Last May, Elizabeth Hanson, who will enter Georgetown University as a freshman this fall, took the Advanced Placement (AP) exam in U.S. government and politics. She, along with nearly 60,000 other high school students across the country who took the test, hoped to score well enough to earn college credit, saving tuition costs and freeing up her class schedule. Unlike all but a tiny minority of her fellow test takers, however, Hanson prepared for the rigorous, comprehensive exam via the Internet rather than in the classroom. Why? Because her school, in common with about half of all U.S. high schools, doesn't offer AP prep classes.

Hanson and six other students at Charlotte Catholic High School in North Carolina, were part of a group of 150 kids from around the country who took the AP Web course offered by APEX Online Learning Inc., a startup based in Bellevue, Wash., that's betting there's a big market for online classes. So far, the six-month-old APEX offers two advanced placement courses, one in U.S. history and government and the other in calculus, through 57 private and public schools nationwide. The 150 were the startup's guinea pigs -- its first class of students. Minuscule, maybe, but APEX has some big shoulders behind it.

Paul Allen, a Microsoft co-founder, started the company because "he believes in the Internet's power to change education for the better," says APEX CEO Sally Narodick. Allen, who has his own nonprofit Virtual Education Foundation, backed the company to the tune of $10 million through his investment firm, Vulcan Ventures Inc.

Yet this is no exercise in starry-eyed idealism. Take Allen's choice of a CEO for his baby. Narodick has a master's degree in teaching, but she's also the former CEO of educational software company Edmark, with two decades on Wall Street under her belt. Narodick makes no bones about the commercial vision behind APEX: "We see a large market emerging for Internet-based courses, test preparation, and teacher training for the K-12 market, and we expect to be a $50 million-plus company in four to five years," she says, adding that the company will shortly announce another strategic venture investor.

Advanced Placement classes amount to a jot in the estimated $740 billion spent on education and training in the U.S. each year. The backing of a high-tech luminary like Allen shows how eager entrepreneurs -- and venture capitalists -- are to mine profits from the movement to rationalize and improve schools, an effort often compared to the health-care revolution of the past few years.

APEX isn't the first to offer remote AP courses, though it is one of the first to try to make money from them. The Virtual High School, a nonprofit educational Web service that allows 44 participating schools to share their classes online, also offers AP classes. So does Stanford University's Education Program for Gifted Youth -- although its course content is currently only available on CD-ROM. Ball State University in Muncie, Ind., which funds the Indiana Academy for gifted high school students, teaches AP classes via the Net and satellite broadcasts.

What makes APEX officials so optimistic about this elite, niche market? Its growth potential. In this day of soaring college tuition, they're betting that many more students would take the AP test and qualify out of college classes if they could do the prep work. Most schools can't afford to hire a teacher for a class with the limited enrollment of AP classes. "That leaves an opportunity for the private sector to fill the gap," says Narodick.

Only about half of the country's 22,000 high schools include AP classes in their curriculum, according to the College Entrance Examination Board, and the majority of those only offer an average of four to five courses out of a possible 32 subjects. About 660,000 students took 1.1 million tests last year, says the College Board.

So far, Narodick says, APEX offers two courses online and plans to add three more this fall. "We started with AP [online courses] because the tests have a nationally accepted curriculum, and college entrance standards are becoming increasingly competitive among students," she says. "The AP market isn't big enough to make a business, but it's a great place to start building the brand name."

Eventually, Narodick says the company, which currently has 50 employees, will eventually offer preparatory classes online for the standardized competency exams more and more states require from elementary school on. "We'll also be training teachers online, allowing them to earn credits and even master's degrees, and next March we'll launch a line of AP review products for kids already taking AP classes at their high schools," she adds.

Online tutoring may not be as personal as a live teacher -- but it is a lot cheaper. Schools so far have paid the cost of offering the course. APEX charges $395 a semester per pupil for each course, including all course material and training for 15 weeks of instruction.

How well does APEX prepare kids for these highly competitive exams? Hanson had to take her U.S. politics course during her free time in the guidance counselor's office at her high school. Moreover, she was responsible for making her own schedule as she worked through seven units of complicated material. The course work involves a mix of scheduled lectures -- broadcast over the Net -- and interactive assignments. Hanson watched streaming media content, such as U.S. Supreme Court Justices reading their decisions. She also took weekly quizzes online and wrote essays that were graded by APEX instructors. She found the course difficult at first. "When I started I was two weeks behind because of some computer problems," Hanson says. "It was also hard to have to be responsible for your own schedule. You don't have a teacher telling you when things are due or reminding you when to study. You have to be self-disciplined."

Narodick concedes that the going was also rough at first for the schools, which had technical problems she says were fixed over the course of the semester. "Surprisingly, one of the biggest complaints was among siblings who were competing for the same phone line at home," she says. The solution? Next year, APEX will distribute CD-ROMs for home use. As for the lack of one-on-one teacher instruction and peer interaction, Narodick says her company encourages schools to appoint an adviser to work with the students. "They need a designated nagger," she says.

How did Hanson fare? Stay tuned for the AP exam scores, due at the end of July.

By Stefani Eads in New York
stefani_eads@businessweek.com