APOL Apollo Education Grp., Inc.

 

 

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 28, 2009

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

4025 S. RIVERPOINT PARKWAY, PHOENIX, ARIZONA 85040
(Address of principal executive offices, including zip code)

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

Former name, former address and former fiscal year, if changed since last report)

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 19, 2009, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:

Apollo Group Class A common stock, no par value		160,351,000 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			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			42
PART II – OTHER INFORMATION
Item 1. Legal Proceedings			43
Item 1A. Risk Factors			43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3. Defaults Upon Senior Securities			43
Item 4. Submission of Matters to a Vote of Security Holders			43
Item 5. Other Information			43
Item 6. Exhibits			44
SIGNATURES			45
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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, as amended, 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 or results. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “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 the regulatory and other requirements discussed in Item 1, Business, of our Annual Report on Form 10-K for the year ended August 31, 2008, under “Accreditation and Jurisdictional Authorizations,” “Financial Aid Programs,” and “Regulatory Environment;”
	•		each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended August 31, 2008; and
	•		those factors set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended August 31, 2008.

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 changes, events, or circumstances occurring after the date of this report. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

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

		As of
		February 28,				August 31,
($ in thousands)		2009				2008
ASSETS:
Current assets
Cash and cash equivalents		$	884,424			$	483,195
Restricted cash and cash equivalents			498,387				384,155
Marketable securities, current portion			1,393				3,060
Accounts receivable, net			193,953				221,919
Deferred tax assets, current portion			55,656				55,434
Prepaid taxes			55,376				—
Other current assets			28,797				21,780
Total current assets			1,717,986				1,169,543
Property and equipment, net			457,528				439,135
Marketable securities, less current portion			23,001				25,204
Goodwill			88,261				85,968
Intangible assets, net			16,804				23,096
Deferred tax assets, less current portion			101,486				89,499
Other assets			29,218				27,967
Total assets		$	2,434,284			$	1,860,412
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities
Accounts payable		$	67,756			$	46,589
Accrued liabilities			121,784				121,200
Current portion of long-term liabilities			40,052				47,228
Income taxes payable			—				6,111
Student deposits			521,468				413,302
Deferred revenue			247,466				231,179
Total current liabilities			998,526				865,609
Deferred tax liabilities			1,943				2,743
Long-term liabilities, less current portion			158,749				145,895
Total liabilities			1,159,218				1,014,247
Commitments and contingencies (Note 13)
Minority interest			11,527				11,956
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			21,937				—
Apollo Group Class A treasury stock, at cost			(1,645,745	)			(1,757,277	)
Retained earnings			2,902,430				2,595,340
Accumulated other comprehensive loss			(15,187	)			(3,958	)
Total shareholders’ equity			1,263,539				834,209
Total liabilities and shareholders’ equity		$	2,434,284			$	1,860,412

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

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

		Three Months Ended								Six Months Ended
		February 28,				February 29,				February 28,				February 29,
(in thousands, except per share data)		2009				2008				2009				2008
Net revenue		$	876,129			$	693,643			$	1,847,096			$	1,474,317
Costs and expenses:
Instructional costs and services			373,290				327,723				750,586				661,011
Selling and promotional			225,711				201,705				454,296				378,614
General and administrative			71,100				55,011				129,321				106,292
Estimated securities litigation loss (Note 13)			—				168,400				—				168,400
Total costs and expenses			670,101				752,839				1,334,203				1,314,317
Income (loss) from operations			206,028				(59,196	)			512,893				160,000
Interest income and other, net			1,977				8,059				3,493				17,708
Income (loss) before income taxes and minority interest			208,005				(51,137	)			516,386				177,708
(Provision for) benefit from income taxes			(82,929	)			19,098				(211,002	)			(69,882	)
Minority interest, net of tax			270				—				322				—
Net income (loss)		$	125,346			$	(32,039	)		$	305,706			$	107,826
Earnings (loss) per share:
Basic income (loss) per share		$	0.78			$	(0.19	)		$	1.91			$	0.64
Diluted income (loss) per share		$	0.77			$	(0.19	)		$	1.89			$	0.63
Basic weighted average shares outstanding			160,153				168,005				159,643				167,521
Diluted weighted average shares outstanding			162,757				168,005				161,806				169,876

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

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

		Three Months Ended								Six Months Ended
		February 28,				February 29,				February 28,				February 29,
($ in thousands)		2009				2008				2009				2008
Net income (loss)		$	125,346			$	(32,039	)		$	305,706			$	107,826
Other comprehensive income (loss) (net of tax):
Currency translation gain (loss)			411				(148	)			(9,907	)			(529	)
Unrealized loss on auction-rate securities			—				—				(1,322	)			—
Comprehensive income (loss)		$	125,757			$	(32,187	)		$	294,477			$	107,297

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

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

		Six Months Ended
		February 28,				February 29,
($ in thousands)		2009				2008
Cash flows provided by (used in) operating activities:
Net income		$	305,706			$	107,826
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation			31,358				35,030
Excess tax benefits from share-based compensation			(11,181	)			(17,674	)
Depreciation and amortization			46,338				37,545
Amortization of deferred gain on sale-leaseback			(818	)			(893	)
Non-cash foreign currency losses, net			2,599				—
Provision for uncollectible accounts receivable			70,913				58,986
Estimated securities litigation loss (Note 13)			—				168,400
Minority interest, net of tax			(322	)			—
Deferred income taxes			(12,583	)			(71,977	)
Changes in assets and liabilities, excluding the impact of acquisitions:
Accounts receivable			(48,272	)			(26,288	)
Other assets			(9,112	)			(6,199	)
Accounts payable and accrued liabilities			18,137				(21,072	)
Income taxes payable			(51,953	)			(20,796	)
Student deposits			108,216				60,455
Deferred revenue			20,921				7,111
Other liabilities			5,696				(986	)
Net cash provided by operating activities			475,643				309,468
Cash flows provided by (used in) investing activities:
Additions to property and equipment			(64,019	)			(55,978	)
Acquisitions, net of cash acquired			—				(47,055	)
Purchase of marketable securities			—				(875,205	)
Maturities of marketable securities			1,660				803,640
Collateralization of bond posted for securities litigation matter			—				(95,000	)
Increase in restricted cash and cash equivalents			(114,232	)			(63,046	)
Net cash used in investing activities			(176,591	)			(332,644	)
Cash flows provided by (used in) financing activities:
Payments on borrowings			(15,498	)			—
Proceeds from borrowings			13,620				—
Issuance of Apollo Group Class A common stock			96,486				79,023
Class A common stock purchased for treasury			(2,505	)			—
Excess tax benefits from share-based compensation			11,181				17,674
Net cash provided by financing activities			103,284				96,697
Exchange rate effect on cash and cash equivalents			(1,107	)			(870	)
Net increase in cash and cash equivalents			401,229				72,651
Cash and cash equivalents, beginning of period			483,195				339,319
Cash and cash equivalents, end of period		$	884,424			$	411,970
Supplemental disclosure of cash flow information
Cash paid during the period for income taxes		$	269,646			$	162,709
Cash paid during the period for interest		$	1,263			$	658
Supplemental disclosure of non-cash investing and financing activities
Credits received for tenant improvements		$	7,161			$	6,000
Purchases of property and equipment included in accounts payable		$	5,251			$	4,614
Settlement and reclassification of liability awards		$	—			$	16,340
Restricted stock units vested and released		$	7,362			$	—
Unrealized loss on auction-rate securities		$	2,203			$	—

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

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

Note 1. Nature of Operations

Apollo Group, Inc. and its wholly-owned subsidiaries and majority-owned subsidiaries, collectively referred to in this report as “the Company,” “Apollo Group,” “Apollo,” “APOL,” “we,” “us” or “our,” has been an education provider for more than 30 years, operating The University of Phoenix, Inc. (“University of Phoenix”), Institute for Professional Development (“IPD”), The College for Financial Planning Institutes Corporation (“CFP”), Western International University, Inc. (“Western International University”), Insight Schools, Inc. (“Insight Schools”) and our new Canadian institution that began operations in September 2008, Meritus University, all of which are our wholly-owned subsidiaries. In addition to these wholly-owned subsidiaries, we have an 80.1% ownership interest in Apollo Global, Inc. (“Apollo Global”), which pursues investments primarily in the international education services industry, and which we consolidate in our financial statements. Apollo Global has completed acquisitions of Universidad de Artes, Ciencias y Comunicación (“UNIACC”) in Chile, and Universidad Latinoamericana (“ULA”) in Mexico. Through these subsidiaries we are able to offer innovative and distinctive educational programs and services at the high school, undergraduate, and graduate levels through doctorate at our various campuses and learning centers, and online throughout the world.

Our operations are generally subject to seasonal trends. We experience, and expect to continue to experience, seasonal fluctuations in our results of operations as a result of changes in the level of student enrollments. While University of Phoenix enrolls students throughout the year, our net revenue generally is lower in the second quarter (December through February) than the other quarters due to holiday breaks in December and January. Certain other subsidiaries experience more significant seasonality, as they have limited enrollment during their respective summer breaks.

Note 2. Basis of Presentation

The unaudited interim condensed consolidated financial statements include the accounts of Apollo Group, Inc. and its wholly-owned and majority-owned subsidiaries. These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission and, in the opinion of management, contain all 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 Securities and Exchange Commission rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently applied the accounting policies described in Item 8, Financial Statements and Supplementary Data, in our 2008 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on October 28, 2008 in preparing these unaudited interim condensed consolidated financial statements. For a discussion of our critical accounting policies, please refer to our 2008 Annual Report on Form 10-K. These unaudited interim condensed consolidated financial statements and accompanying notes should be read in conjunction with Item 2, 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 2008 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 28, 2009 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 assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), which provides enhanced guidance for using fair value to measure

assets and liabilities. On February 12, 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which provides a one year deferral of the effective date of SFAS 157 for non-financial assets or liabilities that are not required or permitted to be measured at fair value on a recurring basis. The provisions of SFAS 157 for fair valuing non-financial assets and liabilities not measured on a recurring basis are effective for us on September 1, 2009. Effective September 1, 2008, we adopted the provisions in SFAS 157 for fair valuing financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis. The partial adoption of SFAS 157 did not have a material impact on our financial condition and results of operations. Please refer to Note 7, Fair Value Measurements, for additional information.

In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). Under SFAS 159, companies have an opportunity to use fair value measurements in financial reporting and may choose to measure many financial instruments and certain other items at fair value. Effective September 1, 2008, we chose not to elect the fair value option for our financial assets and liabilities; therefore, adoption of SFAS 159 did not have a material impact on our financial condition, results of operations, and disclosures.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which is a revision of SFAS 141, “Business Combinations” (“SFAS 141”). The primary requirements of SFAS 141(R) are as follows:

	•		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;
	•		contingent consideration arrangements will be fair valued at the acquisition date and included 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;
	•		for prior business combinations, adjustments for recognized changes in acquired tax uncertainties are to be recognized in accordance with the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB No. 109,” and adjustments for recognized changes in the valuation allowance for acquired deferred tax assets are to be recognized in income tax expense in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes;” and
	•		all transaction costs will be expensed as incurred.

SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. 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 requires non-controlling interests or minority interests to be treated as a separate component of equity and any changes in the parent’s ownership interest (in which control is retained) are to be accounted for as equity transactions. However, a change in ownership of a consolidated subsidiary that results in deconsolidation triggers gain or loss recognition, with the establishment of a new fair value basis in any remaining non-controlling ownership interests. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the non-controlling interests. 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 April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. The intent of the position is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), and other GAAP. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. FSP FAS 142-3 is effective for us on September 1, 2009. We are currently evaluating the impact that the adoption of FSP FAS 142-3 will have on our financial condition, results of operations, and disclosures.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement is not expected to change existing practices but rather reduce the complexity of financial reporting. This statement is effective 60 days following the Securities and

Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Effective November 15, 2008, we adopted the provisions in SFAS 162, which did not have a material impact on our financial condition, results of operations, or disclosures.

In June 2008, the Emerging Issues Task Force (“EITF”) issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies whether unvested share-based payment awards that entitle holders to receive nonforfeitable dividends or dividend equivalents (whether paid or unpaid) are considered participating securities and should be included in the computation of earnings per share pursuant to the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. FSP EITF 03-6-1 requires retrospective application and is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. FSP EITF 03-6-1 is effective for us on September 1, 2009. We are currently evaluating the impact that the adoption of FSP EITF 03-6-1 will have on our calculation of earnings per share and related disclosures.

Note 3. Acquisitions

Apollo Global

Apollo Global purchased 100% of UNIACC in March 2008 and a 65% ownership interest in ULA in August 2008. The purchase of UNIACC included a future payment based on a multiple of earnings. In January 2009, we executed an amendment to the purchase agreement with the former owner of UNIACC, which modified both the timing of the future payment and the period of earnings on which the earn-out calculation is based. In accordance with SFAS 141, we have recorded the estimated obligation of $7.1 million as an additional purchase price adjustment increasing goodwill in the quarter ended February 28, 2009, as the amount became determinable during that period. The payment is expected to be made in two installments consisting of one-third due in June 2009 with the remaining two-thirds due in June 2010. The results of operations of UNIACC and ULA are not significant individually or in the aggregate to our consolidated financial results and therefore, pro forma information has not been provided. Please refer to Note 6, Goodwill, for further discussion of changes to goodwill as of February 28, 2009.

Note 4. Marketable Securities

Marketable securities consist of the following as of February 28, 2009 and August 31, 2008:

		February 28,				August 31,
($ in thousands)		2009				2008
Current marketable securities:
Municipal bonds		$	1,393			$	3,060
Total current marketable securities			1,393				3,060
Noncurrent marketable securities:
Auction-rate securities			23,001				25,204
Total noncurrent marketable securities			23,001				25,204
Total marketable securities		$	24,394			$	28,264

Marketable securities classified as available-for-sale consist of the following as of February 28, 2009 and August 31, 2008:

		February 28, 2009												August 31, 2008
		Amortized				Gross Unrealized				Fair Market				Amortized				Gross Unrealized				Fair Market
($ in thousands)		Cost				Losses				Value				Cost				Losses				Value
Available-for-sale securities
Auction-rate securities		$	26,825			$	(3,824	)		$	23,001			$	26,825			$	(1,621	)		$	25,204
Total available-for-sale securities		$	26,825			$	(3,824	)		$	23,001			$	26,825			$	(1,621	)		$	25,204

Amortized cost and estimated fair market value for marketable securities classified as held-to-maturity as of February 28, 2009 and August 31, 2008 are as follows:

		February 28, 2009								August 31, 2008
		Amortized				Fair Market				Amortized				Fair Market
($ in thousands)		Cost				Value				Cost				Value
Held-to-maturity securities
Municipal bonds		$	1,393			$	1,510			$	3,060			$	3,071
Total held-to-maturity securities		$	1,393			$	1,510			$	3,060			$	3,071

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. 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 auction-rate securities. Auction-rate securities have historically traded 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.

Auction-rate securities “fail” when there are not enough buyers to absorb the amount of securities available for sale for that particular auction period. Historically, auction-rate securities 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 or able to support auction-rate securities and many auction-rate securities auctions have failed.

As of February 28, 2009, we had $26.8 million of principal invested in auction-rate securities that experienced failed auctions. Approximately $16.8 million of our auction-rate securities are invested in tax-exempt municipal bond funds, which carry at least A- credit ratings for the underlying issuer. The remaining $10.0 million are invested in securities collateralized by student loans, which are rated AAA and are guaranteed by the U.S. government. None of the auction-rate securities held by us are mortgage-backed securities.

At February 28, 2009, we used a discounted cash flow model to determine the fair value of our auction-rate securities. Please refer to Note 7, Fair Value Measurements, for further discussion of the unobservable inputs used in our valuation technique. Based on our analysis, we determined that our auction-rate securities carrying value, net of unrealized losses recorded in prior periods, approximated the estimated fair value. As a result, in the three months ended February 28, 2009, no additional impairment charge was recorded on our auction-rate securities. As of February 28, 2009, our cumulative unrealized loss on our auction-rate securities totaled $3.8 million ($2.3 million after-tax), of which $2.2 million ($1.3 million after-tax) was recorded in the six months ended February 28, 2009. The offset was included in accumulated other comprehensive loss in our Condensed Consolidated Balance Sheets. We assessed this decline in value to be temporary due to the following:

	•		our ability and intent to hold these securities until the market stabilizes in order to sell the securities at par based on our cash and cash equivalents balance at February 28, 2009, available borrowing under our credit facility, and our operating cash flow;
	•		the high quality of the underlying collateral;
	•		the high credit quality of the issuers;
	•		the fact that the issuers continue to pay interest in a timely manner; and
	•		the lack of defaults in the underlying debt.

At February 28, 2009, the entire balance of our auction-rate securities totaling $23.0 million, net of the unrealized loss of $3.8 million, is classified as non-current marketable securities due to the lack of liquidity of these instruments.

We will continue to monitor our investment portfolio. Given the uncertainties in the global credit and capital markets, we are no longer investing in auction-rate securities instruments at this time, which may contribute to reduced investment income in the future. We will also continue to evaluate any changes in the market value of the failed auction-rate securities that have not been liquidated and depending upon existing market conditions, we may be required to record other-than-temporary impairment charges in the future.

The cost of liquidated securities is based on the specific identification method. During the six months ended February 28, 2009, none of our auction-rate securities have been liquidated, and thus no realized gains or losses have been recognized.

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 intention to hold municipal bonds until maturity and therefore classify these investments as held-to-maturity, reported at amortized cost. Please refer to Note 7, Fair Value Measurements, for further discussion of the methods used in the fair value disclosure.

Marketable securities are exposed to various risks and rewards, such as interest rate, market and credit risk. Due to the risks and rewards associated with marketable security investments, it is possible that changes in the values of these investments may occur and that such changes could affect the amounts reported in the Condensed Consolidated Balance Sheets.

Note 5. Accounts Receivable, net

Accounts receivable, net consist of the following as of February 28, 2009 and August 31, 2008:

		February 28,				August 31,
($ in thousands)		2009				2008
Student accounts receivable		$	262,854			$	279,841
Less allowance for doubtful accounts			(95,715	)			(78,362	)
Net student accounts receivable			167,139				201,479
Other receivables			26,814				20,440
Total accounts receivable, net		$	193,953			$	221,919

Student accounts receivable is composed primarily of amounts due related to tuition.

Bad debt expense is included in instructional costs and services in our Condensed Consolidated Statements of Operations. Please refer to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations , for further discussion of our related critical accounting policy, which is incorporated herein by reference. The following table summarizes the activity in the related allowance for doubtful accounts for the three and six months ended February 28, 2009 and February 29, 2008:

		Three Months Ended								Six Months Ended
		February 28,				February 29,				February 28,				February 29,
($ in thousands)		2009				2008				2009				2008
Beginning allowance for doubtful accounts		$	88,274			$	104,652			$	78,362			$	99,818
Provision for uncollectible accounts receivable			36,056				26,601				70,913				58,986
Write-offs, net of recoveries			(28,615	)			(37,835	)			(53,560	)			(65,386	)
Ending allowance for doubtful accounts		$	95,715			$	93,418			$	95,715			$	93,418

Note 6. Goodwill

Changes in the carrying amount of goodwill by reportable segment from August 31, 2008 to February 28, 2009 are as follows:

		University of				Apollo				Insight				Other				Total
($ in thousands)		Phoenix				Global				Schools				Schools				Goodwill
Goodwill as of August 31, 2008		$	37,018			$	19,317			$	12,742			$	16,891			$	85,968
UNIACC earn-out consideration			—				7,135				—				—				7,135
Currency translation adjustment			—				(4,842	)			—				—				(4,842	)
Goodwill as of February 28, 2009		$	37,018			$	21,610			$	12,742			$	16,891			$	88,261

Goodwill represents the excess of the purchase price over the amount assigned to the net assets acquired and liabilities assumed from companies we have acquired. Any changes in the fair value of the net assets of the acquired companies will change the amount of the purchase price allocable to goodwill. At February 28, 2009, we recorded an adjustment of $7.1 million to UNIACC’s goodwill for the estimated earn-out payment as the obligation amount and timing became determinable in the quarter ended February 28, 2009. Please

refer to Note 3, Acquisitions, and our significant accounting policies included in our 2008 Annual Report on Form 10-K for further discussion.

At February 28, 2009, our CFP reporting unit had goodwill of approximately $15.3 million, which is included in the Other Schools reportable segment. We perform our annual goodwill impairment test of CFP as of August 31. However, the current economic downturn has caused the demand for CFP’s financial planning education programs and materials to diminish. As of February 28, 2009, given the current business climate, we evaluated and determined that the goodwill balance is not impaired. However, as more information becomes available we will further assess the carrying value of CFP’s goodwill and may record an impairment charge in the future. We do not believe that the current economic downturn has had a significant long-term adverse impact on our other reporting units.

Note 7. Fair Value Measurements

Effective September 1, 2008, we partially adopted SFAS 157 with respect to fair value measurements of all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis. Effective, September 1, 2009, we will apply the provisions of SFAS 157 with respect to fair value measurements to non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. With respect to adoption of SFAS 157, we have also considered the guidance of FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” in determining the fair value of our financial assets and liabilities.

SFAS 157 clarifies fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. SFAS 157 confirms that the valuation techniques used to determine fair value are consistent with either the market approach, income approach and/or cost approach. SFAS 157 also establishes the following three-tier fair value hierarchy that prioritizes the inputs used in the valuation techniques to measure fair value:

	•		Level 1 — Observable inputs that reflect quoted market prices (unadjusted) for identical assets and liabilities in active markets;
	•		Level 2 — Observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities; and
	•		Level 3 — Unobservable inputs that are supported by little or no market activity that are significant to the fair value of assets or liabilities.

SFAS 157 requires that valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. We use prices and inputs that are current as of the measurement date, including during periods of market volatility. Therefore, classification of inputs within the hierarchy may change from period to period depending upon the observability of those prices and inputs. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value for certain assets and liabilities and their placement within the fair value hierarchy.

Assets measured at fair value on a recurring basis in accordance with SFAS 157 consist of the following as of February 28, 2009:

						Fair Value Measurements at Reporting Date Using
										Significant
						Quoted Prices in				Other				Significant
						Active Markets				Observable				Unobservable
		February 28,				for Identical				Inputs				Inputs
($ in thousands)		2009				Assets (Level 1)				(Level 2)				(Level 3)
Assets:
Cash equivalents (including restricted cash equivalents):
Money market funds		$	1,317,524			$	1,312,222			$	5,302			$	—
Marketable securities:
Auction-rate securities			23,001				—				—				23,001
Total assets:		$	1,340,525			$	1,312,222			$	5,302			$	23,001

In accordance with SFAS 157, we measure our money market funds included in cash and restricted cash equivalents and auction-rate securities included in marketable securities at fair value. The majority of our money market funds are classified within Level 1 and were valued primarily using real-time quotes for transactions in active exchange markets involving identical assets. Certain of our non-U.S. based money market funds are classified within Level 2 and were valued using readily available pricing sources for comparable instruments utilizing market observable inputs. Our auction-rate securities are classified within Level 3 due to the illiquidity of the market and were valued using a discounted cash flow model that encompassed significant unobservable inputs to determine probabilities of default and timing of auction failure, probabilities of a successful auction at par and/or repurchase at par value for each auction period, collateralization of the underlying security and credit worthiness of the issuer. Additionally, as the market for auction-rate securities continues to be inactive and the secondary market remains in developmental stages, our discounted cash flow model also factored the illiquidity of the auction-rate securities market by adding a spread of 550 basis points to the applicable discount rate. As of February 28, 2009, cash equivalents disclosed in the table above excludes $65.3 million of cash held in bank overnight deposits and certificates of deposits that approximate fair value. As of February 28, 2009, we did not have any liabilities that were required to be measured at fair value in accordance with SFAS 157 on a recurring basis.

At February 28, 2009, we disclose the fair value of our municipal bonds classified as held-to-maturity securities, which are reported in our condensed consolidated financial statements at amortized cost and thus excluded from the table above. Our municipal bonds were valued using readily available pricing sources for comparable instruments utilizing market observable inputs. Please refer to Note 4, Marketable Securities, for the fair value disclosure.

Changes in the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended February 28, 2009 are as follows:

($ in thousands)
Balance at August 31, 2008		$	25,204
Unrealized loss in other comprehensive loss			(2,203	)
Redemptions at par value			—
Transfers in (out) of Level 3			—
Balance at February 28, 2009		$	23,001
Net unrealized gains (losses) included in earnings related to assets held as of February 28, 2009		$	—

Note 8. Long-Term Liabilities

Long-term liabilities consist of the following as of February 28, 2009 and August 31, 2008:

		February 28,				August 31,
($ in thousands)		2009				2008
Deferred rent and other lease incentives		$	72,796			$	72,512
Reserve for uncertain tax positions (Note 9)			60,563				55,319
Credit facilities — UNIACC and ULA			17,267				23,145
Capital lease obligations			7,022				7,771
Deferred vendor incentive			10,804				12,293
Deferred gains on sale-leasebacks			7,923				8,739
UNIACC earn-out consideration (Note 3)			7,135				—
Deferred compensation			2,391				2,326
Other long-term liabilities			12,900				11,018
Total liabilities			198,801				193,123
Less current portion			(40,052	)			(47,228	)
Total long-term liabilities		$	158,749			$	145,895

Note 9. Income Taxes

We exercise significant judgment in determining our income tax provision due to transactions, credits and calculations where the ultimate tax determination is uncertain. Please refer to our significant accounting policies included in our 2008 Annual Report on Form 10-K for further discussion.

As of February 28, 2009, we had total uncertain tax positions of $60.6 million, including accrued interest and penalties, of which $2.0 million is included in the current portion of long-term liabilities in our Condensed Consolidated Balance Sheets because we believe that it is reasonably possible that this portion of our uncertain tax positions could be resolved or settled within the next 12 months.

Please refer to Note 13, Commitments and Contingencies, for a discussion of the status of our Internal Revenue Service audit.

Note 10. Stockholders’ Equity

Share Reissuances

During the three and six months ended February 28, 2009, we issued approximately 1.4 million and 1.9 million shares, respectively, of our Class A common stock as a result of stock option exercises and our employee stock purchase plan.

Share Repurchases

Our Board of Directors has authorized us to repurchase outstanding shares of Apollo Group Class A common stock, from time to time, depending on market conditions and other considerations. As of February 28, 2009, we had $500 million available under our share repurchase authorization. There is no expiration date on the repurchase authorizations and repurchases occur at our discretion. Repurchases may be made on the open market or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules, and may include repurchases pursuant to Securities and Exchange Commission Rule 10b5-1 nondiscretionary trading programs. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant. We did not repurchase any shares during the three and six months ended February 28, 2009 under this program.

In connection with the release of vested shares of restricted stock, we repurchased approximately 36,000 shares for $2.5 million related to tax withholding requirements on these restricted stock units during the six months ended February 28, 2009. These repurchase transactions do not fall under the repurchase program described above, and therefore do not reduce the amount that is available for repurchase under that program.

Note 11. Earnings Per Share

Apollo Group Common Stock

Our outstanding shares consist of Apollo Group Class A and Class B common stock. Our Articles of Incorporation treat the declaration of dividends on the Apollo Group Class A and Class B common stock in an identical manner. As such, both the Apollo Group Class A and Class B common stock are included in the calculation of our earnings per share.

Diluted weighted average shares outstanding includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and the vesting of restricted stock units. The following provides a reconciliation of the basic and diluted earnings per share computations for our common stock for the periods indicated:

		Three Months Ended
		February 28, 2009												February 29, 2008
						Weighted												Weighted
						Average				Per Share								Average				Per Share
(in thousands, except per share data)		Income				Shares				Amount				Loss				Shares				Amount
Basic income (loss) per share		$	125,346				160,153			$	0.78			$	(32,039	)			168,005			$	(0.19	)
Effect of dilutive securities:
Stock options (1)			—				2,356				(0.01	)			—				—				—
Restricted stock units (2)			—				248				—				—				—				—
Diluted income (loss) per share		$	125,346				162,757			$	0.77			$	(32,039	)		$	168,005			$	(0.19	)

		Six Months Ended
		February 28, 2009												February 29, 2008
						Weighted												Weighted
						Average				Per Share								Average				Per Share
(in thousands, except per share data)		Income				Shares				Amount				Income				Shares				Amount
Basic income per share		$	305,706				159,643			$	1.91			$	107,826				167,521			$	0.64
Effect of dilutive securities:
Stock options (1)			—				1,932				(0.02	)			—				2,213				(0.01	)
Restricted stock units (2)			—				231				—				—				142				—
Diluted income per share		$	305,706				161,806			$	1.89			$	107,826			$	169,876			$	0.63

Note 12. Share-Based Compensation

Share-based compensation expense is included in all of the operating cost line items presented on our Condensed Consolidated Statements of Operations. For the three months ended February 28, 2009 and February 29, 2008, our share-based compensation expense was $16.2 million and $20.1 million, respectively. For the six months ended February 28, 2009 and February 29, 2008, share-based compensation expense was $31.4 million and $35.0 million, respectively.

In accordance with our Apollo Group, Inc. Amended and Restated 2000 Stock Incentive Plan, during the three and six months ended February 28, 2009, we granted approximately 12,000 and 531,000 stock options, respectively, that had weighted average grant date

fair values of $32.03 and $27.02 per option, respectively. The weighted average exercise price of these options was $79.58 and $68.57, respectively. As of February 28, 2009, there was approximately $88.1 million of total unrecognized share-based compensation expense, net of forfeitures, related to unvested stock options.

In accordance with our Apollo Group, Inc. Amended and Restated 2000 Stock Incentive Plan, during the three and six months ended February 28, 2009, we granted approximately 79,000 and 131,000 restricted stock units, respectively, that had weighted average grant date fair values of $81.19 and $76.53 per unit, respectively. As of February 28, 2009, there was approximately $25.8 million of total unrecognized share-based compensation expense, net of forfeitures, related to unvested restricted stock units.

Note 13. Commitments and Contingencies

We are subject to various claims and contingencies which are in the scope of ordinary and routine litigation incidental to our 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,” 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 a conclusion to the matter will be reached. 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.

Contingencies Related to Litigation and Other Proceedings

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

Pending Litigation and Settlements

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 University of Phoenix through submission of a knowingly false or fraudulent claim for payment or approval, and submission of knowingly false records or statements to get a false or fraudulent claim paid or approved in connection with federal student aid programs. The qui tam action also asserts that University of Phoenix improperly compensates its employees. Specifically, the relators allege that our entry into Program Participation Agreements with the 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. Under the District Court’s current Scheduling Order, trial is set for March 2010. Initial 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. 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, we cannot reasonably estimate a range of loss for this action and accordingly have not accrued any liability associated with this action.

Securities Class Action

In October 2004, three class action complaints were filed in the U.S. District Court for the District of Arizona. The District 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 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 District 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 $95.0 million. On February 19, 2008, we posted the $95.0 million bond with the District Court. Oral arguments occurred on August 4, 2008 as part of our post-trial motions, during which the District Court vacated the earlier judgment based on the jury verdict and entered judgment in favor of Apollo and the other defendants. The $95.0 million bond posted in February was subsequently released on August 11, 2008. Plaintiffs’ lawyers filed a Notice of Appeal with the Ninth Circuit Court of Appeals on August 29, 2008. A hearing date for the appeal has not been set. The plaintiffs’ opening brief is currently due on May 18, 2009, and the defendants’ brief is currently due on July 30, 2009.

In the second quarter of fiscal year 2008, we recorded a charge for estimated damages of $168.4 million as a result of the jury verdict awarded in favor of the plaintiffs. The original charge was recorded at the mid-point of the range of $120.5 million to $216.4 million and was estimated for financial reporting purposes, using statistically valid models and a 60% confidence interval which included our estimate of damages based on the verdict, our estimate of potential amounts we expected to reimburse our insurance carriers, our estimate of future defense costs and legal and other professional fees incurred during the second quarter of fiscal year 2008. At that time, we elected to record the mid-point of the range because under statistically valid modeling techniques the mid-point of the range was a more likely estimate than other points in the range, and the point at which there was an equal probability that the ultimate loss could be toward the lower end or the higher end of the range.

In the fourth quarter of fiscal year 2008, we reversed the original estimated charge and related pre- and post-judgment interest totaling $170.0 million because the District Court vacated the earlier judgment and entered judgment in favor of Apollo. Applying similar assumptions used to estimate the original charge, including if the plaintiffs were to prevail in a judgment on appeal, we currently estimate our range of loss for this matter to be between zero and $225.0 million. Damages, if any, will not be known until all court proceedings, including the plaintiffs’ appeal, have been completed. Based on information available to us at present, our management does not expect a material adverse effect on our business to result from this action. We have not accrued any liability associated with this action as of February 28, 2009.

Equal Employment Opportunity Commission v. University of Phoenix

On September 25, 2006, the Equal Employment Opportunity Commission filed a Title VII action against University of Phoenix 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 four identified former employees and an asserted class of unidentified 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 alleged that some of the employees were retaliated against after complaining about the alleged discrimination. University of Phoenix answered the Complaint on December 8, 2006, denying the material allegations asserted. During the course of discovery, the Equal Employment Opportunity Commission identified approximately 48 additional class members on whose behalf it was seeking relief. The parties subsequently reached a settlement resolving this action through a consent decree that was approved by the District Court on November 7, 2008 and the case is now closed. Under the terms of the consent decree, University of Phoenix paid in the first quarter of fiscal year 2009 approximately $1.9 million to the class members and an additional $0.1 million in attorney’s fees, which we accrued for in the third quarter of fiscal year 2008. University of Phoenix will also provide, among other things, additional training and oversight to the Enrollment Department of its online campus. University of Phoenix did not admit any liability or wrongdoing in resolving this matter.

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 Department of Education that led to the issuance of the 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 breaches 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 settlement that we paid to the Department of Education and our losses (both litigation expenses and any damages awarded) stemming from the federal securities class actions pending against us in Federal District Court as described above under “Securities Class Action.” On August 21, 2006, we filed a Motion to Stay the case pending the resolution of the federal Securities Class Action.

On October 10, 2006, plaintiff subsequently 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 adds allegations 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 November 10, 2006, we filed an Amended Motion to Stay the action pending resolution of the federal Securities Class Action and the Special Committee’s investigation into the allegations of stock option backdating. On January 29, 2007, the Court granted the Amended Motion to Stay pending the resolution of the trial in the federal Securities Class Action.

On March 7, 2008, following the entry of judgment in the federal Securities Class Action, we filed a motion to stay discovery regarding the Department of Education claims pending the disposition of post-trial motions in the federal Securities Class Action and informed the Superior Court of an imminent settlement regarding the stock option claims. On March 10, 2008, the Superior Court stayed the stock option claims. On September 17, 2008, the Superior Court dismissed the stock option backdating claims. The settlement does not apply to the Department of Education claims.

With respect to the Department of Education claims, on April 10, 2008, the plaintiff filed his Second Amended Complaint. In addition to the damages previously sought, plaintiff added a request that we recover from defendants the expenses associated with the ongoing qui tam action pending in the U.S. District Court for the Eastern District of California. On May 9, 2008, we moved for a continued stay of Counts 1-2 and dismissal of Counts 3-5 added in the Second Amended Complaint. On July 30, 2008, the Superior Court dismissed Counts 3-5, and stayed Counts 1-2, until the next pre-trial conference. At the continued pretrial conference on October 27, 2008, the Superior Court lifted the discovery stay and set certain long-range deadlines for completion of discovery, dispositive motions, and disclosure of experts, the earliest of which is not until May 31, 2010. A trial, if any, is not likely to occur until some time in 2011. Based on information available to us at present, our management does not expect a material adverse effect on our business 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.

Bamboo Partners Derivative Action

On August 15, 2006, Bamboo Partners, one of our shareholders, filed a shareholder derivative complaint on our behalf and on behalf of University of Phoenix. The lawsuit was filed in the U.S. District Court for the District of Arizona and is entitled Bamboo Partners v. Nelson et al. , Case Number CIV-06-1973-PHX-SRB. 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 University of Phoenix 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 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, the Court granted our motion to extend the stay of the case pending disposition of the post-trial motions. On August 18, 2008, we notified the Court that judgment had been entered in favor of defendants in the Securities Class Action. Plaintiff filed a response on August 25, 2008 notifying the Court of its intention to file a Second Amended Complaint by September 26. The Court dissolved the stay on September 25, 2008, and ordered plaintiff to file its Second Amended Complaint by October 15, 2008. Plaintiff did not file the Second Amended Complaint. Instead, counsel for plaintiff, by letter dated September 25, 2008, advised the Court and defendants’ counsel of its intention to take the necessary steps to obtain an order dismissing the case. On November 14, 2008, another one of our shareholders filed a motion to intervene in the case and pursue the action in the place of Bamboo Partners. We filed a response in opposition to the shareholder’s motion on December 4, 2008, asking the Court to dismiss the case, and fully briefed that motion on December 16, 2008. On January 13, 2009, the shareholder filed a request for oral argument on her motion, which the Court denied on January 16, 2009. On February 3, 2009 the Court also denied the shareholder’s motion to intervene. On March 17, 2009, the Court dismissed this action with prejudice, without costs to either party.

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, filed in the U.S. District Court for the District of Arizona, is entitled Teamsters Local 617 Pension & Welfare Funds v. Apollo Group, Inc. et al. , Case Number 06-cv-02674-RCB, and 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. 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 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 University of Phoenix 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 filed an answer to the complaint on May 27, 2008, in which we denied that Digital-Vending Services International’s patents were duly and lawfully issued, and asserted defenses of non-infringement and patent invalidity, among others. We also asserted a counterclaim seeking a declaratory judgment that the patents are invalid, unenforceable, and not infringed by us. The District Court has scheduled the trial for November 7, 2011. Together with the other defendants, we filed a motion to transfer venue from the Eastern District of Texas to Washington, D.C. on February 27, 2009. 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, we cannot reasonably estimate a range of loss for this action and accordingly have not accrued any liability associated with this action.

Student Loan Class Action

On December 9, 2008, three former University of Phoenix students filed a complaint against Apollo Group, Inc. and University of Phoenix in the United States District Court for the Eastern District of Arkansas. The complaint alleges that with regard to students who dropped from their courses shortly after enrolling, University of Phoenix improperly returned the entire amount of the students’ undisbursed federal loan funds to the lender. The students purport to be bringing the complaint on behalf of themselves and a proposed class of similarly-situated student loan borrowers. On January 21, 2009, the plaintiffs voluntarily filed a dismissal “without prejudice to re-filing.” The plaintiffs then filed a similar complaint in the United States District Court for the Central District of California (Western Division — Los Angeles) on February 5, 2009. At this time, we do not know how many students may fall into this category, or whether there is a proper basis for the lawsuit to proceed as a class action lawsuit. 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, we cannot reasonably estimate a range of loss for this action and accordingly have not accrued any liability associated with this action.

Regulatory and Other Legal Matters

Student Financial Aid

All U.S. federal financial aid programs are established by Title IV of the Higher Education Act and regulations promulgated thereunder. In August 2008, the Higher Education Act was reauthorized through September 30, 2013 by the Higher Education Opportunity Act.

The Higher Education Act specifies the manner in which the 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. University of Phoenix was recertified in June 2003 and its current certification for the Title IV programs expired in June 2007. In March 2007, University of Phoenix submitted its Title IV recertification application to the Department of Education. We have been collaborating with the Department of Education since that date and continue to supply additional follow-up information based on requests from the Department. Our eligibility continues on a month-to-month basis until the 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. Western International University was recertified in October 2003 and its current certification for the Title IV programs expires in June 2009.

Department of Education Audits and Other Matters

All higher education institutions participating in Title IV programs must be accredited by an accrediting body recognized by the Department of Education. The Department of Education periodically reviews all participating institutions for compliance with all applicable standards and regulations under the Higher Education Act. In February 2009, the Department of Education performed an ordinary course, focused program review of University of Phoenix’s policies and procedures involving Title IV programs. We have not received the program review report resulting from this visit.

During a previous internal review of certain Title IV policies and procedures, it came to our attention that certain Satisfactory Academic Progress calculations performed by University of Phoenix and Western International University failed to properly identify students who should have been placed on financial aid disqualification status and therefore were ineligible to participate in Title IV financial aid programs. Additionally, we determined that University of Phoenix was inadvertently disbursing certain funds under a grant program. These matters were self-reported to the U.S. Department of Education in October 2008. In February 2009, after completing our review of these practices, we reported to the Department the results of our review and paid the Department our best estimate of the liability, which was $8.4 million. Approximately half of this amount was recorded in our Consolidated Statements of Income in fiscal year 2008, which was our best estimate based on the information available when we identified the matter. We recorded the remaining amount in our Condensed Consolidated Statements of Operations in the first half of fiscal year 2009 following completion of our review. We believe that this matter has been resolved.

Internal Revenue Service Audit

An Internal Revenue Service audit relating to our U.S. federal income tax returns for fiscal years 2003 through 2005 commenced in September 2006. In February 2009, the Internal Revenue Service issued an examination report and proposed to disallow deductions relating to stock option compensation in excess of the limitations of Internal Revenue Code Section 162(m). Under 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. The Internal Revenue Service examination report also proposed the additions of penalties and interest. On March 6, 2009, we commenced administrative proceedings with the Office of Appeals of the Internal Revenue Service challenging the proposed adjustments, including penalties and interest. The proposed adjustments, including penalties and interest, are consistent with our prior accruals relating to this issue. In addition, we expensed an additional $1.3 million in the six months ended February 28, 2009 related to interest, for a total accrual of $49.0 million as of February 28, 2009 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).

Note 14. Segment Reporting

We operate primarily in the education industry. We have organized our segments using a combination of factors primarily focusing on the type of educational services provided and products delivered. Our seven businesses are managed in the following four reportable segments: University of Phoenix, Apollo Global, Insight Schools and Other Schools. The Other Schools segment includes Western International University, IPD, CFP and Meritus University. The Corporate caption in our segment reporting includes adjustments to reconcile segment results to consolidated results, which primarily consist of net revenue and corporate charges that are not allocated to our reportable segments. Please refer to Item 8, Financial Statements and Supplementary Data, in our 2008 Annual Report on Form 10-K for further discussion of our segments.

A summary of financial information by reportable segment is as follows:

		Three Months Ended								Six Months Ended
		February 28,				February 29,				February 28,				February 29,
		2009				2008				2009				2008
($ in thousands)
Net revenue:
University of Phoenix		$	829,276			$	657,971			$	1,742,484			$	1,401,361
Apollo Global			14,062				—				31,064				—
Insight Schools (1)			6,586				3,060				14,271				5,148
Other Schools (1)			25,618				28,409				57,607				62,986
Corporate			587				4,203				1,670				4,822
Total net revenue		$	876,129			$	693,643			$	1,847,096			$	1,474,317
Income (loss) from operations:
University of Phoenix		$	230,062			$	129,169			$	540,275			$	360,000
Apollo Global			(2,010	)			—				(1,271	)			—
Insight Schools (1)			(5,971	)			(2,661	)			(9,894	)			(5,007	)
Other Schools (1)			(1,297	)			2,759				3,229				10,523
Corporate (2)			(14,756	)			(188,463	)			(19,446	)			(205,516	)
Total income (loss) from operations			206,028				(59,196	)			512,893				160,000
Reconciling items:
Interest income and other, net			1,977				8,059				3,493				17,708
Income (loss) before income taxes and minority interest		$	208,005			$	(51,137	)		$	516,386			$	177,708

A summary of our consolidated assets by reportable segment is as follows:

		February 28,				August 31,
		2009				2008
($ in thousands)
Assets:
University of Phoenix		$	788,548			$	833,511
Apollo Global			108,644				123,688
Insight Schools			32,817				20,294
Other Schools			47,817				46,914
Corporate			1,456,458				836,005
Total assets		$	2,434,284			$	1,860,412

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help investors understand our results of operations, financial conditions and present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. The MD&A is organized as follows:

•

Overview: From management’s point of view, we discuss the following:

	•		An overview of our business and the segments of the education industry in which we operate;
	•		Current economic and industry-wide trends and developments, opportunities, challenges and risks that impact our business; and
	•		Key highlights from the current period.

	•		Critical Accounting Policies and Estimates: A discussion of our accounting policies that require critical judgments and estimates.
	•		Recent Accounting Pronouncements: A discussion of recently issued accounting pronouncements.
	•		Results of Operations: An analysis of our results of operations in our condensed consolidated financial statements.
	•		Liquidity, Capital Resources, and Financial Position: An analysis of cash flows, contractual obligations and other commercial commitments, and discussion regarding federal and private student loans.

OVERVIEW

Apollo is one of the world’s largest private education providers and has been a provider of education services for more than 30 years. We offer innovative and distinctive educational programs and services at the high school, undergraduate and graduate levels through doctorate at our various campuses and learning centers, and online throughout the world. Our North America-based operations focus principally on adult working students and include the following universities, colleges and institutions:

	•		University of Phoenix
	•		Institute for Professional Development (IPD)
	•		College for Financial Planning Institutes (CFP)
	•		Western International University
	•		Insight Schools
	•		Meritus University

Our international operations, which are conducted through our 80.1% owned subsidiary, Apollo Global, Inc., currently include Universidad de Artes, Ciencias y Comunicación (“UNIACC”) in Chile, and Universidad Latinoamericana (“ULA”) in Mexico.

Substantially all of our net revenue is composed of tuition and fees for educational services. In fiscal year 2008, University of Phoenix accounted for 95.2% of our total net revenue. Additionally, approximately 77% of our fiscal year 2008 total net revenue was derived from receipt of U.S. Title IV financial aid program funds, principally student loans and Pell grants.

We believe that a critical element of generating successful long-term growth and attractive returns for our stakeholders is to provide the highest quality educational products and services for our students in order for them to maximize the benefits of their educational experience. Accordingly, we are intensely focused on student success. We are continuously enhancing and expanding our current service offerings and investing in academic quality. We have developed customized computer programs for academic quality management, faculty recruitment and training, student tracking, and marketing to help us more effectively manage toward this objective. We believe we utilize one of the most comprehensive learning assessment programs in the U.S., and in 2008 University of Phoenix published its first Academic Annual Report. We are also focused on improving student retention by enhancing student services, promoting instructional innovation and improving academic support. All of these efforts are designed to help our students stay in school and succeed.

Current Economic and Industry-wide Trends and Developments, Opportunities, Challenges and Risks

Our management team is focused on the following circumstances and trends that present opportunities, challenges and risks as we work toward our goal of providing attractive returns for all of our stakeholders:

•

Evolving Domestic Postsecondary Education Market. We believe domestic postsecondary education continues to experience a profound shift from traditional undergraduate students (those students living on campus and attending classes full-time) to

			non-traditional students who work, are raising a family, or are doing both while trying to earn a college degree. This trend continues to provide an opportunity for education providers such as University of Phoenix to provide quality academic programs and services that appeal to non-traditional students. We believe we are well positioned to capitalize on this trend.
	•		Economic Downturn. The U.S. and much of the world economy are in the midst of an economic downturn. Although not quantifiable, we believe these conditions have contributed to a portion of our recent enrollment growth as an increased number of working adults seek to advance their education to improve their job security or reemployment prospects. One of our primary challenges will be to adequately and effectively service our increased student population without over-building our infrastructure and delivery platform in a manner that might result in excess capacity when the portion of our growth that may be related to the economic downturn subsides. Additionally, see below under Critical Accounting Policies and Estimates a discussion of the impact of the economic downturn on our allowance for doubtful accounts.
	•		Regulatory Environment:

	•		Compliance. Our domestic business is highly regulated by the U.S. Department of Education, the applicable academic accreditation agencies and state education regulatory authorities. Compliance with these regulatory requirements is a significant part of our administrative effort. In August 2008, the U.S. Congress reauthorized the Higher Education Act through 2013 by enacting the Higher Education Opportunity Act, which resulted in a large number of new and modified requirements that ultimately will be implemented through Department of Education rulemaking. Little formal or informal guidance is available for many of these requirements, and we are focused on evaluating their implications and developing appropriate compliance procedures. Because our student body is large, new regulations, or changes in existing regulations, can require significant time and effort on our part.
	•		Certification . As part of our eligibility to participate in Title IV programs, our institutions involved in Title IV programs must be certified to participate and are required to periodically renew their certification. University of Phoenix was recertified in June 2003 and its current certification for the Title IV programs expired in June 2007. In March 2007, University of Phoenix submitted its Title IV recertification application to the Department of Education. We have been collaborating with the Department of Education since that date and continue to supply additional follow-up information based on requests from the Department. Our eligibility continues on a month-to-month basis until the 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.

	•		New U.S. Administration . In January 2009, Barack Obama was sworn in as the 44th U.S. President. It is too soon to predict the changes in higher education public policy that the Obama Administration may propose, or the effect of the current U.S. economic downturn on the Administration’s ability to implement significant changes. However, in the Administration’s 2010 budget request delivered to Congress on February 26, 2009, the Department of Education proposed to eliminate the Federal Family Education Loan Program (FFELP) and instead require all Title IV student loans to be administered through the Federal Direct Loan Program (FDLP) commencing July 1, 2010. We expect to be able to fully transition from the FFELP program to the FDLP by the proposed July 1, 2010 phase-out date, if necessary. If this proposal is adopted, the transition would require us to develop and implement administrative capabilities and procedures for volume processing of loans under the FDLP. If we experience a disruption in our ability to process student loans through the FDLP, either because of administrative challenges on our part or the inability of the Department of Education to process the substantial increase in direct loans, our results of operations and cash flows could be adversely and materially affected. Other policy and program changes in the Department of Education may present opportunities and challenges for our business, the scope and magnitude of which cannot now be determined.
	•		Opportunities to Expand into New Markets. We believe that there is a growing demand for high quality education outside the U.S. and that we have capabilities and expertise that can be useful in providing these services beyond our current reach. We believe we can deploy our key capabilities in student services, technology and marketing to expand into new markets to further our mission of providing high quality, accessible education. We intend to actively pursue quality opportunities to partner with and/or acquire existing institutions of higher learning where we believe we can achieve long-term attractive growth and value creation.

For a more detailed discussion of trends, risks and uncertainties, and our strategic plan, please refer to our 2008 Annual Report on Form 10-K.

Fiscal Year 2009 Highlights

During the first six months of fiscal year 2009, we experienced the following significant events:

	1.		Degreed Enrollment and New Degreed Enrollment Growth . We achieved 19.4% growth in average University of Phoenix Degreed Enrollment for the six months ended February 28, 2009 as compared to the six months ended February 29, 2008. University of Phoenix New Degreed Enrollment during the first six months of fiscal year 2009 increased 24.4% as compared to the first six months of fiscal year 2008. The enrollment growth is primarily attributable to continued investments in enhancing and expanding University of Phoenix service offerings and academic quality, which has attracted new students and increased student retention. We also believe that a portion of the increase in University of Phoenix Degreed Enrollment and New Degreed Enrollment is due to the current economic downturn, as working adults seek to advance their education to improve their job security or reemployment prospects.
	2.		Net Revenue Growth . Our net revenue increased 25.3% for the six months ended February 28, 2009 as compared to the six months ended February 29, 2008 primarily as a result of University of Phoenix Degreed Enrollment growth and selective tuition price increases.
	3.		Income from Operations Growth . Our income from operations increased 220.6%, or $352.9 million for the six months ended February 28, 2009 as compared to the six months ended February 29, 2008 primarily as a result of the securities litigation charge of $168.4 million in the six months ended February 29, 2008 and University of Phoenix net revenue growth described above and associated economies of scale for certain costs that remain relatively fixed. Excluding the securities litigation charge in the first six months ended February 29, 2008, our income from operations grew 56.2% for the six months ended February 28, 2009 as compared to the six months ended February 29, 2008.
	4.		Changes in Management and Addition of Directors . The following changes in management and addition of directors occurred during our second quarter of fiscal year 2009:

	•		On March 26, 2009, our Board of Directors promoted Joseph L. D’Amico to President and Chief Operating Officer, Brian L. Swartz to Senior Vice President, Chief Financial Officer and Treasurer, and Gregory J. Iverson to Vice President, Chief Accounting Officer and Controller. Mr. D’Amico had previously been serving as President and Chief Financial Officer, Mr. Swartz had previously been serving as Senior Vice President of Finance and Chief Accounting Officer, and Mr. Iverson had previously been serving as Vice President and Corporate Controller.
	•		On March 11, 2009, our Class B Shareholders reelected our existing ten incumbent directors to the Board of Directors and elected three additional directors: Terri C. Bishop, our Executive Vice President of External Affairs, and independent directors, Stephen J. Giusto and Manuel F. Rivelo.
	•		In December 2008, Diane Thompson resigned as Chief Human Resources Officer. On March 25, 2009, Frederick J. Newton commenced employment as Senior Vice President of Human Resources.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a detailed discussion of our critical accounting policies and estimates, please refer to our 2008 Annual Report on Form 10-K. Included below is an update for certain of our Critical Accounting Policies and Estimates as of February 28, 2009.

Goodwill

At February 28, 2009, our CFP reporting unit had goodwill of approximately $15.3 million, which is included in the Other Schools reportable segment. We perform our annual goodwill impairment test of CFP as of August 31. However, the current economic downturn has caused the demand for CFP’s financial planning education programs and materials to diminish. As of February 28, 2009, given the current business climate and in accordance with our related accounting policy under Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” we evaluated and determined that the goodwill balance is not impaired. However, as more information becomes available we will further assess the carrying value of CFP’s goodwill and may record an impairment charge in the future. We do not believe that the current economic downturn has had a significant long-term adverse impact on our other reporting units.

Allowance for Doubtful Accounts

The U.S. and much of the world economy are in the midst of an economic downturn. In accordance with our related accounting policy, we periodically evaluate our standard allowance estimation methodology for propriety and modify as necessary. As of February 28, 2009, we have considered the current credit and economic environment in our evaluation of our accounts receivable and related allowance for doubtful accounts. Accordingly, in accordance with our related accounting policy, we have recorded our best estimate of bad debt expense for the three and six months ended February 28, 2009, which includes consideration of the risk of collecting aged receivables given the current economic downturn.

RECENT ACCOUNTING PRONOUNCEMENTS

Please refer to Note 2, Basis of Presentation, in Item 1, Financial Statements , for recent accounting pronouncements.

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 three and six months ended February 28, 2009 and February 29, 2008. Our operations are generally subject to seasonal trends. We experience, and expect to continue to experience, seasonal fluctuations in our results of operations as a result of changes in the level of student enrollments. While University of Phoenix enrolls students throughout the year, our net revenue generally is lower in the second quarter (December through February) than the other quarters due to holiday breaks in December and January. Certain other subsidiaries experience more significant seasonality, as they have limited enrollment during their respective summer breaks.

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

	•		Instructional costs and services — consist primarily of costs related to the delivery and administration of our educational programs and include costs related to faculty and administrative compensation, classroom lease expenses and depreciation, bad debt expense, financial aid processing costs and other related costs. Tuition costs for all employees and their eligible family members are recorded as an expense within instructional costs and services.
	•		Selling and promotional costs — consist primarily of compensation for enrollment counselors, management and support staff and corporate marketing, advertising expenses, production of marketing materials, and other costs directly related to selling and promotional functions. Selling and promotional costs are expensed when incurred.
	•		General and administrative costs — consist primarily of corporate compensation, occupancy costs, depreciation and amortization of property and equipment, legal and professional fees, and other related costs.

For the three months ended February 28, 2009 compared to the three months ended February 29, 2008

Analysis of Condensed Consolidated Statements of Operations

The table below details our consolidated results of operations. For a more detailed discussion by reportable segment, refer to our Analysis of Operating Results by Segment .

		Three Months Ended
		February 28,				February 29,				% of Net Revenue								%
		2009				2008				2009				2008				Change
(in millions, except per share data)
Net revenue		$	876.1			$	693.6				100.0	%			100.0	%			26.3	%
Costs and expenses:
Instructional costs and services			373.3				327.7				42.6	%			47.2	%			13.9	%
Selling and promotional			225.7				201.7				25.8	%			29.1	%			11.9	%
General and administrative			71.1				55.0				8.1	%			7.9	%			29.3	%
Estimated securities litigation loss			—				168.4				0.0	%			24.3	%			(100.0	%)
Total costs and expenses			670.1				752.8				76.5	%			108.5	%			(11.0	%)
Income (loss) from operations			206.0				(59.2	)			23.5	%			(8.5	%)			448.0	%
Interest income and other, net			2.0				8.1				0.2	%			1.2	%			(75.3	%)
Income (loss) before income taxes and minority interest			208.0				(51.1	)			23.7	%			(7.3	%)			507.0	%
(Provision for) benefit from income taxes			(83.0	)			19.1				(9.5	%)			2.8	%			(534.6	%)
Minority interest, net of tax			0.3				—				0.0	%			0.0	%				*
Net income (loss)		$	125.3			$	(32.0	)			14.2	%			(4.5	%)			491.6	%
Diluted income (loss) per share		$	0.77			$	(0.19	)				*				*			505.3	%

Net Revenue

Our net revenue increased $182.5 million, or 26.3%, in the second quarter of fiscal year 2009 compared to the second quarter of fiscal year 2008. University of Phoenix represented approximately 95% of our net revenue during this period, and contributed the majority of the increase primarily due to growth in Degreed Enrollment and selective tuition price increases. Net revenue also increased due to acquisitions by Apollo Global, which contributed $14.1 million in net revenue in the second quarter of fiscal year 2009.

Instructional Costs and Services

Instructional costs and services increased $45.6 million, or 13.9%, in the second quarter of fiscal year 2009 compared to the second quarter of fiscal year 2008, which represented a 460 basis point decrease as a percentage of net revenue. The decrease as a percentage of net revenue is primarily due to University of Phoenix continuing to leverage its fixed costs, such as certain employee wages, classroom space and depreciation expense. This was partially offset by increases as a percentage of net revenue at Apollo Global and Insight Schools associated with their start-up, development and other infrastructure and support costs, as well as an increase as a percentage of net revenue in bad debt expense. Our bad debt expense was 4.1% of net revenue in the second quarter of fiscal year 2009 compared to 3.8% of net revenue in the second quarter of fiscal year 2008.

Selling and Promotional

Selling and promotional expenses increased $24.0 million, or 11.9%, in the second quarter of fiscal year 2009 compared to the second quarter of fiscal year 2008, which represented a 330 basis point decrease as a percentage of net revenue. The decrease as a percentage of net revenue is primarily due to University of Phoenix improved enrollment counselor effectiveness and improved employee retention. Additionally, investments we have made in our corporate marketing function have resulted in more effective advertising.

General and Administrative

General and administrative expenses increased $16.1 million, or 29.3%, in the second quarter of fiscal year 2009 compared to the second quarter of fiscal year 2008, which represented a 20 basis point increase as a percentage of net revenue. The increase as a percentage of net revenue is primarily due to the expense resulting from our internal review of certain Satisfactory Academic Progress calculations. Please refer to Note 13, Commitments and Contingencies, in Item 1, Financial Statements , for further discussion of this matter.

Estimated Securities Litigation Loss

In connection with the securities class action matter, we recorded a charge for estimated damages of $168.4 million as a result of the jury verdict awarded in favor of the plaintiffs in the second quarter of fiscal year 2008. The original charge was recorded at the mid-point of the range of $120.5 million to $216.4 million. In the fourth quarter of fiscal year 2008, we reversed the estimated charge because the U.S. District Court for the District of Arizona vacated the earlier judgment and entered judgment in favor of Apollo. Please refer to Note 13, Commitments and Contingencies, in Item 1, Financial Statements , for further discussion of this matter.

Interest Income and Other, Net

Interest income and other, net, consisted of the following in the periods indicated:

		Three Months Ended
		February 28,				February 29,
		2009				2008
($ in millions)
Interest income		$	3.4			$	8.5
Interest expense			(0.6	)			(0.6	)
Foreign currency and other, net			(0.8	)			0.2
Interest income and other, net		$	2.0			$	8.1

The $5.1 million decrease in interest income was primarily due to lower interest rate yields, which was partially offset by increases in average cash and cash equivalents balances (including restricted) during the respective periods.

(Provision for) Benefit from Income Taxes

Our provision for income taxes for the three months ended February 28, 2009 was $83.0 million, or an effective tax rate of 39.9%. Our benefit from income taxes for the three months ended February 29, 2008 was $19.1 million, or an effective tax rate of 37.3%. The increase in our effective tax rate was primarily attributable to a reduction in tax-exempt interest income, an increase in certain non-deductible losses and an increase in state taxes.

Analysis of Operating Results by Segment

The table below details our operating results by segment for the periods indicated:

		Three Months Ended
		February 28,				February 29,				$				%
($ in millions)		2009				2008				Change				Change
Net revenue
University of Phoenix		$	829.3			$	658.0			$	171.3				26.0	%
Apollo Global			14.1				—				14.1				100.0	%
Insight Schools			6.6				3.0				3.6				120.0	%
Other Schools			25.6				28.4				(2.8	)			(9.9	%)
Corporate (1)			0.5				4.2				(3.7	)			(88.1	%)
Total net revenue		$	876.1			$	693.6			$	182.5				26.3	%
Income (loss) from operations
University of Phoenix		$	230.1			$	129.2			$	100.9				78.1	%
Apollo Global			(2.0	)			—				(2.0	)			(100.0	%)
Insight Schools			(6.0	)			(2.7	)			(3.3	)			(122.2	%)
Other Schools			(1.3	)			2.8				(4.1	)			(146.4	%)
Corporate (1)			(14.8	)			(188.5	)			173.7				92.1	%
Total income (loss) from operations		$	206.0			$	(59.2	)		$	265.2				448.0	%

University of Phoenix

The $171.3 million, or 26.0%, increase in net revenue in our University of Phoenix segment was primarily due to growth in its Degreed Enrollment as detailed below:

		Degreed Enrollment (1)													New Degreed Enrollment (2)
		Q2													Q2
										%													%
		Fiscal 2009				Fiscal 2008				Change					Fiscal 2009				Fiscal 2008				Change
(rounded to the nearest hundred)
Associate’s			170,500				121,200				40.7	%				41,700				31,100				34.1	%
Bachelor’s			150,200				136,400				10.1	%				25,100				21,500				16.7	%
Master’s			70,500				67,000				5.2	%				12,500				11,800				5.9	%
Doctoral			6,500				5,600				16.1	%				700				600				16.7	%
Total			397,700				330,200				20.4	%				80,000				65,000				23.1	%

Enrollment growth is in part the result of investments in enhancing and expanding University of Phoenix service offerings and academic quality, which has attracted new students and increased student retention. We believe that a portion of the increase in Degreed Enrollment and New Degreed Enrollment is due to the current economic downturn, as working adults seek to advance their education to improve their job security or reemployment prospects.

In addition to the growth in Degreed Enrollment, net revenue increased due to selective tuition price increases implemented in July 2008, depending on geographic area, program, and degree level. These selective tuition price increases included an approximate 10% increase in associate’s degree tuition price and increases averaging 4% to 5% for bachelor’s and master’s degree programs. The impact of these price increases on future net revenue and operating income will continue to be impacted by changes in enrollment, changes in student mix within programs and degree levels, and changes in discounts. The increase in net revenue was partially offset by a continued shift in student body mix to a higher percentage of students enrolled in associate’s degree programs, which have tuition prices generally lower than other degree programs. Associate’s Degreed Enrollment represented 42.9% of Degreed Enrollment at February 28, 2009, compared to 36.7% at February 29, 2008. In addition, associate’s Degreed Enrollment increased 40.7% in the second quarter of fiscal year 2009 compared to the second quarter of fiscal year 2008.

Effective March 1, 2008, University of Phoenix 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 the prior refund policy, if a student attended one class of a course, University of Phoenix earned 25% of the tuition for the course, and if they attended two classes of a course, University of Phoenix earned 100% of the tuition for the course. Refunds are recorded as a reduction in deferred revenue during the period that a student withdraws from a class. This new refund policy applies to students in most states, as some states require different policies. University of Phoenix elected to change its refund policy primarily because we believe it is a more reasonable policy and more closely matches the benefits received from the students’ perspective. Furthermore, we believe one of the benefits to University of Phoenix as a result of changing the refund policy is better student retention.

Income from operations in our University of Phoenix segment increased $100.9 million, or 78.1%, during the second quarter of fiscal year 2009 compared to the second quarter of fiscal year 2008. This increase was primarily attributable to the following:

	•		Economies of scale associated with the 26.0% increase in University of Phoenix net revenue as several costs remain relatively fixed such as certain employee wages, classroom space, and depreciation when University of Phoenix grows its net revenue. Additionally, variable employee headcount has grown at a lower rate than the increase in net revenue;
	•		A decrease in financial aid processing costs from favorable renegotiation, effective September 2008, of our contract with our outsourced financial aid processing vendor;
	•		Investments in our corporate marketing function that have produced more effective and efficient advertising; and
	•		An increase in enrollment counselor effectiveness as a result of internal initiatives to assist enrollment counselors in their jobs as well as an increase in the average tenure of enrollment counselors; which was partially offset by
	•		Increased bad debt expense as a percentage of net revenue from the continued economic downturn and lower collection rates on aged accounts receivable.

Apollo Global

Net revenue in our Apollo Global segment was $14.1 million during the second quarter of fiscal year 2009. The net revenue was generated by two universities acquired by Apollo Global in fiscal year 2008: UNIACC and ULA.

Loss from operations in our Apollo Global segment in the second quarter of fiscal year 2009 is primarily due to the following:

	•		General and administrative expense associated with the pursuit of opportunities to partner with and/or acquire existing institutions of higher learning where we believe we can achieve long-term attractive growth and value creation;
	•		Investment in UNIACC and ULA including, but not limited to, initiatives to enhance academic quality and marketing; and
	•		Seasonality in UNIACC’s operations, as UNIACC’s operating results will generally be lower during our second fiscal quarter due to UNIACC’s academic calendar and certain operating costs that remain relatively fixed throughout the fiscal year.

Insight Schools

The $3.6 million increase in net revenue in our Insight Schools segment during the second quarter of fiscal year 2009 compared to the second quarter of fiscal year 2008 was due to an increase in the number of schools we are serving in fiscal year 2009 and an increase in enrollment in the schools that were in operation in fiscal year 2008.

The increase in the loss from operations was primarily due to additional start-up costs for items such as faculty, office space and depreciation, increased regulatory compliance costs and other general and administrative expenses, as well as other infrastructure and support costs to grow this business.

As Insight Schools has expanded its business, it has encountered a number of administrative challenges in its compliance activities. We expect that these challenges will increase operating costs and limit the growth rate of the Insight Schools business in the near term. As a result of anticipated start-up expenses and increased operating costs, we expect that Insight Schools will continue to generate losses for the foreseeable future. Furthermore, in the event these compliance activities are not adequately resolved, it could have a reputational impact on other businesses owned by us. We believe that Insight will eventually become profitable as revenues increase to the level necessary to support its growing infrastructure and we achieve better leverage over the fixed cost structure, as well as improve upon variable curriculum, technology and other costs.

Other Schools

The $2.8 million decrease in net revenue in our Other Schools segment during the second quarter of fiscal year 2009 compared to the second quarter of fiscal year 2008 was primarily due to Western International University associate’s degree program students graduating or withdrawing from the program. We began offering associate’s degree programs at Western International University in September 2004. In April 2006 (our third quarter of fiscal year 2006), we began offering associate’s degree programs at University of Phoenix instead of Western International University; however, we have continued to service the existing associate’s degree students at Western International University until graduation, withdrawal or transfer to University of Phoenix. Additionally, CFP’s net revenue declined due a decrease in demand for CFP’s financial planning education programs and materials as a result of the current economic downturn.

The decrease in income from operations in our Other Schools segment was primarily due to the decrease in net revenue discussed above as well as our investments in developing Meritus University.

For the six months ended February 28, 2009 compared to the six months ended February 29, 2008