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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Mark One)


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

For the quarterly period ended February 28, 2007


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

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

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

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

YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act.

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).

YES o NO þ

AS OF APRIL 30, 2007, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:


Apollo Group Class A common stock, no par value		172,710,000 Shares
Apollo Group Class B common stock, no par value		475,000 Shares

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact may be forward-looking statements. Such forward-looking statements include, among others, those statements regarding future events and future results of Apollo Group, Inc. (“the Company,” “Apollo Group,” “Apollo,” “APOL,” “we,” “us” or “our”) that are based on current expectations, estimates, forecasts, and the beliefs and assumptions of us and our management, and speak only as of the date made and are not guarantees of future performance. The words “believes,” “expects,” “anticipates,” “estimates,” “plans,” “objectives,” and other similar statements of expectation identify forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. The Company undertakes 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.

Explanatory Note Regarding Filing of Form 10-Q/A

This amendment in Form 10-Q/A is being filed to correct a typographical error in the column headings on pages 39, 40 and 41 of our previously filed Form 10-Q and to correct an error in the classification between “Provision for uncollectible accounts receivable” and “Accounts receivable, net” on our Condensed Consolidated Statement of Cash Flows for the Six Months Ended February 28, 2007. This reclassification did not affect our Condensed Consolidated Balance Sheets, our Condensed Consolidated Statements of Income or Comprehensive Income, or our net cash provided by (used in) operating activities, investing activities, or financing activities within our Condensed Consolidated Statements of Cash Flows.

Explanatory Note Regarding Restatement and Material Weaknesses

In this Quarterly Report on Form 10-Q for the quarter ended February 28, 2007 (the “Quarterly Report”), Apollo Group, Inc. has restated its consolidated statements of income, comprehensive income, and cash flows for the three and six months ended February 28, 2006 for the effects of errors in accounting for stock options and other items (the “Restatement”). See Note 4, “Restatement of Consolidated Financial Statements” included in Part I, Item 1.

In response to a report published by an investment bank on June 8, 2006 that questioned whether the Company might have backdated stock option grants during its fiscal years ended August 31, 2000 through August 31, 2004, the Board of Directors authorized a special committee (the “Special Committee”) on June 23, 2006, to retain independent legal counsel, who in turn retained forensic accountants, to assist them in conducting an independent review of the Company’s historical practices related to stock option grants (the “Independent Review”). In November 2006, with the assistance of outside legal counsel, the Company began an in-depth internal review to ascertain the most likely measurement date of every stock option grant since the Company’s initial public offering during its fiscal year 1994 through September 2006 (the “Internal Review”).

Based on the Independent Review and the Internal Review, the Company determined that 57 of the 100 total grants made during this time period used incorrect measurement dates for accounting purposes. Of these 100 grants, 33 grants were issued to the Company’s management and other employees (“Management Grants”). The Company determined that incorrect measurement dates were used for accounting purposes for 24 of the 33 Management Grants. As a result, revised measurement dates were selected for many grants and resulted in exercise prices that were less than the fair market value of the stock on the most likely measurement dates. The Company recorded pre-tax compensation expense of $52.9 million ($59.9 million after-tax), in the aggregate over the fiscal years 1994 through 2005. The after-tax amount is higher due primarily to disallowed deductions pursuant to IRS Section 162(m) and related penalties and interest. For the three and six months ended February 28, 2006, the Company recorded a pre-tax adjustment to share based compensation expense in the amount of $1.9 million (($0.2) million after-tax) and $0.2 million (($0.6) million after-tax), respectively.

The Company has concluded that a significant increase in its allowance for doubtful accounts was required. A portion of the increase has been determined to be the correction of an error from prior periods and is included in the accompanying financial statements as an element of the Restatement. This error related to the fact that in prior years the Company did not properly consider available information related to (a) the cumulative differences between actual write offs and its allowance for doubtful accounts and (b) significant increases in the “Return to Lender” dollars for Title IV recipients who withdraw from University of Phoenix, Inc. (“UPX”) or Western International University, Inc. (“WIU”). When a student with Title IV loans withdraws from UPX or WIU, the Company is sometimes required to return a portion of Title IV funds to the lenders. The Company is generally entitled to collect these funds from the students, but the collection of these receivables is significantly lower than its other receivables from students who remain in its educational programs. Accordingly, the Company has restated its allowance for doubtful accounts for all prior periods presented. This error resulted in adjustments to pre-tax bad debt expense in the amounts of $3.9 million ($2.3 million after-tax) and $7.9 million ($4.8 million after-tax) for the three and six months ended February 28, 2006, respectively.

The Company also concluded that various accounts such as cash, revenue, property and equipment, lease accounting and other investments were not properly recorded in accordance with generally accepted accounting principles (“GAAP”). Specifically, impairment in a venture capital fund investment should have been recorded in an earlier period; cash related to scholarships, grants and refunds should have been classified as restricted cash and student deposits; different assumptions should have been used in determining the fair value of options; certain share based compensation was improperly amortized amongst quarters; auction rate securities were improperly classified as cash and cash equivalents in certain periods; and certain revenue under tuition discount programs were not properly recorded.

Management has determined that the Company did not maintain effective control over (i) the granting of stock options and the related recording and disclosure of share based compensation expense under APB 25, SFAS 123 and SFAS No. 123 (revised 2004), “Share Based Payment” (“SFAS 123(R)”), (ii) the recording of allowance for doubtful accounts, (iii) the recording of impairments for goodwill and (iv) the deduction of compensation expenses under Section 162(m) of the Internal Revenue Code of 1986 (“IRC”). The control

Page 3 of 53

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


	As of
	February 28,			August 31,
($ in thousands)	2007			2006

Assets:
Current assets
Cash and cash equivalents	$	424,088		$	309,058
Restricted cash		281,838			238,267
Marketable securities, current portion		30,138			45,978
Accounts receivable, net		195,795			160,583
Deferred tax assets, net, current portion		42,316			32,622
Other current assets		18,500			16,424

Total current assets		992,675			802,932
Property and equipment, net		343,579			328,440
Marketable securities , less current portion		45,053			53,692
Goodwill, net		31,029			16,891
Deferred tax assets, net, less current portion		66,014			53,131
Other assets (includes receivable from related party of $16,237 and $15,758 as of 2007 and 2006, respectively)		27,502			27,919

Total assets	$	1,505,852		$	1,283,005


Liabilities and Shareholders’ Equity:
Current liabilities
Accounts payable	$	39,147		$	61,289
Accrued liabilities		105,746			73,513
Current portion of long-term liabilities		21,290			23,101
Income taxes payable		33,637			47,812
Student deposits		278,959			254,130
Current portion of deferred revenue		146,201			135,911

Total current liabilities		624,980			595,756
Deferred revenue, less current portion		588			384
Long-term liabilities, less current portion		76,630			82,492

Total liabilities		702,198			678,632


Commitments and contingencies (Note 8)

Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized; none issued		—			—
Apollo Group Class A nonvoting common stock, no par value, 400,000,000 shares authorized; 188,004,000 issued at February 28, 2007 and August 31, 2006, and 172,707,000 and 172,555,000 outstanding at February 28, 2007 and August 31, 2006, respectively		103			103
Apollo Group Class B voting common stock, no par value, 3,000,000 shares authorized; 475,000 issued and outstanding at February 28, 2007 and August 31, 2006		1			1
Additional paid-in capital		—			—
Apollo Group Class A treasury stock, at cost, 15,297,000 and 15,449,000 shares at February 28, 2007 and August 31, 2006, respectively		(1,043,682	)		(1,054,046	)
Retained earnings		1,848,008			1,659,349
Accumulated other comprehensive loss		(776	)		(1,034	)

Total shareholders’ equity		803,654			604,373

Total liabilities and shareholders’ equity	$	1,505,852		$	1,283,005

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

Page 5 of 53

APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


	For the Three Months				For the Six Months
	Ended February 28,				Ended February 28,
	2007		2006		2007		2006
($ in thousands, except per share amounts)			Restated ⁽¹⁾				Restated ⁽¹⁾
Revenues:
Tuition and other, net	$	608,693	$	570,550	$	1,276,479	$	1,199,223

Costs and expenses:
Instructional costs and services		296,360		262,634		592,334		527,742
Selling and promotional		166,940		124,246		322,375		252,218
General and administrative		53,593		58,967		89,989		86,296

Total costs and expenses		516,893		445,847		1,004,698		866,256

Income from operations		91,800		124,703		271,781		332,967
Interest income and other, net		6,978		3,526		13,410		7,984

Income before income taxes		98,778		128,229		285,191		340,951
Provision for income taxes		38,440		49,140		110,979		133,282

Net income	$	60,338	$	79,089	$	174,212	$	207,669


Earnings per share attributed to Apollo Group Class A common stock:

Basic income per share	$	0.35	$	0.46	$	1.01	$	1.18

Diluted income per share	$	0.35	$	0.45	$	1.00	$	1.17

Basic weighted average shares outstanding		173,185		173,496		173,153		175,800

Diluted weighted average shares outstanding		174,624		175,435		174,543		178,094


⁽¹⁾		See Note 4, “Restatement of Consolidated Financial Statements.”

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

Page 6 of 53

APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	For the Six Months Ended Feb 28,
	2007			2006
($ in thousands)				Restated ⁽¹⁾
Cash flows provided by operating activities:
Net income	$	174,212		$	207,669
Adjustments to reconcile net income to net cash provided by operating activities:
Share based compensation		31,879			11,267
Excess tax benefits from share based compensation		(1,064	)		(12,853	)
Depreciation and amortization		34,789			32,506
Amortization of marketable securities discounts and premium, net		109			673
Provision for uncollectible accounts receivable		49,304			47,751
Deferred income taxes		(22,577	)		(6,614	)
Changes in assets and liabilities:
Accounts receivable, net		(84,516	)		(38,517	)
Other assets		(2,275	)		3,406
Accounts payable and accrued liabilities		(5,312	)		(11,847	)
Income taxes payable		(13,898	)		13,848
Student deposits		24,829			9,067
Deferred revenue		10,494			(8,685	)
Other liabilities		(2,227	)		4,748

Net cash provided by operating activities		193,747			252,419

Cash flows (used in) provided by investing activities:
Additions to property and equipment		(26,828	)		(15,308	)
Purchase of land and buildings related to new headquarters building		(23,385	)		(14,761	)
Purchase of Insight Schools, net of cash		(15,079	)		—
Purchase of marketable securities including auction rate securities		(545,475	)		(647,820	)
Maturities of marketable securities including auction rate securities		571,816			782,084
(Decrease) increase in restricted cash		(45,542	)		4,957
Purchase of other assets		—			(721	)

Net cash (used in) provided by investing activities		(84,493	)		108,431

Cash flows provided by (used in) financing activities:
Repurchase of Apollo Group Class A common stock		—			(510,882	)
Issuance of Apollo Group Class A common stock		4,454			19,119
Cash paid for cancellation of vested options		—			(6,330	)
Excess tax benefits from share based compensation		1,064			12,853

Net cash provided by (used in) used in financing activities		5,518			(485,240	)

Currency translation gain (loss)		258			(296	)

Net increase (decrease) in cash and cash equivalents		115,030			(124,686	)
Cash and cash equivalents, beginning of period		309,058			137,184

Cash and cash equivalents, end of period	$	424,088		$	12,498


Supplemental disclosure of non-cash investing activities
Credits received for tenant improvements	$	2,368		$	10,777
Purchases of property and equipment included in accounts payable	$	3,168		$	15,510


⁽¹⁾		See Note 4, “Restatement of Consolidated Financial Statements.”

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

Page 8 of 53

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

Note 1. Basis of Presentation

The interim consolidated financial statements include the accounts of Apollo Group, Inc. and its wholly-owned subsidiaries, collectively referred to herein as “Apollo Group” or the “Company”. These unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, contain all adjustments, consisting only of normal, recurring adjustments, necessary to fairly present the financial condition, results of operations and cash flows for the periods presented.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules. The Company believes that the disclosures made are adequate to make the information presented not misleading. The Company consistently applied the accounting policies described in the Company’s 2006 Annual Report on Form 10-K in preparing these unaudited interim financial statements. For a discussion of the Company’s critical accounting policies, please refer to the Company’s 2006 Annual Report on Form 10-K. These interim consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto contained in Apollo Group’s Annual Report on Form 10-K as filed with the SEC for the fiscal year ended August 31, 2006.

The Company’s fiscal year is from September 1 to August 31. Unless otherwise noted, references to particular years or quarters refer to the Company’s fiscal years and the associated quarters of those fiscal years.

The results of operations for the three and six months ended February 28, 2007 are not necessarily indicative of results to be expected for the entire fiscal year.

The preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The most significant management estimate is the allowance for doubtful accounts. Actual results could differ from these estimates.

Note 2. Nature of Operations

Apollo Group, Inc. has been an education provider for more than 30 years, operating University of Phoenix, Inc. (“UPX”), Institute for Professional Development, Inc. (“IPD”), The College for Financial Planning Institutes Corporation (“CFP”), Western International University, Inc. (“WIU”) and Insight Schools, Inc. (“Insight”), all of which are wholly-owned subsidiaries of the Company. The Company offers innovative and distinctive educational programs and services from high school through college-level at 100 campuses and 163 learning centers in 39 states, Puerto Rico, Alberta, British Columbia, The Netherlands and Mexico, as well as online, throughout the world. The Company’s combined Degreed Enrollment for UPX and Axia College as of February 28, 2007, was approximately 298,400. In addition, students are enrolled in WIU, CFP and regionally accredited private colleges and universities to which IPD provides program development and management consulting services (“IPD Client Institutions”), and additional non-degreed students are enrolled in UPX. Degreed Enrollments represent individual students enrolled in the Company’s degree programs who attended a course during the quarter and did not graduate as of the end of the quarter (including Axia students enrolled in UPX and WIU).

The Company’s operations are generally subject to seasonal trends. The Company experiences, and expects to continue to experience, seasonal fluctuations in the results of operations as a result of changes in the level of student enrollments. While the Company enrolls students throughout the year, second quarter (December through February) enrollments and related revenues generally are lower than other quarters due to holiday breaks in December and January. The Company experiences a seasonal increase in new enrollments in August of each year when most other colleges and universities begin their fall semesters.

Note 3. Significant Accounting Policies

The Company revised the presentation of the consolidated statements of cash flows to combine the purchase and maturities of marketable securities with the changes in restricted cash, including the purchase and maturity of restricted auction rate securities.

Please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2006, filed concurrently with this Form 10-Q, for additional discussion of the Company’s significant accounting policies.

Page 9 of 53

Note 4. Restatement of Consolidated Financial Statements

As a result of the errors discussed below, the Company has restated its consolidated statements of income, comprehensive income, and cash flows, including related disclosures, for the three and six months ended February 28, 2006 (the “Restatement”).

Share Based Compensation Expense Adjustment

With the completion of the Company’s reviews discussed below, the Company determined that errors had occurred in the accounting for share based compensation. Specifically, the Company determined that 57 of the 100 total grants made from June 1994 to September 2006 used incorrect measurement dates for accounting purposes. Of these 100 grants, 33 grants were issued to the Company’s management and other employees (“Management Grants”). The Company determined that incorrect measurement dates were used for accounting purposes for 24 of the 33 Management Grants. As a result, revised measurement dates were selected for many grants and resulted in exercise prices that were less than the fair market value of the stock on the most likely measurement dates. The Company recorded pre-tax compensation expense of $52.9 million ($59.9 million after-tax), in the aggregate over the fiscal years 1994 through 2005. The after-tax amount is higher due primarily to disallowed deductions pursuant to Internal Revenue Code (“IRC”) Section 162(m) and related penalties and interest. For the three and six months ended February 28, 2006, the Company recorded a pre-tax adjustment to increase share based compensation expense in the amount of $1.9 million (($0.2) million after-tax) and $0.2 million (($0.6) million after-tax), respectively.

Independent Review and Internal Review

In response to comments in a report published by an investment bank on June 8, 2006 that questioned whether the Company might have backdated stock option grants during its fiscal years ended August 31, 2000 through August 31, 2004, the Board of Directors authorized a special committee (the “Special Committee”), on June 23, 2006, to retain independent legal counsel, who in turn retained forensic accountants, to assist them in conducting an independent review of the Company’s historical practices related to stock option grants (the “Independent Review”). In November 2006, with the assistance of outside legal counsel, the Company also began an in-depth internal review to ascertain the most likely measurement date of every stock option grant since the Company’s initial public offering during its fiscal year 1994 through September 2006 (the “Internal Review”).

The Special Committee presented its report of findings (the “Special Committee Report”) to the Board of Directors on December 8, 2006, and the Company reported these findings publicly on December 15, 2006. The Special Committee’s findings include, among other things, that many of the stock option grants it reviewed were not accounted for in accordance with GAAP and that the Company’s internal controls over financial reporting with respect to stock option grants were inadequate.

Based on the facts and circumstances surrounding each grant, management and the Special Committee concluded that during the period from June 1994 through September 2006, the Company used incorrect measurement dates for accounting purposes. As a result, revised measurement dates for many grants resulted in exercise prices that were less than the fair market value of the stock on the revised measurement dates.

As part of its Internal Review, the Company adopted a methodology for determining the most likely accounting measurement dates for stock option grants in the following categories: (1) grants to management and other employees; (2) grants to Section 16 officers, except the Former CEO (the “Section 16 Grants”); (3) grants to its Former CEO (the “Former CEO Grants”); (4) grants to employees upon hiring, promotion and other special circumstances (the “Individual Grants”); (5) grants to non-employee Directors (the “Director Grants”); and (6) grants to faculty employees (the “Faculty Grants”). The Company applied the following hierarchy for determining the most likely measurement dates for each category as follows:

Management, Section 16, Former CEO and Individual Grants

	1.		The Company used the original stated grant date for any grant where evidence of Compensation Committee or, after August 2002, Former CEO approval on the stated grant date exists and the recipients and the numbers of stock options were final.

	2.		The Company used the original stated grant date for Section 16 and Former CEO Grants issued after August 2002 when Forms 4 were filed within two days of the stated grant date as long as there was not evidence that the grants were not final and approved as of the stated grant date.

	3.		The Company used the Form 4 filing date for the Section 16 and Former CEO grants issued after August 2002 when there was evidence that the grants were not final and approved as of the stated grant date but were final and approved by the date of the filing of the Form 4.

Page 10 of 53

For the majority of the grants, where the measurement date was not determined by the criteria above, the Company determined that the most likely measurement date was the date the grant was entered into Equity Edge, the Company’s stock and option plan accounting software (the “Equity Edge Record Added Date”). This methodology was used when the Company was unable to locate contemporaneous documentation confirming that the stock option award terms were finalized and approved on the stated grant date.

Director Grants

The Company used the original stated grant date for Director Grants issued under the Director Stock Plan (which expired on August 31, 2003). The Director Stock Plan was a grant program pursuant to which option grants for a specific number of shares were automatically made to the non-employee Board members on a pre-established date each year. The Company used the original stated grant date for Director Grants awarded subsequent to August 2002 under the 2000 Incentive Stock Plan when Forms 4 were filed within two days of the stated grant date.

Faculty Grants

The Company generally used the original grant date for Faculty Grants since faculty employees received grants only when the employee met the criteria set forth in the Company’s faculty handbook or website posting, which states the strike price (market value on the date of grant), number of shares to be granted, and the date and frequency of the grant.

Income Tax Related Matters – Section 162(m)

In relation to the Restatement, certain tax deductions in prior years with respect to compensation attributable to the exercise of certain stock options by executive officers may be in question. Under IRC Section 162(m), the amount of such deduction per covered executive officer is limited to $1.0 million per year, except to the extent the compensation qualifies as performance-based. Compensation attributable to options with revised measurement dates may not have qualified as performance-based compensation. Accordingly, the Company may have claimed deductions with respect to those exercised options which were in excess of the limit imposed under IRC Section 162(m). As a result, the Company has accrued its best estimate with respect to potential tax liabilities, including interest and penalties for the taxable years 2003 through 2005 (which are currently its only open years subject to adjustment for federal tax purposes), of approximately $42.8 million as of February 28, 2007. These accruals have been recorded because the Company believes it is more likely than not that the deductions will be disallowed by the IRS. For prior periods where a liability existed and where the statute of limitations has expired, the accrual relating to that period has been reversed in the appropriate period.

Restatement Adjustments

(1) Share Based Compensation - As discussed above, the Company has restated its financial results to record share based compensation expense.

(2) Allowance for Doubtful Accounts - During the year ended August 31, 2006, the Company concluded that a significant increase in its allowance for doubtful accounts was required. A portion of the increase has been determined to be the correction of an error from prior periods and is included in the accompanying financial statements as an element of the Restatement. This error related to the fact that in prior years the Company did not properly consider available information related to (a) the cumulative differences between actual write-offs and its allowance for doubtful accounts and (b) significant increases in the “Return to Lender” dollars for Title IV recipients who withdraw from UPX or WIU. When a student with Title IV loans withdraws from UPX or WIU, the Company is sometimes required to return a portion of Title IV funds to the lenders. The Company is generally entitled to collect these funds from the students, but the collection of these receivables is significantly lower than its collection of receivables from students who remain in its educational programs. Accordingly, the Company has restated its allowance for doubtful accounts for all prior periods presented.

(3) Other Adjustments – The Company concluded that the accounting for various accounts such as cash, revenue, property and equipment, lease accounting and other investments were not properly recorded in accordance with GAAP. Specifically, the impairment in a venture capital fund investment should have been recorded in an earlier period; cash related to scholarships, grants, and refunds should have been classified as restricted cash and student deposits; different assumptions should have been used in determining the fair value of options; certain share based compensation was improperly amortized amongst quarters; auction rate securities were improperly classified as cash and cash equivalents in certain periods; and certain revenue under tuition discount programs were not properly recorded. Certain of these errors resulted in adjustments to pre-tax expense shown in other adjustments in the table below.

Page 11 of 53

Adjustments to the Company’s various accounts such as cash, revenue, property and equipment, lease accounting and other investments resulted in a net decrease in expense of $0.9 million and $0.7 million for three and six months ended February 28, 2006, respectively. As part of the Restatement, the errors in the Company’s accounting for the tenant improvement allowances were corrected and certain of its operating leases now have been properly accounted for as capital leases. Additionally, the supplemental disclosure of purchases of property and equipment included in accounts payable on the Statement of Cash Flows was omitted. These adjustment amounts are included in Other Adjustments in the table below.

(4) Tax Effect of Adjustments – The tax effect of the Restatement adjustments is shown below.

Impact of the Restatement


Summary of Impact of Restatement Adjustments
												Tax Effect of Adjustments ⁽⁴⁾
												Income Tax Provision (Benefit)
	Share Based								Total			Related to									Penalty and		Tax Effect of						Total
	Compensation			Bad Debt		Other			Adjustments,			Share Based			Related to Bad						Interest on		162(m)						Adjustments,
Fiscal Year	Expense ⁽¹⁾			Expense ⁽²⁾		Adjustments ⁽³⁾			Pre-Tax			Compensation			Debt and Other			Total			Exercises		Limitation			Total Tax Effect			Net of Tax
($ in thousands)
1994	$	—		$	—	$	—		$	—		$	—		$	—		$	—		$	—	$	—		$	—		$	—
1995		176			—		—			176			(71	)		—			(71	)		—		—			(71	)		105
1996		—			—		—			—			—			—			—			—		—			—			—
1997		397			—		—			397			(160	)		—			(160	)		—		—			(160	)		237
1998		487			—		—			487			(196	)		—			(196	)		21		67			(108	)		379
1999		652			—		—			652			(262	)		—			(262	)		92		277			107			759
2000		2,091			—		—			2,091			(841	)		—			(841	)		268		757			184			2,275
2001		28,001			—		—			28,001			(11,256	)		—			(11,256	)		1,307		3,821			(6,128	)		21,873
2002		22,782			4,576		4,058			31,416			(9,158	)		(3,471	)		(12,629	)		3,334		3,628			(5,667	)		25,749
2003		8,294			3,600		918			12,812			(3,314	)		(1,805	)		(5,119	)		3,350		84			(1,685	)		11,127
2004		(14,929	)		4,103		808			(10,018	)		5,941			(1,954	)		3,987			2,541		1,179			7,707			(2,311	)

*Fiscal year 2005:*
Q1	$	5,468		$	3,632	$	(464	)	$	8,636		$	(2,175	)	$	(1,260	)	$	(3,435	)	$	459	$	5,441		$	2,465		$	11,101
Q2		5,684			3,302		6			8,992			(2,261	)		(1,316	)		(3,577	)		469		(246	)		(3,354	)		5,638
Q3		5,554			2,990		(1,384	)		7,160			(2,209	)		(639	)		(2,848	)		480		(217	)		(2,585	)		4,575
Q4		(11,772	)		1,777		610			(9,385	)		4,682			(949	)		3,733			2,643		(1,507	)		4,869			(4,516	)

*Fiscal year 2005*	$	4,934		$	11,701	$	(1,232	)	$	15,403		$	(1,963	)	$	(4,164	)	$	(6,127	)	$	4,051	$	3,471		$	1,395		$	16,798


*Fiscal years Thru 2005*	$	52,885		$	23,980	$	4,552		$	81,417		$	(21,280	)	$	(11,394	)	$	(32,674	)	$	14,964	$	13,284		$	(4,426	)	$	76,991

*Fiscal year 2006:*
Q1	$	(1,680	)	$	3,995	$	266		$	2,581		$	665		$	(1,688	)	$	(1,023	)	$	619	$	18		$	(386	)	$	2,195
Q2		1,872			3,873		(935	)		4,810			(741	)		(1,164	)		(1,905	)		633		(1,993	)		(3,265	)		1,545

*Fiscal year 2006 - Q2 YTD*	$	192		$	7,868	$	(669	)	$	7,391		$	(76	)	$	(2,852	)	$	(2,928	)	$	1,252	$	(1,975	)	$	(3,651	)	$	3,740

Total	$	53,077		$	31,848	$	3,883		$	88,808		$	(21,356	)	$	(14,246	)	$	(35,602	)	$	16,216	$	11,309		$	(8,077	)	$	80,731

The following tables present the effects of the Restatement on the Company’s previously issued Consolidated Statements of Income for the three and six months ended February 28, 2006 and Consolidated Statement of Cash Flows for the six months ended February 28, 2006.

Page 12 of 53

Consolidated Statements of Income


	Three Months Ended February 28, 2006							Six Months Ended February 28, 2006
	As Previously							As Previously
($ in thousands, except per share amounts)	Reported		Adjustments			Restated		Reported		Adjustments			Restated

Revenues:
Tuition and other, net	$	569,551	$	999	⁽³⁾	$	570,550	$	1,198,435	$	788	⁽³⁾	$	1,199,223

Costs and expenses:
Instructional costs and services		258,447		4,187	^(1-3)		262,634		518,332		9,410	^(1-3)		527,742
Selling and promotional		124,426		(180	) ⁽¹⁾		124,246		252,546		(328	)⁽¹⁾		252,218
General and administrative		57,205		1,762	^(1-3)		58,967		87,285		(989	)^(1-3)		86,296

Total costs and expenses		440,078		5,769			445,847		858,163		8,093			866,256

Income from operations		129,473		(4,770	)		124,703		340,272		(7,305	)		332,967
Interest income and other, net		3,567		(41	) ⁽³⁾		3,526		8,070		(86	) ⁽³⁾		7,984

Income before income taxes		133,040		(4,811	)		128,229		348,342		(7,391	)		340,951
Provision for income taxes		52,405		(3,265	) ⁽⁴⁾		49,140		136,933		(3,651	)⁽⁴⁾		133,282

Net income	$	80,635	$	(1,546	)	$	79,089	$	211,409	$	(3,740	)	$	207,669


Earnings per share attributed to Apollo Group Class A common stock:

Basic income per share	$	0.46	$	—		$	0.46	$	1.20	$	(0.02	)	$	1.18

Diluted income per share	$	0.46	$	(0.01	)	$	0.45	$	1.19	$	(0.02	)	$	1.17

Basic weighted average shares outstanding		173,496		—			173,496		175,800		—			175,800

Diluted weighted average shares outstanding		175,235		200			175,435		177,783		311			178,094


^{(1), (2), (3), & (4)} See above under “Restatement Adjustment” for a detailed summary of adjustments.

Page 13 of 53

Consolidated Statement of Cash Flows


	Six Months Ended February 28, 2006
	As Previously
($ in thousands)	Reported			Adjustments			Restated ⁽¹⁾

Cash flows provided by (used in) operating activities:
Net income	$	211,409		$	(3,740	) (1)-(4)	$	207,669
Adjustments to reconcile net income to net cash provided by operating activities:
Share based compensation		10,983			284	(1)		11,267
Depreciation and amortization		32,100			406	(3)		32,506
Amortization of marketable securities		673			—			673
Provision for uncollectible accounts receivable		39,883			7,868	(2)		47,751
Deferred income taxes		989			(7,603	) (4)		(6,614	)
Excess tax benefits from share based compensation		(9,533	)		(3,320	)(3)		(12,853	)
Changes in assets and liabilities:
Accounts receivable, net		(38,987	)		470	(3)		(38,517	)
Other assets		3,408			(2	) (3)		3,406
Accounts payable and accrued liabilities		(9,647	)		(2,200	) (3)		(11,847	)
Income taxes payable		9,896			3,952	(4)		13,848
Student deposits		11,442			(2,375	) (3)		9,067
Deferred revenue		(7,430	)		(1,255	) (3)		(8,685	)
Other liabilities		5,080			(332	) (3)		4,748

Net cash provided by (used in) operating activities		260,266			(7,847	)		252,419

Cash flows provided by (used in) investing activities:
Additions to property and equipment		(15,350	)		42	(3)		(15,308	)
Purchase of land and buildings related to new headquarters building		(14,761	)		—			(14,761	)
Purchase of marketable securities including auction rate securities		(647,820	)		—			(647,820	)
Maturities of marketable securities including auction rate securities		782,084			—			782,084
Increase in restricted cash		—			4,957	(3)		4,957
Purchase of other assets		(721	)		—			(721	)

Net cash provided by (used in) investing activities		103,432			4,999			108,431

Cash flows provided by (used in) financing activities:
Purchase of Apollo Group Class A common stock		(510,882	)		—			(510,882	)
Issuance of Apollo Group Class A common stock		19,119			—			19,119
Cash paid for cancellation of vested options		(6,240	)		(90	) (1)		(6,330	)
Excess tax benefits from share based compensation		9,533			3,320	(3)		12,853

Net cash used in financing activities		(488,470	)		3,230			(485,240	)

Currency translation loss		(296	)		—			(296	)

Net decrease in cash and cash equivalents		(125,068	)		382			(124,686	)
Cash and cash equivalents, beginning of period		145,607			(8,423	)		137,184

Cash and cash equivalents, end of period	$	20,539		$	(8,041	)	$	12,498

Supplemental disclosure of cash flow information

Supplemental disclosure of non-cash investing activities
Credits received for tenant improvements	$	10,777			—		$	10,777
Purchases of property and equipment included in accounts payable	$	15,510			—		$	15,510


^{(1), (2), (3), & (4)} See above under “Restatement Adjustment” for a detailed summary of adjustments.

Page 14 of 53

Note 5. Shareholders’ Equity

Cancellation of Executive Officer Stock Options

On January 11, 2006, Todd S. Nelson, the former Chief Executive Officer and President (“Former CEO”), resigned as a director and an officer of the Company. As part of his Separation Agreement dated January 11, 2006, the Company paid the Former CEO $32.3 million ($18.0 million after-tax) on January 26, 2006, which was primarily in exchange for the cancellation of all of his outstanding vested and unvested stock options. The separation agreement resulted in compensation expense of $26.0 million and a reduction of additional paid in capital of $6.3 million, which represents the fair value of the canceled options.

Note 6. Earnings Per Share

Apollo Group Class A Common Stock

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


	For the Three Months Ended February 28,
	2007						2006
			Weighted						Weighted
			Average		Per Share				Average		Per Share
($ in thousands, except per share amounts)	Income		Shares		Amount		Income		Shares		Amount
									Restated

Basic net income per share	$	60,338		173,185	$	0.35	$	79,089		173,496	$	0.46
Effect of dilutive securities:
Stock options		—		1,439		—		—		1,939		(0.01	)

Diluted net income per share	$	60,338		174,624	$	0.35	$	79,089		175,435	$	0.45


	For the Six Months Ended February 28,
	2007							2006
			Weighted							Weighted
			Average		Per Share					Average		Per Share
	Income		Shares		Amount			Income		Shares		Amount
										Restated

Basic net income per share	$	174,212		173,153	$	1.01		$	207,669		175,800	$	1.18
Effect of dilutive securities:
Stock options		—		1,390		(0.01	)		—		2,294		(0.01	)

Diluted net income per share	$	174,212		174,543	$	1.00		$	207,669		178,094	$	1.17

Diluted weighted average shares outstanding include the incremental effect of shares that would be issued upon the assumed exercise of stock options. For the three months ended February 28, 2007 and 2006, approximately 5,325,000 and 4,134,000, respectively of the Company’s stock options outstanding were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average share price for the quarter, and, therefore, their inclusion would have been anti-dilutive. These options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options.

Note 7. Share Based Compensation Plans

The Company has three share based compensation plans: the Apollo Group, Inc. Second Amended and Restated Director Stock Plan (“DSP”), the Long Term Incentive Plan (“LTIP”), and the 2000 Stock Incentive Plan (“2SIP”).

The DSP provided for an annual grant to the Company’s non-employee directors of options to purchase shares of the Company’s Apollo Group Class A common stock on September 1 of each year through 2003. No additional options are available for issuance under this plan.

Page 15 of 53

Under the LTIP, the Company may grant non-qualified stock options, stock appreciation rights, and other share based awards in the Company’s Apollo Group Class A common stock to certain officers, key employees, or directors of the Company. Most of the options granted under the LTIP vest 25% per year over four years. The vesting may be accelerated for certain grants if certain operational goals are met.

Under the 2SIP, the Company may grant non-qualified stock options, incentive stock options, stock appreciation rights, and other share based awards in the Company’s Apollo Group Class A common stock to certain officers, key employees, or directors of the Company. Prior to the conversion of UPX Online common stock to Apollo Group Class A common stock, the Company had the ability to also grant non-qualified stock options, incentive stock options, stock appreciation rights, and other share based awards in UPX Online common stock. Any unexercised UPX Online common stock options outstanding as of August 27, 2004, were converted to options to purchase Apollo Group Class A common stock. Most of the options granted under the 2SIP vest 25% per year over four years. The vesting may be accelerated for certain grants if certain operational goals are met.

Under all of the above Plans, the stock option price may not be less than 100% of the fair market value of the common stock on the date of grant. Options are granted for terms of up to ten years and can vest over periods from six months up to four years. The requisite service period for all options is equal to the vesting period. Under the Plans currently in effect (the LTIP and 2SIP), the Company is authorized to grant up to 30.8 million shares of common stock under these Plans. As of February 28, 2007, approximately 3.2 million authorized and unissued shares of common stock are reserved for issuance under the LTIP and the 2SIP.

Stock Option Modifications

On January 12, 2007, the Company’s Compensation Committee of the Board of Directors approved a resolution to modify the terms of the stock option grants for approximately 50 individuals. These modifications allowed employees, including officers, terminated on or after November 3, 2006 to exercise their options beyond the normal 90 day post-termination period provided under the 2SIP and their option agreements thereunder. The Company extended the exercise periods of these options because the Company was unable, during the financial statement restatement process, to sell shares of its Class A common stock to such individuals in compliance with the applicable registration requirements of the Securities Act of 1933, as amended. Absent the extension, the options would have expired prior to the employee having the opportunity to exercise, since the 90 day post-termination exercise period would have expired prior to the Company completing its financial statement restatement process.

As a result of these modifications, the Company recorded a non-cash charge to share based compensation of $12.1 million during the second quarter of 2007. In addition, the modified awards held by employees who terminated prior to the January 12, 2007 modification are subject to the provisions of EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). Of the $12.1 million in expense recognized upon modification of the awards, $11.8 million related to awards subject to the provisions of EITF 00-19, under which, these awards are classified as liabilities and reported in Current portion of Long- Term Liabilities in the Company’s consolidated balance sheets. EITF 00-19 also requires the Company to report the awards classified as liabilities at their fair value as of each balance sheet date. Any increase or decrease in this fair value is recorded in General and Administrative expense in the Company’s consolidated statements of income. During the second quarter of 2007, the Company recorded an additional expense of $2.8 million as a result of the increase in the fair value of the awards to $14.6 million as of February 28, 2007. The exercise prices of the approximately 475,000 options subject to EITF 00-19 range between $6.50 and $71.23.

Page 16 of 53

Apollo Group Class A Stock Options

A summary of the activity and changes related to stock options to purchase Apollo Group Class A common stock granted under the DSP, the LTIP and the 2SIP is as follows:


Summary of Stock Options Outstanding
						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Total			Exercise Price		Contractual		Intrinsic
($ in thousands, except per share amounts)	Shares			per Share		Term (years)		Value ($)⁽¹⁾

Outstanding as of August 31, 2006		9,324		$	44.96
Granted		214			47.87
Exercised		(121	)		24.23
Forfeited, canceled or expired		(606	)		59.32

Outstanding as of February 28, 2007		8,811		$	44.33		5.97	$	96,495

Vested or expected to vest as of February 28, 2007		8,319		$	43.56		5.80	$	96,434

Exercisable as of February 28, 2007		6,021		$	38.39		4.84	$	95,117

Available for issuance as of February 28, 2007		3,178


⁽¹⁾		Aggregate intrinsic value represents the value of the Company’s closing stock price on February 28, 2007 ($47.29) in excess of the exercise price multiplied by the number of options outstanding or exercisable.

As of February 28, 2007, there was approximately $46.2 million of total unrecognized share based compensation cost related to unvested share based awards granted under the Company’s share based compensation plans. The Company expects that this compensation will be recognized through the fiscal year ended August 31, 2010.

The following table summarizes information about the stock options outstanding and exercisable as of February 28, 2007:


	Options Outstanding						Options Exercisable
			Weighted Avg.		Weighted Avg.				Weighted Avg.
			Contractual		Exercise				Exercise
Range of	Options		Life		Price		Options		Price
Exercise Prices	Outstanding		Remaining		per Share		Exercisable		per Share
(options in thousands)
$6.50 to $14.84		1,779		2.67	$	10.14		1,743	$	10.12
$17.65 to $46.70		1,888		4.38		31.18		1,725		29.71
$50.68 to $50.68		5		9.56		50.68		—		—
$51.33 to $51.33		1,794		9.31		51.33		450		51.33
$51.67 to $91.00		3,345		6.82		66.17		2,103		66.18

$6.50 to $91.00		8,811		5.97	$	44.33		6,021	$	38.39

The following table summarizes information related to stock options exercised for the three and six months ended February 28, 2007 and 2006.


	For the Three Months Ended				For the Six Months Ended
	February 28,				February 28,
(in thousands)	2007		2006		2007		2006

Amounts related to options exercised:
Intrinsic value realized by optionees	$	83	$	21,530	$	2,605	$	46,596
Actual tax benefit realized by Company for tax deductions		33		8,677		1,032		12,831

The Company issues shares of treasury stock upon exercise of stock options.

Page 17 of 53

Adoption of SFAS 123(R) on September 1, 2005

The table below outlines the effects on share based compensation for the three and six months ended February 28, 2007 and 2006:



	For the Three Months Ended						For the Six Months Ended
	February 28,						February 28,

($ in thousands, except per share amounts)	2007			2006			2007			2006
				Restated						Restated
Instructional costs and services	$	3,965		$	1,945		$	7,855		$	3,950
Selling and promotional		983			230			2,067			586
General and administrative		16,785			4,959			21,957			6,731

Share-based compensation expense included in operating expenses		21,733			7,134			31,879			11,267
Tax effect on share-based compensation		(8,608	)		(2,826	)		(12,627	)		(4,463	)

Share-based compensation expense related to employee stock options, net of tax	$	13,125		$	4,308		$	19,252		$	6,804

SFAS 123(R) Assumptions

Fair Value - The Company uses the Black-Scholes-Merton option pricing model (“BSM”) to estimate the fair value of its options as of the grant dates using the following weighted average assumptions:


	For the Three Months Ended						For the Six Months Ended
	February 28,						February 28,
	2007			2006			2007			2006
				Restated						Restated
Expected volatility		30.0	%		34.3	%		30.1	%		34.1	%
Expected life		2.9			5.7			3.1			5.7
Risk-free interest rate		4.8	%		4.5	%		4.8	%		4.4	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

The weighted average estimated grant date fair value, as defined by SFAS 123(R), for options granted under the Company’s stock option plan during the three months ended February 28, 2007 and 2006 were $12.11 per share and $30.60 per share, respectively, and the six months ended February 28, 2007 and 2006 were $12.63 per share and $29.97 per share, respectively.

Expected Volatility — The Company uses an average of its historical volatility and the implied volatility of long-lived call options to estimate expected volatility consistent with SFAS 123(R) and Staff Accounting Bulletin (“SAB”) No. 107 (“SAB 107”). Prior to the adoption of SFAS 123(R), the Company had used an estimate based on its historical volatility for purposes of its pro forma disclosure.

Expected Life (years) — Beginning on September 1, 2005, the expected life was determined taking into account both the contractual term of the option and the effects of employees’ expected exercise. Where applicable, the expected life has been determined pursuant to SAB 107. Prior to September 1, 2005, the expected life was determined based on an analysis of historical exercise behavior and management judgment.

Risk-Free Interest Rate — The Company uses the U.S. constant maturity treasury rates as the risk-free rate interpolated between the years commensurate with the expected life assumptions.

Dividend Yield — The dividend yield assumption is based on the fact that the Company has not historically paid dividends and does not expect to pay dividends in the future.

Forfeitures - Forfeitures are estimated at the time of grant based on historical forfeiture activity adjusted for any known nonrecurring activity. Management estimates are trued up at the end of each vesting period if actual forfeitures differ from those estimates.

Expected Vesting Period - The Company amortizes the share based compensation expense, net of forfeitures, over the expected vesting period using the accelerated recognition method for pre-September 1, 2005 grants and the straight-line method for awards with only service conditions and the accelerated recognition method for awards with performance conditions for post-September 1, 2005 grants in accordance with SFAS 123(R).

Page 18 of 53

Note 8. Commitments and Contingencies

The Company is subject to various claims and contingencies in the ordinary course of business, including those related to regulation, litigation, business transactions, employee related matters and taxes, among others. In accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), when the Company becomes aware of a claim or potential claim, the likelihood of any loss or exposure is assessed. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company records a liability for the loss. The liability recorded includes probable and estimable legal costs associated with the claim or potential claim. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount is material.

Internal Revenue Service Audit

On September 13, 2006, the Internal Revenue Service (“IRS”) commenced an audit of the Company’s U.S. federal income tax returns for the fiscal years ended August 31, 2003 through 2005 for income and deductions previously claimed by the Company, including deductions claimed under IRC Section 162(m). In relation to the Restatement, certain tax deductions in prior years with respect to compensation attributable to the exercise of certain stock options by executive officers may be in question. Under IRC Section 162(m), the amount of such deduction per covered executive officer is limited to $1.0 million per year; except to the extent the compensation qualifies as performance-based. Compensation attributable to options with revised measurement dates may not have qualified as performance-based compensation. Accordingly, the Company may have claimed deductions with respect to those exercised options that were in excess of the limit imposed under IRC Section 162(m). As a result, the Company has accrued its best estimate with respect to potential tax liabilities, including interest and penalties for the taxable years 2003 through 2005 (which are currently its only open years subject to adjustment for federal tax purposes), of approximately $42.8 million as of February 28, 2007. These accruals have been recorded because the Company believes it is more likely than not that the deductions will be disallowed by the IRS. For prior periods where a liability existed and where the statute of limitations has expired, the accrual relating to that period has been reversed in the appropriate period. In addition, the IRS audit may result in additional tax, penalties and interest, the amount of which may or may not be material, but this will not be known until the IRS audit is complete. The Company does not anticipate that the IRS audit will be complete prior to the second quarter of fiscal year 2008, and it may extend past such quarter, depending on the issues raised by the IRS with respect to such years.

Income Tax Related Matters – Section 409A

The revised measurement dates for certain stock options discussed above may result in adverse tax consequences to holders of those options under IRC Section 409A. Section 409A was enacted in 2004 to impose certain restrictions on deferred compensation arrangements, including limitations on the subsequent distribution of deferred amounts. Deferred compensation for this purpose is defined very broadly and, as a result, includes in that definition, options granted at a discounted exercise price, to the extent those options vest after December 31, 2004 (“409A Affected Options”). Therefore, the revised measurement dates for the options discussed above could subject the options that vest after calendar year 2004 to treatment as 409A Affected Options. Each holder of a 409A Affected Option would recognize taxable income on the option spread at the time of vesting (or, for 409A Affected Options exercised in calendar years 2006 or 2007, at the time of exercise) and would incur, in addition to regular income taxes, an additional 20% penalty tax on such spread and interest. Similar penalty taxes could apply under state tax laws. We are subject to certain reporting and withholding obligations with respect to the taxable income on the option spread.

(1) Unexercised 409A Affected Options

Section 16 Officers: In December 2006, the Company entered into irrevocable written agreements with each of its Section 16 Officers and certain Former Section 16 Officers, holding 409A Affected Options pursuant to which those options were to be brought into compliance with Section 409A, and thereby would avoid the adverse tax consequences summarized above, through either of the following alternatives: (a) amendment of the option to increase the exercise price to the market price per share of the Company’s Class A common stock on the revised measurement date or (b) the optionee’s commitment to exercise the option (to the extent in the money) during the 2007 calendar year prior to its contractual expiration date. Generally, these amendments will be treated as a modification of the option under SFAS 123(R). However, in this circumstance, there are no accounting consequences under SFAS 123(R).

Non-Section 16 Officers: An offer to amend the 409A Affected Options held by non-Section 16 Officers to increase the exercise price to the market price per share of the underlying Class A common stock on the revised measurement date cannot be made until after the Annual Report on Form 10-K and all other delinquent filings are filed with the SEC. In order to avoid adverse taxation under Section 409A, this amendment must be made on or before the earlier of (i) December 31, 2007 or (ii) the exercise of the 409A Affected Options during the 2007 calendar year. The Company anticipates that it will commence such an offer after the filing of the Annual Report on Form 10-K and all other delinquent filings.

Page 19 of 53

As part of the offer and amendment process under IRC Section 409A, the Company may provide bonuses to the holders of the amended options to compensate them for the resulting increase in their stock option exercise price. However, the Company has not yet made a decision to implement a bonus program to compensate either the Section 16 Officers or the non-Section 16 Officers resulting from the increased exercise prices. A decision to compensate for increased prices through a bonus would represent a modification to the grant and would result in accounting consequences under SFAS 123(R).

(2) Exercised 409A Affected Options

In February 2007, the Company elected to participate in a program announced by the Internal Revenue Service in Notice 2007-30, which pertains to 409A Affected Options exercised by non-Section 16 Officers during the calendar year 2006 and which allows the Company to pay the penalty tax and interest due to the related measurement date changes that would otherwise be payable by the option holders who exercised the 409A Affected Options. The payment of the tax penalty and interest on behalf of the option holders in 2007 will result in additional taxable income to the option holders. As such, the Company will pay on behalf of or reimburse the option holders for applicable payroll and income taxes related to the additional income, as well as provide a gross up for any tax consequences of the penalty tax and interest reimbursement it makes. The Company recorded a pre-tax liability in the second quarter of 2007 for compensation expense under this program totaling approximately $2.6 million.

Sale Lease-back Option

On June 20, 2006, the Company entered into an option agreement (which was amended in November 2006) with Macquarie Riverpoint AZ, LLC (“Macquarie”). The option agreement allows the Company to execute a sale and simultaneous leaseback of the new corporate headquarters buildings located in Phoenix, Arizona. The Company anticipates beginning to occupy this building late in fiscal year 2007 and finishing construction by the end of the third quarter of 2008. In the third quarter of 2008, the Company anticipates executing the sale lease-back option. When the sale-leaseback option is exercised, the Company anticipates receiving approximately $170 million in cash for the building and land, and expects to generate a gain on the sale of approximately $20.0 — $30.0 million. The gain will be deferred over the 12 year term of the lease agreement.

Naming Rights to Glendale, Arizona Sports Complex

On September 22, 2006, the Company entered into an agreement with New Cardinals Stadium LLC, B&B Holdings, Inc., an unrelated third party doing business as the Arizona Cardinals, for UPX naming rights on a stadium in Glendale, Arizona, which is home to the Arizona Cardinals National Football League football club. The naming rights include signage, advertising and other promotional benefits. The initial agreement term is 20 years with options to extend. Pursuant to the agreement, the Company is required to pay a total of $5.8 million for the 2006 contract year, which is increased 3% per year until 2026. Other payments apply if certain events occur, such as the Cardinals playing in the Super Bowl or if there are sold-out home games.

Contingencies Related to Litigation and Other Proceedings

The following is a description of pending litigation that fall outside the scope of ordinary and routine litigation incidental to the Company’s business. The Company’s policy is to expense legal fees and expenses as incurred.

Pending Litigation

Incentive Compensation Qui Tam Action

On August 29, 2003, the Company was notified that a qui tam action had been filed against it on March 7, 2003, in the U.S. District Court for the Eastern District of California by two current employees on behalf of themselves and the federal government. When the federal 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 federal 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 UPX 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 UPX 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 the case was subsequently dismissed with prejudice. On June 11, 2004, an appeal was filed with the U.S. Court of Appeals for the Ninth Circuit. On September 5, 2006, the Ninth Circuit reversed the ruling of the district court and held that the relators had adequately alleged the elements of a False Claims Act cause of action. On January 22, 2007, UPX filed a Petition for Writ of Certiorari with the U.S. Supreme Court; on April 23, 2007, the U.S. Supreme Court denied UPX’s petition. As a result, the case has been remanded to the District Court in accordance with the order of the Ninth Circuit. In addition, on March 23, 2007, UPX filed a motion in the District Court to dismiss the complaint on the grounds that the September 7, 2004 settlement agreement between UPX and the U.S. Department of Education constituted an alternate remedy under the False Claims Act. In addition, the Company has filed a Motion to Dismiss based on the availability of an alternative remedy; this Motion is currently pending. Discovery has not yet

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commenced in the District Court. 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 addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Axia Qui Tam Action

On August 15, 2005, a relator filed a qui tam complaint under seal in the U.S. District Court for the District of Columbia. On April 12, 2006, the DOJ filed The Government’s Notice of Election to Decline Intervention in this qui tam lawsuit and on June 15, 2006, the court entered an order unsealing the complaint. An amended complaint was served on or about November 1, 2006. On November 15, 2006, the relator filed a Voluntary Notice of Dismissal. On November 17, 2006, the court ordered that the relator comply with the statutory requirements for dismissal of a qui tam False Claims Act action by December 1, 2006. On December 1, 2006, the United States consented to the dismissal of the action with prejudice as to the relator, so long as the dismissal is without prejudice as to the United States. On February 2, 2007, the court ordered the United States to articulate its reasons for consenting to the dismissal of the action. On February 21, 2007, the United States filed a Statement of Reasons for Consenting to Dismissal. 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 addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Sekuk Class Action

On approximately October 12, 2004, a class action complaint was filed in the U.S. District Court for the District of Arizona, captioned Sekuk Global Enterprises et al v. Apollo Group, Inc. et al, Case No. CV 04-2147 PHX NVW. A second class action complaint making similar allegations was filed on or about October 18, 2004, in the U.S. District Court for the District of Arizona, captioned Christopher Carmona et al v. Apollo Group, Inc. et al, Case No. CV 04-2204 PHX EHC. A third class action complaint making similar allegations was filed on or about October 28, 2004, in the U.S. District Court for the District of Arizona, captioned Jack B. McBride et al v. Apollo Group, Inc. et al, Case No. CV 04-2334 PHX LOA. The court consolidated the three pending class action complaints and a consolidated class action complaint was filed on May 16, 2005 by the lead plaintiff. Lead plaintiff purports to represent a class of the Company’s shareholders who acquired their shares between February 27, 2004 and September 14, 2004, and seeks monetary damages in unspecified amounts. Lead plaintiff alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under the Act by the Company for their issuance of allegedly materially false and misleading statements in connection with their failure to publicly disclose the contents of the U.S. Department of Education’s program review report. A motion to dismiss the consolidated class action complaint was filed on June 15, 2005, on behalf of Apollo Group, Inc. and the individual named defendants. The court denied the motion to dismiss on October 18, 2005 and discovery commenced. The parties conducted discovery from October 2005 until discovery closed on February 16, 2007. On March 9, 2007, both parties filed motions for summary judgment. Opposition briefs were filed on May 11, 2007, and reply briefs are due to be filed no later than June 8, 2007. The summary judgment motions are scheduled to be heard on September 4, 2007. The case remains set for trial on November 14, 2007. 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 addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Alaska Electrical Pension Fund Derivative Action

Three shareholder derivative suits are pending in the U.S. District Court for the District of Arizona, alleging on behalf of the Company that certain of the Company’s current and former officers and directors engaged in misconduct regarding stock option grants. As with any derivative action, an independent committee of the Board of Directors of the Company will need to determine whether it is in the Company’s best interest to itself pursue the allegations made on behalf of the Company. These derivative complaints were filed on or around September 5 and 19, 2006 and November 11, 2006 after the Company announced the formation of the Special Committee and the commencement of its investigation, and the Company has moved the Court to stay these actions pending the conclusion of the Special Committee’s investigation and review of plaintiffs’ claims. On December 4, 2006, the Court issued an order in the case captioned Alaska Electrical Pension Fund v. Sperling, Case No. CV06-02124-PHX-ROS, stating that the Company’s motion to stay the proceedings would be granted upon notice that Hedy F. Govenar had been replaced on the Special Committee by another board member who was not a party to the case. Effective December 8, 2006, K. Sue Redman has replaced Hedy F. Govenar as a member of the Special Committee. As of March 13, 2007, James R. Reis joined the special committee in place of Daniel D. Diethelm. Now that the Special Committee has concluded its factual findings, the Special Committee has been charged to analyze, in light of the investigation, whether the pursuit of these shareholder derivative cases would be in the Company’s best interest. 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 addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

EEOC v. UPX

On September 25, 2006, the Equal Employment Opportunity Commission (“EEOC”) filed a Title VII action against UPX captioned Equal Employment Opportunity Commission v. UPX, No. CV-06-2303-PHX-MHM, in the U.S. District Court for the District of

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Arizona on behalf of four identified individuals and an asserted class of unidentified individuals who were allegedly discriminated against because they were not members of the Church of Jesus Christ of Latter Day Saints. The Complaint also alleges that the identified individuals were retaliated against after complaining about the alleged discrimination. The EEOC did not serve its Complaint on UPX until November 21, 2006. UPX answered the Complaint on December 8, 2006, denying the material allegations asserted. An initial Scheduling Conference was held on February 15, 2007. The parties are currently engaged in initial 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 addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Barnett Derivative Action

On April 24, 2006, Larry Barnett filed a complaint derivatively on behalf of the Company. The lawsuit was filed in the Superior Court for the State of Arizona, Maricopa County and is entitled Barnett v. John Blair et al, Case Number CV2006-051558. On October 10, 2006, plaintiff filed a First Amended Complaint adding allegations of stock option backdating. The complaint names as defendants the Company, John M. Blair, Dino J. DeConcini, Hedy F. Govenar, Kenda Gonzales, Todd Nelson, Laura Palmer Noone, John Norton, John G. Sperling and Peter V. Sperling. The First Amended Complaint alleges, among other things, that the individual defendants breached their fiduciary duties to the Company and that certain of the individual defendants were unjustly enriched by their receipt of backdated stock option grants. The plaintiff seeks, among other things, an award of unspecified damages and reasonable costs and expenses, including attorneys’ fees. On August 21, 2006, the Company filed a Motion to Stay the case arguing that it is not in the best interests of the Company to prosecute plaintiffs’ purported derivative claims prior to resolution of the parallel federal securities class action pending against the Company in federal district court as described below under “Teamsters Local Union Putative Class Action.” The individual defendants joined in the Motion to Stay. On November 10, 2006, after plaintiff filed the First Amended Complaint and added allegations of stock option backdating, the Company filed an Amended Motion to Stay arguing that the action should be stayed pending resolution of the federal securities class action and pending the Special Committee’s investigation into the allegations of stock option backdating. Also on November 10, 2006, the Company filed a motion to sever the claims relating to stock option backdating from the claims made in the original complaint. On January 29, 2007, the Court granted the Amended Motion to Stay for a period of six months. The Court set an interim case management conference for June 4, 2007. 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 addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Bamboo Partners Derivative Action

On August 15, 2006, Bamboo Partners filed a complaint derivatively on behalf of the Company and UPX. The lawsuit was filed in the U.S. District Court, District of Arizona and is entitled Bamboo Partners v. Nelson et al, Case Number 2:06-at-10858. The complaint names as defendants Apollo Group, Inc., UPX, Todd Nelson, Kenda Gonzales, Daniel Bachus, John G. Sperling, Peter V. Sperling, Laura Palmer Noone, John M. Blair, Dino J. DeConcini, Hedy F. Govenar and John Norton III. The complaint alleges, among other things, that the defendants violated Sections 10 and 21D of the Exchange Act and numerous breaches of fiduciary duties. The complaint seeks damages sustained by Apollo Group and UPX as a result of breaches of fiduciary duty, abuse of control and waste of corporate assets. The complaint seeks damages against Laura Palmer Noone for unjust enrichment. The complaint also seeks attorneys’ fees, reasonable costs and disbursements. On November 13, 2006, the Company filed a Motion to Stay the case arguing that it is not in the best interests of the Company to prosecute plaintiffs’ purported derivative claims prior to resolution of the parallel federal securities class action pending against the Company in federal district court, as described below under “Teamsters Local Union Putative Class Action.” The individual defendants joined in the Motion to Stay. The court granted the Company’s motion to stay on May 18, 2007. 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 addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

Teamsters Local Union Putative Class Action

On November 2, 2006, a plaintiff filed a class action complaint purporting to represent a class of shareholders who purchased the Company’s stock between November 28, 2001 and October 28, 2006. The complaint alleges that the Company and certain of its current and former directors and officers violated Sections 10(b) and 20(a) and Rule 10b-5 promulgated thereunder of the Securities Exchange Act of 1934 by purportedly failing to disclose alleged deficiencies in the Company’s stock option granting policies and practices. Plaintiff seeks compensatory damages and other relief. On January 3, 2007, other shareholders, through their separate attorneys, filed motions seeking appointment as lead plaintiff and approval of their designated counsel as lead counsel to pursue this action. Those motions are pending before the court. The Company has not yet responded to the complaint in this action, but intends to vigorously oppose plaintiffs’ allegations. 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 addition, the Company cannot reasonably estimate a reserve for this action and accordingly has not accrued any liability associated with this action.

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Regulatory and Other Legal Matters

U.S. Department of Education Audits

From time to time as part of the normal course of business, UPX and WIU are subject to periodic program reviews and audits by regulating bodies. The U.S. Department of Education, Office of Inspector General (“OIG”), conducted an audit of UPX for the period September 1, 2002, through March 31, 2004. On August 24, 2005, the OIG issued a final audit report whereby the OIG concluded that UPX had policies and procedures that provide reasonable assurances that the institution properly makes initial and subsequent disbursements to students enrolled in Title IV eligible programs and issued certain recommendations. On September 27, 2006, the U.S. Department of Education issued a final audit determination letter regarding disbursing Title IV funds to student accounts for allowable institutional charges and disbursing funds to students who were not in eligible programs. UPX has complied with the final audit determination letter.

On December 22, 2005, the OIG issued a separate audit report on their review of UPX’s policies and procedures for the calculation and return of Title IV funds. The OIG concluded that UPX had policies and procedures that provide reasonable assurances that it properly identified withdrawn students, appropriately determined whether a return of Title IV funds was required, returned Title IV funds for withdrawn students in a timely manner and used appropriate methodologies for most aspects of calculating the return of Title IV funds. The OIG did conclude, however, that UPX did not use appropriate methodologies for calculating the percentage of Title IV financial aid earned from March 1, 2004 through December 7, 2004. Since December 8, 2004, UPX has adopted the methodologies deemed appropriate by the U.S. Department of Education. The U.S. Department of Education will ultimately issue a final audit determination letter regarding the return of Title IV funds. UPX has accrued $3.7 million, which is its best estimate of the refund liability. While the outcome of the OIG audit proceedings are on-going, management does not expect a material adverse effect on the Company’s business, financial position, results of operations, or cash flows to result from these actions.

Department of Justice Investigation

On June 19, 2006, the Company received a grand jury subpoena from the U.S. Attorney’s Office for the Southern District of New York requesting that the Company provide documents relating to its stock option grants. The Company is cooperating fully with this request.

SEC Informal Inquiry

On June 30, 2006, the Company was notified by letter from the SEC of an informal inquiry and the Commission’s request for the production of documents relating to the Company’s stock option grants. The Company is cooperating fully with this investigation.

Nasdaq Proceeding

Due to the Independent and Internal Reviews and the resulting Restatement, the Company did not file on time its Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, the Annual Report on Form 10-K for the fiscal year ended August 31, 2006 and the Quarterly Reports on Form 10-Q for the quarters ended November 30, 2006 and February 28, 2007. As a result, the Company received four Nasdaq Staff Determination letters, dated July 11, 2006, November 14, 2006, January 11, 2007 and April 11, 2007, respectively, stating that the Company was not in compliance with the filing requirements of Marketplace Rule 4310(c)(14) and, therefore, that the Company’s stock was subject to delisting from the Nasdaq Global Select Market. The Company appealed this determination, requested a hearing before a Nasdaq Listing Qualifications Panel (the “Panel”) and attended the hearing at which the Company sought appropriate exceptions to the filing requirements from the Panel, pending completion of its delinquent reports. On September 20, 2006, the Panel granted the Company’s request for continued listing of its securities on the Nasdaq Global Select Market, subject to the condition that the Company files this Report and its Quarterly Reports on Form 10-Q for the quarters ended May 31, 2006 and November 30, 2006 on or before December 29, 2006. On December 14, 2006, the Company informed the Panel that it would not be able to file its delinquent reports by December 29, 2006 and sought a reasonable extension of that date. On December 20, 2006, the Panel denied the Company’s request and notified the Company that it had determined to suspend trading of the Company’s securities on December 29, 2006. The Company appealed this determination, and on December 22, 2006, the Company was informed by the Listing Council that it had determined to call the Panel’s Delisting Decision for review, as contemplated by Marketplace Rule 4807(b), and had also stayed the delisting of the Company’s securities pending further review of the Listing Council. The Company submitted additional information for the Listing Council’s consideration on February 2, 2007. On March 29, 2007, the Panel determined to exercise its discretionary authority, under Rule 4802(b), to grant the Company an exception to demonstrate compliance with all of the Nasdaq Global Select Market continued listing requirements until May 25, 2007. With the filing of this Report, its Annual Report on Form 10-K for 2006 and its Quarterly Reports on Form 10-Q for the quarters ended, November 30, 2006 and February 28, 2007, the Company believes it is current with SEC reporting requirements and Nasdaq listing requirements.

Note 9. Segment Reporting

The Company operates exclusively in the educational industry providing higher education. The Company’s five reportable segments are aggregated into three reportable operating segments for financial reporting purposes: the University of Phoenix, Other Schools and

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Corporate. The Other Schools segment includes IPD, WIU, CFP, and Insight which are not material to the Company’s overall results. The University of Phoenix and Other Schools segments are composed of educational operations conducted in similar markets and produce similar economic results. The Company’s operations are also subject to a similar regulatory environment, which includes licensing and accreditation.

Consistent with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), the Company’s reportable segments have been determined based on the method by which management evaluates performance and allocates resources. Management evaluates performance based on reportable segment profit. This measure of profit includes charges allocating all corporate support costs to each segment, as part of a general allocation, but excludes interest income and certain revenue and unallocated corporate charges. The revenue and corporate charges which are not allocated to the UPX or other school segments are included in the Corporate segment.

The accounting policies of each segment are consistent with those referred to in the summary of significant accounting policies in Note 3. Transactions between segments, which are not significant, are consummated on a basis intended to reflect the market value of the underlying services and are eliminated upon consolidation.

The Company’s principal operations are located in the United States, and the results of operations and long-lived assets in geographic regions outside of the United States are not significant. During the three months ended February 28, 2007 and 2006, no individual customer accounted for more than 10% of the Company’s consolidated revenues.

Summary financial information by reportable segment is as follows:


	For the Three
	Months Ended						For the Six Months Ended
	February 28,						February 28,
	2007			2006			2007			2006
($ in thousands)				Restated						Restated
Tuition and other, net
UPX	$	565,589		$	463,240		$	1,172,605		$	993,167
Other Schools		42,989			107,244			103,783			205,717
Corporate		115			66			91			339

Total tuition and other revenues, net	$	608,693		$	570,550		$	1,276,479		$	1,199,223


Income from operations:
UPX	$	106,481		$	113,380		$	279,043		$	296,744
Other Schools		5,444			23,861			18,869			50,437
Corporate/Eliminations		(20,125	)		(12,538	)		(26,131	)		(14,214	)

		91,800			124,703			271,781			332,967

Reconciling items:
Interest income and other, net		6,978			3,526			13,410			7,984

Income before income taxes	$	98,778		$	128,229		$	285,191		$	340,951

Note 10. Acquisitions

On October 20, 2006, the Company completed the acquisition of Insight Schools (“Insight”). Insight operates an online high school and engages in the business of servicing cyber high schools and other online education. The Company acquired all of the outstanding common stock of Insight for $15.5 million. The purchase price included the payment of seller transaction fees, the repayment of certain existing indebtedness, payment of employee sale bonuses, and payments to option holders, warrant holders, and convertible note holders. The Company believes this acquisition allows it to expand into the online charter high school market. The acquisition has been accounted for using the purchase method in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations”. As a result of the acquisition, Goodwill increased by $14.1 million.

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Note 11. Subsequent Events

Changes in Board of Directors Members

As previously reported in a Current Report on Form 8-K filed May 4, 2007, Mr. John M. Blair and Ms. Hedy F. Govenar have resigned from the Company’s Board of Directors, effective immediately after the Company files its Annual Report on Form 10-K for the fiscal year ended August 31, 2006 and its other delinquent reports.

Changes in Board of Directors Committees

On March 13, 2007, James R. Reis joined as Chairman of the Special Committee in place of Mr. Daniel D. Diethelm. With their resignations, Mr. Blair and Ms. Govenar no longer serve on the Nominating and Governance Committee, effective immediately after the Company files its Annual Report on Form 10-K for the fiscal year ended August 31, 2006 and its other delinquent reports.

Changes in Management

On March 31, 2007, Mr. Gregory W. Cappelli entered into an employment contract with the company and was appointed Executive Vice President, Global Strategy and Assistant to the Executive Chairman. Under the terms of his employment agreement, Mr. Cappelli will be granted 1,000,000 options (subject to an Equalization Grant, as defined) to purchase shares in the Company’s Class A common stock and $5 million in restricted stock units.

Stock Option Plans

On May 15, 2007, holders of the Company’s Class B common stock increased the number of shares reserved for issuance under the 2SIP by 5.0 million shares.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) has been revised for the effects of the Restatement as discussed in Note 4 to the consolidated financial statements included in Item 1 of the Form 10-Q.

This is intended to help the investor understand Apollo Group, Inc., (“the Company,” “Apollo Group,” “Apollo,” or “APOL”) our operations, and our present business environment. MD&A is provided as a supplement to—and should be read in conjunction with—our consolidated financial statements and the accompanying notes (“Notes”). The following overview provides a summary of the section included in our MD&A:

	•		Forward-Looking Statements—cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from our historical results or our current expectations or projections.

	•		Results of Independent and Internal Review; Effect of Restatement—a discussion of the results of our independent and internal reviews of our historical practices related to stock option grants and the effects of the Restatement.

	•		Executive Summary—a general description of our business and the education industry as well as, key highlights in the current year.

	•		Critical Accounting Policies and Estimates—a discussion of accounting policies that require critical judgments and estimates and a summary of recent accounting pronouncements.

	•		Results of Operations—an analysis of our results in our consolidated financial statements. We operate in one business sector—education. Except to the extent that differences between our three operating segments are material to an understanding of our business as a whole, we present the discussion in the MD&A on a consolidated basis.

	•		Liquidity, Capital Resources, and Financial Position—an analysis of cash flows, sources and uses of cash, commitments and contingencies, seasonality in the results of our operations, the impact of inflation, and quantitative and qualitative disclosures about market risk.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact may be forward-looking statements. Such forward-looking statements include, among others, those statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and the beliefs and assumptions of us and our management, and speak only as of the date made and are not guarantees of future performance. The words “believes,” “expects,” “anticipates,” “estimates,” “plans,” “objectives,” and other similar statements of expectation identify forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Future events and actual results could differ materially from those set forth in the forward-looking statements as a result of many factors. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the Company’s 2006 Annual Report on Form 10-K filed concurrently with this 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.

Results of Independent and Internal Review; Effect of Restatement

In this quarterly report for the quarter ended February 28, 2007, we have restated our consolidated statements of income, comprehensive income, and cash flows for the three and six months ended February 28, 2006. See Note 4, “Restatement of Consolidated Financial Statements,” included in Part I, Item 1.

As part of the Restatement, we have recorded additional pre-tax share based compensation expense with regard to past stock option grants of approximately $1.9 million and $0.2 million under SFAS 123 and SFAS No. 123 (revised 2004), “Share Based Payment” (“SFAS 123(R)”) for the three and six months ended February 28, 2006.

Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q affected by the Restatement will not be amended. Accordingly, previously issued financial statements and related reports of our independent registered public accounting firm should not be relied upon.

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Background

In response to comments in a report published by an investment bank on June 8, 2006 that questioned whether we might have backdated stock option grants during its fiscal years ended August 31, 2000 through August 31, 2004, our Board of Directors authorized a Special Committee on June 23, 2006, and authorized it to retain independent legal counsel, who in turn retained forensic accountants, to assist them in conducting the Independent Review of the Company’s historical practices related to stock option grants. In November 2006, with the assistance of outside legal counsel, we began an in-depth Internal Review to ascertain the most likely measurement date of every stock option grant since our initial public offering (“IPO”) during our fiscal year 1994 through September 2006 (the “Internal Review”).

On December 15, 2006, we announced in a Form 8-K that the Special Committee presented the final factual findings of the Independent Review to the Board disclosing, among other things, that:

	•		“In the accounting of certain stock option grants, the Company did not correctly apply the requirements of APB 25. In certain instances, the Company used a measurement date for option awards that corresponded with the [stated] grant date even though the approvals for those grants as set forth in the operative plans were not obtained until after the reported grant date and the final lists of grantees and award amounts were incomplete at the time of the reported grant date.”

	•		“The Company misapplied Internal Revenue Code Section 162(m) with respect to the contemporaneous tax treatment of certain stock option grants and may face significant tax liability for prior years.”

	•		“The Company prepared and maintained inaccurate documentation concerning the date that grant award lists were completed and approved.”

	•		“The Special Committee has found no direct evidence that the grant date for any of the large Management Grants was selected with the benefit of hindsight. In two instances, though, the price on the grant date is at a relative low point for the Company’s stock, and there is little contemporaneous evidence to establish that the grant was made on the grant date. While there is a possibility that the grant date was retroactively selected, there is insufficient evidence to reach such a conclusion.”

	•		“[T]he Special Committee, in connection with its factual findings, reported to the Board that certain former officers took steps that may have been intended to mask failures in the grant approval process with respect to the Company’s financial reporting and payment of taxes. The Special Committee also recently discovered additional evidence that raises questions whether another grant (in addition to the two grants referenced in a previous Form 8-K dated November 6, 2006) may have been retroactively selected by a day, although there is insufficient evidence to reach such a conclusion.”

Based on the Independent Review and the Internal Review, we determined that 57 of the 100 total grants made during this time period used incorrect measurement dates for accounting purposes. Of these 100 grants, 33 grants were Management Grants. We determined that incorrect measurement dates were used for accounting purposes for 24 of the 33 Management Grants. As a result, revised measurement dates were selected for many grants and resulted in exercise prices that were less than the fair market value of the stock on the most likely measurement dates. We recorded pre-tax compensation expense of $52.9 million ($59.9 million after-tax), in the aggregate over the fiscal years 1994 through 2005. The after-tax amount is higher due primarily to disallowed deductions pursuant to IRS Section 162(m) and related penalties and interest. For the three and six months ended February 28, 2006, the Company recorded a pre-tax adjustment to increase share based compensation expense in the amount of $1.9 million (($0.2) million after-tax) and $0.2 million (($0.6) million after-tax), respectively. As a result of errors resulting from the use of incorrect measurement dates, we restated previously issued consolidated financial statements (the “Restatement”).

Based on the available documentation and evidence, the following summarizes our understanding of our historical granting process and determination of the most likely measurement dates for our stock option grants.

Historically, we made annual grants of APOL and UPX Online options. We have historically granted stock options to the following groups:

	•		Management and other employees (annual grants), including those officers covered by Section 16 of the Securities and Exchange Act of 1934 (“Section 16 Officers”) and other employees;

	•		Non-employee directors (the “Director Grants”);

	•		Faculty (full- and part-time employees) (the “Faculty Grants”); and

	•		Individual employees (new hires, promotions, transfers, etc.) (the “Individual Grants”).

Employee Stock Option Plans

We typically awarded stock options to certain employees (including the Section 16 Officers) on an annual basis. From June 1994 to March 24, 2000, we issued Management Grants pursuant to the Long Term Incentive Plan dated May 13, 1994, as amended on September 22, 1995 (“LTIP”). The LTIP required approval of all grants by the majority of the members of the Compensation Committee. Subsequent to March 24, 2000, we awarded Management Grants pursuant to the 2000 Stock Incentive Plan (“2SIP”). The

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2SIP required the approval of all grants by the Compensation Committee or by both the President and CEO. Our former CEO became President of the Company in 1998 and was promoted to President and CEO in August 2001, and he retained both offices until he resigned in January 2006 (the “Former CEO”). The Former CEO had authority to approve the option grants for employees other than himself. Grant approval memoranda (“Approval Memoranda” or “Approval Memorandum”) were signed by the Former CEO or the Compensation Committee for a number of grants to employees.

Our Process for Granting Stock Options

Management Grants

Our annual Management Grant process followed a similar pattern each year. Generally, near the end of each fiscal year (before the grant date), we began developing a list of grantees. Over a period of time the list was finalized. Once the total number of shares to be issued to each grantee was known, the list was submitted to the Stock Option Manager (“Manager”) in our accounting department.

Over the next few weeks to a few months, changes were made to the list: names were added, shares were adjusted, and underlying vesting goals were developed. We understand that prior to August 2001, most grant dates were selected at Board or Compensation Committee meetings. We understand that beginning in August 2001, the Former CEO generally selected the grant date. The majority of the Management Grants have a 10-year term with 4-year standard vesting. The grants typically contained vesting acceleration provisions based upon meeting certain financial performance goals (e.g., earnings per share, stock price, net income, etc.). Once the list was finalized by the accounting department, the Former CEO communicated his approval, however, no contemporaneous evidence exists to support on what date this occurred. It was then communicated to the Manager that the list could be entered into Equity Edge, our stock option plan administration software.

Our Use of Equity Edge

We began using Equity Edge in approximately May 1997 and still use it today. Data relating to pre-May 1997 grants was also entered into the system in 1997 for recordkeeping purposes. The date a grant is first entered in Equity Edge is referred to as the “Equity Edge Record Added Date.” After February 2000, the Equity Edge data was then uploaded to an external third-party broker-dealer firm. On each day that activity occurred in Equity Edge, the third-party broker-dealer’s system would automatically download the option grant information into the individual employee brokerage accounts that night. The grantees could then view the options in their brokerage accounts online.

Approval of Management Grants

Management Grants issued from June 1994 to August 2001 under both the LTIP and the 2SIP required approval by both members of the Compensation Committee. Such approval was mostly documented by Compensation Committee minutes. However, often no list was attached to the minutes. We believe that most grant dates were set at Board or Compensation Committee meetings. Based on a review of past granting practices, the Compensation Committee did not and has not invalidated any grants and we have honored all grants. In 2000, instead of using Compensation Committee minutes, we began using Approval Memoranda to memorialize grants to employees. Beginning in August 2001, an Approval Memorandum was prepared for grants to the Former CEO. At this time, the Former CEO also had the authority to approve the option grants for employees other than himself.

In the course of the Independent Review and the Internal Review, two types of Approval Memoranda were found. We found Approval Memoranda signed by either the Compensation Committee or, beginning in August 2001, signed by the Former CEO approving grants to all employees. These Approval Memoranda, in limited instances, indicate the specific number of shares to be received by each grantee. We also found Approval Memoranda signed by the Compensation Committee for grants to the Former CEO. These Approval Memoranda typically stated the number of shares being granted to the Former CEO.

Although there exists a general lack of documentation surrounding the creation and execution of Approval Memoranda, we understand that Approval Memoranda were created at some point in the grant-making process, and in certain cases, the Approval Memoranda were dated “as of” the date of the grant it was approving, such that in certain cases, the date on the Memorandum contained a date before the actual creation date of the Memorandum. In many instances, the Approval Memorandum was signed by only the Chairman of the Compensation Committee and we lack evidence as to whether all of the grants issued were, in fact, approved by a majority of the members of the Compensation Committee. As a result of the Independent Review and Internal Review, we understand that the Approval Memoranda are not conclusive as to the actual date of approval, but they do reflect that the approval was given and that the grant was authorized. As a result of the review of our past granting practices, we determined the Equity Edge Record Added Date represents the most likely measurement date as to when the terms of the awards were finalized and approved. After the Former CEO resigned in January 2006, to the extent evidence exists of Compensation Committee approval of the final terms of the grant on the original grant date, we used the original grant date.

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Section 16 Officer Grants (Except the Former CEO)

Section 16 Officers received Management Grants according to the same general Management Grant process described above. After August 2002, we filed timely Forms 4 for the Section 16 Officers within two days of a grant. When the list was finalized, grant information was provided to the Manager, who would enter the grant into Equity Edge, which was used to prepare and file the Forms 4. The Section 16 Officers typically took up to but no longer than two days to file the Forms 4. Beginning in August 2001, the Former CEO had the authority to approve the grants to Section 16 Officers. We generally determined the original stated grant date is the most likely measurement date for Section 16 Officer grants after August 2002.

Former CEO Grants

Under the LTIP and the 2SIP, only the Compensation Committee could approve grants to the Former CEO. While Compensation Committee minutes generally stated approvals for grants, these minutes did not always specify the shares the Former CEO was to receive in the grant. The Former CEO was typically in attendance at the Compensation Committee meetings where the minutes reflect that option grants were discussed and approved. The minutes reflect the Former CEO was excused prior to his compensation being discussed.

The number of APOL options granted to the Former CEO remained the same from 1998 through 2001. From 2001, specific approval for grants to the Former CEO was documented using Approval Memoranda signed by the Chairman of the Compensation Committee. By early 2001, approval was obtained verbally by the Former CEO and was typically later memorialized in an Approval Memorandum. Prior to August 2002, to the extent we were able to determine that evidence of Board or Compensation Committee approval existed, we concluded the original grant date was the most likely measurement date. If we were unable to determine that evidence of approval existed for a grant, we used the Equity Edge Record Added Date as the measurement date.

As discussed above for the Section 16 Officers, after August 2002, the Former CEO began filing Forms 4 with the SEC within two days of a grant. We generally concluded the original stated grant date is the most likely measurement date after August 2002, based on the history of the filing process for Forms 4 after a grant.

Director Grants

We grant options to non-employee directors on an annual basis. From December 6, 1994 through September 1, 2003, we granted annual Director Grants pursuant to the Apollo Director Stock Plan (“DSP”), which was approved on and effective as of August 5, 1994. The DSP provisions stated that each director received a defined number of stock options on a defined date and price on the date of grant. As a result, we generally concluded that the original stated grant date was the most likely measurement date for Director Grants made under the DSP.

Subsequent to September 1, 2003, the Director Grants were made pursuant to the 2SIP. Forms 4 were prepared in the same manner as the Section 16 Officers discussed above, except that the forms were emailed to the Directors for signatures. As a result, after September 2003, we concluded the original stated grant date is the most likely measurement date based on the history of our granting process for Forms 4.

Faculty Grants

Each qualifying faculty member was eligible to receive one Faculty Grant per calendar year. Starting in fiscal year 1999, each qualifying faculty member received a fixed number of shares annually. The Faculty Grants were issued to eligible faculty that met certain previously communicated criteria. Faculty Grants were awarded under both the LTIP and 2SIP; however, provisions do not specifically address Faculty Grants. Detailed Faculty Grant information was posted to the Company website and in the Faculty Handbook, including the frequency and timing of the grants for the upcoming year. The strike price per share was to be equal to the closing price on the grant date or the nearest day before the grant date if it fell on a weekend or holiday, pursuant to the plan.

In most cases, grants were entered into Equity Edge by the Manager and then a few days later Human Resources sent a grant email to faculty. After 2000, Faculty Grants are also uploaded nightly to an external third-party broker-dealer’s system and automatically downloaded into the individual employee brokerage accounts that same night.

As a result of the pre-defined criteria, we determined that the original stated grant date was generally the most likely measurement date. In certain instances, we noted that certain faculty met the pre-established criteria but were not included in the appropriate quarterly/semi-annual stated grant. Because they met all the criteria at the stated grant date and had completed an Eligibility Checklist, they should have received an award on that date but were left off due to administrative delay. Therefore, we determined the most likely measurement date was the date of the quarterly/semi-annual grant date in which the award should have been included.

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Individual Grants

We also granted options to certain employees on an ad hoc basis throughout the year for various reasons such as new hire, transfer, promotion, etc. These options were granted pursuant to the LTIP or the 2SIP, and the terms normally matched all terms in the grant agreements used for the Management Grant issued during that same fiscal year. Prior to 2001, all of the information and approvals required to establish a proper measurement date for certain grants were either not documented or we lacked sufficient evidence as to whether such information and approvals were obtained by the originally selected grant date. Beginning in August 2001, the Former CEO picked the grant date and determined the number of shares. We normally did not document these types of option grants in a letter or in the employee’s personnel file. The individuals were notified of their grants either verbally or via an email from Human Resources. Certain grants were documented via an Approval Memorandum signed by the Former CEO after August 2001, as discussed in the Management Grants discussion above.

The grant was entered into Equity Edge following the process described above for Management Grants. We similarly concluded that the Equity Edge Record Added Date is the most likely measurement date for Individual Grants.

Income Tax Related Matters

Section 162(m)

In relation to the Restatement, certain tax deductions in prior years with respect to compensation attributable to the exercise of certain stock options by executive officers may be in question. Under IRC Section 162(m), the amount of such deduction per covered executive officer is limited to $1.0 million per year, except to the extent the compensation qualifies as performance-based. Compensation attributable to options with revised measurement dates may not have qualified as performance-based compensation. Accordingly, we may have claimed deductions with respect to those exercised options that were in excess of the limit imposed under IRC Section 162(m). As a result, we have accrued our best estimate with respect to potential tax liabilities, including interest and penalties for the taxable years 2003 through 2005 (which are currently our only open years subject to adjustment for federal tax purposes), of approximately $42.8 million as of February 28, 2007. These accruals have been recorded because we believe it is more likely than not that the deductions will be disallowed by the IRS. For prior periods where a liability existed and where the statute of limitations has expired, the accrual relating to that period has been reversed in the appropriate period.

Section 409A

(1) Unexercised 409A Affected Options

Section 16 Officers: In December 2006, we entered into irrevocable written agreements with each of our Section 16 Officers and certain Former Section 16 Officers, holding 409A Affected Options pursuant to which those options were to be brought into compliance with Section 409A, and thereby would avoid the adverse tax consequences summarized above, through either of the following alternatives: (a) amendment of the option to increase the exercise price to the market price per share of our Class A common stock on the revised measurement date or (b) the optionee’s commitment to exercise the option (to the extent in the money) during the 2007 calendar year prior to its contractual expiration date. Generally, these amendments will be treated as a modification of the option under SFAS 123(R). However, in this circumstance, there are no accounting consequences under SFAS 123(R).

Non Section 16 Officers: An offer to amend the 409A Affected Options held by non-Section 16 Officers to increase the exercise price to the market price per share of the underlying Class A common stock on the revised measurement date cannot be made until after the Annual Report on Form 10-K and all other delinquent filings are filed with the SEC. In order to avoid adverse taxation under Section 409A, this amendment must be made on or before the earlier of (i) December 31, 2007 or (ii) the exercise of the 409A Affected Options during the 2007 calendar year. We anticipate that we will commence such an offer after the filing of the Annual Report on Form 10-K and all other delinquent filings.

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As part of the offer and amendment process under IRC Section 409A, we may provide bonuses to the holders of the amended options to compensate them for the resulting increase in their stock option exercise price. However, we have not yet made a decision to implement a bonus program to compensate either the Section 16 Officers or the non Section 16 Officers resulting from the increased exercise prices. A decision to compensate for increased prices through a bonus would represent a modification to the grant and would result in accounting consequences under SFAS 123(R).

(2) Exercised 409A Affected Options

In February 2007, we elected to participate in a program announced by the Internal Revenue Service in Notice 2007-30, which pertains to 409A Affected Options exercised by non Section 16 Officers during the calendar year 2006 and which allows us to pay the penalty tax and interest due to the related measurement date changes that would otherwise be payable by the option holders who exercised the 409A Affected Options. The payment of the tax penalty and interest on behalf of the option holders in 2007 will result in additional taxable income to the option holders. As such, we will pay on behalf of or reimburse the option holders for applicable payroll and income taxes related to the additional income, as well as provide a gross up for any tax consequences of the penalty tax and interest reimbursement we make. We recorded a pre-tax liability in the second quarter of 2007 for compensation expense under this program totaling approximately $2.6 million.

Restatement Adjustments

(1) Share Based Compensation - As discussed above, we have restated our financial results to record additional share based compensation expense.

(2) Allowance for Doubtful Accounts - During the year ended August 31, 2006, we concluded that a significant increase in our allowance for doubtful accounts was required. A portion of the increase has been determined to be the correction of an error from prior periods and is included in the accompanying financial statements as an element of the Restatement. This error related to the fact that in prior years we did not properly consider available information related to (a) the cumulative differences between actual write-offs and our allowance for doubtful accounts and (b) significant increases in the “Return to Lender” dollars for Title IV recipients who withdraw from UPX or WIU. When a student with Title IV loans withdraws from UPX or WIU, we are sometimes required to return a portion of Title IV funds to the lenders. We are generally entitled to collect these funds from the students, but the collection of these receivables is significantly lower than our collection of receivables from students who remain in our educational programs. Accordingly, we have restated our allowances for doubtful accounts for all prior periods presented.

(3) Other Adjustments – We concluded that the accounting for various accounts such as cash, revenue, property and equipment, lease accounting and other investments were not properly recorded in accordance with GAAP. Specifically, the impairment in a venture capital fund investment should have been recorded in an earlier period; cash related to scholarships, grants, and refunds should have been classified as restricted cash and student deposits; different assumptions should have been used in determining the fair value of options; certain share based compensation was improperly amortized amongst quarters; auction rate securities were improperly classified as cash and cash equivalents in certain periods; and certain revenue under tuition discount programs were not properly recorded. Certain of these errors resulted in adjustments to pre-tax expense shown in other adjustments in the table below.

Adjustments to our various accounts such as cash, revenue, property and equipment, lease accounting and other investments resulted in a net decrease in expense of $0.9 million and $0.7 million for three and six months ended February 28, 2006, respectively. As part of the Restatement, the errors in our accounting for the tenant improvement allowances were corrected and certain of our operating leases now have been properly accounted for as capital leases. Additionally, the supplemental disclosure of purchases of property and equipment included in accounts payable on the Statement of Cash Flows was omitted. These adjustment amounts are included in Other Adjustments in the table below.

(4) Tax Effect of Adjustments – The tax effect of the Restatement adjustments is shown below.

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Impact of the Restatement

The financial information presented in this Item 2 has been adjusted to reflect the incremental impact resulting from the Restatement adjustments discussed above, as follows:


Summary of Impact of Restatement Adjustments
												Tax Effect of Adjustments ⁽⁴⁾
												Income Tax Provision (Benefit)
	Share Based								Total			Related to									Penalty and		Tax Effect of						Total
	Compensation			Bad Debt		Other			Adjustments,			Share Based			Related to Bad						Interest on		162(m)						Adjustments,
Fiscal Year	Expense ⁽¹⁾			Expense ⁽²⁾		Adjustments ⁽³⁾			Pre-Tax			Compensation			Debt and Other			Total			Exercises		Limitation			Total Tax Effect			Net of Tax
($ in thousands)
1994	$	—		$	—	$	—		$	—		$	—		$	—		$	—		$	—	$	—		$	—		$	—
1995		176			—		—			176			(71	)		—			(71	)		—		—			(71	)		105
1996		—			—		—			—			—			—			—			—		—			—			—
1997		397			—		—			397			(160	)		—			(160	)		—		—			(160	)		237
1998		487			—		—			487			(196	)		—			(196	)		21		67			(108	)		379
1999		652			—		—			652			(262	)		—			(262	)		92		277			107			759
2000		2,091			—		—			2,091			(841	)		—			(841	)		268		757			184			2,275
2001		28,001			—		—			28,001			(11,256	)		—			(11,256	)		1,307		3,821			(6,128	)		21,873
2002		22,782			4,576		4,058			31,416			(9,158	)		(3,471	)		(12,629	)		3,334		3,628			(5,667	)		25,749
2003		8,294			3,600		918			12,812			(3,314	)		(1,805	)		(5,119	)		3,350		84			(1,685	)		11,127
2004		(14,929	)		4,103		808			(10,018	)		5,941			(1,954	)		3,987			2,541		1,179			7,707			(2,311	)
*Fiscal year 2005:*
Q1	$	5,468		$	3,632	$	(464	)	$	8,636		$	(2,175	)	$	(1,260	)	$	(3,435	)	$	459	$	5,441		$	2,465		$	11,101
Q2		5,684			3,302		6			8,992			(2,261	)		(1,316	)		(3,577	)		469		(246	)		(3,354	)		5,638
Q3		5,554			2,990		(1,384	)		7,160			(2,209	)		(639	)		(2,848	)		480		(217	)		(2,585	)		4,575
Q4		(11,772	)		1,777		610			(9,385	)		4,682			(949	)		3,733			2,643		(1,507	)		4,869			(4,516	)

*Fiscal year 2005*	$	4,934		$	11,701	$	(1,232	)	$	15,403		$	(1,963	)	$	(4,164	)	$	(6,127	)	$	4,051	$	3,471		$	1,395		$	16,798


*Fiscal years Thru 2005*	$	52,885		$	23,980	$	4,552		$	81,417		$	(21,280	)	$	(11,394	)	$	(32,674	)	$	14,964	$	13,284		$	(4,426	)	$	76,991

*Fiscal year 2006:*
Q1	$	(1,680	)	$	3,995	$	266		$	2,581		$	665		$	(1,688	)	$	(1,023	)	$	619	$	18		$	(386	)	$	2,195
Q2		1,872			3,873		(935	)		4,810			(741	)		(1,164	)		(1,905	)		633		(1,993	)		(3,265	)		1,545

*Fiscal year 2006 - Q2 YTD*	$	192		$	7,868	$	(669	)	$	7,391		$	(76	)	$	(2,852	)	$	(2,928	)	$	1,252	$	(1,975	)	$	(3,651	)	$	3,740

Total	$	53,077		$	31,848	$	3,883		$	88,808		$	(21,356	)	$	(14,246	)	$	(35,602	)	$	16,216	$	11,309		$	(8,077	)	$	80,731


^{(1), (2), (3), & (4)}		See Note 4, “Restatement of Consolidated Financial Statements,” included in Item 1 of this Form 10-Q for a detailed summary of adjustments.

Changes to Controls, Processes and Procedures

Management is committed to remediating the control deficiencies that constitute the material weaknesses described herein by implementing changes to our internal control over financial reporting. For its stock option grants, management has implemented virtually all of the improvements in internal control over financial reporting suggested as a result of the Independent Review into stock option granting practices. Management plans to continue to implement further changes and improvements during the remainder of the current fiscal year. In addition, management has established procedures to consider the ongoing effectiveness of both the design and operation of our internal control over financial reporting.

We have implemented a number of significant changes and improvements in our internal control over financial reporting during the first and second quarters of fiscal year 2007. Our President and CFO of the Company have taken responsibility to implement changes and improvements in the internal control over financial reporting and remediate the control deficiencies that gave rise to the material weaknesses. Specifically, these changes include:

Management

	•		We engaged our new Chief Financial Officer on November 14, 2006.

	•		We engaged our Corporate Controller effective December 15, 2006, who was subsequently appointed our new Vice President, Corporate Controller and Chief Accounting Officer on February 6, 2007.

	•		We hired a new Vice President, Controller of Accounting.

	•		We hired a new Vice President of Tax.

	•		We appointed a new Stock Option Plan Administrator in January 2007 to work under the supervision of and report to the new Chief Financial Officer.

	•		We are conducting a search for an experienced and well qualified individual to serve as our General Counsel.

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Outside Legal Counsel; Board of Directors and Committees

	•		We considered and adopted the recommendations of the Special Committee with respect to procedures, processes and controls related to stock option grants.

	•		We hired Morgan, Lewis & Bockius LLP (“Morgan Lewis”) as counsel to the Company with respect to reporting with the SEC, options and related matters, tax matters and corporate governance matters. Morgan Lewis is an experienced counsel with regard to stock plan administration.

	•		We added two independent directors to the Board of Directors.

	•		The members of the Audit Committee changed in 2007. The Chairman of the Audit Committee resigned from that committee. The Board appointed a new Chairperson of the Audit Committee, with the requisite experience. The Audit Committee revised and adopted its charter to reflect additional policies, processes, procedures and controls.

	•		The members of the Compensation Committee completely changed in 2007. The Chairman of the Compensation Committee resigned from the Board, and the Board appointed a new Chairman of the Compensation Committee who had not been previously involved in the option grant process. In addition, the Board expanded the size of the Compensation Committee to three members.

	•		The Compensation Committee suspended the exercise of stock options until we are in compliance with our periodic reporting requirements under the Act, as amended, and retained Pearl, Meyer & Partners (“Pearl Meyer”) to provide consulting advice related to compensation.

	•		The Compensation Committee revised and adopted its charter to reflect additional policies, processes, procedures and controls as noted below. For example, minutes of all Compensation Committee meetings are prepared timely and documentation for stock option grants are included as attachments to such minutes. The Company also now requires all stock options to be granted by the Compensation Committee, as now reflected in an amendment to the 2000 Stock Incentive Plan adopted by the Board in March 2007.

	•		The Charter of the Compensation Committee requires all grants under the Company’s stock option plans (other than new hire grants) to be made within a designated period following the release of financial results for the prior fiscal quarter or fiscal year.

Policies, Processes, Procedures and Controls

	•		We are monitoring industry and regulatory developments in stock option awards, with the intent to implement and maintain best practices with respect to grants of equity-based compensation awards.

	•		We have enhanced and standardized the process and documentation required for (i) the granting, exercise and cancellation of all equity-based compensation awards, (ii) analyzing the required allowance for doubtful accounts balance and (iii) the use of third party firms for valuation and other services.

	•		Accounting personnel are now conducting quarterly (or annual) reviews and reconciliations related to equity-based compensation award activity, allowance for doubtful accounts activity and the valuation of goodwill. The CFO and/or the CAO will specifically review and approve each of these calculations.

	•		Employees previously involved in key roles or the decision making process for each of the material weaknesses are no longer involved in the process.

	•		We have retained third party stock option software administration professionals to assist with the understanding of our stock option administration software and to train our employees that are involved in the stock option administration process.

	•		Our Internal Audit reporting line has been clarified such that the Director of Internal Audit reports directly to the Chairperson of the Audit Committee.

Executive Summary

We have been an education provider for more than 30 years, operating University of Phoenix, Inc. (“UPX”), Institute for Professional Development (“IPD”), The College for Financial Planning Institutes Corporation (“CFP”), Western International University, Inc. (“WIU”) and Insight Schools, Inc., all of which are wholly-owned subsidiaries of the Company. We offer innovative and distinctive educational programs and services from high school through college-level at 100 campuses and 163 learning centers in 39 states, Puerto Rico, Alberta, British Columbia, The Netherlands and Mexico, as well as online throughout the world. Our combined Degreed Enrollment for UPX and Axia College as of February 28, 2007 was approximately 298,400. In addition, students are enrolled in WIU, CFP and IPD Client Institutions, and additional non-degreed students are enrolled in UPX. Degreed Enrollments represent individual students enrolled in our degree programs who attended a course during the quarter and did not graduate as of the end of the quarter (including Axia students enrolled in UPX and WIU).

The non-traditional education market is a significant and growing component of the post-secondary education market, which is estimated by the U.S. Department of Education to be a more than $343.0 billion industry. According to the U.S. Department of Education, National Center for Education Statistics, over 6.5 million, or 39%, of all students enrolled in higher education programs are over the age of 24. A large percentage of these students would not be classified as traditional (i.e., living on campus, supported by

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parents and not working). The non-traditional students typically are looking to improve their skills and enhance their earnings potential within the context of their careers. Between 2002 and 2014, the percentage of 18- to 24-year-old students is expected to increase 16%. The market for non-traditional education should continue to increase reflecting the rapidly expanding knowledge-based economy. The National Center for Educational Statistics projects an increase of 11% in enrollments of persons under age 25 and an increase of 15% in persons age 25 and over during the period of 2004 to 2014.

During fiscal year 2007, we experienced the following significant events:

	1.		Senior Management Changes- Ms. Kenda B. Gonzales resigned as Chief Financial Officer and Treasurer. Ms. Gonzales was replaced by Mr. Joseph L. D’Amico who was appointed Chief Financial Officer. Mr. Daniel E. Bachus resigned as Chief Accounting Officer and Controller and was replaced by Mr. Brian L. Swartz, who was appointed Vice President, Corporate Controller, and Chief Accounting Officer.

	2.		Enrollment and Revenue Growth While Investing in our Business for the Future- We achieved a 9.3% average quarterly Degreed Enrollment growth for the six months ended February 28, 2007, which resulted in 6.4% increase in revenue for the six months ended February 28, 2007. These increases help fund a significant portion of our investment in product development and marketing and lead generation to ensure our continued growth and viability in the future.

	3.		Stock Option Investigation- In response to a report published by an investment bank in June 2006, our Board of Directors established the Special Committee and authorized it to retain independent legal counsel, who in turn, retained forensic accountants, to assist them in conducting the Independent Review. On December 15, 2006, we announced in a Form 8-K that the Special Committee presented the final factual findings of the Independent Review to the Board of Directors. The findings and results are discussed elsewhere in this document. With the filing of the Annual Report on Form 10-K and all other delinquent filings with the SEC, we have substantially completed the processes related to the stock option investigation and restatement.

	4.		Naming Rights to Glendale, Arizona Sports Complex- On September 22, 2006, we entered into an agreement with New Cardinals Stadium LLC, B&B Holdings, Inc., an unrelated third party doing business as the Arizona Cardinals, for UPX naming rights on a stadium in Glendale, Arizona, which is home to the Arizona Cardinals National Football League football club. The naming rights include signage, advertising and other promotional benefits. The initial agreement term is 20 years with options to extend. Pursuant to the agreement, we are required to pay a total of $5.8 million for the 2006 contract year, which is increased 3% per year until 2026. Other payments apply if certain events occur, such as the Cardinals playing in the Super Bowl or if there are sold-out home games.

	5.		Insight Schools Acquisition- On October 20, 2006, we completed the acquisition of Insight. Insight operates an online high school and engages in the business of servicing cyber high schools and other online education. We acquired all of the outstanding common stock of Insight for $15.5 million. The purchase price included the payment of seller transaction fees, the repayment of certain existing indebtedness, payment of employee sale bonuses, and payments to option holders, warrant holders, and convertible note holders. We believe this acquisition allows us to expand into the online charter high school market. The acquisition has been accounted for using the purchase method in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.” As a result of the acquisition, Goodwill increased by $14.1 million.

Critical Accounting Policies and Estimates

Please refer to our Form 10-K for each of the fiscal year ended August 31, 2006, filed concurrently with this Form 10-Q.

In connection with the Restatement, we determined that during the period from June 1994 through September 2006, we applied incorrect measurement dates in our accounting for certain stock options.

Based on the available facts and circumstances surrounding our stock option granting practices, we adopted a methodology for determining the most likely measurement dates. We believe the application of this methodology indicated the most likely date when the number of options granted to each employee was approved and the exercise price and number of shares were known with finality. When there was not conclusive documentation or evidence of an earlier date, we believe the best indication of finality and approval is the Equity Edge Record Added Date.

However, we acknowledge that many of the measurement date conclusions are dependent on the facts and circumstances of each stock option grant and involved the application of significant judgment. Because the revised measurement date is subjective, we performed a

Page 34 of 53

sensitivity analysis to determine the impact of using alternative measurement dates for certain grants other than the Equity Edge Record Added Date.

We performed the sensitivity analysis to the annual Management and Individual Grants issued under APB 25 for the period June 1994 through August 31, 2005. This sensitivity analysis also included the stock options issued to the Former CEO from June 1994 through October 2002 (the date when we began filing timely Forms 4) to the extent the Equity Edge Record Added Date was used as the most likely measurement date. To perform the sensitivity analysis, we used the highest and lowest market price of APOL or UPX Online stock for the period from the original grant date to the revised measurement date. For the Management and Individual grants issued under APB 25, the Restatement resulted in a pre-tax increase in share based compensation expense of $52.9 million from the amounts previously reported. The use of the low stock prices during the period from the stated grant date to the revised measurement date instead of the price on the revised measurement date would result in no increase in share-based compensation expense from the amounts previously reported. The use of the high stock prices during the period from the stated grant date to the revised measurement date instead of the price on the revised measurement date would result in a pre-tax increase of $8.9 million from the share based compensation expense reflected in the Restatement.

We believe our methodology, based on the best evidence available, results in the most likely measurement date for our stock option grants.

Results of Operations

We have included below a discussion of our operating results and significant items which explain the material changes in our operating results during the last six months.

We categorize our expenses as instructional costs and services, selling and promotional, and general and administrative.

Instructional costs and services at UPX, WIU, and the CFP 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, technology spending in support of student systems and depreciation and amortization of property and equipment. UPX and WIU faculty members are primarily 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 IPD consist primarily of program administration, student services, and classroom lease expense. Most of the other instructional costs for IPD-assisted programs, including faculty, financial aid processing, and other administrative salaries, are the responsibility of IPD’s Client Institutions.

Selling and promotional costs consist primarily of compensation and employee benefits for enrollment counselors, management and support staff, corporate marketing, advertising, 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.

Three-Months Ended February 28, 2007 Compared to the Three-Months Ended February 28, 2006

All references to fiscal 2006 and fiscal 2007 in this section refer to the three-months ended February 28, 2006 and 2007, unless otherwise noted. The following table sets forth an analysis of our Consolidated Statements of Income for the periods indicated:

Page 35 of 53

Analysis of Consolidated Statements of Income


					% of Revenues
	For the Three Months				For the Three Months
	Ended February 28,				Ended February 28,						% Change
	2007		2006		2007			2006			2007 vs. 2006
($ in millions, except percentages)			Restated ⁽¹⁾					Restated ⁽¹⁾
Revenues:
Tuition and other, net	$	608.7	$	570.5		100.0	%		100.0	%		6.7	%

Costs and expenses:
Instructional costs and services		296.4		262.6		48.7	%		46.0	%		12.9	%
Selling and promotional		166.9		124.2		27.4	%		21.8	%		34.4	%
General and administrative		53.6		59.0		8.8	%		10.3	%		-9.2	%

		516.9		445.8		84.9	%		78.1	%		15.9	%

Income from operations		91.8		124.7		15.1	%		21.9	%		-26.4	%
Interest income and other, net		7.0		3.5		1.2	%		0.6	%		100.0	%

Income before income taxes		98.8		128.2		16.2	%		22.5	%		-22.9	%
Provision for income taxes		38.4		49.1		6.3	%		8.6	%		-21.8	%

Net income	$	60.4	$	79.1		9.9	%		13.9	%		-23.6	%


⁽¹⁾		See Note 4, “Restatement of Consolidated Financial Statements,” included in Item 1 of this Form 10-Q.

Refer to the above Analysis of Consolidated Statements of Income when reading the results of operations discussion below.

Tuition and Other, Net Revenues

Information about our tuition and other, net revenues by reportable segment on a percentage basis is as follows:


	For the Three Months
	Ended February 28,
	2007			2006

UPX		92.9	%		81.2	%
Other Schools		7.1	%		18.8	%
Corporate		0.0	%		0.0	%

Tuition and other, net		100.0	%		100.0	%

Our tuition and other revenues, net increased by 6.7% for the three months ended February 28, 2007, primarily due to a 10.2% increase in Degreed Enrollments and selective tuition price increases depending on the geographic area and program. These increases include a 60.8% increase in our lower-tuition associate’s Degree Enrollments for the three months ended February 28, 2007. As of February 28, 2007, 29.6% of our Degreed Enrollments are in associate’s degree programs compared with 20.3% of our students as of February 28, 2006.

Tuition and other revenues, net at Other Schools decreased as a percentage of total revenues in fiscal 2007 due to enrollment in associate’s degree programs at Axia College of UPX. Axia College began offering these programs in September 2004 at WIU. In March 2006 (our third quarter of fiscal 2006), we began offering all Axia College programs within UPX, instead of WIU. Therefore, we expect the percentage of revenue within Other Schools to continue to decrease prospectively.

Page 36 of 53

Instructional Costs and Services

Instructional costs and services increased by 12.9% in fiscal 2007 versus fiscal 2006. The following table sets forth the changes in significant components of instructional costs and services:


					% of Revenues
	For the Three Months				For the Three Months
	Ended February 28,				Ended February 28,						% Change
	2007		2006		2007			2006			2007 vs. 2006
($ in millions)			Restated ⁽¹⁾					Restated ⁽¹⁾
Employee compensation and related expenses	$	108.4	$	91.4		17.8	%		16.0	%		18.6	%
Faculty compensation		53.5		49.1		8.8	%		8.6	%		9.0	%
Classroom lease expenses and depreciation		49.6		46.7		8.1	%		8.2	%		6.2	%
Other instructional costs and services		40.3		37.2		6.6	%		6.5	%		8.3	%
Bad debt expense		26.2		23.7		4.3	%		4.2	%		10.5	%
Financial aid processing costs		14.4		12.6		2.4	%		2.2	%		14.3	%
Share based compensation		4.0		1.9		0.7	%		0.3	%		110.5	%

Instructional costs and services	$	296.4	$	262.6		48.7	%		46.0	%		12.9	%


⁽¹⁾		See Note 4, “Restatement of Consolidated Financial Statements,” included in Item 1 of this Form 10-Q.

Instructional costs and services as a percentage of tuition and other net revenues increased in fiscal 2007 versus fiscal 2006 due primarily to employee compensation and related expenses. The increase is primarily due to the 10.2% increase in Degreed Enrollments and wage adjustments instituted in December 2005 that increased pay principally to entry-level employees.

Selling and Promotional Expenses

Selling and promotional expenses increased by 34.4% in fiscal 2007 versus fiscal 2006. The following table sets forth the changes in significant components of selling and promotional expenses:


					% of Revenues
	For the Three Months				For the Three Months
	Ended February 28,				Ended February 28,						% Change
	2007		2006		2007			2006			2007 vs. 2006
($ in millions)			Restated ⁽¹⁾					Restated ⁽¹⁾
Enrollment advisors’ compensation and related expenses	$	79.2	$	62.7		13.0	%		11.0	%		26.3	%
Advertising		72.2		49.4		11.9	%		8.7	%		46.2	%
Other selling and promotional expenses		14.5		11.9		2.4	%		2.1	%		21.8	%
Share based compensation		1.0		0.2		0.1	%		0.0	%		400.0	%

Selling and promotional expenses	$	166.9	$	124.2		27.4	%		21.8	%		34.4	%


⁽¹⁾		See Note 4, “Restatement of Consolidated Financial Statements,” included in Item 1 of this Form 10-Q.

Selling and promotional expenses increased as a percentage of revenue in fiscal 2007 versus fiscal 2006 due primarily to an increase in the number of enrollment advisors to support leads for our Internet advertising campaign and the establishment of a national qualifying center for efficiency and timeliness of lead distribution. We also increased the entry-level pay for enrollment advisors in an attempt to bring in more highly qualified staff. Selling and promotional expenses also increased as a result of our continued investment in Internet-based advertising campaigns, as well as the launch of our national televised branding campaign.

Page 37 of 53

General and Administrative Expenses

General and administrative expenses decreased by 9.2% in fiscal 2007 versus fiscal 2006. The following table sets forth the changes in significant components of general and administrative expenses:


					% of Revenues
	For the Three Months				For the Three Months
	Ended February 28,				Ended February 28,						% Change
	2007		2006		2007			2006			2007 vs. 2006
($ in millions)			Restated ⁽¹⁾					Restated ⁽¹⁾
Employee compensation and related expenses	$	13.3	$	38.8		2.2	%		6.8	%		-65.7	%
Share based compensation		16.8		5.0		2.8	%		0.9	%		236.0	%
Legal, audit, and corporate insurance		4.6		3.2		0.7	%		0.5	%		43.8	%
Administrative space and depreciation		6.6		5.3		1.1	%		0.9	%		24.5	%
Other general and administrative expenses		12.3		6.7		2.0	%		1.2	%		83.6	%

General and administrative expenses	$	53.6	$	59.0		8.8	%		10.3	%		-9.2	%


⁽¹⁾		See Note 4, “Restatement of Consolidated Financial Statements,” included in Item 1 of this Form 10-Q.

Included in the above amounts are several one-time or unusual items, which are summarized below:


	For the Three Months
	Ended February 28,
	2007		2006

Former CEO severance	$	—	$	26.0

Stock option modifications		12.1		—
Former employee fair value adjustment for stock option		2.8		—
Stock option investigation/ financial statement restatement		2.9		—

Subtotal	$	17.8	$	26.0

Excluding the items above, General and Administrative expense was $35.8 million and $33.0 million in the three months ended February 28, 2007 and 2006, respectively, or 5.9% as a percentage of revenue during both periods.

During the second quarter of 2007, our Board of Directors approved a resolution to modify the terms of certain stock option grants. These modifications allowed employees, including officers, terminated on or after November 3, 2006 to exercise their options beyond the 90 day post-termination period as provided in our stock option plans. As a result of these modifications, we were required to record a $12.1 million charge to share based compensation during the second quarter of 2007. In addition, for modified options held by employees who terminated prior to the January 12, 2007, the modifications are subject to fair value adjustments to our income statement until the awards are exercised or forfeited. We recorded $2.8 million of expense as a result of the increase in the fair value of these awards as of February 28, 2007.

Interest Income and Other, Net

Net interest income and other increased by $3.5 million in fiscal 2007 versus fiscal 2006. This increase was primarily attributable to; a) higher yields earned on our cash equivalents and marketable securities as a result of higher interest rates, and 2) higher average balances in cash and cash equivalents, restricted cash and marketable securities.

Provision for Income Taxes

Our effective income tax rate increased to 38.9% in the three months ended February 28, 2007, from 38.3% in the three months ended February 28, 2006, due to a change in the estimate of annual 2006 tax rate that occurred in February 2006 to bring the cumulative year-to-date tax rate down to 39.1%.

Page 38 of 53

Six-Months Ended February 28, 2007 Compared to the Six-Months Ended February 28, 2006

All references to fiscal 2006 and fiscal 2007 in this section refer to the six-months ended February 28, 2006 and 2007, unless otherwise noted. The following table sets forth an analysis of our Consolidated Statements of Income for the periods indicated:

Analysis of Consolidated Statements of Income


					% of Revenues

	For the Six Months				For the Six Months
	Ended February 28,				Ended February 28,						% Change

	2007		2006		2007			2006			2007 vs. 2006
($ in millions, except percentages)			Restated ⁽¹⁾					Restated ⁽¹⁾
Revenues:
Tuition and other, net	$	1,276.5	$	1,199.2		100.0	%		100.0	%		6.4	%

Costs and expenses:
Instructional costs and services		592.3		527.7		46.4	%		44.0	%		12.2	%
Selling and promotional		322.4		252.2		25.2	%		21.0	%		27.8	%
General and administrative		90.0		86.3		7.1	%		7.2	%		4.3	%

		1,004.7		866.2		77.5	%		72.2	%		16.0	%

Income from operations		271.8		333.0		22.5	%		27.8	%		-18.4	%
Interest income and other, net		13.4		8.0		1.0	%		0.6	%		67.5	%

Income before income taxes		285.2		341.0		23.5	%		28.4	%		-16.4	%
Provision for income taxes		111.0		133.3		8.7	%		11.1	%		-16.7	%

Net income	$	174.2	$	207.7		14.3	%		17.3	%		-16.1	%


⁽¹⁾		See Note 4, “Restatement of Consolidated Financial Statements,” included in Item 1 of this Form 10-Q.

Refer to the above Analysis of Consolidated Statements of Income when reading the results of operations discussion below.

Tuition and Other, Net Revenues

Information about our tuition and other, net revenues by reportable segment on a percentage basis is as follows:


	For the Six Months
	Ended February 28,
	2007			2006

UPX		91.9	%		82.8	%
Other Schools		8.1	%		17.2	%
Corporate		0.0	%		0.0	%

Tuition and other, net		100.0	%		100.0	%

Our tuition and other revenues, net increased by 6.4% for the six months ended February 28, 2007 primarily due to a 9.3% increase in average quarterly Degreed Enrollments and selective tuition price increases depending on the geographic area and program. These increases include a 64.9% average quarterly increase in our lower-tuition associate’s Degree Enrollments for the six months average ended February 28, 2007.

Page 39 of 53

Instructional Costs and Services

Instructional costs and services increased by 12.2% in fiscal 2007 versus fiscal 2006. The following table sets forth the changes in significant components of instructional costs and services:


					% of Revenues

	For the Six Months				For the Six Months
	Ended February 28,				Ended February 28,						% Change

	2007		2006		2007			2006			2007 vs. 2006
($ in millions)			Restated ⁽¹⁾					Restated ⁽¹⁾
Employee compensation and related expenses	$	214.9	$	180.9		16.8	%		15.1	%		18.8	%
Faculty compensation		111.0		102.4		8.7	%		8.5	%		8.4	%
Classroom lease expenses and depreciation		99.3		93.5		7.8	%		7.8	%		6.2	%
Other instructional costs and services		80.7		73.7		6.3	%		6.1	%		9.5	%
Bad debt expense		49.3		47.8		3.9	%		4.0	%		3.1	%
Financial aid processing costs		29.2		25.5		2.3	%		2.1	%		14.5	%
Share based compensation		7.9		3.9		0.6	%		0.3	%		102.6	%

Instructional costs and services	$	592.3	$	527.7		46.4	%		44.0	%		12.2	%


⁽¹⁾		See Note 4, “Restatement of Consolidated Financial Statements,” included in Item 1 of this Form 10-Q.

Instructional costs and services as a percentage of tuition and other net revenues increased in fiscal 2007 versus fiscal 2006 due primarily to employee compensation and related expenses and faculty compensation. The increase is primarily due to the 9.3% increase in average quarterly Degreed Enrollments and wage adjustments instituted in December 2005 that increased pay principally to entry-level employees.

Selling and Promotional Expenses

Selling and promotional costs and services increased by 27.8% in fiscal 2007 versus fiscal 2006. The following table sets forth the changes in significant components of selling and promotional expenses:


					% of Revenues
	For the Six Months				For the Six Months
	Ended February 28,				Ended February 28,						% Change
	2007		2006		2007			2006			2007 vs. 2006
($ in millions)			Restated ⁽¹⁾					Restated ⁽¹⁾
Enrollment advisors’ compensation and related expenses	$	154.9	$	119.5		12.1	%		10.0	%		29.6	%
Advertising		137.5		105.9		10.8	%		8.8	%		29.8	%
Other selling and promotional expenses		27.9		26.2		2.2	%		2.2	%		6.5	%
Share based compensation		2.1		0.6		0.1	%		0.0	%		250.0	%

Selling and promotional expenses	$	322.4	$	252.2		25.2	%		21.0	%		27.8	%


⁽¹⁾		See Note 4, “Restatement of Consolidated Financial Statements,” included in Item 1 of this Form 10-Q.

Selling and promotional expenses increased as a percentage of revenue in fiscal 2007 versus fiscal 2006 due primarily to an increase in the number of enrollment advisors to support leads for our Internet advertising campaign and the establishment of a national qualifying center for efficiency and timeliness of lead distribution. We also increased the entry-level pay for enrollment advisors in an attempt to bring in more highly qualified staff. Selling and promotional expenses also increased as a result of our continued investment in Internet-based advertising campaigns and the launch of our national televised branding campaign.

Page 40 of 53

General and Administrative Expenses

General and administrative expenses increased by 4.3% in fiscal 2007 versus fiscal 2006. The following table sets forth the changes in significant components of general and administrative expenses:


					% of Revenues

	For the Six Months				For the Six Months
	Ended February 28,				Ended February 28,						% Change

	2007		2006		2007			2006			2007 vs. 2006
($ in millions)			Restated ⁽¹⁾					Restated ⁽¹⁾
Employee compensation and related expenses	$	26.0	$	49.8		2.0	%		4.1	%		-47.8	%
Share based compensation		22.0		6.7		1.7	%		0.6	%		228.4	%
Legal, audit, and corporate insurance		9.0		5.6		0.7	%		0.5	%		60.7	%
Administrative space and depreciation		13.0		10.9		1.0	%		0.9	%		19.3	%
Other general and administrative expenses		20.0		13.3		1.6	%		1.1	%		50.4	%

General and administrative expenses	$	90.0	$	86.3		7.1	%		7.2	%		4.3	%


⁽¹⁾		See Note 4, “Restatement of Consolidated Financial Statements,” included in Item 1 of this Form 10-Q.

Included in the above amounts are several one-time or unusual items, which are summarized below:


	For the Six Months
	Ended February 28,
	2007		2006

Former CEO severance	$	—	$	26.0
Stock option modifications		12.1		—
Former employee fair value adjustment for stock option		2.8		—
Stock option investigation/ financial statement restatement		4.9		—

Subtotal	$	19.8	$	26.0

Excluding the items above, General and Administrative expense was $70.2 million and $60.3 million in the six months ended February 28, 2007 and 2006, respectively, or 5.5% and 5.0% as a percentage of revenue, respectively. This remaining increase as a percentage of revenue is primarily due to higher employee compensation due to wage increases and higher share based compensation expense related to stock option grants.

Interest Income and Other, Net

Net interest income and other increased by $5.4 million in fiscal 2007 versus fiscal 2006. This increase was attributable to; a) higher yields earned on our cash equivalents and marketable securities as a result of higher interest rates, and 2) higher average balances in cash and cash equivalents, restricted cash and marketable securities.

Provision for Income Taxes

Our effective income tax rate decreased to 38.9% in the six months ended February 28, 2007, from 39.1% in the six months ended February 28, 2006, due to an increase in tax-exempt interest income.

Page 41 of 53

Liquidity, Capital Resources, and Financial Position

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, acquisitions and other liquidity requirements associated with our existing operations through at least the next 12 months and the foreseeable future. We believe that the most strategic uses of our cash resources include potential acquisition opportunities, possible 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 of whom we are aware of that are reasonably likely to materially affect liquidity or the availability of our requirements for capital during at least the next 12 months.

Cash and Cash Equivalents and Marketable Securities

Cash and cash equivalents and marketable securities increased $90.6 million, or 22.2%, to $499.3 million as of February 28, 2007 from $408.7 million, as of August 31, 2006. Cash and cash equivalents and marketable securities represented 31.9% and 33.2% of our total assets as of August 31, 2006 and February 28, 2007, respectively. The increase was primarily our $193.7 million of cash from operations, partially offset by $50.2 million from capital expenditures.

Cash Flows

Operating Activities. Operating activities provided $193.7 million in cash for the first six months of fiscal 2007 compared to $252.4 million for the same period in fiscal 2006. Included below is a summary of operating cash flows:


	Six Months Ended February 28,
	2007			2006
($ in millions)				Restated
Net income	$	174.2		$	207.7
Non-cash items		92.4			72.7
Changes in certain operating assets and liabilities		(72.9	)		(28.0	)

Net cash from operating activities	$	193.7		$	252.4

Our non-cash items primarily consist of the following:


	Six Months Ended February 28,
	2007			2006
($ in millions)				Restated
Share based compensation	$	31.9		$	11.3
Excess tax benefits from share based compensation		(1.1	)		(12.9	)
Depreciation and amortization		34.8			32.5
Provision for uncollectible accounts receivable		49.3			47.7
Deferred income taxes		(22.6	)		(6.6	)
Other, net		0.1			0.7

	$	92.4		$	72.7

Changes in certain operating assets and liabilities primarily consist of the following:

Page 42 of 53


	Six Months Ended February 28,
	2007			2006
($ in millions)				Restated
Accounts receivable, net	$	(84.5	)	$	(38.5	)
Accounts payable and accrued liabilities		(5.3	)		(11.8	)
Income taxes payable		(13.9	)		13.8
Student deposits		24.8			9.0
Deferred revenue		10.5			(8.7	)
Other, net		(4.5	)		8.2

	$	(72.9	)	$	(28.0	)

Days sales outstanding (“DSO”) in accounts receivable as of February 28, 2007 and 2006, were 40 days and 33 days, respectively. Our accounts receivable and DSO are primarily affected by collections performance.

Investing Activities. Investing activities used $84.5 million in cash during the first six months of fiscal 2007 compared to providing $108.4 million in fiscal 2006. The fiscal 2007 amount primarily includes $50.2 million for capital expenditures, of which $23.4 million related to the build out of our new corporate headquarters building in Phoenix, Arizona. Also included in the fiscal 2007 investing cash flows is $15.1 million used in the purchase of Insight Schools. The fiscal 2006 amount includes $30 million for capital expenditures, of which $14.8 million is related to the build out of our new corporate headquarters building in Phoenix, AZ.

Financing Activities. Financing activities provided $5.5 million of cash during fiscal 2007 compared to using $485.2 million in fiscal 2006. The 2006 amount relates primarily to repurchases of our Class A common stock, net of proceeds from stock option exercises. There were no repurchases of stock during the first six months of fiscal 2007.

The Board of Directors has authorized the Company to repurchase outstanding shares of Apollo Group Class A common stock, from time to time, depending on market conditions and other considerations. As of February 28, 2007, we have authorization from our Board of Directors to repurchase up to $136.1 million of Apollo Group Class A common stock.

Contractual Obligations and Other Commercial Commitments

Please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2006, filed concurrently with this Form 10-Q.

Recent Accounting Pronouncements

Please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2006, filed concurrently with this Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2006, filed concurrently with this Form 10-Q.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company intends to maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (the “Act”) is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to management, including its President (Principal Executive Officer) and CFO, as appropriate to allow timely decisions regarding required disclosure.

Management, under the supervision and with the participation of its President (Principal Executive Officer) and CFO, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Act), as of the end of the period covered by this report. Based on that evaluation, management concluded that, as of that date, the Company’s disclosure controls and procedures were not effective at the reasonable assurance level because of the identification of material weaknesses in its internal control over financial reporting, which the Company views as an integral part of its disclosure controls and procedures.

Page 43 of 53

Attached as exhibits to this Quarterly Report on Form 10-Q are certifications of the Company’s President (Principal Executive Officer) and CFO, which are required in accordance with Rule 13a-14 of the Act. This Disclosure Controls and Procedures section includes information concerning management’s evaluation of disclosure control and procedures referred to in those certifications and, as such, should be read in conjunction with the certifications of the Company’s President (Principal Executive Officer) and CFO.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in there being a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management evaluated the effectiveness of disclosure controls and procedures as of February 28, 2007, utilizing the criteria described in the “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In its evaluation of the effectiveness of disclosure controls and procedures as of February 28, 2007, management determined that there were control deficiencies that constituted material weaknesses, as described below.

(i) Control Activities Relating to Stock Option Grants

The Company did not maintain effective controls over its granting of stock options and the related recording and disclosure of share based compensation expense under APB 25, SFAS 123, SFAS 123(R) and their related interpretations. Specifically, effective controls, including monitoring, were not designed and in place to provide reasonable assurance regarding the existence, completeness, accuracy, valuation and presentation of activity related to the Company’s granting of stock options in the financial statements. These control deficiencies resulted in errors in (i) share based compensation expense, additional paid-in capital, related income tax accounts and weighted averaged diluted shares outstanding and (ii) related financial statement disclosures that resulted in the restatement of the Company’s historical financial statements. Accordingly, management determined that in the aggregate these control deficiencies constitute a material weakness in internal control over financial reporting.

(ii) Control Activities Relating to Accounting for the Allowance for Doubtful Accounts

The Company did not maintain effective controls over its accounting for bad debt expense and the related allowance for doubtful accounts. Specifically, the Company did not properly consider all available historical information as well as current trends in estimating its required bad debt reserve. This control deficiency resulted in errors in bad debt expense and the allowance for doubtful accounts, and related income tax accounts which resulted in a restatement of the Company’s historical financial statements for 2004 through May 31, 2006. Accordingly, management determined that this control deficiency constituted a material weakness in internal control over financial reporting.

(iii) Control Activities Relating to the Valuation of Goodwill

The Company did not maintain effective controls over the valuation of goodwill. Specifically, the Company did not adequately review, analyze and test assumptions provided to its third party appraiser and the related valuation in accordance with SFAS 142. This control deficiency resulted in errors in goodwill and impairment expense that resulted in an adjustment to the Company’s previously released earnings on October 18, 2006 for the fourth quarter of 2006. Accordingly, management determined that this control deficiency constituted a material weakness in internal control over financial reporting.

(iv) Control Activities Relating to Accounting for Tax Liability Under IRC Section 162(m)

The Company did not maintain effective controls over the implementation, documentation and the administration of its share based compensation plans. In relation to the Restatement, certain tax deductions in prior years with respect to compensation attributable to the exercise of certain stock options by executive officers may be in question. Under IRC Section 162(m), the amount of such deduction per covered executive officer is limited to $1.0 million per year; except to the extent the compensation qualifies as performance-based. Compensation attributable to options with revised measurements dates may not have qualified as performance-based compensation. Accordingly, the Company may have claimed deductions with respect to those exercised options that were in excess of the limit imposed under IRC Section 162(m). As a result, the Company has accrued its best estimate with respect to potential tax liabilities, including interest and penalties for the taxable years 2003 through 2005 (which are currently its only open years subject to adjustment for federal tax purposes), of approximately $42.8 million as of February 28, 2007. These accruals have been recorded because the Company believes it is more likely than not that the deductions will be disallowed by the IRS. For prior periods where a liability existed and where the statute of limitations has expired, the accrual relating to that period has been reversed in the appropriate period. Accordingly, management determined that the control deficiency constituted a material weakness in internal controls over financial reporting.

Page 44 of 53

Changes in Internal Control Over Financial Reporting

As of February 28, 2007, the Company believes it has made substantial progress towards remediating the material weaknesses described above relating to the Company’s internal control over financial reporting. Changes made to the Company’s internal controls over financial reporting are discussed below.

Remediation of Material Weaknesses

Management is committed to remediating the control deficiencies that constitute the material weaknesses described above by implementing changes to the Company’s internal control over financial reporting. For its stock option grants, management has implemented or has plans to implement all of the improvements in internal control over financial reporting suggested as a result of the Independent Review and Internal Review into stock option granting practices. Management plans to continue to implement further changes and improvements during the remainder of the current fiscal year. In addition, management has established procedures to consider the ongoing effectiveness of both the design and operation of the Company’s internal control over financial reporting.

As mentioned above, the Company has implemented a number of significant changes and improvements in the Company’s internal control over financial reporting during the first and second quarters of fiscal year 2007. The President and CFO of the Company have taken the responsibility to implement changes and improvements in the Company’s internal control over financial reporting and remediate the control deficiencies that gave rise to the material weaknesses. Specifically, these changes include:

Management

	•		The Company engaged its new Chief Financial Officer on November 14, 2006.

	•		The Company engaged its Corporate Controller effective December 15, 2006, who was subsequently appointed its new Vice President, Corporate Controller and Chief Accounting Officer on February 6, 2007.

	•		The Company has hired a new Vice President, Controller of Accounting.

	•		The Company has hired a new Vice President of Tax.

	•		The Company appointed a new Stock Option Plan Administrator in January 2007 to work under the supervision of and report to the new Chief Financial Officer.

	•		The Company is conducting a search for an experienced and well-qualified individual to serve as a General Counsel to the Company.

Outside Legal Counsel; Board of Directors and Committees

	•		The Company considered and adopted the recommendations of the Special Committee with respect to procedures, processes and controls related to stock option grants.

	•		The Company hired Morgan, Lewis & Bockius LLP (“Morgan Lewis”) as counsel to the Company with respect to reporting with the SEC, options and related matters, tax matters and corporate governance matters. Morgan Lewis is an experienced counsel with regard to stock plan administration.

	•		The Company added two independent directors to the Board of Directors.

	•		The members of the Audit Committee changed in 2007. The Chairman of the Audit Committee resigned from that committee. The Board appointed a new Chairperson of the Audit Committee, with the requisite experience. The Audit Committee revised and adopted its charter to reflect additional policies, processes, procedures and controls.

	•		The members of the Compensation Committee completely changed in 2007. The Chairman of the Compensation Committee resigned from the Board, and the Board appointed a new Chairman of the Compensation Committee who had not been previously involved in the option grant process. In addition, the Board expanded the size of the Compensation Committee to three members.

	•		The Compensation Committee suspended the exercise of stock options until the Company is in compliance with its periodic reporting requirements under the Act, as amended, and retained Pearl, Meyer & Partners (“Pearl Meyer”) to provide consulting advice related to compensation.

	•		The Compensation Committee revised and adopted its charter to reflect additional policies, processes, procedures and controls as noted below. For example, minutes of all Compensation Committee meetings are prepared timely and documentation for stock option grants are included as attachments to such minutes. The Company also now requires all stock options to be granted by the Compensation Committee, as now reflected in an amendment to the 2SIP adopted by the Board in March 2007.

	•		The Charter of the Compensation Committee requires all grants under the Company’s stock option plans (other than new hire grants) to be made within a designated period following the release of financial results for the prior fiscal quarter or fiscal year.

Policies, Processes, Procedures and Controls

•

The Company is monitoring industry and regulatory developments in stock option awards, with the intent to implement and maintain best practices with respect to grants of equity-based compensation awards.

Page 45 of 53

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Please refer to Note 8 in Part I, Item 1 for legal proceedings.

Item 1A. Risk Factors

Please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2006, filed concurrently with this Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Apollo Group Class A common stock made by Apollo Group during the three months ended February 28, 2007.


									Maximum Value
	Total # of								of Shares
	Shares						Average Price Paid		Available for
(Numbers in thousands, except per share amounts)	Repurchased			Cost			per Share		Repurchase

Treasury stock as of November 30, 2006		15,301		$	1,044,010		$	68.23		$ 136,092
New authorizations		—			—			—
Shares repurchased		—			—			—
Shares reissued		(4	)		(328	)		68.23

Treasury stock as of December 31, 2006		15,297			1,043,682			68.23		136,092
New authorizations		—			—			—
Shares repurchased		—			—			—
Shares reissued		—			—			—

Treasury stock as of January 31, 2007		15,297			1,043,682			68.23		136,092
New authorizations		—			—			—
Shares repurchased		—			—			—
Shares reissued		—			—			—

Treasury stock as of February 28, 2007		15,297		$	1,043,682		$	68.23		$ 136,092

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

None.

Page 47 of 53


		APOLLO GROUP, INC.
		(Registrant)


Date: May 25, 2007


		By: /s/ Joseph L. D’Amico
		Joseph L. D’Amico
		Chief Financial Officer
		(Principal Financial Officer and Duly Authorized Signatory)

		By: /s/ Brian L. Swartz
		Brian L. Swartz
		Vice President, Corporate Controller and Chief Accounting Officer
		(Principal Accounting Officer and Duly Authorized Signatory)


Exhibit Number		Description of Exhibit
31.1		Certification of Principal 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 Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*


	PAGE
PART I – FINANCIAL INFORMATION

Special Note Regarding Forward-Looking Statements		3
Explanatory Note Regarding Filing of Form 10-Q/A		3
Explanatory Note Regarding Restatement and Material Weaknesses		3
Item 1. Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3. Quantitative and Qualitative Disclosures About Market Risk		43
Item 4. Controls and Procedures		43

PART II – OTHER INFORMATION

Item 1. Legal Proceedings		47
Item 1A. Risk Factors		47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3. Defaults Upon Senior Securities		47
Item 4. Submission of Matters to a Vote of Security Holders		47
Item 5. Other Information		47

SIGNATURES		48

EXHIBIT INDEX		49
EX-31.1
EX-31.2
EX-32.1
EX-32.2

	•		The Company has enhanced and standardized the process and documentation required for (i) the granting, exercise and cancellation of all equity-based compensation awards, (ii) analyzing the required allowance for doubtful accounts balance, and (iii) the use of third-party firms for valuation and other services.

	•		Accounting personnel are now conducting quarterly (or annual) reviews and reconciliations related to equity-based compensation award activity, allowance for doubtful accounts activity and the valuation of goodwill. The CFO and/or the CAO will specifically review and approve each of these calculations.

	•		Employees previously involved in key roles or the decision making process for each of the material weaknesses are no longer involved in the process.

	•		The Company has retained third party stock option software administration professionals to assist with the understanding of the Company’s stock option administration software and to train its employees that are involved in the stock option administration process.

	•		The Company’s Internal Audit reporting line has been clarified such that the Director of Internal Audit reports directly to the Chairperson of the Audit Committee.