business, financial position, results of operations, or cash flows; 3) total purchases of property and equipment for the year ended August 31, 2004, excluding the land and buildings for University of Phoenix Online, are expected to range from $65.0 to $70.0 million; 4) we anticipate that these seasonal trends in the second and fourth quarters will continue in the future; and 5) while the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action. These forward-looking statements are based on our estimates, projections, beliefs, and assumptions and speak only as of the date made and are not guarantees of future performance.

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

OVERVIEW

     Apollo Group, Inc. has been providing higher education to working adults for over 25 years. We operate through our subsidiaries, University of Phoenix, Institute for Professional Development, The College for Financial Planning, and Western International University. We currently offer our programs and services at 78 campuses and 133 learning centers in 38 states, Puerto Rico, and Vancouver, British Columbia. Our combined degree enrollment at May 31, 2004, was approximately 239,300. University of Phoenix is our largest subsidiary with its tuition revenues currently representing approximately 95.1% of consolidated tuition revenues.

     University of Phoenix had degree enrollments of approximately 213,100 adult students at May 31, 2004. University of Phoenix has successfully replicated its teaching/learning model while maintaining educational quality at 51 physical campuses and 99 learning centers in 30 states, Puerto Rico, and Vancouver, British Columbia. University of Phoenix plans to continue increasing its student base by growing existing locations and by opening new campuses and learning centers throughout the United States and Canada. New locations are selected based on an analysis of various factors, including the population of working adults in the area, the number of local employers and their educational reimbursement policies, and the availability of similar programs offered by other institutions. University of Phoenix currently plans on opening 7-9 new campuses during 2004. In the first nine months of 2004, five new University of Phoenix campuses were opened. University of Phoenix also offers its educational programs worldwide through University of Phoenix Online, its computerized educational delivery system. We plan to continue expanding our distance education

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programs and services. We will also continue to respond to the changing educational needs of working adults and their employers by introducing new undergraduate and graduate degree programs as well as training programs.

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

     Our future success is highly dependent on our ability to obtain, maintain, or renew required regulatory approvals, accreditation, or state authorizations. We are subject to extensive private, federal, and state regulation. The Higher Education Act of 1965, as amended, and the related regulations govern all higher education institutions participating in Title IV programs. The Higher Education Act mandates specific additional regulatory responsibilities for each of the following components:

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

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

• state higher education regulatory bodies.

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

     Our institutions are covered by regional accreditation, which provides the following:

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

• qualification to participate in Title IV programs; and

• qualification for authorization in certain states.

     Regional accreditation is accepted nationally as the basis for the recognition of earned credit and degrees for academic purposes, employment, professional licensure, and, in some states, for authorization to operate as a degree-granting institution. The loss of accreditation would significantly reduce demand for our programs as it would prohibit us from offering degrees and credits that are recognized and accepted by employers, other higher education institutions, and governmental entities. It would also render us ineligible to participate in federal financial aid programs.

     The Higher Education Act of 1965 and the related regulations adopted by the U.S. Department of Education also impose numerous requirements with which institutions participating in the Title IV programs must comply. Students at University of Phoenix, Western International University, and Institute for Professional Development client institutions may receive federal financial aid under the Title IV programs. The College for Financial Planning does not participate in Title IV programs because most of its students are enrolled in non-degree programs. The failure to comply with any of the Title IV requirements could result in adverse action by the U.S. Department of Education against us, including the termination of Title IV eligibility, the imposition of fines, or the imposition of liabilities by the U.S. Department of Education. Institute for Professional Development client institutions administer their own Title IV programs. The loss of Title IV eligibility would significantly reduce demand for our programs.

     Our institutions are required to have authorization to operate as degree-granting institutions in each state where they physically provide education programs. Depending on the state, the addition of a degree program not offered previously or the addition of a new location must be included in the institution’s accreditation and be approved by the appropriate state authorization agency. The failure to obtain authorization to operate in new states or to add new programs/locations would adversely effect our ability to expand our business.

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CRITICAL ACCOUNTING POLICIES

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

Revenue recognition

     Approximately 94.3% of our tuition and other net revenues during the first nine months of 2004 consist of tuition revenues. Tuition revenue is recognized on a weekly basis, pro rata over the period of instruction. Our tuition and other net revenues also include rEsource fees, application fees, commissions from the sale of education-related products, other student fees, and other income. Our tuition and other net revenues vary from period to period based on several factors that include: 1) the aggregate number of students attending classes; 2) the number of classes held during the period; and 3) the weighted average tuition price per credit hour (weighted by program and location). University of Phoenix tuition revenues currently represent 95.1% of consolidated tuition revenues. Institute for Professional Development tuition revenues consist of the contractual share of tuition revenues from students enrolled in related programs at its client institutions. Institute for Professional Development’s contracts with its respective client institutions generally have terms of five to ten years with provisions for renewal.

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

     Tuition and other revenues are shown net of discounts relating to a variety of promotional programs. Such discounts totaled $15.5 million (3.0% of gross revenues) and $8.7 million (2.3% of gross revenues) in the three months ended May 31, 2004 and 2003, respectively, and $41.9 million (3.1% of gross revenues) and $24.4 million (2.5% of gross revenues) in the nine months ended May 31, 2004 and 2003, respectively.

Allowance for doubtful accounts

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

Income taxes

     Our effective tax rates differ from the statutory rate primarily due to state taxes and the tax impact of tax-exempt interest income. The effective tax rate was 39.2% in the third quarter of 2004 and 39.3% in both the first and second quarters of 2004. Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax laws or interpretations thereof. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Loss contingencies

     We are subject to the possibility of various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or

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a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.

Impairment of intangible assets

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

RESULTS OF OPERATIONS

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

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

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

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     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:

	For the Three Months Ended						For the Nine Months Ended
	May 31,						May 31,
	2004			2003			2004			2003
				(Unaudited)
Revenues:
Tuition and other, net		100.0	%		100.0	%		100.0	%		100.0	%
Costs and expenses:
Instructional costs and services		39.4			43.7			42.3			45.9
Selling and promotional		20.8			19.5			20.8			20.2
General and administrative		4.6			4.7			4.9			5.2
		64.8			67.9			68.0			71.3
Income from operations		35.2			32.1			32.0			28.7
Interest income, net		1.0			1.1			1.0			1.1
Income before income taxes		36.2			33.2			33.0			29.8
Provision for income taxes		14.2			12.8			13.0			11.6
Net income		22.0	%		20.4	%		20.0	%		18.2	%

THREE MONTHS ENDED MAY 31, 2004, COMPARED WITH THREE MONTHS ENDED MAY 31, 2003

     Tuition and other net revenues increased by 36.5% to $497.0 million in the three months ended May 31, 2004, from $364.2 million in the three months ended May 31, 2003, primarily due to a 29.0% increase in average full-time equivalent degree student enrollments and tuition price increases averaging four to six percent (depending on the geographic area and program) at University of Phoenix. Most of our University of Phoenix campuses, which include their respective learning centers, had increases in net revenues and average full-time equivalent degree student enrollments from the three months ended May 31, 2003, to the three months ended May 31, 2004.

     Tuition and other net revenues for the three months ended May 31, 2004 and 2003, consist primarily of $464.5 million and $342.6 million, respectively, of net tuition revenues from students enrolled in degree programs and $2.6 million and $3.1 million, respectively, of net tuition revenues from students enrolled in non-degree programs.

     Instructional costs and services increased by 23.0% to $196.0 million in the three months ended May 31, 2004, from $159.3 million in the three months ended May 31, 2003, due primarily to increases in direct costs necessary to support the increase in degree student enrollments such as employee compensation and related expenses, faculty compensation, classroom lease expenses, and financial aid processing costs which increased $15.0 million, $8.1 million, $3.9 million, and $3.4 million, respectively. Instructional costs and services as a percentage of tuition and other net revenues decreased to 39.4% in the three months ended May 31, 2004, from 43.7% in the three months ended May 31, 2003, due primarily to greater tuition and other net revenues being spread over the fixed costs related to centralized student services. We may not be able to leverage our recurring costs to the same extent as we face increased costs related to our expansion into new geographic markets.

     Selling and promotional expenses increased by 45.5% to $103.3 million in the three months ended May 31, 2004, from $71.0 million in the three months ended May 31, 2003, due primarily to an increase in enrollment advisors’ compensation and related expenses of $17.2 million, additional advertising expenditures of $14.0 million, and small increases in various other costs. Selling and promotional expenses as a percentage of tuition and other net revenues increased to 20.8% in the three months ended May 31, 2004, from 19.5% in the three months ended May 31, 2003, as a result of an increase in the cost of enrollment advisors and advertising expenditures as a percentage of revenue of 1.5% and 0.5%, respectively, partially offset by greater tuition and other net revenues being spread over a proportionately lower increase in the other selling and promotional expenses.

     General and administrative expenses increased by 34.3% to $22.8 million in the three months ended May 31, 2004, from $17.0 million in the three months ended May 31, 2003, due primarily to increased employee compensation and related expenses of $3.0 million and small increases in various other costs. General and administrative expenses as a percentage of tuition and other net revenues decreased to 4.6% in the three months ended May 31, 2004, from 4.7% in the three months ended May 31, 2003, due primarily to greater tuition and other net revenues being spread over the fixed costs related to various centralized functions such as information services, corporate accounting, and human resources.

     Net interest income increased to $4.9 million in the three months ended May 31, 2004, from $3.9 million in the three months ended May 31, 2003. This increase was attributable to the increase in cash equivalents and marketable securities between periods primarily as a result of the investment of cash flows from operations. Interest expense was $20,000 and $44,000 in the three months ended May 31, 2004 and 2003, respectively.

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     Our effective income tax rate increased to 39.2% in the three months ended May 31, 2004, from 38.5% in the three months ended May 31, 2003. This decrease was due primarily to a refund of state income taxes in the prior year.

NINE MONTHS ENDED MAY 31, 2004, COMPARED WITH NINE MONTHS ENDED MAY 31, 2003

     Tuition and other net revenues increased by 34.8% to $1.306 billion in the nine months ended May 31, 2004, from $968.2 million in the nine months ended May 31, 2003, primarily due to a 28.4% 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 nine months ended May 31, 2003, to the nine months ended May 31, 2004.

     Tuition and other net revenues for the nine months ended May 31, 2004 and 2003, consist primarily of $1.224 billion and $911.3 million, respectively, of net tuition revenues from students enrolled in degree programs and $7.0 million and $8.2 million, respectively, of net tuition revenues from students enrolled in non-degree programs.

     Instructional costs and services increased by 24.1% to $552.0 million in the nine months ended May 31, 2004, from $444.7 million in the nine months ended May 31, 2003, due primarily to direct costs necessary to support the increase in degree student enrollments such as employee compensation and related expenses, faculty compensation, classroom lease expenses, and financial aid processing costs which increased $44.1 million, $20.8 million, $10.8 million, and $9.0 million, respectively. Instructional costs and services as a percentage of tuition and other net revenues decreased to 42.3% in the nine months ended May 31, 2004, from 45.9% in the nine months ended May 31, 2003, due primarily to greater tuition and other net revenues being spread over the fixed costs related to centralized student services. We may not be able to leverage our recurring costs to the same extent as we face increased costs related to our expansion into new geographic markets.

     Selling and promotional expenses increased by 39.1% to $272.3 million in the nine months ended May 31, 2004, from $195.8 million in the nine months ended May 31, 2003, due primarily to an increase in enrollment advisors’ compensation and related expenses of $43.6 million, additional advertising expenditures of $28.4 million, and small increases in various other costs. Selling and promotional expenses as a percentage of tuition and other net revenues increased to 20.8% in the nine months ended May 31, 2004, from 20.2% in the nine months ended May 31, 2003, as a result of the increase in the cost of enrollment advisors as a percentage of revenue of 1.4% partially offset by greater tuition and other net revenues being spread over a proportionately lower increase in the other selling and promotional expenses.

     General and administrative expenses increased by 27.4% to $63.5 million in the nine months ended May 31, 2004, from $49.9 million in the nine months ended May 31, 2003, due primarily to increased employee compensation and related expenses of $6.4 million and small increases in various other costs. General and administrative expenses as a percentage of tuition and other net revenues decreased to 4.9% in the nine months ended May 31, 2004, from 5.2% in the nine months ended May 31, 2003, due primarily to greater tuition and other net revenues being spread over the fixed costs related to various centralized functions such as information services, corporate accounting, and human resources.

     Net interest income increased to $13.6 million in the nine months ended May 31, 2004, from $10.9 million in the nine months ended May 31, 2003. This increase was attributable to the increase in cash equivalents and marketable securities between periods primarily as a result of the investment of cash flows from operations. Interest expense was $60,000 and $254,000 in the nine months ended May 31, 2004 and 2003, respectively.

     Our effective income tax rate increased to 39.2% in the nine months ended May 31, 2004, from 38.8% in the nine months ended May 31, 2003, primarily as a result of a refund of state income taxes received during the nine months ended May 31, 2003.

SEASONALITY IN RESULTS OF OPERATIONS

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

Balance sheet and cash flows

     Cash and cash equivalents and marketable securities. Cash and cash equivalents and marketable securities were $1.164 billion as of May 31, 2004, an increase of $266.2 million or 29.6% from $898.2 million at August 31, 2003. The increase was primarily a result of cash provided by operating activities of $386.3 million and cash provided by the issuance of Apollo Education Group Class A common stock and University of Phoenix Online common stock of $32.7 million and $13.2 million, respectively, related to employee stock option exercises and employee stock purchases partially offset by the repurchase of Apollo Education Group Class A common stock and University of Phoenix Online common stock of $43.0 million and $32.7 million, respectively, and capital expenditures of $83.7 million.

     Capital expenditures. Capital expenditures increased to $83.7 million during the nine months ended May 31, 2004, primarily due to the purchase of land, two buildings, and the capital improvements to the buildings totaling $32.1 million for future University of Phoenix Online expansion. In June 2004 the two buildings were sold for $31.3 million and are being leased back under a ten year lease agreement. The gain on the sale of the buildings will be recognized over the term of the lease. Excluding the costs related to the land and buildings for future University of Phoenix Online expansion, capital expenditures increased to $51.7 million for the nine months ended May 31, 2004, from $41.2 million for the nine months ended May 31, 2003. Total purchases of property and equipment for the year ended August 31, 2004, excluding the land and buildings for University of Phoenix Online, are expected to range from $65.0 to $70.0 million. These expenditures will primarily be related to new campuses and learning centers and increases in normal recurring capital expenditures due to the overall increase in student and employee levels resulting from the growth in the business.

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

     Restricted cash. The U.S. Department of Education requires that Title IV Program funds collected in advance of student billings be kept in a separate cash or cash equivalent account until the students are billed for that portion of their program. In addition, all Title IV Program funds received by us through electronic funds transfer are subject to certain holding period restrictions. These funds generally remain in these separate accounts for an average of 60 to 75 days from receipt. As of May 31, 2004, we had approximately $178.5 million in these separate accounts, which are reflected in the Consolidated Balance Sheet as restricted cash, to comply with these requirements. These restrictions on cash have not affected our ability to fund daily operations.

     Accounts receivable, net. Accounts receivable, net was $136.3 million and $123.7 million as of May 31, 2004, and August 31, 2003, respectively. Days sales outstanding (“DSO”) in receivables, net as of May 31, 2004, and August 31, 2003, were 30 days and 34 days, respectively. Our accounts receivable and DSO are primarily affected by collections performance. Improved collections performance will result in reduced DSO.

Commitments and contingencies

     Leases. We currently lease the majority of our administrative and educational facilities under operating lease agreements. In some cases, classes are held in the facilities of the students’ employers at no charge to us. Lease terms generally range from five to ten years with one to two renewal options for extended terms. Management expects that as these leases expire, they will be renewed or replaced by other leases in the normal course of business. We are required to make additional payments under operating lease terms for taxes, insurance, and other operating expenses incurred during the operating lease period. We also lease space from time to time on a short-term basis in order to provide specific courses or programs.

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

26

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

     On approximately December 19, 2001, a class action complaint was filed in the Superior Court of the State of California for the County of Solano, captioned Davis et. al. v. Apollo Group, Inc. et. al., Case No. FCS018663. Plaintiffs, one current and two former enrollment advisors with University of Phoenix, filed this class action on behalf of themselves and current and former enrollment advisors employed by the Company in the State of California and seek certification as a class, monetary damages in unspecified amounts, and injunctive relief. Plaintiffs allege that during their employment, they and other enrollment advisors worked in excess of 8 hours per day or 40 hours per week, and contend that the Company failed to pay overtime. In July 2003, the Court denied the plaintiffs’ motion to certify a class. The parties nonetheless have negotiated a settlement on a class-wide basis. The settlement has been preliminarily approved by the Court and the final approval by the Court is scheduled to occur in late July 2004. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action.

     On August 29, 2003, the Company was notified that a qui tam action had been filed against it in the United States District Court for the Eastern District of California by two current employees on behalf of themselves and the federal government. A qui tam action is a civil lawsuit brought by one or more individuals (a qui tam “relator”) for an alleged submission to the federal government of a false claim for payment. A qui tam action is always filed under seal and remains under seal until the U.S. Department of Justice decides whether to intervene in the litigation. When the Government declines to intervene in a qui tam action, as it has done in this case, the relators may elect to pursue the litigation on behalf of the Government and, if they are successful, receive a portion of the federal government’s recovery. The qui tam action alleges, among other things, violations of the False Claims Act 31 U.S.C. § 3729(a)(1) and (2), by University of Phoenix for submission of a knowingly false or fraudulent claim for payment or approval, and knowingly false records or statements to get a false or fraudulent claim paid or approved in connection with federal student aid programs, and asserts that University of Phoenix improperly compensates its employees. On or about October 20, 2003, a motion to dismiss the action was filed and was subsequently granted with leave to amend the complaint. Subsequently, a second amended complaint was filed on or about March 3, 2004. A motion to dismiss this amended complaint was filed on or about March 22, 2004, and was subsequently granted with prejudice. On June 11, 2004, an appeal was filed with the United States Ninth Circuit Court of appeals. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action.

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

     In November 2002, two former enrollment advisors at University of Phoenix Online filed an administrative claim with the Wage & Hour Division of the Department of Labor that they were incorrectly classified as exempt employees and therefore owed unpaid overtime. The Wage & Hour Division conducted an investigation, but issued no determination. The matter was then transferred to the Department of Labor, Office of the Solicitor, which asserted that unpaid overtime was due to all enrollment advisors employed at University of Phoenix Online after November 2001. On June 16, 2004, the parties reached a negotiated resolution of these claims, which includes a payment of between $2 million and $3 million by the Company.

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

Stock repurchase program

Our Board of Directors has authorized a program allocating up to $300.0 million of our funds to repurchase shares of Apollo Education Group Class A common stock and University of Phoenix Online common stock. As of May 31, 2004, the Company had repurchased approximately 10,823,000 shares of Apollo Education Group Class A common stock at a total cost of approximately $158.4 million and 986,000 shares of University of Phoenix Online common stock at a total cost of approximately $46.7 million. In

27

June 2004 the Board of Directors of Apollo authorized a program allocating up to an additional $500 million in Company funds to repurchase shares of Apollo Education Group Class A common stock and University of Phoenix Online common stock. Additional shares were repurchased between June 1, 2004 and July 9, 2004 consisting of approximately 1,183,000 shares of Apollo Education Group Class A common stock at a cost of approximately $103.0 million and 233,000 shares of University of Phoenix Online common stock at a cost of approximately $20.2 million.

Liquidity and capital resource requirements

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

     At May 31, 2004, we had no outstanding borrowings on our $10.0 million line of credit. Borrowings under the line of credit bear interest at LIBOR plus ..75% or prime at our election. The line of credit is renewable annually, and any amounts borrowed under the line are payable upon its termination in February 2006.

     On March 24, 2000, our Board of Directors authorized the issuance of a new class of stock called University of Phoenix Online common stock, that is intended to reflect the separate performance of University of Phoenix Online, a division of University of Phoenix. Our other businesses and our retained interest in University of Phoenix Online are referred to as “Apollo Education Group.” On October 3, 2000, an offering of 5,750,000 shares of University of Phoenix Online common stock was completed at a price of $14.00 per share. At the time of the offering this stock represented a 10.8% interest in that business with Apollo Education Group retaining the remaining 89.2% interest in University of Phoenix Online. This percentage has decreased to 85.7% at May 31, 2004, due to the issuance of shares related to the exercise of University of Phoenix Online stock options and the issuance of shares of University of Phoenix Online common stock as part of the Apollo Group, Inc. Employee Stock Purchase Plan, partially offset by the repurchase of shares of University of Phoenix Online common stock.

IMPACT OF INFLATION

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

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

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

Item 4 — Controls and Procedures

     Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e), promulgated under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of our most recently completed fiscal quarter, our disclosure controls and procedures were effective to ensure that information is gathered, analyzed, and disclosed on a timely basis.

     There were no significant changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

28

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

     On approximately December 19, 2001, a class action complaint was filed in the Superior Court of the State of California for the County of Solano, captioned Davis et. al. v. Apollo Group, Inc. et. al., Case No. FCS018663. Plaintiffs, one current and two former enrollment advisors with University of Phoenix, filed this class action on behalf of themselves and current and former enrollment advisors employed by the Company in the State of California and seek certification as a class, monetary damages in unspecified amounts, and injunctive relief. Plaintiffs allege that during their employment, they and other enrollment advisors worked in excess of 8 hours per day or 40 hours per week, and contend that the Company failed to pay overtime. In July 2003, the Court denied the plaintiffs’ motion to certify a class. The parties nonetheless have negotiated a settlement on a class-wide basis. The settlement has been preliminarily approved by the Court and the final approval by the Court is scheduled to occur in late July 2004. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action.

     On August 29, 2003, the Company was notified that a qui tam action had been filed against it in the United States District Court for the Eastern District of California by two current employees on behalf of themselves and the federal government. A qui tam action is a civil lawsuit brought by one or more individuals (a qui tam “relator”) for an alleged submission to the federal government of a false claim for payment. A qui tam action is always filed under seal and remains under seal until the U.S. Department of Justice decides whether to intervene in the litigation. When the Government declines to intervene in a qui tam action, as it has done in this case, the relators may elect to pursue the litigation on behalf of the Government and, if they are successful, receive a portion of the federal government’s recovery. The qui tam action alleges, among other things, violations of the False Claims Act 31 U.S.C. § 3729(a)(1) and (2), by University of Phoenix for submission of a knowingly false or fraudulent claim for payment or approval, and knowingly false records or statements to get a false or fraudulent claim paid or approved in connection with federal student aid programs, and asserts that University of Phoenix improperly compensates its employees. On or about October 20, 2003, a motion to dismiss the action was filed and was subsequently granted with leave to amend the complaint. Subsequently, a second amended complaint was filed on or about March 3, 2004. A motion to dismiss this amended complaint was filed on or about March 22, 2004, and was subsequently granted with prejudice. On June 11, 2004, an appeal was filed with the United States Ninth Court of Appeals. While the outcome of this legal proceeding is uncertain, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from this action.

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

     In November 2002, two former enrollment advisors at University of Phoenix Online filed an administrative claim with the Wage & Hour Division of the Department of Labor that they were incorrectly classified as exempt employees and therefore owed unpaid overtime. The Wage & Hour Division conducted an investigation, but issued no determination. The matter was then transferred to the Department of Labor, Office of the Solicitor, which asserted that unpaid overtime was due to all enrollment advisors employed at University of Phoenix Online after November 2001. On June 16, 2004, the parties reached a negotiated resolution of these claims, which includes a payment of between $2 million and $3 million by the Company.

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

29

Item 2. Changes in Securities and Use of Proceeds

     Purchases of Apollo Education Group and University of Phoenix Online common stock made by the company during the three months ended May 31, 2004 are as follows:

Total Number of Shares

Purchased as Part of Publicly

Approximate

Total Number of Shares

Announced Plans or

Dollar Value of

Purchased

Average Price Paid per Share

Programs

Shares that

May Yet be

Apollo

University of

Apollo

University of

Apollo

University of

Purchased

Education

Phoenix

Education

Phoenix

Education

Phoenix

Under the Plans

Period

Group

Online

Group

Online

Group

Online

or Programs

March 1, 2004 - March 31, 2004

April 1, 2004 - April 30, 2004

May 1, 2004 - May 31, 2004

250,000

191,500

$

88.78

$

80.98

250,000

191,500

Total

250,000

191,500

$

88.78

$

80.98

250,000

191,500

$

95,000,000

     The Board of Directors of Apollo initially authorized a program allocating $40 million in Company funds to repurchase shares of Apollo Education Group Class A common stock and University of Phoenix Online common stock on September 25, 1998, on May 13, 1999 an additional $20 million was approved, on October 25, 1999 an additional $40 million was approved, on March 24, 2000 an additional $50 million was approved, and on March 28, 2003 an additional $150 million was approved, bringing the total funds authorized for repurchase as of May 31, 2004, to $300 million. As of May 31, 2004, the Company had repurchased approximately 10,823,000 shares of Apollo Education Group Class A common stock at a total cost of approximately $158.4 million and 986,000 shares of University of Phoenix Online common stock at a total cost of approximately $46.7 million. In June 2004 the Board of Directors of Apollo authorized a program allocating up to an additional $500 million in Company funds to repurchase shares of Apollo Education Group Class A common stock and University of Phoenix Online common stock. Additional shares were repurchased between June 1, 2004 and July 9, 2004 consisting of approximately 1,183,000 shares of Apollo Education Group Class A common stock at a cost of approximately $103.0 million and 233,000 shares of University of Phoenix Online common stock at a cost of approximately $20.2 million. There is no expiration date on the authorization of these funds and repurchases occur at the Company’s discretion.

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 15.1	Letter in Lieu of Consent
EXHIBIT 15.2	Letter in Lieu of Consent
EXHIBIT 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.1	Certification of Chief Executive Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.2	Certification of Chief Financial Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 99.1	Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online

30

(b)	Reports on Form 8-K
	During the third quarter of 2004, we filed the following on Form 8-K. Information regarding the items reported on are as follows:

Date Filed	Item Number	Description
March 12, 2004	Items 7 and 9*	On March 12, 2004, we announced our results of operations for our second quarter ended February 29, 2004

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

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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: July 13, 2004
	By:     /s/ Kenda B. Gonzales
	Kenda B. Gonzales
	Chief Financial Officer, Secretary, and Treasurer
	By:      /s/ Daniel E. Bachus
	Daniel E. Bachus Chief Accounting Officer and Controller
	By:     /s/ Todd S. Nelson
	Todd S. Nelson
	Chairman of the Board, President, and Chief Executive Officer

32

APOLLO GROUP, INC. AND SUBSIDIARIES

EXHIBIT INDEX

Exhibit Number	Description of Exhibit
15.1	Letter in Lieu of Consent
15.2	Letter in Lieu of Consent
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online

33

EX-15.1

Exhibit 15.1

July 12, 2004

Apollo Group, Inc.
4615 East Elwood Street
Phoenix, Arizona

We have made a review, in accordance with standards of the Public Company Accounting Oversight Board (United States), of the unaudited interim financial information of Apollo Group, Inc. and subsidiaries for the periods ended May 31, 2004 as indicated in our report dated July 12, 2004 (which report included an explanatory paragraph regarding the condensed financial information as of August 31, 2003, and for the three-month and nine-months ended May 31, 2003, which were not audited or reviewed by us); because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended May 31, 2004, is incorporated by reference in Registration Statement No. 333-46834, 33-87844, 33-88982, 33-88984, and 33-63429 on Form S-8 and Registration Statement No. 333-35465 and 333-33370 on Form S-3.

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

DELOITTE & TOUCHE LLP
Phoenix, Arizona

EX-15.2

Exhibit 15.2

July 12, 2004

University of Phoenix Online
4615 East Elwood Street
Phoenix, Arizona

We have made a review, in accordance with standards of the Public Company Accounting Oversight Board (United States), of the unaudited interim financial information of University of Phoenix Online for the periods ended May 31, 2004 as indicated in our report dated July 12, 2004 (which report included an explanatory paragraph regarding the condensed financial information as of August 31, 2003, and for the three-month and nine-months ended May 31, 2003, which were not audited or reviewed by us); because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended May 31, 2004, is incorporated by reference in Registration Statement No. 333-46834, 33-87844, 33-88982, 33-88984, and 33-63429 on Form S-8 and Registration Statement No. 333-35465 and 333-33370 on Form S-3.

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

DELOITTE & TOUCHE LLP
Phoenix, Arizona

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Todd S. Nelson, certify that:

     1. I have reviewed this Form 10-Q of Apollo Group, Inc. (the “registrant”);

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

          a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

          b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

          c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

          a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

          b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 13, 2004

/s/ Todd S. Nelson  

Todd S. Nelson 

Chairman of the Board,
President, and Chief Executive Officer 

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Kenda B. Gonzales, certify that:

     1. I have reviewed this Form 10-Q of Apollo Group, Inc. (the “registrant”);

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

          a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

          b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

          c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

          a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

          b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 13, 2004

/s/ Kenda B. Gonzales  

Kenda B. Gonzales 

Chief Financial Officer, Secretary, and Treasurer 

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 1350 PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Apollo Group, Inc. (the “Company”) on Form 10-Q for the three months ended May 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Todd S. Nelson, Chairman of the Board, President, and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July 13, 2004

/s/ Todd S. Nelson  

Todd S. Nelson 

Chairman of the Board, President, and Chief Executive Officer 

     A signed original of this written statement required by Section 906 has been provided to Apollo Group, Inc. and will be retained by Apollo Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 1350 PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Apollo Group, Inc. (the “Company”) on Form 10-Q for the three months ended May 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kenda B. Gonzales, Chief Financial Officer, Secretary and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July 13, 2004

/s/ Kenda B. Gonzales  

Kenda B. Gonzales 

Chief Financial Officer, Secretary, and Treasurer 

     A signed original of this written statement required by Section 906 has been provided to Apollo Group, Inc. and will be retained by Apollo Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99.1

EXHIBIT 99.1

UNIVERSITY OF PHOENIX ONLINE
(a division of The University of Phoenix, Inc.,
a wholly-owned subsidiary of Apollo Group, Inc.)
BALANCE SHEET

	May 31,		August 31,
	2004		2003
(In thousands)	(Unaudited)
Assets:
Current assets
Cash and cash equivalents	$	211,690	$	144,017
Marketable securities		99,770		107,683
Receivables, net		58,412		46,986
Other current assets		7,218		5,128
Total current assets		377,090		303,814
Property and equipment, net		56,157		22,220
Marketable securities		142,053		84,971
Revolving credit advance to Apollo Education Group		18,450		5,445
Other assets		260		207
Total assets	$	594,010	$	416,657
Liabilities and Divisional Net Worth:
Current liabilities
Current portion of long-term liabilities	$	115	$	89
Accounts payable		1,433		1,130
Accrued liabilities		20,382		11,678
Student deposits and deferred revenue		150,334		118,130
Total current liabilities		172,264		131,027
Long-term liabilities		2,670		2,926
Total liabilities		174,934		133,953
Commitments and contingencies
Divisional net worth
Funds allocated to/from Apollo Education Group		46,474		46,474
Accumulated earnings		372,602		236,230
Total divisional net worth		419,076		282,704
Total liabilities and divisional net worth	$	594,010	$	416,657

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

UNIVERSITY OF PHOENIX ONLINE
(a division of The University of Phoenix, Inc.,
a wholly-owned subsidiary of Apollo Group, Inc.)
STATEMENT OF OPERATIONS

	For the Three Months Ended				For the Nine Months Ended
	May 31,				May 31,
	2004		2003		2004		2003
(In thousands)			(Unaudited)
Revenues:
Tuition and other, net	$	233,280	$	145,819	$	595,100	$	372,986
Costs and expenses:
Instructional costs and services		79,654		55,558		216,050		146,117
Selling and promotional		50,358		32,572		129,929		85,852
General and administrative		10,046		6,312		27,230		17,990
		140,058		94,442		373,209		249,959
Income from operations		93,222		51,377		221,891		123,027
Interest income, net		1,673		1,242		4,640		3,262
Income before income taxes		94,895		52,619		226,531		126,289
Provision for income taxes		37,768		20,942		90,159		50,263
Net income	$	57,127	$	31,677	$	136,372	$	76,026

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

UNIVERSITY OF PHOENIX ONLINE
(a division of The University of Phoenix, Inc.,
a wholly-owned subsidiary of Apollo Group, Inc.)
STATEMENT OF CASH FLOWS

	For the Nine Months Ended
	May 31,
	2004			2003
(In thousands)	(Unaudited)
Cash flows provided by (used for) operating activities:
Net income	$	136,372		$	76,026
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,748			3,922
Amortization of investment premiums		916			998
Provision for uncollectible accounts		9,457			6,316
Increase in assets:
Receivables		(20,883	)		(21,353	)
Other current assets		(2,156	)		(805	)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities		9,007			1,853
Student deposits and deferred revenue		32,204			32,982
Other liabilities		(6	)		546
Net cash provided by operating activities		170,659			100,485
Cash flows provided by (used for) investing activities:
Net additions to property and equipment		(9,554	)		(6,211	)
Purchase of land and buildings related to future Online expansion		(32,080	)
Purchase of marketable securities		(180,552	)		(167,982	)
Maturities of marketable securities		130,467			90,123
Net cash used for investing activities		(91,719	)		(84,070	)
Cash flows provided by financing activities:
Revolving credit advance to (from) Apollo Education Group		(11,267	)		270
Net cash provided by (used for) financing activities		(11,267	)		270
Net increase in cash and cash equivalents		67,673			16,685
Cash and cash equivalents at beginning of period		144,017			108,296
Cash and cash equivalents at end of period	$	211,690		$	124,981

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

UNIVERSITY OF PHOENIX ONLINE
(a division of The University of Phoenix, Inc.,
a wholly-owned subsidiary of Apollo Group, Inc.)
Notes to Financial Statements
(Unaudited)

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. (“University of Phoenix”), 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. At the time of the offering 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. This percentage has decreased to 85.7% at May 31, 2004, due to the issuance of shares related to the exercise of University of Phoenix Online stock options and the issuance of shares of University of Phoenix Online common stock as part of the Apollo Group, Inc. Employee Stock Purchase Plan, partially offset by the repurchase of shares of University of Phoenix Online common stock.

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, criminal justice, education, health care, human services, information technology, management, and nursing. University of Phoenix Online offers its educational programs worldwide through its computerized educational delivery system. University of Phoenix is accredited by The Higher Learning Commission and is a member 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 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 and will be subject to all the risks associated with an investment in Apollo’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’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 and its subsidiaries, are governed by corporate expense, income tax, and license allocation policies, which are described in Note 3. Related Party Transactions.

This financial information reflects all adjustments, consisting only of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Unless otherwise noted, references to 2004 and 2003 refer to the periods ended May 31, 2004 and 2003, respectively.

Note 2. Significant Accounting Policies

Basis of presentation

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

Cash and cash equivalents

All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents.

Investments

Investments in marketable securities such as municipal bonds and U.S. government sponsored enterprises are stated at amortized cost, which approximates fair value. It is the Company’s intention to hold its marketable securities until maturity.

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. 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 related to a variety of promotional programs. Approximately 96.2% of University of Phoenix Online’s tuition and other net revenues during the nine months ended May 31, 2004, consist of tuition revenues. Tuition revenue is recognized on a weekly basis, pro rata over the period of instruction. University of Phoenix Online’s tuition and other net revenues also include rEsource fees, application fees, commissions from the sale of education-related products, other student fees, and other income.

University of Phoenix Online’s educational programs are primarily degree programs lasting up to four years. Students in University of Phoenix Online’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 is recognized on a pro rata basis over the period of instruction for each course. Fees for rEsource, the Company’s online delivery method for course materials, are also recognized on a pro rata basis over the period of instruction. Application fee revenue and related costs are deferred and recognized on a pro rata basis over the period of the program.

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

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, as amended. These financial aid programs generally consist of guaranteed student loans and direct grants to students. Guaranteed student loans are issued directly to the student by external financial institutions, to whom the student is obligated, and are non-recourse to 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 and is not part of the capital structure of University of Phoenix Online.

Apollo’s consolidated financial statements 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 cash and cash equivalents, marketable securities, accounts receivable, accounts payable, accrued liabilities, and student deposits and deferred revenue approximates fair value because of the short-term nature of these financial instruments.

Selling and promotional costs

Selling and promotional costs consist primarily of compensation for enrollment advisors, advertising costs, production of marketing materials, other costs related to selling and promotional functions, and an allocation of expenses relating to our centralized marketing functions. University of Phoenix Online expenses selling and promotional costs as incurred.

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.

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, Apollo’s 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 accompanying financial statements, certain costs incurred by Apollo and University of Phoenix were allocated to University of Phoenix Online on the basis of its revenues in relation to those of Apollo and University of Phoenix. The allocation of such expenses to University of Phoenix Online was as follows, in thousands:

	For the Three Months Ended				For the Nine Months Ended
	May 31,				May 31,
	2004		2003		2004		2003
			(Unaudited)
Instructional costs and services	$	11,911	$	7,445	$	30,311	$	19,544
Selling and promotional		446		339		1,161		815
General and administrative		10,046		6,312		27,230		17,990
	$	22,403	$	14,096	$	58,702	$	38,349

License fee

Apollo 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 and its subsidiaries. The license fee, which is included in instructional costs and services in the accompanying Statement of Operations, was $9.3 million and $5.8 million for the three months ended May 31, 2004 and 2003, respectively, and was $23.8 million and $14.9 million for the nine months ended May 31, 2004 and 2003, respectively.

Income taxes

University of Phoenix Online’s results, along with those of University of Phoenix’s other divisions, are included in Apollo’s consolidated federal income tax return. State taxes are paid based upon apportioned taxable income or loss of Apollo, 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 Online at the end of each period through the revolving credit advance to Apollo Education Group 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.

Treasury activities

Since its inception, Apollo 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 Apollo 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 of University of Phoenix Online common stock in October 2000.

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 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 to the extent this difference was not transferred to University of Phoenix Online. To date, this difference has been transferred to University of Phoenix Online on a monthly basis, therefore, no intercompany interest has been recorded.

Note 4. Balance Sheet Components

Marketable securities consist of the following, in thousands:

	May 31,				August 31,
	2004				2003
			(Unaudited)
	Estimated		Amortized		Estimated		Amortized
Type	Market Value		Cost		Market Value		Cost
Classified as current:
Municipal bonds	$	78,778	$	78,770	$	53,384	$	53,344
U.S. government sponsored enterprises						300		300
Auction rate preferred stock		16,000		16,000		6,050		6,050
Corporate obligations		5,000		5,000		48,004		47,989
Total current marketable securities		99,778		99,770		107,738		107,683
Classified as noncurrent:
Municipal bonds due in 1-5 years		64,238		64,546		33,511		33,591
U.S. government sponsored enterprises		39,700		41,510		24,415		25,250
Auction rate preferred stock		34,950		34,950		18,050		18,050
Corporate obligations		1,059		1,047		7,932		8,080
Total noncurrent marketable securities		139,947		142,053		83,908		84,971
Total marketable securities	$	239,725	$	241,823	$	191,646	$	192,654

Receivables consist of the following, in thousands:

	May 31,			August 31,
	2004			2003
	(Unaudited)
Trade receivables	$	60,920		$	49,485
Interest receivable		1,548			1,119
		62,468			50,604
Less allowance for doubtful accounts		(4,056	)		(3,618	)
Total receivables, net	$	58,412		$	46,986

Bad debt expense was $2.7 million and $1.9 million for the three months ended May 31, 2004 and 2003, respectively, and $9.5 million and $6.3 million for the nine months ended May 31, 2004 and 2003, respectively. Write-offs, net of recoveries, were $2.9 million and $2.2 million for the three months ended May 31, 2004 and 2003, respectively, and $9.0 million and $5.3 million for the nine months ended May 31, 2004 and 2003, respectively.

Property and equipment consist of the following, in thousands:

	May 31,			August 31,
	2004			2003
	(Unaudited)
Furniture and equipment	$	34,542		$	27,449
Software		5,068			5,163
Leasehold improvements		4,403			3,716
Land and buildings		32,099
		76,112			36,328
Less accumulated depreciation and amortization		(19,955	)		(14,108	)
Property and equipment, net	$	56,157		$	22,220

Depreciation and amortization expense was $2.1 million and $1.5 million for the three months ended May 31, 2004 and 2003, respectively, and $6.0 million and $4.1 million for the nine months ended May 31, 2004 and 2003, respectively.

Accrued liabilities consist of the following, in thousands:

	May 31,		August 31,
	2004		2003
	(Unaudited)
Salaries, wages, and benefits	$	5,661	$	4,270
Accrued advertising		9,150		4,097
Other accrued liabilities		5,571		3,311
Total accrued liabilities	$	20,382	$	11,678

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

	May 31,		August 31,
	2004		2003
	(Unaudited)
Student deposits	$	102,929	$	81,954
Deferred tuition revenue		41,375		32,214
Deferred application fee revenue		6,030		3,962
Total student deposits and deferred revenue	$	150,334	$	118,130

Note 5. Long-Term Liabilities

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

	May 31,			August 31,
	2004			2003
	(Unaudited)
Deferred rent	$	647		$	653
Deferred gain on sale-leasebacks and other contracts		2,138			2,362
Total long-term liabilities		2,785			3,015
Less current portion		(115	)		(89	)
Total long-term liabilities, net	$	2,670		$	2,926

Note 6. Commitments and Contingencies

In November 2002, two former enrollment advisors at University of Phoenix Online filed an administrative claim with the Wage & Hour Division of the Department of Labor that they were incorrectly classified as exempt employees and therefore owed unpaid overtime. The Wage & Hour Division conducted an investigation, but issued no determination. The matter was then transferred to the Department of Labor, Office of the Solicitor, which asserted that unpaid overtime was due to all enrollment advisors employed at University of Phoenix Online after November 2001. On June 16, 2004, the parties reached a negotiated resolution of these claims, which includes a payment of between $2 million and $3 million by the Company.

University of Phoenix Online is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the financial position, results of operations, or cash flows of Apollo Education Group or University of Phoenix Online.

Report of Independent Registered Public Accounting Firm

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

We have reviewed the accompanying condensed balance sheet of University of Phoenix Online as of May 31, 2004, and the related condensed statements of operations for the three-month and nine-month periods then ended and of cash flows for the nine-month period then ended. These interim financial statements are the responsibility of University of Phoenix Online’s management.

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to such condensed interim financial statements as of May 31, 2004, and for the three-month and nine-month periods then ended for them to be in conformity with accounting principles generally accepted in the United States of America.

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

Deloitte & Touche LLP
Phoenix, Arizona
July 12, 2004

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

     The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online” and the financial statements and related notes of University of Phoenix Online for the fiscal year ended August 31, 2003, included in our Form 10-K as filed with the Securities and Exchange Commission, as well as in conjunction with the financial statements and related notes of University of Phoenix Online for the three-month and nine-month periods ended May 31, 2004, included above.

     This Form 10-Q, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online” contains forward-looking statements. The words “believes,” “expects,” “anticipates,” “estimates,” “plans,” and other similar statements of expectations identify forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Forward-looking statements in this Form 10-Q, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online,” include, but are not limited to, statements such as: 1) total purchases of property and equipment for University of Phoenix Online for the year ended August 31, 2004, excluding the land and buildings for University of Phoenix Online, are expected to range from $15.0 to $20.0 million; and 2) management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the financial position, results of operations, or cash flows of Apollo Education Group or University of Phoenix Online. 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.

     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 Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of University of Phoenix Online,” 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 that are or may become applicable to us; 2) changes in or new interpretations of applicable laws, rules, and regulations; 3) University of Phoenix Online depends on University of Phoenix’s accreditation and the failure to maintain that accreditation would significantly reduce demand for University of Phoenix Online’s programs; 4) University of Phoenix Online depends on University of Phoenix’s state authorization to operate and the failure to maintain that authorization could prevent University of Phoenix Online from operating its business; 5) our ability to continue to attract and retain students; 6) our ability to successfully defend litigation claims; 7) our ability to protect University of Phoenix Online’s intellectual property and proprietary rights; 8) our ability to recruit and retain key personnel; 9) our ability to successfully manage economic conditions, including stock market volatility; and 10) other factors set forth in this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, or any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. You are advised, however, to consult any further disclosures we make in our reports filed with the Securities and Exchange Commission.

OVERVIEW

     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 56.6K modem, and an Internet service provider, thereby enhancing the accessibility of and the potential market for its programs. University of Phoenix Online currently offers 18 accredited degree programs in business, criminal justice, education, health care, human services, information technology, management, and nursing. As of May 31, 2004, University of Phoenix Online had approximately 109,800 degree-seeking students.

     The University of Phoenix Online plans to continue expanding its distance education programs and services. It will also continue to respond to the changing educational needs of working adults and their employers by introducing new undergraduate and graduate degree programs as well as training programs.

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

     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.

     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.

CRITICAL ACCOUNTING POLICIES

     Securities and Exchange Commission Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Notes 2 and 3 of the “Notes to Financial Statements” of University of Phoenix Online included in this Form 10-Q includes a summary of the significant accounting policies and methods used in the preparation of University of Phoenix Online’s financial statements. The following is a brief discussion of the critical accounting policies and methods used by University of Phoenix Online.

Related party transactions

     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, are governed by corporate expense, license, and income tax allocation policies, which are described below.

     Although we have no present intention to do so, our Board of Directors may at any time in its sole discretion modify, rescind, or supplement 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 favor of the other. The allocation of such expenses to University of Phoenix Online was as follows, in thousands:

	For the Three Months Ended				For the Nine Months Ended
	May 31,				May 31,
	2004		2003		2004		2003
			(Unaudited)
Instructional costs and services	$	11,911	$	7,445	$	30,311	$	19,544
Selling and promotional		446		339		1,161		815
General and administrative		10,046		6,312		27,230		17,990
	$	22,403	$	14,096	$	58,702	$	38,349

     License fee

     We charge University of Phoenix Online a license fee equal to 4% of its 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 $9.3 million and $5.8 million for the three months ended May 31, 2004 and 2003, respectively, and was $23.8 million and $14.9 million for the nine months ended May 31, 2004 and 2003, 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 Online at the end of each period through the revolving credit advance 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.

Revenue recognition

     Tuition and other revenues are shown net of discounts related to a variety of promotional programs. Approximately 96.2% of University of Phoenix Online’s tuition and other net revenues during the nine months ended May 31, 2004, consist of tuition revenues. Tuition revenue is recognized on a weekly basis, pro rata over the period of instruction. Our tuition and other net revenues also include rEsource fees, application fees, commissions from the sale of education-related products, other student fees, and other income.

     University of Phoenix Online’s educational programs are primarily degree programs lasting up to four years. Students in University of Phoenix Online’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 revenue for each course is recognized on a pro rata basis over the period of instruction for each course. Fees for rEsource, our online delivery method for course materials, are also recognized on a pro rata basis over the period of instruction. Application fee revenue and related costs are deferred and recognized on a pro rata basis over the period of the program.

Allowance for doubtful accounts

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

RESULTS OF OPERATIONS

     University of Phoenix Online categorizes its expenses as instructional costs and services, selling and promotional, and general and administrative. 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, 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. University of Phoenix Online faculty members are contracted for one course offering at a time.

     Selling and promotional costs consist primarily of compensation for enrollment advisors, advertising costs, production of marketing materials, other costs related to selling and promotional functions, and an allocation of expenses relating to our centralized marketing functions. University of Phoenix Online expenses selling and promotional costs as incurred.

     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.

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

	For the Three Months Ended						For the Nine Months Ended
	May 31,						May 31,
	2004			2003			2004			2003
				(Unaudited)
Revenues:
Tuition and other, net		100.0	%		100.0	%		100.0	%		100.0	%
Costs and expenses:
Instructional costs and services		34.1			38.1			36.3			39.2
Selling and promotional		21.6			22.4			21.8			23.0
General and administrative		4.3			4.3			4.6			4.8
		60.0			64.8			62.7			67.0
Income from operations		40.0			35.2			37.3			33.0
Interest income, net		0.7			0.9			0.8			0.9
Income before income taxes		40.7			36.1			38.1			33.9
Provision for income taxes		16.2			14.4			15.2			13.5
Net income		24.5	%		21.7	%		22.9	%		20.4	%

THREE MONTHS ENDED MAY 31, 2004, COMPARED WITH THREE MONTHS ENDED MAY 31, 2003

     Tuition and other net revenues increased by 60.0% to $233.3 million in the three months ended May 31, 2004, from $145.8 million in the three months ended May 31, 2003, due primarily to a 52.5% increase in average full-time equivalent degree student enrollments and tuition price increases averaging four to five percent.

     Instructional costs and services increased by 43.4% to $79.7 million in the three months ended May 31, 2004, from $55.6 million in the three months ended May 31, 2003, due primarily to the direct costs necessary to support the increase in degree student enrollments such as employee compensation and related expenses and faculty compensation which increased $8.5 million and $5.1 million, respectively, and increases in the overhead allocation and license fee between periods of $3.5 million and $4.5 million, respectively. The increase in the overhead allocation is 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 instructional costs and services expenses to University of Phoenix Online. The increase in the license fee is due to the increase in University of Phoenix Online revenue between periods. Instructional costs and services as a percentage of tuition and other net revenues decreased to 34.1% in the three months ended May 31, 2004, from 38.1% in the three months ended May 31, 2003, due primarily to greater tuition and other net revenues being spread over the fixed costs related to centralized student services. 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 54.6% to $50.4 million in the three months ended May 31, 2004, from $32.6 million in the three months ended May 31, 2003, due primarily to an increase in enrollment advisors’ compensation and related expenses of $9.7 million, additional advertising expenditures of $7.8 million, and small increases in various other costs. Selling and promotional expenses as a percentage of tuition and other net revenues decreased to 21.6% in the three months ended May 31, 2004, from 22.4% in the three months ended May 31, 2003, due primarily to greater tuition and other net revenues being spread over a proportionately lower increase in advertising expenditures and the other selling and promotional expenses partially offset by an increase in the cost of enrollment advisors as a percentage of revenue of 0.7% between periods.

     General and administrative expenses increased by 59.2% to $10.0 million in the three months ended May 31, 2004, from $6.3 million in the three months ended May 31, 2003, 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 remained constant at 4.3% in the three months ended May 31, 2004 and 2003.

     Net interest income increased to $1.7 million in the three months ended May 31, 2004, from $1.2 million in the three months ended May 31, 2003. This increase was attributable to the increase in cash equivalents and marketable securities between periods primarily as a result of the investment of cash flows from operations.

     University of Phoenix Online’s effective income tax rate remained constant at 39.8% in the three months ended May 31, 2004 and 2003.

NINE MONTHS ENDED MAY 31, 2004, COMPARED WITH NINE MONTHS ENDED MAY 31, 2003

     Tuition and other net revenues increased by 59.6% to $595.1 million in the nine months ended May 31, 2004, from $373.0 million in the nine months ended May 31, 2003, due primarily to a 54.2% increase in average full-time equivalent degree student enrollments and tuition price increases averaging four to five percent.

     Instructional costs and services increased by 47.9% to $216.1 million in the nine months ended May 31, 2004, from $146.1 million in the nine months ended May 31, 2003, due primarily to the direct costs necessary to support the increase in degree student enrollments such as employee compensation and related expenses and faculty compensation which increased $25.9 million and $13.5 million, respectively, and increases in the overhead allocation and license fee between periods of $8.9 million and $11.1 million, respectively. The increase in the overhead allocation is 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 instructional costs and services expenses to University of Phoenix Online. The increase in the license fee is due to the increase in University of Phoenix Online revenue between periods. Instructional costs and services as a percentage of tuition and other net revenues decreased to 36.3% in the nine months ended May 31, 2004, from 39.2% in the nine months ended May 31, 2003, due primarily to greater tuition and other net revenues being spread over the fixed costs related to centralized student services. 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 51.3% to $129.9 million in the nine months ended May 31, 2004, from $85.9 million in the nine months ended May 31, 2003, due primarily to an increase in enrollment advisors’ compensation and related expenses of $25.7 million, additional advertising expenditures of $15.5 million, and small increases in various other costs. Selling and promotional expenses as a percentage of tuition and other net revenues decreased to 21.8% in the nine months ended May 31, 2004, from 23.0% in the nine months ended May 31, 2003, due primarily to greater tuition and other net revenues being spread over a proportionately lower increase in the other selling and promotional expenses partially offset by the increase in the cost of enrollment advisors as a percentage of revenue of 1.0%.

     General and administrative expenses increased by 51.4% to $27.2 million in the nine months ended May 31, 2004, from $18.0 million in the nine months ended May 31, 2003, 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 4.6% in the nine months ended May 31, 2004, from 4.8% in the nine months ended May 31, 2003, due primarily to greater tuition and other net revenues being spread over a proportionately lower increase in general and administrative expenses.

     Net interest income increased to $4.6 million in the nine months ended May 31, 2004, from $3.3 million in the nine months ended May 31, 2003. This increase was attributable to the increase in cash equivalents and marketable securities between periods primarily as a result of the investment of cash flows from operations.

     University of Phoenix Online’s effective income tax rate remained constant at 39.8% in the nine months ended May 31, 2004 and 2003.

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

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

Balance sheet and cash flows

     Cash and cash equivalents and marketable securities. Cash and cash equivalents and marketable securities were $453.5 million as of May 31, 2004, an increase of $116.8 million or 34.7% from $336.7 million at August 31, 2003. The increase was primarily a result of cash provided by operating activities of $170.7 million partially offset by capital expenditures of $41.6 million and an increase in the Revolving Credit Advance from Apollo Education Group of $11.3 million.

     Capital expenditures. Capital expenditures increased to $41.6 million during the nine months ended May 31, 2004 primarily due to the purchase of land, two buildings, and capital improvements to the buildings totaling $32.1 million for future University of Phoenix Online expansion. In June 2004 the two buildings were sold for $31.3 million and are being leased back under a ten year lease agreement. The gain on the sale of the buildings will be recognized over the term of the lease. Excluding the costs related to the land and buildings for future University of Phoenix Online expansion, capital expenditures increased to $9.6 million for the nine months ended May 31, 2004 from $6.2 million for the nine months ended May 31, 2003 as a result of the purchase of

furniture and equipment to support the increase in student and employee levels. Total purchases of property and equipment for the year ended August 31, 2004, excluding the land and buildings for University of Phoenix Online, are expected to range from $15.0 to $20.0 million. These expenditures will primarily be related to increases in normal recurring capital expenditures due to the overall increase in student and employee levels resulting from the growth in the business.

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

     Accounts receivable, net. Accounts receivable, net was $58.4 million and $47.0 million as of May 31, 2004, and August 31, 2003, respectively. Days sales outstanding (“DSO”) in receivables, net as of May 31, 2004, and August 31, 2003, were 28 days and 32 days, respectively. University of Phoenix Online’s accounts receivable and DSO are primarily affected by collections performance. Improved collections performance will result in reduced DSO.

Commitments and contingencies

     Leases. University of Phoenix Online currently leases the majority of its administrative facilities.

     Contingencies. In November 2002, two former enrollment advisors at University of Phoenix Online filed an administrative claim with the Wage & Hour Division of the Department of Labor that they were incorrectly classified as exempt employees and therefore owed unpaid overtime. The Wage & Hour Division conducted an investigation, but issued no determination. The matter was then transferred to the Department of Labor, Office of the Solicitor, which asserted that unpaid overtime was due to all enrollment advisors employed at University of Phoenix Online after November 2001. On June 16, 2004, the parties reached a negotiated resolution of these claims, which includes a payment of between $2 million and $3 million by the Company.

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

Liquidity and capital resource requirements

     University of Phoenix Online currently is able to provide for its own capital expenditures and cash required for operations. All of its cash receipts and cash disbursements are processed by Apollo on behalf of University of Phoenix Online. Cash generated by Apollo Education Group and University of Phoenix Online has been and will continue to be managed centrally by Apollo. University of Phoenix Online’s liquidity could be adversely affected by the investment decisions we make.

     On March 24, 2000, our Board of Directors authorized the issuance of a new class of stock called University of Phoenix Online common stock, that is intended to reflect the separate performance of University of Phoenix Online, a division of University of Phoenix. Our other businesses and our retained interest in University of Phoenix Online are referred to as “Apollo Education Group.” On October 3, 2000, an offering of 5,750,000 shares of University of Phoenix Online common stock was completed at a price of $14.00 per share. At the time of the offering this stock represented a 10.8% interest in that business with Apollo Education Group retaining the remaining 89.2% interest in University of Phoenix Online. This percentage has decreased to 85.7% at May 31, 2004, due to the issuance of shares related to the exercise of University of Phoenix Online stock options and the issuance of shares of University of Phoenix Online common stock as part of the Apollo Group, Inc. Employee Stock Purchase Plan, partially offset by the repurchase of shares of University of Phoenix Online common stock.