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

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

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

Executive Summary
Apollo Group, Inc. is one of the world's largest private education providers and has been in the education business for more than 30 years. We offer innovative and distinctive educational programs and services at the high school, undergraduate and graduate levels online and on-campus through our wholly-owned subsidiaries, 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"), and Insight Schools, Inc. ("Insight Schools"), and through our 80.1% owned subsidiary, Apollo Global, Inc. ("Apollo Global"). We also recently commenced operation of a new Canadian institution, Meritus University ("Meritus"), which began operations in September 2008. Domestic Postsecondary Education
The domestic non-traditional education industry is a significant and growing component of the postsecondary education market, which was estimated to be a more than $373.0 billion industry in 2006, according to the Digest of Education Statistics published in 2007 by the U.S. Department of Education's National Center for Education Statistics. According to the same study, in 2005, over 6.8 million, or 39%, of all students enrolled in higher education programs were over the age of 24, and enrollment in degree-granting institutions between 2006 and 2016 is expected to increase approximately 30% for students aged 25 to 34 and 7% for those 35 and over. These students would not be classified as traditional (i.e., living on campus, supported by parents and not working full-time). The non-traditional students typically are looking to improve their skills and enhance their earnings potential within the context of their careers. We believe that the demand for non-traditional education will continue to increase, reflecting the rapidly expanding knowledge-based economy in the U.S. International Education
There were approximately 132 million students enrolled in postsecondary education worldwide and global government education expenditures totaled the equivalent of $2.0 trillion in 2004, according to the Global Education Digest 2007 published by the United Nations Educational, Scientific and Cultural Organization Institute for Statistics. This does not include capital expenditures in private education, which are difficult to track, though acknowledged by United Nations Educational, Scientific and Cultural Organization to be growing around the world.
We believe that private education is playing a critical role in advancing development of education, specifically higher education and lifelong learning, in many countries around the world. While primary and secondary education outside the U.S. are still funded mainly through government expenditures, we believe that postsecondary education outside of the U.S. is experiencing governmental funding constraints that create opportunities for a broader private sector role. The International Finance Corporation of the World Bank reported in May 2008 that governments around the world are embracing private sector participation as a way to increase quality and efficiency.

Domestic High School Education
According to the Department of Education's National Center for Education Statistics, based on data from 2005, there are approximately 20 million high school-age students in the U.S. Throughout the nation, nearly five million high school-age children are not enrolled in school and the high school dropout rate averages 25.3% across the nation based on the average freshman graduation rate. These statistics are illustrative of the large number of high school-age children facing different challenges and with different needs in today's environment.
Many parents and educators are seeking alternatives to traditional classroom-based education that can help improve academic achievement. Demand for these alternatives is evident in the growing number of choices available to parents and students. For example, charter schools emerged in 1992 to provide an alternative to traditional public schools. As of May 2008, over 1.2 million students attend over 4,300 charter schools in 40 states and the District of Columbia according to the National Alliance for Public Charter Schools. At the same time, acceptance of online learning initiatives has increased. Online schools can offer a comprehensive curriculum and flexible delivery model; therefore, we believe that a growing number of families will pursue online public schools as an attractive public school alternative. We believe there is a significant opportunity for a high-quality, trusted, national education provider to serve online public schools.
Student Enrollment
Degreed Enrollment
Our Degreed Enrollment for the quarter ended November 30, 2008 was 384,900. Degreed Enrollment for a quarter represents individual students enrolled in a University of Phoenix degree program or Western International University associate's degree program who attended a course during the quarter and did not graduate as of the end of the quarter. Degreed Enrollment for a quarter also includes any student who previously graduated from one degree program and started a new University of Phoenix degree program in the quarter (for example, a graduate of the associate's degree program returns for a bachelor's degree or a bachelor's degree graduate returns for a master's degree). In addition, Degreed Enrollment includes students participating in University of Phoenix certificate programs of at least 18 credit hours with some course applicability into a related degree program. Students enrolled in or serviced by Apollo Global institutions, Insight Schools and Other Schools (Western International University's non-associate's degree programs, IPD, CFP and Meritus) are not included in Degreed Enrollment.
The following table provides a breakdown of our Degreed Enrollment (rounded to the nearest hundred):

                                                                              Degreed Enrollment
Quarter Ended:               Associate's                Bachelor's                  Master's                 Doctoral                   Total
August 31, 2007          104,500        33.3 %      138,700        44.2 %      65,300        20.8 %      5,200        1.7 %      313,700        100.0 %
November 30, 2007        114,300        35.2 %      137,800        42.4 %      67,300        20.7 %      5,600        1.7 %      325,000        100.0 %
February 29, 2008        121,200        36.7 %      136,400        41.3 %      67,000        20.3 %      5,600        1.7 %      330,200        100.0 %
May 31, 2008             134,300        38.9 %      137,900        39.9 %      67,300        19.5 %      5,800        1.7 %      345,300        100.0 %
August 31, 2008          146,500        40.5 %      141,800        39.1 %      67,700        18.7 %      6,100        1.7 %      362,100        100.0 %
November 30, 2008        161,800        42.0 %      146,800        38.2 %      69,800        18.1 %      6,500        1.7 %      384,900        100.0 %

New Degreed Enrollment
Our aggregate New Degreed Enrollment for the first quarter in fiscal year 2009 was 86,300. New Degreed Enrollment for a quarter represents any individual student enrolled in a University of Phoenix degree program who is a new student and started a course in the quarter, any individual student who previously graduated from one degree program and started a new degree program in the quarter (for example, a graduate of an associate's degree program returns for a bachelor's degree program, or a graduate of a bachelor's degree program returns for a master's degree), as well as any individual student who started a degree program in the quarter and had been out of attendance for greater than 12 months. In addition, New Degreed Enrollment includes students who in the quarter started participating in University of Phoenix certificate programs of at least 18 credit hours in length with some course applicability into a related degree program. Students enrolled in or serviced by Apollo Global institutions, Insight Schools and Other Schools (Western International University, IPD, CFP and Meritus) are not included in New Degreed Enrollment.

The following table provides a breakdown of our aggregate New Degreed Enrollment (rounded to the nearest hundred):

                                                                         New Degreed Enrollment
Quarter Ended:             Associate's                Bachelor's                 Master's                 Doctoral                   Total
November 30, 2007       33,700        49.1 %      21,800        31.7 %      12,400        18.0 %        800        1.2 %      68,700        100.0 %
February 29, 2008       31,100        47.8 %      21,500        33.1 %      11,800        18.2 %        600        0.9 %      65,000        100.0 %
May 31, 2008            37,100        52.0 %      21,900        30.7 %      11,600        16.2 %        800        1.1 %      71,400        100.0 %
August 31, 2008         41,500        49.9 %      27,200        32.7 %      13,600        16.4 %        800        1.0 %      83,100        100.0 %
November 30, 2008       45,800        53.1 %      26,100        30.2 %      13,300        15.4 %      1,100        1.3 %      86,300        100.0 %

During the first three months of fiscal year 2009, we experienced the following significant events:
1. Enrollment and Start Growth - We achieved 18.4% growth in Degreed Enrollment as of November 30, 2008 as compared to November 30, 2007. Our New Degreed Enrollment increased 25.6% in the first quarter of fiscal year 2009 as compared to the first quarter of fiscal year 2008. We believe that a portion of this increased enrollment is due to the current global financial crisis and economic uncertainty, as working adults seek to advance their education to improve their job security or reemployment prospects.

2. Revenue Growth - Our net revenue increased 24.4% for the three months ended November 30, 2008 as compared to the three months ended November 30, 2007 primarily as a result of our enrollment growth and selective tuition price increases.

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 November 30, 2008.
Goodwill
At November 30, 2008, 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 credit crisis in the U.S. and global financial markets has caused the demand for CFP's financial planning education programs and materials to diminish. As of November 30, 2008, 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. Allowance for Doubtful Accounts
In addition to the current credit crisis noted in Goodwill above, the U.S. economy and the economies of other key industrialized countries currently are characterized by reduced economic activity, increased unemployment and substantial uncertainty. In accordance with our related accounting policy, we periodically evaluate our standard allowance estimation methodology for propriety and modify as necessary. As of November 30, 2008, 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 months ended November 30, 2008, which includes consideration of the risk of collecting aged receivables given the current economic environment.

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 months ended November 30, 2008 and 2007. For additional information on
seasonal trends, please refer to Note 1, Nature of Operations, in Item 1,
Financial Statements. The following table sets forth an analysis of our
Condensed Consolidated Statements of Income for the periods indicated:

                                            Three Months
                                         Ended November 30,                % of Net Revenue                % Change
($ in millions)                         2008             2007            2008            2007            2008 vs. 2007
Net revenue                          $     971.0        $ 780.7           100.0 %         100.0 %                  24.4 %

Costs and expenses:
Instructional costs and
services                                   377.3          333.3            38.9 %          42.7 %                  13.2 %
Selling and promotional                    228.6          176.9            23.5 %          22.6 %                  29.2 %
General and administrative                  58.2           51.3             6.0 %           6.6 %                  13.5 %

Total costs and expenses                   664.1          561.5            68.4 %          71.9 %                  18.3 %

Income from operations                     306.9          219.2            31.6 %          28.1 %                  40.0 %
Interest income and other, net               1.5            9.7             0.2 %           1.2 %                     *

Income before income taxes and
minority interest                          308.4          228.9            31.8 %          29.3 %                  34.7 %
Provision for income taxes                (128.1 )        (89.0 )         (13.2 %)        (11.4 %)                 43.9 %
Minority interest, net of tax                0.1              -             0.0 %           0.0 %                     *

Net income                           $     180.4        $ 139.9            18.6 %          17.9 %                  28.9 %

* not meaningful

We categorize our expenses as instructional costs and services, selling and promotional, and general and administrative.
Instructional costs and services at University of Phoenix, Apollo Global, Insight Schools, and Other Schools consist primarily of costs related to the delivery and administration of our educational programs and include faculty compensation (full-time and contract), administrative compensation for departments that provide service directly and indirectly to the students, financial aid processing costs, costs for collections efforts, bad debt expense and costs of educational materials sold. Additionally, instructional costs include those costs such as rents and other occupancy costs, IT costs in support of student systems, and depreciation and amortization of property and equipment that support both the recruitment and retention of our students. Classroom facilities are primarily leased or, in some cases, are provided by the students' employers at no charge to us. Instructional costs and services at IPD (included in Other Schools) consist primarily of program administration, student services, and classroom lease expense. Most of the other instructional costs for IPD-assisted programs, including faculty, financial aid processing, and other administrative salaries, are the responsibility of IPD's client institutions. Tuition costs for all employees and their eligible dependants are recorded as a fringe benefit 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 as 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 departments such as executive management, information systems infrastructure, corporate accounting and finance, corporate human resources, and other departments that perform functions unrelated to the core business of recruiting and servicing our students.

Net Revenue
The table below presents net revenue by reportable segment, and net revenue for
each reportable segment as percentage of total net revenue, for the first
quarter of fiscal years 2009 and 2008. The Corporate caption in our segment
reporting includes adjustments to reconcile segment results to consolidated
results, which primarily consists of net revenue not allocated to our University
of Phoenix, Apollo Global, Insight Schools and Other Schools segments.

                               Three Months
                            Ended November 30,          % of Net Revenue           % Change
  ($ in millions)            2008          2007         2008         2007        2008 vs. 2007
  University of Phoenix   $    913.2      $ 743.4          94.0 %      95.2 %              22.8 %
  Apollo Global                 17.0            -           1.8 %       0.0 %             100.0 %
  Insight Schools                7.7          2.1           0.8 %       0.3 %             266.7 %
  Other Schools                 32.0         34.6           3.3 %       4.4 %              (7.5 %)
  Corporate                      1.1          0.6           0.1 %       0.1 %              83.3 %

  Net revenue             $    971.0      $ 780.7         100.0 %     100.0 %              24.4 %

Our net revenue increased 24.4%, primarily in our University of Phoenix segment, due in large part to our 18.4% increase in quarterly Degreed Enrollment. We believe that a portion of this increased enrollment is due to the current global financial crisis and economic uncertainty, as working adults seek to advance their education to improve their job security or reemployment prospects. In addition to increases in enrollments, revenues were also impacted by selective tuition price increases, depending on geographic area, program, and degree level, which were partially offset by a continued shift in our student body mix to a higher percentage of students enrolled in associate's degree programs with lower tuition prices. Our associate's Degreed Enrollment represented 42.0% of our Degreed Enrollment at November 30, 2008, compared to 35.2% at November 30, 2007. In addition, our associate's quarterly Degreed Enrollment increased 41.6% in the first quarter of fiscal year 2009 compared to the first quarter of fiscal year 2008. Furthermore, in July 2008, University of Phoenix increased its associate's degree tuition price by approximately 10% and implemented selective tuition 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 depend on several factors including, but not limited to, changes in enrollment, changes in student mix within programs and degree levels, and changes in discounts. Notwithstanding these tuition price increases, our associate's degree programs continue to have a lower tuition price than our other programs.
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 our 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. 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 because we believe it is more reasonable from our students' perspective.
Net revenue increased in our Apollo Global segment due to acquisitions that were completed during fiscal year 2008.
Net revenue increased in our Insight Schools segment as a result of 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. Net revenue decreased in our Other Schools segment both in dollars and as a percentage of consolidated net revenue 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.

Instructional Costs and Services
Instructional costs and services increased by 13.2% in the first quarter of
fiscal year 2009 compared to the first quarter of fiscal year 2008. The
following table sets forth the significant components of instructional costs and
services:

                                            Three Months
                                         Ended November 30,                % of Net Revenue               % Change
($ in millions)                         2008             2007            2008             2007          2008 vs. 2007
Employee compensation and
related expenses                     $    133.5         $ 113.8             13.7 %         14.6 %                 17.3 %
Faculty compensation                       87.7            65.7              9.0 %          8.4 %                 33.5 %
Classroom lease expenses and
depreciation                               59.5            52.0              6.1 %          6.7 %                 14.4 %
Other instructional costs and
services                                   47.5            44.7              5.0 %          5.6 %                  6.3 %
Bad debt expense                           34.9            32.4              3.6 %          4.2 %                  7.7 %
Financial aid processing costs             10.2            19.6              1.1 %          2.5 %                (48.0 %)
Share-based compensation                    4.0             5.1              0.4 %          0.7 %                (21.6 %)

Instructional costs and
services                             $    377.3         $ 333.3             38.9 %         42.7 %                 13.2 %

Instructional costs and services decreased 380 basis points as a percentage of net revenue primarily due to decreases as a percentage of net revenue in classroom lease expenses and depreciation, other instructional costs and services, bad debt expense and financial aid processing costs. The decrease in employee compensation and related expenses and the increase in faculty compensation, both as a percentage of net revenue, is primarily due to faculty related benefit costs being classified in faculty compensation beginning in fiscal year 2009 versus being classified in employee compensation and related expenses in fiscal year 2008. The reclassification has no impact on total instructional cost and services expense.
Classroom lease expenses and depreciation decreased 60 basis points as a percentage of net revenue due to a larger percentage of our student body choosing to enroll in our online modality.
Other instructional costs and services decreased 60 basis points as a percentage of net revenue primarily due to lower negotiated contract costs from third-party vendors.
Bad debt expense decreased 60 basis points as a percentage of net revenue primarily due to a continued focus on front-end collection efforts and improved student retention rates. On a sequential basis, our bad debt expense as a percentage of net revenue, increased from 3.0% in the fourth quarter of fiscal year 2008 to 3.6% in the first quarter of fiscal year 2009, due in part to the risk of collecting aged receivables given the current economic environment. Financial aid processing costs decreased 140 basis points as a percentage of net revenue due to the favorable renegotiation of our contract with our outsourced financial aid processing vendor.
Selling and Promotional Expenses
Selling and promotional expenses increased by 29.2% in the first quarter of fiscal year 2009 compared to the first quarter of fiscal year 2008. The following table sets forth the significant components of selling and promotional expenses:

                                            Three Months
                                         Ended November 30,                % of Net Revenue               % Change
($ in millions)                         2008             2007            2008             2007          2008 vs. 2007
Enrollment counselors'
compensation and related
expenses                             $    112.0         $  89.0             11.5 %         11.4 %                 25.8 %
Advertising                                87.9            71.1              9.0 %          9.1 %                 23.6 %
Other selling and promotional
expenses                                   27.2            16.1              2.8 %          2.0 %                 68.9 %
Share-based compensation                    1.5             0.7              0.2 %          0.1 %                114.3 %
. . .