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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number 001-31825

THE FIRST MARBLEHEAD CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

        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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        As of April 30, 2004, the registrant had 61,914,110 shares of Common Stock, $0.01 par value per share, outstanding.

THE FIRST MARBLEHEAD CORPORATION

Table of Contents

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PART I. FINANCIAL INFORMATION

Item 1—Financial Statements

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)   Nature of Business and Summary of Significant Accounting Policies

Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements of The First Marblehead Corporation (FMC, and together with its subsidiaries, the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Interim results are not necessarily indicative of results to be expected for the entire fiscal year. All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended June 30, 2003 filed as Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q filed on November 14, 2003. Certain prior period amounts have been reclassified to conform with current period presentation.

Student Loan Market Seasonality and Revenue Related to Securitization Transactions

        Origination of student loans is generally subject to seasonal trends, with the volume of loan applications increasing with the approach of tuition payment dates. In general, the Company processes the greatest application volume during the summer months, as students and their families seek to borrow money in order to pay tuition costs for the fall semester or the entire school year. The Company also tends to process increased volume of loan applications during November and December, as students and their families seek to borrow money to pay tuition costs for the spring semester. This seasonality of loan originations impacts the amount of processing fees from The Education Resources Institute, Inc. (TERI) that the Company earns in a particular quarter.

        Consistent with the Company's past practice of conducting securitization transactions in its second and fourth fiscal quarters, the Company did not conduct a securitization transaction during the first or third quarters of either fiscal 2004 or fiscal 2003. The securitization conducted in the second quarter of fiscal 2003 included an acquisition fund that allowed for the purchase of student loans during the third quarter of fiscal 2003, resulting in securitization revenues during the third quarter of fiscal 2003. The securitization conducted in the second quarter of fiscal 2004 did not include such an acquisition fund, and therefore, during the third quarter of fiscal 2004, the Company did not generate any structural advisory fees or residuals from new securitization transactions.

Initial Public Offering

        In September 2003, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission registering 14,375,000 shares of the Company's common stock, including:

•

6,875,000 shares offered by the Company;



•

5,625,000 shares offered by the Company's selling stockholders;



•

1,031,250 shares that the underwriters had the option to purchase from the Company to cover over-allotments; and

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•

843,750 shares that the underwriters had the option to purchase from certain selling stockholders to cover over-allotments.

        All of the 14,375,000 shares were sold on November 5, 2003 at a price to the public of $16.00 per share. Net proceeds of the initial public offering to the Company, after underwriting discounts and offering expenses, were approximately $115.1 million. The Company did not receive any of the proceeds of the sale of the shares sold by the selling stockholders.

Concentrations

TERI

        In its role as guarantor in the private education lending market, TERI agrees to reimburse lenders for unpaid principal and interest on defaulted loans. TERI is the exclusive provider of borrower default guarantees for our clients' private student loans, with limited exceptions. As of March 31, 2004, TERI had a Baa3 counterparty rating from Moody's Investors Service, which is the lowest investment grade rating, and an insurer financial strength rating of A+ from Fitch Ratings. If these ratings are lowered, the Company's clients may not wish to enter into guarantee arrangements with TERI. In addition, the Company may receive lower structural advisory fees because the costs of credit enhancement for the asset-backed securitizations that the Company structures could increase.

PHEAA

        There are currently seven loan servicers for newly generated TERI-guaranteed loans, with three of these servicers servicing a majority of the loans we facilitate. Most of our clients enter into a servicing agreement with Pennsylvania Higher Education Assistance Agency (PHEAA) that governs the servicing of their loans prior to securitization. These arrangements allow the Company to increase the volume of loans in its clients' loan programs without incurring the overhead investment in servicing operations. As with any external service provider, there are risks associated with inadequate or untimely services. In addition, if the Company's relationship with PHEAA terminates, the Company would either need to expand or develop a relationship with another TERI-approved loan servicer, which could be time-consuming and costly.

Significant Customers

        During the three and nine month periods ended March 31, 2004, processing fees from TERI represented approximately 71% and 23%, respectively, of total service revenue. Over the nine month period ended March 31, 2004, securitization fees from the December 2003 securitization through The National Collegiate Student Loan Trust 2003-1 (NCSLT 2003) represented approximately 70% of total service revenue. See Note 3—Service Receivables. The Company did not recognize more than 10% of total service revenue from any other customer.

Critical Accounting Policies and Estimates

        The preparation of the Company's financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. The Company bases its estimates and judgments on historical experience and on various other factors, and actual results may differ from these estimates under varying assumptions or conditions.

        On an ongoing basis, the Company evaluates its estimates and judgments, particularly as they relate to accounting policies that the Company believes are most important to the portrayal of the

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Company's financial condition and results of operations. The Company regards an accounting estimate or assumption underlying its financial statements to be a "critical accounting estimate" where:

•

the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and



•

the impact of the estimates and assumptions on its financial condition or operating performance is material.

These accounting policies involve the recognition and valuation of the Company's service revenue related to the securitizations that it structures for its clients, as well as the valuation of goodwill and intangible assets. The Company also considers its policy with respect to the determination of whether or not to consolidate the securitization trusts that it facilitates to be a critical accounting policy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies and Estimates".

(2)   Stock Options

        The Company uses the intrinsic value method to account for stock options and provides pro forma net earnings disclosures as if the fair-value-based method had been applied.

        For purposes of pro forma disclosures, the estimated fair value of the stock options is amortized to expense over the vesting period of the options. The Company's consolidated pro forma net income (loss) and net income (loss) per share for the three and nine month periods ended March 31, 2004 and 2003, had the Company elected to recognize compensation expense for the granting of options under

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Statement of Financial Accounting Standards (SFAS) No. 123 using the Black-Scholes option pricing model, are as follows:

        The fair value of the options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the three and nine month periods ended March 31, 2004 and 2003:

*

No options granted during this period.

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        The Company accounts for non-employee stock-based awards in which goods or services are the consideration received for the equity instruments issued based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

(3)   Service Receivables

        Structural advisory fees and residuals receivables represent the present value of additional structural advisory fees and residuals expected to be collected over the life of the student loan, net of prepayment, default and recovery estimates. The fees are paid to the Company from the various separate securitization trusts established by The National Collegiate Trust (NCT trusts), from The National Collegiate Master Student Loan Trust I (NCMSLT), and from NCSLT 2003. Processing fees receivable from TERI represents amounts due from TERI for expenses incurred by First Marblehead Education Resources, Inc. (FMER), a wholly owned subsidiary of FMC, on TERI's behalf.

        The Company did not conduct any securitization transactions in its first or third quarters of either fiscal 2004 or 2003. The Company does, on a quarterly basis, update its estimate of the present value of its structural advisory fees and residuals receivables, to reflect the passage of time, any change in discount rates used to estimate their present value, and any changes to the trust performance metrics that the Company considers in its present value estimates, such as default, recovery, prepayment and forward London Interbank Offered Rate (LIBOR) rates.

        For the NCT trusts and NCMSLT, the Company made no changes in its assumptions regarding default rates, prepayment rates and recovery rates in the first nine months of either fiscal 2004 or 2003. For the private label loans securitized in December 2003 in NCSLT 2003, the Company used a default rate assumption of 9.06%, a prepayment rate assumption of 7%, and a recovery rate assumption of 40%. The Company made no changes in its assumptions regarding these rates in the third quarter of fiscal 2004.

        The Company uses an implied forward one-month LIBOR curve to estimate trust cash flows. During the nine month period ended March 31, 2004, the rates along the implied forward one-month LIBOR curve decreased between 4 and 35 basis points over the next 20 months and increased up to 122 basis points thereafter. These increases in rates resulted in an increase in the average life of the underlying trust assets, thereby having an effect of increasing the fair market value of the structural advisory fees and residuals receivables during the period. The impact of changing LIBOR rates in the nine month period ended March 31, 2003 did not have a material impact on the fair market value of these receivables during that period.

        The Company bases the discount rate that it uses to calculate the present value of its additional structural advisory fees on the 10-year U.S. Treasury rate plus 200 basis points. From July 1, 2003 to March 31, 2004, the discount rate used increased by 51 basis points from 5.33% to 5.84%. From July 1, 2002 to March 31, 2003, the discount rate used decreased by 103 basis points from 6.86% to 5.83%. A decrease in the 10-year U.S. Treasury rate has the effect of increasing the fair market value of the Company's structural advisory fees receivable, while an increase in the rate has the opposite effect on the Company's estimate of their fair market value. In determining an appropriate discount rate for valuing residuals, the Company reviews the rates used by student loan securitizers, as well as rates used in the much broader commercial mortgage-backed securities, or CMBS, market. The Company believes that CMBS residuals are valued at 800 to 1200 basis points over comparable maturity U.S. Treasury Notes, with 15-year maturity asset pools valued toward the lower discount rate and 30-year maturity asset pools valued more toward the higher discount rate. The Company believes that the 12% discount rate it uses is appropriate given the maximum 24-year life of the trust assets and residuals.

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        The following table summarizes the changes in the structural advisory fees receivable for the nine month periods ended March 31, 2004 and 2003:

        The following table summarizes the changes in the residuals receivable for the nine month periods ended March 31, 2004 and 2003:

        The principal balance of loans facilitated and available to the Company for later securitization at March 31, 2004 and June 30, 2003 totaled $731.6 million and $160.4 million, respectively.

        The effect on the fair market value of the structural advisory fees and residuals receivables (excluding the $8.5 million up-front structural advisory fee receivable that the Company expects to receive in July 2004) based on variations of 10% or 20%, except for the forward LIBOR rates, which are based on variations of 1% and 2% from the forward LIBOR rates at March 31, 2004, from the assumed levels for each key assumption are as follows:

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(4)   Related Party Transactions

        On March 4, 2002, the Company advanced an unsecured loan to a non-executive employee in the amount of $40,000 to be repaid over 5 years at 6% interest per year through payroll deductions, of which $30,394 and $35,444 was outstanding at March 31, 2004 and June 30, 2003, respectively.

        At March 31, 2004 and June 30, 2003, Milestone Capital Management (MCM), an institutional money management firm, was managing approximately $112.4 million and $15.8 million, respectively, of cash and cash equivalents for the Company and charging its standard fees for its services. One of the Company's directors is a director of MCM. Members of the director's immediate family own approximately 40% of MCM's outstanding equity.

(5)   Borrowings from Related Parties

(a) Line of Credit

        The Company entered into a $975,000 revolving line of credit with a bank effective April 24, 2002. The line of credit matured on April 24, 2003 and was renewed through December 31, 2003 subject to the same terms and conditions, with interest payable at 1% above the highest published Wall Street Journal prime rate. The terms of the line of credit required that the Company maintain accurate books and records; the assets be free of all liens, encumbrances and financing not approved by the lender; and when there was a balance outstanding under the line, no dividends or payments of principal and interest on any loans held by any guarantor, officer, director or stockholder could be made. A member of the board of directors of the Company is also a director and significant stockholder of a company that owns the bank. The Company believes that the line of credit was on substantially the same terms as those prevailing at the same time for comparable transactions with third parties. The Company did not renew this credit facility upon its expiration. The Company had no amounts outstanding under this line of credit at June 30, 2003 or subsequent to December 31, 2003, the date it matured, or at any time during the nine months ended March 31, 2004.

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(b) Notes Payable to Related Parties

        The Company utilized borrowings with conditional warrants totaling $5.5 million from stockholders and certain affiliates to fund the acquisition of TERI's loan processing operations in June 2001. The notes payable were to mature on May 30, 2004, with interest payable quarterly, at an annual rate of 10% of the current principal balance. Additional interest was required to be paid at a rate of 15% of the outstanding balance as of June 1 of the previous year on each May 30 until maturity. The terms of the borrowings required quarterly condensed financial statement reporting within 60 days of quarter-end, reporting of cash flow activities within 30 days of month-end, and audited financial statements within 180 days of year-end. The notes were paid in full on May 30, 2003. The notes would have entitled stockholders to conditional warrants that provided the right to purchase up to an aggregate of 22,072,000 shares of FMC's common stock at an exercise price of $0.25 per share if the notes were at any time in default, including for non-payment of the additional interest. The value ascribed to the warrants, which expired prior to becoming exercisable, was not material.

(c) Notes Payable to TERI

        In connection with the acquisition of TERI's loan processing operations, the Company entered into a Note Payable Agreement with TERI on June 20, 2001, amounting to $3.9 million, $2.0 million of which related to the acquisition of TERI's software and network assets and $1.9 million of which related to the workforce-in-place. Principal and interest at an annual rate of 6% are payable in 120 monthly installments of $43,298 commencing on July 20, 2001 and ending on June 20, 2011. The note payable is secured by the software and network assets and workforce-in-place intangible assets. The outstanding balance of this note payable at March 31, 2004 and June 30, 2003 amounted to $3.1 million and $3.3 million, respectively.

        The Company also entered into a second note payable, amounting to $4.0 million, with TERI on June 20, 2001 to fund the acquisition of TERI's loan database. Principal and interest at an annual rate of 6% are payable in 120 monthly installments of $44,408 commencing on July 20, 2001 and ending on June 20, 2011. The note payable is secured by the loan database. The outstanding balance of this note payable at March 31, 2004 and June 30, 2003 amounted to $3.1 million and $3.4 million, respectively.

(6)   Other Borrowings

(a) Revolving Line of Credit

        On August 28, 2003, the Company entered into an agreement with Fleet National Bank (Bank) to establish a revolving line of credit in the amount of $10 million, which includes a sub-limit for letters of credit. The proceeds are available for working capital and general corporate purposes. The revolving credit facility matures on August 28, 2005, with interest currently payable, at the Company's option, at the Bank's prime rate or LIBOR, plus 2%. The revolving credit line contains financial covenants, including minimum trailing 12-month up-front structural advisory fees, minimum tangible net worth, maximum liabilities to net worth ratios and minimum cash flow to debt service ratios, as well as certain financial reporting covenants. The Company was in compliance with these covenants at March 31, 2004. This agreement restricts the Company's ability to pay cash dividends in the event it is in default. At March 31, 2004, the Company had no borrowings outstanding under the revolving line of credit. The Bank has also issued on the Company's behalf three irrevocable letters of credit in the aggregate amount of $943,000 in lieu of security deposits for the lease and sublease of office space. Third party beneficiaries have not drawn upon this revolving credit facility. These letters of credit reduce the amount the Company may borrow under this revolving credit facility.

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(b) Note Payable Related to December 2003 Securitization

        In December 2003, we received $7.0 million upon the issuance of a $7.25 million note to the lead underwriter of our December 2003 securitization. The Company agreed to repay this note with the first $7.25 million of the $8.5 million up-front structural advisory fee that it expects to receive in July 2004 in connection with its December 2003 securitization. This note is further collateralized by the first $6.3 million of residual cash flow from the December 2003 securitization as well as $700,000 of restricted cash.

(7)   Stockholders' Equity

Equity Transactions

        An executive officer of the Company had an agreement with two principal stockholders of the Company relating to shares of common stock of the Company owned by these stockholders. Pursuant to this agreement, the executive officer earned non-cash compensation of $900,000 through June 30, 2003. The executive officer earned additional non-cash compensation of approximately $1.6 million during the first quarter of fiscal 2004. On September 30, 2003, the agreement was terminated in exchange for vested options issued by these two principal stockholders.

Authorized Shares

        In July 2003, the Board of Directors approved, and in August 2003 the stockholders approved, an increase in the total number of shares of common stock which the Company is authorized to issue from 14,280,440 to 25,000,000. In October 2003, the Board of Directors and stockholders approved an increase in the total number of shares of common stock which the Company is authorized to issue from 25,000,000 to 100,000,000. See "Stock Splits" below.

2002 Director Stock Plan

        In September 2002, the Board of Directors approved, and in August 2003 the stockholders approved, a 2002 Director Stock Plan and reserved 200,000 shares of common stock for issuance to the Company's non-employee directors. As of March 31, 2004, options to purchase 40,000 shares have been issued under this plan.

2003 Stock Incentive Plan

        In September 2003, the Board of Directors and stockholders approved a 2003 Stock Incentive Plan and reserved 1,200,000 shares of common stock for issuance under this plan. As of March 31, 2004, no options had been issued under this plan.

Offering

        On September 2, 2003, the Board of Directors authorized management to proceed with an initial public offering. The costs associated with the initial public offering were capitalized and deducted from the proceeds upon the sale and issuance of stock. These costs totaled approximately $11.4 million, including underwriters' discounts. At June 30, 2003, capitalized offering costs amounted to approximately $72,000.

Stock Splits

        In August 2003, the stockholders approved a 10-for-1 stock split which became effective on August 25, 2003. As such, all prior period share data have been retroactively adjusted to reflect the stock split.

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        In October 2003, the Board of Directors approved a 4-for-1 stock split to be effected as a stock dividend immediately prior to the effectiveness of the initial public offering. On October 29, 2003, the stockholders became entitled to payment of such stock dividend. All share data has been retroactively adjusted to reflect this stock split.

2003 Employee Stock Purchase Plan

        In October 2003, the Board of Directors and stockholders approved a 2003 Employee Stock Purchase Plan, and authorized the issuance of up to a total of 400,000 shares of the Company's common stock to participating employees. Employees who own 5% or more of the Company's common stock are not eligible to participate under the purchase plan. Participation in the plan is voluntary.

(8)   Pension Plan

        The following table sets forth the amounts recognized related to FMER's defined benefit pension plan in the Company's consolidated financial statements for the three and nine month periods ended March 31, 2004 and 2003:

Employer Contributions

        During the nine months ended March 31, 2004, the Company made contributions of $328,000 to FMER's defined benefit pension plan. The Company expects to make additional contributions of $150,000 during the fourth quarter of fiscal 2004.

(9)   New Accounting Pronouncements

        In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes new standards for how an issuer classifies and measures certain financial instruments with characteristics of both debt and equity. It requires that an issuer classify three classes of freestanding financial instruments that embody obligations for the issuer as a liability or, in some cases, assets. This statement generally is effective for financial instruments entered into or modified after May 31, 2003 and for contracts in existence at the start of the first interim period beginning after June 15, 2003. The adoption of this standard, a portion of which has been indefinitely deferred, did not and is not expected to have a material impact on the Company's consolidated financial condition, results of operations, earnings per share or cash flows.

        Beginning July 1, 2003, and for securitization trusts created after January 31, 2003, the Company applies FASB Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51," in assessing consolidation. FIN No. 46 provides a new framework for identifying variable interest entities and determining when a company should include the assets, liabilities, non-controlling interests and results of activities of a variable interest entity in its consolidated financial statements. At March 31, 2004, the securitization trusts created after January 31,

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2003 have either met the criteria to be a qualified special-purpose entity (QSPE), as defined in paragraph 35 of SFAS No. 140, "Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," or the Company has determined that it is not the primary beneficiary of the securitization trusts, as defined by FIN No. 46. Accordingly, the Company did not consolidate these existing securitization trusts in these financial statements. In addition, the securitization trusts created prior to January 31, 2003 have been amended in order for them to be considered QSPEs.

        On December 24, 2003, the FASB issued FIN No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" (FIN No. 46R), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN No. 46R has replaced FIN No. 46. Public companies must apply either FIN No. 46 or FIN No. 46R immediately to entities created after January 31, 2003 and no later than the end of the first reporting period that ends after December 15, 2003 to entities considered to be special-purpose entities. The adoption of FIN No. 46R, which the Company began to apply in December 2003, did not have a material impact on the Company's consolidated financial condition, results of operations, earnings per share or cash flows.

        The FASB issued an Exposure Draft, "Qualifying Special-Purpose Entities and Isolation of Transferred Assets—an amendment of FASB Statement No. 140." This proposal would, among other things, change the requirements that an entity must meet to be considered a QSPE. The FASB has announced that it expects to issue in the first half of 2004 a revised exposure draft that would include all of the proposed amendments to FASB Statement No. 140. The Company is monitoring the status of this Exposure Draft to assess its impact on the Company.

        In December 2003, the FASB issued revised SFAS Statement No. 132. This statement reforms the disclosure requirements contained in SFAS No. 132, which it replaces. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit post retirement plans. This statement is effective for financial statements with fiscal years ending after December 15, 2003. The interim-period disclosures required by this statement are effective for interim periods beginning after December 15, 2003. The adoption of this statement has not had a material impact on the financial statements of the Company.

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Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations

        You should read the following discussion together with our financial statements and accompanying notes included in this quarterly report. In addition to the historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by the forward-looking statements due to factors including, but not limited to, those set forth under "Factors That May Affect Future Results" below.

Executive Summary

Overview

        We provide outsourcing services for private education lending in the United States. We provide services in connection with each of the five typical phases of the student loan lifecycle, offering our clients a single point of interface for:

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program design and marketing;



•

borrower inquiry and application;



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loan origination and disbursement;



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loan securitization; and



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loan servicing.

We receive fees for the services we provide in connection with both processing our clients' private student loans and structuring and administering securitizations of those loans. Securitization refers to the technique of pooling loans and selling them to a special purpose, bankruptcy remote entity, typically a trust, which issues securities to investors backed by those loans.

        We do not take a direct ownership interest in the loans our clients generate, nor do we serve as a lender or guarantor with respect to any loan programs that we facilitate. We assist the lenders in our loan programs in selecting the underwriting criteria used in deciding whether a student loan will be made to an applicant. However, each lender has ultimate control over the selection of these criteria, and in providing our services we are obligated by contract to observe them. Although we oversee loan servicing as a component of our administrative duties, we do not act as a loan servicer.

        We currently focus on facilitating private student loans for undergraduate, graduate and professional education, although we believe we can enhance our service offerings for continuing education programs, primary and secondary schools, career training and study abroad programs. During the first nine months of fiscal 2004, we processed over 400,000 loan applications and facilitated $1.47 billion in loan disbursements at over 4,000 schools. We have provided structural, advisory and other services for 20 securitization transactions since our formation in 1991.

        We offer services in connection with loan programs targeted at two major marketing channels:

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Private label programs that:



•

lenders market directly to prospective student borrowers and their families;



•

lenders market directly to educational institutions;



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third parties who are not themselves lenders design and market directly to prospective student borrowers and their families; loans under these programs are made by referral lenders; and



•

businesses, unions, affinity groups and other organizations offer to their employees or members.

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•

Guaranteed Access to Education, or GATE, programs that educational institutions offer directly to their students.

        During the first nine months of fiscal 2004, we securitized only private label loans. We expect we will securitize GATE loans, including those we facilitated during the first nine months of our current fiscal year, in our fourth fiscal quarter. Our private label programs contributed $86.0 million, or 94.1%, of our total service revenue in fiscal 2003, while our GATE programs contributed $5.4 million, or 5.9%, of our total service revenue in fiscal 2003.

        In June 2001, we significantly enhanced our risk management and loan processing capabilities through a strategic relationship with The Education Resources Institute, Inc., or TERI, the nation's oldest and largest guarantor of private student loans. We acquired TERI's loan processing operations, including its historical database, but not its investment assets or guarantee liabilities. In connection with this acquisition, 161 members of TERI's staff became our employees. In addition, we entered into a master servicing agreement pursuant to which TERI engages us to provide loan origination and processing services with respect to the loans generated through the private label programs we facilitate, as well as other TERI-guaranteed loans. TERI reimburses us for the expenses we incur in providing these services. This agreement has a term through June 2006 and provides that either party may unilaterally exercise a right to renew the contract for an additional five-year term. Under the terms of a master loan guarantee agreement that we entered into with TERI, we also agreed to provide to TERI 25% of the residual interest in the securitizations of TERI-guaranteed loans that we facilitate in the future, and a right of first refusal to guarantee our private label clients' existing and future loan programs.

        The primary driver of our results of operations and financial condition is the volume of loans for which we provide outsourcing services from loan origination through securitization. We facilitated the securitization of $532 million of student loans during the first nine months of fiscal 2004, up from $296 million for the same period last year.

        In the first nine months of fiscal 2004, we facilitated disbursement of approximately 166,000 loans in an aggregate principal amount of approximately $1.47 billion. Approximately $1.11 billion of this amount was available to us for securitization. In the comparable period of fiscal 2003, we facilitated disbursement of approximately 106,000 loans in an aggregate principal amount of approximately $865 million. Approximately $549 million of this amount was available to us for securitization.

        The dollar volume of the loans that we facilitated in the first nine months of fiscal 2004 increased 70% as compared to the same period last year. The loans that we facilitated that are available to us for securitization increased 103% in the first nine months of fiscal 2004 as compared to the same period in fiscal 2003.

        Although we offer our clients a fully integrated suite of outsourcing services, we do not charge separate fees for many of these services. Moreover, although we receive fees for providing loan processing services to TERI in connection with TERI-guaranteed loans, these fees represent reimbursement of the direct expenses we incur. Accordingly, we do not earn a profit on these fees. Although we provide these various services without charging a separate fee, or at "cost" in the case of TERI-guaranteed loans, we generally enter into agreements with the private label lenders, and Bank of America, N.A. in the case of GATE programs, giving us the exclusive right to securitize the loans that they do not intend to hold, and we receive structural advisory fees and residuals for facilitating securitizations of these loans. Our level of profitability depends on these structural advisory fees and residuals. We discuss the manner in which we recognize them in our revenue in greater detail below. We may in the future enter into arrangements with private label lenders under which we provide outsourcing services, but do not have the exclusive right to securitize the loans that they originate.

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        Changes in any of the following factors can materially affect our financial results:

•

the demand for private education financing;



•

the competition for providing private education financing;



•

the education financing preferences of students and their families;



•

applicable laws and regulations, which may affect the terms upon which our clients agree to make private student loans and the cost and complexity of our loan facilitation operations;



•

the private student loan securitization market, including the costs or availability of financing;



•

the general interest rate environment, including its effect on our discount rates;



•

borrower default rates; and



•

prepayment rates on private student loans, including prepayments through loan consolidation.

Securitizations and Related Revenue

        We structure and facilitate securitization transactions for our clients through a series of bankruptcy remote, special purpose trusts. The trusts purchase private student loans from the originating lenders, which relinquish to the trust their ownership interest in the loans. The debt instruments that the trusts issue to finance the purchase of these student loans are obligations of the trusts, rather than our obligations or those of originating lenders. To date, we have utilized the following special purpose entities for the securitizations we have structured:

•

The National Collegiate Student Loan Trust 2003-1, or NCSLT 2003, was formed in December 2003 to purchase exclusively TERI-guaranteed private label loans.



•

The National Collegiate Master Student Loan Trust I, or NCMSLT, was formed in fiscal 2002 to purchase exclusively TERI-guaranteed private label loans.



•

The National Collegiate Trust, or NCT, was formed in fiscal 1993 and has established separate securitization trusts, which we refer to as the NCT trusts, that have purchased primarily GATE loans and a limited number of TERI-guaranteed and other loans.

        In the future, we may securitize private label or GATE loans using new trust vehicles.

        Under the terms of some of our contracts with key lender clients, we have an obligation to securitize periodically, typically twice per year, the private student loans that these clients originate, and we may agree with other lenders to securitize more frequently in the future. If we do not honor our obligations to these lenders, we may be required to pay liquidated damages, generally not exceeding an amount equal to 1% of the face amount of the loans available for securitization. In September 2003, we entered into an agreement with Chase Manhattan Bank USA, N.A. under which we agreed, under certain circumstances, to arrange for the purchase of loans from Chase by a third party no later than the end of the month following the month in which a student loan in fully disbursed to the student borrower.

        We receive several types of fees in connection with our securitization services:

•

Structural advisory fees.    We charge structural advisory fees that are paid in two portions:



•

Up-front.    We receive a portion of the structural advisory fees at the time the securitization trust purchases the loans or soon thereafter. For these fees, we structure the securities sold in the securitization, coordinate the attorneys, accountants, trustees, loan servicers, loan originators and other transaction participants and prepare the cash flow modeling for rating agencies and financial guarantee insurers, as needed. In recent securitizations, these fees

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have ranged from 4.7% to 6.7% of the principal and capitalized interest of the loans securitized; and

•

Additional.    We receive a portion of the structural advisory fees over time, based on the amount of loans outstanding in the trust from time to time over the life of the loan. This portion accumulates monthly from the date of a securitization transaction at a rate of 15 basis points per year. We begin to receive this additional portion, plus interest, once the ratio of trust assets to trust liabilities, which we refer to as the "parity ratio," reaches a stipulated level, which ranges from 103.0% to 105.0%. We currently expect to receive the additional fees beginning five to seven years after the date of a particular securitization transaction.



•

Residuals.    We also have the right to receive a portion of the residual interests that these trusts create. This interest is junior in priority to the rights of the holders of the debt sold in the securitizations and entitles us to receive:



•

in connection with the securitizations in NCSLT 2003, 75% of the residual cash flows once a parity ratio of 103.0% is reached and maintained;



•

in connection with securitizations in NCMSLT, 75% of the residual cash flows once a parity ratio of 103.5% is reached and maintained; and



•

in connection with securitizations in the NCT trusts, our share of residual cash flows once all of the debtholders of the securitization trust have been repaid, plus, in the case of securitized GATE loans, 10% of the residual cash flows.

Our residual interest derives almost exclusively from the services we perform in connection with each securitization rather than from a direct cash contribution to the securitization trust. We contributed no funding to NCSLT 2003 or NCMSLT, the trusts that have securitized solely TERI-guaranteed private label loans. In connection with the three most recent securitizations of GATE loans in the NCT trusts, in order to accommodate a limited number of schools, we invested in the aggregate approximately one-third of our GATE-related up-front structural advisory fees to eliminate the risk exposure of those schools. These investments, which reduced our up-front structural advisory fees that would have been recognized in these periods, totaled $2.0 million, $1.8 million and $1.2 million in fiscal 2003, 2002 and 2001, respectively. In fiscal 2003, our investment comprised 5.6% of our total up-front structural advisory fees. In exchange for these investments, we received the rights to the residual interest that these schools would otherwise hold in the trust and accounted for these rights as residuals, consistent with the manner in which we account for our other residuals. The value of these residual interests is primarily affected by the loan performance at each school. In the case of securitizations in NCSLT 2003 and NCMSLT, we currently expect to receive the residuals beginning approximately five years after the date of a particular securitization. In the case of securitizations in the NCT trusts, we currently expect to receive the residuals beginning 12 to 15 years after the date of a particular securitization.

•

Administrative and other fees.    We receive administrative fees from the trusts ranging from 5 to 20 basis points per year of the student loan balance in the trust for daily management of the trusts and for the services we provide in obtaining information from the loan servicer and reporting this and other information to the parties related to the securitization. In addition, in connection with some securitizations, we receive other fees from originating lenders when their loans are purchased by the securitization trust. To date, these other fees have not been material.

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Processing Fees from TERI

        We provide outsourcing services to TERI, including loan origination, customer service, default prevention, default processing and administrative services under a master servicing agreement between TERI and us. We recognize as revenue the monthly reimbursement that TERI provides us for the expenses we incur in providing these services.

Recognition and Valuation of Service Revenue

        We recognize up-front structural advisory fees as revenue at the time the securitization trust purchases the loans. In order for the securitization trust to purchase the loans, all of the applicable services must be performed, rating agencies must deliver their ratings letters, transaction counsel must deliver the required legal opinions and the underwriters must receive the debt securities created by the securitization trust. These events indicate that the securitization transaction has been properly structured and loans have been properly sold to the securitization trust.

        As required under accounting principles generally accepted in the United States of America, we also recognize additional structural advisory fees and residuals as revenue at that time, as they are deemed to be earned at the time of the securitization and before we actually receive payment. These amounts are deemed earned because evidence of an arrangement exists, we have provided the services, the fee is fixed and determinable based upon a discounted cash flow analysis, there are no future contingencies or obligations and collection is reasonably assured. We estimate the present value of the additional structural advisory fees and residuals based on certain assumptions we make about the timing and amount of payment.

        Financial Accounting Standards Board, or FASB, Statement No. 140 requires us to measure the additional structural advisory fees and residuals like investments in debt securities classified as available-for-sale or trading under SFAS No. 115, similar to retained interests in securitizations. Accordingly, we record additional structural advisory fees and residuals receivables on our balance sheet at fair value using a discounted cash flow model. We estimate the fair value both initially and each subsequent quarter and reflect the change in value in earnings for that period.

        Because there are no quoted market prices for our additional structural advisory fees and residuals receivables, we use certain key assumptions to estimate their values. See "Application of Critical Accounting Policies and Estimates-Service Revenue."

        We recognize administrative and other fees, as well as processing fees from TERI, as revenue at the time that we perform the underlying services.

Quarterly Fluctuations

        Our quarterly revenue, operating results and profitability have varied and are expected to continue to vary on a quarterly basis primarily because of the timing of the securitizations that we structure. During the first nine months of fiscal 2004, we facilitated a securitization in our second fiscal quarter. In fiscal 2003, we facilitated securitizations in the second and fourth fiscal quarters. In addition, during the third quarter of fiscal 2003, NCMSLT utilized funds raised in the second quarter securitization to acquire additional student loans from our clients, which generated service revenue for us in the third quarter. The trusts did not conduct a similar acquisition during the third quarter of fiscal 2004, and therefore incurred a net loss during the quarter. The following table sets forth our quarterly service

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revenue and net income (loss) for the first three quarters of fiscal 2004 and the four quarters of fiscal 2003:

Application of Critical Accounting Policies and Estimates

        Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions.

        Our significant accounting policies are more fully described in Note 2 of the notes to the audited consolidated financial statements for the year ended June 30, 2003, which are included in exhibit 99.1 to our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2003. On an ongoing basis, we evaluate our estimates and judgments, particularly as they relate to accounting policies that we believe are most important to the portrayal of our financial condition and results of operations. We regard an accounting estimate or assumption underlying our financial statements to be a "critical accounting estimate" where:

•

the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and



•

the impact of the estimates and assumptions on our financial condition or operating performance is material.

        We have discussed our accounting policies with the audit committee of our board of directors, and we believe that our estimates relating to the recognition and valuation of our service revenue related to the securitizations that we structure for our clients, as well as the valuation of goodwill and intangible assets, fit the definition of critical accounting estimates. We also consider our policy with respect to the determination of whether or not to consolidate the securitization trusts that we facilitate to be a critical accounting policy.

Service Revenue

        For a discussion of our revenue recognition policy, see "—Recognition and Valuation of Service Revenue."

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        Because there are no quoted market prices for our additional structural advisory fees and residuals receivables, we use the following key assumptions to estimate their values:

•

the discount rate, which we use to calculate the present value of our additional structural advisory fees and residuals;



•

the annual compound rate of student loan prepayments, which we refer to as the constant prepayment rate, or CPR;



•

the trend of interest rates over the life of the loan pool; and



•

expected defaults, net of recoveries.

        We base these estimates on our proprietary historical data, third-party data and our industry experience, adjusting for specific program and borrower characteristics such as loan type and borrower creditworthiness. We recognize the revenue associated with our processing fees from TERI and our administrative and other fees as we perform these services.

        The following table shows the loan performance assumptions at March 31, 2004:

        In selecting loan performance assumptions, we consider the underlying creditworthiness of the student loan borrowers as well as the type of loans being securitized. We analyze creditworthiness in several tiers, and select appropriate loan performance assumptions based on these tiers. For example, approximately four percent of the loans securitized in NCSLT 2003 represent a new product line offered this fiscal year by some of our private label clients. This new product line includes co-signed loans for which the co-signer has a lower Fair, Isaac and Company, or FICO, credit score, between 625 and 644, than our other tiered products, which require a FICO score of 645 or above. We worked, in consultation with TERI and our bank clients, to structure and price this loan product to reflect its increased default risk. Accordingly, the interest rate being charged on these loans and the segregated reserves that TERI provided to NCSLT 2003 to cover projected default exposure on these loans are greater than those provided for our clients' other loan products. Although the inclusion of these new loans in NCSLT 2003 resulted in an estimated overall default rate for NCSLT 2003 that is 98 basis points higher than what we estimated for NCMSLT, the average FICO score for all loans in both trusts remained above 700.

        Our private label loan programs, under which approximately 80% of the borrowers have creditworthy co-borrowers, typically have an extensive credit underwriting process. GATE programs historically have had a borrower approval rate of approximately 97% as a result of the credit support provided by the participating schools. Accordingly, we believe that borrowers in our private label programs will prepay at a higher rate and default at a lower rate than borrowers in our GATE programs. We also monitor trends in loan performance over time, and make adjustments we believe are necessary to value properly our receivables balance.

        We do not believe we can accurately determine the market price of residuals generated by a pool of securitized student loans. To our knowledge, there have been no market transactions in this type of asset. In determining an appropriate discount rate for valuing residuals, we reviewed the rates used by student loan securitizers, and rates used in the much broader commercial mortgage-backed securities,

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or CMBS, market, where actual trades have occurred. We believe that CMBS residuals are valued at 800 to 1200 basis points over comparable maturity U.S. Treasury Notes, with 15-year maturity asset pools valued more toward the lower discount rate and 30-year maturity asset pools valued more toward the higher discount rate. We believe that the 12% discount rate we use is appropriate given the maximum 24-year life of the trust assets and residuals.

        At March 31, 2004 we used a 5.84% discount rate for valuing structural advisory fees. Based on the priority payment status of structural advisory fees in the flow of funds out of the securitization trust, we believe these fees are comparable to interest payable on double-B or triple-B rated, intermediate-term corporate debt securities. Based on market quotes on such securities, we believe a spread over comparable maturity U.S. Treasury Notes of 200 basis points is an appropriate discount rate in valuing these projected cash flows.

        Other than changes in the discount rate to be applied to structural advisory fees, we have not changed any other loan performance assumptions regarding default rates, recovery rates, CPR rates or discount rates in valuing these projected cash flows during fiscal 2004.

        Our statistics on GATE loan prepayments over the last few years have shown a gradual increase in prepayments. Therefore, during fiscal 2003, we increased our estimate of the GATE loan prepayment rate from three to four percent. We used this four percent prepayment rate to value the 2003 GATE loan securitization, and during fiscal 2003 we updated GATE structural advisory fees and residuals receivables balances from prior securitizations to reflect this increased prepayment assumption.

Sensitivity analysis

        Increases in our estimates of defaults, prepayments and discount rates, as well as decreases in default recovery rates and the multi-year forward estimates of the London Interbank Offered Rate, or LIBOR, which is the reference rate for the loan assets and borrowings of the trusts, would have a negative effect on the value of our additional structural advisory fees and residuals. Student loan prepayments include either full or partial payments by a borrower in advance of the maturity schedule specified in the note, including payments as a result of loan consolidation activity. Because essentially all of the credit defaults experienced by NCSLT 2003, NCMSLT and the NCT trusts are reimbursable by third parties, increases in defaults generally have the same effect as increases in prepayments. If defaults increase beyond the level of expected third party reimbursement, then these changes will have an additional negative effect on the value of our additional structural advisory fees and residuals. Also, in the case of securitizations of GATE loans in which we have invested a portion of our up-front structural advisory fees, increases in estimates of defaults would reduce the value of our residual interests because amounts that we would otherwise receive as residual interests would be applied to the defaults.

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        The following tables show the estimated change in our structural advisory fees and residuals receivables balance at March 31, 2004 based on changes in these loan performance assumptions:

(1)

NCT trusts include approximately $287 million of GATE loans and $47 million of TERI guaranteed loans.

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