10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(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 29, 2008

OR

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

Commission file number: 0-25232

APOLLO GROUP, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

YES þ   NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

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 MARCH 20, 2008, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:

Apollo Group Class A common stock, no par value	167,798,000 Shares
Apollo Group Class B common stock, no par value	475,000 Shares

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

	PAGE
PART I — FINANCIAL INFORMATION
Special Note Regarding Forward-Looking Statements		3
Item 1. Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3. Quantitative and Qualitative Disclosures About Market Risk		39
Item 4. Controls and Procedures		39
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		40
Item 1A. Risk Factors		40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 3. Defaults Upon Senior Securities		40
Item 4. Submission of Matters to a Vote of Security Holders		40
Item 5. Other Information		40
Item 6. Exhibits		41
SIGNATURES		42
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.6
EX-10.7
EX-10.8
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Page 2 of 42

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. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “predict,” “target,” “potential,” “continue,” “objectives,” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties. Such statements should be viewed with caution. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include but are not limited to:

• changes in the regulation of the education industry, including those items set forth in Item 1 of our Annual Report on Form 10-K for the year ended August 31, 2007, under the sections titled “Regulatory Environment,” “Accreditation,” “Federal Financial Aid Programs,” and “State Authorization;”

• each of the factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended August 31, 2007, Risk Factors;

• those factors set forth in Item 7 of our Annual Report on Form 10-K for the year ended August 31, 2007; and

• changes in the requirements surrounding the reports that we file with the Securities and Exchange Commission (“SEC”).

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements, for any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.

Page 3 of 42

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

	As of
	February 29,			August 31,
($ in thousands)	2008			2007
Assets:
Current assets
Cash and cash equivalents	$	411,970		$	339,319
Restricted cash		359,515			296,469
Marketable securities, current portion		30,879			31,278
Accounts receivable, net		160,478			190,912
Deferred tax assets, current portion		47,736			50,885
Prepaid taxes		42,943			—
Other current assets		20,621			16,515
Total current assets		1,074,142			925,378
Property and equipment, net		389,801			364,207
Restricted cash for bond collateralization (Note 6)		95,000			—
Marketable securities, less current portion		94,014			22,084
Goodwill		66,773			29,633
Deferred tax assets, less current portion		161,890			80,077
Other assets		36,072			28,484
Total assets	$	1,917,692		$	1,449,863
Liabilities and Shareholders’ Equity:
Current liabilities
Accounts payable	$	42,299		$	80,729
Accrued liabilities		119,098			103,651
Current portion of long-term liabilities		20,950			21,093
Income taxes payable		—			43,351
Student deposits		388,463			328,008
Current portion of deferred revenue		174,210			167,003
Total current liabilities		745,020			743,835
Deferred revenue, less current portion		230			295
Long-term liabilities, less current portion		286,995			71,893
Total liabilities		1,032,245			816,023
Commitments and contingencies (Note 11)
Shareholders’ equity
Preferred stock, no par value		—			—
Apollo Group Class A nonvoting common stock, no par value		103			103
Apollo Group Class B voting common stock, no par value		1			1
Additional paid-in capital		—			—
Apollo Group Class A treasury stock, at cost		(1,332,543	)		(1,461,368	)
Retained earnings		2,219,696			2,096,385
Accumulated other comprehensive loss		(1,810	)		(1,281	)
Total shareholders’ equity		885,447			633,840
Total liabilities and shareholders’ equity	$	1,917,692		$	1,449,863

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

Page 4 of 42

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

	Three Months Ended					Six Months Ended
	February 29,			February 28,		February 29,		February 28,
(in thousands, except per share amounts)	2008			2007		2008		2007
Revenues:
Tuition and other, net	$	693,643		$	608,693	$	1,474,317	$	1,276,479
Costs and expenses:
Instructional costs and services		327,723			294,439		661,011		589,194
Selling and promotional		201,705			166,940		378,614		322,375
General and administrative		55,011			55,514		106,292		93,129
Estimated securities litigation loss (Note 11)		168,400			—		168,400		—
Total costs and expenses		752,839			516,893		1,314,317		1,004,698
Income (loss) from operations		(59,196	)		91,800		160,000		271,781
Interest income and other, net		8,059			6,978		17,708		13,410
Income (loss) before income taxes		(51,137	)		98,778		177,708		285,191
Provision for (benefit from) income taxes		(19,098	)		38,440		69,882		110,979
Net income (loss)	$	(32,039	)	$	60,338	$	107,826	$	174,212
Earnings (loss) per share:
Basic income (loss) per share	$	(0.19	)	$	0.35	$	0.64	$	1.01
Diluted income (loss) per share	$	(0.19	)	$	0.35	$	0.63	$	1.00
Basic weighted average shares outstanding		168,005			173,185		167,521		173,153
Diluted weighted average shares outstanding		168,005			174,624		169,876		174,543

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

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

	Three Months Ended					Six Months Ended
	February 29,			February 28,		February 29,			February 28,
($ in thousands)	2008			2007		2008			2007
Net income (loss)	$	(32,039	)	$	60,338	$	107,826		$	174,212
Other comprehensive income (loss) (net of tax):
Currency translation gain (loss)		(148	)		85		(529	)		258
Comprehensive income (loss)	$	(32,187	)	$	60,423	$	107,297		$	174,470

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

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

	Six Months Ended
	February 29,			February 28,
($ in thousands)	2008			2007
Cash flows provided by (used in) operating activities:
Net income	$	107,826		$	174,212
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation		35,030			31,879
Excess tax benefits from share-based compensation		(17,674	)		(1,064	)
Depreciation and amortization		37,511			35,650
Amortization of deferred gain on sale-leaseback		(893	)		(861	)
Amortization of marketable securities discount and premium, net		34			109
Provision for uncollectible accounts receivable		58,986			49,304
Estimated securities litigation loss (Note 11)		168,400			—
Deferred income taxes		(71,977	)		(22,577	)
Changes in assets and liabilities excluding the impact of acquisitions:
Accounts receivable		(26,288	)		(84,516	)
Other assets		(6,199	)		(2,275	)
Accounts payable and accrued liabilities		(21,072	)		(5,312	)
Income taxes payable		(20,796	)		(13,898	)
Student deposits		60,455			24,829
Deferred revenue		7,111			10,494
Other liabilities		(986	)		(2,227	)
Net cash provided by operating activities		309,468			193,747
Cash flows provided by (used in) investing activities:
Additions to property and equipment		(48,190	)		(26,828	)
Additions to land and buildings related to new headquarters		(7,788	)		(23,385	)
Acquisitions, net of cash acquired		(47,055	)		(15,079	)
Purchase of marketable securities including auction-rate securities		(875,205	)		(545,475	)
Maturities of marketable securities including auction-rate securities		803,640			571,816
Collateralization of bond posted for securities litigation matter (Note 6)		(95,000	)		—
Increase in restricted cash		(63,046	)		(45,542	)
Net cash used in investing activities		(332,644	)		(84,493	)
Cash flows provided by (used in) financing activities:
Issuance of Apollo Group Class A common stock		79,023			4,454
Excess tax benefits from share-based compensation		17,674			1,064
Net cash provided by financing activities		96,697			5,518
Effect of currency exchange gain (loss) on cash and cash equivalents		(870	)		258
Net increase in cash and cash equivalents		72,651			115,030
Cash and cash equivalents, beginning of period		339,319			309,058
Cash and cash equivalents, end of period	$	411,970		$	424,088
Supplemental disclosure of non-cash investing and financing activities
Credits received for tenant improvements	$	6,000		$	2,368
Purchases of property and equipment included in accounts payable	$	4,614		$	3,168
Settlement of liability-classified awards through the issuance of treasury stock	$	16,340		$	—

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

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

Note 1. Basis of Presentation

The unaudited interim condensed consolidated financial statements include the accounts of Apollo Group, Inc. and its wholly-owned subsidiaries and consolidated joint venture, collectively referred to herein as “the Company,” “Apollo Group,” “Apollo,” “APOL,” “we,” “us” or “our.” These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, in the opinion of management, contain all adjustments, consisting 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 these unaudited interim condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently applied the accounting policies described in our 2007 Annual Report on Form 10-K as filed with the SEC on October 29, 2007, in preparing these unaudited interim condensed consolidated financial statements. For a discussion of our critical accounting policies, please refer to our 2007 Annual Report on Form 10-K. These unaudited interim condensed consolidated financial statements and accompanying notes should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this filing and the audited consolidated financial statements and notes thereto contained in our 2007 Annual Report on Form 10-K.

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

Because of the seasonal nature of our business, the results of operations for the three and six months ended February 29, 2008 are not necessarily indicative of results to be expected for the entire fiscal year.

The preparation of financial statements in accordance with 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. Actual results could differ from such estimates.

Certain Reclassifications

We revised the presentation of certain information technology-related expense items between instructional costs and services and general and administrative expenses. The net effect of the reclassification was an increase in general and administrative expenses in the amount of $1.9 million and $3.1 million, for the three and six months ended February 28, 2007, respectively, and an offsetting decrease in instructional costs and services.

Recent Accounting Pronouncements

Please refer to our 2007 Annual Report on Form 10-K.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB No. 109,” (“FIN 48”). This interpretation, among other things, creates a two-step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements. We adopted FIN 48 on September 1, 2007, and did not recognize an adjustment to our liability for unrecognized income tax benefits as of August 31, 2007.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS 141(R)”), “Business Combinations,” which is a revision of SFAS 141, “Business Combinations.” The primary requirements of SFAS 141(R) are as follows: (a) upon initially obtaining control, the acquiring entity in a business combination must recognize 100% of the fair values of the acquired assets, including goodwill, and assumed liabilities, with only limited exceptions even if the acquirer has not acquired 100% of its target. As a consequence, the current step acquisition model will be eliminated, (b) Contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration. The concept of recognizing contingent consideration at a later date when the

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amount of that consideration is determinable beyond a reasonable doubt, will no longer be applicable, and (c) All transaction costs will be expensed as incurred. SFAS 141(R) is effective for us on September 1, 2009. We are currently evaluating the impact that the adoption of SFAS 141(R) will have on our financial condition, results of operations, and disclosures.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 is effective for us on September 1, 2009. We are currently evaluating the impact that the adoption of SFAS 160 will have on our financial condition, results of operations, and disclosures.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — An Amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 expands the disclosure requirements for derivative instruments and hedging activities. This Statement specifically requires entities to provide enhanced disclosures addressing the following: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 is effective for us on December 1, 2008. We are currently evaluating the impact that the adoption of SFAS 161 will have on our financial condition, results of operations, and disclosures.

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 our wholly-owned subsidiaries. In addition to these wholly-owned subsidiaries, on October 22, 2007, we formed a joint venture with The Carlyle Group (“Carlyle”), called Apollo Global, Inc. (“Apollo Global”), of which we own 80.1% and consolidate in our financial statements, to pursue investments in the international education services sector. Through these subsidiaries we are able to offer innovative and distinctive educational programs and services at high school, college, and graduate levels, at campuses and learning centers, as well as online throughout the world.

In addition to our education-based offerings, on October 29, 2007, we completed the acquisition of Aptimus, Inc. (“Aptimus”), an online advertising network. The acquisition enables us to more effectively monitor, manage and control our marketing investments and brands.

Our operations are generally subject to seasonal trends. We experience, and expect to continue to experience, seasonal fluctuations in the results of operations as a result of changes in the level of student enrollment. While we enroll students throughout the year, second quarter (December through February) enrollment and related revenues generally are lower than other quarters due to holiday breaks in December and January, and third quarter (March through May) enrollment and related revenues are generally the highest of any quarter. We have historically experienced a seasonal increase in new enrollments in August of each year when most other colleges and universities begin their fall semesters.

Note 3. Restricted Cash

A significant portion of our revenue is received from students who participate in government financial aid and assistance programs. Restricted cash primarily represents amounts received from the federal and state governments under various student aid grant and loan programs, such as Title IV program funds. These funds are received subsequent to the completion of the authorization and disbursement process for the benefit of the student. The U.S. Department of Education requires Title IV program funds collected in advance of student billings to be kept in separate cash or cash equivalent accounts until the students are billed for that portion of their program. We record these amounts as restricted cash. On average, the majority of these funds remain as restricted cash for a period between 60 to 90 days from date of receipt. Restricted cash is excluded from cash and cash equivalents in the Condensed Consolidated Balance Sheets and Statements of Cash Flows until the cash is no longer restricted. Our restricted cash is primarily invested in municipal bonds and U.S. government-sponsored enterprises with maturities of 90 days or less.

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Note 4. Marketable Securities

Marketable securities are reflected at amortized cost in the accompanying Condensed Consolidated Balance Sheets and consist of the following as of February 29, 2008 and August 31, 2007:

	February 29, 2008							August 31, 2007
					Unrecognized							Unrecognized
	Estimated		Amortized		Holding			Estimated		Amortized		Holding
Type	Market Value		Cost		Losses (Gains)			Market Value		Cost		Losses
($ in thousands)
Classified as current and available-for-sale:
Auction-rate securities	$	11,670	$	11,670	$	—		$	—	$	—	$	—
Classified as current and held-to-maturity:
Municipal bonds	$	9,194	$	9,218	$	24		$	16,193	$	16,278	$	85
U.S. government-sponsored enterprises		9,998		9,991		(7	)		14,825		15,000		175
		19,192		19,209		17			31,018		31,278		260
Total classified as current	$	30,862	$	30,879	$	17		$	31,018	$	31,278	$	260
Classified as noncurrent and available-for-sale:
Auction-rate securities	$	85,500	$	85,500	$	—		$	—	$	—	$	—
Classified as noncurrent and held-to-maturity:
Municipal bonds due in 1-3 years	$	1,529	$	1,522	$	(7	)	$	3,060	$	3,096	$	36
U.S. government-sponsored enterprises		—		—		—			11,796		12,000		204
Corporate obligations		6,875		6,992		117			6,397		6,988		591
		8,404		8,514		110			21,253		22,084		831
Total classified as noncurrent	$	93,904	$	94,014	$	110		$	21,253	$	22,084	$	831
Total marketable securities	$	124,766	$	124,893	$	127		$	52,271	$	53,362	$	1,091

Auction-Rate Securities: We have a long history of investing excess cash under a conservative corporate policy that only allows investments in highly rated securities, with preservation of capital and liquidity as the primary objectives. Our investment policy also limits the amount of our credit exposure to any one issue or issuer. We have historically invested a portion of our unrestricted investment portfolio in high quality (A rated and above) tax-exempt municipal securities, preferred stock and other tax-exempt auction-rate securities (“ARS”). ARS trade on a shorter term than the underlying debt based on an auction bid that resets the interest rate of the security. The auction or reset dates occur at intervals established at the time of issuance that are generally between 7 and 35 days.

ARS “fail” when there are not enough buyers to absorb the amount of securities available for sale for that particular auction period. Historically, ARS auctions have rarely failed since the investment banks and broker dealers have been willing to purchase the security when investor demand was weak. However, beginning in mid-February 2008, due to uncertainty in the global credit and capital markets and other factors, investment banks and broker dealers have been less willing to support ARS and many ARS auctions have failed.

As of February 29, 2008, we had $97.2 million of principal invested in ARS that had experienced failed auctions. These ARS consist solely of investment grade municipal debt ($87.2 million) and student loan securities ($10.0 million) and do not include mortgage-backed securities. As of February 29, 2008, we determined that there had not been a decline in market value of the failed ARS as the par value of these securities approximated the estimated fair market value due to the quality of the underlying collateral, the credit enhancement from insurers and the fact that the issuers continue to pay interest in a timely manner and there have been no defaults in the underlying debt.

From March 1, 2008 through March 24, 2008, approximately $55.0 million of the $97.2 million of previously failed ARS as of February 29, 2008 had auction reset dates. Of this amount, we were able to sell $11.7 million for cash at par. Accordingly, as of February 29, 2008, we have classified $85.5 million in failed ARS as non-current since they were unable to be liquidated subsequent to our quarter-end.

For the immediate future, we will continue to monitor our investment portfolio, and given the uncertainties in the global credit and capital markets we will limit our investments in ARS, which will likely reduce investment income. We will continue to evaluate any changes in the market value of the failed ARS that have not been liquidated subsequent to quarter-end and in the future, depending upon existing market conditions, we may be required to record an other-than-temporary decline in market value. We believe we have the ability and we intend to hold the failed ARS as long-term investments until the market stabilizes.

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Municipal Bonds: Municipal bonds represent debt obligations issued by states, cities, counties, and other governmental entities, which earn federally tax-exempt interest. We have the ability and intent to hold municipal bonds until maturity and therefore classify these investments as held-to-maturity, reported at amortized cost. Based on the nature of the investments and the intent and ability to hold them to maturity, we have not recorded an impairment as of February 29, 2008, because we believe the unrecognized holding loss is temporary.

U.S. Government-Sponsored Enterprises: U.S. government-sponsored enterprises are fixed-income investments that include the Federal Farm Credit Note, Federal Home Loan Banks, and Federal National Mortgage Association (Fannie Mae). We have the ability and intent to hold U.S. government-sponsored enterprises until maturity and therefore classify these investments as held-to-maturity, reported at amortized cost.

Corporate Obligations: Corporate obligations include secured commercial paper with the Royal Bank of Canada. We have the ability and intent to hold corporate obligations until maturity and therefore classify these investments as held-to-maturity, reported at amortized cost. Based on the nature of the investments and the intent and ability to hold them to maturity, we have not recorded an impairment as of February 29, 2008 because we believe the unrecognized holding loss is temporary as of February 29, 2008.

Note 5. Accounts Receivable, net

Accounts receivable, net consist of the following as of February 29, 2008 and August 31, 2007:

($ in thousands)	February 29, 2008			August 31, 2007
Tuition accounts receivable	$	242,779		$	281,834
Less allowance for doubtful accounts		(93,418	)		(99,818	)
Net tuition accounts receivable	$	149,361		$	182,016
Other receivables		11,117			8,896
Total accounts receivable, net	$	160,478		$	190,912

Tuition accounts receivable is composed primarily of amounts due from students.

Bad debt expense is included in instructional costs and services in our Condensed Consolidated Statements of Operations. The following table summarizes the activity in the related allowance for doubtful accounts for the three and six months ended February 29, 2008 and February 28, 2007:

	Three Months Ended						Six Months Ended
	February 29,			February 28,			February 29,			February 28,
($ in thousands)	2008			2007			2008			2007
Beginning allowance for doubtful accounts	$	104,652		$	69,786		$	99,818		$	65,184
Provision for uncollectible accounts receivable		26,601			26,189			58,986			49,304
Write-offs, net of recoveries		(37,835	)		(20,014	)		(65,386	)		(38,527	)
Ending allowance for doubtful accounts	$	93,418		$	75,961		$	93,418		$	75,961

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Note 6. Long-Term Restricted Cash for Bond Collateralization

In connection with the securities litigation matter described in Note 11, we posted a bond in the amount of $95.0 million in the second quarter of fiscal 2008 as part of our motion to stay execution of the judgment pending resolution of our motions for post-trial relief. This bond had been fully cash collateralized by us and is reported as long-term restricted cash for bond collateralization on our Condensed Consolidated Balance Sheets as of February 29, 2008.

Note 7. Long-Term Liabilities

Long-term liabilities consist of the following as of February 29, 2008 and August 31, 2007:

($ in thousands)	February 29, 2008			August 31, 2007
Deferred rent and other lease incentives	$	76,668		$	77,755
Deferred gains on sale-leasebacks		10,421			10,602
Deferred compensation agreement with Dr. John G. Sperling		2,298			2,197
Unrecognized tax benefit (see Note 8)		53,363			—
Accrual for estimated securities litigation loss (see Note 11)		164,088			—
Other long-term liabilities		1,107			2,432
Total liabilities		307,945			92,986
Less current portion		(20,950	)		(21,093	)
Total long-term liabilities	$	286,995		$	71,893

Note 8. Income Taxes

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109,” (“FIN 48”). This interpretation, among other things, creates a two-step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements.

We adopted FIN 48 on September 1, 2007, and did not recognize an adjustment to our liability for unrecognized income tax benefits upon adoption. It is our policy to recognize interest and penalties related to uncertain tax positions in income tax expense. At the date of adoption, we reclassified $53.0 million of unrecognized tax benefits, including penalties and interest, from current income taxes payable to long-term liabilities, as these contingencies are not expected to be paid within the next year. Each quarter, we accrue for any additional interest and penalties, as necessary. In addition, for prior periods where a liability existed and where the statute of limitations has expired, any accruals relating to that period have been reversed in the period in which the statute expired. The total amount of unrecognized tax benefits, including penalties and interest, would impact our effective tax rate if recognized. We are continually under audit by various taxing jurisdictions, and as a result, it is possible that the amount of unrecognized tax benefits could change within the next twelve months. An estimate of the range of the possible change cannot be made unless or until tax positions are further developed or examinations closed. At the adoption date, our U.S. federal tax filings are subject to examination for years ending on or after August 31, 2003, and our other tax filings are generally subject to examination in state and foreign jurisdictions for years ending on or after August 31, 2001.

An Internal Revenue Service (“IRS”) audit relating to our U.S. federal income tax returns for the fiscal years ended August 31, 2003 through 2005 commenced in September 2006. The audit relates to income and deductions previously claimed by us, including deductions potentially limited by IRC Section 162(m). 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 expensed an additional $0.8 million and $1.7 million in three and six months ended February 29, 2008, respectively, related to interest and penalties, for a total accrual of $46.3 million as of February 29, 2008 with respect to this uncertain tax

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position for the taxable years 2003 through 2007 (which are currently our only open years subject to adjustment for federal tax purposes). For prior periods where a liability existed and where the statute of limitations has expired, any accruals relating to that period have been reversed in the period in which the statute expired. 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 increase in deferred tax assets is primarily attributable to the timing of deductibility for the expense related to the charge for the securities litigation matter described in Note 11.

Note 9. Earnings Per Share

Apollo Group Class A Common Stock

A reconciliation of the basic and diluted earnings (loss) per share computations for our common stock is as follows:

	Three Months Ended
	February 29, 2008								February 28, 2007
				Weighted Average							Weighted Average
($ in thousands, except per share amounts)	Loss			Shares		Per Share Amount			Income		Shares		Per Share Amount
Basic income (loss)	$	(32,039	)		168,005	$	(0.19	)	$	60,338		173,185	$	0.35
Effect of dilutive securities:
Stock options		—			—		—			—		1,439		—
Restricted stock units		—			—		—			—		—		—
Diluted income (loss)	$	(32,039	)		168,005	$	(0.19	)	$	60,338		174,624	$	0.35

	Six Months Ended
	February 29, 2008							February 28, 2007
			Weighted Average							Weighted Average
($ in thousands, except per share amounts)	Income		Shares		Per Share Amount			Income		Shares		Per Share Amount
Basic income	$	107,826		167,521	$	0.64		$	174,212		173,153	$	1.01
Effect of dilutive securities:
Stock options		—		2,213		(0.01	)		—		1,390		(0.01	)
Restricted stock units		—		142		—			—		—		—
Diluted income	$	107,826		169,876	$	0.63		$	174,212		174,543	$	1.00

Diluted weighted average shares outstanding include the incremental effect of shares that would be issued upon the assumed exercise of stock options and the vesting of restricted stock unit awards (“RSUs”). For the three months ended February 29, 2008 and February 28, 2007, approximately 547,000 and 5,325,000, respectively, and for the six months ended February 29, 2008 and February 28, 2007 approximately 1,330,000 and 5,415,000, respectively, of our stock options 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; therefore, their inclusion would have been anti-dilutive. These stock options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options. In addition, for the three months ended February 29, 2008, approximately 2,273,000 of our stock options and 169,000 of our RSUs were excluded from the calculation of diluted loss per share because we reported a net loss; therefore their inclusion would also have been anti-dilutive.

Note 10. Share-Based Compensation Plans

Stock Option Modifications

On January 12, 2007, our 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 former employees, including officers, terminated on or after November 3, 2006, to exercise options that were “in the money” as of the end of the 90-day post-termination period provided

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under the 2SIP and their option agreements thereunder, beyond this 90-day period. We extended the exercise periods of these options because we were unable, during the financial statement restatement process as described in our 2007 Annual Report on Form 10-K, to issue shares of our 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 former employees having the opportunity to exercise, since the 90-day post-termination exercise period would have expired prior to us completing our financial statement restatement process.

As a result of these modifications, we recorded a non-cash charge to share-based compensation of $12.1 million during the second quarter of fiscal 2007. In addition, the modified awards held by former 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. EITF 00-19 requires that we 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 our Condensed Consolidated Statements of Operations. During the three months ended February 28, 2007, we recorded fair value adjustments of $2.8 million, which were recorded as increases in expense. The fair value adjustments recorded as expenses for the six months ended February 28, 2007 totaled $2.7 million. All awards that were subject to the above modification had been exercised as of the first quarter of fiscal 2008, and therefore there are no liabilities in our Condensed Consolidated Balance Sheets as of February 29, 2008 associated with these modifications.

Acceleration of Vesting

During the second quarter of 2008, we recorded a charge of $4.4 million as a result of the acceleration of vesting for certain options granted during 2006 as a result of meeting certain performance conditions that are specified in the grant agreements. The vesting acceleration will result in an offsetting reduction in expense over the next four quarters, which is the period over which the options would have vested had vesting not accelerated at February 29, 2008.

Share-Based Compensation Expense

The table below outlines the effects of share-based compensation included in the following costs and expenses in the Condensed Consolidated Statements of Operations for the three and six months ended February 29, 2008 and February 28, 2007:

	Three Months Ended						Six Months Ended
	February 29,			February 28,			February 29,			February 28,
($ in thousands, except per share amounts)	2008			2007			2008			2007
Instructional costs and services	$	6,711		$	3,965		$	11,817		$	7,855
Selling and promotional		1,253			983			1,986			2,067
General and administrative		12,141			16,785			21,227			21,957
Share-based compensation expense included in operating expenses		20,105			21,733			35,030			31,879
Tax effect on share-based compensation		(7,886	)		(8,608	)		(13,741	)		(12,627	)
Share-based compensation expense, net of tax	$	12,219		$	13,125		$	21,289		$	19,252

2000 Stock Incentive Plan

In March 2008, holders of our Class B common stock increased the number of shares reserved for issuance under our Amended and Restated 2000 Stock Incentive Plan (“2SIP”) by 5.0 million shares.

Note 11. Commitments and Contingencies

We are 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 we become 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, we record a liability for the loss. The liability recorded includes probable and estimable legal costs incurred to date and future legal costs to the point in the legal matter where we believe we will prevail. If the loss is not probable or the amount of the loss cannot be reasonably estimated, we disclose the claim if the likelihood of a potential loss is reasonably possible and the amount of the potential loss is material. For matters where no loss contingency is recorded, our policy is to expense legal fees as incurred.

Internal Revenue Service Audit

On September 13, 2006, the IRS commenced an audit of our U.S. federal income tax returns for the fiscal years ended August 31, 2003 through 2005 for income and deductions previously claimed by us, including deductions potentially limited by IRC Section 162(m).

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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 expensed an additional $0.8 million and $1.7 million for the three and six months ended February 29, 2008, respectively, related to interest and penalties, for a total accrual of $46.3 million as of February 29, 2008 with respect to this uncertain tax position for the taxable years 2003 through 2007 (which are currently our only open years subject to adjustment for federal tax purposes). For prior periods where a liability existed and where the statute of limitations has expired, any accruals relating to that period have been reversed in the period in which the statute expired. 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.

Sale-Leaseback Option

On June 20, 2006, we entered into an option agreement (which was amended on March 7, 2007) with Macquarie Riverpoint AZ, LLC (“Macquarie”). The option agreement grants Macquarie the option to purchase all membership interests in our consolidated subsidiaries formed as limited liability entities that own our new headquarters land and buildings for approximately $170 million and simultaneously have the owning entities enter into a 12-year lease of these facilities with us. Macquarie made a deposit of $9.0 million in connection with this option. On March 6, 2008, we provided the final completion notices to Macquarie. In March 2008, we agreed to extend the option until May 1, 2008 for additional consideration of approximately $0.3 million. If Macquarie does not exercise its option, we plan to market the land and buildings’ membership interests to other parties, but we cannot predict the timing or the amount of proceeds of any such sale. If Macquarie does exercise its option, we expect to generate a gain on the sale of approximately $20-23 million, which would be recognized over the 12-year term of the lease agreement.

Contingencies Related to Litigation and Other Proceedings

The following is a description of pending litigation and other proceedings that fall outside the scope of ordinary and routine litigation incidental to our business.

Pending Litigation

Incentive Compensation False Claims Act Lawsuit

On August 29, 2003, we were notified that a qui tam action had been filed against us on March 7, 2003, in the U.S. District Court for the Eastern District of California by two then-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. Specifically, plaintiffs allege that our entry into Program Participation Agreements with the U.S. Department of Education under Title IV of the Higher Education Act constitutes a false claim because we did not intend to comply with the employee compensation requirements applicable to us as a result of such participation. 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. That motion was denied on August 20, 2007. On January 7, 2008, the Court denied a UPX motion to certify the Court’s order regarding the motion to dismiss for purposes of bringing an interlocutory appeal. The District Court has issued a Scheduling Order pursuant to which trial is set for September 2009. Rule 26 disclosures have been made and discovery is proceeding. We believe that our compensation programs and practices at all relevant times were in compliance with the requirements imposed in our Program Participation Agreements and that, in any event, a failure to comply would not give rise to a false claim under the False Claims Act. Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on information available to us at present, our management does not expect a material adverse effect on our business, financial position, results of operations, or cash flows to result from this action. In addition, we cannot reasonably estimate a range of loss for this action and accordingly have not accrued any liability associated with this action.

Axia False Claims Act Lawsuit

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 U.S. Department of Justice filed The Government’s Notice of Election to Decline Intervention in this qui tam lawsuit and on

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June 15, 2006, the Court entered an order unsealing the complaint. An amended complaint was served on or about November 1, 2006. The qui tam action alleges violations of the False Claims Act by UPX in connection with federal student aid programs, and asserts that UPX improperly compensates its employees. 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. Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on information available to us at present, our management does not expect a material adverse effect on our business, financial position, results of operations, or cash flows to result from this action. In addition, we cannot reasonably estimate a range of loss for this action and accordingly have not accrued any liability associated with this action.

Alaska Electrical Pension Fund Derivative Action

On September 5, 2006, the Alaska Electrical Pension Fund filed a shareholder derivative suit in the U.S. District Court for the District of Arizona, alleging on behalf of us that certain of our current and former officers and directors engaged in misconduct regarding stock option grants. Similar derivative complaints were filed in the same Court on or about September 19, 2006 and November 11, 2006 by other of our purported shareholders, and the three cases were consolidated by the Court under the caption Alaska Electrical Pension Fund v. Sperling, Case No. CV06-02124-PHX-ROS, on January 9, 2007. The defendants in the consolidated case are Apollo, J. Jorge Klor de Alva, Daniel E. Bachus, John M. Blair, Dino J. DeConcini, Anthony F. Digiovanni, Kenda B. Gonzales, Hedy F. Govenar, Brian E. Mueller, Todd S. Nelson, Jerry F. Noble, Laura Palmer Noone, John R. Norton III, John G. Sperling, and Peter V. Sperling. An independent committee of our Board of Directors (“Special Committee”) was appointed and authorized to determine whether it is in our best interest to pursue the allegations made on our behalf. Effective December 8, 2006, in response to an order by the Court on December 4, 2006, K. Sue Redman, who is not a party to the case, replaced Hedy F. Govenar on the Special Committee. As of March 13, 2007, James R. Reis joined the Special Committee in place of Daniel D. Diethelm. On July 2, 2007, all defendants and Apollo filed Motions to Dismiss the case, and the Special Committee filed notice of its intent to terminate the action. On August 1, 2007, the Court appointed as lead plaintiff Louisiana Municipal Police Employees’ Retirement System, and lead plaintiff filed a Second Amended Complaint on August 15, 2007. On August 17, 2007, the Special Committee filed a Motion to Terminate the action, based in part upon its conclusion that pursuit of the claims is not in our best interest. Through mediation, the parties reached an agreement in principle to resolve this action, subject to documentation, which the parties have documented in a stipulation of settlement which we anticipate will be filed with the court in the third quarter of fiscal 2008. The settlement is subject to court approval. Management does not expect a material adverse effect on our business, financial position, results of operations, or cash flows to result from the proposed settlement, and we have accrued for the expected liability associated with the proposed settlement in our condensed consolidated financial statements as of February 29, 2008.

Securities Class Action

In October 2004, three class action complaints were filed in the U.S. District Court for the District of Arizona. The Court consolidated the three pending class action complaints under the caption In re Apollo Group, Inc. Securities Litigation, Case No. CV04-2147-PHX-JAT and a consolidated class action complaint was filed on May 16, 2005 by the lead plaintiff. The consolidated complaint named us, Todd S. Nelson, Kenda B. Gonzales and Daniel E. Bachus as defendants. On March 1, 2007, by stipulation and order of the Court, Daniel E. Bachus was dismissed as a defendant from the case. Lead plaintiff represents a class of our shareholders who acquired their shares between February 27, 2004 and September 14, 2004. The complaint 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 us for defendants’ allegedly material false and misleading statements in connection with our failure to publicly disclose the contents of a preliminary U.S. Department of Education program review report. The case proceeded to trial on November 14, 2007. On January 16, 2008, the jury returned a verdict in favor of the plaintiffs awarding damages of up to $5.55 for each share of common stock in the class suit, plus pre-judgment and post-judgment interest. The class shares are those purchased after February 27, 2004 and still owned on September 14, 2004. The judgment was entered on January 30, 2008, subject to an automatic stay until February 13, 2008. On February 13, 2008, the Court granted our motion to stay execution of the judgment pending resolution of our motions for post-trial relief, which were also filed on February 13, 2008, provided that we post a bond in the amount of $95 million by February 19, 2008. On February 19, 2008, we posted the $95 million bond with the Court. Oral arguments have been requested; a hearing date has not been set. If our motions are denied, in whole or in part, we intend to pursue any and all remedies that may be available, including, if necessary, appealing the judgment. If an appeal is necessary, the Court may require that we post a bond in order to stay enforcement of the judgment during the appeal, and the bond could be in a different amount from the present bond. We believe we have adequate liquidity to fund any likely bond amount.

Liability in the case is joint and several, which means that each defendant, including us, is liable for the entire amount of the judgment. As a result, we will be responsible for payment of the full amount of damages as ultimately determined. We do not expect to receive material amounts of insurance proceeds from our insurers to satisfy any amounts ultimately payable to the plaintiff class.

The actual amount of damages will not be known until all court proceedings, including post trial motions and any appeal, have been completed. We have estimated for financial reporting purposes, using statistically valid models and a 60% confidence interval, that the

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damages could range from $120.5 million to $216.4 million, which includes (a) our estimate of damages based on the verdict, (b) our estimate of potential amounts we expect to reimburse our insurance carriers, (c) estimated future defense costs, and (d) legal and other professional fees incurred during the second quarter of 2008. In the second quarter of 2008, we recorded a charge for estimated damages at the mid-point of this range, or $168.4 million. We elected to record the mid-point of this range because under statistically valid modeling techniques the mid-point of the range is in fact a more likely estimate than other points in the range, and the point at which there is an equal probability that the ultimate loss could be toward the lower end or the higher end of the range.

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. University of Phoenix, Inc., No. CV-06-2303-PHX-MHM, in the U.S. District Court for the District of Arizona on behalf of approximately 26 former and current employees 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 some of the employees 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 discovery. Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on information available to us at present, our management does not expect a material adverse effect on our business, financial position, results of operations, or cash flows to result from this action. In addition, we cannot reasonably estimate a range of loss for this action and accordingly have not accrued any liability associated with this action.

Barnett Derivative Action

On April 24, 2006, Larry Barnett, one of our shareholders, filed a shareholder derivative complaint on behalf of Apollo. The allegations in the complaint pertain to the matters that were the subject of the investigation performed by the U.S. Department of Education that led to the issuance of the U.S. Department of Education’s February 5, 2004 Program Review Report. The complaint 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. In the complaint, plaintiff asserts a derivative claim, on our behalf, for breach of fiduciary duty against the following nine of our current or former officers and directors: John M. Blair, Dino J. DeConcini, Hedy F. Govenar, Kenda B. Gonzales, Todd S. Nelson, Laura Palmer Noone, John R. Norton III, John G. Sperling and Peter V. Sperling. Plaintiff contends that we are entitled to recover from these individuals the amount of the fines that we paid to the U.S. Department of Education and our losses (both litigation expenses and any damages awarded) stemming from the parallel federal securities class actions pending against us in federal district court as described above under “Securities Class Action.” On October 10, 2006, plaintiff amended his complaint to include new allegations pertaining to our alleged backdating of stock option grants to Todd S. Nelson, Kenda B. Gonzales, Laura Palmer Noone, John G. Sperling and three additional defendants: J. Jorge Klor de Alva, Jerry F. Noble and Anthony F. Digiovanni. This First Amended Complaint alleges, among other things, that the individual defendants breached their fiduciary duties to us and that certain of them 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, we filed a Motion to Stay the case arguing that it is not in our best interest to prosecute plaintiffs’ purported derivative claims prior to resolution of the parallel federal securities 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, we 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, we 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. On June 12, 2007 the Court extended the Stay to November 5, 2007 and set a case management conference for November 13, 2007. In addition, the plaintiff filed a motion to lift the stay on August 31, 2007 in order to conduct discovery related to the Special Committee’s report regarding alleged stock option backdating. On October 4, 2007, the Court denied the motion to lift the stay without prejudice. On October 12, 2007, we filed a motion to extend the stay through February 2008 pending the resolution of the trial in the federal securities class action. At the case management conference on November 13, 2007, the Court heard arguments on the motion and, at the conference, granted the motion to extend the stay. The Court scheduled another status conference for March 10, 2008, ordered that the parties file a Joint Proposed Case Management Report and Status Memorandum by March 3, 2008, and extended the stay of the case until the date of the status conference. On March 3, 2008, the parties submitted a Joint Proposed Case Management Report to the Court. On March 7, 2008, we filed a motion to stay discovery pending the disposition of pre-trial motions in the federal securities class action. On March 10, 2008, the court conducted a status conference and stayed the stock option claims raised in the case pending submission of a stipulation of settlement in the related federal securities class action, the approval of the settlement by the federal court, and dismissal of the federal securities class action. With respect to the U.S. Department of Education claims, the Court stayed all discovery until August 11, 2008, on which date the Court will conduct a pretrial conference. The Court also permitted plaintiffs to file a second amended complaint by April 10, 2008, with defendants to answer or otherwise respond to the amended complaint by May 9, 2008. Oral argument on the anticipated motions to dismiss to be filed by the defendants is scheduled for July 15, 2008. In light of this schedule, the Court denied our motion to stay discovery as moot. Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on information available to us at present, our management does not expect a material adverse effect on our business, financial position, results of operations, or cash flows to result from this action. In addition, we cannot reasonably estimate a range of loss for this action and accordingly have not accrued any liability associated with this action.

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Bamboo Partners Derivative Action

On August 15, 2006, Bamboo Partners, one of our shareholders, filed a shareholder derivative complaint our behalf and on behalf of the University of Phoenix, Inc. 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., University of Phoenix, Inc., Todd S. Nelson, Kenda B. Gonzales, Daniel E. 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 seeks contribution from defendants Nelson, Gonzales and Bachus pursuant to Sections 10(b) and 21D of the Exchange Act for damages incurred by Apollo and UPX in connection with the federal securities class action described above under “Securities Class Action”, and also alleges that all defendants committed numerous breaches of fiduciary duties associated with the facts underlying the federal securities class action. In addition, the complaint asserts claims relating to Laura Palmer Noone’s sale of our stock and Todd S. Nelson’s separation agreement executed with us in January 2006. In addition to damages, the complaint seeks attorneys’ fees, reasonable costs and disbursements. On November 13, 2006, we filed a Motion to Stay the case arguing that it is not in our best interest to prosecute plaintiffs’ purported derivative claims prior to resolution of the parallel federal securities class action. The individual defendants joined in the Motion to Stay. The Court granted our motion to stay on May 18, 2007. Following entry of judgment in the federal securities class action, on January 31, 2008, the Court issued an order to show cause why the stay should not be dissolved. On February 13, 2008, we filed a motion to extend the stay until the Court in the federal securities class action rules on defendants’ post-trial motions. On February 27, 2008, plaintiff filed a response in opposition to the motion. The reply brief by Apollo and UPX was filed on March 10, 2008. In addition, on March 3, 2008, the plaintiff filed a motion to lift the stay in order to file an amended complaint. The proposed amended complaint, among other things, does not include two defendants named in the initial complaint (Daniel E. Bachus and Hedy F. Govenar) and adds new jurisdictional allegations based on the parties’ diversity of citizenship. Discovery in this case has not yet begun. Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on information available to us at present, our management does not expect a material adverse effect on our business, financial position, results of operations, or cash flows to result from this action. In addition, we cannot reasonably estimate a range of loss for this action and accordingly have not accrued any liability associated with this action.

Teamsters Local Union Putative Class Action

On November 2, 2006, the Teamsters Local 617 Pension and Welfare Funds, filed a class action complaint purporting to represent a class of shareholders who purchased our stock between November 28, 2001 and October 18, 2006. The complaint alleges that we and certain of our current and former directors and officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by purportedly making misrepresentations concerning our stock option granting policies and practices and related accounting. The defendants are Apollo Group, Inc., J. Jorge Klor de Alva, Daniel E. Bachus, John M. Blair, Dino J. DeConcini, Kenda B. Gonzales, Hedy F. Govenar, Brian E. Mueller, Todd S. Nelson, Laura Palmer Noone, John R. Norton III, John G. Sperling and Peter V. Sperling. Plaintiff seeks unstated 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. On September 11, 2007, the Court appointed The Pension Trust Fund for Operating Engineers as lead plaintiff and approved lead plaintiff’s selection of lead counsel and liaison counsel. Lead plaintiff filed an amended complaint on November 23, 2007, asserting the same legal claims as the original complaint and adding claims for violations of Section 20A of the Securities Exchange Act of 1934 and allegations of breach of fiduciary duties and civil conspiracy. All defendants filed motions to dismiss the case on January 22, 2008, which are now pending before the Court. Discovery in this case has not yet begun. We intend to vigorously oppose plaintiffs’ allegations. Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on information available to us at present, our management does not expect a material adverse effect on our business, financial position, results of operations, or cash flows to result from this action. In addition, we cannot reasonably estimate a range of loss for this action and accordingly have not accrued any liability associated with this action.

Patent Infringement Litigation

On March 3, 2008, Digital-Vending Services International Inc. filed a complaint against The University of Phoenix, Inc. and Apollo Group Inc., as well as Capella Education Company, Laureate Education Inc., and Walden University Inc. in the United States District Court for the Eastern District of Texas. The complaint alleges that we and the other defendants have infringed and are infringing various patents relating to managing courseware in a shared use operating environment. We are in the process of reviewing and evaluating the complaint and have not yet replied to it. Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on information available to us at present, our management does not expect a material adverse effect on our business, financial position, results of operations, or cash flows to result from this action. In addition, we cannot reasonably estimate a range of loss for this action and accordingly have not accrued any liability associated with this action.

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Regulatory and Other Legal Matters

Student Financial Aid

All federal financial aid programs are established by the Higher Education Act and regulations promulgated thereunder. The Higher Education Act has an expiration date; in the past, if Congress did not reauthorize the Higher Education Act before its expiration date, Congress extended the authorization of the Higher Education Act. The Higher Education Act was set to expire on March 31, 2008. Congress passed legislation that was signed by the President on March 24, 2008, extending the Higher Education Act until April 30, 2008.

The Higher Education Act specifies the manner in which the U.S. Department of Education reviews institutions for eligibility and certification to participate in Title IV programs. Every educational institution involved in Title IV programs must be certified to participate and is required to periodically renew this certification. UPX was recertified in June 2003 and its current certification for the Title IV programs expired in June 2007. However, in March 2007, UPX submitted its Title IV program participation recertification application to the U.S. Department of Education. We have been collaborating with the U.S. Department of Education regarding the UPX recertification application. Although we have submitted our application for renewal, we are continuing to supply additional follow-up information based on requests from the U.S. Department of Education. Our eligibility continues on a month-to-month basis until the U.S. Department of Education issues its decision on the application. A month-to-month status is not unusual considering the process is multi-faceted and iterative. We have no reason to believe that the application will not be renewed and expect that the renewal process will be completed satisfactorily. WIU was recertified in October 2003 and its current certification for the Title IV programs expires in June 2009.

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 as a result of their participation in Title IV programs. On December 22, 2005, the U.S. Department of Education, Office of Inspector General (“OIG”), issued an 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 provided reasonable assurance that it properly identified withdrawn students, appropriately determined whether a return of Title IV funds calculation 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 September 1, 2002 through December 7, 2004. Since December 8, 2004, UPX has adopted the methodologies deemed appropriate by the U.S. Department of Education. On November 3, 2006, the U.S. Department of Education issued a preliminary audit determination letter (“PADL”) concerning UPX’s administration of the Title IV federal student aid programs regarding this matter and requested UPX to conduct a file review of all students who received Title IV funds and for whom a return of funds calculation was performed, or should have been performed, during the period from March 1, 2004 through December 7, 2004. On June 7, 2007, UPX responded to the PADL request with results of the file review. On January 10, 2008, the U.S. Department of Education issued a final audit determination letter (“FADL”) regarding the return of Title IV funds. As of August 31, 2007, UPX had accrued $3.7 million related to the refund liability and in the second quarter of fiscal 2008 recorded an additional charge of $0.5 million. Under the FADL, UPX returned approximately $4.2 million for the recalculated Title IV funds, which included the repayment of interest and special allowance of approximately $0.5 million, as calculated by the U.S. Department of Education, as of February 29, 2008, which satisfied our obligation under the FADL.

Federal regulations require institutions and third-party servicers to submit annually to the Secretary its student financial aid (“SFA”) compliance audit, prepared by an independent auditor, no later than six months after the last day of the institution’s or third-party servicer’s fiscal year. UPX and WIU have timely submitted their respective fiscal year 2007 annual SFA compliance audits; however, the IPD SFA compliance audit has been delayed pending the resolution of one item. While the outcome of this proceeding is uncertain, management does not expect a material adverse effect on our business, financial position, results of operations, or cash flows to result from this action.

SEC Informal Inquiry and Department of Justice Investigation

In June 2006, we were notified by letter from the SEC of an informal inquiry and the SEC’s request for the production of documents relating to our stock option grants. In July 2007, the SEC notified us that it had closed its inquiry into our stock option grants, without recommending any enforcement action. Also in June 2006, we received a grand jury subpoena from the U.S. Attorney’s Office for the Southern District of New York requesting that we provide documents relating to our stock option grants. We have cooperated fully with this request.

Note 12. Segment Reporting

We operate primarily in the education industry. Our six operating segments are aggregated into three reportable segments for financial reporting purposes: UPX, Other Schools, and Corporate. The Other Schools segment includes IPD, WIU, CFP and Insight. In March

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2006, we began enrolling new students in Axia College of UPX. From September 2004 through February 2006, we enrolled new Axia students in WIU. Costs incurred related to our global expansion are currently included in the Corporate segment. Apollo Global had not yet received any capital contribution and had no operating activity as of February 29, 2008. Aptimus is an integral part of our corporate marketing function and therefore is included in our Corporate segment.

Consistent with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), our 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 allocating corporate support costs to each segment as part of a general allocation, but excludes interest income and certain revenue and unallocated corporate charges. At the discretion of management, certain corporate costs are not allocated to the subsidiaries due to their designation as special charges because of their infrequency of occurrence, the non-cash nature of the expense, and/or the determination that the allocation of these costs to the subsidiaries will not result in an appropriate measure of the subsidiaries’ results. These costs include such items as unscheduled or significant management bonuses, unusual severance pay, stock-based compensation expense attributed to corporate management and administrative employees, etc. The revenue and corporate charges which are not allocated to UPX or Other Schools segments are included in the Corporate segment. The estimated securities litigation loss is included in our Corporate segment.

The accounting policies of each segment are consistent with those described in the summary of significant accounting policies in Note 2 of our audited consolidated financial statements included in our 2007 Annual Report on Form 10-K. 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 in consolidation.

Our 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 and six months ended February 29, 2008 and February 28, 2007, no individual customer accounted for more than 10% of our consolidated revenues.

Summary financial information by reportable segment is as follows:

	Three Months Ended						Six Months Ended
	February 29,			February 28,			February 29,			February 28,
($ in thousands)	2008			2007			2008			2007
Tuition and other revenue, net:
UPX	$	657,971		$	565,589		$	1,401,361		$	1,172,605
Other Schools		31,469			42,989			68,134			103,783
Corporate		4,203			115			4,822			91
	$	693,643		$	608,693		$	1,474,317		$	1,276,479
Income (loss) from operations:
UPX	$	129,169		$	106,481		$	360,000		$	279,043
Other Schools		98			5,444			5,516			18,869
Corporate		(188,463	)		(20,125	)		(205,516	)		(26,131	)
	$	(59,196	)	$	91,800		$	160,000		$	271,781

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Note 13. Acquisitions and Joint Ventures

Aptimus

On October 29, 2007, we completed the acquisition of all outstanding common stock of online advertising network Aptimus, Inc. for approximately $48.1 million. The acquisition has been accounted for pursuant to SFAS No. 141, “Business Combinations” (“SFAS 141”), under which the initial purchase price allocation is subject to a revision for a period of up to one year from the date of acquisition. The operating results are included in the unaudited interim condensed consolidated financial statements from the date of acquisition. In connection with the acquisition, we recorded $37.1 million of goodwill. The results of operations of Aptimus are not significant to our consolidated results of operations and therefore, pro forma information for the three and six months ended February 28, 2007 has not been provided. The acquisition enables us to more effectively monitor, manage and control our marketing investments and brands, with the goal of increasing awareness of and access to quality and affordable education.

A summary of the purchase price is as follows:

($ in thousands)
Cash paid for the outstanding common stock of Aptimus	$	41,486
Cash paid for certain common stock equivalents of Aptimus		4,672
Transaction-related costs		1,919
Total purchase price	$	48,077

A summary of the purchase price allocation is as follows:

($ in thousands)
Net working capital	$	(1,881	)
Property and equipment		654
Intangibles		7,600
Deferred tax assets		6,346
Goodwill		37,140
Employee stock options assumed		(1,782	)
Total allocated purchase price		48,077
Less: Cash acquired		(1,022	)
Acquisition, net of cash acquired	$	47,055

Apollo Global

On October 22, 2007, we formed a joint venture with The Carlyle Group (“Carlyle”), called Apollo Global, Inc. (“Apollo Global”), to pursue investments in the international education services sector. Carlyle, based in Washington D.C., is one of the world’s largest private equity firms. Through Apollo Global, we intend to capitalize on the significant global demand for education services. Apollo Global will provide education services through two primary strategies. First, Apollo Global will facilitate delivery of a wide range of U.S. accredited degrees to foreign students outside the U.S. Within approximately 18 months from formation, we expect to transfer at fair value to Apollo Global assets that are dedicated to recruiting and servicing international students. Following such transfer, Apollo Global, under a service agreement with us, will perform enrollment activities directed toward students who live outside the U.S. and who are not citizens of the U.S. or members of the U.S. military. Second, Apollo Global will acquire or invest in companies that provide local education services, including post-secondary degrees, in the countries it seeks to enter. These investments will be achieved through both a disciplined acquisition process and organic growth.

We have agreed to commit up to $801 million in cash or contributed assets and own 80.1% of Apollo Global. Carlyle has agreed to commit up to $199 million in cash or contributed assets and own the remaining 19.9%. Additionally, appropriate amounts of debt will be employed. The Board of Apollo Global consists of seven directors, four of whom were designated by us and two of whom were designated by Carlyle. The seventh director is the Interim President of Apollo Global. Additionally, 10 to 15% of the value of the equity in Apollo Global will be available to provide incentives for management of Apollo Global. Apollo Global is consolidated in our financial statements. No cash contributions to Apollo Global had been made as of February 29, 2008.

UNIACC

Apollo Global signed a stock purchase agreement February 19, 2008 to acquire Universidad de Artes, Ciencias y Comunicación (“UNIACC”), an accredited, private arts and communications university in Chile, as well as its related entities. This includes the Instituto Superior de Artes y Ciencias de la Comunicación, S.A. (“IACC”), the first online autonomous professional institute in the country which was founded in 1981. UNIACC, founded in 1989 and based in Santiago, Chile, has over 3,000 students and three campuses. Apollo Global has agreed to purchase 100% of UNIAAC for approximately $40 million composed of cash and assumed debt,

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plus an earn-out payment based on a multiple of earnings to be paid four years from the closing date. The acquisition is expected to close in the third quarter of fiscal 2008 subject to customary closing conditions.

Note 14. Financing

On January 4, 2008, we entered into a syndicated $500 million Credit Agreement (the “Bank Facility”). The Bank Facility is an unsecured revolving credit facility that will be used for general corporate purposes including acquisitions and stock buybacks. The Bank Facility has an expansion feature for an aggregate principal amount of up to $250 million. The term is five years and will expire on January 4, 2013. The Bank Facility provides a multi-currency sub-limit facility for borrowings in certain specified foreign currencies up to $300 million. The Bank Facility fees are determined based on a pricing grid that varies according to our leverage ratio. The facility fee ranges from 12.5 basis points to 17.5 basis points and the incremental fees for borrowings under the facility range from LIBOR + 50.0 basis points to 82.5 basis points. There have not been any borrowings under the Bank Facility through March 27, 2008.

The Bank Facility contains affirmative and negative covenants, including the following financial covenants: maximum leverage ratio, minimum coverage interest and rent expense ratio, and a U.S. Department of Education financial responsibility composite score. In addition, there are covenants restricting indebtedness, liens, investments, asset transfers and distributions. We are in compliance with the aforementioned covenants as of February 29, 2008 and through March 27, 2008. Our obligations under the Bank Facility are guaranteed by our material domestic subsidiaries.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help investors understand Apollo Group, Inc. (“the Company,” “Apollo Group,” “Apollo,” “APOL,” “we,” “us,” or “our”), our operations, and our present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, the audited consolidated financial statements and notes thereto contained in our 2007 Annual Report on Form 10-K as filed with the SEC on October 29, 2007. The following overview provides a summary of the sections 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.

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

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

• Results of Operations—an analysis of our results of operations in our condensed consolidated financial statements. We operate primarily in one business sector: education. Except to the extent that differences between our reportable segments are material to an understanding of our business as a whole, we present the discussion in our 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 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. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “predict,” “target,” “potential,” “continue,” “objectives,” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties. Such statements should be viewed with caution. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include but are not limited to:

• changes in the regulations of the education industry, including those items set forth in Item 1 of our 2007 Annual Report on Form 10-K, under the sections titled “Regulatory Environment,” “Accreditation,” “Federal Financial Aid Programs,” and “State Authorization;”

• each of the factors discussed in Item 1A of our 2007 Annual Report on Form 10-K, Risk Factors;

• those factors set forth in Item 7 of our 2007 Annual Report on Form 10-K; and

• changes in the requirements surrounding the reports that we file with the Securities and Exchange Commission (“SEC”).

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements, for any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.

Executive Summary

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 our wholly-owned subsidiaries, and Apollo Global, Inc.

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(“Apollo Global”), a consolidated joint venture. We offer innovative and distinctive educational programs and services at high school, college and graduate levels in 40 states and the District of Columbia; Puerto Rico; Alberta and British Columbia, Canada; Mexico; and the Netherlands; as well as online throughout the world. Our combined Degreed Enrollment for UPX, including Axia College (Axia College has been a part of UPX since March 2006, but was a part of WIU from September 2004 through February 2006), as of February 29, 2008, was approximately 330,200. In addition, students are enrolled in WIU, CFP, IPD Client Institutions, and Insight, and additional non-degreed students are enrolled in UPX. Degreed enrollment (“Degreed Enrollment”) represents individual students enrolled in UPX or WIU degree programs who attended a course during the quarter and did not graduate as of the end of the quarter (including UPX students and Axia students enrolled in UPX or 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 $373.0 billion industry. According to the U.S. Department of Education, National Center for Education Statistics, based on its most recent data from 2005, over 6.8 million, or 39%, of all students enrolled in higher education programs are over the age of 24, and this number is expected to increase by 21% from 2005 through 2016. A large percentage of these students would not be classified as traditional (i.e., living on campus, supported by 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. From 2005 through 2016, the percentage of 18- to 24-year-old students in the U.S. is expected to increase 15%. The market for non-traditional education should continue to increase, reflecting the rapidly expanding knowledge-based economy.

Our operations are generally subject to seasonal trends. We experience, and expect to continue to experience, seasonal fluctuations in the results of operations as a result of changes in the level of student enrollment. While we enroll students throughout the year, second quarter (December through February) enrollment and related revenues generally are lower than other quarters due to holiday breaks in December and January. We have historically experienced a seasonal increase in new enrollments in August of each year when most other colleges and universities begin their fall semesters.

During the first six months of fiscal 2008, we experienced the following significant events:

1.	Enrollment and Revenue Growth While Investing in our Business for the Future - We achieved 11.0% growth in average Degreed Enrollment for the six months ended February 29, 2008 as compared to the six months ended February 28, 2007, which, coupled with previously implemented selective tuition price increases, depending on geographic area and program, resulted in a 15.5% increase in revenue over the same period. These increases helped fund a significant portion of our investment in product development and marketing and lead generation during the first six months of fiscal 2008 to ensure our continued growth in the future.
2.	Apollo Global - On October 22, 2007, we formed a joint venture with The Carlyle Group (“Carlyle”), called Apollo Global, to pursue investments in the international education services sector. Carlyle, based in Washington D.C., is one of the world’s largest private equity firms. Through Apollo Global, we intend to capitalize on the significant global demand for education services. Apollo Global will provide education services through two primary strategies. First, Apollo Global will facilitate delivery of a wide range of our U.S. accredited degrees to foreign students outside the U.S. Within approximately 18 months from formation, we expect to transfer at fair value to Apollo Global assets that are dedicated to recruiting and servicing international students. Following such transfer, Apollo Global, under a service agreement with us, will perform enrollment activities directed toward students who live outside the U.S. and who are not citizens of the U.S. or members of the U.S. military. Second, Apollo Global will acquire or invest in companies that provide local education services, including post-secondary degrees, in the countries it seeks to enter. These investments will be achieved through both a disciplined acquisition process and organic growth.
	We have agreed to commit up to $801 million in cash or contributed assets and own 80.1% of Apollo Global. Carlyle has agreed to commit up to $199 million in cash or contributed assets and own the remaining 19.9%. Additionally, appropriate amounts of debt will be employed. The Board of Apollo Global consists of seven directors, four of whom were designated by us and two of whom were designated by Carlyle. The seventh director is the Interim President of Apollo Global. Additionally, 10 to 15% of the value of the equity in Apollo Global will be available to provide incentives for management of Apollo Global. Apollo Global is consolidated in our financial statements. No cash contributions to Apollo Global had been made as of February 29, 2008.
3.	Bank Facility - On January 4, 2008, we entered into a syndicated $500 million Credit Agreement (the “Bank Facility”). The Bank Facility is an unsecured revolving credit facility that will be used for general corporate purposes including acquisitions and stock buybacks. The Bank Facility has an expansion feature for an aggregate principal amount of up to $250 million. The term is five years and will expire on January 4, 2013. The Bank Facility provides a multi-currency sub-limit facility for borrowings in certain specified foreign currencies up to $300 million. The Bank Facility fees are determined based on a pricing grid that varies according to our leverage ratio. The facility fee ranges from 12.5 basis points to 17.5 basis points and the incremental fees for borrowings under the facility range from LIBOR + 50.0 basis points to 82.5 basis points. There have not been any borrowings under the Bank Facility through March 27, 2008.

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	The Bank Facility contains affirmative and negative covenants, including the following financial covenants: maximum leverage ratio, minimum coverage interest and rent expense ratio, and a U.S. Department of Education financial responsibility composite score. In addition, there are covenants restricting indebtedness, liens, investments, asset transfers and distributions. We are in compliance with the aforementioned covenants as of February 29, 2008 and through March 27, 2008. Our obligations under the Bank Facility are guaranteed by our material domestic subsidiaries.
4.	Aptimus, Inc. (“Aptimus”) - On October 29, 2007, we completed the acquisition of all outstanding common stock of online advertising network Aptimus (Nasdaq:APTM) for approximately $48.1 million. The acquisition has been accounted for pursuant to SFAS No. 141, “Business Combinations” (“SFAS 141”). The operating results are included in the unaudited interim condensed consolidated financial statements from the date of acquisition. In connection with the acquisition, we recorded $37.1 million of goodwill. The acquisition enables us to more effectively monitor, manage and control our marketing investments and brands, with the goal of increasing awareness of and access to quality and affordable education.
5.	Universidad de Artes, Ciencias y Comunicación (“UNIACC”) — On February 19, 2008 Apollo Global signed a stock purchase agreement to acquire UNIACC, an accredited, private arts and communications university in Chile, as well as its related entities. This includes the Instituto Superior de Artes y Ciencias de la Comunicación, S.A. (“IACC”), the first online autonomous professional institute in the country which was founded in 1981. UNIACC, founded in 1989 and based in Santiago, Chile, has over 3,000 students and three campuses. Apollo Global has agreed to purchase 100% of UNIAAC for approximately $40 million composed of cash and assumed debt, plus an earn-out payment based on a multiple of earnings to be paid four years from the closing date. The acquisition is expected to close in the third quarter of fiscal 2008 subject to customary closing conditions.
6.	Securities Class Action — On January 16, 2008, a jury in a federal securities class action lawsuit against us returned a verdict in favor of the plaintiffs awarding damages of up to $5.55 for each share of common stock in the class suit, plus pre-judgment and post-judgment interest. The class is defined as shareholders who purchased shares after February 27, 2004, and still owned shares on September 14, 2004. The judgment was entered on January 30, 2008, subject to an automatic stay until February 13, 2008. On February 13, 2008, the Court granted our motion to stay execution of the judgment pending resolution of our motions for post-trial relief, which were also filed on February 13, 2008, provided that we post a bond in the amount of $95 million by February 19, 2008. On February 19, 2008, we posted the $95 million bond with the Court. Oral arguments have been requested, but a hearing date has not been set. If our motions are denied, in whole or in part, we intend to pursue any and all remedies that may be available, including, if necessary, appealing the judgment. If an appeal is necessary, the Court may require that we post a bond in order to stay enforcement of the judgment during the appeal, and the bond could be in a different amount from the present bond. We believe we have adequate liquidity to fund any likely bond amount.
	Liability in the case is joint and several, which means that each defendant, including us, is liable for the entire amount of the judgment. As a result, we will be responsible for payment of the full amount of damages as ultimately determined. We do not expect to receive material amounts of insurance proceeds from our insurers to satisfy any amounts ultimately payable to the plaintiff class.
	The actual amount of damages will not be known until all court proceedings, including post trial motions and any appeal, have been completed. We have estimated for financial reporting purposes, using statistically valid models and a 60% confidence interval, that the damages could range from $120.5 million to $216.4 million, which includes (a) our estimate of damages based on the verdict, (b) our estimate of potential amounts we expect to reimburse our insurance carriers, (c) estimated future defense costs, and (d) legal and other professional fees incurred during the second quarter of 2008. In the second quarter of 2008, we recorded a charge for estimated damages at the mid-point of this range, or $168.4 million. We elected to record the mid-point of this range because under statistically valid modeling techniques the mid-point of the range is in fact a more likely estimate than other points in the range, and the point at which there is an equal probability that the ultimate loss could be toward the lower end or the higher end of the range.

Critical Accounting Policies and Estimates

Please refer to our Annual Report filed on Form 10-K for the fiscal year ended August 31, 2007 filed on October 29, 2007.

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.

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Instructional costs and services at UPX, WIU, CFP and Insight consist primarily of costs related to the delivery and administration of our educational programs and include faculty compensation, administrative compensation for departments that provide service directly to 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 for enrollment counselors, management and support staff, corporate marketing, advertising, production of marketing materials, and other costs related to selling and promotional functions. All operating expenses related to Aptimus are classified as selling and promotional costs. We expense selling and promotional costs as incurred.

General and administrative costs consist primarily of administrative compensation, occupancy costs, depreciation and amortization, and other related costs for departments such as executive management, information technology, 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.

Certain Reclassifications

We revised the presentation of certain information technology-related expense items between instructional costs and services and general and administrative expenses. The net effect of the reclassification was an increase in general and administrative expenses in the amount of $1.9 million and $3.1 million, for the three and six months ended February 28, 2007, respectively, and an offsetting decrease in instructional costs and services.

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Three Months Ended February 29, 2008 Compared to the Three Months Ended February 28, 2007

All references to fiscal 2008 and fiscal 2007 in this section refer to the three months ended February 29, 2008 and February 28, 2007, respectively. The following table sets forth an analysis of our Condensed Consolidated Statements of Operations for the periods indicated:

Analysis of Condensed Consolidated Statements of Operations

						% of Revenues
	Three Months Ended					Three Months Ended						% Change
	February 29,			February 28,		February 29,			February 28,
($ in millions)	2008			2007		2008			2007			2008 vs 2007
Revenues:
Tuition and other, net	$	693.6		$	608.7		100.0	%		100.0	%		13.9	%
Costs and expenses:
Instructional costs and services		327.7			294.4		47.2	%		48.4	%		11.3	%
Selling and promotional		201.7			166.9		29.1	%		27.4	%		20.9	%
General and administrative		55.0			55.6		7.9	%		9.1	%		-1.1	%
Estimated securities litigation loss (Note 11)		168.4			—		24.3	%		0.0	%		100.0	%
		752.8			516.9		108.5	%		84.9	%		45.6	%
Income (loss) from operations		(59.2	)		91.8		-8.5	%		15.1	%		-164.5	%
Interest income and other, net		8.1			7.0		1.1	%		1.1	%		15.7	%
Income (loss) before income taxes		(51.1	)		98.8		-7.4	%		16.2	%		-151.7	%
Provision (benefit) for income taxes		(19.1	)		38.4		-2.8	%		6.3	%		-149.7	%
Net income (loss)	$	(32.0	)	$	60.4		-4.6	%		9.9	%		-153.0	%

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

Tuition and Other Revenue, Net

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

					% of Revenues
	Three Months Ended				Three Months Ended
	February 29,		February 28,		February 29,			February 28,
($ in millions)	2008		2007		2008			2007
UPX	$	657.9	$	565.6		94.9	%		92.9	%
Other Schools		31.5		43.0		4.5	%		7.1	%
Corporate		4.2		0.1		0.6	%		0.0	%
Tuition and other revenue, net	$	693.6	$	608.7		100.0	%		100.0	%

Our tuition and other revenue, net increased by 13.9% in the second quarter of fiscal 2008 versus fiscal 2007 primarily due to our (a) 10.7% increase in Degreed Enrollment and (b) selective tuition price increases, depending on geographic area and program, which were partially offset by (a) continued shift in our student body mix to a higher percentage of students attending associate’s degree programs with lower price points and (b) an increase in the amount of promotion, scholarship and grant programs. The primary price increase by program type was in our associate’s degree program. In May 2007, we increased our associate’s degree tuition price by approximately 9%. We expect this tuition increase to continue to positively impact our associate’s degree tuition rate earned per Degreed Enrollment prospectively. Notwithstanding this tuition price increase our associate’s degree program has a lower tuition price than our other programs. Accordingly, we continued to experience a shift in our student body mix during the second quarter

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of fiscal 2008 as our associate’s Degreed Enrollment increased 37.3% from the second quarter of fiscal 2007 and represented 36.7% of our Degreed Enrollment at February 29, 2008, compared to 29.6% at February 28, 2007.

Tuition and other revenue, net at Other Schools decreased both in dollars and as a percentage of consolidated tuition and other revenue, net in the second quarter of fiscal 2008 versus fiscal 2007, as WIU Axia College students graduate or drop from the program. Axia College began offering their associate’s degree programs in September 2004 at WIU; however, in March 2006 (our third quarter of fiscal 2006), we began offering all new enrollments in Axia College programs at UPX instead of WIU.

Revenue increased in our Corporate segment as a result of our acquisition of Aptimus. Aptimus is an integral part of our corporate marketing function and therefore is included in our Corporate segment. Through the Aptimus network, our corporate marketing function generates revenue from Internet-based advertising activities performed for third-party customers.

Effective March 1, 2008, UPX changed its refund policy whereby students who attend 60% or less of a course are eligible for a refund for the portion of the course they did not attend. Under our prior refund policy, if a student attended one class of a course, UPX earned 25% of the tuition for the course, and if they attended two classes of a course, UPX earned 100% of the tuition for the course. This new refund policy applies to students in most states, as some states have their own mandated policies. UPX elected to change its refund policy because we believe it is a more reasonable policy from our students’ perspective.

Instructional Costs and Services

Instructional costs and services increased by 11.3% in the second quarter of fiscal 2008 versus fiscal 2007. The following table sets forth the changes in the significant components of instructional costs and services:

					% of Revenues
	Three Months Ended				Three Months Ended
	February 29,		February 28,		February 29,			February 28,			% Change
($ in millions)	2008		2007		2008			2007			2008 vs. 2007
Employee compensation and related expenses	$	119.7	$	105.1		17.3	%		17.3	%		13.9	%
Faculty compensation		60.1		53.5		8.7	%		8.8	%		12.3	%
Classroom lease expenses and depreciation		52.8		50.9		7.6	%		8.4	%		3.7	%
Other instructional costs and services		42.6		40.2		6.0	%		6.6	%		6.0	%
Bad debt expense		26.6		26.2		3.8	%		4.3	%		1.5	%
Financial aid processing costs		19.2		14.5		2.8	%		2.4	%		32.4	%
Share-based compensation		6.7		4.0		1.0	%		0.6	%		67.5	%
Instructional costs and services	$	327.7	$	294.4		47.2	%		48.4	%		11.3	%

Instructional costs and services as a percentage of tuition and other revenue, net decreased in the second quarter of fiscal 2008 versus fiscal 2007 primarily due to decreases as a percentage of tuition and other revenue, net in classroom lease expenses and depreciation, other instructional costs and services, and bad debt expense, which were partially offset by increases as a percentage of tuition and other revenue, net in financial aid processing costs and share-based compensation.

Classroom lease expense and depreciation decreased 80 basis points as a percentage of tuition and other revenue, net in the second quarter of fiscal 2008 versus fiscal 2007 due to a larger percentage of our student body choosing to enroll in our online modality. Other instructional costs and services decreased 60 basis points as a percentage of tuition and other revenue, net primarily due to lower negotiated contract costs from third-party vendors, which was partially offset by our continued investment in Insight Schools.

Bad debt expense as a percentage of tuition and other revenue, net decreased in the second quarter of fiscal 2008 versus fiscal 2007 primarily due to the reclassification of certain components of bad debt expense that should have been classified as discounts or refunds (reduction of tuition and other revenue, net) as opposed to bad debt expense, which is offset by the continuing trend of a higher percentage of students enrolled in our associate’s degree programs. During the first quarter of fiscal 2008, we performed a review of the components of bad debt expense and identified certain items that should have been classified as discounts or refunds (reduction of tuition and other revenue, net) as opposed to bad debt expense. No reclassification was made for prior periods as the amounts were not material to prior period financial statements and had no effect on reported net income (loss). For the first, second, third and fourth quarters of fiscal 2007, our reported bad debt expense as a percentage of tuition and other revenue, net would have been lower by 59, 82, 65 and 87 basis points, respectively, as a result of this reclassification. With respect to the enrollment growth in our associate’s degree program, when we are required to collect outstanding balances directly from these students, we generally have higher write-offs,

Page 28 of 42

based on the greater risk of default presented by the associate’s degree program’s demographics, versus students enrolled in other degree programs. Accordingly, excluding the reclassification discussed above, we experienced an increase in bad debt expense in the second quarter of fiscal 2008 versus the second quarter of fiscal 2007.

Financial aid processing costs as a percentage of tuition and other revenue, net increased in the second quarter of fiscal 2008 versus fiscal 2007 primarily due to increased processing volume.

Share-based compensation expense increased principally as a result of the 2007 stock option and RSU grants to officers.

Selling and Promotional Expenses

Selling and promotional expenses increased by 20.9% in the second quarter of fiscal 2008 versus fiscal 2007. The following table sets forth the changes in the significant components of selling and promotional expenses:

					% of Revenues
	Three Months Ended				Three Months Ended						% Change
	February 29,		February 28,		February 29,			February 28,
($ in millions)	2008		2007		2008			2007			2008 vs. 2007
Enrollment counselors’ compensation and related expenses	$	96.1	$	79.2		13.9	%		13.0	%		21.3	%
Advertising		81.1		72.2		11.7	%		11.9	%		12.3	%
Other selling and promotional expenses		23.2		14.5		3.3	%		2.3	%		60.0	%
Share-based compensation		1.3		1.0		0.2	%		0.2	%		30.0	%
Selling and promotional expenses	$	201.7	$	166.9		29.1	%		27.4	%		20.9	%

Selling and promotional expenses as a percentage of tuition and other revenue, net increased in the second quarter of fiscal 2008 versus fiscal 2007 primarily due to an increase as a percentage of tuition and other revenue, net in enrollment counselors’ compensation and related expenses and in other selling and promotional expenses, which were partially offset by a decrease as a percentage of tuition and other revenue, net in advertising.

Enrollment counselors’ compensation and related expenses increased primarily due to additional enrollment counselors to support our strategic growth initiatives.

Other selling and promotional expenses have increased as a percentage of tuition and other revenue, net primarily due to the acquisition of Aptimus that closed on October 29, 2007. We believe this acquisition will help us, over time, increase the effectiveness and efficiency of our online advertising directed at increasing awareness of and access to our quality education services.

Our advertising costs as a percentage of tuition and other revenue, net decreased primarily due to more efficient and productive spending to acquire higher quality Internet-based leads. As previously disclosed, we launched our national branding campaign for UPX in January 2007 and continue to invest to support the UPX brand.

General and Administrative Expenses

General and administrative expenses decreased by 1.1% in the second quarter of fiscal 2008 versus fiscal 2007. The following table sets forth the changes in the significant components of general and administrative expenses:

					% of Revenues
	Three Months Ended				Three Months Ended						% Change
	February 29,		February 28,		February 29,			February 28,
($ in millions)	2008		2007		2008			2007			2008 vs. 2007
Employee compensation and related expenses	$	22.9	$	16.5		3.3	%		2.7	%		38.8	%
Share-based compensation		12.1		16.8		1.7	%		2.8	%		(28.0	%)
Legal, audit, and corporate insurance		4.5		3.1		0.6	%		0.5	%		45.2	%
Administrative space and depreciation		5.9		5.3		0.9	%		0.9	%		11.3	%
Other general and administrative expenses		9.6		13.9		1.4	%		2.2	%		(30.9	%)
General and administrative expenses	$	55.0	$	55.6		7.9	%		9.1	%		(1.1	%)

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The following items, which are included in the above table, are unusual in nature:

	Three Months Ended
	February 29,		February 28,
($ in millions)	2008		2007		Line item included in above
Stock option modifications	$	—	$	12.1	Share-based compensation
Stock option investigation/ financial statement restatement		—		5.7	Other general and administrative expenses
Subtotal	$	—	$	17.8

For comparison purposes, the following table presents the significant components of general and administrative expenses excluding the unusual items listed in the table above:

					% of Revenues
	Three Months Ended				Three Months Ended						% Change
	February 29,		February 28,		February 29,			February 28,
($ in millions)	2008		2007		2008			2007			2008 vs. 2007
Employee compensation and related expenses	$	22.9	$	16.5		3.3	%		2.7	%		38.8	%
Share-based compensation		12.1		4.7		1.7	%		0.8	%		157.4	%
Legal, audit, and corporate insurance		4.5		3.1		0.6	%		0.5	%		45.2	%
Administrative space and depreciation		5.9		5.3		0.9	%		0.9	%		11.3	%
Other general and administrative expenses		9.6		8.2		1.4	%		1.3	%		17.1	%
General and administrative expenses	$	55.0	$	37.8		7.9	%		6.2	%		45.5	%

Excluding the unusual items above, general and administrative expenses as a percentage of tuition and other revenue, net increased from 6.2% in the second quarter of fiscal 2007 to 7.9% in the second quarter of fiscal 2008. This increase as a percentage of tuition and other revenue, net is primarily due to (a) salary and related payroll costs due to additional employees in our information technology, corporate development, legal, and finance functions to support our strategic growth initiatives and corporate governance, (b) higher share-based compensation expense principally as a result of the 2007 stock option and RSU grant to officers, as well as the acceleration of vesting for certain option grants, (c) increased legal costs in connection with defending ourselves in the legal matters described elsewhere in this report, and (d) increased other general & administrative expenses to support our strategic growth initiative .

Estimated Securities Litigation Loss

In connection with the securities class action verdict, we recorded our estimate of anticipated damages in the second quarter of fiscal 2008. The actual amount of damages will not be known until all post trial motions and appeals are heard and adjudicated, which is likely to take years. We have estimated for financial reporting purposes, using statistically valid models and a 60% confidence interval, that the damages could range from $120.5 million to $216.4 million, which includes (a) our estimate of damages based on the verdict, (b) our estimate of potential amounts we expect to reimburse our insurance carriers, (c) estimated future defense costs through the next phase of the litigation, and (d) legal and other professional fees incurred during the second quarter of 2008. In the second quarter of 2008, we recorded the mid-point of this range, or $168.4 million. We elected to record the mid-point of this range because under statistically valid modeling techniques the mid-point of the range is in fact a more likely estimate than other points in the range, and the point at which there is an equal probability that the ultimate loss could be toward the lower end or the higher end of the range.

Interest Income and Other, Net

Interest income and other, net increased by $1.1 million in the second quarter of fiscal 2008 versus fiscal 2007. This increase was primarily attributable to higher average balances in cash and cash equivalents, restricted cash and marketable securities. This increase was offset by a slight decrease in tax-exempt interest yields from the second quarter of fiscal 2007 versus fiscal 2008.

Provision for (Benefit from) Income Taxes

Our 2008 effective income tax rate increased to 39.3% for the six months ended February 29, 2008 from 38.9% for the first quarter of fiscal 2008. Our 2008 effective rate increased from 38.9% for the three months ended February 28, 2007 primarily due to a shift from tax-exempt investments to taxable investments during the second quarter of fiscal 2008. Because we reported a loss in the second quarter of fiscal 2008, the increase in the 2008 effective income tax rate resulted in our recognizing a tax benefit at a lower rate of 37.3% for the second quarter of fiscal 2008.

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Six Months Ended February 29, 2008 Compared to the Six Months Ended February 28, 2007

All references to fiscal 2008 and fiscal 2007 in this section refer to the six months ended February 29, 2008 and February 28, 2007, respectively. The following table sets forth an analysis of our Condensed Consolidated Statements of Operations for the periods indicated:

Analysis of Condensed Consolidated Statements of Operations

					% of Revenues
	Six Months Ended				Six Months Ended						% Change
	February 29,		February 28,		February 29,			February 28,
($ in millions)	2008		2007		2008			2007			2008 vs 2007
Revenues:
Tuition and other, net	$	1,474.3	$	1,276.5		100.0	%		100.0	%		15.5	%
Costs and expenses:
Instructional costs and services		661.0		589.2		44.8	%		46.2	%		12.2	%
Selling and promotional		378.6		322.4		25.7	%		25.3	%		17.4	%
General and administrative		106.3		93.1		7.2	%		7.2	%		14.2	%
Estimated securities litigation loss (Note 11)		168.4		—		11.4	%		0.0	%		100.0	%
		1,314.3		1,004.7		89.1	%		78.7	%		30.8	%
Income from operations		160.0		271.8		10.9	%		21.3	%		-41.1	%
Interest income and other, net		17.7		13.4		1.2	%		1.0	%		32.1	%
Income before income taxes		177.7		285.2		12.1	%		22.3	%		-37.7	%
Provision for income taxes		69.9		111.0		4.8	%		8.7	%		-37.0	%
Net income	$	107.8	$	174.2		7.3	%		13.6	%		-38.1	%

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

Tuition and Other Revenue, Net

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

					% of Revenues
	Six Months Ended				Six Months Ended
	February 29,		February 28,		February 29,			February 28,
($ in millions)	2008		2007		2008			2007
UPX	$	1,401.4	$	1,172.6		95.1	%		91.9	%
Other Schools		68.1		103.8		4.6	%		8.1	%
Corporate		4.8		0.1		0.3	%		0.0	%
Tuition and other revenue, net	$	1,474.3	$	1,276.5		100.0	%		100.0	%

Our tuition and other revenue, net increased by 15.5% in the first six months of fiscal 2008 versus fiscal 2007 primarily due to our (a) 11.0% increase in our average Degreed Enrollment and (b) selective tuition price increases, depending on geographic area and program, which were partially offset by (a) continued shift in our student body mix to a higher percentage of students attending associate’s degree programs with lower price points and (b) an increase in the amount of promotion, scholarship and grant programs. The primary price increase by program type was in our associate’s degree program. In May 2007, we increased our associate’s degree tuition price by approximately 9%. We expect this tuition increase to continue to positively impact our associate’s degree tuition rate earned per Degreed Enrollment prospectively. Notwithstanding this tuition price increase, our associate’s degree program has a lower tuition price than our other programs. Accordingly, we continued to experience a shift in our student body mix during the first six months of fiscal 2008 as our associate’s average Degreed Enrollment increased 37.5% from the first six months of fiscal 2007 and represented 36.7% of our Degreed Enrollment at February 29, 2008, compared to 29.6% at February 28, 2007.

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Tuition and other revenue, net at Other Schools decreased both in dollars and as a percentage of consolidated tuition and other revenue, net in the first six months of fiscal 2008 versus fiscal 2007, as WIU Axia College students graduate or drop from the program. Axia College began offering their associate’s degree programs in September 2004 at WIU; however, in March 2006 (our third quarter of fiscal 2006), we began offering all new enrollments in Axia College programs at UPX instead of WIU.

Revenue increased in our Corporate segment as a result of our acquisition of Aptimus. Aptimus is an integral part of our corporate marketing function and therefore is included in our Corporate segment. Through the Aptimus network, our corporate marketing function generates revenue from Internet-based advertising activities performed for third-party customers.

Effective March 1, 2008, UPX changed its refund policy whereby students who attend 60% or less of a course are eligible for a refund for the portion of the course they did not attend. Under our prior refund policy, if a student attended one class of a course, UPX earned 25% of the tuition for the course, and if they attended two classes of a course, UPX earned 100% of the tuition for the course. This new refund policy applies to students in most states, as some states have their own mandated policies. UPX elected to change its refund policy because we believe it is a more reasonable policy from our students’ perspective.

Instructional Costs and Services

Instructional costs and services increased by 12.2% in the first six months of fiscal 2008 versus fiscal 2007. The following table sets forth the changes in the significant components of instructional costs and services:

					% of Revenues
	Six Months Ended				Six Months Ended						% Change
	February 29,		February 28,		February 29,			February 28,
($ in millions)	2008		2007		2008			2007			2008 vs. 2007
Employee compensation and related expenses	$	233.5	$	209.1		15.8	%		16.4	%		11.7	%
Faculty compensation		125.8		111.0		8.5	%		8.7	%		13.3	%
Classroom lease expenses and depreciation		104.8		101.9		7.1	%		8.0	%		2.8	%
Other instructional costs and services		87.3		80.8		6.0	%		6.3	%		8.0	%
Bad debt expense		59.0		49.3		4.0	%		3.9	%		19.7	%
Financial aid processing costs		38.8		29.2		2.6	%		2.3	%		32.9	%
Share-based compensation		11.8		7.9		0.8	%		0.6	%		49.4	%
Instructional costs and services	$	661.0	$	589.2		44.8	%		46.2	%		12.2	%

Instructional costs and services as a percentage of tuition and other revenue, net decreased in the first six months of fiscal 2008 versus fiscal 2007 primarily due to decreases as a percentage of tuition and other revenue, net in employee compensation and related expenses, classroom lease expenses and depreciation, and other instructional and costs and services, which were partially offset by increases as a percentage of tuition and other revenue, net in bad debt expense and financial aid processing costs.

Employee compensation and related expenses as a percentage of tuition and other revenue, net decreased in the first six months of fiscal 2008 versus fiscal 2007 primarily due to the improved efficiency with which we provided our student support services (finance and academic counseling, etc.) in the current year as compared with prior years.

Classroom lease expense and depreciation decreased 90 basis points as a percentage of tuition and other revenue, net in the first six months of fiscal 2008 versus fiscal 2007 primarily due to our student body choosing to enroll in our online modality. Other instructional costs and services decreased 30 basis points as a percentage of tuition and other revenue, net primarily due to lower negotiated contract costs from third-party vendors, which was partially offset by our continued investment in Insight Schools.

Bad debt expense as a percentage of tuition and other revenue, net increased in the first six months of fiscal 2008 versus fiscal 2007 primarily due to the continuing trend of a higher percentage of students enrolled in our associate’s degree programs, which is offset by the reclassification of certain components of bad debt expense that should have been classified as discounts or refunds (reduction of tuition and other revenue, net) as opposed to bad debt expense. During the first quarter of fiscal 2008, we performed a review of the components of bad debt expense and identified certain items that should have been classified as discounts or refunds (reduction of tuition and other revenue, net) as opposed to bad debt expense. No reclassification was made for prior periods as the amounts were not material to prior period financial statements and had no effect on reported net income. For the first, second, third and fourth quarters of fiscal 2007, our reported bad debt expense as a percentage of tuition and other revenue, net would have been lower by 59, 82, 65 and 87 basis points, respectively, as a result of this reclassification. With respect to the enrollment growth in our associate’s degree program,

Page 32 of 42

when we are required to collect outstanding balances directly from these students, we generally have higher write-offs, based on the greater risk of default presented by the associate’s degree program’s demographics, versus students enrolled in other degree programs.

Financial aid processing costs as a percentage of tuition and other revenue, net increased in the first six months of fiscal 2008 versus fiscal 2007 primarily due to increased processing volume.

Selling and Promotional Expenses

Selling and promotional expenses increased by 17.4% in the first six months of fiscal 2008 versus fiscal 2007. The following table sets forth the changes in the significant components of selling and promotional expenses:

					% of Revenues
	Six Months Ended				Six Months Ended						% Change
	February 29,		February 28,		February 29,			February 28,
($ in millions)	2008		2007		2008			2007			2008 vs. 2007
Enrollment counselors’ compensation and related expenses	$	185.1	$	154.9		12.6	%		12.1	%		19.5	%
Advertising		152.2		137.5		10.3	%		10.8	%		10.7	%
Other selling and promotional expenses		39.3		27.9		2.7	%		2.2	%		40.9	%
Share-based compensation		2.0		2.1		0.1	%		0.2	%		(4.8	%)
Selling and promotional expenses	$	378.6	$	322.4		25.7	%		25.3	%		17.4	%

Selling and promotional expenses as a percentage of tuition and other revenue, net increased in the first six months of fiscal 2008 versus fiscal 2007 primarily due to an increase as a percentage of tuition and other revenue, net in enrollment counselors’ compensation and related expenses and other selling and promotional expenses, which were partially offset by a decrease as a percentage of tuition and other revenue, net in advertising costs.

Enrollment counselors’ compensation and related expenses increased primarily due to additional enrollment counselors to support our strategic growth initiatives.

Other selling and promotional expenses have increased as a percentage of tuition and other revenue, net primarily due to the acquisition of Aptimus that closed on October 29, 2007. We believe this acquisition will help us, over time, increase the effectiveness and efficiency of our online advertising directed at increasing awareness of and access to our quality education services.

Our advertising costs as a percentage of tuition and other revenue, net decreased primarily due to more efficient and productive spending to acquire higher quality Internet-based leads. As previously disclosed, we launched our national branding campaign for UPX in January 2007 and continue to invest to support the UPX brand. Therefore, the first six months of fiscal 2008 had an additional quarter of branding costs versus the six month period of the prior fiscal year.

General and Administrative Expenses

General and administrative expenses increased by 14.2% in the first six months of fiscal 2008 versus fiscal 2007. The following table sets forth the changes in the significant components of general and administrative expenses:

					% of Revenues
	Six Months Ended				Six Months Ended						% Change
	February 29,		February 28,		February 29,			February 28,
($ in millions)	2008		2007		2008			2007			2008 vs. 2007
Employee compensation and related expenses	$	42.8	$	31.8		2.9	%		2.5	%		34.6	%
Share-based compensation		21.2		22.0		1.4	%		1.7	%		(3.6	%)
Legal, audit, and corporate insurance		10.2		6.0		0.7	%		0.5	%		70.0	%
Administrative space and depreciation		11.8		10.4		0.8	%		0.8	%		13.5	%
Other general and administrative expenses		20.3		22.9		1.4	%		1.7	%		(11.4	%)
General and administrative expenses	$	106.3	$	93.1		7.2	%		7.2	%		14.2	%

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The following items, which are included in the above table, are unusual in nature:

	Six Months Ended
	February 29,		February 28,
($ in millions)	2008		2007		Line item included in above
Stock option modifications	$	—	$	12.1	Share-based compensation
Stock option investigation/ financial statement restatement		—		7.7	Other general and administrative expenses
Subtotal	$	—	$	19.8

For comparison purposes, the following table presents the significant components of general and administrative expenses excluding the unusual items listed in the table above:

					% of Revenues
	Six Months Ended				Six Months Ended						% Change
	February 29,		February 28,		February 29,			February 28,
($ in millions)	2008		2007		2008			2007			2008 vs. 2007
Employee compensation and related expenses	$	42.8	$	31.8		2.9	%		2.5	%		34.6	%
Share-based compensation		21.2		9.9		1.4	%		0.8	%		114.1	%
Legal, audit, and corporate insurance		10.2		6.0		0.7	%		0.5	%		70.0	%
Administrative space and depreciation		11.8		10.4		0.8	%		0.8	%		13.5	%
Other general and administrative expenses		20.3		15.2		1.4	%		1.1	%		33.6	%
General and administrative expenses	$	106.3	$	73.3		7.2	%		5.7	%		45.0	%

Excluding the unusual items above, general and administrative expenses as a percentage of tuition and other revenue, net increased from 5.7% in the first six months of fiscal 2007 to 7.2% in the first six months of fiscal 2008. This increase as a percentage of tuition and other revenue, net is primarily due to (a) salary and related payroll costs due to additional employees in our information technology, corporate development, legal, and finance functions to support our strategic growth initiatives and corporate governance, (b) higher share-based compensation expense principally as a result of the 2007 stock option and RSU grant to officers, as well as the acceleration of vesting for certain option grants, (c) increased legal costs in connection with defending ourselves in the legal matters described elsewhere in this report, and (d) increased other general & administrative expenses to support our strategic growth initiatives.

Estimated Securities Litigation Loss

In connection with the securities class action verdict, we recorded our estimate of anticipated damages in the second quarter of fiscal 2008. The actual amount of damages will not be known until all post trial motions and appeals are heard and adjudicated, which is likely to take years. We have estimated for financial reporting purposes, using statistically valid models and a 60% confidence interval, that the damages could range from $120.5 million to $216.4 million, which includes (a) our estimate of damages based on the verdict, (b) our estimate of potential amounts we expect to reimburse our insurance carriers, (c) estimated future defense costs through the next phase of the litigation, and (d) legal and other professional fees incurred during the second quarter of 2008. In the second quarter of 2008, we recorded the mid-point of this range, or $168.4 million. We elected to record the mid-point of this range because under statistically valid modeling techniques the mid-point of the range is in fact a more likely estimate than other points in the range, and the point at which there is an equal probability that the ultimate loss could be toward the lower end or the higher end of the range.

Interest Income and Other, Net

Interest income and other, net increased by $4.3 million in the first six months of fiscal 2008 versus fiscal 2007. This increase was primarily attributable to higher average balances in cash and cash equivalents, restricted cash and marketable securities.

Provision for Income Taxes

Our 2008 effective income tax rate increased to 39.3% in the six months ended February 29, 2008, from 38.9% in the six months ended February 28, 2007, primarily due to a change from tax-exempt investments to taxable investments.

Liquidity, Capital Resources, and Financial Position

Based on past performance and current expectations, we believe that our cash and cash equivalents, short-term marketable securities, cash generated from operations plus available borrowings under our Bank Facility and our capacity for additional borrowings will be

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adequate to satisfy our working capital needs, capital expenditures, marketing and advertising program expenditures, any additional requirements for a supersedeas bond to stay enforcement of the judgment in our securities class action litigation pending appeal or the payment of damages awarded in that action, share repurchases, interest and principal payments under our Bank Facility, commitments, acquisitions, discretionary investments under our investment policy 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, including over time our commitment to Apollo Global, possible repurchase of shares, and start-up costs associated with new campuses.

Cash and Cash Equivalents and Marketable Securities

Cash and cash equivalents and marketable securities increased $144.2 million, or 36.7%, to $536.9 million as of February 29, 2008, from $392.7 million as of August 31, 2007. Cash and cash equivalents and marketable securities represented 28.0% and 27.1% of our total assets as of February 29, 2008, and August 31, 2007, respectively. The increase was primarily due to the $309.5 million of cash generated from operations and $79.0 million of cash generated primarily from the exercise of stock options, partially offset by an increase of $158.0 million in restricted cash and the cash collateralization related to posting the supersedeas bond in connection with our securities class action litigation verdict, $56.0 million used for capital expenditures (including $7.8 million for our new corporate headquarters), and $47.1 million used for the purchase of Aptimus.

We have a long history of investing excess cash under a conservative corporate policy that only allows investments in highly rated securities, with preservation of capital and liquidity as the primary objectives. Our investment policy also limits the amount of our credit exposure to any one issue or issuer. We have historically invested a portion of our unrestricted investment portfolio in high quality (A rated and above) tax-exempt municipal securities, preferred stock and other tax-exempt auction-rate securities (“ARS”). ARS trade on a shorter term than the underlying debt based on an auction bid that resets the interest rate of the security. The auction or reset dates occur at intervals established at the time of issuance that are generally between 7 and 35 days.

ARS “fail” when there are not enough buyers to absorb the amount of securities available for sale for that particular auction period. Historically, ARS auctions have rarely failed since the investment banks and broker dealers have been willing to purchase the security when investor demand was weak. However, beginning in mid-February 2008, due to uncertainty in the global credit and capital markets and other factors, investment banks and broker dealers have been less willing to support ARS and many ARS auctions have failed.

As of February 29, 2008, we had $97.2 million of principal invested in ARS that had experienced failed auctions. These ARS consist solely of investment grade municipal debt ($87.2 million) and student loan securities ($10.0 million) and do not include mortgage-backed securities. As of February 29, 2008, we determined that there had not been a decline in market value of the failed ARS as the par value of these securities approximated the estimated fair market value due to the quality of the underlying collateral, the credit enhancement from insurers and the fact that the issuers continue to pay interest in a timely manner and there have been no defaults in the underlying debt.

From March 1, 2008 through March 24, 2008, approximately $55.0 million of the $97.2 million of previously failed ARS as of February 29, 2008 had auction reset dates. Of this amount, we were able to sell $11.7 million for cash at par. Accordingly, as of February 29, 2008, we have classified $85.5 million in failed ARS as non-current since they were unable to be liquidated subsequent to our quarter-end.

For the immediate future, we will continue to monitor our investment portfolio, and given the uncertainties in the global credit and capital markets we will limit our investments in ARS, which will likely reduce investment income. We will continue to evaluate any changes in the market value of the failed ARS that have not been liquidated subsequent to quarter-end and in the future, depending upon existing market conditions, we may be required to record an other-than-temporary decline in market value. We believe we have the ability and we intend to hold the failed ARS as long-term investments until the market stabilizes.

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Cash Flows

Operating Activities

Operating activities provided $309.5 million in cash for the first six months of fiscal 2008 compared to providing $193.7 million for the first six months of fiscal 2007. Included below is a summary of operating cash flows:

	Six Months Ended
	February 29,			February 28,
($ in millions)	2008			2007
Net income	$	107.8		$	174.2
Non-cash items		209.5			92.4
Changes in certain operating assets and liabilities		(7.8	)		(72.9	)
Net cash from operating activities	$	309.5		$	193.7

For the first six months of fiscal 2008, our non-cash items primarily consist of a $168.4 million accrual for our estimate of anticipated damages related to the securities litigation matter, a $59.0 million provision for uncollectible accounts receivable, $37.5 million for depreciation and amortization, and $35.0 million for share-based compensation; partially offset by a $72.0 million increase in deferred taxes, primarily a result of the timing of deductibility related to the securities litigation matter, and $17.7 million of excess tax benefits from share-based compensation. For the first six months of fiscal 2007, our non-cash items primarily consist of a $49.3 million provision for uncollectible accounts receivable, $35.7 million for depreciation and amortization, and $31.9 million for share-based compensation; partially offset by a $22.6 million increase in deferred taxes.

For the first six months of fiscal 2008, changes in certain operating assets and liabilities primarily consist of $21.1 million for accounts payable and accrued liabilities, primarily due to timing of payments for Internet-based advertising, $26.3 million for accounts receivable, as discussed below, and $20.8 million for income taxes payable, primarily due to higher quarterly estimated tax payments; partially offset by a $60.5 million increase in student deposits, primarily due to increased student enrollment receiving financial aid. For the first six months of fiscal 2007, changes in certain operating assets and liabilities primarily consist of $84.5 million for accounts receivable, and $13.9 million for income taxes payable; partially offset by a $24.8 million increase in student deposits.

Accounts receivable is a significant component of our working capital. We monitor our accounts receivable through a variety of metrics, including days sales outstanding (“DSO”). We calculate our DSO by determining average daily student revenue based on a rolling twelve month analysis and divide it into the gross student accounts receivable balance as of the end of the period. As of February 29, 2008, our DSO was 30 days as compared to 37 days as of February 28, 2007, and 38 days as of August 31, 2007. The decrease in DSO is primarily due to improvements in our processing time for the receipt of student financial aid, the write-off of approximately $38 million in previously reserved uncollectible accounts receivable during the quarter, and the seasonality we experienced in our second quarter. As a result of this seasonality, our DSO may increase in the third quarter.

Investing Activities

Investing activities used $332.6 million in cash during the first six months of fiscal 2008 compared to using $84.5 million in the first six months of fiscal 2007. The fiscal 2008 amount primarily consists of $95.0 million used to collateralize the supersedeas bond in connection with our securities class action litigation verdict, $71.6 million used for the net purchase of marketable securities, $47.1 million used for the purchase of Aptimus, as well as $56.0 million used for capital expenditures, of which $7.8 million related to the build-out of our new corporate headquarters building, and an increase in restricted cash of $63.0 million. The fiscal 2007 amount primarily includes $50.2 million for capital expenditures, of which $23.4 million is related to the build-out of our new corporate headquarters building. Also included in the fiscal 2007 investing cash flows was $15.1 million used for the purchase of Insight Schools and an increase in restricted cash of $45.5 million, partially offset by net maturities of marketable securities of $26.3 million.

Sale-Leaseback Option. On June 20, 2006, we entered into an option agreement (which was amended on March 7, 2007) with Macquarie Riverpoint AZ, LLC (“Macquarie”). The option agreement grants Macquarie the option to purchase all membership interests in our consolidated subsidiaries formed as limited liability entities that own our new headquarters land and buildings for approximately $170 million and simultaneously have the owning entities enter into a 12-year lease of these facilities with us. Macquarie made a deposit of $9.0 million in connection with this option. On March 6, 2008, we provided the final completion notices to Macquarie. In March 2008, we agreed to extend the option until May 1, 2008 for additional consideration of approximately $0.3 million. If Macquarie does not exercise its option, we plan to market the land and buildings’ membership interests to other parties, but we cannot predict the timing or the amount of proceeds of any such sale. If Macquarie does exercise its option, we expect to generate a gain on the sale of approximately $20-23 million, which would be recognized over the 12-year term of the lease agreement.

Financing Activities

Financing activities provided $96.7 million of cash during the first six months of fiscal 2008, compared to providing $5.5 million in the first six months of fiscal 2007. The first six months of fiscal 2008 amount includes $79.0 million received primarily for stock issued to employees related to the exercise of stock options and $17.7 million related to excess tax benefits from share-based compensation. The

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first six months of fiscal 2007 amount includes $4.5 million received primarily for stock issued to employees and $1.1 million related to excess tax benefits from share-based compensation.

Contractual Obligations and Other Commercial Commitments

In addition to our previously disclosed contractual obligations and other commercial commitments at the end of fiscal 2007, unrecognized tax benefits were $53.4 million as of February 29, 2008. Based on the uncertainties associated with the settlement of these items, we are unable to make estimates of potential cash settlements, if any, with taxing authorities.

There have been no other material changes in our contractual obligations and other commercial commitments other than in the ordinary course of business since the end of fiscal year 2007, except as discussed in Item 2 of this report related to the securities litigation matter. Information regarding our contractual obligations and commercial commitments is provided in our 2007 Annual Report on Form 10-K.

Federal Family Education Loan Program and Private Student Loans

Recently there have been reports of various educational entities experiencing interruption of Title IV student loan funding, which includes Federal Family Education Loan Program (“FFELP”) loans guaranteed by the government. We have not experienced any such interruptions. In addition, we added a fifth lender as of February 29, 2008 to our preferred lender list to provide students seeking loans with an even broader list of lender choices. This additional lender will offer FFELP loans directly and private loans through a third-party relationship.

Tuition payments funded from third-party private loans represent approximately 3-4 percent of UPX and WIU’s combined net revenues. Third-party private loans are generally utilized by students in the UPX bachelor’s degree programs. The fastest growing sector of our student body, UPX associate’s degree students, do not require private loans to cover the cost of their program as the tuition levels are below Title IV loan limits.

Although we have seen some tightening of underwriting for students seeking private loans (measured as a percentage of applications approved relative to those submitted to a lender), students generally have had more than one choice of lenders and therefore, this tightening, to date, has not had a significant adverse impact on students in our programs. As previously disclosed, we do not have recourse exposure on private student loans, with one exception of a minor private loan relationship. The total exposure on this loan program is less than $1 million.

Management does not expect a material adverse effect on our business, financial position, results of operations or cash flows to result from student access to private loans.

Recent Accounting Pronouncements

Please refer to our 2007 Annual Report on Form 10-K.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB No. 109,” (“FIN 48”). This interpretation, among other things, creates a two-step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements. We adopted FIN 48 on September 1, 2007, and did not recognize an adjustment to our liability for unrecognized income tax benefits as of August 31, 2007.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS 141(R)”), “Business Combinations,” which is a revision of SFAS 141, “Business Combinations.” The primary requirements of SFAS 141(R) are as follows: (a) upon initially obtaining control, the acquiring entity in a business combination must recognize 100% of the fair values of the acquired assets, including goodwill, and assumed liabilities, with only limited exceptions even if the acquirer has not acquired 100% of its target. As a consequence, the current step acquisition model will be eliminated, (b) Contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration. The concept of recognizing contingent consideration at a later date when the amount of that consideration is determinable beyond a reasonable doubt, will no longer be applicable, and (c) All transaction costs will be expensed as incurred. SFAS 141(R) is effective for us on September 1, 2009. We are currently evaluating the impact that the adoption of SFAS 141(R) will have on our financial condition, results of operations, and disclosures.

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In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 is effective for us on September 1, 2009. We are currently evaluating the impact that the adoption of SFAS 160 will have on our financial condition, results of operations, and disclosures.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — An Amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 expands the disclosure requirements for derivative instruments and hedging activities. This Statement specifically requires entities to provide enhanced disclosures addressing the following: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 is effective for us on December 1, 2008. We are currently evaluating the impact that the adoption of SFAS 161 will have on our financial condition, results of operations, and disclosures.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We have a long history of investing excess cash under a conservative corporate policy that only allows investments in highly rated securities, with preservation of capital and liquidity as the primary objectives. Our investment policy also limits the amount of our credit exposure to any one issue or issuer. We have historically invested a portion of our unrestricted investment portfolio in high quality (A rated and above) tax-exempt municipal securities, preferred stock and other tax-exempt auction-rate securities (“ARS”). ARS trade on a shorter term than the underlying debt based on an auction bid that resets the interest rate of the security. The auction or reset dates occur at intervals established at the time of issuance that are generally between 7 and 35 days.

ARS “fail” when there are not enough buyers to absorb the amount of securities available for sale for that particular auction period. Historically, ARS auctions have rarely failed since the investment banks and broker dealers have been willing to purchase the security when investor demand was weak. However, beginning in mid-February 2008, due to uncertainty in the global credit and capital markets and other factors, investment banks and broker dealers have been less willing to support ARS and many ARS auctions have failed.

As of February 29, 2008, we had $97.2 million of principal invested in ARS that had experienced failed auctions. These ARS consist solely of investment grade municipal debt ($87.2 million) and student loan securities ($10.0 million) and do not include mortgage-backed securities. As of February 29, 2008, we determined that there had not been a decline in market value of the failed ARS as the par value of these securities approximated the estimated fair market value due to the quality of the underlying collateral, the credit enhancement from insurers and the fact that the issuers continue to pay interest in a timely manner and there have been no defaults in the underlying debt.

From March 1, 2008 through March 24, 2008, approximately $55.0 million of the $97.2 million of previously failed ARS as of February 29, 2008 had auction reset dates. Of this amount, we were able to sell $11.7 million for cash at par. Accordingly, as of February 29, 2008, we have classified $85.5 million in failed ARS as non-current since they were unable to be liquidated subsequent to our quarter-end.

For the immediate future, we will continue to monitor our investment portfolio, and given the uncertainties in the global credit and capital markets we will limit our investments in ARS, which will likely reduce investment income. We will continue to evaluate any changes in the market value of the failed ARS that have not been liquidated subsequent to quarter-end and in the future, depending upon existing market conditions, we may be required to record an other-than-temporary decline in market value. We believe we have the ability and we intend to hold the failed ARS as long-term investments until the market stabilizes.

We have no significant short-term or long-term debt; therefore, we do not currently face any other significant interest rate risk.

There have been no material changes associated with the impact of inflation and concentration of credit risk from that previously disclosed in our 2007 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We 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 our President (Principal Executive Officer) and CFO (Principal Financial Officer), as appropriate, to allow timely decisions regarding required disclosure.

Management, under the supervision and with the participation of our President (Principal Executive Officer) and CFO (Principal Financial Officer), evaluated the effectiveness of our 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, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting during the quarter ended February 29, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Please refer to Note 11 in Part I, Item 1 for legal proceedings.

Item 1A. Risk Factors

There have been no material changes in the risk factors previously disclosed in our 2007 Annual Report on Form 10-K.

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

We did not purchase any Apollo Group Class A common stock or have any sales of unregistered equity securities during the three months ended February 29, 2008.

Item 3. Defaults Upon Senior Securities

Not Applicable.

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

None.

Item 5. Other Information

None.

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Item 6. Exhibits

APOLLO GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX

Exhibit Number		Description of Exhibit
	3.1	Amended and Restated Articles of Incorporation of Apollo Group, Inc., incorporated by reference to Annex B of Apollo Group, Inc.’s Proxy Statement filed with the Securities and Exchange Commission on August 1, 2000.
	3.1a	Articles of Amendment to the Articles of Incorporation of Apollo Group, Inc., incorporated by reference to Exhibit 99.1 of Apollo Group, Inc.’s Form 8-K filed with the Securities and Exchange Commission on June 27, 2007.
	3.2	Amended and Restated Bylaws of Apollo Group, Inc., incorporated by reference to Exhibit 3.2 of Apollo Group, Inc.’s Form 10-Q filed with the Securities and Exchange Commission on April 10, 2006.
	10.1	Rule 62(b) Bond and Supersedeas Bond, dated February 15, 2008.
	10.2	Registered Pledge and Master Security Agreement by and between Travelers Casualty and Surety Company of America and Apollo Group, Inc., entered into by Apollo Group, Inc. on February 14, 2008.
	10.3	General Contract of Indemnity by Apollo Group, Inc. for the benefit of Travelers Casualty and Surety Company of America, entered into by Apollo Group, Inc. on February 14, 2008.
	10.4	Control Agreement by and among Apollo Group, Inc., Travelers Casualty and Surety Company of America, and Smith Barney Inc., entered into by Apollo Group, Inc. on February 14, 2008.
	10.5	Apollo Group, Inc. Amended and Restated 2000 Stock Incentive Plan, effective March 25, 2008, incorporated by reference to Apollo Group, Inc.’s Form 8-K filed with the Securities and Exchange Commission on March 27, 2008.
	10.6	Option Agreement by and between Apollo Group, Inc. and Macquarie Riverpoint AZ, LLC, dated June 20, 2006.
	10.7	First Amendment to Option Agreement by and between Apollo Group, Inc. and Macquarie Riverpoint AZ, LLC, dated March 7, 2007.
	10.8	Second Amendment to Option Agreement by and between Apollo Group, Inc. and Macquarie Riverpoint AZ, LLC, dated March 17, 2008.
	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 Section 906 of Sarbanes-Oxley Act of 2002.
	32.2	Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

	APOLLO GROUP, INC. (Registrant)
Date: March 27, 2008
	By:	/s/ Joseph L. D’Amico
		Joseph L. D’Amico
		Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Duly Authorized Signatory)

By:	/s/ Brian L. Swartz
	Brian L. Swartz
	Senior Vice President of Finance and Chief Accounting Officer (Principal Accounting Officer and Duly Authorized Signatory)

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EX-10.1

Exhibit 10.1

Rule 62(b) Bond and Supersedeas Bond	Travelers Casualty and Surety
	Company of America
	One Tower Square, Hartford, CT 06183

     IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

In re Apollo Group Inc. Securities Litigation	Bond No.	105036869
	Index or
	Cause No.	Master File No.
		CV-04-2147- PHX-JAT (LEAD)
		CV 04-2204-PHX-JAT
		(Consolidated)
		CV 04-2334-PHX-JAT
		(Consolidated)

KNOW ALL PEOPLE BY THESE PRESENTS, this bond is being filed on behalf of the Defendants , Apollo Group Inc., Todd S. Nelson and Kenda B. Gonzales (collectively “Defendants”) by Apollo Group, Inc., as Principal, and that Apollo Group, Inc. and Travelers Casualty and Insurance Company of America, a corporation organized under the laws of the State of Connecticut and authorized to do business in the State of Arizona, as Surety, are held and firmly bound unto Policeman’s Annuity and Benefit Fund of Chicago and the class of plaintiffs it represents, as Obligee, in the maximum aggregate penal sum of Ninety Five Million and no/100ths Dollars ($95,000,000.00), lawful money of the United States of America, for which payment well and truly to be made we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by this instrument.

On January 30, 2008, in a consolidated class action pending in the above court, with Policemen’s Annuity and Benefit Fund of Chicago, et al, as lead plaintiff, judgment was rendered against Defendants and duplicates of the judgment were filed in consolidated cases CV 04-2204-PHX-JAT and CV 04-2334-PHX-JAT, and Defendants having filed post-trial motions (Doc. Nos. 523, 524 and 525) with the above court, and having applied for and obtained an Order in the above court staying enforcement of such judgment during the pendency of the post trial motions, and Defendants intending, if the post-trial motions are denied, to file a notice of appeal from such judgment to the United States Court of Appeals for the Ninth Circuit and in connection therewith to seek a continued stay in enforcement of such judgment during the pendency of any appeal,

THEREFORE, the condition of this obligation is that if Defendants shall prosecute their post trial motions to effect and shall satisfy the judgment in full, together with costs, interest and damages for delay if the post trial motions are denied and no appeal taken, or if an appeal is taken shall prosecute their appeal to effect, and if the appeal is dismissed or the judgment is affirmed shall satisfy in full such judgment as modified together with such costs, interest and damages for delay as the Court of Appeals may adjudge and award, subject however to the maximum aggregate penal sum stated herein, this obligation shall be void; otherwise it shall remain in full force and effect. In no event shall the maximum aggregate liability of the Surety under this Bond exceed Ninety Five Million and no/100ths Dollars ($95,000,000.00).

Travelers Casualty and Surety Company of America, as surety, submits itself to the jurisdiction of the District Court and irrevocably appoints the clerk of the District Court as Travelers’ agent upon whom any papers effecting its liability on this obligation may be served.

SIGNED, SEALED AND DATED this 15th day of February, 2008.

	APOLLO GROUP, INC.
By:	/s/ Joseph L. D’Amico
	Principal
	Travelers Casualty and Surety Company of
	America
By:	/s/ David G. Jensen
	David G. Jensen, Attorney-in-Fact

WARNING: THIS POWER OF ATTORNEY IS INVALID WITHOUT THE RED BORDER

	POWER OF ATTORNEY
	Farmington Casualty Company	St. Paul Guardian Insurance Company
	Fidelity and Guaranty Insurance Company	St. Paul Mercury Insurance Company
	Fidelity and Guaranty Insurance Underwriters, Inc.	Travelers Casualty and Surety Company
	Seaboard Surety Company	Travelers Casualty and Surety Company of America
	St. Paul Fire and Marine Insurance Company	United States Fidelity and Guaranty Company
Attorney-In Fact No. 219472		Certificate No. 002138721

KNOW ALL MEN BY THESE PRESENTS: That Seaboard Surety Company is a corporation duly organized under the laws of the State of New York, that St. Paul Fire and Marine Insurance Company, St. Paul Guardian Insurance Company and St. Paul Mercury Insurance Company are corporations duly organized under the laws of the State of Minnesota, that Farmington Casualty Company, Travelers Casualty and Surety Company, and Travelers Casualty and Surety Company of America are corporations duly organized under the laws of the State of Connecticut, that United States Fidelity and Guaranty Company is a corporation duly organized under the laws of the State of Maryland, that Fidelity and Guaranty Insurance Company is a corporation duly organized under the laws of the State of Iowa, and that Fidelity and Guaranty Insurance Underwriters, Inc. is a corporation duly organized under the laws of the State of Wisconsin (herein collectively called the “Companies”), and that the Companies do hereby make, constitute and appoint

David G. Jensen. Terry Crull, Maryann Carafello, Brandy L. Balch, and Ethan Baker

of the City of Phoenix , State of Arizona, their true and lawful Attorney(s)-in-Fact, each in their separate capacity if more than one is named above, to sign, execute, seal and acknowledge any and all bonds, recognizances, conditional undertakings and other writings obligatory in the nature thereof on behalf of the Companies in their business of guaranteeing the fidelity of persons, guaranteeing the performance of contracts and executing or guaranteeing bonds and undertakings required or permitted in any actions or proceedings allowed by law.

IN WITNESS WHEREOF, the Companies have caused this instrument to be signed and their corporate seals to be hereto affixed, this 9th day of January, 2008.

Farmington Casualty Company	St. Paul Guardian Insurance Company
Fidelity and Guaranty Insurance Company	St. Paul Mercury Insurance Company
Fidelity and Guaranty Insurance Underwriters, Inc.	Travelers Casualty and Surety Company
Seaboard Surety Company	Travelers Casualty and Surety Company of America
St. Paul Fire and Marine Insurance Company	United States Fidelity and Guaranty Company

State of Connecticut	By:	/s/ George W. Thompson
City of Hartford ss.		George W. Thompson, Senior Vice President

On this 9th day of January, 2008, before me personally appeared George W. Thompson, who acknowledged himself to be the Senior Vice President of Farmington Casualty Company, Fidelity and Guaranty Insurance Company, Fidelity and Guaranty Insurance Underwriters, Inc., Seaboard Surety Company, St. Paul Fire and Marine Insurance Company, St. Paul Guardian Insurance Company, St. Paul Mercury Insurance Company, Travelers Casualty and Surety Company, Travelers Casualty and Surety Company of America, and United States Fidelity and Guaranty Company, and that he, as such, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing on behalf of the corporations by himself as a duly authorized officer.

In Witness Whereof, I hereunto set my hand and official seal.		/s/ Marie C. Tetreault
My Commission expires the 30th day of June, 2011.		Marie C. Tetreault, Notary Public

58440-5-07 Printed in U.S.A.

WARNING: THIS POWER OF ATTORNEY IS INVALID WITHOUT THE RED BORDER

WARNING: THIS POWER OF ATTORNEY IS INVALID WITHOUT THE RED BORDER

This Power of Attorney is granted under and by the authority of the following resolutions adopted by the Boards of Directors of Farmington Casualty Company, Fidelity and Guaranty Insurance Company, Fidelity and Guaranty Insurance Underwriters, Inc., Seaboard Surety Company, St. Paul Fire and Marine Insurance Company, St. Paul Guardian Insurance Company, St. Paul Mercury Insurance Company, Travelers Casualty and Surety Company, Travelers Casualty and Surety Company of America, and United States Fidelity and Guaranty Company, which resolutions are now in full force and effect, reading as follows:

RESOLVED, that the Chairman, the President, any Vice Chairman, any Executive Vice President, any Senior Vice President, any Vice President, any Second Vice President, the Treasurer, any Assistant Treasurer, the Corporate Secretary or any Assistant Secretary may appoint Attorneys-in-Fact and Agents to act for and on behalf of the Company and may give such appointee such authority as his or her certificate of authority may prescribe to sign with the Company’s name and seal with the Company’s seal bonds, recognizances, contracts of indemnity, and other writings obligatory in the nature of a bond, recognizance, or conditional undertaking, and any of said officers or the Board of Directors at any time may remove any such appointee and revoke the power given him or her; and it is

FURTHER RESOLVED, that the Chairman, the President, any Vice Chairman, any Executive Vice President, any Senior Vice President or any Vice President may delegate all or any part of the foregoing authority to one or more officers or employees of this Company, provided that each such delegation is in writing and a copy thereof is filed in the office of the Secretary; and it is

FURTHER RESOLVED, that any bond, recognizance, contract of indemnity, or writing obligatory in the nature of a bond, recognizance, or conditional undertaking shall be valid and binding upon the Company when (a) signed by the President, any Vice Chairman, any Executive Vice President, any Senior Vice President or any Vice President, any Second Vice President, the Treasurer, any Assistant Treasurer, the Corporate Secretary or any Assistant Secretary and duly attested and sealed with the Company’s seal by a Secretary or Assistant Secretary; or (b) duly executed (under seal, if required) by one or more Attorneys-in-Fact and Agents pursuant to the power prescribed in his or her certificate or their certificates of authority or by one or more Company officers pursuant to a written delegation of authority; and it is

FURTHER RESOLVED, that the signature of each of the following officers; President, any Executive Vice President, any Senior Vice President, any Vice President, any Assistant Vice President, any Secretary, any Assistant Secretary, and the seal of the Company may be affixed by facsimile to any power of attorney or to any certificate relating thereto appointing Resident Vice Presidents, Resident Assistant Secretaries or Attorneys-in-Fact for purposes only of executing and attesting bonds and undertakings and other writings obligatory in the nature thereof, and any such power of attorney or certificate bearing such facsimile signature or facsimile seal shall be valid and binding upon the Company and any such power so executed and certified by such facsimile signature and facsimile seal shall be valid and binding on the Company in the future with respect to any bond or understanding to which it is attached.

I, Kori M. Johanson, the undersigned. Assistant Secretary, of Farmington Casualty Company, Fidelity and Guaranty Insurance Company, Fidelity and Guaranty Insurance Underwriters, Inc., Seaboard Surety Company, St. Paul Fire and Marine Insurance Company, St. Paul Guardian Insurance Company, St. Paul Mercury Insurance Company, Travelers Casualty and Surety Company, Travelers Casualty and Surety Company of America, and United States Fidelity and Guaranty Company do hereby certify that the above and foregoing is a true and correct copy of the Power of Attorney executed by said Companies, which is in full force and effect and has not been revoked.

IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed the seals of said Companies this 15^th day of February, 2008

/s/ Kori M. Johanson  

Kori M. Johanson, Assistant Secretary  

To verify the authenticity of this Power of Attorney, call 1-800-421-3880 or contact us at www.travelersbond.com. Please refer to the Attorney-In-Fact number, the above-named individuals and the details of the bond to which the power is attached.

WARNING: THIS POWER OF ATTORNEY IS INVALID WITHOUT THE RED BORDER

EX-10.2

Exhibit 10.2

COLLATERALIZED BOND SURETY PROGRAM
REGISTERED PLEDGE AND MASTER SECURITY AGREEMENT

     THIS AGREEMENT (“Master Agreement”), made and entered into by and between Travelers Casualty and Surety Company of America acting on its own behalf and as Agent on behalf of its parents, subsidiaries and affiliates (the “Secured Party”) and Pledgor, as identified below, on its own behalf and as Agent on behalf of any affiliate or other entity which is a party to the Indemnity Agreements defined below (“Pledgor”). This Master Agreement shall be effective as of the date executed by the Pledgor as evidenced by the signature below, subject to the acceptance by Secured Party.

WITNESSETH:

     WHEREAS, Pledgor desires Secured Party to issue an instrument or instruments of suretyship, undertakings or guarantees (“Bonds”);

     WHEREAS, Secured Party desires to be adequately secured with respect to Pledgor’s obligations to Secured Party;

     WHEREAS, to induce Secured Party to issue such Bonds, Pledgor has agreed, at Secured Party’s request, to make and enter into this Master Agreement;

     WHEREAS, Pledgor has executed or will execute General Agreements of Indemnity and for Security; General Contracts of Indemnity; or Applications for Bonds (“Indemnity Agreements”);

     WHEREAS, Pledgor has agreed to indemnify and hold harmless Secured Party from any loss, cost or expense as a result of furnishing Bonds;

     NOW, THEREFORE, in consideration for inducing Secured Party to issue such Bonds to and for the benefit of Pledgor, the receipt and sufficiency of which are hereby acknowledged, Pledgor and Secured Party hereby agree as follows:

     1. Indemnity Agreements. Any and all Indemnity Agreements executed by Pledgor and its affiliates or any other entity which is party to an Indemnity Agreement executed by Pledgor are hereby incorporated into this Master Agreement by reference.

     2. Pledge of Collateral. Pledgor does hereby pledge, hypothecate, assign, transfer, set over, deliver and grant to Secured Party a security interest, at any time or from time to time, in all of the Pledgor’s right, title and interest in the shares of the Smith Barney Money Funds, Inc. Cash Portfolio (such portfolio being referred to herein as the “Fund”) (which such right, title and interest is simultaneously herewith being delivered to Secured Party via a registered pledge, which is to be so noted on the books of the Fund by PFPC Global Fund Services (the Fund’s transfer agent) as evidenced by the shares of the Fund referenced on each Pledge Schedule executed, from time to time pursuant to this Master Agreement (each Pledge Schedule shall be made a part hereof, shall incorporate therein all of the terms, and conditions of this Master Agreement and shall contain such additional terms and conditions as Pledgor and Secured Party shall agree upon) together with any and all other securities, cash or other property at any time and from time to time receivable or otherwise distributed in respect of or in exchange for or redemption of or liquidation of any or all of Pledgor’s interest in such Fund, and together with the proceeds thereof and such other property, rights and assets as may be pledged from time to time hereunder, (hereinafter said property being collectively referred to as the “Collateral”), all as security for the payment and performance when due of any and all duties, debts, liabilities and obligations of Pledgor

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(either directly, as maker, or indirectly, as guarantor, surety, endorser or otherwise) to Secured Party, whether now or hereafter existing, howsoever arising or incurred or evidenced including specifically, but without limitation, the “Obligations” defined in the Indemnity Agreements and Bonds (hereinafter collectively called the “Obligations”) and the obligations and liabilities created herein, including the reimbursement of expenses as described in Section 13 hereof.

     3. Holding of Collateral and Rights. Pledgor acknowledges and agrees that Secured Party shall hold the Collateral, together with all right, title, interest, powers, privileges and preferences pertaining or incidental thereto forever, subject, however, to return of the Collateral (or such portion thereof as may be existing from time to time hereafter after giving effect to the terms hereof) by Secured Party to Pledgor upon (a) payment in full of all outstanding Obligations and (b) termination of all Obligations of Pledgor (past, present or future) evidenced by releases of all liabilities under or pursuant to the Bonds satisfactory to Secured Party.

     4. Additions to Collateral. Pledgor further acknowledges and agrees that, at any time or from time to time hereafter, should the market value or marketability of said Collateral, as determined by Secured Party, be reduced or impaired by an aggregate amount deemed material by Secured Party, or should the value of the Collateral be reduced by any redemption or series of redemptions to pay outstanding Obligations or to reimburse the Secured Party as required or permitted under or pursuant to the Bonds, then, at the option of Secured Party, the Secured Party may require that Pledgor pledge additional mutual fund shares or like property or other liquid assets to Secured Party in order to replenish or replace such loss in market value or marketability or decrease in value due to redemption and, in such event, within 30 days after Pledgor’s receipt of notice of such request, Pledgor shall deliver such additional Collateral to Secured Party in form acceptable to Secured Party together with such documents, instruments and agreements as Secured Party may request in connection therewith to evidence, effect and perfect such pledge.

     Pledgor may, at any time, and for any reason, pledge and deliver additional Collateral to Secured Party together with all documents, instruments and agreements necessary to evidence, effect and perfect such pledge.

     5. Representations and Warranties. In order to induce Secured Party to accept this Master Agreement, Pledgor hereby represents and warrants to Secured Party with respect to this Master Agreement and each Pledge Schedule executed hereunder:

     (1) that Pledgor has the complete and unconditional authority to pledge the Collateral, holds (or will hold on date of pledge thereof) the Collateral free and clear of any and all liens, charges, encumbrances and security interests thereon (other than in favor of Secured Party), has (or will have on the date of pledge thereof) good right, title and legal authority to pledge the Collateral in the manner contemplated herein and that the execution and performance of this Master Agreement and each Pledge Schedule constitutes authorized, legal, valid and binding acts of Pledgor enforceable in accordance with their respective terms as evidenced (should Secured Party so request) by a certificate of incumbency for the individual executing this Master Agreement or any Pledge Schedule; and

     (2) that no authorization, approval, or other action by, and no notice to or filing with, any governmental authority or regulatory body having jurisdiction over the assets, affairs or business of Pledgor is required either

     (i) for the pledge by Pledgor, of the Collateral pursuant to this Master Agreement or any Pledge Schedule or for the execution, delivery or performance of this Master Agreement or any Pledge Schedule by Pledgor, or

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     (ii) for the exercise by Secured Party of the voting or other rights provided for in this Master Agreement or the remedies in respect of the Collateral pursuant to this Master Agreement.

     6. Further Assurances. Pledgor agrees that at any time and from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action that Secured Party may reasonably request, in order to perfect and protect the security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights, powers and remedies hereunder with respect to any Collateral.

     7. Name in Which Collateral Held. Pledgor further acknowledges and agrees that Secured Party upon taking possession of the Collateral, may hold any of the Collateral in its own name, endorsed, registered or assigned in blank or in the name of any nominee or nominees.

     8. Voting Rights; Dividends; Etc.

     (a) So long as no Event of Default (as defined in Section 11 hereof) shall have occurred and be continuing:

          (i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not prohibited by the terms of this Master Agreement; provided, however, that following request therefor by Secured Party, Pledgor shall not exercise or, as the case may be, shall not refrain from exercising any such right if such action or failure to act would have a material adverse effect on the value of the Collateral or any part thereof; and, provided further, that Pledgor shall give Secured Party at least ten days’ written notice of the manner in which it intends to exercise or fail to exercise any such right.

          (ii) Secured Party shall execute and deliver (or cause to be executed and delivered) to Pledgor all such proxies and other instruments as Pledgor may reasonably request for the purpose of enabling Pledgor to exercise the voting and other rights which it is entitled to exercise pursuant to clause (i) above.

          (iii) Pledgor shall be credited with any cash dividends, interest or any other distribution of property paid, payable or otherwise distributed in cash in respect of the Collateral other than by way of redemption or liquidation of such Collateral.

     (b) Upon the occurrence and during the continuance of an Event of Default:

          (i) All rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 8(a) hereof shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights; provided, however, Pledgor shall continue to have the rights to exercise such voting and other consensual rights notwithstanding the occurrence and continuance of an Event of Default until Secured Party delivers a notice to Pledgor of its intention to exercise such voting and other consensual rights.

          (ii) All rights of Pledgor to receive credit for cash dividends, interest, or other distributions in cash pursuant to Section 8(a) hereof shall cease and all rights to dividends, interest and other distributions shall thereupon be vested in Secured Party, who shall thereupon have the sole right to receive and hold as Collateral such dividends, interest and other distributions, or to direct that all such dividends, interest and other distributions shall be reinvested in additional shares of the Fund, all of which shall become additional Collateral. All dividends, interest and other distributions which are received by Pledgor contrary to these provisions shall be received in trust for the benefit of Secured Party, shall be segregated from other property or funds of Pledgor and shall be forthwith delivered to Secured Party as Collateral in the same form as so received (with any necessary endorsement or registrations on the books of the Fund’s transfer agent).

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     9. Secured Party Appointed Attorney-in-Fact. Pledgor hereby irrevocably appoints Secured Party as Pledgor’s attorney-in-fact upon and as of the happening of an Event of Default, with full authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, from time to time in Secured Party’s discretion, to take any action and to execute any instrument which Secured Party may deem reasonably necessary or advisable to accomplish the purposes of this Master Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Pledgor representing any dividend or interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same, when and to the extent permitted by this Master Agreement.

     10. Secured Party May Perform. If Pledgor fails to perform any agreement, obligation or responsibility contained herein, Secured Party may itself perform, or cause performance of, such agreement, obligation or responsibility, and the expenses of Secured Party incurred in connection therewith shall be payable by Pledgor under Section 13 hereof.

     11. Events of Default. The following shall constitute “Events of Default” hereunder:

          (a) Any default under any Bonds or any default under any Indemnity Agreements;

          (b) Pledgor assigns, attempts to encumber, subjects to further pledge or security interest, sells, transfers or otherwise disposes of any of the Collateral without the prior written consent of Secured Party;

          (c) Pledgor fails to respond to any demand by Secured Party or to reimburse Secured Party pursuant to the terms of any Indemnity Agreements or Bonds for amounts paid out by Secured Party on behalf of Pledgor;

          (d) Pledgor fails to perform any covenant or agreement set forth herein, or in any document, instrument or agreement evidencing, securing, guaranteeing or pertaining to any of the Obligations, including the Bonds;

          (e) Any default occurs, and is not cured within any applicable cure or grace period, with respect to any document, instrument or agreement evidencing, securing, guaranteeing or pertaining to any of the Obligations, including the Bonds, whether or not due to any default by Pledgor;

          (f) Any representation or warranty made by Pledgor in this Agreement is false or misleading in any material respect;

          (g) A receiver, liquidator, custodian or trustee of Pledgor, or of all or any of the property of Pledgor, is appointed by court order and such order remains in effect for more than thirty (30) days; or an order for relief is entered with respect to Pledgor or Pledgor is adjudicated a bankrupt or insolvent, or any of the property of Pledgor is sequestered by court order and such order remains in effect for more than thirty (30) days; or a petition is filed against Pledgor under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and is not dismissed within thirty (30) days after such filing;

          (h) Pledgor files a petition in voluntary bankruptcy or seeking relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under any such law; or

          (i) Pledgor makes an assignment for the benefit of its creditors, or admits in writing its inability, or fails, to pay its debts generally as they become due, or consents to the appointment of a receiver, liquidator or trustee of the Pledgor, or of all or any part of the property of Pledgor.

     12. Remedies. If any Event of Default shall have occurred and be continuing:

          (a) Secured Party may exercise (in compliance with all applicable securities laws) in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of New York at that time, and Secured Party may also, without notice except as specified below,

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sell the Collateral or any part thereof by redemption of all or any number of the shares of the Fund. To the extent such redemption is deemed a sale with respect to which notice shall be required by law, Secured Party shall give Pledgor at least five days’ notice of the time after which any private sale is to be made, which Pledgor agrees shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Pledgor agrees that any redemption of the shares by Secured Party shall be deemed to be a commercially reasonable sale under the New York Uniform Commercial Code. As an alternative to exercising the power of sale and redemption herein conferred upon it, Secured Party may proceed by a suit or suits at law or in equity to foreclose the security interest granted under this Agreement and to sell or redeem the Collateral, or any portion thereof, pursuant to a judgment or decree of a court or courts of competent jurisdiction.

          (b) Any cash held by Secured Party as Collateral and all cash proceeds and any income or interest from said cash proceeds received by Secured Party in respect of any sale of, collection from, redemption of or other realization upon or any part of the Collateral following the occurrence of an Event of Default may, in the discretion of Secured Party, be held by Secured Party as collateral for, and then and/or at any time thereafter applied against, all or any part of the Obligations, in such order of application as Secured Party shall select.

          (c) Any surplus of such cash or cash proceeds held by Secured Party and remaining after payment in full of all outstanding Obligations and the termination of all Obligations of the Secured Party (past, present or future) under or pursuant to the Bonds evidenced by releases of all liabilities under or pursuant to Bonds satisfactory to Secured Party, shall be paid over to Pledgor or to whomsoever may be lawfully entitled to receive such surplus.

     13. Expenses. Pledgor will upon demand pay to Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which Secured Party may incur in connection with (1) the administration of this Agreement, (2) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (3) the exercise or enforcement of any of the rights of Secured Party hereunder, or (4) the failure by Pledgor to perform or observe any of the provisions hereof.

     14. Security Interest Absolute. All rights of Secured Party hereunder, the security interest granted to Secured Party hereunder, and all obligations of Pledgor hereunder, shall be absolute and unconditional irrespective of any of the following circumstances, acts, events, or occurrences, and Pledgor expressly consents to the occurrence of any of such events and waives any defense arising therefrom:

          (a) any lack of validity or enforceability of the Bonds or any other agreement or instrument relating thereto;

          (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Bonds any other agreement or instrument relating thereto;

          (c) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Pledgor in respect of the Obligations or in respect of this Master Agreement.

     15. Amendments, Etc. No amendment or waiver of any provision of this Master Agreement nor consent to any departure by Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by Secured Party and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

     16. No Waiver, Cumulative Remedies. No failure on the part of Secured Party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy by Secured Party preclude any

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other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law.

     17. Severability. If any provision of any of this Master Agreement or the application thereof to any party hereto or circumstances shall be invalid or unenforceable to any extent, the remainder of this Master Agreement and the application of such provisions to any other party thereto or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law.

     18. Interpretation. No provision of this Master Agreement shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision.

     19. Jurisdiction. Pledgor agrees that any legal action or proceeding with respect to this Master Agreement may be brought in the state or federal courts of the State of New York, all as Secured Party may elect. By execution of this Master Agreement, Pledgor hereby submits to each such jurisdiction, hereby expressly waiving whatever rights may correspond to it by reason of its present or future domicile. Nothing herein shall affect the right of Secured Party to commence legal proceedings or otherwise proceed against Pledgor in any other jurisdiction or to serve process in any manner permitted or required by law. In furtherance of the foregoing, Pledgor hereby appoints the Secretary of State of the State of New York as its agent for service of process.

     20. Acceptance. This Master Agreement shall not become effective unless and until delivered to Secured Party at its principal office in Hartford, Connecticut, and accepted in writing by Secured Party thereafter at such office as evidenced by its execution hereof (notice of which delivery and acceptance are hereby waived by Pledgor).

     21. Governing Law. This Master Agreement shall be governed by and construed in accordance with the laws of the State of New York and shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto.

     22. Notices. All notices, requests and demands to or upon the respective parties hereto shall be deemed to have been given or made when personally delivered or deposited in the mail, registered or certified mail, postage prepaid, addressed as follows or to such other address as may be designated hereafter in writing by the respective parties hereto:

Pledgor: (Name and Address)	Secured Party:
Apollo Group, Inc.	Travelers Casualty and Surety Company of America
4025 S. Riverpoint Parkway	One Tower Square, Bond — 2SHS2
Phoenix, AZ 85040	Hartford, CT 06183
Taxpayer ID# 86-0419443	Collateral Processing, National Resources
	H.O. Bond, 2SHS2
Attn: P. Robert Moya, Senior VP and Secretary	Taxpayer ID# 06-0907370

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     Except in cases where it is expressly provided herein or by applicable law that such notice, demand or request is not effective until received by the party to whom it is addressed.

     IN WITNESS WHEREOF, I hereby execute this agreement on behalf of Pledgor as of the date set forth below.

Signed:	/s/ Brian E. Mueller	Signed:	/s/ P. Robert Moya
	Apollo Group, Inc.		Apollo Group, Inc.
By:	Brian E. Mueller, President	By:	P. Robert Moya, Senior Vice President
			and Secretary

     I hereby certify that I am the duly elected and qualified (Assistant) Secretary of the corporation (“Pledgor”) that entered into the foregoing agreement (the “Master Agreement”) with Travelers; that the officer who executed the Master Agreement on behalf of the Pledgor has been duly elected and qualified as such officer; that the signature above is the genuine signature of such officer, that the Master Agreement was duly executed and delivered by the Pledgor; that its execution and delivery were properly authorized by the Board of Directors of the Pledgor; and that the Master Agreement represents a valid and binding obligation of the Pledgor.

     IN WITNESS WHEREOF, I have set my hand and the seal of this Corporation this 14th day of February, 2008.

/s/ P. Robert Moya

Secretary

SEAL
ACCEPTED:	TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA
	By:	/s/ George W. Thompson
	Title:	Sr. Vice President
	Date:	February 25, 2008

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EX-10.3

Exhibit 10.3

General Contract	TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA
Of Indemnity (Form A)	Hartford, Connecticut 06183

We, the undersigned, hereinafter referred to, individually and/or collectively, as “Indemnitors,” hereby request, have requested and/or will request TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, ST. PAUL FIRE AND MARINE INSURANCE COMPANY, any of their present or future direct or indirect parent companies, any of the respective present or future direct or indirect affiliates or subsidiaries of such companies and parent companies, and/or any of the aforementioned entities’ successors or assigns, hereinafter referred to, individually and/or collectively, as “Company,” to execute or procure bonds, undertakings, guarantees, and/or contractual obligations, including renewals and extensions thereof, whether before or after the date of this Agreement, and bonds and undertakings for which Company has obligations as a result of an asset purchase, acquisition, merger or like transaction, hereinafter referred to, individually and/or collectively, as “Bond(s).” As an inducement therefore we make the following representations of fact, promises and agreements:

REPRESENTATIONS OF FACT:

1.	In the transaction of business one, some or all of the Indemnitors are required, or may desire to give such Bond(s).
2.	Indemnitors have a substantial, material and beneficial interest (a) in the obtaining of Bond(s) by any of the Indemnitors and (b) in the transaction(s) for which any other Indemnitor has applied or will apply to Company for Bond(s) pursuant to this General Contract of Indemnity, hereinafter referred to as “Agreement.” It is understood that the purpose of this Agreement is to induce Company to furnish Bond(s); however, Company is under no obligation to furnish Bond(s) to Indemnitors.
3.	Indemnitors have the full power and authority to execute, deliver and perform this Agreement and to carry out the obligations stated herein. Indemnitors further acknowledge and agree that (a) the execution, delivery and performance of this Agreement by such Indemnitors, (b) the compliance with the terms and provisions hereof, and (c) the carrying out of the obligations contemplated herein, do not, and will not, conflict with and will not result in a breach or violation of any terms, conditions or provisions of the charter documents or bylaws of such Indemnitors, or any law, governmental rule or regulation, or any applicable order, writ, injunction, judgment or decree of any court or governmental authority against Indemnitors, or any other agreement binding upon Indemnitors, or constitute a default thereunder.

PROMISES AND AGREEMENTS: In consideration of the furnishing of any such Bond, the forbearance of cancellation of any existing Bond(s) by Company, the assumption of obligations by Company of any Bond, and for other valuable consideration, Indemnitors hereby jointly and severally promise and agree as follows:

1. To pay all premiums for each Bond, as they fall due, until Company has been provided with competent legal evidence that the Bond has been duly discharged.

2. To indemnify and exonerate Company from and against any and all loss, cost and expense of whatever kind which it may incur or sustain as a result of or in connection with the furnishing of Bond(s), the assumption of obligations by Company of Bond(s), and/or the enforcement of this Agreement, including unpaid premiums, interest, court costs and counsel fees, and any expense incurred or sustained by reason of making any investigation, hereinafter referred to as “Loss.” To this end Indemnitors promise:

(a)

To promptly reimburse Company for all sums paid on account of such Loss and it is agreed that (1) originals or photocopies of claim drafts, or of payment records, kept in the ordinary course of business, including computer printouts, verified by affidavit, shall be prima fade evidence of the fact and amount of such Loss, and (2) Company shall be entitled to reimbursement for any and all disbursements made by it, under the belief that it was liable, or that such disbursement was necessary or expedient.

(b)

To deposit with Company, on demand, the amount of any reserve against such Loss which Company is required, or deems it prudent to establish whether on account of an actual liability or one which is, or may be, asserted against it and whether or not any payment for such Loss has been made.

3. This Agreement shall apply to any and all Bond(s) furnished as follows:

(a)	If Company executes the Bond(s), procures the execution of Bond(s) by other sureties, executes Bond(s) with co-sureties and/or obtains reinsurance;
(b)	For or on behalf of any or all of the following:

(1)	One, some or all of the Indemnitors;
(2)	Any joint venture or other form of common enterprise in which Indemnitors were members at the time the Bond(s) were furnished;
(3)	Any present or future affiliate and/or subsidiary of Indemnitors;
(4)	Any third party at the request of Indemnitors, their subsidiaries and/or affiliates.

4. (a) The validity and effect of this Agreement shall not be impaired by, and Company shall incur no liability on account of, and Indemnitors need not be notified of:

(1)	Company’s failure or refusal to furnish Bond(s), including final Bond(s) where Company has furnished a bid Bond;
(2)	Company’s consent or failure to consent to changes in the terms and provisions of any Bond, or the obligation or performance secured by any Bond;

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(3)	The taking, failing to take, or release of security, collateral, assignment, indemnity agreements and the like, as to any Bond;
(4)	The release by Company, on terms satisfactory to it, of any Indemnitors; or
(5)	Information which may come to the attention of Company which affects or might affect its rights and liabilities or those of any of the Indemnitors.

(b) The validity and effect of this Agreement shall not be impaired by, and Company shall incur no liability on account of, the cancellation or termination of any Bond(s).

5.	Indemnitors shall have no rights of indemnity, contribution or right to seek collection of any other outstanding obligation against any other Indemnitors or their property until the obligations of the Indemnitors to Company under this Agreement have been satisfied in full.
6.	Company shall have the right, in its sole discretion, (a) to deem this Agreement breached should any Indemnitor become involved in any agreement or proceeding of liquidation, receivership, bankruptcy, insolvency or creditor assignment, whether voluntarily or involuntarily, or should any Indemnitor, if an individual, die, or be convicted of a felony, become a fugitive from justice, or for any reason disappear and cannot immediately be found by Company by use of usual methods, and (b) to adjust, settle, compromise or defend any claim, demand, suit or judgment upon any Bond(s).
7.	If Company has or obtains collateral or letters of credit, Company shall not have any obligation to release collateral or letters of credit or turn over the proceeds thereof until it shall have received a written release in form and substance satisfactory to Company with respect to each and every Bond. Any collateral or letters of credit provided to Company by any Indemnitor or any third party, or the proceeds thereof, may be applied to any Loss.
8.	Indemnitors also understand and agree that their obligations remain in full force and effect for any Bond(s) issued pursuant to this Agreement, notwithstanding that the entity on whose behalf Bond(s) were issued has been sold, dissolved or whose ownership has been otherwise altered in any way.
9.	This Agreement shall remain in full force and effect until terminated. Indemnitors may only terminate participation in this Agreement by providing written notice to Company of Indemnitors’ intent to terminate. Such notice shall be addressed to St. Paul Travelers Bond, Attention: Senior Vice President Commercial Surety, One Tower Square, Hartford, Connecticut 06183. Such notice of termination shall become effective thirty (30) days after Company’s receipt of the same. The obligations and liability of Indemnitors giving such notice shall thereafter be limited to Bond(s) furnished before the effective date of the notice, which liability shall include any Bond(s) which were originally issued prior to the effective date of notice and renewed or otherwise extended subsequent to the notice or effective date of termination.

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10.	Indemnitors hereby expressly authorize Company to access credit records and to make such pertinent inquiries as may be necessary from third party sources for underwriting purposes, claim purposes and/or debt collection. To the extent required by law, Company will, upon request, provide notice whether or not a consumer report has been requested by Company, and if so, the name and address of the consumer reporting agency furnishing the report.
11.	In the event of a claim or notice of a potential claim, Company shall have the right, at all times, to free access to the books, records, and accounts of the Indemnitors for the purpose of examining the same.
12.	Company may furnish copies of any and all statements, agreements, financial statements and any information which it now has or may hereafter obtain concerning Indemnitors, to other persons or companies for the purpose of procuring co-suretyship or reinsurance.
13.	A duplicate or facsimile copy or electronic reproduction of the original document shall have the same force and effect as the original.
14.	This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.
15.	If any provision or portion of this Agreement shall be unenforceable, this Agreement shall not be void, but shall be construed and enforced with the same effect as though such provision or portion were omitted.
16.	This Agreement is in addition to and not in lieu of any other agreements and obligations undertaken in favor of Company, whether now existing or entered into hereafter.
17.	The rights and remedies afforded to Company by the terms of this Agreement can only be impaired by a written rider to this Agreement signed by an authorized employee of the Company.
18.	Company’s failure to act to enforce any or all of its rights under this Agreement shall not be construed as a waiver of these rights.
19.	The date of this Agreement shall be the earliest date any Indemnitor executes this Agreement.
20.	Special Provisions:

(a) This Agreement shall only apply to that certain Supersedeas Bond Number 105036869 and including any and all modifications, replacements, substitutions, supplements, or increases thereof (the “Bond”) posted under Federal Rule of Civil Procedure 62 and/ or Federal Rule of Appellate Procedure 8 in connection with post-trial motions and/or an appeal of the judgment entered in that certain case entitled, In re Apollo Group Securities Litigation (“the Case”), pending as Case

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	Nos. CV 04-2147-PHX-JAT (LEAD), CV 04-2204-PHX-JAT (Consolidated) and CV 04-2334-PHX-JAT (Consolidated) in the United States District Court for the District of Arizona (together with the courts having appellate jurisdiction thereof, the “Court”).
(b)	Notwithstanding any other provision of this Agreement, that certain Control Agreement of even date herewith (the “Control Agreement”), or that certain Collateralized Bond Surety Program Registered Pledge and Master Security Agreement of even date herewith (the “Security Agreement”):

     (1) Upon receipt of a notice of claim against the Bond and prior to making any payments under the Bond or drawing upon the collateral, Company shall, as soon as practicable, provide notice to Indemnitors and shall make a written demand upon Indemnitors to timely satisfy the claim or provide defenses thereto. In the event the Indemnitors do not timely satisfy a valid Bond obligation that the Company is obligated to pay, Company shall have the right, in its sole discretion, to adjust, settle, compromise or defend any such claim, demand, suit or judgment upon the Bond and use the collateral to satisfy the claim. In the event Indemnitors wish to either settle or pay the judgment using the collateral, Indemnitors shall provide notice in writing directing the Company to do so.

     (2) Company shall not have any obligation to release the collateral or turn over the proceeds thereof to the Indemnitors until it shall have received a Final Order of the Court discharging Company from any and all obligations arising under the Bond and releasing, discharging, or terminating the Bond without any further liability to the Company. Any collateral provided to Company by the Indemnitors may be applied to any Loss. “Final Order” as used in this Agreement means an order that is subject to appeal or a writ of certiorari and with respect to which the time to appeal or seek issuance of a writ of certiorari has expired.

     (3) Indemnitors shall not be obligated to deposit amounts to cover reserves under paragraph 2(b) above with respect to Loss that is fully secured by collateral and, in the event a reserve is set, any such reserve shall reflect the amount of collateral on deposit at the time Company establishes such reserve or on deposit at the time of any subsequent reserve adjustments. Any amounts deposited pursuant to such paragraph 2(b) above shall constitute additional collateral.

     (4) The collateral pledged under the Control Agreement and the Security Agreement shall only secure Loss under this Agreement, at law or in equity and obligations and liabilities created under the Control Agreement and the Security Agreement, including but not limited to the reimbursement of expenses described in Section 13 of the Security Agreement.

     (5) If the Company becomes legally obligated to pay on the Bond or it appears to the Company that its obligation to pay on the Bond may come due within ten (10) business days, and it further appears to the Company at the time of either such event that any portion of the collateral then held by the Company will

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not timely mature and/or become liquid by the time the Company is obligated to make payment on the Bond, Company shall so notify Indemnitors in writing, who shall within five (5) business days after receipt of such notice provide substitute collateral that is payable on demand or will mature by the time such payment on the Bond is due. If the amount of collateral on deposit is insufficient to pay the Company’s obligation on the Bond when it becomes due, then Indemnitor shall either forthwith pay the difference or provide additional collateral equal to the shortfall. Such payment will be made by wire transfer or otherwise in immediately available funds to the bank account specified in the notice provided to the Indemnitors by Company. The Indemnitors waive, to the fullest extent permitted by applicable law, each and every right which they may have to contest any such payment that is due and that the Company is legally obligated to make. Failure to make payment to Company as herein provided shall cause the Indemnitors to be additionally liable for any and all costs and expenses, including attorney’s fees, incurred by Company in enforcing this Agreement, together with interest on unpaid amounts due Company. Interest shall accrue, commencing the date Company pays the amount of the Demand, at 130% of the prime rate of interest in effect on December 31 of the previous calendar year as published in the Wall Street Journal. Indemnitors stipulate and agree that the Company will suffer immediate irreparable harm and will have no adequate remedy at law should Indemnitors fail to perform this obligation, and therefore Company shall be entitled to specific performance of this obligation.

WE HAVE READ THIS CONTRACT OF INDEMNITY CAREFULLY. THERE ARE NO SEPARATE AGREEMENTS OR UNDERSTANDINGS WHICH IN ANY WAY LESSEN OUR OBLIGATIONS AS ABOVE SET FORTH. IN TESTIMONY HEREOF, WE THE INDEMNITORS HAVE SET OUR HANDS AND FIXED OUR SEALS AS SET FORTH BELOW.

If Indemnitor is an Individual, sign below:

Instructions: Signatures of individual Indemnitors must be witnessed. Indemnitors must include their Social Security Number. All signatures must be dated with names printed or typed on the line provided.

(Witness Signature)	(Date)	(Witness	Signature)	(Date)
Print of Type Name:		Print of Type Name:
		SS#:

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If Indemnitor a Corporation, Limited Liability Company or Partnership, sign below:

Instructions: If the entity is: 1) a corporation the secretary and an authorized officer should sign on behalf of the corporation, 2) a limited liability company the manager(s) or member(s) should sign on behalf of the LLC, or 3) a partnership the partner(s) should sign on behalf of the partnership. Two signatures are required for all entities and all signatures must be notarized and dated. Please provide the entity’s federal tax identification number on the line provided.

Each of the undersigned hereby affirms to Company as follows: I am a duly authorized official of the business entity Indemnitor on whose behalf I am executing this Agreement. In such capacity I am familiar with all of the documents which set forth and establish the rights which govern the affairs, power and authority of such business entity including, to the extent applicable, the certificate or articles of incorporation, bylaws, corporate resolutions and/or partnership, operating or limited liability agreements of such business entity. Having reviewed all such applicable documents and instruments and such other facts as deemed appropriate, I hereby affirm that such entity has the power and authority to enter into this Agreement and that the individuals executing this Agreement on behalf of such entity are duly authorized to do so.

Apollo Group, Inc.		(Seal)
(Indemnitor Name)	(First Signature)
86-0419443	/s/ Brian E. Mueller	2-14-08
(Federal Tax ID)	Brian E. Mueller, President	(Date)
		(Seal)
	(Second Signature)
	/s/ P. Robert Moya	2-14-08
	P. Robert Moya, Senior Vice President and Secretary	(Date)

ACKNOWLEDGEMENT
STATE OF ARIZONA	County of Maricopa

On this 14 day of February, 2008, before me personally appeared Brian E. Mueller, known or proven to me to be the President of the entity executing the foregoing instrument (“Entity”) and P. Robert Moya, known or proven to me to be the SVP and Secretary of the Entity, and they acknowledged said instrument to be the free and voluntary act and deed of said Entity, for the uses and purposes therein mentioned and on oath stated that the seal affixed is the seal of said Entity and that it was affixed and that they executed said instrument by authority of the Entity. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my OFFICIAL SEAL the day and year first above written.

/s/ Catherine S. Davis  

Notary Public residing at Phoenix AZ 

(Commission Expires 10/05/09                     ) 

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EX-10.4

Exhibit 10.4

CONTROL AGREEMENT

Re:           Account No. Smith Barney *** — ***** — ** — ***          

Travelers Casualty and Surety Company of America, Secured Party

FBO Apollo Group, Inc.

     This agreement refers to the above-referenced and entitled Smith Barney Inc. (“SB”) Account (together with any substitution or replacement thereof, the “Account”) which the undersigned account holder(s) (jointly and severally if more than one) (the “Account Holder”) has instructed SB (the “Securities Intermediary”) to entitle as referenced above and hold certain of the Account Holder’s assets as set forth in Exhibit “A”. The Account Holder and the Securities Intermediary hereby acknowledge and agree that the Account is a cash securities account and is not a DVP account, a retirement account, an SB margin account or an SB linked account.

     The Account Holder and the Secured Party (“Secured Party”) hereby notify the Securities Intermediary that the Account Holder has granted the Secured Party a security interest in the Account, all financial assets and other items therein, all proceeds thereof and distributions in connection therewith and income received thereon (the “Collateral”) pursuant to a Collateralized Bond Surety Program Registered Pledge and Master Security Agreement dated even date herewith made by the Account Holder in favor of the Secured Party (as amended, supplemented or otherwise modified from time to time, the “Security Agreement”). The Securities Intermediary hereby acknowledges being so notified and confirms that it has recorded such security interest on its books and records. Further, the Securities Intermediary confirms that as of the date hereof, its personnel generally responsible for maintaining records of liens or security interests with respect to cash securities accounts, have no knowledge of any restraint, security interest, lien or other adverse claim in or to the Account or any item therein; provided that the Securities Intermediary may retain a subordinated lien in connection with any obligations that Account Holder may have incurred with the Securities Intermediary. In addition, the Securities Intermediary agrees to promptly notify the Secured Party and the Account Holder in the event it receives any written notice of any lien, encumbrance or adverse claim against the Account or any of the other Collateral.

     The Account Holder and Secured Party agree that the Account Holder may only instruct the Securities Intermediary to sell or purchase the types of securities for the benefit of the Portfolio, as set forth in Exhibit “B” hereinafter referred to as “Permitted Trading.”

     The Account Holder and Secured Party consent and agree that, other than the instructions set forth in the preceding paragraph, the only instructions that shall be given to the Securities Intermediary in regard to or in connection with the Account shall be given by the Secured Party. The Account Holder shall not instruct the Securities Intermediary to deliver and, subject to Section 8(a)(iii) of the Security Agreement, the Securities Intermediary shall not deliver cash, securities, or proceeds from the sale of, or distributions on, such securities out of the Account.

     Notwithstanding anything herein to the contrary, upon written notice, at any time, by the Secured Party to the Securities Intermediary (the form of such notice is hereinafter referred to as

1

“Notice of Exclusive Control”, as set forth in “Exhibit C”) the Securities Intermediary shall not accept or honor any instructions from or on behalf of the Account Holder in respect of the Account, including but not limited to instructions relating to Permitted Trading, and shall only comply with the instructions of the Secured Party. The Securities Intermediary agrees that all property in the Account at any time shall be treated as a financial asset for purposes of the Uniform Commercial Code in effect in New York as of the date thereof.

     The Account Holder hereby authorizes the Securities Intermediary to, and the Securities Intermediary shall, provide the Secured Party with a monthly statement of assets and a confirmation statement of each transaction effected in the Account after such transaction is effected. The Account Holder further authorizes the Securities Intermediary to disclose to the Secured Party such information relative to the Account, the financial assets and credit balances therein as the Secured Party may at any time request, without any reference to any further authority for, or inquiry as to the justification for, such disclosure, with it being agreed that Securities Intermediary will provide Account information to Secured Party as frequently as Secured Party may require to permit it to monitor the Collateral for compliance with the Security Agreement.

     The Securities Intermediary will comply with all entitlement orders originated by the Secured Party without further action or consent by Account Holder or any other person and will (i) as frequently as requested in writing by the Secured Party, transfer all available credit balances and financial assets in the Account to such account as may be designated by the Secured Party by wire transfer, depository transfer check, automatic clearing house electronic transfer, or otherwise, as the Secured Party may direct in its sole discretion and (ii) maintain the Account and all financial assets and other items therein as the Secured Party may direct in writing from time to time (including using its best efforts to place or negotiate orders to sell securities in the Account, including but not limited to sell orders pursuant to stock powers issued in favor of the Securities Intermediary, and transferring the proceeds of sale to the Secured Party in accordance herewith), in each case until such time (if any) as the Notice of Exclusive Control is withdrawn or rescinded by the Secured Party.

     Any security interest in or lien on the Account or other Collateral, as defined in this Control Agreement, granted to or otherwise obtained by the Securities Intermediary (including, without limitation, by operation of law) shall be junior and subordinate to the security interest and lien of the Secured Party in and on the Account and other Collateral, as defined in this Control Agreement, regardless of the order of perfecting any such security interest or lien, the filing or absence of filing any financing statement or the taking or failure to take any other action. The Securities Intermediary acknowledges the Secured Party’s perfected security interest in the Account and other Collateral, as defined in this Control Agreement, and agrees that, except as provided herein, it will not (i) foreclose upon, sell or otherwise dispose of the Account or any such other Collateral, or exercise any bankers’ or other lien or right of setoff or similar right in connection with the Account or any such other Collateral, in each case without the prior written consent of the Secured Party or (ii) receive, accept or apply any proceeds of the Account or any such other Collateral to or on account of any indebtedness or obligation of the Account Holder to the Securities Intermediary, in each case until the Secured Party has released its security interest in the Account and any such other Collateral, provided however that nothing herein shall limit the right of the Securities Intermediary from debiting the Account in an amount equal to the

2

amount of any deposit that the Securities Intermediary has credited to the Account that is thereafter returned to the Securities Intermediary because of insufficient funds or is otherwise unpaid. The Securities Intermediary shall neither advance margin or other credit against the Account, nor hypothecate any financial assets or other items carried in the Account, without the prior written consent of the Secured Party. The Securities Intermediary shall not agree with any other person or entity that it will comply (and the Securities Intermediary shall not comply) with any withdrawal, transfer, payment or redemption instruction, or any other entitlement order or other order, from such person or entity concerning the Account or any financial assets or other items therein, without the prior written consent of the Secured Party, and any such agreement entered into without such consent shall be null and void.

     The Account Holder acknowledges and agrees that this Control Agreement constitutes written notification to the Securities Intermediary with respect to the Secured Party’s security interest in the Collateral pursuant to Articles 8 and 9 of the Uniform Commercial Code in effect in New York as of the date hereof and any applicable federal regulations for the Federal Reserve Book Entry System. The Account Holder and the Secured Party each acknowledge and agree that the Securities Intermediary shall not be held responsible for (i) any decline in the market value of the Collateral or the failure to notify the Account Holder or the Secured Party thereof or (ii) the failure to take any action with respect to the Collateral, except as expressly provided in this Control Agreement, or as instructed by the Secured Party to the Securities Intermediary in accordance with this Control Agreement (which instructions may be oral followed by written confirmation within three (3) business days), (iii) and, except as expressly provided in this Control Agreement, this Control Agreement shall not abridge any rights the Securities Intermediary otherwise may have. To the extent that any provisions of this Control Agreement conflicts with any provisions of the Account Agreements, the provisions of this Control Agreement shall control.

     Except with respect to the obligations and duties expressly provided in this Control Agreement, this Control Agreement shall not impose or create any obligations or duties upon the Securities Intermediary that are greater than or in addition to the usual and customary obligations and duties, if any, of the Securities Intermediary with respect to the Account or the Account Holder. Except as expressly provided in this Control Agreement, the Securities Intermediary shall have no obligation or duty whatsoever to interpret the terms of any other agreements between the Account Holder and the Secured Party or to determine whether any default exists thereunder.

     The Account Holder hereby irrevocably authorizes and instructs the Securities Intermediary to perform and comply with the terms of this Control Agreement and to the extent there is any conflict between this Control Agreement and the Account Agreements, the provisions of this Control Agreement will control. The Account Holder hereby indemnifies and holds harmless the Securities Intermediary from and against any and all claims, actions and suits (whether groundless or otherwise), losses, damages, costs, expenses (including reasonable attorney’s fees) and liabilities of every nature and character arising out of or related to this Control Agreement or the transactions, contemplated hereby or any actions taken or omitted to be taken by the Securities Intermediary hereunder, including, without limitation, claims arising out of the Securities Intermediary’s failure to permit the Account Holder to withdraw funds from the Account other than in strict compliance with the terms of this Control Agreement, except to

3

the extent directly caused by the Securities Intermediary’s negligence or willful misconduct. The Secured Party shall indemnify and hold harmless the Securities Intermediary from and against any and all claims, actions and suits (whether groundless or otherwise), losses, damages, costs, expenses (including reasonable attorneys’ fees) and liabilities of every nature and character that may result by reason of the Securities Intermediary complying with instructions or requests of the Secured Party as permitted or required under this Control Agreement, except to the extent directly caused by the Securities Intermediary’s negligence or willful misconduct. The foregoing indemnifications shall survive any termination of this Control Agreement.

     The Securities Intermediary may act upon any instrument or other writing believed by it in good faith to be genuine and to have been signed or presented by Secured Party. The Securities Intermediary shall not be liable in connection with the performance or nonperformance of its duties hereunder, except for its own negligence or willful misconduct. The Securities Intermediary’s duties shall be determined only with reference to this Control Agreement and applicable laws, and the Securities Intermediary shall not be charged with knowledge of or any duties or responsibilities in connection with, any other document or agreement.

     All notices required to be given pursuant to this Control Agreement shall be in writing and shall be delivered by hand, mailed by United States registered or certified first class mail, postage prepaid and return receipt requested, sent by overnight courier, sent via facsimile with evidence of receipt, addressed to the applicable party at its address set forth on the signature page hereto or, in each case, to such other address for notices as any of the parties to this Control Agreement shall last have furnished in writing to the other parties hereto in accordance with this paragraph. Any such notice or communication shall be deemed to have been duly given or made and to have become effective at the time of the receipt thereof by the party to which it is directed, or when delivery is duly attempted and refused.

     This Control Agreement may not be amended or modified without the prior written consent of the Securities Intermediary, the Account Holder and the Secured Party. This Control Agreement shall continue in full force until the Securities Intermediary receives written notice from the Secured Party terminating this Control Agreement. Upon receipt of such notice, all obligations of the Securities Intermediary under this Control Agreement shall cease including without limitation any and all obligations hereunder with respect to the maintenance of the Account. Thereafter, the Securities Intermediary may take such steps as the Account Holder may request to vest full ownership and control of the Account in the Account Holder.

     No delay or omission on the part of the Secured Party or the Securities Intermediary in exercising any right hereunder shall operate as a waiver of such right or of any other right under this Control Agreement. No waiver of any right under this Control Agreement shall be effective unless in writing and signed by the Secured Party and the Securities Intermediary, and no waiver on one occasion shall be construed as a bar to or waiver of any such right on any other occasion.

     This Control Agreement and any waiver or amendment hereto may be executed in counterparts and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. This Control Agreement may be executed and delivered by telecopier or other

4

facsimile transmission all with the same force and effect as if the same were a fully executed and delivered original manual counterpart.

     This Control Agreement shall be governed by and construed in accordance with the laws of the State of New York (without giving effect to the conflicts of law principles thereof and shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns.

     This Control Agreement constitutes the entire agreement, and supersedes any prior agreements, of the parties concerning its subject matter. In the event a provision of this Control Agreement is unenforceable, this agreement shall be construed to the extent possible as if the unenforceable provision were omitted.

     Please indicate your agreement with the foregoing by signing below and returning this Control Agreement.

ACCOUNT HOLDER
Signature	/s/ Brian E. Mueller	/s/ P. Robert Moya		Date: 2-14-08
Signers:	Brian E. Mueller, President	P. Robert Moya, Senior Vice President and Secretary
Address:	Apollo Group, Inc., 4025 S. Riverpoint Parkway,    Phoenix, AZ 85040
SECURED PARTY
Signature	/s/ George W. Thompson	Date:	February 25, 2008
Authorized Signer:	George W. Thompson, Sr. Vice President
Address:	Travelers Casualty and Surety Company of America, One Tower Square, Bond - 2SHS2, Hartford, CT 06183

Accepted and Agreed:

SMITH BARNEY INC.

By:	/s/ Gabriel D’Amica, Jr.	Date:	2/25/08
Authorized Signer: Gabriel D’Amica, Jr., Branch Manager
Address: Cityplace I, 185 Asylum Street, Floor 21 Hartford, CT 06103

5

EXHIBIT A

PLEDGED COLLATERAL ACCOUNT NUMBER: ***- ***** - ** -***

APOLLO GROUP, INC.

TOTAL COLLATERAL REQUIREMENT: $ 95,000,000

6

EXHIBIT B

APOLLO GROUP, INC.

PERMITTED TRADING

Types of securities which Account Holder is permitted to instruct the Securities Intermediary to sell or purchase:

a.	Money Market Funds
b.	U.S. Treasuries
c.	Government Agencies
d.	Municipal Bonds: Rated AA- or better
e.	Auction Rate Securities, within all of the following parameters:

• Long-term credit ratings of AA- or better; and

• Total Portfolio Holdings not to exceed $150 Million (par value); and

• No investment in any single municipality or entity exceeds 10% of portfolio; and

• No more than $10 Million may be purchased in a single security transaction.

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SAMPLE FORM ONLY — DO NOT COMPLETE UNLESS ACCOUNT HOLDER WILL BE DENIED TRADING PRIVILEGES

EXHIBIT C

Form of Notice of Exclusive Control

                                        ,                     

Smith Barney Inc.

Attn.:

Re: Control Agreement dated [             ]

Ladies and Gentlemen:

     Reference is made to the Control Agreement dated                                          (the “Agreement”; capitalized terms used herein shall have the meanings assigned thereto in the Agreement) among you, us and                                          (the “Account Holder”). This letter constitutes a Notice of Exclusive Control under the Agreement.

     Effective today and continuing until we shall authorize you in writing to do otherwise, you shall no longer accept or honor any instructions from or on behalf of the Account Holder in respect of the Account or any financial assets or credit balances in the Account including but limited to instruction relating to Permitted Trading and, instead, shall only accept and honor our instructions, as further provided in the Agreement.

Very truly yours,

By:

(SECURED PARTY)

Name:

Title:

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EX-10.6

Exhibit 10.6

OPTION AGREEMENT

APOLLO GROUP, INC., OPTION GRANTOR

and

MACQUARIE RIVERPOINT AZ, LLC, OPTION HOLDER

OPTION AGREEMENT

     THIS OPTION AGREEMENT (this “Agreement”) is made as of June 20, 2006 (the “Agreement Date”) by and between APOLLO GROUP, INC., an Arizona corporation, a duly organized and existing Arizona corporation, being hereafter referred to as “Option Grantor”, and MACQUARIE RIVERPOINT AZ, LLC, a duly organized and existing Delaware limited liability company, herein referred to as “Option Holder” concerning the sale and assignment of all of the membership interests of RIVERPOINT LOTS 1/3/5, LLC, a duly organized Arizona limited liability company (“Riverpoint 1/3/5”) and RIVERPOINT LOT 2, LLC, a duly organized Arizona limited liability company (“Riverpoint 2”). Riverpoint 1/3/5 and Riverpoint 2 are each referred to in this Agreement as a “Company” and collectively as the “Companies”.

RECITALS:

     WHEREAS, Option Grantor is the owner of one hundred percent (100%) of the membership interests in the Companies (the “Membership Interests”).

     WHEREAS, Riverpoint 1/3/5 is the owner of that certain real property to be improved, commonly known as Lot 1 and Lot 3 of Riverpoint, according to the plat recorded in Book 566 of Maps, page 04, records of Maricopa County, Arizona (“Lots l and 3”), and located at 4015 S. Riverpoint Parkway and 4050 S. Riverpoint Parkway in Phoenix, Arizona, respectively.

     WHEREAS, Riverpoint 2 is the owner of that certain real property to be improved, commonly known as Lot 2 of Riverpoint, according to the plat recorded in Book 566 of Maps, page 04, records of Maricopa County, Arizona (“Lot 2”), and located at 4025 S. Riverpoint Parkway in Phoenix, Arizona. Lots 1 and 3 and Lot 2 are hereinafter referred to as the “Real Property”. A site plan of the Real Property is attached hereto as Exhibit “A”.

     WHEREAS, the Companies intend to improve the Real Property with a multi-level parking garage, surface parking spaces, and an office tower with a cafe (collectively, the “Improvements”) in accordance with and as more particularly described in the plans and specifications listed on Exhibit “B” (as modified by any Change Orders permitted under this Agreement, the “Plans and Specifications”).

     WHEREAS, Option Grantor has agreed to grant to Option Holder an Option to acquire the Membership Interests in the Companies following completion of the Improvements on the terms and conditions set forth in this Agreement.

     WHEREAS, if Option Holder exercises its option to purchase the Membership Interests, (i) Option Holder will cause the Companies to enter into a commercial lease of the Real Property and completed Improvements (the “Assets”) in the form attached hereto as Exhibit “C” (the “UOP Lease”) without modification with The University of Phoenix, Inc, as tenant (“Tenant”) and (ii) Option Grantor shall cause Tenant to enter into the UOP Lease and shall enter into a guarantee of the UOP Lease.

     WHEREAS, the UOP Lease shall have an initial term of twelve (12) years and shall be guaranteed by Option Grantor.

     NOW, THEREFORE, in consideration of the foregoing and the mutual undertakings set forth herein, and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Option Grantor and Option Holder hereby agree as follows:

     1. Recitals. Each of the recitals set forth above are incorporated herein as covenants and agreements of the parties hereto.

     2. Construction of Improvements; Material Change Orders.

          (a) Option Grantor shall cause the Companies to construct the Improvements substantially in accordance with the Plans and Specifications and all applicable laws. If during the construction of the Improvements, the Companies desire to, or are required by law or by governmental authorities with jurisdiction over the Improvements to, make modifications to the Plans and Specifications (i.e., “Change Orders”), the Companies retain the right to make such Change Orders, provided that (a) the Companies disclose to Option Holder in writing a complete accounting of all Change Orders, along with modifications to the Plans and Specifications and/or the construction contract(s) required to document such Change Order, and (b) if the Change Order is a Material Change Order, as such term is defined herein, the Companies follow the process outlined below. “Material Change Orders” is defined herein to mean any changes to the Plans and Specifications that are not required by law or by governmental authorities with jurisdiction over the Improvements and that do one or more of the following:

               (i) Decrease the overall quality of the materials, workmanship or equipment of the Improvements, which shall be determined by the project architect in his sole and absolute judgment,

               (ii) Increase the frequency of on-going maintenance/replacement or otherwise increase the cost of on-going maintenance/replacement of materials and equipment for the Improvements,

               (iii) Decrease the aesthetic quality of the original architectural design, which shall be determined by the project architect in his sole and absolute judgment,

               (iv) Modify in more than an inconsequential manner any of the Major Components of the central heating ventilation and air conditioning systems and electrical (power and lighting) capacity. “Major Components” are thereby defined to include all energy management systems, chillers, cooling towers, air handler units, main switchboard, main mechanical switchboard and central air distribution and collection ductwork and equipment. Major Components specifically exclude changes to air distribution, collection, and energy management components (including ductwork, VAV boxes, thermostats, etc.) utilized to control, zone and ventilate heated and chilled air on each of the Improvement’s 10 floors,

               (v) Alter the structural design of the Improvements, including but not limited to the seismic or structural integrity of the Improvement’s foundation, columns, beams, girders, floor slabs and ceiling joists,

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               (vi) Modify the floor to floor height or floor to ceiling height, other than normal construction tolerances,

               (vii) Modify the exterior wall systems of the Improvements, including design details for the pre-cast panels, glass, glazing, insulation, flashings and other exterior claddings in such a manner as to decrease the life expectancy of such components or to increase probability of water infiltration inside the wall cavity,

               (viii) Modify in more than an inconsequential manner the life safety design or life safety systems of the Improvements, including fire sprinklers, smoke or fire detection systems, emergency power back-up systems, and fire ingress and egress, or any other design or equipment change which impacts human life safety,

               (ix) Modify the site plan or floor plan in such a manner to decrease the rentable area below 265,000 rentable square feet of the office tower or increase the rentable area above 290,000 (as measured in accordance with the BOMA Standard defined below) or the number of surface and structured parking spaces so that the parking ratio is less than 7.5 per 1,000 square feet of rentable area,

               (x) Modify the site plan in such a manner to decrease or in any adverse manner change the quality or means of ingress or egress to and from the Improvements,

               (xi) Modify the specifications to decrease the number of cabs, decrease weight capacities in more than an inconsequential manner, decrease the cab dimensions, increase response time, decrease handling capacity or transportation speeds of the elevators, or change the quantity or location of stair shafts, or

               (xii) Modify in any adverse manner any warranty provisions, defect liability periods and/or warranty maintenance obligations.

     If Change Orders made by the Companies are Material Change Orders, the Companies shall provide to Roger Dahlin of Pritchard Associates (the “Construction Monitor”) and Todd Felger of Principal Real Estate Investors, LLC, copies of all documentation received from the General Contractor and architect to disclose the reason for the change order, including without limitation, the specific changes to the construction materials, specifications, and methods of installation, any drawings depicting the Material Change Order, material data sheets, if any, and information related to the cost of the Material Change Order, if applicable. Upon receipt of such information, Option Holder shall have two (2) business days to respond to such Material Change Order and instruct the Companies in writing whether Option Holder approves or disapproves of such Material Change Order, and if it disapproves the Material Change Order specifying the reasons therefor. A failure by Option Holder to disapprove a Material Change Order within such two (2) business day shall be deemed an approval of such Material Change Order. Option Holder’s Construction Monitor shall have the authority to approve or disapprove all Material Change Orders on behalf of Option Holder, and the Construction Monitor’s written decisions or failure to act shall be binding on Option Holder. In the event Option Holder approves the Material Change Order, then the Companies may implement such Material Change Order, without credit, offset or adjustment to the Purchase Price.

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     In the event Option Holder disapproves of such Material Change Order, then the Companies shall either (x) instruct the General Contractor that such change order is not acceptable and complete the construction substantially in accordance with the original Plans and Specifications (as modified by any prior Change Orders permitted under this Agreement), (y) make modifications to the Material Change Order to address the objections specified in the Option Holder’s response and thereafter repeat the same notice provisions for approval by the Option Holder, (z) make any change reflected in a Material Change Order that is disapproved pursuant to this Section, in which event Option Holder’s sole remedy shall be to terminate this Agreement, receive an immediate full refund of the Option Payment less $75,000, which shall be paid to Option Grantor as consideration for taking the Membership Interests off the market.

     (b) The Companies shall provide the Construction Monitor with reasonable access to the Improvements to review the status of the construction. At a minimum, Rick Mason, or any other person designated in writing by notice to Option Holder as the project manager for the Companies (the “Project Manager”), shall update Option Holder as to the construction progress at a meeting to take place on the next business day following the monthly on-site meeting with the Project Manager and the General Contractor superintendent; provided that the Project Manager may reschedule such meeting, but will give the Construction Monitor at least five (5) business days prior notice. The Project Manager will deliver copies of the meeting minutes for the monthly on-site meeting and copies of other materials related to such meeting within two (2) business days following receipt thereof. All visits to the site by the Construction Monitor shall be coordinated through the Project Manager. The Construction Monitor shall not directly contact the project superintendent, architect or any other members of the construction team regarding the Improvements or construction thereof.

     Within two (2) business days of Project Manager’s receipt thereof, the Construction Monitor shall be provided copies of construction documentation exchanged between the General Contractor and the Project Manager, including:

               (i) Copies of updated milestone calendars for completion of the Improvements;

               (ii) Copies of any material testing or sample reports (i.e. compaction reports, concrete core samples, etc.); and

               (iii) Copies of any modifications to Plans and Specifications as a result of change orders.

     Notwithstanding the foregoing, (i) the Companies shall not be required to provide copies of any General Contractor applications for payment and (ii) the Companies shall only be required to furnish copies of all General Contractor or subcontractor lien waivers following the completion of the Improvements.

     The Construction Monitor shall not access the job site at any time without the advance permission of the Project Manager, which access shall not be unreasonably withheld, delayed or conditioned. The Construction Monitor shall take all reasonable steps to avoid disruption to the job site, construction schedule, or superintendent management of the overall construction of the Improvements and shall follow all reasonable restrictions or limitations imposed by the Project Manager or the employees at the job site. Option Holder shall indemnify, defend and hold

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harmless Option Grantor, the Companies, Project Manager and the General Contractor for from and against any loss, cost, damage or expense as the result of or arising from the Construction Monitor’s entry onto the Property or exercise of the rights granted under this Section.

     Upon completion of the Improvements, the Construction Monitor shall also be afforded an invitation to attend the construction walk-through along with the Project Manager and the project superintendent at which a final punch list is prepared. The Construction Monitor’s attendance at the walk-thru shall be as a silent observer, but following the walk-thru Project Manager shall schedule a meeting to afford the Construction Monitor any opportunity to provide input into the documentation of the final punch list. The Construction Monitor’s recommendations regarding final punch list shall include only items necessary to conform the Improvements to the Plans and Specifications as modified by Change Orders permitted under this Agreement, and the project architect shall determine whether the recommended punch list items are necessary to conform the Improvements to the Plans and Specifications. If the Construction Monitor requests any punch list item that is inconsistent with or would require changes to the Plans and Specifications, Option Grantor may accept or reject such item, in its sole and absolute discretion, or may condition its acceptance of the item on any terms the Companies deem appropriate, including without limitation, Option Holder agreeing to pay any increased cost resulting from the requested punch list item.

     3. Option to Purchase.

          (a) Option Grantor hereby grants to Option Holder, an exclusive and irrevocable right and option (the “Option”) to purchase the Membership Interests upon and subject to the terms, conditions and limitations hereafter set forth.

          (b) Option Grantor shall notify Option Holder the date that it anticipates that Completion (as defined in the following sentence) of the Improvements will occur (the “Estimated Completion Notice”). Option Grantor shall provide written notice to Option Holder (and evidence of the completion of each thereof) (the “Completion Notice”), within five (5) business days after the last to occur of (i) final completion of the Improvements substantially in accordance with the Plans and Specifications; (ii) receipt of a notice of substantial completion from Option Grantor’s architect; and (ii) issuance of an unconditional final certificate of occupancy from the City of Phoenix (“Completion”). Option Holder may exercise the Option by giving written notice (the “Option Exercise Notice”) of the exercise thereof to Option Grantor on or before the later of (i) five (5) business days following delivery by Option Grantor to Option Holder of the Completion Notice or (ii) sixty (60) days after the delivery by Option Grantor to Option Holder of the Estimated Completion Notice (the “Option Exercise Date”).

          (c) If the Option Exercise Date has not occurred on or before September 30, 2007 (as the same may be extended for any Force Majeure Delay), Option Holder, at its absolute discretion and as its sole remedy, may either (i) terminate this Agreement by written notice and receive an immediate refund of the Option Payment or (ii) extend from time to time and as often as Option Holder elects the period for the Option Exercise Date to occur; provided, however, that notwithstanding anything contained herein to the contrary, in no event shall Option Holder be entitled to extend beyond March 30, 2008 (the “Outside Expiration Date”). For purposes of this Agreement, a “Force Majeure Delay” shall mean any delay caused by strike, other labor trouble, governmental preemption of priorities or other controls in connection with a national or

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other public emergency, or shortages of fuel, supplies or labor resulting therefrom or any other cause, similar to the above, beyond a party’s reasonable control. Notwithstanding anything contained in this Agreement to the contrary, if the Option Exercise Date has not occurred by the Outside Expiration Date (without regard to any Force Majeure Event), the Option shall lapse, the Option Payment shall be refunded to Option Holder, and Option Holder shall have no further Option to purchase the Membership Interests.

          (d) The giving of the Option Exercise Notice shall create a valid and binding contract between Option Grantor, as seller, and Option Holder, as purchaser, whereby seller shall be bound to sell, and purchaser shall be bound to purchase, the Membership Interests, upon and subject to the terms, conditions, and limitations set forth in the form of purchase and sale agreement attached hereto as Exhibit “D” (the “Purchase and Sale Agreement”), which Option Grantor and Option Holder agree to execute without modification and deliver to the other within five (5) business days after the exercise of the Option to memorialize such contract.

          (e) From and after the date of this Agreement, and until the first to occur of (i) the lapse or expiration of the Option or (ii) the Closing, Option Grantor shall neither sell, transfer, convey or otherwise alienate the Membership Interests, and the Companies shall neither sell, transfer, convey or otherwise alienate the Assets or any part thereof or interest therein, nor grant or create or suffer the creation of any mortgage, trust deed, lien, charge, or encumbrance of or on the Assets or any part thereof or interest therein that cannot be and is not released by Option Grantor at the Closing, nor grant or enter into any lease of the Assets or any part thereof (other than licenses or subleases that would otherwise be permitted under the terms of the UOP Lease).

          (f) From time to time after the date hereof and prior to Closing, Option Holder shall be entitled to reasonable access to the Real Property and the Improvements, after prior written notice to Project Manager; provided that Project Manager may limit such entry to periods when Project Manager or his designee is available to accompany Option Holder on its entry on to the Property and may impose reasonable requirements intended to minimize interference with the construction and insure safety to persons on-site. Option Holder shall not create any liens on the Real Property or the Improvements by virtue of its access to or entry thereon and will indemnify, defend, and hold Option Grantor and the Companies harmless for, from and against all loss, cost, damage and expense, including, but not limited to, claims asserted by third parties against Option Grantor or the Companies to recover for personal injury or property damage as a result of Option Holder’s entry onto or activities at the Real Property and Improvements. In the course of its investigations Option Holder may make reasonable inquiries to third parties, including, without limitation parties to service contracts, municipal, local and other government officials and representatives, but excluding architects, contractors and subcontractors in which case communications shall be limited to those set forth in Section 2, and Option Grantor and the Companies consent to such inquiries.

          (g) Prior to the Agreement Date, the Companies provided to Option Holder the due diligence materials listed on Exhibit “E” (collectively, the “Due Diligence Items”). Neither Option Grantor nor the Companies make any representation as to the accuracy of any Due Diligence Item or the content therein. The Companies are providing such reports to Option Holder for informational purposes only. In the event the transaction contemplated herein does

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not close for any reason other than a default by Option Grantor, Option Holder shall promptly return the Due Diligence Items and any copies thereof to the Companies.

     On or before 5:00 p.m. (Central Time) on the date which is the tenth (10th) business day following the Agreement Date (the “Approval Date”), if Option Holder disapproves of any of the Due Diligence Items or the Assets, for any reason or for no reason, this Agreement shall terminate without any liability on the part of either party and the Option shall lapse. In the event of such termination and lapse, the Option Payment shall be immediately returned to Option Holder, and Option Holder shall promptly return to the Companies all Due Diligence Items and any copies of same. If by 5:00 p.m. (Central Time) on the Approval Date Option Holder does not deliver an approval notice to Option Grantor (the “Approval Notice”), there shall be a conclusive presumption that Option Holder has disapproved the Due Diligence Items or the Assets, this Agreement shall terminate without any liability on the part of either party, and the Option Payment shall be immediately returned to Option Holder. If by 5:00 p.m. (Central Time) on the Approval Date, Option Holder delivers an Approval Notice, then Option Holder will be deemed to have approved of the Due Diligence Items and the Assets, Option Holder shall have no further right to terminate this Agreement and it shall remain in full force and effect, and the Option Payment shall be non-refundable except as otherwise expressly provided in this Agreement.

     4. Option Payment.

          (a) In consideration of the granting of the Option by Option Grantor to Option Holder hereunder, Option Holder shall deposit with the Title Company the sum of Four Million No/100 Dollars ($4,000,000.00) (the “Option Payment”).

          (b) The Option Payment shall be paid on or before the date which is three (3) business days after the Agreement Date, by wire transfer of immediately available funds in U.S. dollars via the federal bank wire transfer system, to the Phoenix office of First American Title Insurance Company, Attn: Carol Peterson, 2425 E. Camelback Road, Suite 300, Phoenix, AZ 85016 (telephone: 602/567-8109; fax: 602/567-8101) (the “Title Company”).

          (c) The Option Payment shall remain in escrow with the Title Company until first to occur of (i) the Closing, (ii) the termination of this Agreement or the lapse or termination of the Option or (iii) the termination of the Purchase and Sale Agreement. The Option Payment shall be invested by the Title Company as directed by Option Holder, and all earnings thereon shall become part of the Option Payment and disbursed to the party entitled to receive the Option Payment. If the transaction contemplated by the Purchase Agreement closes, Option Holder shall receive a credit against the Purchase Price at Closing in an amount equal to the interest earned on the Option Payment from the date of deposit with the Title Company through the date of the Closing.

          (d) Upon the Approval Date the Option Payment shall be non-refundable to Option Holder, unless or except if any of the following events shall occur on or before the Closing Date in which event the Option Payment shall be immediately refunded to Option Holder:

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                    (1) This Agreement is terminated pursuant to Section 2(a), Section 3(c), Section 3(g), Section 9(a) or Section 10(q);

                    (2) On or after the Agreement Date there shall be (A) a violation of Environmental Law (defined below) related to the Assets, except where such violation would not have a material adverse effect or (B) the presence or release of Hazardous Materials (defined below) on or from the Assets or the migration of Hazardous Materials onto the Assets from adjacent property if such presence, release or migration is in violation of any Environmental Law unless such violation is remedied prior to the Option Exercise Date. If Option Grantor discovers that Hazardous Materials have migrated onto the Assets from adjacent property prior to Closing, Option Grantor shall take such actions as it deems reasonably appropriate against the adjoining landowner(s) from whose property the Hazardous Substance originated.

                    (3) The termination of this Agreement by Option Holder as the result of a filing by or against Tenant or Option Grantor of a petition for order of relief in bankruptcy for the purpose of bankruptcy, liquidation or reorganization under any law relating to bankruptcy whether now existing or hereafter enacted (including, without limitation, any petition filed by or against Tenant under any one or more of the following Chapters of the Bankruptcy Reform Act of 1978, 11 U.S.C. §§ 101 1330 as amended: Chapter 7, Chapter 11 or Chapter 13) except that, in the case of a filing against Tenant or Option Grantor of such a petition, Option Holder may not terminate this Agreement if the petition is dismissed or discharged on or before sixty (60) days after the filing thereof;

                    (4) Any condemnation of any portion of the Assets; or

                    (5) An Exception to Warranty Notice has been given by Option Grantor and Option Holder elects to terminate this Agreement in accordance with the provisions of Section 8(c) hereof;

     If any of the conditions set forth in items (1) through (5) above occur, the Option Deposit shall be immediately returned to Option Holder; otherwise the Option Payment shall be released to Option Grantor upon the earlier to occur of (i) the Closing under the Purchase and Sale Agreement or (ii) the expiration, termination or lapse of the Option pursuant to this Agreement. Following the exercise of the Option and the execution of the Purchase and Sale Agreement, the parties respective rights to the Purchase and Sale Agreement shall be governed by the terms of the Purchase and Sale Agreement.

     5. Purchase Price. Subject to the adjustment below, the purchase price at which Option Grantor, as seller shall sell and the Option Holder, as purchaser, shall purchase the Membership Interests, pursuant to the contract created by the exercise of the Option (the “Purchase Price”) shall be $70,800,000.00 (Seventy Million Eight Hundred Thousand and No/100 US Dollars). The Option Payment also shall be paid to Option Grantor at Closing, and the Option Holder shall receive a credit against the Purchase Price in an amount equal to the interest earned on the Option Payment from the date of deposit with the Title Company through the date of the Closing. The Purchase Price was determined based on the lease revenue to be derived assuming the office tower constructed as part of the Improvements will contain a net rentable area of 267,949 square feet. Within thirty (30) days following the Estimated

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Completion Notice, Option Grantor shall provide Option Holder with a certification of the rentable area of the office tower measured by Carpenter Sellers Associates in accordance with “American National Standard ASNI/BOMA Z65.1-1996: Standard Method for Measuring Floor Area in Office Buildings” issued by the Building Owners and Managers Association International (the “BOMA Standard”). The rent under the UOP Lease shall be determined based on the net rentable area of the Building calculated in accordance with the BOMA Standard, and therefore, the Purchase Price shall be adjusted at closing to equal the rentable area of the office tower as set forth in such certification multiplied by $264.23 US dollars.

     6. Assignment of Membership Interests. Upon the exercise of the Option as provided in Section 3 and the Closing under the Purchase and Sale Agreement, the Membership Interests shall be assigned and conveyed to Option Holder in accordance with the Purchase and Sale Agreement.

     7. The Closing. Upon the exercise of the Option as provided in Section 3, the closing of the transaction (the “Closing”) shall be held and delivery of all items shall be made under the terms and conditions of the Purchase and Sale Agreement through an escrow with the Title Company, on the date which is five (5) business days after the Option Holder’s exercise of the Option, or such earlier date prior thereto as Option Grantor, as seller and Option Holder, as buyer, may mutually agree in writing (the “Closing Date”). The Closing Date may not be extended without the prior written approval of both Option Grantor, as seller and Option Holder, as buyer.

     8. Representations and Warranties.

          (a) On the date hereof and again on the Closing Date, Option Grantor hereby represents and warrants to Option Holder as follows:

               (i) Option Grantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Arizona.

               (ii) Each of the Companies is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Arizona.

               (iii) The Companies collectively own and hold 100% of all right, title and interest in and to the Assets.

               (iv) Option Grantor is the sole member of each of the Companies and owns 100% of the Membership Interests. Option Grantor holds all right, title and interest to the Membership Interests, free of all liens, encumbrances or any other defects of title whatsoever, and the Membership Interests were not issued in violation of the preemptive rights of any person or any agreement or laws by which the Option Grantor at the time of issuance was bound. There are no outstanding options, warrants, rights, calls, commitments, conversion rights, rights of exchange, rights of redemption, subscriptions, claims, agreements, obligations, convertible or exchangeable securities or other plans or commitments, contingent or otherwise, relating to the Membership Interests, except as may be provided in the Operating Agreements of the Companies. Option Grantor has delivered to Option Holder true, complete and correct copies of the Articles of Organization and the Operating Agreements of the Companies and the same have

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not been amended or modified, except as provided, and remain in full force and effect. All of the rights with respect to the operation or management of the Companies are set forth in such documents. There are no officers in the Companies.

               (v) The execution, delivery and performance by the Option Grantor of this Agreement and the Purchase and Sale Agreement have been duly and validly approved by all necessary company action and no other actions or proceedings on the part of the entities constituting Option Grantor are necessary to authorize this Agreement or the Purchase and Sale Agreement or the transactions contemplated hereby and thereby. No consent, waiver, approval, or authorization of, or filing, registration, or qualification with, or notice to, any governmental instrumentality or any other person or entity is required to be made, obtained, or given by the entities constituting Option Grantor in connection with the execution, delivery, and performance of this Agreement or the Purchase and Sale Agreement or, if required, such consent or action has been obtained or taken. The entities constituting Option Grantor have full power and authority to own and grant the option, to own and sell the Membership Interests, and to enter into this Agreement and the Purchase and Sale Agreement and to consummate the transactions contemplated in such documents. This Agreement, the Purchase and Sale Agreement, and all closing documents executed by Option Grantor which are to be delivered to Option Holder at the Closing Date are, or at the Closing Date will be, duly authorized, executed, and delivered by Option Grantor, are, or at the Closing Date will be, legal, valid, and binding obligations of Option Grantor, enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited, or otherwise affected by the application of rules of law or general principles of equity governing specific performance, injunctive relief or other equitable remedies (regardless of whether enforceability is considered in a proceeding in equity or at law) and by bankruptcy, reorganization, insolvency, moratorium and other similar laws enacted for the relief of debtors generally, from time to time in effect, and other similar laws or decisions of courts affecting creditors’ rights or remedies generally, are sufficient to convey title, and do not violate any provisions of any agreement to which Option Grantor is a party or to which it is subject.

               (vi) The execution and delivery of this Agreement and the Purchase and Sale Agreement, and the performance by Option Grantor under this Agreement and the Purchase and Sale Agreement, do not and will not conflict with or result in a breach of (with or without the passage of time or notice or both) the terms of Option Grantor’s organizational documents, any judgment, order or decree of any governmental authority binding on Option Grantor, and, to Option Grantor’s knowledge, do not breach or violate any applicable law, rule or regulation of any governmental authority. The execution, delivery and performance by Option Grantor under this Agreement and the Purchase and Sale Agreement will not result in a breach or violation of (with or without the passage of time or notice or both) the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which Option Grantor is a party or by which Option Grantor is bound or to which the Assets are subject. Neither Option Grantor nor the Companies have granted any rights, options, rights of first refusal, or any other agreements of any kind, which are currently in effect, to purchase or to otherwise acquire the Assets or any part thereof or any interest therein, except for rights under this Agreement and the Purchase and Sale Agreement or any rights disclosed by the Permitted Exceptions (defined in the Purchase and Sale Agreement).

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               (vii) To Option Grantor’s knowledge, Option Grantor has not breached any material provision of, nor is it in default under the terms of, any material contract to which it is a party or under which it has any rights or by which it is bound. Neither Option Grantor nor the Companies have received any written notice of any violation of or default under or with respect to any law, governmental regulation or rule or order of any governmental authority that is applicable in any way to the business or operation of Option Grantor.

               (viii) To Option Grantor’s knowledge, (A) the Assets are free and clear of all liens or encumbrances other than the Permitted Exceptions (defined in the Purchase Agreement), (B) there are no public plans or proposals for changes in road grade, access or improvements which would affect the Assets or result in any general or specific assessment against it other than any expansion of the I-10 right of way, which is currently in the study phase pursuant to the I-10 Corridor Improvement Study (the “I-10 Expansion”), and (C) no condemnation proceedings, eminent domain proceedings or similar actions or proceedings are now pending or threatened against the Assets. Notwithstanding the foregoing, Option Holder acknowledges that Option Grantor and its affiliates own other lots in the Riverpoint development that are not part of the Assets (the “Riverpoint Lots”), and nothing in this Agreement shall limit the right of the owner of such lots to make any improvements or changes to the Riverpoint Lots. The preceding sentence shall in no way limit Option Holder’s right, as the possible owner of the Assets, to appear and participate in any public proceedings related to the Riverpoint Lots.

               (ix) To Option Grantor’s knowledge, there is no action, suit or proceeding pending or to Option Grantor’s knowledge, threatened against the Companies or the Assets.

               (x) The Companies are classified as disregarded entities for Federal income tax purposes. The Companies have not made a “check the box” election to be treated as a corporation for Federal income tax purposes. All Federal income taxes and state and other tax returns and reports of the Companies required by law to be filed as of the Closing Date will have been duly filed as of such date, and all taxes imposed upon the Companies or any of its properties, assets or income which are due and payable or claimed by any taxing authority to be due and payable have been paid or reserved for as of the Closing Date, other than taxes, assessments, fees and charges being contested by the Companies in good faith using appropriate procedures. There are no claims for taxes pending against the Companies, and there are not now in force any waivers or agreements by the Companies for the extension of time for the assessment of any tax, nor has any such waiver or agreement been requested by the Internal Revenue Service (the “Service”) or any other taxing authority. The federal income tax returns of the Companies have not been examined by the Service. The Companies have paid or are withholding and will pay when due to the proper taxing authorities all withholding amounts required to be withheld with respect to all taxes on income, unemployment, social security or other similar programs or benefits with respect to salary and other compensation of directors, officers and employees of the Companies, if any.

               (xi) Except for the UOP Lease, there will not be any other leases affecting the Assets at the Closing (other than licenses or subleases permitted under the terms of the UOP Lease).

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               (xii) The Option Grantor will prior to the Closing deliver to Option Holder copies of the financial statements for each of the Companies as of June 30, 2006 (collectively, the “Financial Statements”). Each of the Financial Statements has been or will be prepared on a modified cash basis with depreciable assets being recorded on an income tax basis, and each presents fairly the financial position of the applicable Company, as of its date and the results of their operations, as the case may be. Since March 31, 2006, there has been no circumstance, event, occurrence, change or effect that has had a materially adverse effect on the financial condition of the Companies, other than, in each case, as a result of (a) changes in general economic conditions nationally, regionally or within the market in which the Assets are located; and (b) changes in the real estate industry generally and the office building leasing market specifically. Except as set forth in the Financial Statements, the Companies have no material liabilities, debts, claims or obligations, whether accrued, absolute, contingent or otherwise, whether due or to become due, other than (A) real estate taxes and assessments not yet due and payable, (B) obligations, duties and responsibilities under items disclosed by the Permitted Exceptions, (C) trade payables in the ordinary course, (D) obligations, duties and responsibilities under applicable laws and (E) costs incurred in connection with the construction of the Improvements.

               (xiii) Option Grantor has received no notice that the current or intended use of the Assets violates, or that following completion of the Improvements the Assets will violate, in any material respect any governmental law, rules, regulations or codes, or any covenants or restrictions encumbering the Companies or the Assets.

               (xiv) Except as disclosed in writing to Option Holder or as disclosed in the environmental reports, if any, pertaining to the Assets provided by Option Grantor, or received by Option Holder as a result of Option Holder’s tests, Option Grantor has no knowledge of (1) any violation of Environmental Laws related to the Assets, except where such violation would not have a material adverse effect or (2) the presence or release of Hazardous Materials on or from the Assets in violation of any Environmental Law. The term “Environmental Laws” includes without limitation the Resource Conservation and Recovery Act and the Comprehensive Environmental Response Compensation and Liability Act and other federal laws governing the environment as in effect on the date of this Agreement or such later date as of which this representation is effective pursuant to the terms hereof, together with their implementing regulations and guidelines as of the date of this Agreement or such later date as of which this representation is effective pursuant to the terms hereof, and all state, regional, county, municipal and other local laws, regulations and ordinances that are equivalent or similar to the federal laws recited above or that purport to regulate Hazardous Materials. The term “Hazardous Materials” includes petroleum, including crude oil or any fraction thereof, natural gas, natural gas liquids, liquified natural gas, or synthetic gas usable for fuel (or mixtures of natural gas or such synthetic gas), and any substance, material waste, pollutant or contaminant listed or defined as hazardous or toxic under any Environmental Laws.

               (xv) Other than this Agreement, the documents delivered pursuant hereto, matters disclosed in the title policy and title commitment, the UOP Lease and such other contracts and agreements disclosed to Option Holder (including, but not limited to the construction contracts related to construction of the Improvements), to Option Grantor’s

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knowledge, there are no material contracts or agreements of any kind relating to the Companies or the Assets to which Option Holder or the Companies will be bound after the Closing Date.

               (xvi) As of the date of this Agreement, Option Holder is not aware of any circumstances that would require the treatment of the transaction contemplated by this Agreement as a “reportable transaction” (within the meaning of Treasury Regulation Section 1.6011-4) and therefore does not presently intend to treat the transaction as such. If in the future, the IRS publishes any guidance that describes this transaction, or any substantially similar transaction, as being a “listed transaction” (within the meaning of Treasury Regulation Section 1.6011-4), or if there is any change in law that requires Option Holder to treat this transaction as a “reportable transaction,” Option Holder reserves the right to treat this transaction as such.

               (xvii) Neither the Tenant, nor the Companies, nor the Option Grantor has (i) made a general assignment for the benefit of creditors, (ii) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by its respective creditors which is not dismissed within sixty (60) days, (iii) suffered the appointment of a receiver to take possession of all or substantially all of its respective assets, (iv) suffered the attachment or other judicial seizure of all, or substantially all, of its respective assets, (v) admitted in writing its inability to pay their respective debts as they become due, or (vi) made an offer of settlement, extension or composition to its creditors generally.

               (xviii) The Operating Agreements of the Companies are in full force and effect, a true and correct copy thereof was delivered to Option Holder with the Due Diligence Items and there are no dissolution, termination or liquidation proceedings pending or contemplated with respect to the Companies or, prior to the Closing, Option Grantor.

               (xix) Other than Lot 5 (defined in Section 11 below), the Companies have no business and have engaged in no activity other than the direct ownership and operation of the Real Property and construction of the Improvements and have never leased or owned, directly or indirectly, any other real property other than the Real Property, and the Companies have not conveyed any interest in the Real Property to any third party since the date the Title Policy (defined on Exhibit “E”) was issued.

               (xx) Neither Option Grantor nor the Companies have received any written notice of any casualty with respect to the Assets.

               (xxi) To Option Grantor’s knowledge, the Companies have not been cited, fined or otherwise noticed of any asserted past or present failure to comply with any laws, regulations or orders relating to the Assets which have not been cured and to Option Grantor’s knowledge, no proceeding with respect to any such violation is pending or threatened.

               (xxii) For federal and state income tax purposes, the Assets has been treated as owned by Option Grantor.

               (xxiii) Neither Option Grantor nor the Companies are (a) currently identified on the Specially Designated Nationals and Blocked Persons List maintained by the Office of Foreign Assets Control, Department of the Treasury (“OFAC”) and/or on any other similar list maintained by OFAC pursuant to any authorizing statute, executive order or

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regulation (collectively, the “List”), and (b) a person or entity with whom a citizen of the United States is prohibited to engage in transactions by any trade embargo, economic sanction, or other prohibition of United States law, regulation, or Executive Order of the President of the United States. None of the funds or other assets of the Companies constitute property of, or are beneficially owned, directly or indirectly, by any Embargoed Person (as hereinafter defined), and (c) the members and managers of the Companies are not Embargoed Persons.

               (xxiv) Neither of the Companies is required to file reports pursuant to Sections 12(g) or 15(d) of the Securities Exchange Act of 1934, as amended.

               (xxv) There are no claims pending, or to the Option Grantor’s knowledge, threatened, against any manager, officer, employee or agent of either Company or any person which could give rise to any claim for indemnification against either of the Companies.

               (xxvi) Neither of the Companies has ever had any, nor currently has, any employees. Neither of the Companies is a party to, nor maintains, any employee benefit plan or employee welfare plan (within the meaning of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)), and none of the Subsidiaries has any obligation to contribute to any multi-employer plan (within the meaning of ERISA).

               (xxvii) Neither of the Companies own, control or hold with the power to vote, directly or indirectly, any shares of capital stock or beneficial interest in any corporation, partnership, limited liability company, association, joint venture or other entity.

     The term “Embargoed Person” means any person, entity or government subject to trade restrictions under the International Emergency Economic Powers Act, 50 U.S.C. §1701 et seq., The Trading with the Enemy Act, 50 U.S.C. App. 1 et seq., and any Executive Orders or regulations promulgated thereunder with the result that the investment in Option Grantor is prohibited by law or Option Grantor is in violation of law.

     This Section shall not apply to any person to the extent that such person’s interest in Option Grantor is through a U.S. Publicly-Traded Entity. As used in this Agreement, “U.S. Publicly-Traded Entity” means a Person (other than an individual) whose securities are listed on a national securities exchange, or quoted on an automated quotation system, in the United States, or a wholly-owned subsidiary of such a person.

     To the extent that any of the representations and warranties made by Option Grantor pursuant to this Section 8 or elsewhere in this Agreement are made to Option Grantor’s knowledge, Option Holder acknowledges and agrees that such representations and warranties are based on the actual (as distinguished from implied, imputed or constructive) knowledge of William J. Swirtz and Rick Mason as of the date of the Agreement and that such individuals have made such representations and warranties without making, or being under any duty to make, any investigation or inquiry whatsoever with respect thereto. Option Holder acknowledges that Mr. Swirtz and Mr. Mason are named solely for the purpose of defining and narrowing the scope of Option Grantor’s knowledge and not for the purpose of imposing any liability on or creating any duties running from such individual to Option Holder. Option Holder covenants that it will bring

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no action of any kind against such individual, and in no event shall Mr. Swirtz or Mr. Mason be personally liable for any representation or warranty contained herein.

          (b) Option Holder hereby represents and warrants to Option Grantor as of the Agreement Date and again as of the Closing Date as follows:

               (i) Option Holder is a limited liability company, duly organized and validly existing under the laws of the State of Delaware and will at Closing be qualified to do business in the State of Arizona.

               (ii) The execution, delivery and performance by Option Holder of this Agreement and the Purchase and Sale Agreement have been duly and validly approved by all necessary corporate or other applicable action. No consent, waiver, approval, or authorization of, or filing, registration, or qualification with, or notice to, any governmental instrumentality or any person or entity is required to be made, obtained, or given by Option Holder in connection with the execution, delivery, and performance of this Agreement or the Purchase and Sale Agreement or, if required, such consent or action has been obtained or taken. Option Holder has full power and authority to enter into this Agreement and the Purchase and Sale Agreement and to consummate the transactions contemplated in such documents. This Agreement, the Purchase and Sale Agreement and all documents executed by Option Holder which are to be delivered to Option Grantor at the Closing Date are, or at the Closing Date will be, duly authorized, executed, and delivered by Option Holder, and are, or at the Closing Date will be, legal, valid, and binding obligations of Option Holder enforceable against Option Holder in accordance with their respective terms, except to the extent that the enforceability thereof may be limited, or otherwise affected by the application of rules of law or general principles of equity governing specific performance, injunctive relief or other equitable remedies (regardless of whether enforceability is considered in a proceeding in equity or at law) and by bankruptcy, reorganization, insolvency, moratorium and other similar laws enacted for the relief of debtors generally, from time to time in effect, and other similar laws or decisions of courts affecting creditors’ rights or remedies generally, and do not and at the Closing Date will not violate any provisions of any agreement to which Option Holder is a party or to which it is subject.

               (iii) Option Holder shall furnish all of the funds for the purchase of the Option (other than funds, if any, supplied by institutional lenders which will hold valid mortgage liens against the Property) and such funds will not be from sources of funds or properties derived from any unlawful activity.

               (iv) Option Holder does not intend to treat the transaction contemplated by the Purchase and Sale Agreement as being a “reportable transaction” (within the meaning of Treasury Regulation Section 1.6011-4).

               (v) Option Holder is a sophisticated investor with substantial experience in investing in assets of the same type as the Membership Interests and the Assets and has such knowledge and experience in financial and business matters that Option Holder is capable of evaluating the merits and risks of an investment in the Membership Interests.

               (vi) The execution and delivery of this Agreement and the Purchase and Sale Agreement, and the performance by Option Holder under this Agreement and the

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Purchase Agreement, do not and will not conflict with or result in a breach of (with or without the passage of time or notice or both) the terms of any of Option Holder’s organizational documents, any judgment, order or decree of any governmental authority binding on Option Holder, and, to Option Holder’s knowledge, do not breach or violate any applicable law, rule or regulation of any governmental authority. The execution, delivery and performance by Option Holder under this Agreement and the Purchase and Sale Agreement will not result in a breach or violation of (with or without the passage of time or notice or both) the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which Option Holder is a party or by which Option Holder is bound.

               (vii) Option Holder has not (i) made a general assignment for the benefit of creditors, (ii) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by its creditors, (iii) suffered the appointment of a receiver to take possession of all or substantially all of its assets, (iv) suffered the attachment or other judicial seizure of all, or substantially all, of its assets, (v) admitted in writing its inability to pay its debts as they become due, or (vi) made an offer of settlement, extension or composition to its creditors generally.

               (viii) Option Holder and each member of Option Holder (a) is not currently identified on the List, and (b) is not a person or entity with whom a citizen of the United States is prohibited to engage in transactions by any trade embargo, economic sanction, or other prohibition of United States law, regulation, or Executive Order of the President of the United States. None of the funds or other assets of Option Holder constitute property of, or are beneficially owned, directly or indirectly, by any Embargoed Person, and (c) the members and managers of Option Holder are not Embargoed Persons.

     This Section shall not apply to any person to the extent that such person’s interest in Option Holder is through a U.S. Publicly-Traded Entity.

          (c) If at any time after the date of this Agreement, either party learns of any facts or circumstances which would render any of the foregoing representations and warranties untrue, then such party shall promptly notify the other party of all such facts and circumstances (an “Exception to Warranty Notice”) and the party receiving such notice shall, within five (5) business days following receipt of an Exception to Warranty Notice have the right, as its sole and exclusive remedy, to elect to (i) terminate this Agreement, and if Option Holder is the party receiving the Exception to Warranty Notice, it shall be entitled to receive an immediate refund of the Option Payment (otherwise the Option Payment shall be released to Option Grantor at Closing in accordance with the Purchase and Sale Agreement); or (ii) waive any claim against the party providing such notice arising out of or related to the information disclosed in the Exception to Warranty Notice and proceed with the transaction, in which case the representation or warranty shall be deemed modified as necessary to conform with the additional information disclosed in the Exception to Warranty Notice. If any party receiving an Exception to Warranty Notice fails to timely elect in writing to terminate this Agreement within the five (5) business day period as set forth above in this Section 8(c), it shall be deemed an election to proceed in accordance with clause (i) above.

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     9. Remedies.

          (a) If Option Grantor shall be in default hereunder, Option Holder shall deliver a written notice to Option Grantor on or before the Closing stating with particularity the alleged default of Option Grantor and the action required by Option Grantor to cure such default, whereupon Option Grantor shall have ten (10) days after receipt of such written notice in which to cure the alleged default (and the Closing Date shall be delayed, if necessary, until the end of such ten (10) day period), and in the event such default is not cured within such ten (10) day period, Option Holder may elect to either: (i) waive such default by Option Grantor or (ii) terminate this Agreement by written notice to Option Grantor, in which case the Option Payment shall be returned to Option Holder, Option Grantor shall reimburse Option Holder for Option Holder’s out-of-pocket due diligence costs to third parties upon presentation to Option Grantor of actual third party invoices, not to exceed $500,000; or (iii) enforce specific performance of this Agreement; provided, however, that any such action must be filed and served not later than ninety (90) days after the Closing Date, or the remedy of specific performance shall be deemed waived; and further provided that if specific performance is not a legally available remedy because Option Grantor has conveyed the Membership Interests to a third party other than Option Holder or the Companies have conveyed title to the Property to a third party other than Option Holder, then Option Holder shall be entitled to exercise any and all other remedies available at law or in equity. In no event (other than under the provision to clauses (ii) and (iii) above) shall Option Grantor be liable to Option Holder for any actual, punitive, speculative, consequential or other damages. Nothing in this Section shall limit Option Holder’s rights to indemnification specifically set forth in this Agreement or Option Holder’s right to recover from Option Grantor costs and fees set forth in Section 10(g).

          (b) If Option Holder breaches this Agreement, Option Grantor’s sole and exclusive remedy will be to terminate this Agreement, such termination to be effective immediately upon Option Grantor giving written notice of termination to Option Holder. Upon such termination, Option Grantor will be entitled to receive the Option Payment, as liquidated damages and not as a penalty, the parties agreeing and stipulating that the exact amount of damages would be extremely difficult to ascertain and that the Option Payment constitutes a reasonable and fair approximation of such damages. Nothing in this Section shall limit Option Grantor’s rights to indemnification specifically set forth in this Agreement or Option Grantor’s right to recover from Option Holder costs and fees set forth in Section 10(g).

     10. Miscellaneous.

               (a) Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to be an adequate and sufficient notice if given in writing and service is made either by (i) personal delivery, in which case the service shall be deemed received the date of such personal delivery, (ii) nationally recognized overnight air courier service, next day delivery, prepaid, in which case the notice shall be deemed to have been received one (1) business day following delivery to such nationally recognized overnight air courier service, or (iii) at the time of being sent by facsimile if delivery thereof is confirmed by sender’s receipt of a transmission report, generated by sender’s facsimile machine, which confirms that the facsimile was successfully transmitted in its entirety and provided the facsimile

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was forwarded prior to 5:00 pm at the location of the recipient, and to the following addresses or facsimile numbers:

If to Option Grantor or the Companies:

c/o Apollo Development Company
4615 East Elwood Street, MSC 900086,
Phoenix, Arizona 85040,
Attn: William J. Swirtz
Fax: (480) 966-5394

With a copy to:

Snell & Wilmer
One Arizona Center
Phoenix, Arizona 85004-2202
Attn: Jody K. Pokorski, Esq.
Fax: (602) 382-6070

If to Option Holder:

Principal Real Estate Investors, LLC
711 High Street
Des Moines, Iowa 50392-1360
Attn: Kevin Anderegg
Fax: 866-850-4022

With a copy to:

Macquarie Real Estate, Inc.
One North Wacker Drive
9th Floor
Chicago, IL 60606
Attn.: Kristin Marsilje
Fax: 312-499-8686

With a copy to:

Mayer, Brown, Rowe & Maw LLP
71 S Wacker Drive
Chicago, Illinois 60606
Attn: Ronald Dietrich
Fax: 312-706-8703

or such other address as either party may from time to time specify in writing to the other.

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          (b) Brokers and Finders. If Option Holder exercises the Option and purchases the Membership Interests under the Purchase and Sale Agreement, Option Grantor shall pay a commission in accordance with the terms of the Purchase and Sale Agreement.

          (c) Successors and Assigns. Except as set forth in this Section, this Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors, heirs, administrators and assigns. Without being relieved of any liability under this Agreement, Option Holder reserves the right to acquire the Membership Interests in any entity controlled by, controlling or under common control with Option Holder, upon written notice to Option Grantor given at least five (5) business days prior to the Closing Date. Except as set forth in the preceding sentence, Option Holder may not assign its rights hereunder to any person or entity without Option Grantor’s prior written consent, which may be conditioned or withheld in Option Grantor’s sole and absolute discretion. Any assignment consented to by Option Grantor shall not relieve Option Holder of Option Holder’s continuing covenants and obligations under this Agreement. Any purported assignment of Option Holder’s rights hereunder that does not comport with the foregoing shall be strictly prohibited and shall be deemed void. Except as set forth in the following sentence, Option Grantor may not assign any of its rights hereunder to any person or entity without Option Holder’s prior written consent, which may be conditioned or withheld in Option Holder’s sole and absolute discretion.

          (d) Amendments and Terminations. Except as otherwise provided herein, this Agreement may be amended or modified by, and only by, a written instrument executed by Option Grantor and Option Holder.

          (e) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona.

          (f) Merger of Prior Agreements. This Agreement supersedes all prior agreements and understandings between the parties hereto relating to the subject matter hereof.

          (g) Enforcement. In the event either party hereto fails to perform any of its obligations under this Agreement or in the event a dispute arises concerning the meaning or interpretation of any provision of this Agreement, the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay any and all costs and expenses incurred by the other party in enforcing or establishing its rights hereunder, including, without limitation, court costs and reasonable attorneys’ fees. Option Holder and Option Grantor both acknowledge each has been advised by counsel as to their respective rights, duties and obligations in this Agreement and have had ample opportunity to negotiate same. Thus, both Option Holder and Option Grantor acknowledge that any ambiguity in this Agreement should not necessarily be resolved against the drafter of this Agreement.

          (h) Time of the Essence. Time is of the essence of this Agreement.

          (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but such counterparts when taken together shall constitute but one Agreement.

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          (j) Survivability. All representations and warranties by the respective parties contained herein or made in writing pursuant to this Agreement are intended to and shall remain true and correct as of the time of Closing, shall be deemed to be material, and shall survive the execution and delivery of this Agreement for a period of one (1) year from the Closing Date except that all representations and warranties related to taxes, including, without limitation Section 8(a)(x), shall survive for a period equal to thirty (30) days after the applicable statute of limitation expires. All statements contained in any certificate or other instrument delivered at any time by or on behalf of Option Grantor in connection with the transaction contemplated hereby shall constitute representations and warranties hereunder.

          (k) Memorandum of Option. Concurrently with the execution of this Agreement, Option Grantor, Option Holder and the Companies shall execute a recordable Memorandum of Option in the form attached hereto as Exhibit “F” (the “Memorandum”). Option Holder is hereby authorized to record such Memorandum in the public records of the County and State where the Assets are located. At the time of any bona fide termination of Option Holder’s rights under this Agreement, Option Holder shall execute and record a document evidencing such termination. Contemporaneously with the execution of this Agreement, Option Holder shall execute and deliver to Title Company, a Notice of Termination of Option and Quit-Claim Deed in the form attached hereto as Exhibit “G” (the “Termination”), releasing any and all interests of Option Holder under the Memorandum. If the Option expires or lapses or is terminated, Option Grantor may instruct Title Company in writing (with a copy to Option Holder) that the Termination is to be recorded and unless Option Holder notifies Title Company within ten (10) days following receipt of such instruction that it disputes that the Option has expired, lapses or terminate, then Title Company shall (a) insert the recording information for the Memorandum in the Termination, and then (b) record the Termination in the official records of Maricopa County, Arizona, and Option Holder expressly and irrevocably releases Title Company from liability for doing so to the extent done in good faith. In addition, at the time of the termination of Option Holder’s rights under this Agreement, at Option Grantor’s reasonable request, Option Holder shall also execute and record any other documents evidencing such termination.

          (l) Proper Execution. The submission by Option Grantor to Option Holder of this Agreement in unsigned form shall have no binding force and effect, shall not constitute an option, and shall not confer any rights or impose any obligations upon either Option Holder or Option Grantor irrespective of any reliance thereon, change of position or partial performance until both Option Holder and Option Grantor shall have executed and delivered to the other party this Agreement.

          (m) Exclusivity. Option Grantor agrees to not actively solicit offers to purchase the Membership Interests and agrees to prohibit the Companies from actively soliciting offers to purchase the Assets or any portion thereof, from other prospective purchasers on or after the execution date of this Agreement, unless Option Holder defaults under the terms of this Agreement, or either party terminates this Agreement according to the terms contained herein or Option Holder fails to exercise the Option prior to the Option Exercise Date.

          (n) Personal Liability. There shall be no personal liability imposed on the individuals who have executed this Agreement (or the attached exhibits).

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          (o) Time Periods. Except as expressly provided for in this Agreement, the time for performance of any obligation or taking any action under this Agreement will be deemed to expire at 5:00 p.m. (Central Time) on the last day of the applicable time period provided for in this Agreement. If the time for the performance of any obligation or taking any action under this Agreement expires on a Saturday, Sunday or legal holiday, the time for performance or taking such action will be extended to the next succeeding day which is not a Saturday, Sunday or legal holiday.

          (p) Publicity. Prior to the Closing, Option Holder and Option Grantor shall refrain from generating or participating in a publicity statement for an audience other than Option Holder’s existing or prospective capital clients, a press release or other public notice regarding this transaction or designed to inform third parties of this transaction or the terms hereof unless (i) such statement is jointly issued or approved by the parties or (ii) is required under applicable laws, rules, regulations or ordinances or by order of a court or other tribunal having jurisdiction over such disclosure and prior written notice to the other party is given at least 24 hours in advance of the date of such press release or public notice or (iii) is required to enforce the terms of this Agreement. Regardless of whether any statement is issued prior to the Closing (by or with the approval of both parties) or following the Closing, it shall reflect that the sale involves the transfer of the Membership Interests and not the Assets This provision shall survive the Closing.

          (q) Conditions. Option Holder’s obligations under this Agreement are contingent upon the approval of the Investment Committee of Principal Real Estate Investors, LLC and the board of directors of Macquarie Office Trust (the “Transaction Approvals”). Option Grantor acknowledges Option Holder will not seek the Transaction Approvals until the Approval Date has passed and Option Holder has failed to exercise its right of termination of this Agreement. Option Holder makes no representation with regard to the likelihood of obtaining the Transaction Approvals. Option Holder shall have a period of ten (10) business days after the Approval Date to obtain the Transaction Approvals. If for any reason the Investment Committee or board of directors does not approve this Agreement or the transaction contemplated herein, this Agreement shall terminate, the Title Company shall return the Option Payment to Option Holder and neither party shall have any further obligations or rights hereunder. If Option Holder fails to notify Option Grantor and Title Company prior to the expiration of such 10 business day period that the Transaction Approvals have been obtained, then Option Holder shall be deemed not to have obtained the Transaction Approvals, this Agreement shall terminate, the Title Company shall return the Option Payment to Option Holder and neither party shall have any further obligations or rights hereunder except as expressly set forth herein.

          (r) Like-Kind Exchange. Option Holder and Option Grantor agree that, at either party’s election, the sale of the Membership Interests shall be structured as an exchange of like-kind properties under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations and proposed regulations thereunder. The parties agree that such election, must be made at least five (5) business days prior to the Closing Date and shall not extend the Closing Date. If such an election is made by one of the parties hereto, the non-electing party shall reasonably cooperate with the electing party. The electing party shall in all events be responsible for all costs and expenses related to the Section 1031 exchange and shall fully indemnify, defend and hold the non-electing party harmless from and against any and all

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liability, claims, damages, expenses (including reasonable attorneys’ and paralegal fees and reasonable attorneys’ and paralegal fees on appeal), proceedings and causes of action of any kind or nature whatsoever arising out of, connected with or in any manner related to such 1031 exchange that would not have been incurred by the non-electing party if the transaction were a purchase for cash. The provisions of the immediately preceding sentence shall survive closing and the transfer of title to the Membership Interests to Option Holder. Notwithstanding anything to the contrary contained in this paragraph, any such Section 1031 exchange shall be consummated through the use of a facilitator or intermediary so that the non-electing party shall in no event be requested or required to acquire title to any property other than the Membership Interests.

     11. Lot 5.

          (a) In addition to Lots 1 and 3, Riverpoint 1/3/5 owns Lot 5 of Riverpoint, according to the plat recorded in Book 566 of maps, page 04, records of Maricopa County, Arizona (“Lot 5”). Prior to the Closing, Riverpoint 1/3/5 shall convey Lot 5 to Option Grantor or to another entity designated by Option Grantor (the “Lot 5 Owner”), and shall assign, convey or otherwise transfer to the grantee of Lot 5 the following:

               (i) Tracts A through L, Riverpoint, according to Book 566 of Maps, page 04, records of Maricopa County, Arizona (the “Median Tracts”);

               (ii) all of Riverpoint 1/3/5’s right, title and interest in any rights, privileges and easements appurtenant to Lot 5 and the Median Tracts, including, without limitation, all minerals, oil, gas and other hydrocarbon substances as well as all development rights, air rights, water, water rights (and water stock, if any) relating to Lot 5 and the Median Tracts and owned by Riverpoint 1/3/5 and any easements, rights-of-way or other appurtenances used in connection with the beneficial use and enjoyment of Lot 5 or the Median Tracts;

               (iii) all of Riverpoint 1/3/5’s right, title and interest in any improvements then-located on Lot 5 and the Median Tracts, including, without limitation, all buildings and structures located on Lot 5 and the Median Tracts, all apparatus, equipment and appliances used in connection with the operation or occupancy of Lot 5 and the Median Tracts, such as heating and air conditioning systems and facilities used to provide any utility services, refrigeration, ventilation, garbage disposal, recreation or other services on Lot 5 and the Median Tracts;

               (iv) all of Riverpoint 1/3/5’s right, title and interest in any apparatus, equipment or appliances which are a part of the improvements on Lot 5 and the Median Tracts;

               (v) the Riverpoint 1/3/5’s interest in any contracts or agreements, utility contracts or other rights relating to the ownership of Lot 5 and the Median Tracts, the improvements on any Lot 5 and the Median Tracts or the Lot 5 personal property;

               (vi) the rights and obligations as “Declarant” under the Declaration of Covenants, Conditions, Easements and Restrictions for Riverpoint Business Park (the “CC&Rs”), including, but not limited to, the rights and obligations held by Declarant as the Approving Agent and as the Operator, as such terms are defined therein;

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               (vii) the rights and obligations of Riverpoint 1/3/5 under that certain Lease (No. 84051-001) dated January 1, 2004, by and between Riverpoint 1/3/5, as landlord, and the City of Phoenix, as tenant (the “Lift Station Lease”); and

               (viii) the rights and obligations of Riverpoint 1/3/5 under that certain City of Phoenix, Arizona Revocable Permit No. RP-04002-05-I, issued by the City of Phoenix Street Transportation Department to Riverpoint 1/3/5, as permittee, recorded on March 12, 2004 as Document No. 2004-0255408 in the Official Records of Maricopa County Recorder and that certain City of Phoenix Street Improvements Maintenance Agreement MH-04002, by and between the City of Phoenix, an Arizona municipal corporation, and Riverpoint Lots 1/3/5, LLC, an Arizona limited liability company, dated March 5, 2004, and recorded on March 12, 2004 as Document No. 2004-0255409 in the Official Records of Maricopa County Recorder (collectively the “City Permits”).

(Lot 5 and the items described in items (i) through (viii) above are referred to at the “Lot 5 Property.”

          (b) Lot 5, the Median Tracts and any improvements thereon and rights appurtenant thereto shall be conveyed by special warranty deed to the Lot 5 Owner; provided, however, that notwithstanding any warranty of title set forth in the special warranty deed or otherwise, Riverpoint 1/3/5 shall only be liable for a breach such warranty or any other claim relating to the status of title for the Lot 5 Property to the extent that coverage for such claim is available under the Title Policy, it being understood and agreed that the parties intend that Riverpoint 1/3/5 will not have any obligation to pay for or reimburse the Lot 5 Owner for any claims relating to a breach of warranty of title other than out of proceeds actually received by Riverpoint 1/3/5 from the Title Policy.

          (c) In connection with the assignment of the Membership Interests to Option Holder, Option Grantor shall indemnify, defend and hold harmless Option Holder for from and against all claims related to the ownership by Riverpoint 1/3/5 of the Lot 5 Property, including, but not limited to claims related to or arising out of (i) the construction of improvements on Lot 5, and (ii) any actions undertaken by Riverpoint 1/3/5 as the Declarant under the CC&Rs; (iii) the ownership and maintenance of the Median Tracts; (iv) the Lift Station Lease; or the (v) the City Permits. This indemnity shall survive the Closing.

          (d) Option Grantor reserves the right to change the name of Riverpoint 1/3/5 to “Riverpoint Lots 1/3, LLC” prior to Closing.

[ Remainder of page intentionally left blank; signature page follows.]

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

Option Holder: MACQUARIE RIVERPOINT AZ, LLC, a Delaware limited liability company
By:	Macquarie Office (US) No. 2 Corporation, a Minnesota corporation, its sole member and manager
By:	/s/ Simon Jones
	Its: Chief Executive Officer
Option Grantor: APOLLO GROUP, INC., an Arizona corporation
By:	/s/ William J. Swirtz
	Its: Authorized Officer

ACCEPTED AND APPROVED: RIVERPOINT LOTS 1/3/5, LLC, an Arizona limited liability company
By:	Apollo Group, Inc., its sole member and manager
By:	/s/ Kenda B. Gonzalez
	Its: Chief Financial Officer
By:	/s/ William J. Swirtz
	Its: Authorized Officer

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RIVERPOINT LOT 2, LLC, an Arizona limited liability company
By:	Apollo Group, Inc., its sole member and manager
By:	/s/ Kenda B. Gonzalez
	Its: Chief Financial Officer
By:	/s/ William J. Swirtz
	Its: Authorized Officer

JOINDER

Macquarie Office (US) No 2 Corporation, a Minnesota corporation joins in and executes this Agreement solely for the purpose of guaranteeing Option Holder’s obligations to indemnify, defend and hold harmless Option Grantor pursuant to Sections 2(b) and 3(f) of this Agreement and for the payment of costs and fees pursuant to Section 10(g), only to the extent that any of such obligations are not covered by insurance proceeds and not to exceed the amount of $500,000.

Macquarie Office (US) No 2 Corporation, a Minnesota corporation.

By:	/s/ Simon Jones
	Its: Chief Executive Officer

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TABLE OF CONTENTS

		Page
1.	Recitals		2
2.	Construction of Improvements; Material Change Orders		2
3.	Option to Purchase		5
4.	Option Payment		7
5.	Purchase Price		8
6.	Assignment of Membership Interests		9
7.	The Closing		9
8.	Representations and Warranties		9
9.	Remedies		16
10.	Miscellaneous		17
11.	Lot 5		21

-i-

EX-10.7

Exhibit 10.7

FIRST AMENDMENT TO OPTION AGREEMENT

     THIS FIRST AMENDMENT TO OPTION AGREEMENT (the “Amendment”) is entered into this 7th day of March, 2007 (the “Effective Date”), by and between APOLLO GROUP, INC., an Arizona corporation (“Option Grantor”) and MACQUARIE RIVERPOINT AZ, LLC, a Delaware limited liability company (the “Option Holder”).

RECITALS:

     A. Option Grantor and Option Holder are parties to that certain Option Agreement dated June 20, 2006 (the “Agreement”), whereby Option Grantor agreed to grant to Option Holder an Option to acquire the Membership Interests in the Companies following completion of the Improvements in accordance with the terms and conditions set forth in the Agreement.

     B. In addition to the Improvements to be made to Lots 1, 2 and 3 as described in the Plans and Specifications under the Agreement (the “Original Improvements”), Riverpoint 1/3/5 intends to improve the real property known as Lot 5 of Riverpoint, according to the plat recorded in Book 566 of maps, page 04, records of Maricopa County, Arizona (“Lot 5”) with two six story Class A office buildings and a multi-level parking structure (collectively, the “Lot 5 Improvements”) in accordance with and as more particularly described in the plans and specifications listed on Exhibit “B” attached hereto (as modified by any Change Orders permitted under the Agreement, the “Lot 5 Plans and Specifications”) which are hereby agreed to be in addition to and not in substitution for the Plans and Specifications attached as Exhibit B to the Agreement.

     C. Riverpoint 1/3/5 is the owner of Lot 5 and the Lot 5 Improvements currently under construction on Lot 5.

     D. Section 11 of the Agreement provides that prior to the Closing, Riverpoint 1/3/5 will convey the Lot 5 Property to the Option Grantor or another entity designated by the Option Grantor.

     E. Option Grantor and Option Holder now desire to amend the Agreement to set forth the terms on which the Lot 5 Property would remain in Riverpoint 1/3/5 and would be included in the sale to Option Holder.

AGREEMENT:

     NOW THEREFORE, for good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties agree as follows:

     1. Rectials. Each of the recitals set forth above are incorporated herein as covenants and agreements of the parties hereto.

     2. Definitions. All initial capitalized terms used herein shall have the meanings ascribed thereto in the Agreement, unless otherwise specifically defined herein. Unless the

Option Holder terminates this Amendment in accordance with Paragraph 4 below, the following defined terms in the Agreement shall be amended as follows:

          (a) “Assets” is hereby amended to include the Real Property and the Improvements, as such terms are amended below, together with the following:

               (i) Tracts A through L, Riverpoint, according to Book 566 of Maps, page 04, records of Maricopa County, Arizona (the “Median Tracts”);

               (ii) all of Riverpoint 1/3/5’s right, title and interest in any apparatus, equipment or appliances which are a part of the improvements on the Median Tracts;

               (iii) the Riverpoint 1/3/5’s interest in any contracts or agreements, utility contracts or other rights relating to the ownership of the Median Tracts, the improvements on the Median Tracts;

               (iv) the rights and obligations as “Declarant” under the Declaration of Covenants, Conditions, Easements and Restrictions for Riverpoint Business Park (the “CC&Rs”), including, but not limited to, the rights and obligations held by Declarant as the Approving Agent and as the Operator, as such terms are defined therein;

               (v) the rights and obligations of Riverpoint 1/3/5 under that certain Lease (No. 84051-001) dated January 1, 2004, by and between Riverpoint 1/3/5, as landlord, and the City of Phoenix, as tenant (the “Lift Station Lease”); and

               (vi) the rights and obligations of Riverpoint 1/3/5 under that certain City of Phoenix, Arizona Revocable Permit No. RP-04002-05-I, issued by the City of Phoenix Street Transportation Department to Riverpoint 1/3/5, as permittee, recorded on March 12, 2004 as Document No. 2004-0255408 in the Official Records of Maricopa County Recorder and that certain City of Phoenix Street Improvements Maintenance Agreement MH-04002, by and between the City of Phoenix, an Arizona municipal corporation, and Riverpoint Lots 1/3/5, LLC, an Arizona limited liability company, dated March 5, 2004, and recorded on March 12, 2004 as Document No. 2004-0255409 in the Official Records of Maricopa County Recorder (collectively the “City Permits”), to the extent assignable.

          (b) “Improvements” is hereby amended to add the Lot 5 Improvements to the Improvements originally described in the Agreement. For purposes of this Amendment, the “Improvements” (as that term was originally defined in the Agreement without regard to this Amendment) are be referred to in this Amendment as the “Original Improvements”.

          (c) “Option Payment” is hereby amended to add the Lot 5 Option Payment, as such term is defined in Paragraph 5 below, to the Option Payment originally specified in the Agreement.

          (d) “Plans and Specifications” is hereby amended to add the Lot 5 Plans and Specifications to the Plans and Specifications originally described in the Agreement. For purposes of this Amendment, the Plans and Specifications for the Original Improvements may sometimes be referred to in this Amendment as the “Original Plans and Specifications”.

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          (e) “Real Property” is hereby amended to add Lot 5 to the Real Property originally described in the Agreement.

          (f) “UOP Lease” is hereby amended to mean all of the three (3) following leases collectively: (i) the lease for the Original Improvements attached to the Agreement as Exhibit C (the “Lot 1/2/3 Lease”), (ii) the lease for East six-story office building at 4035 S, Riverpoint Parkway attached hereto as Exhibit “C-2” (the “Lot 5 Building 1 Lease”), and (iii) the lease for the West six-story office building at 4045 S. Riverpoint Parkway attached hereto as Exhibit “C-3” (the “Lot 5 Building 2 Lease”).

     3. Site Plan. Unless the Option Holder terminates this Amendment in accordance with Paragraph 4 below, Exhibit A attached to the Agreement (site plan of the Real Property) is hereby deleted and replaced with Exhibit “A” attached to this Amendment.

     4. Due Diligence. Option Grantor has provided to Option Holder the due diligence Materials listed on Exhibit “I” attached hereto (collectively, the “Lot 5 Due Diligence Items”). On or before 5:00 p.m. (Central Time) on the date that is the thirtieth (30^th) day following the Effective Date (the “Lot 5 Approval Date”), if Option Holder disapproves of any of the Lot 5 Due Diligence Items in accordance with the terms of this Paragraph 4, for any reason or for no reason, this Amendment shall terminate and be of no further force or effect without any liability on the part of either party with respect to this Amendment, the Lot 5 Option Payment (as such term is defined in Paragraph 5 below) shall be immediately returned to Option Holder, and the terms and conditions of the Agreement shall remain in full force and effect, unmodified and unchanged in any way by this Amendment. If by 5:00 p.m. (Central Time) on the Lot 5 Approval Date Option Holder does not deliver an approval notice to Option Grantor (the “Lot 5 Approval Notice”), there shall be a conclusive presumption that Option Holder has disapproved the Lot 5 Due Diligence Items, this Amendment shall terminate and be of no further force or effect without any liability on the part of either party with respect to this Amendment, the Lot 5 Option Payment shall be immediately returned to Option Holder, and the terms and conditions of the Agreement shall remain and continue in full force and effect, unmodified and unchanged in any way by this Amendment. In the event of such termination, Option Holder shall promptly return to Option Grantor all Lot 5 Due Diligence Items and any copies of same. If by 5:00 p.m. (Central Time) on the Lot 5 Approval Date, Option Holder delivers a Lot 5 Approval Notice, then Option Holder will be deemed to have approved the Lot 5 Due Diligence Items, Option Holder shall have no further right to terminate this Amendment pursuant to this Paragraph 4, this Amendment shall remain in full force and effect, and the Option Payment (as such defined term is amended by this Amendment) shall be non-refundable except as otherwise expressly provided in this Amendment or the Agreement.

     5. Option Payment. Within five (5) business days of the Effective Date, Option Holder shall deposit with the Title Company the additional sum of Five Million and No/100 Dollars ($5,000,000.00) (the “Lot 5 Option Payment”). If Option Holder fails to timely deliver the Lot 5 Approval Notice in accordance with Paragraph 4 above, the Lot 5 Option Payment shall be immediately returned to Option Holder, and the Option Holder shall promptly return to Option Grantor all Lot 5 Due Diligence Items. Unless the Option Holder terminates this Amendment in accordance with Paragraph 4 above, the Lot 5 Option Payment shall be added to,

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and treated in the same manner as, the original Option Payment deposited pursuant to the Agreement.

     6. Construction of Improvements. Unless the Option Holder terminates this Amendment in accordance with Paragraph 4 above, all of the terms and conditions of Section 2 of the Agreement shall apply mutatis mutandis to Option Grantor’s obligation to construct the Lot 5 Improvements; provided, however, that:

          (a) Section 2(a)(iv) shall be amended to delete the phrase “10 floors” at the end of such provision and shall be replaced with the phrase “the Improvement’s floors”;

          (b) Section 2(a)(ix) shall be deleted in its entirety and replaced with the following:

Modify the site plan or floor plan for the office tower under construction on Lot 3 in such a manner to decrease the rentable area below 265,000 rentable square feet or increase the rentable area above 290,000 square feet (as measured in accordance with the BOMA Standard defined below); or modify the site plan or floor plan for the office buildings under construction on Lot 5 in such a manner to decrease the total rentable area for either building below 325,000 rentable square feet or increase the total rentable area for either buildings above 338,000 square feet; or modify the number of surface and structured parking spaces so that the parking ratio is less than 7.5 per 1,000 square feet of rentable area of the original office tower portion of the Original Improvements; or modify the number of structured parking spaces so that the parking ratio is less than 6.50 per 1,000 square feet of rentable area of the two six story office building portion of the Lot 5 Improvements;

          (c) Clause (z) of the last paragraph of Section 2(a) of the Agreement shall be deleted in its entirety and replaced with the following:

(z) make any change reflected in a Material Change Order that is disapproved pursuant to this Section, in which event:

     (1) if the change reflected in a Material Change Order that is disapproved pursuant to this Section involves the Original Improvements, Option Holder’s sole remedy shall be to terminate this Agreement with respect to both the Original Improvements and the Lot 5 Improvements, and receive an immediate full refund of the Option Payment less $125,000, which shall be paid to Option Grantor as consideration for taking the Membership Interests off the market; or

     (2) if the change reflected in a Material Change Order that is disapproved pursuant to this Section involves the Lot 5 Improvements, Option Holder’s sole remedy shall be to either terminate this Agreement (A) only with respect to the Lot 5 Improvements and receive an immediate full refund of the Option Payment less $75,000 or (B) with respect to both

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the Original Improvements and the Lot 5 Improvements and receive an immediate full refund of the Option Payment less $125,000, and the $75,000 or $125,000, as applicable, shall be paid to Option Grantor as consideration for taking the Membership Interests off the market.

     7. Option to Purchase.

          (a) Unless the Option Holder terminates this Amendment in accordance with Paragraph 4 above, Section 3(b) of the Agreement is deleted in its entirety and replaced with the following subsections 3(b)(i), 3(b)(ii) and 3(b)(iii):

     (i) Option Grantor shall notify Option Holder the date that it anticipates that Completion of the Original Improvements (as defined in the following sentence) will occur (the “Estimated Original Completion Notice”). Option Grantor shall provide written notice to Option Holder (and evidence of the completion of each thereof) (the “Original Completion Notice”), within five (5) business days after the last to occur of (i) final completion of the Original Improvements substantially in accordance with the Original Plans and Specifications; (ii) receipt of a notice of substantial completion from Option Grantor’s architect for the Original Improvements; and (iii) issuance of an unconditional final certificate of occupancy from the City of Phoenix for the Original Improvements (“Completion of the Original Improvements”).

     (ii) Option Grantor shall notify Option Holder the date that it anticipates that Completion of the Lot 5 Improvements (as defined in the following sentence) will occur (the “Estimated Lot 5 Completion Notice”). Option Grantor shall provide written notice to Option Holder (and evidence of the completion of each thereof) (the “Lot 5 Completion Notice”), within five (5) business days after the last to occur of (i) final completion of the Lot 5 Improvements substantially in accordance with the Lot 5 Plans and Specifications; (ii) receipt of a notice of substantial completion from Option Grantor’s architect for the Lot 5 Improvements; and (iii) issuance of an unconditional final certificate of occupancy from the City of Phoenix for the Lot 5 Improvements (“Completion of the Lot 5 Improvements”).

     (iii) Option Holder may exercise the Option by giving written notice (the “Option Exercise Notice”) of the exercise thereof to Option Grantor on or before the later of (i) five (5) business days following delivery by Option Grantor to Option Holder of the later of the Original Completion Notice or the Lot 5 Completion Notice or (ii) sixty (60) days after the delivery by Option Grantor to Option Holder of the later of the Estimated Original Completion Notice or the Estimated Lot 5 Completion Notice (the “Option Exercise Date”).

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          (b) Unless the Option Holder terminates this Amendment in accordance with Paragraph 4 above, Section 3(c) of the Agreement is hereby amended by deleting the reference in the first sentence to “September 30, 2007” and replacing it with “March 31, 2008”, and by extending the Outside Expiration Date to August 31, 2008, and by adding the following to the end of Section 3(c):

Notwithstanding anything contained herein to the contrary, if all of the Improvements other than the Lot 5 Improvements are complete by the Outside Expiration Date, Option Holder may elect, by written notice to Option Grantor on or before the Outside Expiration Date to proceed with the transaction and purchase the Original Improvements on the terms and conditions set forth in the Agreement unmodified and unchanged in any way by this Amendment except with respect to the Outside Expiration Date as modified herein and Option Holder shall receive an immediate full refund of the Lot 5 Option Payment. However, if Completion of the Lot 5 Improvements has not occurred by the Option Exercise Date due to a Force Majeure Delay, Option Grantor will have the right to extend the Option Exercise Date until Completion of the Lot 5 Improvements, but in no event later than the Outside Expiration Date.

     8. Purchase and Sale Agreement. Unless the Option Holder terminates this Amendment in accordance with Paragraph 4 above, Exhibit “D” of the Agreement is hereby replaced with Exhibit “D” attached to this Amendment.

     9. Purchase Price. Unless the Option Holder terminates this Amendment in accordance with Paragraph 4 above, Section 5 of the Agreement shall be deleted in its entirety and replaced with the following:

5. Purchase Price. Subject to the adjustment below, the purchase price at which Option Grantor, as seller, shall sell and the Option Holder, as purchaser, shall purchase the Membership Interests, pursuant to the contract created by the exercise of the Option (the “Purchase Price”) shall be One Hundred Sixty Million Fifty Thousand and No/100 Dollars ($160,050,000.00). The Option Payment also shall be paid to Option Grantor at Closing (in addition to the Purchase Price), and the Option Holder shall receive a credit against the Purchase Price in an amount equal to the interest earned on the Option Payment from the date of deposit with the Title Company through the date of the Closing. The Purchase Price was determined based on the following: (a) the lease revenue to be derived for the Original Improvements assuming the office building constructed as part of the Improvements to Lot 3 will contain a net rentable area of 267,949 square feet, and (b) the office buildings constructed as part of the Improvements to Lot 5 will contain a total net rentable area of 331,702 square feet. Within thirty (30) days following the later of the Estimated Original Completion Notice or the Estimated Lot 5 Completion Notice, Option Grantor shall provide Option Holder with a certification of the rentable area of each of the Lot 3 office tower and a

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certification of the rentable area of the Lot 5 office buildings measured by Carpenter Sellers Associates in accordance with “American National Standard ASNI/BOMA Z65.1-1996: Standard Method for Measuring Floor Area in Office Buildings” issued by the Building Owners and Managers Association International (the “BOMA Standard”). The rent under the UOP Lease shall be determined based on the net rentable area of the Lot 3 office tower and the Lot 5 office buildings calculated in accordance with the BOMA Standard, and therefore, the Purchase Price shall be adjusted at closing to equal (i) the rentable area of the Lot 3 office tower as set forth in such certification multiplied by $264.23 US dollars plus (ii) the rentable area of the Lot 5 office buildings as set forth in such certification multiplied by $269.07 US dollars.

     10. Representations and Warranties. Unless the Option Holder terminates this Amendment in accordance with Paragraph 4 above, Section 8(a)(xix) of the Agreement shall be amended by deleting the phrase “Other than Lot 5 (defined in Section 11 below),” in the first sentence of such provision.

     11. Memorandum of Option. Concurrently with the execution of this Amendment, Option Grantor, Option Holder and the Companies shall execute a recordable First Amendment to Memorandum of Option in the form attached hereto as Exhibit “H” (the “Memorandum Amendment”). Option Holder is hereby authorized to record such Memorandum Amendment in the public records of the County and State where the Assets are located. At the time of any bona fide termination of Option Holder’s rights under this Agreement as to the Original Improvements or the Lot 5 Improvements or both, Option Holder shall execute and record a document evidencing such termination. Contemporaneously with the execution of this Agreement, Option Holder shall execute and deliver to Title Company, a Notice of Termination of Option and Quit-Claim Deed in the forms attached hereto as Exhibit “J-1” and “J-2” (each a “Termination”) which Exhibit “J-1” and “J-2” hereby replace in its entirety Exhibit G of the Agreement, releasing any and all interests of Option Holder with respect to the Original Improvements (Exhibit “J-1”) or both the Original Improvements and the Lot 5 Improvements (Exhibit “J-2”) under the Memorandum, as amended. If the Option expires or lapses or is terminated as to either the Original Improvements, the Lot 5 Improvements or both, Option Grantor may instruct Title Company in writing (with a copy to Option Holder) that the applicable Termination is to be recorded and unless Option Holder notifies Title Company within ten (10) days following receipt of such instruction that it disputes that the Option has expired, lapsed or terminated, then Title Company shall (a) insert the recording information for the Memorandum, as amended, in the applicable Termination, and then (b) record the applicable Termination in the official records of Maricopa County, Arizona, and Option Holder expressly and irrevocably releases Title Company from liability for doing so to the extent done in good faith. In addition, at the time of the termination of any or all of Option Holder’s rights under this Agreement, at Option Grantor’s reasonable request, Option Holder shall also execute and record any other documents evidencing such termination.

     12. Lot 5. Unless the Option Holder terminates this Amendment in accordance with Paragraph 4 above, Section 11 of the Agreement shall be deleted in its entirety.

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     13. Miscellaneous. The parties hereto acknowledge that except as expressly modified hereby, the Agreement remains unmodified and in full force and effect. In the event of any conflict or inconsistency between the terms of this Amendment and the Agreement, the terms of this Amendment shall control. This Amendment may be executed simultaneously or in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.

     14. Counterparts. This Amendment may be executed in counterparts, each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Amendment by telecopy to the other party shall be effective as delivery of a manually executed counterpart of this Amendment.

[Remainder of page intentionally left blank; signature page follows.]

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     IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.

OPTION GRANTOR: APOLLO GROUP, INC., an Arizona corporation
By:	/s/ William J. Swirtz
	Its: Authorized Officer
OPTION HOLDER: MACQUARIE RIVERPOINT AZ, L.L.C., a Delaware limited liability company
By:   Macquarie Office (US) No. 2 Corporation, a Minnesota corporation, its sole member and manager
By:	/s/ Simon Jones
	Its: Chief Executive Officer

ACCEPTED AND APPROVED: Riverpoint 1/3/5 and Riverpoint 2, as signatories to the Agreement, hereby accept and approve this Amendment RIVERPOINT LOTS 1/3/5, LLC, an Arizona limited liability company By: Apollo Group, Inc., its sole member and manager
By:	/s/ William J. Swirtz
	Its: Authorized Officer
By:	/s/ Brian Mueller
	Its: President
RIVERPOINT LOT 2, LLC, an Arizona limited liability company By: Apollo Group, Inc., its sole member and manager
By:	/s/ William J. Swirtz
	Its: Authorized Officer
By:	/s/ Brian Mueller
	Its: President

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EX-10.8

Exhibit 10.8

SECOND AMENDMENT TO OPTION AGREEMENT

     THIS SECOND AMENDMENT TO OPTION AGREEMENT (the “Amendment”) is entered into this 17th day of March, 2008 (the “Effective Date”), by and between APOLLO GROUP, INC., an Arizona corporation (“Option Grantor”) and MACQUARIE RIVERPOINT AZ, LLC, a Delaware limited liability company (the “Option Holder”).

RECITALS:

     A. Option Grantor and Option Holder are parties to that certain Option Agreement dated June 20, 2006, as amended by First Amendment to Option Agreement dated March 7, 2007 (as amended, the “Agreement”).

     B. Option Grantor delivered the Estimated Original Completion Notice and the Estimated Lot 5 Completion Notice to Option Holder on January 15, 2008 and the Original Completion Notice and the Lot 5 Completion Notice to Option Holder on March 6, 2008.

     C. Option Grantor and Option Holder now desire to amend the Agreement to extend the Option Exercise Date and the Closing Date as set forth in this Amendment.

AGREEMENT:

     NOW THEREFORE, for good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties agree as follows:

     1. Recitals. Each of the recitals set forth above are incorporated herein as covenants and agreements of the parties hereto.

     2. Definitions. All initial capitalized terms used herein shall have the meanings ascribed thereto in the Agreement, unless otherwise specifically defined herein.

     3. Option Exercise Date. The last sentence of Section 3(b)(iii) of the Agreement is hereby amended in its entirety to read as follows:

Option Holder may exercise the Option by giving written notice (the “Option Exercise Notice”) of the exercise thereof to Option Grantor on or before April 28, 2008 (the “Option Exercise Date”).

Section 3(c) is deleted in its entirety.

     4. Closing Date. The first sentence of Section 7 of the Agreement is hereby amended in its entirety as follows:

Upon the exercise of the Option as provided in Section 3, the closing of the transaction (the “Closing”) shall be held and delivery of all items shall be made under the terms and conditions of the Purchase and Sale Agreement through an escrow with the Title Company, on May 1, 2008 (the “Closing Date”).

     5. Extension Payment. In consideration for the extension of the Option Exercise Date and the Closing Date, on or before March 21, 2008, Option Holder shall pay to Option Grantor direct and outside of escrow $250,000 (the “Extension Payment”), which shall be non-refundable. The Extension Payment shall be paid to Option Grantor in addition to the Purchase Price (consistent with the treatment of the Option Payment under the Agreement), and the total amount payable by the Option Holder shall equal the Purchase Price plus the Option Payment plus the Extension Payment. If Option Holder fails to pay the Extension Payment within the aforementioned time period, the Option shall terminate and be of no further effect. If Option Holder fails to exercise the Option on or before the Option Exercise Date (as the same has been extended pursuant to this Amendment), Option Holder acknowledges that Option Grantor shall be entitled to receive the Option Payment, and in such event, the Option Payment shall be immediately released to Option Grantor. Option Holder hereby waives any defenses to the release of the Option Payment existing as of the date of this Amendment, but will continue to have the right to a return of the Option Payment as the result of any Option Grantor’s default under the Agreement or the Purchase and Sale Agreement following the date of this Amendment or the failure of a condition precedent to Option Holder’s performance under the Agreement or the Purchase and Sale Agreement, which failure of the relevant condition is within the sole control of, or caused solely by Option Grantor, including, without limitation, under Section 4(d)(2), Section 4(d)(3) and Section 4(d)(5) of the Agreement and Section 5(b), Section 5(d), Section 5(f) and Section 5(g) of the Purchase and Sale Agreement.

     6. Miscellaneous. The parties hereto acknowledge that except as expressly modified hereby, the Agreement remains unmodified and in full force and effect. In the event of any conflict or inconsistency between the terms of this Amendment and the Agreement, the terms of this Amendment shall control. This Amendment may be executed simultaneously or in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.

     7. Counterparts. This Amendment may be executed in counterparts, each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Amendment by telecopy to the other party shall be effective as delivery of a manually executed counterpart of this Amendment.

[Remainder of page intentionally left blank; signature page follows.]

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     IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.

OPTION GRANTOR: APOLLO GROUP, INC., an Arizona corporation
By:	/s/ Brian Swartz
	Its: Senior Vice President
OPTION HOLDER: MACQUARIE RIVERPOINT AZ, L.L.C., a Delaware limited liability company
By:	Macquarie Office (US) No. 2 Corporation, a Minnesota corporation, its sole member and manager
By:	/s/ Paul Sorenson
	Its: Vice President

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ACCEPTED AND APPROVED: Riverpoint 1/3/5 and Riverpoint 2, as signatories to the Agreement, hereby accept and approve this Amendment RIVERPOINT LOTS 1/3/5, LLC, an Arizona limited liability company
By:	Apollo Group, Inc., its sole member and manager
By:	/s/ Brian Swartz
	Its: Senior Vice President
By:	/s/ P. Robert Moya
	Its: Secretary
RIVERPOINT LOT 2, LLC, an Arizona limited liability company
By:	Apollo Group, Inc., its sole member and manager
By:	/s/ Brian Swartz
	Its: Senior Vice President
By:	/s/ P. Robert Moya
	Its: Secretary

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EX-31.1

EXHIBIT 31.1

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

I, Brian E. Mueller, certify that:

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

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

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

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

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

          b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

Date: March 27, 2008

/s/ Brian E. Mueller  

Brian E. Mueller 

President
(Principal Executive Officer) 

EX-31.2

EXHIBIT 31.2

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

I, Joseph L. D’Amico, certify that:

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

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

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

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

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

          b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

Date: March 27, 2008

/s/ Joseph L. D’ Amico  

Joseph L. D’ Amico 

Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer) 

EX-32.1

EXHIBIT 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

     In connection with the Quarterly Report of Apollo Group, Inc. (the “Company”) on Form 10-Q for the three months ended February 29, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian E. Mueller, President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

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

Date: March 27, 2008

/s/ Brian E. Mueller  

Brian E. Mueller 

President
(Principal Executive Officer) 

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

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Apollo Group, Inc. (the “Company”) on Form 10-Q for the three months ended February 29, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph L. D’Amico, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

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

Date: March 27, 2008

/s/ Joseph L. D’Amico  

Joseph L. D’sAmico 

Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer) 

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