##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  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.
  ARIZONA
    
    86-0419443(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 
 
  þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ
  Apollo Group Class A common stock, no par value
    
    167,798,000 SharesApollo Group Class B common stock, no par value
    
    475,000 Shares




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##### 



APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
 PAGEPART I  FINANCIAL INFORMATIONSpecial Note Regarding Forward-Looking Statements
    
    
    3Item 1. Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    39PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3. Defaults Upon Senior Securities
    
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    
    40Item 5. Other Information
    
    
    40Item 6. Exhibits
    
    
    41SIGNATURES
    
    
    42EX-10.1EX-10.2EX-10.3EX-10.4EX-10.6EX-10.7EX-10.8EX-31.1EX-31.2EX-32.1EX-32.2
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Special Note Regarding Forward-Looking Statements
  
    
    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).
  Page 3 of 42




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




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APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Six Months EndedFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,(in thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Tuition and other, net
    
    $
    693,643
    
    
    $
    608,693
    
    
    $
    1,474,317
    
    
    $
    1,276,479Costs and expenses:Instructional costs and services
    
    
    327,723
    
    
    
    294,439
    
    
    
    661,011
    
    
    
    589,194Selling and promotional
    
    
    201,705
    
    
    
    166,940
    
    
    
    378,614
    
    
    
    322,375General and administrative
    
    
    55,011
    
    
    
    55,514
    
    
    
    106,292
    
    
    
    93,129Estimated securities litigation loss (Note 11)
    
    
    168,400
    
    
    
    
    
    
    
    168,400
    
    
    
    Total costs and expenses
    
    
    752,839
    
    
    
    516,893
    
    
    
    1,314,317
    
    
    
    1,004,698Income (loss) from operations
    
    
    (59,196
    )
    
    
    91,800
    
    
    
    160,000
    
    
    
    271,781Interest income and other, net
    
    
    8,059
    
    
    
    6,978
    
    
    
    17,708
    
    
    
    13,410Income (loss) before income taxes
    
    
    (51,137
    )
    
    
    98,778
    
    
    
    177,708
    
    
    
    285,191Provision for (benefit from) income taxes
    
    
    (19,098
    )
    
    
    38,440
    
    
    
    69,882
    
    
    
    110,979Net income (loss)
    
    $
    (32,039
    )
    
    $
    60,338
    
    
    $
    107,826
    
    
    $
    174,212Earnings (loss) per share:Basic income (loss) per share
    
    $
    (0.19
    )
    
    $
    0.35
    
    
    $
    0.64
    
    
    $
    1.01Diluted income (loss) per share
    
    $
    (0.19
    )
    
    $
    0.35
    
    
    $
    0.63
    
    
    $
    1.00Basic weighted average shares outstanding
    
    
    168,005
    
    
    
    173,185
    
    
    
    167,521
    
    
    
    173,153Diluted 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.
 Page 5 of 42




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APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 Three Months Ended
    
    
    Six Months EndedFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,($ in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (32,039
    )
    
    $
    60,338
    
    
    $
    107,826
    
    
    $
    174,212Other comprehensive income (loss) (net of tax):Currency translation gain (loss)
    
    
    (148
    )
    
    
    85
    
    
    
    (529
    )
    
    
    258Comprehensive income (loss)
    
    $
    (32,187
    )
    
    $
    60,423
    
    
    $
    107,297
    
    
    $
    174,470
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 Page 6 of 42




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APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedFebruary 29,
    
    
    February 28,($ in thousands)
    
    2008
    
    
    2007Cash flows provided by (used in) operating activities:Net income
    
    $
    107,826
    
    
    $
    174,212Adjustments to reconcile net income to net cash provided by operating activities:Share-based compensation
    
    
    35,030
    
    
    
    31,879Excess tax benefits from share-based compensation
    
    
    (17,674
    )
    
    
    (1,064
    )Depreciation and amortization
    
    
    37,511
    
    
    
    35,650Amortization of deferred gain on sale-leaseback
    
    
    (893
    )
    
    
    (861
    )Amortization of marketable securities discount and premium, net
    
    
    34
    
    
    
    109Provision for uncollectible accounts receivable
    
    
    58,986
    
    
    
    49,304Estimated 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
    
    
    
    24,829Deferred revenue
    
    
    7,111
    
    
    
    10,494Other liabilities
    
    
    (986
    )
    
    
    (2,227
    )Net cash provided by operating activities
    
    
    309,468
    
    
    
    193,747Cash 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
    
    
    
    571,816Collateralization 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
    
    
    
    4,454Excess tax benefits from share-based compensation
    
    
    17,674
    
    
    
    1,064Net cash provided by financing activities
    
    
    96,697
    
    
    
    5,518Effect of currency exchange gain (loss) on cash and cash equivalents
    
    
    (870
    )
    
    
    258Net increase in cash and cash equivalents
    
    
    72,651
    
    
    
    115,030Cash and cash equivalents, beginning of period
    
    
    339,319
    
    
    
    309,058Cash and cash equivalents, end of period
    
    $
    411,970
    
    
    $
    424,088Supplemental disclosure of non-cash investing and financing activitiesCredits received for tenant improvements
    
    $
    6,000
    
    
    $
    2,368Purchases of property and equipment included in accounts payable
    
    $
    4,614
    
    
    $
    3,168Settlement 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.
 Page 7 of 42




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APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 Note 1. Basis of Presentation
      Certain Reclassifications
  Recent Accounting Pronouncements
    Page 8 of 42




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Note 2. Nature of Operations
    Note 3. Restricted Cash
  Page 9 of 42




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Note 4. Marketable Securities
  February 29, 2008
    
    August 31, 2007Unrecognized
    
    
    
    
    
    
    
    
    
    UnrecognizedEstimated
    
    Amortized
    
    Holding
    
    Estimated
    
    Amortized
    
    HoldingType
    
    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
    
    
    $
    85U.S. government-sponsored enterprises
    
    
    9,998
    
    
    
    9,991
    
    
    
    (7
    )
    
    
    14,825
    
    
    
    15,000
    
    
    
    17519,192
    
    
    
    19,209
    
    
    
    17
    
    
    
    31,018
    
    
    
    31,278
    
    
    
    260Total classified as current
    
    $
    30,862
    
    
    $
    30,879
    
    
    $
    17
    
    
    $
    31,018
    
    
    $
    31,278
    
    
    $
    260Classified 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
    
    
    $
    36U.S. government-sponsored enterprises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,796
    
    
    
    12,000
    
    
    
    204Corporate obligations
    
    
    6,875
    
    
    
    6,992
    
    
    
    117
    
    
    
    6,397
    
    
    
    6,988
    
    
    
    5918,404
    
    
    
    8,514
    
    
    
    110
    
    
    
    21,253
    
    
    
    22,084
    
    
    
    831Total classified as noncurrent
    
    $
    93,904
    
    
    $
    94,014
    
    
    $
    110
    
    
    $
    21,253
    
    
    $
    22,084
    
    
    $
    831Total marketable securities
    
    $
    124,766
    
    
    $
    124,893
    
    
    $
    127
    
    
    $
    52,271
    
    
    $
    53,362
    
    
    $
    1,091
 Auction-Rate Securities:
     Page 10 of 42




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Municipal Bonds:
 U.S. Government-Sponsored Enterprises:
 Corporate Obligations:
 Note 5. Accounts Receivable, net
  ($ in thousands)
    
    February 29, 2008
    
    
    August 31, 2007Tuition accounts receivable
    
    $
    242,779
    
    
    $
    281,834Less allowance for doubtful accounts
    
    
    (93,418
    )
    
    
    (99,818
    )Net tuition accounts receivable
    
    $
    149,361
    
    
    $
    182,016Other receivables
    
    
    11,117
    
    
    
    8,896Total accounts receivable, net
    
    $
    160,478
    
    
    $
    190,912
   Three Months Ended
    
    
    Six Months EndedFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,($ in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Beginning allowance for doubtful accounts
    
    $
    104,652
    
    
    $
    69,786
    
    
    $
    99,818
    
    
    $
    65,184Provision for uncollectible accounts receivable
    
    
    26,601
    
    
    
    26,189
    
    
    
    58,986
    
    
    
    49,304Write-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
 Page 11 of 42




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Note 6. Long-Term Restricted Cash for Bond Collateralization
  Note 7. Long-Term Liabilities
  ($ in thousands)
    
    February 29, 2008
    
    
    August 31, 2007Deferred rent and other lease incentives
    
    $
    76,668
    
    
    $
    77,755Deferred gains on sale-leasebacks
    
    
    10,421
    
    
    
    10,602Deferred compensation agreement with
Dr. John G. Sperling
    
    
    2,298
    
    
    
    2,197Unrecognized tax benefit (see Note 8)
    
    
    53,363
    
    
    
    Accrual for estimated securities
litigation loss (see Note 11)
    
    
    164,088
    
    
    
    Other long-term liabilities
    
    
    1,107
    
    
    
    2,432Total liabilities
    
    
    307,945
    
    
    
    92,986Less current portion
    
    
    (20,950
    )
    
    
    (21,093
    )Total long-term liabilities
    
    $
    286,995
    
    
    $
    71,893
 Note 8. Income Taxes
    Page 12 of 42




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Note 9. Earnings Per Share
 Apollo Group Class A Common Stock
  Three Months EndedFebruary 29, 2008
    
    February 28, 2007Weighted Average
    
    
    
    
    
    
    
    
    
    Weighted Average($ in thousands, except per share amounts)
    
    Loss
    
    Shares
    
    Per Share Amount
    
    Income
    
    Shares
    
    Per Share AmountBasic income (loss)
    
    $
    (32,039
    )
    
    
    168,005
    
    
    $
    (0.19
    )
    
    $
    60,338
    
    
    
    173,185
    
    
    $
    0.35Effect 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 EndedFebruary 29, 2008
    
    February 28, 2007Weighted Average
    
    
    
    
    
    
    
    
    
    Weighted Average($ in thousands, except per share amounts)
    
    Income
    
    Shares
    
    Per Share Amount
    
    Income
    
    Shares
    
    Per Share AmountBasic income
    
    $
    107,826
    
    
    
    167,521
    
    
    $
    0.64
    
    
    $
    174,212
    
    
    
    173,153
    
    
    $
    1.01Effect 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
  Note 10. Share-Based Compensation Plans
 Stock Option Modifications
  Page 13 of 42




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Acceleration of Vesting
  Share-Based Compensation Expense
  Three Months Ended
    
    
    Six Months EndedFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,($ in thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Instructional costs and services
    
    $
    6,711
    
    
    $
    3,965
    
    
    $
    11,817
    
    
    $
    7,855Selling and promotional
    
    
    1,253
    
    
    
    983
    
    
    
    1,986
    
    
    
    2,067General and administrative
    
    
    12,141
    
    
    
    16,785
    
    
    
    21,227
    
    
    
    21,957Share-based compensation expense included in
operating expenses
    
    
    20,105
    
    
    
    21,733
    
    
    
    35,030
    
    
    
    31,879Tax 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
  Note 11. Commitments and Contingencies
  Internal Revenue Service Audit
  Page 14 of 42




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Sale-Leaseback Option
  Contingencies Related to Litigation and Other Proceedings
  Pending Litigation
 Incentive Compensation False Claims Act Lawsuit
  Axia False Claims Act Lawsuit
  Page 15 of 42




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Alaska Electrical Pension Fund Derivative Action
  Securities Class Action
 In re Apollo Group, Inc. Securities Litigation
   Page 16 of 42




---



##### Table of Contents



EEOC v. UPX
 Equal Employment Opportunity Commission v. University of Phoenix,
Inc.
 Barnett Derivative Action
 Barnett v. John Blair
et al
 Page 17 of 42




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Bamboo Partners Derivative Action
  Teamsters Local Union Putative Class Action
  Patent Infringement Litigation
  Page 18 of 42




---



##### Table of Contents



Regulatory and Other Legal Matters
 Student Financial Aid
   U.S. Department of Education Audits
   SEC Informal Inquiry and Department of Justice Investigation
  Note 12. Segment Reporting
  Page 19 of 42




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Three Months Ended
    
    
    Six Months EndedFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,($ in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Tuition and other revenue, net:UPX
    
    $
    657,971
    
    
    $
    565,589
    
    
    $
    1,401,361
    
    
    $
    1,172,605Other Schools
    
    
    31,469
    
    
    
    42,989
    
    
    
    68,134
    
    
    
    103,783Corporate
    
    
    4,203
    
    
    
    115
    
    
    
    4,822
    
    
    
    91$
    693,643
    
    
    $
    608,693
    
    
    $
    1,474,317
    
    
    $
    1,276,479Income (loss) from operations:UPX
    
    $
    129,169
    
    
    $
    106,481
    
    
    $
    360,000
    
    
    $
    279,043Other Schools
    
    
    98
    
    
    
    5,444
    
    
    
    5,516
    
    
    
    18,869Corporate
    
    
    (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
   ($ in thousands)Cash paid for the outstanding common stock of Aptimus
    
    $
    41,486Cash paid for certain common stock equivalents of Aptimus
    
    
    4,672Transaction-related costs
    
    
    1,919Total purchase price
    
    $
    48,077
  ($ in thousands)Net working capital
    
    $
    (1,881
    )Property and equipment
    
    
    654Intangibles
    
    
    7,600Deferred tax assets
    
    
    6,346Goodwill
    
    
    37,140Employee stock options assumed
    
    
    (1,782
    )Total allocated purchase price
    
    
    48,077Less: Cash acquired
    
    
    (1,022
    )Acquisition, net of cash acquired
    
    $
    47,055
 Apollo Global
   UNIACC
  Page 21 of 42




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Note 14. Financing
   Page 22 of 42




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(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
  
    
    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).
  Executive Summary
  Page 23 of 42




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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.
 Page 24 of 42




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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
  Results of Operations
   Page 25 of 42




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Certain Reclassifications
  Page 26 of 42




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Three Months Ended February 29, 2008 Compared to the Three Months Ended February 28, 2007
  Analysis of Condensed Consolidated Statements of Operations
 % of RevenuesThree Months Ended
    
    Three Months Ended
    
    % ChangeFebruary 29,
    
    February 28,
    
    February 29,
    
    February 28,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007
    
    2008 vs 2007Revenues: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
    %
  Tuition and Other Revenue, Net
  % of RevenuesThree Months Ended
    
    
    Three Months EndedFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,($ in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007UPX
    
    $
    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
    %
  Page 27 of 42




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Instructional Costs and Services
  % of RevenuesThree Months Ended
    
    
    Three Months EndedFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,
    
    
    % Change($ in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008 vs. 2007Employee 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
    %
    Page 28 of 42




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Selling and Promotional Expenses
  % of RevenuesThree Months Ended
    
    
    Three Months Ended
    
    
    % ChangeFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,($ in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008 vs. 2007Enrollment 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
    %
     General and Administrative Expenses
  % of RevenuesThree Months Ended
    
    
    Three Months Ended
    
    

% ChangeFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,($ in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008 vs. 2007Employee 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
    %)
 Page 29 of 42




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Three Months EndedFebruary 29,
    
    
    February 28,($ in millions)
    
    2008
    
    
    2007
    
    
    Line item included in aboveStock option modifications
    
    $
    
    
    
    $
    12.1
    
    
    Share-based compensationStock option
investigation/ financial
statement restatement
    
    
    
    
    
    
    5.7
    
    
    Other general and administrative expensesSubtotal
    
    $
    
    
    
    $
    17.8
  % of RevenuesThree Months Ended
    
    
    Three Months Ended
    
    
    % ChangeFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,($ in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008 vs. 2007Employee 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
    %
  Estimated Securities Litigation Loss
  Interest Income and Other, Net
  Provision for (Benefit from) Income Taxes
  Page 30 of 42




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Six Months Ended February 29, 2008 Compared to the Six Months Ended February 28, 2007
  Analysis of Condensed Consolidated Statements of Operations
 % of RevenuesSix Months Ended
    
    Six Months Ended
    
    % ChangeFebruary 29,
    
    February 28,
    
    February 29,
    
    February 28,($ in millions)
    
    2008
    
    2007
    
    2008
    
    2007
    
    2008 vs 2007Revenues: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
    %
  Tuition and Other Revenue, Net
  % of RevenuesSix Months Ended
    
    
    Six Months EndedFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,($ in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007UPX
    
    $
    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
    %
  Page 31 of 42




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##### Table of Contents



Instructional Costs and Services
  % of RevenuesSix Months Ended
    
    
    Six Months Ended
    
    
    % ChangeFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,($ in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008 vs. 2007Employee 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
    %
     Page 32 of 42




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Selling and Promotional Expenses
  % of RevenuesSix Months Ended
    
    
    Six Months Ended
    
    
    % ChangeFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,($ in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008 vs. 2007Enrollment
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
    %
     General and Administrative Expenses
  % of RevenuesSix Months Ended
    
    
    Six Months Ended
    
    
    % ChangeFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,($ in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008 vs. 2007Employee 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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Six Months EndedFebruary 29,
    
    
    February 28,($ in millions)
    
    2008
    
    
    2007
    
    
    Line item included in aboveStock option modifications
    
    $
    
    
    
    $
    12.1
    
    
    Share-based compensationStock option
investigation/ financial
statement restatement
    
    
    
    
    
    
    7.7
    
    
    Other general and administrative expensesSubtotal
    
    $
    
    
    
    $
    19.8
  % of RevenuesSix Months Ended
    
    
    Six Months Ended
    
    
    % ChangeFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,($ in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008 vs. 2007Employee 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
    %
  Estimated Securities Litigation Loss
  Interest Income and Other, Net
  Provision for Income Taxes
  Liquidity, Capital Resources, and Financial Position
  Page 34 of 42




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Cash and Cash Equivalents and Marketable Securities
       Page 35 of 42




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Cash Flows
 Operating Activities
  Six Months EndedFebruary 29,
    
    
    February 28,($ in millions)
    
    2008
    
    
    2007Net income
    
    $
    107.8
    
    
    $
    174.2Non-cash items
    
    
    209.5
    
    
    
    92.4Changes in certain operating
assets and liabilities
    
    
    (7.8
    )
    
    
    (72.9
    )Net cash from operating activities
    
    $
    309.5
    
    
    $
    193.7
    Investing Activities
  Sale-Leaseback Option
 Financing Activities
  Page 36 of 42




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Contractual Obligations and Other Commercial Commitments
   Federal Family Education Loan Program and Private Student Loans
     Recent Accounting Pronouncements
    Page 37 of 42




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Page 38 of 42




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
        
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  Page 39 of 42




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  Page 40 of 42




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Item 6. Exhibits
 APOLLO GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX
 Exhibit Number
    
    Description of Exhibit3.1
    
    
    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.
 Page 41 of 42




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APOLLO GROUP, INC.
(Registrant)Date: March 27, 2008By:
    /s/ Joseph L. DAmicoJoseph L. DAmicoExecutive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer and Duly Authorized Signatory) By:
    /s/ Brian L. SwartzBrian L. SwartzSenior Vice President of Finance and Chief Accounting Officer
(Principal Accounting Officer and Duly Authorized Signatory) Page 42 of 42