Greetings, ladies and gentlemen, and welcome to the ITT Educational Services First Quarter 2008 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. Joining us today from the management of ITT Educational Services, we have, Kevin Modany, Chairman, CEO and President; and Dan Fitzpatrick, Senior Vice President and Chief Financial Officer. Before we begin, ITT Educational Services Incorporated wishes to remind you that this conference call may include forward-looking information. Actual results may differ from the information presented during this call. For additional information, please review the section on forward-looking information contained in today's new release or in the company's public filings with the Securities and Exchange Commission. Thank you. Mr. Modany, you may begin.

Thank you very much. Good morning, ladies and gentlemen, and thank you for joining us to review our 2008 first quarter results. With me on the call this morning is our Senior VP and Chief Financial Officer, Dan Fitzpatrick. I'd like to begin by providing a brief outline of the information that we will review with you on the call today. I'll begin the prepared comments by providing more details regarding our operational results, an overview of the student retention and graduate employment trend, and an update on the current status of our integration efforts with our new student lenders [ph]. I'll also provide you with a quick review of our progress with a few of our growth initiatives as we continue to make investments in our business to take advantage of what we believe is a very attractive operating environment for high quality, post secondary education. I will then turn the call over to Dan who will provide you with some additional color on our outstanding first quarter financial results. At the conclusion of our prepared comments, we will open the phone lines to entertain your questions. With that, let's get started. As you've already read in this morning's press release, we had another tremendous quarter in terms of our operating and financial performance. During our January 2008 conference call, we indicated our belief that the conditions in the operating environment for our business were favorable as we entered the new year. The results that we reported to you this morning, in our opinion, are a reflection of very positive operating environment for our company at the value of high quality, career-based post-secondary education continues to increase. As we began the second quarter, our outlook for the business in the remainder of 2008 exclusive of the current disruption in…

Thanks, Kevin. I would like to begin by reviewing the key financial highlights for the quarter. In the three months ended March 31, 2008 revenue increased 15% to $234.9 million compared to $204.2 million in the same period in 2007. Revenue increase was primarily due to a 13.1% increase in total student enrollment as of December 31, 2007 compared to the same point in 2006, and a 5% increases in tuition that became effective in the academic quarters that began in both March 2008 and 2007. The revenue increase was partially offset by a 190 basis point decline in the student persistence in the first quarter of 2008 compared to the same period in the prior year. Revenue per student increased 1.7% in the three months ended March 31, 2008 compared to the same period in the prior year. The increase was negatively impacted by the change in our student persistence that Kevin mentioned in his comments. Cost of educational services increased $1.3 million or 1.4% to $92 million in the three months ended March 31, 2008 compared to $90.8 million in the three months ended March 31, 2007, primarily due to additional costs to support the increased number of students and to operate our new colleges. The increase in the cost of educational services was fully offset by greater efficiencies in operating our colleges. Improvement in the efficiency of our operating model resulted from continued increase in the effective utilization of our existing staffing and facility capacity, which was supported by current and previous investments in our technology infrastructure. We should note that there were no material one-time or special items that impacted the cost of educational services in the three months ended March 31, 2008. As a result, the cost of educational services as a percentage of revenue…

Thanks, Dan. We continue to believe that the fundamentals of the company are very strong. We recognize the difficulties presented by the current state of the financial markets and we are taking steps to address those difficulties so that we can continue to pursue our mission to increase access to post secondary education for all qualified individuals. We believe that the actions that we have taken to date in this regard position us very well to achieve our internal operating and financial goals for 2008. At this point, I would like to ask the operator to open up the lines for any questions that you may have. Question And Answer

Thank you. Ladies and gentlemen, at this time we will conduct a question-and-answer session. [Operator Instructions]. Our first question come from Mark Marostica from Piper Jaffray. Please proceed with your question.

Good job on the quarter, guys. I'd just like to start off with the recent announcement from Citi, Chase and BOA and ask the question, what are the implications of the policy, lending policy changes at each of the three and tied to that, can you give us a sense; you talked about vendor one, two and three. Can you give us a sense who is vendor one, who is vendor two and who is vendor three?

Sure Mark. I really appreciate the question. Let me just say that I think we've learnt our lesson in terms of disclosing the names of lenders in January when we did that. The resulting impact for those lenders was that they were inundated by other schools, coming to them to get in line and really try to establish relationships and that created some difficulties for our lending partners and we have committed to them at this point that we will avoid a repeat of that and so I am going to try to give as much color on this as I can, without violating that commitment that we made to the lending partners. We did talk a little bit about receiving notice from one of our lenders that we wouldn't be participating or they would not be able to fulfill their obligations in terms of making the student loans to our students. That was Citi, the Student Loan Corporation. So I will disclose that only because we are not continuing a relationship there. They basically indicated that just as a result of a very short term nature of the relationship and we were only with them for a couple of weeks. And their severe restrictions in terms of liquidity that they could not move forward in that regard, so we will not be participating in their lending program until they return to the market. As far as the other banks and lenders we announced in January, let me just make a statement that we are working with lenders today, we are working with traditional student lenders today, these are nationally recognized lenders. They are providing our students with federal and private loan options and we are in discussions with others to come onboard as well. Certainly they are indicating to us that there are pressures on the fed side of the business in terms of the subsidy cuts as well as liquidity. So they are voicing those concerns, but we have availability right now in the federal side. There is no push back in terms of the private side. I won't say that as we've been saying for quite some time that the underwriting standards are the same. They clearly have changed as a result of liquidity, but there aren't any lenders who are telling us that they don't want to participate in private lending in terms of those that we are dealing with today. So hopefully that gives you some color and I hope you can appreciate why we are nor giving specificity in terms of names of banks at this point.

And just a follow up in regards to one of the alternative measures that you are putting in place, now it's a pilot with a direct leaning program. Can you let us know how that pilot is going and what you are experiencing with regards to that pilot that may portend the future around default rates and that sort of thing?

Sure. And I will speak not only to our experience in the pilot, but also our previous experience. We've had schools that have participated in direct lending in the past and quite frankly, we have a couple of our financial aid professionals who are still with us today, that were part of our work with the direct loan program several years back. The experience with them has been acceptable quite frankly, clearly, it's a much more manual process. I think many of you know we talked over the years about our technology in our processes and that certainly extends to our financial aid process. We have a pretty integrated process, fairly streamlined, consolidated application. We're going to have to go away from some of that a little bit and that will cause some strain on the financial aid professionals, should we take that route. But it's nothing that can't be managed and it isn't anything that should cause a major disruption. So it's clearly an adequate backstop for us. I want to emphasize, we're still participating in the FFELP program right now. The direct lending program is a step that all of you would take in terms of ensuring that our students have access to federal funds. So we thought it was prudent to do that given kind of some of the responses of the lenders, again we're still providing access to our students through the FFELP program, but we want to be prepared, we don't want that to be an issue should there be future disruption in the financial market.

Okay, thank you. I'll turn it over.

Okay, thanks

Our next question comes from Gary Bisbee with Lehman Brothers. Please proceed with your question.

Hi guys, great job on the quarter.

Okay

A couple of questions. I guess first of all, with trying to get more color on the margins, I know you haven't in the past have been willing to say this amount came from here and this amount came from there and what not. But I guess this is an obvious thing, the last few quarters, opening a bunch of school, almost no growth in cost of educational services, it seems like costs have to be down at the schools year-over-year versus that schools that have been operating for a while. So can you give us some sense as to how are you doing that and as we think going forward, I mean is there enough juice left in the strategies that you talked a lot about using technology that we could expect that you will be able to continue to have, no or very low cost growth on a same-school basis or is this line just going to have to start growing at some point?

Well, obviously, it's not an unlimited type of opportunity, so we certainly don't need to profess that. I will tell you that we have put some technologies in place and we have talked about these at various times that are generating efficiencies for the organization. In addition to that, we have talked previously about the fact that our new locations as we start them up and we put some modifications I guess to the way we go about opening schools and what not, those have been performing better. So as you think about new locations, clearly, and we are comping against other new locations, we are doing better in that regard with the finding cost and being more efficient in terms of what we do on that front. And I can tell you just this quarter, even cost of educational services and even student services quite frankly, we saw efficiencies across the board and some of that is related to several of the initiatives I talked about, some of it's related to other initiatives. Clearly, in these markets we need to be as efficient as we possible can and I'll commend our staff and faculty at the field for doing exactly that. So by no means, I want to give the impression that we are cutting into the bone per se, I still think there are efficiency opportunities there. The cost of run rate per se that you are seeing in the first quarter certainly as Dan mentioned, nothing unusual in there. There were no special material one-time kind of charges. That's a reflection of just becoming very efficient with the model and with the process. Obviously, we don't want to give every detailed way of our initiatives and we are doing, but clearly the team is doing a very good job of running the model in a very efficient way.

Okay. If I can bear down a little more on the SG&A line, I guess a couple of things. First of all, I heard you say in your prepared remarks that you'll be hiring more admissions rep, I wonder if that's sort of continuing at the level you've been done or you're going to accelerate that and might that be one reason that line would start growing more? And then secondly, can you put any quantification at this point on incremental costs in 2008 related to people, systems and what not as you get prepared to handle some loan volumes internally?

Okay. First comment on the reps, yes, we do anticipate a ramp up there, probably in the 5% range side to 10% range over and above our original plan was in terms of recruiting representative counts. So you'll see a little bit of costs there. There is the opportunity and I'm not giving guidance there, but there's the opportunity that that might be offset by some efficiencies in the media planning. We're seeing very attractive sort of response and cost structure there, so we're very pleased with that. But, yes, there will be increases in costs as a result of reps. Your additional question related to incremental costs associated with financing. We've embedded those into the model right now and some of the things that you will be thinking about there are certainly some outsourcing servicing costs. We're not a financing organization; we don't pretend to be one as far as infrastructure and capability. So, we're talking to third parties who can assist us with that process. We do have the capacity to originate and track and record. We do some outsourcing of collections and things today for the amounts of self funding we provide or for a student was on packaged and did not pay their amount back, so we'll be using some of those vendors as well. So won't be just necessarily new processes per se. There'll be some costs there, but we've reflected those into the numbers. The costs for those third process processing aren't materially different than you see in the marketplace, but because we are not giving specific guidance on what our anticipated impact is right now, purely because we don't know what the volume is, I hesitate to give any kind of range there as well. And I can appreciate the frustration on this front, but I hope you all understand that we just don't have enough clarity in terms of transaction volume, with brand new lenders with totally new underwriting criteria. We need some more visibility here before we can give you the kind of specificity that I know you all want.

Okay. And then just one last one. I respect that, but you just don't know at this point. Can you give us a little color on the Q1 students so, what percent of them got Sallie Mae loans before that program was canceled and already been packaged. What percent was lenders other than Sallie Mae and maybe what percent are the private loans you made yourself in Q1?

For the vast majority of the students were getting processed through lenders, just because of the timing. I mean we... it's not a situation where all of the students get packets at the very end or right before the start of the quarter, so transition really from Sallie Mae was at the end of February. So, we really didn't start anything until the beginning of March and the quarter started in the second week of March. So, there is not a lot there and that leads to some of our uncertainty in terms of our ability to really give you a clear view of what's happening.

Okay. And then, if I could just sneak one more in which is, you mentioned the extra week. Did that have a revenue benefit having got rid of the break week between the two terms? Thanks a lot.

Sure.

No, Gary. That had no impact whatsoever. Each quarter we have 12 weeks of revenue we recognize, so that the changing in the calendar doesn't impact it at all.

Okay. Thanks a lot.

Our next question comes from Trace Urdan from Signal Hill. Please proceed with your question.

Hi, thanks. I'd like to go back to Gary's question again about the growth margins and maybe ask it a different way. If you go back two years and look at the first quarter of 2006, the incremental gross margin on this revenue is north of 97% and efficiency is one thing, but that's... it is just clearly very remarkable and I am wondering if you could sort of speak to whether there is a possibility that you might have some additional catch up cost associated with that growth at some point in the future as there are some steps tight cost that might be that... we might need to think about as we sort of look forward in the model or is that kind of incremental gross margin really something that you can sustain in the upcoming quarters?

Thanks for the question, Trace. As we look at our internal model and as we are planning at a very, very detailed level, we look at line by line at our expenses looking at our projected enrollment and our anticipated servicing requirements for that enrollment, we are not seeing anything materially different or any types of incremental costs over and above the run rate that you are seeing here that we would anticipate for the remaining part of the year. Now I will separate only from that of course whatever might be there in terms of internal financing and again, we just don't have a very clear picture on that right now, we have some projections, but we don't have a clear enough picture for us to be out on a limb telling you exactly what it is. So aside from that additional cost, no, we don't see anything over and above sort of what was incurred again on a relative basis in the first quarter of 2008.

Okay and then just sort of a mechanical arithmetic question. Dan, I am not sure I understand the logic behind the student retention affecting revenue per student, don't you lose those students in the numerator and the denominator in that calculation, could you walk us through that?

Yeah, it is going to affect the timing. I mean you've got... you think about if you are keeping those folks in the denominator, you are not taking them out of the denominator, so the numerator is going to be the revenue you recognize on the individual students, but the denominator stays the same. So if they do not persist throughout the quarter, we've got... you are going to see a smaller impact. In fact you have seen in the past too. If you think about all things being equal, you would expect to see revenue per student increase that would be right in line with our price increase because there is not any other major shift there with respect to full time equivalency or anything like that, so it does remain the same in the denominator to answer the question directly.

Okay. So going forward Dan, if you guys expect the retention to sort of normalize, then you would expect the revenue per student metric to normalize as well?

Yeah, it's been in the 3.5% to 4% range over a long period of time. We have seen a little bit of fluctuation. Last year, we had to do minor things and laptops and what not, but that's more sustainable.

Okay, thanks.

Our next question comes from Bob Craig with Stifel Nicolaus. Please proceed with your question.

Good morning, everybody. Just a follow-up on some questioning that's already taken place here and sorry to go back on the gross margin question for a second. But, in addition to efficiency, is persistence a pretty big driver of that as well? And if that flattens out as you're indicating it might, that necessarily portend the gross margins improvement is going to diminish going forward?

There is no doubt that as you improve your persistence and improve your retention that you can increase your student census and clearly there is leverage in the model that provides for additional operating margin expansion in terms of better retention. So I totally agree with you Bob on that front. I think we have been speaking specifically to sort of cost without factoring in the top line and we have been trying to give the indication that from a cost perspective, there is really nothing unusual there. We have been able to hold the line a lot of cost that exists there and anticipate continuing to do that going forward. When we speak to retention and we speak to your enrollment expectations, whatever they maybe, you certainly can calculate a revenue run rate and make some estimates on margin from there.

That's helpful. We go back to the federal direct lending program for a second, Kevin, can you give us some idea of the speed and costs of a full ramp there that would be necessary.

Sure. At this particular point, given that everyone is registered, so we have all the schools registered for the programs, which basically means they are approved. We're looking at a training component in terms of getting our staff trained and up and ready to go. It's hard for me to estimate here on the call, we've got some project timelines of course as we do contingency planning and what not and we're probably talking about a week or two to get everybody up and running. We have some experience in the system, but the vast majority of our finance aid professionals have not worked with the direct loan program before. That said, it's come a long way from where it was several years ago I can tell you and certainly outsourcing that to a vendor who has experienced processing financial aid transactions, we're not just the federal government, but also for lenders, there has been many improvements there. Again I'm not trying to say, it's the same as working with FFELP. That is not what we are saying at all. Clearly, there would be some disruption. But from what we look at right now and the way we look at the process, it doesn't look like it's something that we couldn't manage quite frankly.

Okay. Kevin, any estimates as to the incremental costs of the administrative costs that would result in?

Nothing that we've quantified yet, Bob. I don't think we see anything there; it's just a matter of financial aid professionals in the field basically using a different process that likely could take them a little more time. I will say though that as we work with some of these new lenders even on the FFELP side, we're using different processes from what we've used in the past. So I don't think it's different direct loan versus new lenders. I don't think we need more people, I don't think we need more staff, that's not in our expectations right now in terms of that contingency plan.

Okay. And I know you didn't want to get into names, but I think you did mention that Student Loan Corp. was out and you are not seeing any other disruptions in the private side. But I thought there was an announcement from BOA that they were not doing private any longer. Is that still one of your lenders?

I guess deductively reasoning, you can conclude that we are not working with them as one of the ones in the mix right now, given that private communication that they may.

Okay. And how much cherry picking are you seeing among your current lender relationships?

In terms of selectivity of this --

Yeah, selectivity.

Okay. On FFELP, we see none of that. I mean there is no selectivity there. So, all the students have access to the FFELP. In terms of the private lending, of course the underwriting criteria have changed and they are not what they were before and we thought before that those are certainly tightening as result of liquidity. But we are not in a position yet, given the limited transaction volume to give any kind of clarity on what it's likely to be. It will be less, there is no doubt, but we want to make sure we have a sufficient amount of volume before we make any kind of communications to the market as to what our expectations are for the private lending, as well as what our expectations are for internal financing.

So even if some of your registrations with greater than 10% default rate, no selectivity on FFELP?

None whatsoever at this point.

Okay, great. Thanks guys.

Thank you.

Our next question comes from Kevin Doherty with Bank of America Securities. Please proceed with your question.

Hey, thanks guys. I just wanted to drill down a little more about the persistence rates. You know was there any disruptions caused by the student lending situation there and I guess as we look out over the next couple of quarters, could you see that being more of an impact in terms of just the ability of your senior students to get their serial loans?

I think it's a very good question Kevin, and it is certainly something that we had internally here... keeping in mind after you subtract what we thought was a change in the retention rate as a result of the academic calendar there is still was some movement there. Even after you take the graduates off and also keeping in mind that was against an extremely difficult comp, but still we had on a year-over-year basis we always want to analyze our retention in a great amount of detail. We look at as we always do, the academic team and the operations folks, at all of the variables, one of which was financing. So you look at the different types of financing, you look at different sources and you're looking at all of those variables we did not note any correlation whatsoever in financing source and retention on a year-over-year basis at this point. I will tell you certainly something we are going to continue to look at so we obviously must be mindful like you are asking the question, could it be, we are mindful of that, we are going to watch it, we did not see that at all in the first quarter however.

Okay. And then just separately, I know obviously, when you guys initially gave your guidance or the widened guidance range prior to some of the legislation proposals out there. I mean ultimately if we get higher federal loan than the entire covering substantially, how significant could that be in getting you more comfortable with that... that earnings band that you gave and may be just more generally how you are kind of handicapping the potential of some legislations?

Another very good question, quite frankly, a very, very important development in Washington certainly the legislation proposed by Kennedy and Miller, we are going to stop short of providing specificity in terms of how that would impact our numbers, but I can give you a couple of data points. I mean we are not reflecting that in anything that we are looking at right now, so that's included in what you are seeing in terms of our goals. As we look at legislation, we are optimistic, but again I don't want to put... get ahead of myself here quite frankly, but we are optimistic, given support in the House by partisan support, overwhelming support for the legislation proposed by Miller. And we are understanding that there is support for Kennedy's proposal as well, which is fairly similar to the Miller proposal. And also the White House came out with a letter supporting the Miller proposal. So there appears to be support across the board, and there appears to be a recognition of this severe and extreme disruption in the financial markets and the impact on trial [ph] and that is very, very real. There is no doubt about that. So I think people who own capital here are aware of it. They understand that something needs to be done. They have a plan in place that would have a material impact for students at collages and university across the country, not just ITT Technical Institutes, and this is very much needed legislation. So, we are excited at the prospects. Again, we are optimistic that we think there is an opportunity there. And again, just to conclude nothing referenced or incorporated in our expectations in terms of this legislation as of yet. If and when that should occur and that legislation becomes law, I assure you we will provide you with a great amount of specificity in terms of how we think that impacts our results.

Okay.Thanks Kevin.

Thank you.

Our next question comes from Suzy Stein with Morgan Stanley. Please proceed with your question.

Hi. I just got a question on the private loans. How much have terms changed over the past six months or so. As you're looking at it now and just kind of thinking about the return on investments for students, how much more expensive have the private loans become at this point?

Sure. Good question. Private loan expenses, as we said previously on a call, probably up somewhere in the neighborhood of 100 basis points, 150 basis points. It depends which tier you are looking at. Some of the tiers in fact have gone down quite frankly, and I think some of that isn't economical per se. It might be optics, quite frankly. So, you just have to keep that in mind if some of the lenders think about this. So, in total if you take the private lending and you combine that with what has happened on the federal lending side in terms of interest rate reductions, and then you factor in the pilgrim [ph] increases, we calculate our weighted average cost of capital for our students for 2008 versus 2007, that number has gone down. So, a very positive development on that front, and of course, with the reduce debt service costs, that means an increase in the value proposition for our students. And we made reference to that and that's one of the data elements driving the increased value of the ITT Technical Institute degree. That and one of the other major elements certainly is the 5% increase in our graduate starting salary. So, very positive developments on that front.

Okay. And just one more question. As students come to you now, are they very well aware of what's happening in the student lending market. I mean is that a primary concern when they are considering going to school?

No, we are not seeing that as of yet. Now clearly, there's been a ton of press on this, and so it's not like this is a secret. But the reports we're getting back from our folks in the field, we're not hearing that there's an overwhelming concern on the part of students that that should in some way be anticipated impact student demand or perspective student demand. So, we're not seeing that yet, but like the previous question I'd say, it's something we're certainly monitoring and paying attention to.

Okay, great. Thank you.

Thank you.

Mr. Modany, we're out of time today. I would like to turn the floor back over to management for additional or closing comments.

Okay. Thank you very much. I appreciate all of you participating in the call today, and I appreciate your patience in terms of the volatility in the financial market certainly, and as we get more clarity on that, we will provide more guidance to you as best we can. We certainly factor that into our range of our expectations and our internal goals for 2008. That said, again appreciate your time, and look forward to talking to all of you in our July call. Thank you.

This concludes today's teleconference. Thank you for your participation.