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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549



FORM 10-Q



(MARK ONE)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For The Quarterly Period Ended September 30, 2009ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                to


Commission File Number 001-31825



The First Marblehead Corporation(Exact Name of Registrant as Specified in Its Charter)



Delaware(State or Other Jurisdiction of
Incorporation or Organization)

04-3295311(I.R.S. Employer
Identification No.)The Prudential Tower
800 Boylston Street, 34th Floor
Boston, Massachusetts(Address of Principal Executive Offices)

02199-8157(Zip Code)


Registrant's
telephone number, including area code:(800) 895-4283



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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files). Yes o    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

As of November 5, 2009, the registrant had 99,246,664 shares of Common Stock, $0.01 par value per share, outstanding.



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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES        Table of Contents



Part I. Financial InformationItem 1



Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2009 and June 30, 2009

1Condensed Consolidated Statements of Operations for the three months ended September 30, 2009 and
2008

2Condensed Consolidated Statements of Changes in Stockholders' Equity for the three months ended
September 30, 2009 and 2008

3Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2009 and
2008

4Notes to Unaudited Condensed Consolidated Financial Statements

5Item 2



Management's Discussion and Analysis of Financial Condition and
Results of Operations

28Item 3



Quantitative and Qualitative Disclosures About Market
Risk

50Item 4



Controls and Procedures

51Part II. Other InformationItem 1



Legal Proceedings

53Item 1A



Risk Factors

53Item 2



Unregistered Sales of Equity Securities and Use of
Proceeds

77Item 6



Exhibits

77SIGNATURES

78EXHIBIT INDEX

79


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Table of Contents

Part I. Financial Information



Item 1Financial Statements



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES        CONDENSED CONSOLIDATED BALANCE SHEETS        (unaudited)        (dollars and shares in thousands,
except per share amounts)

September 30, 2009

June 30, 2009ASSETSCash and cash equivalents

$
168,853

$
158,770Federal funds sold


10,780


14,326Investments


8,052


8,450Loans held for sale


232,775


350,960Service receivables:Additional structural advisory fees


55,469


55,130Asset servicing fees


4,647


2,385Residuals


10,784


9,960Total service receivables


70,900


67,475Property and equipment, net


16,764


19,929Intangible assets, net


1,733


1,931Other prepaid expenses


3,521


3,571Mortgage loans held to maturity, net


8,543


9,515Income taxes receivable


159,084


166,410Net deferred tax asset


49,707


13,124Other assets


5,986


6,869Total assets

$
736,698

$
821,330LIABILITIES AND STOCKHOLDERS' EQUITYLiabilities:Deposits

$
156,372

$
154,462Education loan warehouse facility


229,474


230,137Accounts payable and accrued expenses


30,248


21,512Other liabilities


8,464


9,754Total liabilities


424,558


415,865Commitments and contingenciesStockholders' equity:Preferred stock, par value $0.01 per share; 20,000 shares authorized at September 30, 2009 and June 30, 2009; 133 shares issued and outstanding
September 30, 2009 and June 30, 2009


1


1Common stock, par value $0.01 per share; 250,000 shares authorized at September 30, 2009 and June 30, 2009; 106,890 and 106,768 shares issued at
September 30, 2009 and June 30, 2009, respectively; 99,247 and 99,125 shares outstanding at September 30, 2009 and June 30, 2009, respectively


1,069


1,068Additional paid-in capital


432,096


431,461Retained earnings


62,847


156,913Treasury stock, 7,643 shares held at September 30, 2009 and June 30, 2009, at cost


(184,246
)

(184,246
)Accumulated other comprehensive income


373


268Total stockholders' equity


312,140


405,465Total liabilities and stockholders' equity

$
736,698

$
821,330


See accompanying notes to unaudited condensed consolidated financial statements.

1

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (unaudited)        (dollars and shares in
thousands, except per share amounts)

Three months ended
September 30,2009

2008Service revenues:Additional structural advisory feestrust updates

$
363

$
(17,890
)Asset servicing fees:Fee income


2,102


Fee updates


160


Total asset servicing fees


2,262


Residualstrust updates


824


(80,156
)Administrative and other fees


5,597


6,004Total service revenues


9,046


(92,042
)Net interest income


4,440


7,137Total revenues


13,486


(84,905
)Non-interest expenses:Compensation and benefits


8,137


15,257General and administrative expenses


18,139


24,447Unrealized loss on loans held for sale


123,926


21,226Total non-interest expenses


150,202


60,930Loss before income taxes


(136,716
)

(145,835
)Income tax benefit


(42,650
)

(52,938
)Net loss

$
(94,066
)
$
(92,897
)Net loss per share, basic

$
(0.95
)
$
(0.94
)Net loss per share, diluted


(0.95
)

(0.94
)Weighted average shares outstanding, basic


99,156


98,964Weighted average shares outstanding, diluted


99,156


98,964


See
accompanying notes to unaudited condensed consolidated financial statements.

2

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY        (unaudited)    
(dollars and shares in thousands)

Non-voting
convertible
preferred stock
issued

Common stockAccumulated
other
comprehensive
income,
net of taxIssued

In treasuryAdditional
paid-in
capital

Retained
earnings

Total
stockholders'
equityShares

Amount

Shares

Amount

Shares

AmountBalance at June 30, 2008




$



106,456

$
1,065


(7,570
)
$
(183,993
)
$
300,498

$
519,933

$
109

$
637,612Comprehensive lossNet loss























(92,897
)




(92,897
)Accumulated other comprehensive income, net


























64


64Total comprehensive loss























(92,897
)

64


(92,833
)Issuance of preferred stock


133


1














125,857








125,858Net stock issuance from vesting of restricted stock units








299


3


(72
)

(253
)

(3
)







(253
)Stock-based compensation




















2,555








2,555Tax expense from employee stock options




















(2,363
)







(2,363
)Balance at September 30, 2008


133

$
1


106,755

$
1,068


(7,642
)
$
(184,246
)
$
426,544

$
427,036

$
173

$
670,576Balance at June 30, 2009


133

$
1


106,768

$
1,068


(7,643
)
$
(184,246
)
$
431,461

$
156,913

$
268

$
405,465Comprehensive lossNet loss























(94,066
)




(94,066
)Accumulated other comprehensive income, net


























105


105Total comprehensive loss























(94,066
)

105


(93,961
)Net stock issuance from vesting of restricted stock units








122


1








(1
)







Stock-based compensation




















1,540








1,540Tax expense from employee stock options




















(904
)







(904
)Balance at September 30, 2009


133

$
1


106,890

$
1,069


(7,643
)
$
(184,246
)
$
432,096

$
62,847

$
373

$
312,140


See accompanying notes to unaudited condensed consolidated financial statements.

3

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (unaudited)        (dollars in thousands)

Three months ended
September 30,2009

2008Cash flows from operating activities:Net loss

$
(94,066
)
$
(92,897
)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization


3,693


5,055Deferred income tax benefit


(36,583
)

(58,473
)Stock-based compensation


1,540


2,555Unrealized loss on loans held for sale


123,926


21,226Loss on disposal of property and equipment





1,394Additional structural advisory fee distributions


24


1,477Change in assets/liabilities:Loans held for sale


(3,321
)

(6,617
)Structural advisory fees


(363
)

17,890Asset servicing fees


(2,262
)

Residuals


(824
)

80,156Other service receivables





3,295Income taxes receivable


7,326


Other prepaid expenses


50


1,462Other assets


883


(2,292
)Accounts payable and accrued expenses and other liabilities


5,880


(16,546
)Net cash provided by (used in) operating activities


5,903


(42,315
)Cash flows from investing activities:Net changes in federal funds sold


3,546


(2,977
)Dispositions of investments


503


12,610Purchases of investments





(11,400
)Purchases of property and equipment


(330
)

(283
)Net change in mortgage loans held to maturity


972


588Net cash provided by (used in) investing activities


4,691


(1,462
)Cash flows from financing activities:Increase in deposits


1,910


2,254(Payments for) proceeds from education loan warehouse facility


(663
)

1,340Payment of capital lease obligations


(854
)

(955
)Tax expense from stock-based compensation


(904
)

(2,363
)Issuance of non-voting convertible preferred stock, net





125,858Repurchase of common stock





(253
)Net cash (used in) provided by financing activities


(511
)

125,881Net increase in cash and cash equivalents


10,083


82,104Cash and cash equivalents, beginning of period


158,770


70,280Cash and cash equivalents, end of period

$
168,853

$
152,384Supplemental disclosures of cash flow information:Interest paid

$
2,319

$
4,933Income taxes paid

$
109

$
26,234


See accompanying notes to unaudited condensed consolidated financial statements.

4

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        (dollars and shares in thousands, except
per share amounts)

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

Nature of Business

Unless otherwise indicated or unless the context of the discussion requires otherwise, all references in these Notes to Unaudited
Condensed Consolidated Financial Statements to "we", "us", "our" or similar references mean The First Marblehead Corporation (FMC) and its subsidiaries on a consolidated basis. These unaudited
financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended
June 30, 2009 included in our annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on September 3, 2009.

We
offer outsourcing services to national and regional financial institutions and educational institutions for designing and implementing private education loan programs. In addition, we
provide administrative and other services to securitization trusts that we have facilitated, asset servicing to the third-party owner of certain of those securitization trusts (NCSLT Trusts) and
portfolio management services to a limited number of clients. Our subsidiary, Union Federal Savings Bank (Union Federal), is a federally chartered thrift that, prior to fiscal 2009, offered private
education loans directly to consumers and continues to offer residential and commercial mortgage loans, retail savings products, time deposit products and money market accounts. As a result of our
ownership of Union Federal, we are a savings and loan holding company subject to regulation, supervision and examination by the U.S. Office of Thrift Supervision (OTS). Substantially all of our
financial results have been derived from these activities, which are considered to be in a single industry segment for financial reporting purposes.

Prior
to fiscal 2009, we structured and facilitated the securitization of private education loans generated by our clients through a series of bankruptcy remote, special purpose
statutory trusts. Through the securitization process, the trusts obtained loans from the originating lenders or their assignees, which relinquished to the trust their ownership interest in the loans.
The debt instruments issued by the trusts to finance the purchase of these private education loans are obligations of the trusts, not obligations of us or the originating lenders or their assignees.
For our past securitization services, we are entitled to receive additional structural advisory fees from the trusts over time. Effective March 31, 2009, we sold the trust certificate (Trust
Certificate) of our subsidiary NC Residuals Owners Trust, formerly known as GATE Holdings, Inc., a statutory trust that owned certain certificates of beneficial ownership interests, also known
as residuals, of the NCSLT Trusts. The NCSLT Trusts held substantially all of the private education loans previously securitized by us and guaranteed by The Education Resources Institute, Inc.
(TERI), a not-for-profit organization. As a result of the sale, we are no longer entitled to receive residual cash flows from the NCSLT Trusts. However, we continue to be
entitled to receive residual cash flows from other trusts, and we are entitled to receive asset servicing fees for our services that support the purchasers' ownership of the Trust Certificate. In
addition, during fiscal 2009, we began to receive service fees for stand-alone services for loan origination and default prevention and collections services.

Servicing Concentration

As of September 30, 2009, there were seven loan servicers providing loan services to trusts that we facilitated. Servicers
provide administrative services relating to loans, including processing deferment and forbearance requests, sending out account statements and accrual notices, responding to borrower

5

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

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

inquiries,
and collecting and crediting payments received from borrowers. As of September 30, 2009, Pennsylvania Higher Education Assistance Agency (PHEAA) serviced a significant majority of
the loans for which we facilitated origination. PHEAA also operates under the name American Education Services.

Business Trends, Uncertainties and Outlook

Asset-backed securitizations have historically been our sole source of permanent financing for clients' private education loan
programs. Conditions of the debt capital markets generally, and the asset-backed securities (ABS) market specifically, rapidly deteriorated during the second quarter of fiscal 2008, and disruptions
have persisted, to a lesser extent, through November 6, 2009. Our business has been and continues to be materially adversely impacted by these market dynamics, including an inability to access
the securitization market. We did not complete a securitization transaction during fiscal 2009 or the first quarter of fiscal 2010, and we expect the structure and pricing terms in future financing
transactions, if any, to be substantially less favorable than in the past.

In
addition, credit performance of consumer-related loans generally, and the private education loans held by us and the various securitization trusts we have facilitated, have been
adversely affected by general economic conditions in the United States, including increasing unemployment rates. We increased the projected weighted-average gross default rates for the NCSLT Trusts by
415 basis points between September 30, 2008 and 2009, and by a total of 1,089 basis points since June 30, 2006. The portfolio of private education loans held by us has also experienced a
higher level of defaults than we originally projected. Credit rating agencies have taken negative rating actions with respect to certain securitizations that we previously facilitated, and the
interest rate, economic and credit environments may continue to have a material negative effect on the estimated fair value of our service receivables and loans held for sale.

Our
lender clients previously had the opportunity to mitigate their credit risk through a loan repayment guaranty by TERI. TERI guaranteed the loans held by the NCSLT Trusts, and we
historically received reimbursement from TERI for outsourced loan processing services we performed on TERI's behalf. In April 2008, TERI filed a voluntary petition for relief (TERI Reorganization)
under Chapter 11 of the United States Bankruptcy Code (Bankruptcy Code). The TERI Reorganization has had, and will likely continue to have, a material negative effect on securitization trusts'
ability to realize guaranty obligations of TERI, our client relationships, our facilitated loan volumes, the value of our service receivables, and our ability to realize fully the cost reimbursement
obligations of TERI. See Note 5, "Commitments and ContingenciesTERI ReorganizationChallenge to Security Interests," for more information on the TERI Reorganization and
its impact on our operations.

During
fiscal 2009, we implemented a plan to adjust our business model and address some of the uncertainties facing us. We made major changes in senior management, significantly reduced
our operating expenses and sold the Trust Certificate. The sale of the Trust Certificate, coupled with operating losses for fiscal 2009, generated a refund on October 1, 2009 from the Internal
Revenue Service (IRS) for income taxes previously paid of $176,636 and is expected to eliminate certain future tax liabilities, which would have had a material negative effect on our financial
condition and liquidity. See Note 11, "Income Taxes," for additional information.

6

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

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

We
significantly refined our product offerings and added fee-for-service offerings such as portfolio management and asset servicing during fiscal 2009. Our new
Monogram product has been designed to provide prospective lenders with flexible product features intended to meet their desired risk control and return objectives, while also providing borrowers with
some ability to configure the terms of their private education loans. The Monogram product, which was completed in August 2009 and had not been fully deployed to any clients as of November 6,
2009, also incorporates refinements to our origination process, including an enhanced application interface, an expanded credit decisioning model and additional disbursement and data capabilities. It
has been designed to reduce our dependence on the securitization market in order to generate revenue, as well as our dependence on credit enhancement. The success of the new product will be critical
to growing and diversifying our revenues and client base.

Our
near term financial performance and future growth depend, in large part, on our ability to successfully market our new product and transition to more fee-based revenues.
We are uncertain whether former, current or prospective clients will be interested in the new product offering, particularly in the current economic environment. As of November 6, 2009, Union
Federal is not expected to participate as a program lender during fiscal 2010 in light of regulatory constraints. See Note 13, "Union Federal Regulatory MattersSupervisory
Agreement and Order to Cease and Desist," for additional details.

Summary of Significant Accounting Policies

Our accompanying unaudited condensed consolidated financial statements 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 these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities
and the reported disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our
estimates and judgments on historical experience and various other factors. Actual results may differ from these estimates under varying assumptions or conditions. 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. Material estimates
that are particularly susceptible to change relate to the recognition of service revenues and the valuation of our service receivables and portfolio of private education loans held for sale. Interim
results are not necessarily indicative of results to be expected for the entire fiscal year.

(a) Cash and Cash Equivalents

All highly liquid debt instruments purchased with original maturities of three months or less on the date of purchase and all funds
invested in money market funds are considered cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value.

7

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

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

(b) Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is evaluated on a quarterly
basis. When available, the fair value is based on quoted market values. We have incorporated the sales price received for private education loans sold in the second quarter of fiscal 2010 in our
determination of fair value at September 30, 2009. In the absence of readily determined market values, fair value is estimated by management based on the present value of expected future cash
flows from the loans held for sale. These estimates are based on historical and third-party data and our industry experience with the assumptions for, among other things, default rates, recovery rates
on defaulted loans, prepayment rates, the proportion of buyer's equity to financing and the corresponding weighted-average cost of capital commensurate with the risks involved. If readily determined
market values became available, or if actual performance were to vary appreciably from management's estimates, the fair value of the loans would need to be further adjusted, which could result in
material differences from the recorded carrying amounts. Changes in the carrying value of loans held for sale are recorded as a separate component of non-interest expense.

Loans
in default (greater than 120 days past due) are fully reserved. If a private education loan is delinquent by greater than 90 days, the accrual of interest income on
that loan is discontinued until the loan is brought current or paid. Past due status is based on the contractual terms of the credit agreement between the lender and the borrowers.

(c) Fair Value of Financial Instruments

The Accounting Standards Codification (ASC) 820-10,Fair Value Measurements and
Disclosures, of the Financial Accounting Standards Board (FASB) permits, but does not require, entities to measure many financial instruments and certain other items not
specifically identified in other topics of the ASC, such as available-for-sale investments, to be measured at fair value. We did not elect to measure additional assets and
liabilities at fair value.

Fair
value is defined as the price that would be received in the sale of an asset, or paid to transfer a liability, in an orderly transaction between market participants at the
measurement date. A three-level valuation hierarchy is used to qualify fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement
date:

Level 1.Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 1 assets and liabilities include debt and equity securities and derivative financial instruments actively traded on exchanges, as well as U.S. Treasury securities and U.S. Government and
agency mortgage-backed securities that are actively traded in highly liquid over-the-counter markets.

Level 2.Observable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities in active
markets, quoted
prices for identical or similar assets or liabilities in markets that are not active, and inputs that are observable or can be corroborated, either directly or indirectly, for substantially the full
term of the financial instrument. Level 2 assets and liabilities include debt instruments that are traded less frequently than exchange traded securities and derivative instruments whose model
inputs are observable in the market or can be corroborated by market observable data.

8

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

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

Examples
in this category are certain variable and fixed rate non-agency mortgage-backed securities, corporate debt securities and derivative contracts.

Level 3.Inputs to the valuation methodology are unobservable but significant to the fair value measurement. Examples in this
category include
interests in certain securitized financial assets or certain private equity investments.

Fair
value is applied to eligible assets based on quoted market prices, where available. For financial instruments for which quotes from recent exchange transactions are not available,
fair value is based on discounted cash flow analysis and comparison to similar instruments. Discounted cash flow analysis is dependent upon estimated future cash flows and the level of interest rates.

The
methods used for current fair value calculations may not be indicative of net realizable value or reflective of future fair values. If readily determined market values became
available or if actual performance were to vary appreciably from assumptions used, assumptions may need to be adjusted, which could result in material differences from the recorded carrying amounts.
We believe our methods of determining fair value are appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain
financial instruments could result in a different estimate of fair value.

(d) Revenue Recognition

Additional Structural Advisory Fees.We recognize as service revenues additional structural advisory fees for structuring and
facilitating the
securitization of the private education loans held by various securitization trusts, principally the NCSLT Trusts. We are entitled to receive additional structural advisory fees over time, based on
the amount of loans outstanding in the trusts from time to time over the life of the trusts.

Additional
structural advisory fees receivables are carried at fair value. In the absence of readily determined market values, we update our estimates of the fair value of additional
structural advisory fees receivables on a quarterly basis, based on the present value of expected future cash flows. Our estimates consider changes in discount rates, the estimated operational
expenses for the separate securitization trusts and trust performance assumptions, including the expected annual rate and timing of loan defaults, TERI's obligation to pay default claims, expected
recoveries on defaulted loans, including use of recoveries to replenish the segregated reserve accounts pledged to the securitization trusts by TERI to secure its guaranty obligations (Pledged
Accounts), the annual rate and timing of education loan prepayments, the trend of contractual and market interest rates over the life of the loan pool, including the forward London Interbank Offered
Rate (LIBOR), the cost of funding outstanding auction rate notes, the existence of Trigger Events (defined below) and the discount rate commensurate with the risk involved. These assumptions are based
on historical and third-party data, and our industry experience.

The
indentures relating to the securitization trusts specify certain circumstances (Trigger Events) upon the occurrence of which payments that would otherwise be due in respect of
additional structural advisory fees and residuals would instead be directed to the holders of the notes issued by the trusts until the condition causing the Trigger Event ceases to exist or all notes,
and related interest, are paid

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

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

in
full. Under the indentures, a Trigger Event generally occurs when the cumulative gross defaults of loans held by such trust exceed a specified level.

If
readily determined market values became available or if actual performance were to vary appreciably from assumptions used, assumptions may need to be adjusted, which could result in
material differences from the recorded carrying amounts. Changes to the value of these receivables are recorded in the statement of operations as additional structural advisory fees-trust
updates. We
generally become entitled to receive these additional fees, plus interest, once the ratio of trust assets to trust liabilities reaches a stipulated level, which ranges from 103.0% to 105.5%, or after
all noteholders have been paid in full. Our receipt of these fees may be significantly delayed as a result of the TERI Reorganization, thereby decreasing the estimated fair value of the receivables.

Asset Servicing Fees and Residuals.During the first quarter of fiscal 2009, we had the right to receive a portion of the residual
interests, if any,
generated by securitization trusts that we facilitated. This right was junior in priority to the rights of the holders of the debt sold in the securitizations and additional structural advisory fees.
As a result of the sale of the Trust Certificate in the third quarter of fiscal 2009, we are no longer entitled to residuals receivables from the NCSLT Trusts, but we continue to be entitled to
receive residuals receivables from trusts other than the NCSLT Trusts. We entered into an asset services agreement (Asset Services Agreement) with the third-party purchaser of the Trust Certificate in
April 2009. As compensation for our services, we are entitled to a monthly asset servicing fee based on the aggregate outstanding principal balance of the loans owned by the NCLST Trusts. Our receipt
of the fees, however, is contingent upon distributions available to the third-party owners of the residual interests in the NCSLT Trusts. See Note 4, "Service Receivables and Related Revenues,"
for further detail regarding the sale and related fees.

The
fair values of asset servicing fees and residuals receivables were estimated by management using the same assumptions used for additional structural advisory fees receivables, with
the exception of the discount rate which was adjusted to be commensurate with the risks involved. Changes in the fair value of asset servicing fees and residuals receivables are recognized as service
revenues.

Administrative and Other Fees.Administrative fees are received from the securitization trusts for services performed in administering
securitization
trusts, including the daily management of the trusts, coordination of loan servicers and reporting information to the parties related to the securitization. The fees are based upon a percentage of the
outstanding principal balance of the loan principal of each of the trusts. The fees vary with each separate securitization and are recognized in service revenue when earned, as administrative services
are provided.

During
the fourth quarter of fiscal 2009, we began receiving fees from certain securitization trusts under a special servicing agreement. These fees are paid by the securitization trusts
for the performance by us of default prevention services and management of private education loan collections. Such fees are based, in part, upon the reimbursement of expenses, and are recognized as
the expenses are incurred. Other fees are earned on a stand-alone fee-for-service basis and are considered earned in the period in which the service was provided, or in the
case of loan originations, at the time the funds are disbursed.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

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

Net Interest Income.Interest income and expense is recognized using the effective interest method.

(e) Income Taxes

In determining a quarterly provision for income taxes, the estimated annual effective tax rate is based on expected annual income,
statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. The estimated annual effective tax rate also includes our best estimate of the
ultimate outcome of tax audits.

The
asset and liability method of accounting is utilized for recognition of income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized in
connection with the tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry
backs and carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as tax expense (benefit) in the period that includes the enactment date. A deferred
tax asset valuation allowance is established if it is considered more likely than not that all or a portion of the deferred tax assets will not be realized.

(f) Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the basic weighted-average number of shares of common stock outstanding
for the periods presented. Diluted net loss per share is computed by dividing net loss by the basic weighted-average shares and common stock equivalent shares outstanding during the period, if common
stock equivalent shares are dilutive. The weighted-average shares and common stock equivalent shares outstanding have been determined in accordance with the treasury stock method. Common stock
equivalents consist of shares issuable upon the exercise of outstanding stock options, conversion of preferred stock to common stock and the vesting of restricted stock units.

(g) Consolidation

Our consolidated financial statements include the accounts of FMC and its subsidiaries, after eliminating inter-company accounts and
transactions. We have not consolidated the financial results of the securitization trusts purchasing loans that we have facilitated.

At
September 30, 2009 and 2008, each of the securitization trusts created after January 31, 2003, has met the criteria to be a qualified special-purpose entity (QSPE) as
defined by ASC 860-40,Transfers and Servicing-Transfers to Qualifying Special Purpose Entities(ASC 860-40). Accordingly, we
did not consolidate these existing securitization trusts in our financial statements. In addition, the securitization trusts created prior to January 31, 2003 in which we hold a variable
interest that could result in our being considered the primary beneficiary of such trusts, have been amended in order for them to be considered QSPEs.

On
June 12, 2009, FASB issued Financial Accounting Standard 166,Accounting for Transfers of Financial Assets, an Amendment of FASB Statement
140(FAS 166) and Financial Accounting Standard

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

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

167,Amendments to FASB Interpretation No. 46(R)(FAS 167). Both statements are effective beginning with our financial statements for
fiscal year 2011. FAS 166 removes the concept of a QSPE from ASC 860-40 and removes the exception from consolidation for qualifying special-purpose entities from ASC
810-10,Consolidation(ASC 810-10).

FAS 167
amends ASC 810-10 to require an enterprise to perform an analysis to determine whether the enterprise's variable interest or interests gives it a controlling
financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following
characteristics:



As
of November 6, 2009, we are evaluating the impact that adoption of these statements will have on our consolidated financial condition and results of operations.

(2) Cash and Cash Equivalents

The following table summarizes our cash and cash equivalents:

September 30,
2009

June 30,
2009Cash equivalents

$
154,103

$
142,723Interest-bearing deposits with banks


7,940


11,550Non-interest-bearing deposits with banks


6,810


4,497Total cash and cash equivalents

$
168,853

$
158,770


We
invest in a money market fund for which the investment advisor is the institutional money management firm, Milestone Capital Management, LLC (MCM), a wholly-owned subsidiary of
Milestone Group Partners. MCM receives fees for services it performs for the money market fund. Members of the immediate family of one of FMC's directors owned approximately 65% of Milestone Group
Partners as of September 30, 2009, making MCM a related party. At September 30, 2009, and June 30, 2009, approximately $47,772 and $59,983 of our holdings in money market funds,
respectively, were invested in funds managed by MCM.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(3) Loans Held for Sale

The following table reflects the carrying value of private education loans held for sale:

September 30,
2009

June 30,
2009Principal and interest of loans

$
529,862

$
526,542Fair value adjustment


(297,087
)

(175,582
)Net carrying value

$
232,775

$
350,960Principal and interest of loans:Delinquent (>90 days past due)

$
5,883

$
17,329In default (>120 days past due)


40,260


15,112Pledged as collateral under education loan warehouse facility


263,478


261,923


We
classify our private education loan portfolio as held for sale. A portion of our private education loan portfolio has been pledged as collateral to a third-party conduit lender
pursuant to an education loan warehouse facility. Loans used to secure the education loan warehouse facility are subject to call provisions by the third-party lender; therefore, we do not have the
ability to hold those loans to maturity. The conduit lender's recourse to us under the indenture is limited to the private education loans pledged as collateral.

During
the first quarter of fiscal 2010, we received a bid for a private sale of all loans less than 31 days delinquent held by Union Federal. This bid served as the basis of our
fair value estimate of all such loans held at September 30, 2009, including those securing the education loan warehouse facility, adjusted for differences in loan performance. Loans greater
than 120 days delinquent were fully reserved.

On
October 16, 2009, Union Federal sold a portfolio of private education loans, representing approximately 88% of its portfolio of private education loans held for sale, to a
third party. See Note 14, "Subsequent EventsDisposition of Union Federal Private Education Loans," for additional information.

(4) Service Receivables and Related Revenues

Additional structural advisory fees, asset servicing fees and residuals receivables represent the estimated fair value of service receivables expected to be collected over the life of
the various separate securitization trusts that have purchased private education loans facilitated by us. The fees are expected to be paid directly from the various securitization trusts.

Effective
March 31, 2009, we entered into a purchase agreement with VCG Owners Trust and VCG Securities, LLC, pursuant to which we transferred to the purchasers our sole
ownership of the Trust Certificate. As a result, we are no longer entitled to the residual cash flows of the NCSLT Trusts. In consideration for the sale of the Trust Certificate, the purchasers agreed
to bear all future federal and state tax liabilities associated with the NCSLT Trust residuals.

We
entered into an asset servicing agreement in April 2009, pursuant to which we have agreed to provide certain services to the purchasers of the Trust Certificate to support their
ownership of the

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(4) Service Receivables and Related Revenues (Continued)

NCSLT
Trust residuals, including analysis and valuation optimization services and services relating to funding strategy. As compensation for our services, we are entitled to an asset servicing fee,
calculated as a percentage of the aggregate outstanding principal balance of loans outstanding in the NCSLT Trusts. Although this fee is earned monthly, we will not receive any asset servicing fees
until the purchasers have begun to receive residual cash flows.

At
September 30, 2009 and 2008, the aggregate outstanding principal balance of the debt issued by the NCSLT Trusts was $12,569,949 and $13,532,840, respectively. The underlying
assets in the NCSLT Trusts were TERI-guaranteed private education loans, of which approximately 32.8% were in deferment, 6.4% were in forbearance and 60.8% were in repayment status as of
September 30, 2009. Approximately 88.1% of the loans in repayment status as of September 30, 2009 were current, 4.9% were between 31 and 90 days past due, 3.8% were between 91 and
180 days past due, and 3.2% were greater than 180 days past due. As of September 30, 2009, the cumulative gross default rate with regard to loans in, and loans that have
previously been in, repayment status in the NCSLT Trusts was 12.2%.

The
following table shows the approximate weighted average assumptions for loan performance and discount rates of the NCSLT Trusts and changes made to our assumptions during the quarter:

September 30,2009

2008Rate

Rate Change
for the
Quarter

Rate

Rate Change
for the
QuarterDiscount rateadditional structural advisory fees


11.30
%

(1.23
)%

11.07
%

1.35
%Discount rateasset servicing fees and residuals


16.00


(1.00
)

16.35


1.47Gross default rate


20.11


1.11


15.96


1.13Net default rate


12.07


0.67


8.30


0.59Recovery rate


40.00





48.00


Prepayment rate


8.01





8.40





Discount RateAdditional Structural Advisory Fees.We base the discount rate that we use to estimate the fair value of our
additional
structural advisory fees on a spread over the 10-year U.S. Treasury Bond rate. During the first quarter of fiscal 2010, we decreased the spread by 100 basis points, to 800 basis points. In
decreasing the spread, we considered, among other things, decreasing yield curves for certain composite indices for B-rated corporate bonds with 12- and 15-year
maturities, as well as decreases in the broader ABS marketplace during the quarter. In addition, the 10-year U.S. Treasury Bond rate decreased by 23 basis points during the first quarter
of fiscal 2010, to 3.30% at September 30, 2009. As a result, we applied a discount rate of 11.30% for purposes of estimating the fair value of the additional structural advisory fees, which
resulted in an increase of $7,453 during the first quarter of fiscal 2010.

During
the first quarter of fiscal 2009, due to the continued dislocation in the debt capital markets and the private student loan securities sector, we increased the spread over the
10-year U.S. Treasury Bond rate by 150 basis points, to 725 basis points, in determining the discount rate. The 10-year U.S. Treasury Bond rate decreased by 15 basis points, to
3.82%, during the period. As a result, we applied a

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(4) Service Receivables and Related Revenues (Continued)

discount
rate of 11.07% for purposes of estimating the fair value of the additional structural advisory fees, which resulted in a net decrease of $14,066 during the first quarter of fiscal 2009.

Discount RateAsset Servicing Fees and Residuals.In determining an appropriate discount rate for valuing our asset servicing fees
and
residuals receivables, we consider a number of factors, including market data made available to us on spreads on federally guaranteed loans and private education loans, as well as rates used in the
much broader ABS market. We also evaluate yield curves for corporate subordinated debt with maturities similar to the weighted-average life of our residuals. During the first quarter of fiscal 2010,
due to the tightening of credit spreads in the debt capital markets, we decreased our discount rate by 100 basis points, to 16.00%, for purposes of estimating the fair value of our asset servicing
fees and residuals receivables. The decrease in the discount rate resulted in an increase in residuals receivables of $1,176 during the quarter.

During
the first quarter of fiscal 2009, due to widening credit spreads in the debt capital markets, we increased our weighted-average discount rate by 147 basis points, to 16.35%. The
increase in the discount rate resulted in a decrease in the estimated fair value of our residuals receivables of $43,643 during the quarter.

Default and Recovery Rates.During the first quarter of fiscal 2010, we increased the weighted-average gross default rate assumptions
used to
estimate the fair value of our service receivables from 19.00% to 20.11%. The 111 basis points increase reflects actual default experience in excess of projections. The increase in the gross default
rate resulted in an increase in the assumed weighted-average net default rate from 11.40% to 12.07% during the first quarter of fiscal 2010, with no changes made to the assumptions for recovery rate.
The increase in the net default rate resulted in a decrease in the estimated fair value of our additional structural advisory fees receivable of $1,729 during the quarter. In addition, during the
quarter we recorded a decrease of $4,692 in the estimated fair value of additional structural advisory fees for potential deviations in the collateral performance of securitized loans. Changes to the
net default rate did not have a material impact on the estimated fair value of our asset servicing fees or residuals receivables.

During
the first quarter of fiscal 2009, the increase in the net default rate was made as higher default rates were experienced in the trusts and resulted in a decrease in the estimated
fair value of our additional structural advisory fees receivable of $3,133, and a decrease in the estimated fair value of our residuals receivables of $40,728, as we did not sell the Trust Certificate
until the third quarter of fiscal 2009.

Prepayment Rates.In response to a historically low prepayment rate, the current interest rate environment and limited availability of
consumer
credit, we adjusted our prepayment assumption during the first quarter of fiscal 2010 by extending the period during which decreased prepayments were expected to persist. As of September 30,
2009, we assumed that the current prepayment rate will persist until September 30, 2010, and then eventually revert to historical norms during the ensuing 12 months. These changes did
not have a material impact on the estimated fair value of our service receivables.

During
the first quarter of fiscal 2009, we did not adjust our assumptions for prepayment rates.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(4) Service Receivables and Related Revenues (Continued)

Forward LIBOR Curve.LIBOR is the underlying rate for most of the trusts' assets and liabilities and can have a significant effect on
the cash flows
generated by each trust. Changes in the forward LIBOR curve affect the principal balances of education loans held by the trusts, particularly as interest is capitalized during loan deferment, which
affects the net interest margin that the trust generates. In addition, certain trusts have issued a tranche of ABS that bears a fixed interest rate. A decrease in the forward LIBOR curve may result in
a reduced spread on the fixed-interest tranche, which in turn decreases the estimated fair value of our service receivables. Significant changes to the forward LIBOR curve can also affect the
estimated fair value of our additional structural advisory fees, which bear interest at the rate of LIBOR plus a spread to the extent such fees are accrued but unpaid by the trusts. During the first
quarters of fiscal 2010 and 2009, there was a tightening in the forward LIBOR curve, which resulted in a decrease in the estimated fair value of our structural advisory fees of $2,048 during the first
quarter of fiscal 2010, and decreases to our additional structural advisory fees and residuals receivables of $4,135 and $5,984, respectively, during the first quarter of fiscal 2009.

The
following table summarizes changes in the estimated fair value of our additional structural advisory fees receivables:

Three months ended
September 30,2009

2008Fair value at beginning of period

$
55,130

$
113,842Cash received from trust distributions


(24
)

(1,477
)Trust updates:Passage of timefair value accretion


1,746


2,789Decrease (increase) in discount rate assumption


7,453


(14,066
)Increase in timing and average default rate


(1,729
)

(3,133
)Decrease in forward LIBOR curve


(2,048
)

(4,135
)Other factors, net


(5,059
)

655Net change from trust updates


363


(17,890
)Fair value at end of period

$
55,469

$
94,475


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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(4) Service Receivables and Related Revenues (Continued)

The
following table summarizes the changes in the estimated fair value of our residuals receivable:

Three months ended
September 30,2009

2008Fair value at beginning of period

$
9,960

$
293,255Trust updates:Passage of timefair value accretion


426


10,931Decrease (increase) in discount rate assumption


1,176


(43,643
)Decrease (increase) in forward LIBOR curve


22


(5,984
)Increase in timing and average default rate





(40,728
)Other factors, net


(800
)

(732
)Net change from trust updates


824


(80,156
)Fair value at end of period

$
10,784

$
213,099


TERI's Obligation to Pay Claims.We did not adjust our assumptions regarding TERI during the first quarter of fiscal 2010 or 2009,
including our
assumption that all future recoveries on defaulted TERI-guaranteed loans would be available to replenish the trusts' Pledged Accounts. See Note 5, "Commitments and
ContingenciesTERI ReorganizationChallenges to Security Interests." For a discussion of the sensitivity of the additional structural advisory fees and residuals receivables to
variations in our assumptions and estimates, see "Service Revenue and Receivables" and "Sensitivity Analysis" under "Management's Discussion and Analysis of Financial Condition and Results of
OperationsExecutive SummaryApplication of Critical Accounting Policies and Estimates."

(5) Commitments and Contingencies

(a) Agreements with Lender Clients

At
September 30, 2009, the principal balance of loans facilitated and available to us for securitization was $1,256,047. Under the terms of purchase
agreements with lender clients, we generally have an obligation to use our best efforts to facilitate the purchase of the client's TERI-guaranteed private education loans during a
specified loan purchase period. The length of the loan purchase period varies by client and generally ranges from 195 days to 555 days following final loan disbursement. Under the terms
of certain of our purchase agreements, if we fail to facilitate a purchase in breach of our obligations, our liability would be limited to liquidated damages of one percent of the total principal
amount of the loans as to which the loan purchase period had expired. Those purchase agreements that limit our liability to liquidated damages generally provide that our obligation to close a
securitization is subject to the condition that no "market disruption event" has occurred. Under certain of these purchase agreements, the TERI Reorganization constitutes a "market disruption event,"
suspending our contractual obligation to close a securitization. Any liquidated damages would be due at expiration of the relevant loan purchase period, which would not occur for a period of time
after the market disruption event ceases. Purchase agreements applicable to approximately $485,518 of the facilitated loan volume available for securitization as of September 30, 2009 may be
subject to liquidated damages provisions in the event we fail to facilitate a securitization in breach of our

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(5) Commitments and Contingencies (Continued)

obligations.
Our potential liability under our loan purchase agreements is dependent, in part, upon the outcome of the TERI Reorganization and is not determinable at this time.

Although
we generally have an obligation to use our best efforts to facilitate the purchase of the clients' TERI-guaranteed loans during a specified loan purchase period, no
amounts have been accrued in the financial statements as a result of the market disruption clauses and the TERI Reorganization.

(b) TERI ReorganizationChallenge to Security Interests

TERI is a private, not-for-profit Massachusetts organization as described under section 501(c)(3) of the
Internal Revenue Code. In its role as guarantor in the private education lending market, TERI agreed to reimburse lenders or securitization trusts for unpaid principal and interest on defaulted loans.
Historically, TERI was the exclusive third-party provider of borrower default guarantees for our clients' private education loans.

On
April 7, 2008, TERI filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. The TERI Reorganization has had, and will likely continue to
have, a material negative effect on securitization trusts' ability to realize guaranty obligations of TERI, our client relationships, facilitated loan volumes, the value of our service receivables and
our ability to realize fully TERI's cost reimbursement obligations. In connection with the TERI Reorganization, our master agreements with TERI have been terminated, including our master servicing
agreement, our database sale and supplementation agreement and our master loan guarantee agreement. We entered into a transition services agreement with TERI pursuant to which we agreed to provide
certain services to TERI through September 2008, and TERI affirmed both our rights to certain data and certain data restrictions applicable to TERI. In addition, Union Federal entered into
stipulations in the context of the TERI Reorganization relating to the termination of its agreements with TERI and the settlement of related claims. We have filed a general unsecured claim with regard
to $16.0 million of processing fees from TERI that were due pursuant to the master servicing agreement, but unpaid, prior to the filing of TERI's bankruptcy petition.

As
a result of the automatic stay under the Bankruptcy Code, TERI ceased purchasing defaulted loans, including defaulted loans from the NCSLT Trusts, in April 2008. In June 2008, the
Bankruptcy Court entered an order approving a motion by TERI to purchase defaulted loans from the securitization trusts using cash in the Pledged Accounts. Beginning in July 2008, TERI resumed paying
its obligations under the guaranty agreements with respect to defaulted loans from the trusts, but only using cash in the Pledged Account established for the benefit of the specific trust that owned
the defaulted loan. As of November 6, 2009, TERI is not permitted to satisfy its guaranty obligations using funds from TERI's general reserves. Funds in the Pledged Accounts of certain trusts
have been exhausted, or are expected to be exhausted in the near term, at which point such trust will have a general unsecured claim against TERI.

The
Bankruptcy Court's June 2008 order also granted parties rights to challenge the trusts' security interests in the collateral other than the Pledged Accounts. In January 2009, the
official committee of unsecured creditors of TERI (Creditors Committee) filed an adversary complaint in the Bankruptcy Court against the owner trustee and indenture trustee of 17 securitization
trusts, and against our subsidiary First Marblehead Data Services, Inc. (FMDS) as administrator of such trusts. The complaint

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(5) Commitments and Contingencies (Continued)

generally
alleges that the security interests granted by TERI to the trusts, excluding the security interests in the Pledged Accounts, are unperfected or may otherwise be avoided under the Bankruptcy
Code. In particular, the complaint alleges that the trusts do not have enforceable rights to future recoveries on defaulted loans owned by TERI with an aggregate principal and accrued interest balance
of more than $600,000 as of September 30, 2009, or in amounts owed or transferred by TERI to Pledged Accounts after the filing of TERI's petition for reorganization totaling more than $35,000
as of September 30, 2009. In February 2009, pending resolution of the issues raised in the Creditors Committee's complaint, the trusts generally suspended the transfer of defaulted loans to
TERI and generally suspended requests for default claim payments from amounts in the Pledged Accounts.

In
March 2009, FMDS and the owner trustee filed a motion to dismiss the Creditors Committee's adversary complaint. The indenture trustee also filed a motion to dismiss, joining the
arguments made in the motion filed by FMDS and the owner trustee. The Creditors Committee filed an opposition to the motions to dismiss in April 2009, together with an amended complaint naming the
trusts themselves as defendants. FMDS filed a response to the opposition and amended complaint in May 2009. In September 2009, the Bankruptcy Court denied the motions to dismiss. We have not adjusted
our accounting assumptions as of September 30, 2009 in response to the adversary proceeding. We continued to assume that the trusts have valid and enforceable security interests in, among other
collateral, future recoveries on defaulted loans owned by TERI and that such recoveries would eventually be available to replenish the trusts' Pledged Accounts.

If
the Creditors Committee or any other party is successful in challenging the trusts' security interests in the funds transferred to the Pledged Accounts after the filing of TERI's
petition for reorganization or other collateral, the amount of pledged collateral available exclusively to a particular securitization trust to satisfy TERI's guaranty obligations to that trust would
decrease materially. As a result, the trust's unsecured claims against TERI would increase proportionately. For example, recoveries from defaulted education loans transferred to TERI, which have
historically been used to replenish a particular trust's Pledged Account, would instead become an asset of TERI's bankruptcy estate and available to satisfy administrative claims of TERI's bankruptcy
estate and other holders of claims in accordance with the priorities established by the Bankruptcy Code. Recoveries from defaulted loans not transferred to TERI, however, would remain available to the
trusts. A successful challenge to the security interests could decrease materially the value of our additional structural advisory fees or our asset servicing fees by decreasing the pledged collateral
available exclusively to the NCSLT Trusts.

On
September 22, 2009, a Joint Plan of Reorganization of TERI and the Creditors Committee was filed in the Bankruptcy Court. On October 22, 2009, a First Amended Joint Plan
of Reorganization of TERI and the Creditors Committee and an accompanying Disclosure Statement were filed. The plan includes a proposed settlement of the adversary complaint and includes other
provisions that would affect the claims of the NCSLT Trusts. Approval of the plan of reorganization may not be solicited until the disclosure statement has been approved by the Bankruptcy Court.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(6) Stockholders' Equity

Series B Non-Voting Convertible Preferred Stock

In December 2007, FMC entered into an investment agreement (Investment Agreement) with GS Parthenon A, L.P. and GS Parthenon
B, L.P., affiliates of GS Capital Partners. Pursuant to the Investment Agreement, we agreed to sell, after receipt of applicable regulatory approvals and determinations and satisfaction of
other closing conditions, shares of newly-created Series B Non-Voting Convertible Preferred Stock, $0.01 par value per share (Series B Preferred Stock). On August 18,
2008, FMC issued 133 shares of newly designated Series B Preferred Stock at a purchase price of $1,000 per share. The Series B Preferred Stock is convertible, at the option of the
holders, into 8,847 shares of common stock, at a conversion price of $15.00 per share. Dividends would be paid on the Series B Preferred Stock when, as and if, and in the same amounts (on an
as-converted basis), declared on common stock. Upon liquidation, dissolution or winding up of FMC, holders of Series B Preferred Stock would have the right to receive an amount
equal to $0.01 per share of Series B Preferred Stock, plus the amount of any declared but unpaid dividends thereon. After payment of this amount, holders of the Series B Preferred Stock
would be entitled to participate (on an as-converted basis) with common stock in the distribution of remaining assets.

(7) Fair Value of Financial Instruments

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a
description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Cash
equivalents consist of money market funds with available quoted market prices on active markets that we classify as Level 1 of the valuation hierarchy.

Investments
available for sale are mortgage-backed agency securities that are marked to market using pricing from an independent third party and are classified as Level 2 in the
hierarchy. Prior to the issuance of these financial statements, we received a bid from a third party for a portion of Union Federal's loans held for sale. For that portion of loans held for sale, we
used the bid price as our estimate of fair value. Those loans are also classified as Level 2 in the hierarchy. On October 16, 2009, Union Federal completed the sale of that portion of
its private education loans held for sale to the third party. See Note 14, "Subsequent EventsDisposition of Union Federal Private Education Loans," for additional information.

Market
prices are not available for our structural advisory fees receivables, asset servicing fees receivables or residuals receivables, and only on a limited basis for our loans held
for sale. As a result, we estimated fair value utilizing internally-developed discounted cash flow models which include assumptions regarding prepayment rates, net default rates, the LIBOR forward
interest rate curve, operational expenses, and auction rate note interest rates, as well as the market prices obtained from the sale of a portion of Union Federal's portfolio, adjusted to reflect
differences in performance between the loans sold and those we retained. These assets are classified within Level 3 of the valuation hierarchy.

We
believe that the carrying values of federal funds sold and deposits approximate fair value due to their short duration.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(7) Fair Value of Financial Instruments (Continued)

The
following table presents financial instruments carried at fair value as of September 30, 2009 and June 30, 2009, by caption on the consolidated balance sheet and in
accordance with the valuation hierarchy described above on a recurring and nonrecurring basis:

September 30, 2009

June 30, 2009Level 1

Level 2

Level 3

Total
carrying
value

Level 1

Level 2

Level 3

Total
carrying
valueAssets:Recurring:Cash equivalents

$
154,103

$


$


$
154,103

$
142,723

$


$


$
142,723Investments





8,052





8,052





8,450





8,450Additional structural advisory fees








55,469


55,469








55,130


55,130Residuals








10,784


10,784








9,960


9,960Asset servicing fees








4,647


4,647








2,385


2,385Non-recurring:Loans held for sale





121,481


111,294


232,775








350,960


350,960Total assets:

$
154,103

$
129,533

$
182,194

$
465,830

$
142,723

$
8,450

$
418,435

$
569,608


Our
liability under the education loan warehouse facility of $229,474 at September 30, 2009, is recorded in our balance sheet at the value of outstanding principal and interest.
We have elected not to apply the fair value provisions available under ASC 820-10,Fair Value Measurements and Disclosures, to this
liability. We believe that the fair value of the education loan warehouse facility is limited to the fair value of assets used as collateral, which are the lender's only recourse under the facility.
The estimated fair value of such assets is $106,640 at September 30, 2009.

Please
see Note 3, "Loans Held for Sale," for information with respect to loans held for sale and Note 4, "Service Receivables and Related Revenues," for a roll forward of
the structural advisory fees and residuals receivables.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(8) Net Interest Income

The following table reflects the components of net interest income:

Three months ended
September 30,2009

2008Interest incomeCash and cash equivalents

$
122

$
464Federal funds sold


2


421Investmentsavailable-for-sale


104


578Loans held for sale


8,125


10,485Mortgage loans held to maturity


129


151Total interest income


8,482


12,099Interest expenseTime and savings account deposits


471


1,690Money market account deposits


228


375Warehouse line of credit


3,200


2,696Other interest-bearing liabilities


143


201Total interest expense


4,042


4,962Net interest income

$
4,440

$
7,137


(9) Stock-Based Compensation

2008 Meyers' Option Plan

The Board of Directors elected Daniel Meyers as President and Chief Executive Officer and as a member of the Board of Directors,
effective September 1, 2008. In connection with the election, the Board of Directors and a subcommittee of the Compensation Committee of the Board of Directors approved the grant on
August 18, 2008 (Grant Date) of stock options to Mr. Meyers to purchase (a) 2,000 shares of common stock, at an exercise price of $6.00 per share, 25% of which vested and became
exercisable in August 2009, with the remainder to vest and become exercisable in three equal installments on each of the second, third and fourth anniversaries of the Grant Date ($6.00 Stock Options);
(b) 2,000 shares of common stock, at an exercise price of $12.00 per share, that vested and became exercisable in full on November 30, 2008; and (c) 2,000 shares of common stock,
at an exercise price of $16.00 per share, that vested and became exercisable in full on November 30, 2008. Any unvested stock options will vest and become exercisable in full (a) if the
closing sale price of the common stock is at least 150% of the exercise price of the applicable option for a period of five consecutive trading days (assuming the trading on each day is not less than
90% of the average daily trading volume for the prior three months prior to such five day period), (b) in the event of Mr. Meyers's death or disability, as defined in his employment
agreement, or (c) in the event that Mr. Meyers' employment is terminated by us without Cause, as defined in his employment agreement, or by Mr. Meyers with Good Reason, as defined
in his employment agreement. In addition, subject to certain conditions set forth in his employment agreement, the $6.00 Stock Options may be exercised beginning 90 days after the Grant Date
prior to vesting, provided that the unvested shares issued will be held in escrow by us and will be subject to a repurchase option by us. Each of the stock options will

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(9) Stock-Based Compensation (Continued)

expire
ten years from the Grant Date. The stock options were not granted under any of our existing stockholder-approved incentive plans.

(10) General and Administrative Expenses

The following table reflects components of general and administrative expenses:

Three months ended
September 30,2009

2008General and administrative expenses:Depreciation and amortization

$
3,693

$
5,055Third-party services


6,090


7,547Occupancy and equipment


6,336


4,960Marketing coordination


14


3,428Other


2,006


3,457Total

$
18,139

$
24,447


(11) Income Taxes

Income tax benefit decreased to $42,650 for the first quarter of fiscal 2010 from $52,938 million for the first quarter of fiscal 2009. The decrease in income tax benefit was
primarily the result of a decrease in the amount of the loss before income tax expense between periods. In addition, during the first quarter of fiscal 2010, our effective tax rate, or the income tax
benefit as a percentage of pre-tax loss, decreased to 31.2% from an effective tax rate of 36.3% for the first quarter of fiscal 2009. The decrease in our effective tax rate was primarily
due to certain permanent differences, expense accruals related to unrecognized tax benefits and the establishment of a deferred tax asset valuation allowance.

We
have determined that a valuation allowance is necessary for certain deferred tax assets, as it is more likely than not that these assets will not be realized through future reversals
of existing temporary differences or available tax planning strategies. We will continue to review the recognition of deferred tax assets on a regular basis.

Net
unrecognized tax benefits were $20,108 at September 30, 2009. At September 30, 2009, we had approximately $2,481 accrued for interest and no amount accrued for the
payment of penalties.

As
a result of the sale of the Trust Certificate effective March 31, 2009, as well as our operating losses for fiscal 2009, we recorded an income tax receivable for federal income
taxes paid on prior taxable income. On October 1, 2009, we received $176,636 from the IRS related to our income tax receivable.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(12) Net Loss per Share

The following table sets forth the computation of basic and diluted net loss per share of common stock:

Three months ended
September 30,2009

2008Net loss

$
(94,066
)
$
(92,897
)Net loss per common share:Basic

$
(0.95
)
$
(0.94
)Diluted


(0.95
)

(0.94
)Shares used in computing net loss per common share:Basic


99,156


98,964Diluted


99,156


98,964Anti-dilutive securities


8,880


4,731


Anti-dilutive
securities include restricted stock units, Series B Preferred Stock and stock options for which the conversion or exercise price exceeds fair market
value at the report date.

(13) Union Federal Regulatory Matters

(a) Regulatory Capital Requirements

Union Federal is subject to various regulatory capital requirements administered by certain federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial
condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Union Federal must meet specific capital guidelines that involve quantitative measures of Union
Federal's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weighting and other factors.

Quantitative
measures established by regulation to ensure capital adequacy require Union Federal to maintain minimum amounts and ratios of total capital and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined in the regulations).

Regulatory GuidelinesMinimum

Well
Capitalized

September 30,
2009

June 30,
2009Risk-based capital ratios:Tier 1 capital


4
%

6
%

18.80
%

37.86
%Total capital


8


10


18.86


37.91Tier 1 leverage ratio


4


5


15.01


34.51


Union
Federal's equity capital was $47,511 at September 30, 2009, down from $84,286 at June 30, 2009, primarily as a result of the write-down of the education
loans held for sale. Although the reduction in equity capital had an adverse impact on capital ratios at September 30, 2009 compared to those at June 30, 2009, the sale of the loan
portfolio on October 16, 2009 will result in an improvement

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(13) Union Federal Regulatory Matters (Continued)

in
our Tier 1 and total capital ratios due to the lower risk weight associated with cash and cash equivalents, as opposed to loans held for sale.

As
of September 30, 2009 and June 30, 2009, Union Federal was well capitalized under the regulatory framework for prompt corrective action. In July 2009, FMC and Union
Federal agreed to comply with certain requirements imposed by the OTS that could adversely affect our operations and financial condition. See "Supervisory Agreement and Order to Cease and
Desist" below for additional details.

(b) Supervisory Agreement and Order to Cease and Desist

On July 2, 2009, FMC entered into a supervisory agreement (Supervisory Agreement) with the OTS and Union Federal entered into a
stipulation consenting to the issuance by the OTS of an order to cease and desist (Order).

The
Supervisory Agreement requires FMC to, among other things:



Pursuant
to the requirements of the Order, Union Federal took the following actions during the quarter ended September 30, 2009:



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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(13) Union Federal Regulatory Matters (Continued)



The
Order further requires Union Federal to, among other things:



In
addition, the terms of the Order require Union Federal to adopt a concentration reduction plan that would: (i) prevent Union Federal from originating private education loans
until Union Federal reduces the concentration of private education loans to Tier 1 capital plus allowances for loan losses below 50% and (ii) require Union Federal to achieve such a
reduction by December 31, 2009. On October 16, 2009, Union Federal sold approximately 88% of its portfolio of private education loans held for sale as of September 30, 2009. As a
result, Union Federal achieved the reduction required by the concentration reduction plan. See Note 14, "Subsequent EventsDisposition of Union Federal Private Education Loans," for
additional information.

The
terms of the Supervisory Agreement and the Order will remain in effect until terminated, modified or suspended by the OTS.

(14) Subsequent Events

We have evaluated events subsequent to the balance sheet date through November 6, 2009, for purposes of disclosure.

(a) Resolution of Securities Litigation

In April and May 2008, seven purported class action lawsuits were filed against us and certain of our current and former officers and
certain of our directors in the United States District Court for the District of Massachusetts. The plaintiffs alleged, among other things, that the defendants made false and misleading statements and
failed to disclose material information in various SEC filings, press releases and other public statements. The complaints alleged various claims under the Securities Exchange Act of 1934, as amended
(Exchange Act) and Rule 10b-5 promulgated thereunder. The complaints sought, among other relief, class certification, unspecified damages, fees and such other relief as the court
deemed just and proper. In August 2008, the court consolidated these cases and appointed lead plaintiffs and a lead counsel. In November 2008, a consolidated amended complaint was filed by the lead
plaintiffs that contained allegations similar to the earlier complaints. In August 2009, the court issued an order granting our motion to dismiss the plaintiffs' consolidated amended

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars and shares in thousands, except per share amounts)

(14) Subsequent Events (Continued)

complaint.
The court did not grant plaintiffs leave to re-plead, and the period during which the plaintiffs could appeal the dismissal has expired.

In
addition, in May and June 2008, three federal derivative lawsuits were filed against certain of our current and former officers and directors and nominally against us in the United
States District Court for the District of Massachusetts. The complaints were purportedly brought on our behalf to remedy
alleged violations of federal and state law, including violations of the Exchange Act, breaches of fiduciary duties, waste of corporate assets and unjust enrichment, which allegedly occurred between
August 2006 and May 2008 or June 2008, as applicable. The complaints sought a monetary judgment, injunctive relief, restitution, disgorgement and a variety of purported corporate governance reforms.
In August, 2008, the court consolidated the federal derivative cases and stayed them pending resolution of the purported class actions described above. On October 6, 2009, the court entered an
order approving a stipulation for dismissal of the consolidated case with prejudice. No compensation in any form passed directly or indirectly from any of the defendants to plaintiffs or any of
plaintiffs' attorneys.

A
state derivative action was also filed in Massachusetts Superior Court in June 2008. The complaint was purportedly brought on our behalf to remedy alleged violations of federal and
state law, including breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment, which allegedly occurred between August 2006 and June 2008.
The complaint sought a monetary judgment, injunctive relief, restitution, disgorgement, and costs and disbursements of the action. On October 1, 2009, the court entered an order approving a
stipulation for dismissal of the case without prejudice. No compensation in any form passed directly or indirectly from any of the defendants to plaintiffs or any of plaintiffs' attorneys.

(b) Disposition of Union Federal Private Education Loans

On October 16, 2009, following receipt of approval from the OTS, Union Federal completed the sale of a portfolio of private
education loans with an aggregate outstanding principal and accrued interest balance of approximately $233,832 pursuant to a loan purchase and sale agreement (Sale Agreement). The sale of these loans,
which represented 88% of the private education loans held by Union Federal, resulted in proceeds of $121,481 to Union Federal. The carrying value of the loans at September 30, 2009 was equal to
the sale price, therefore, no gain or loss on sale will be recorded in the second quarter of fiscal 2010. Following the sale, the purchaser bears the risk of future performance of the loans, including
risk of future default, except as otherwise set forth in the Sale Agreement.

On
the Purchase Date, we delivered a performance guaranty (Performance Guaranty) pursuant to which we guaranty the performance by Union Federal of its obligations and agreements under
the Sale Agreement. The Performance Guaranty provides that we will be released from its obligations, without any action of the purchaser, upon (1) any merger or consolidation of Union Federal
into another entity as a result of which a majority of the capital stock of Union Federal is converted into or exchanged for the right to receive cash, securities or other property or (2) a
sale of all or substantially all assets of Union Federal, in either case after which transaction Union Federal is no longer our subsidiary. Union Federal plans to sell the balance of its private
education loan portfolio to an affiliate by December 31, 2009, subject to OTS approval.

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Table of Contents

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

You should read the following discussion and analysis of our financial condition and results of operations
together with our unaudited condensed consolidated financial statements and accompanying notes included in this quarterly report.

We use the terms "First Marblehead," "we," "us" and "our" in this quarterly report to refer to the business of The First Marblehead Corporation, or "FMC," and its
subsidiaries on a consolidated basis.

Factors That May Affect Future Results

In addition to historical information, this quarterly report includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained
herein regarding our strategy, future operations and products, financial performance, future funding transactions, projected costs, future market position, prospects, plans and outlook of management,
other than statements of historical facts, are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "observe," "plans," "projects," "will,"
"would," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guaranty that we actually
will achieve the plans, intentions or expectations expressed or implied in our forward-looking statements, which involve risks, assumptions and uncertainties. There are a number of important factors
that could cause actual results, levels of activity, performance or events to differ materially from those expressed or implied in the forward-looking statements we make. These important factors
include our "critical accounting estimates" set forth below under "Executive SummaryApplication of Critical Accounting Policies and Estimates" and factors including, but not
limited to, those set forth below under the caption "Risk Factors" in Item 1A of Part II of this quarterly report. Although we may elect to update forward-looking statements in the
future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date
subsequent to November 6, 2009.

Executive Summary

Overview

We offer outsourcing services to national and regional financial institutions and educational institutions for designing and
implementing private education loan programs. These private education loan programs are designed to be marketed to prospective student borrowers and their families directly or through educational
institutions and to generate portfolios intended to be held by the originating lender or financed in the capital markets. In addition, we provide administrative and other services to securitization
trusts that we have facilitated, asset servicing to the third-party owner of certain securitization trusts and portfolio management services to a limited number of clients.

We
offer prospective clients the opportunity to outsource key components of their private education loan programs to us by providing a fully integrated suite of services, including our
new Monogram product offering. In addition, we offer the following services on a stand alone, fee-for-service basis:



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We
also provide banking services such as residential and commercial mortgage loans, retail savings products, time deposit products and money market accounts through our subsidiary Union
Federal Savings Bank, or Union Federal, which is a federally chartered thrift regulated by the Office of Thrift
Supervision, or OTS. In the past, Union Federal has also offered private education loans directly to consumers. Substantially all of our financial results have been derived from these activities,
which are considered to be in a single industry segment for financial reporting purposes.

Our
new Monogram product offering encompasses some or all of our service offerings and enables a lender to customize its loan program to meet its risk control and return objectives
without a third-party guaranty. Specifically, the lender can customize the range of loan terms offered to its qualified applicants, such as repayment options, loan limits and borrower pricing. The
Monogram product is based on our proprietary origination risk score model, which uses borrower and cosigner attributes, as well as distribution channel variables, to assign a specific level of credit
risk to the application at the time of initial credit decisioning. A score is assigned to each application and governs the loan terms offered to applicants who have been conditionally approved for a
loan. For example, higher risk applicants may not be eligible to defer principal and interest while in school. Our on-line application also provides a qualified applicant with some ability
to configure loan terms, showing the financial effects of the choices using a real-time repayment calculator. The product can be structured to offer lenders either a "make and hold" or
"make and sell" loan program. In "make and hold" loan programs, lenders finance the loans on their balance sheet and generally intend to continue to hold the loans through the scheduled repayment,
prepayment or default. In "make and sell" loan programs, lenders intend to hold the loans on their balance sheet for some limited period of time before disposing of the loans in a capital markets
transaction. We believe that the loans generated through the Monogram loan product will generally have shorter repayment terms, higher cosigner participation rates, and an increased percentage of
borrowers making payments while in school compared to our past loan products. The success of the new product will be the key driver of our future financial results and will be critical to growing and
diversifying our revenues and client base. In light of regulatory constraints, Union Federal is not expected to participate as a program lender during fiscal 2010.

Historically,
the driver of our results of operations and financial condition has been the volume of private education loans for which we provided outsourcing services from loan
origination through securitization. In addition, asset-backed securitizations were our sole source of permanent financing for our clients' private education loan programs, and substantially all of our
income was derived from such securitizations. Securitization refers to the technique of pooling loans and selling them to a special purpose, bankruptcy remote entity, typically a trust, which issues
bonds backed by those loans to investors. In the past, we offered our clients a fully integrated suite of outsourcing services, but we did not charge separate fees for many of those services. Although
we provided those various services without charging a separate fee, or at "cost" in the case of loan processing services, we generally

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entered
into agreements with the lender clients giving us the exclusive right to securitize the private education loans that they did not intend to hold. For our past securitization services, we are
entitled to receive from the trusts additional structural advisory fees over time and, in the case of certain trusts, residual cash flows.

We
have been unable to access the securitization market since September 2007 as a result of market disruptions that began in the second quarter of fiscal 2008, accelerated during the
third quarter of fiscal
2008 and, to a lesser extent, persist as of November 6, 2009. In addition, our lender clients previously had the opportunity to mitigate their credit risk through a loan repayment guaranty by
The Education Resources Institute, Inc., or TERI, and we historically received reimbursement from TERI for outsourced loan processing services we performed on TERI's behalf. In April 2008, TERI
filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, or Bankruptcy Code. We refer in this quarterly report to TERI's bankruptcy proceedings as the TERI
Reorganization. The TERI Reorganization, together with capital markets dislocations, has had, and will likely continue to have, a material negative effect on securitization trusts' ability to realize
guaranty obligations of TERI, our client relationships, our facilitated loan volumes, the value of our service receivables and our ability to realize fully the cost reimbursement obligations of TERI.

As
a result, we took several measures in fiscal 2009 to adjust our business model. Our new Monogram product offering has been designed to reduce our dependence on the securitization
market in order to generate revenue, as well as our dependence on credit enhancement. We have changed our fee structure with respect to our services and developed additional services that would
provide us with fee-based income as our services are provided. In addition, in August 2009, we received $132.7 million in gross proceeds from an equity financing, and we greatly
reduced our annual cash expenditure requirements through reductions in headcount, consolidation of office space and other cost saving initiatives that began in fiscal 2008. Finally, as of
March 31, 2009, we sold the trust certificate of NC Residuals Owners Trust, which represented our residual interests in trusts holding substantially all of the TERI-guaranteed
private education loans that we previously securitized. We refer to this trust certificate in this quarterly report as the Trust Certificate, and to these trusts as the NCSLT Trusts. We remain focused
on preserving capital and maximizing liquidity in these challenging market conditions.

Recent Developments

We have summarized below certain recent developments affecting our business since the beginning of the first quarter of fiscal
2010:



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Business Trends and Uncertainties

Beginning in late 2007 and continuing through the date of this quarterly report, general economic conditions in the United States have
deteriorated. Our business has been and continues to be materially adversely impacted by these conditions, and our inability to access the securitization markets as a result of market disruptions
continued during the first quarter of fiscal 2010. In addition, credit performance of consumer-related loans generally, and the private education loans held by us and the various securitization trusts
we have facilitated, continued to be adversely affected by general economic conditions, including increasing unemployment rates. The interest rate, economic and credit environments may continue to
have a material negative effect on the estimated value of our service receivables and loans held for sale.

During
the first quarter of fiscal 2010, we increased the weighted-average gross default rate assumptions used to estimate the fair value of our additional structural advisory fees,
asset servicing fees and residuals receivables by 111 basis points to 20.11%. Since June 30, 2006, we have increased the projected weighted-average gross default rates for the NCSLT Trusts by
1,089 basis points. The portfolio of private education loans held by us has also experienced a higher level of defaults than we originally projected. During the first quarter of fiscal 2010,
prepayment rates, however, remained at a rate that is extremely low by historical standards. During the first quarter of fiscal 2010, we recorded an unrealized loss of $123.9 million in
connection with write-downs of our loans held for sale to their estimated fair value. We recorded aggregate losses during fiscal 2009 of $138.2 million in connection with similar write-downs.
We may record a realized or unrealized loss in the future in connection with the remaining portfolio of private education loans held for sale.

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



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In
addition, rating agencies have expressed concerns that direct to consumer loans will experience higher levels of defaults than school channel loans. A significant portion of the loans
that we have facilitated for clients in the past, and all of our private education loans held for sale at September 30, 2009, are direct to consumer loans. We believe, however, that conditions
in capital markets began to improve during the first quarter of fiscal 2010, including additional issuances of private education loan ABS pursuant to the TALF program. If we are able to facilitate the
securitization of private education loans in the future, we expect the structure and economics of such a transaction to be substantially different from our past transactions. We expect lower revenues
and additional cash requirements on our part and limited, if any, demand for subordinate tranches of ABS.

In
July 2009, Union Federal agreed pursuant to the Order to submit to the OTS a new business plan for Union Federal covering fiscal years 2010, 2011 and 2012. We are uncertain whether
the OTS will approve the new business plan that we proposed for Union Federal, including the extent to which Union Federal will be permitted to originate private education loans. See Note 13,
"Union Federal Regulatory MattersSupervisory Agreement and Order to Cease and Desist."

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Application of Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America, or GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities at the
report date and the reported amounts of income and expenses during the reporting periods. We base our estimates, assumptions 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, "Summary of Significant Accounting Policies," in the notes to our audited consolidated financial statements
for the fiscal year ended June 30, 2009, which are included under Item 8 of our annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC,
on September 3, 2009. 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, such as those involving recognition of service revenues and the valuation of our service receivables and portfolio of private education loans held for
sale. We regard an accounting estimate or assumption underlying our financial statements to be a "critical accounting estimate" where:



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
securitization-related
revenue and receivables and asset servicing revenue and receivables, as described below, fit the definition of critical accounting estimates. We also consider our policy with respect to the
determination of whether or not to consolidate the financial results of the securitization trusts that we facilitate and the valuation of the portfolio of private education loans held for sale to be
critical accounting policies.



We have historically structured and facilitated securitization transactions for our clients through a series of bankruptcy remote,
special purpose statutory trusts. Through the securitization process, the trusts obtain private education loans from the originating lenders or their assignees, which relinquish to the trust their
ownership interest in the loans. The debt instruments that the trusts issue to finance the purchase of these private education loans are obligations of the trusts, rather than our obligations or those
of originating lenders or their assignees. We have received several types of fees in connection with our past securitization services:



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As
required under GAAP, we recognize the fair value of additional structural advisory fees and residuals as revenue at the time the securitization trust purchases the private education
loans, as they are deemed to be earned at the time of the securitization but 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 earn
asset servicing fees as the services are performed; however, the receipt of the fees is contingent on distributions available to the owners of the residual interests of the trusts subject to these
services. Under GAAP, we are required to estimate the fair value of the additional structural advisory fees, asset servicing fees and residuals receivables as if they are investments in securities
classified as trading, similar to retained interests in securitizations. In subsequent periods, we reevaluate the estimated fair value of these receivables and recognize the change in fair value as
servicing revenue in the period in which the change in estimate occurs.

Because
there are no quoted market prices for our additional structural advisory fees, asset servicing fees or residuals receivables, we use discounted cash flow modeling techniques and
the following key assumptions to estimate their values:



We
base our estimates on our proprietary historical data, publicly available third-party data and our industry experience, adjusting for specific product and borrower characteristics
such as loan type and borrower creditworthiness. We also monitor trends in loan performance over time and make adjustments we believe are necessary to value properly our receivables balances at each
balance sheet date.

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At September 30, 2009 and 2008, the aggregate outstanding principal balance of the debt issued by the NCSLT Trusts was $12.6 billion and
$13.5 billion, respectively. The underlying assets in the NCSLT Trusts were TERI-guaranteed private education loans, of which approximately 32.8% were in deferment, 6.4% were in
forbearance and 60.8% were in repayment status as of September 30, 2009. Approximately 88.1% of the loans in repayment status as of September 30, 2009 were current, 4.9% were between 31
and 90 days past due, 3.8% were between 91 and 180 days past due, and 3.2% were greater than 180 days past due. As of September 30, 2009, the cumulative gross default rate
with regard to loans in, and loans that have previously been in, repayment status in the NCSLT Trusts was 12.2%. We have posted to our website, and filed as exhibit 99.1 to this quarterly
report, static pool data as of September 30, 2009, including original pool characteristics and borrower payment status, delinquency, cumulative loss and prepayment data as of
September 30, 2009 for certain securitization trusts that we have facilitated. We have also posted to our website, and filed as exhibit 99.2 to this quarterly report, a supplemental
presentation of certain historical trust performance data, including parity ratios by trust, net recovery rates by year of default, FICO score ranges by year of loan disbursement since fiscal 2005 and
by channel, six-month rolling prepayment rates and payment status by trust.

Because
our fair value estimates rely on quantitative and qualitative factors, including historical data and macroeconomic indicators to predict prepayment, default and recovery rates,
management's ability to determine which factors should be more heavily weighted in our estimates, and our ability to accurately incorporate those factors into our loan performance assumptions, are
subjective and can have a material effect on our valuations.

Default and Recovery Rates.The net default rate is calculated as the weighted average for all of our private education loan
securitization trusts
of:



A
securitization trust may have a life of over 20 years, based on a lifecycle for private education loans that includes borrowers' in-school deferment, grace,
repayment and forbearance periods. Higher levels of loan defaults are generally expected to occur in the early years of a trust, as loans enter repayment. Recoveries on defaulted loans are expected to
lag defaults by months or years, with cumulative recoveries increasing gradually over an extended period of time later in the life of a trust. As a result, at a single point in time, particularly
early in the life of a trust, a trust may experience an actual net default rate that is higher than the estimated endpoint net default rate for that trust. For the same reason, we assess the actual
current net default rates against an expected default timing curve, which reflects the expected speed of defaults over the life of a trust. The shape of the default curve is based in part on our
proprietary database of loan performance information, reflecting data through a variety of economic cycles, and influences the estimated endpoint defaults, which in turn influence the net default
rate.

Prepayment Rates.We compute prepayments as the difference between the total amount of payments, both principal and interest, received
from or on
behalf of a borrower and the amount of principal and interest billed to the borrower during the same period. To convert this dollar amount into a rate, we divide these amounts by the dollar amounts
that could possibly have been repaid during that period and annualize the result. This approach results in a rate that is expressed as a conditional prepayment rate, or CPR. The CPR is essentially an
estimate of the likelihood that a loan will be prepaid during a period, given that it has not previously defaulted or been prepaid in full. The prepayment rate can be significantly different at
different points in time over the life of a trust, or any

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pool
of loans, because the prepayment rate for a given cohort of loans will vary with their seasoning, credit quality, prevailing interest rates and availability of consumer credit.

Discount RateAdditional Structural Advisory Fees.We base the discount rate that we use to estimate the fair value of our
additional
structural advisory fees on a spread over the 10-year U.S. Treasury Bond rate. The spread represents our estimate of the risk premium related to the additional structural advisory fees. In
developing the spreads, we primarily consider yield curves for certain composite indices for subordinated corporate bonds with 15-year maturities, as well as yields, including indicative
yields, in the broader ABS marketplace during the fiscal quarter.

Discount RateAsset Servicing Fees and Residuals.In determining an appropriate discount rate for valuing our asset servicing fees
and
residuals receivables, we consider a number of factors, including market data made available to us on spreads on federally guaranteed loans and private education loans as well as rates used in the
much broader ABS market. We also evaluate yield curves for corporate subordinated debt with maturities similar to the weighted-average life of our residuals.

Auction Rate Note Interest Rates.Prior to fiscal 2009, we facilitated five trusts that issued auction rate notes to finance, in whole
or in part,
the purchase of private education loans. Interest rates for the auction rate notes are determined from time to time at auction. We use a spread over one-month LIBOR to project the future
cost of funding of the auction rate notes issued by each such trust. The spread over LIBOR used to estimate the future cost of funding was based on current rates paid by the trusts.

During
fiscal 2008 and fiscal 2009, failed auctions occurred and persisted with respect to auction rate notes issued by each of the five securitization trusts. As a result of the failed
auctions, the auction rate notes bear interest at a contractual maximum spread over one-month LIBOR, based on the ratings assigned to the notes by certain rating agencies. During fiscal
2009, the ratings assigned to the auction rate notes were downgraded, resulting in an increase in that maximum spread. In addition, the insurance financial strength rating assigned to Ambac Assurance
Corporation, which provides credit enhancement for certain auction rate notes, was downgraded in fiscal 2009, resulting in further downgrading of the ratings assigned to certain of our auction rate
notes. We assumed at September 30, 2009 that all auction rate notes would continue to bear interest at their current maximum spreads until their expected maturity dates.

If
auctions do not fail, but the interest rate determined pursuant to the auction procedures exceed the maximum rate, the interest rate for the applicable interest period would be set at
the maximum rate. The amount of the "excess" interest would accrue as "carryover interest." A noteholder's right to receive carryover interest is superior to our additional structural advisory fees,
asset servicing fees and residual interest in the applicable securitization trust. As a result, our projected cash releases from securitization trusts that have issued auction rate notes, including
the timing of receipt, could be
materially adversely affected. In estimating the fair value of our service receivables, we have assumed that no trust will accrue carryover interest.

Forward LIBOR Curve.LIBOR is the underlying rate for most of the trusts' assets and liabilities and can have a significant effect on
the cash flows
generated by each trust. Changes in the forward LIBOR curve affect the principal balances of education loans held by the trusts, particularly as interest is capitalized during loan deferment, which
affects the net interest margin that the trust generates. In addition, certain trusts have issued a tranche of ABS that bears a fixed interest rate. A decrease in the forward LIBOR curve may result in
a reduced spread on the fixed-interest tranche, which in turn decreases the estimated fair value of our service receivables. Significant changes to the forward LIBOR curve can also affect the
estimated fair value of our additional structural advisory fees and asset servicing fees, which bear interest at the rate of LIBOR plus a spread to the extent such fees are accrued but unpaid by the
trusts.

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TERI's Obligation to Pay Claims.The indentures relating to the securitization trusts specify certain circumstances, which we refer to
as Trigger
Events, upon the occurrence of which payments that would otherwise be due in respect of additional structural advisory fees and residuals instead be directed to the holders of the notes issued by the
trusts until the conditions causing the Trigger Event cease to exist or all notes, and related interest, are paid in full. Under the indentures, a Trigger Event generally occurs when the cumulative
gross defaults of loans held by such trust exceed a specified level. As a result of the TERI Reorganization, in the third quarter of fiscal 2008, we adjusted our assumptions to assume that amounts
available to pay a trust's default claims will be limited to amounts available from the trust's Pledged Account, assuming that future recoveries on defaulted loans would replenish such Pledged
Account. Previously, we assumed that TERI would pay default claims on a timely basis and that no default Trigger Event would occur. Although the overall expected cash flows generated by the trusts
improved as a result of the higher priority of repayment of the notes, the expected timing of cash payments to us with respect to additional structural advisory fees and residuals was delayed,
reducing their estimated fair value.

In
January 2009, the Creditors Committee filed an adversary complaint in the Bankruptcy Court alleging that certain security interests granted by TERI to the trusts are unperfected or
may otherwise be avoided under the Bankruptcy Code. In particular, the complaint alleges that the trusts do not have enforceable rights to future recoveries on defaulted loans owned by TERI with an
aggregate principal and accrued interest balance of more than $600 million as of September 30, 2009. In September 2009, the Creditors Committee and TERI filed a proposed joint plan of
reorganization that included a proposed settlement of the adversary complaint. The proposed joint plan of reorganization, which was amended in October 2009, generally proposes that defaulted loans
owned by TERI with an aggregate
principal balance of more than $350 million, as well as rights to future recoveries on such loans, be transferred to the trusts and defaulted loans with an aggregate principal balance of more
than $250 million, as well as rights to future recoveries on such loans, be transferred to a liquidating trust for the benefit of TERI's unsecured creditors, including the trusts. We are
uncertain whether the terms of the proposed settlement will be further amended and whether the trusts will vote to approve the proposed plan of reorganization and thereby opt-in to the
proposed settlement. We did not adjust our assumptions regarding the trusts' security interests as of September 30, 2009. We continued to assume that the trusts had valid and enforceable
security interests in, among other collateral, all future recoveries on defaulted loans owned by TERI and that such recoveries would be available to replenish the trusts' Pledged Accounts.



Loans used to secure an education loan warehouse facility provided by a third-party lender are subject to call provisions by the
third-party lender; therefore, we do not have the ability to hold the loans to maturity. In addition, we classified Union Federal's education loan portfolio as held for sale because we were actively
seeking a buyer of the portfolio. Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is evaluated on a quarterly basis.

When
available, the fair value is based on quoted market values. Prior to the first quarter of fiscal 2010, market prices were not available for our loans held for sale, and we
relied on the assumptions noted below to estimate the fair value of such loans. Subsequent to September 30, 2009, we received a bid for a private sale of all loans less than 31 days
delinquent held by Union Federal. This bid served as the basis of our fair value estimate of all such loans held at September 30, 2009, adjusted, as appropriate, for differences in loan
performance of the loans retained versus those sold. In the absence of readily determined market values, the fair value is estimated by management based on the present value of expected future cash
flows from the loans held for sale. These estimates are based on historical and third-party data and our industry experience with the assumptions for, among other things, default rates, recovery rates
on defaulted loans, prepayment rates, the proportion of buyer's equity to financing and the corresponding weighted-average cost of capital commensurate with the risks

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involved.
If readily determined market values became available, or if actual performance were to vary appreciably from management's estimates, the fair value of the loans would need to be further
adjusted, which could result in material differences from the recorded carrying amounts. Changes in the carrying value of loans held for sale are recorded as a separate component of
non-interest expense.

Loans
greater than 120 days delinquent are fully reserved. If a private education loan is delinquent by greater than 90 days, the accrual of interest income on that loan is
discontinued until the loan is
brought current or paid. Delinquency status is based on the contractual terms of the credit agreement between the lender and the borrowers.

On
October 16, 2009, Union Federal sold a portion of its portfolio of private education loans held for sale. See Note 14, "Subsequent EventsDisposition of
Union Federal Private Education Loans," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional
information.



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 LIBOR, would have a negative effect on the value of our additional structural advisory fees as well as our asset servicing fees receivable and our loans
held for sale. Private education loan prepayments include either full or partial payments by a borrower in advance of the maturity schedule specified in the credit agreement. If amounts in the Pledged
Accounts were unavailable to pay the trusts' default claims or if recoveries on defaulted loans were not available in whole or in part to replenish such Pledged Accounts, as a result of a plan of
reorganization or otherwise, or if net defaults increase beyond the level of expected third-party reimbursement assumptions, then these changes will have an additional negative effect on the value of
these assets.

The
following table shows our loan performance and discount rate assumptions and additional structural advisory fee balances at September 30, 2009 and estimated changes that would
result from changes in our assumptions. The effect on the fair value of the structural advisory fees are 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 September 30, 2009.

The
sensitivities presented below are hypothetical and should be used with caution. The effect of each change in assumption must be calculated independently, holding all other
assumptions constant. Because the key assumptions may not in fact be independent, the net effect of simultaneous adverse

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changes
in key assumptions may differ materially from the sum of the individual effects calculated below.

Percentage change in assumptions

Management
assumptions and
receivables
balance at
September 30, 2009

Percentage change
in assumptionsStructural advisory fees

Down 20%

Down 10%

Up 10%

Up 20%(dollars in thousands)Default rate:Management assumption(1)


18.19
%

19.16
%

20.11
%

21.04
%

21.95
%Total structural advisory fees

$
57,242

$
56,368

$
55,469

$
54,551

$
53,621Change in receivables balance


3.20
%

1.62
%




(1.65
)%

(3.33
)%Default recovery rate:Management assumption


32.00
%

36.00
%

40.00
%

44.00
%

48.00
%Total structural advisory fees

$
54,099

$
54,892

$
55,469

$
56,009

$
56,505Change in receivables balance


(2.47
)%

(1.04
)%




0.97
%

1.87
%Annual prepayment rate:Management assumption


6.41
%

7.21
%

8.01
%

8.81
%

9.61
%Total structural advisory fees

$
56,626

$
56,039

$
55,469

$
54,929

$
54,446Change in receivables balance


2.09
%

1.03
%




(0.97
)%

(1.84
)%Discount rate:Management assumption


9.04
%

10.17
%

11.30
%

12.44
%

13.57
%Total structural advisory fees

$
73,321

$
63,759

$
55,469

$
48,279

$
42,039Change in receivables balance


32.18
%

14.95
%




(12.96
)%

(24.21
)%




Change in assumption



Change in assumptionDown 200
basis points

Down 100
basis points

Receivables
balance

Up 100
basis points

Up 200
basis points(dollars in thousands)Forward LIBOR rates:Total structural advisory fees

$
45,574

$
50,078

$
55,469

$
61,521

$
68,173Change in receivables balance


(17.84
)%

(9.72
)%




10.91
%

22.90
%


(1)The
percentage change in assumptions applies to future projected defaults in the portfolio after taking into account actual defaults occurring in the
portfolio through September 30, 2009. As a result, application of the nominal 10% or 20% variation results in a change in the management assumption that is less than 10% or 20% of 20.11%.




Our consolidated financial statements include the accounts of FMC and its subsidiaries, after eliminating inter-company accounts and
transactions. We have not consolidated the financial results of the securitization trusts purchasing loans that we have facilitated.

At
September 30, 2009 and 2008, each of the securitization trusts created after January 31, 2003 has met the criteria to be a qualified special-purpose entity, or QSPE, as
defined by Accounting Standards Codification, or ASC, 860-40,Transfers and Servicing- Transfers to Qualifying Special Purpose Entities,
which we refer to as ASC 860-40. Accordingly, we did not consolidate these existing securitization trusts in our financial statements. In addition, the securitization trusts created prior
to January 31, 2003 in which we hold a variable interest that could result in us being considered the primary beneficiary of such trust, have been amended in order for them to be considered
QSPEs.

On
June 12, 2009, the Financial Accounting Standards Board, or FASB, issued Financial Accounting Standard 166,Accounting for Transfers of Financial
Assets-an amendment of FASB Statement

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140,which we refer to as FAS 166, and Financial Accounting Standard 167,Amendments to FASB Interpretation
No. 46(R),which we refer to as FAS 167. Both statements are effective beginning with our financial statements for fiscal year 2011. FAS 166 removes the
concept of a QSPE from ASC 860-40 and removes the exception from consolidation for qualifying special-purpose entities from ASC 810-10, Consolidation, which we refer to as ASC 810-10.

FAS 167
amends ASC 810-10 to require an enterprise to perform an analysis to determine whether the enterprise's variable interest or interests give it a controlling
financial interest in
a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:



As
of November 6, 2009, we are evaluating the impact that adoption of these statements will have on our consolidated financial condition and results of operations.

Results of Operations

Three months ended September 30, 2009 and 2008

Summary

The following table summarizes our results of operations:

Three months ended
September 30,

Change
between periods2009

2008

2009-2008(in thousands, except per share data)Service revenues

$
9,046

$
(92,042
)
$
101,088Net interest income


4,440


7,137


(2,697
)Total revenues


13,486


(84,905
)

98,391Non-interest expense


150,202


60,930


89,272Loss before income taxes


(136,716
)

(145,835
)

9,119Income tax benefit


(42,650
)

(52,938
)

10,288Net loss

$
(94,066
)
$
(92,897
)
$
(1,169
)Net loss per share, diluted

$
(0.95
)
$
(0.94
)
$
(0.01
)Diluted average shares outstanding


99,156


98,964


192


On
a fully diluted basis, we reported a net loss per share of $0.95 for the first quarter of fiscal 2010, compared with a net loss per share of $0.94 in the first quarter of fiscal 2009.
The higher net loss per share for the first quarter of fiscal 2010 is attributable to higher write-downs on loans held for sale, offset in large part by lower write-downs of service revenue
receivables. We did not facilitate any new securitization transactions in the first quarters of fiscal 2010 or 2009. We ceased providing loan processing services to TERI and marketing coordination
services to many clients in fiscal 2009, causing a significant decrease in our cost reimbursement fee revenues and the expenses associated with them. However, we had an increase in our stand-alone
fee-for-service revenues over the two periods. In total, revenues in the first quarter of fiscal 2010 increased by $101.1 million from the first quarter of fiscal 2009.
Total non-interest expense increased $89.3 million over the same period, reflecting an increase in the write-down of loans held for sale of $123.9 million,
partially offset by lower compensation and benefits and general and administrative expenses.

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Service Revenues

The following table summarizes the changes in our service revenues:

Three months ended
September 30,

Change
between periods2009

2008

2009-2008(in thousands)

(in thousands)Additional structural advisory feestrust updates

$
363

$
(17,890
)
$
18,253Asset servicing fees:Fee income


2,102





2,102Fee update


160





160Total asset servicing fees


2,262





2,262Residualstrust updates


824


(80,156
)

80,980Administrative and other fees


5,597


6,004


(407
)Total service revenues

$
9,046

$
(92,042
)
$
101,088


Additional
structural advisory fees, asset servicing fees and residuals receivables represent the estimated fair value of service receivables expected to be collected over the life of
the various separate securitization trusts that have purchased private education loans facilitated by us. The fees are expected to be paid directly from the various securitization trusts.



We are entitled to receive additional structural advisory fees over time, based on the amount of loans outstanding in the trusts from
time to time over the life of the trusts, with no further requirement for service on our part. In the case of the NCSLT Trusts, this portion accumulates monthly in each trust from the date of a
securitization at a rate of 15 to 30 basis points per year plus accrued interest on earned but unpaid fee income. We generally become entitled to receive this additional portion, plus interest, once
the ratio of assets to liabilities in the particular NCSLT Trust, which we refer to as the Parity Ratio, reaches a stipulated level, which ranges from 103.0% to 105.5%. The stipulated Parity Ratio
levels may be raised if certain trust characteristics change. The level applicable to a particular trust is determined at the time of securitization. Actual Parity Ratios at September 30, 2009
ranged from 91.28% to 98.00%. Please refer to exhibit 99.2 to this quarterly report for additional information on actual trust Parity Ratios as of September 30, 2009.

We
record the net present value of the future cash flows due to us from the trusts, or estimated fair value, of these fees as additional structural advisory fee receivables on the
balance sheet. Additional structural advisory fees recognized in the income statement represent the change in fair value during the period in the structural advisory fee receivable, less cash
received, if any. To estimate the amount and timing of the cash flows of these fees, we apply a discount rate to the estimated amount and timing of cash flows of each trust, taking into consideration
default and recovery rates, prepayments, recoverability from third-party guarantors, operating expenses of the trust and trust performance assumptions, the trend of contractual and market interest
rates over the life of the loan pool, the cost of funding outstanding auction rate notes, and the probability of delays due to the existence of Trigger Events, which generally occur when the
cumulative gross defaults of loans held by a trust exceed a specified level. These assumptions are based on historical and third-party data and our industry experience.

On
a quarterly basis, we update our estimate of the fair value of our additional structural advisory fee receivable. We expect, as of September 30, 2009, to begin to receive these
fees approximately five to 22 years after the date of a particular securitization transaction. However, for many of the trusts, the

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bankruptcy
filing of their loans' primary guarantor, TERI, or cumulative gross default rates have resulted in Trigger Events. These events may significantly delay the receipt of fees. We estimate the
trend of interest rates over the life of the loan pool using an implied forward LIBOR curve, and an assumed spread between LIBOR and auction rates, to estimate trust cash flows.

For
the first quarter of fiscal 2010, we recorded revenue from trust updates for additional structural advisory fees of $0.4 million, compared to losses from trust updates of
$17.9 million for the first quarter of fiscal 2009. The improvement is largely attributable to the decrease in the discount rate in the first quarter of fiscal 2010 as a result of the
tightening of credit spreads in the current interest rate environment, compared with widening of credit spreads coupled with high default experience in the first quarter of fiscal 2009. See
"Service Revenues Receivables Assumptions" below for a discussion of each assumption.

The
following table summarizes the changes in our estimate of the fair value of the additional structural advisory fees receivable:

Three months ended
September 30,2009

2008(in thousands)Fair value at beginning of period

$
55,130

$
113,842Cash received from trust distributions


(24
)

(1,477
)Trust updates:Passage of timefair value accretion


1,746


2,789Decrease (increase) in discount rate assumption


7,453


(14,066
)Increase in timing and average default rate


(1,729
)

(3,133
)Decrease in forward LIBOR curve


(2,048
)

(4,135
)Other factors, net


(5,059
)

655Net change from trust updates


363


(17,890
)Fair value at end of period

$
55,469

$
94,475




Historically, as we facilitated the securitizations of loan pools, we were entitled to receive a portion of the residual cash flows, if
any, generated by the various securitization trusts that purchased the loans. We recorded the estimated fair value of these residual cash flows on our balance sheet as residuals receivables. Residual
fees recognized in our statement of operations represent the change during the period in the estimated fair value of residuals receivable. The estimated fair value is based on the net present value of
the future cash flows due to us from the trusts related to our residual interest ownerships.

NC
Residuals Owners Trust, a statutory trust, directly or indirectly owned certain certificates of beneficial ownership interests, or residuals, of the NCSLT Trusts. As a result of our
sale of the Trust Certificate, we are no longer entitled to the residual cash flows of the NCSLT Trusts, although we continue to be entitled to receive residuals from other trusts. The purchasers of
the Trust Certificate agreed to bear all future federal and state tax liabilities associated with the NCSLT Trust residuals.

During
the first quarter of fiscal 2010, we recorded revenue from residuals receivables of $0.8 million, compared with losses of $80.2 million in the first quarter of
fiscal 2009. The revenue in the first quarter of fiscal 2010 reflects the decrease in the discount rate used to estimate the fair value at September 30, 2009. Residuals receivables for the
first quarter of fiscal 2010 relate to residuals from trusts other than the NCSLT Trusts. Losses in the first quarter of fiscal 2009 reflected changes we made to assumptions regarding discount rates,
prepayment rates and net default rates used to estimate the

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value
of our residuals receivables to all trusts, prior to the sale of the Trust Certificate. See "Service Revenues Receivables Assumptions" below for a discussion of each assumption.

The
following table summarizes the changes in our estimate of the fair value of the residuals receivables:

Three months ended
September 30,2009

2008(in thousands)Fair value at beginning of period

$
9,960

$
293,255Trust updates:Passage of timefair value accretion


426


10,931Decrease (increase) in discount rate assumption


1,176


(43,643
)Decrease in forward LIBOR curve


22


(5,984
)Increase in timing and average default rate





(40,728
)Other factors, net


(800
)

(732
)Net change from trust updates


824


(80,156
)Fair value at end of period

$
10,784

$
213,099


We
entered into an asset servicing agreement, or Asset Services Agreement, in April 2009 pursuant to which we have agreed to provide certain services to the purchasers of the Trust
Certificate to support their ownership of the NCSLT Trust residuals, including analysis and valuation optimization services and services relating to funding strategy. As compensation for our services,
we are entitled to an asset servicing fee, calculated as a percentage of the aggregate outstanding principal balance of loans outstanding in the NCSLT Trusts. Although this fee is earned monthly, we
will not receive any asset servicing fees until the purchasers have begun to receive residual cash flows. We earned asset servicing fees during the first quarter of fiscal 2010 of $2.3 million.



Administrative and other fees decreased to $5.6 million in the first quarter of fiscal 2010 from $6.0 million in the
first quarter of fiscal 2009. Administrative and other fees include trust administration fees generated from the daily management and information gathering and reporting services for parties related
to securitization trusts, stand-alone fee-based loan origination, processing fees and loan portfolio default prevention services. During the first quarter of fiscal 2010, our
administrative and other fees included $0.2 million in outsourcing fees from TERI, compared to $2.4 million in outsourcing fees from TERI in the first quarter of fiscal 2009. During both
periods, these fees related to certain transition services provided to TERI in connection with the TERI Reorganization following termination of our master servicing agreement effective May 31,
2008, and we expect them to continue to diminish. We recorded $1.9 million of revenue related to default prevention services provided to the NCSLT Trusts during the first quarter of fiscal
2010, which partially offset the decrease in fees from TERI period over period.

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Service Revenues Receivables Assumptions

The following table shows the approximate weighted-average assumptions for discount rates and loan performance:

At and for the three months ended
September 30,2009

2008Rate

Rate Change
for the
Quarter

Rate

Rate Change
for the
QuarterDiscount rateadditional structural advisory fees


11.30
%

(1.23
)%

11.07
%

1.35
%Discount rateasset servicing fees and residuals


16.00


(1.00
)

16.35


1.47Gross default rate


20.11


1.11


15.96


1.13Net default rate


12.07


0.67


8.30


0.59Recovery rate


40.00





48.00


Prepayment rate


8.01





8.40





Discount RateAdditional Structural Advisory Fees.We base the discount rate that we use to estimate the fair value of our
additional
structural advisory fees on a spread over the 10-year U.S. Treasury Bond rate. During the first quarter of fiscal 2010, we decreased the spread by 100 basis points, to 800 basis points. In
decreasing the spread, we considered, among other things, decreasing yield curves for certain composite indices for B-rated corporate bonds with 12- and 15-year
maturities, as well as decreases in the broader ABS marketplace during the quarter. In addition, the 10-year U.S. Treasury Bond rate decreased by 23 basis points during the quarter, to
3.30% at September 30, 2009. As a result, we applied a discount rate of 11.30% for purposes of estimating the fair value of the additional structural advisory fees, which resulted in an
increase of $7.5 million during the first quarter of fiscal 2010.

At
September 30, 2008, due to the continued dislocation in the debt capital markets and the private education loan securities sector, we increased the spread over the
10-year U.S. Treasury Bond rate by 150 basis points, to 725 basis points. During the first quarter of fiscal 2009, the 10-year U.S. Treasury Bond rate decreased by 15 basis
points, to 3.82%. As a result, we applied a discount rate of 11.07% for purposes of estimating the fair value of the additional structural advisory fees, which resulted in a net decrease of
$14.1 million during the first quarter of fiscal 2009.

Discount RateAsset Servicing Fees and Residuals.In determining an appropriate discount rate for valuing our asset servicing fees
and
residuals receivables, we consider a number of factors, including market data made available to us on spreads on federally guaranteed loans and private education loans, as well as rates used in the
much broader ABS market. We also evaluate yield curves for corporate subordinated debt with maturities similar to the weighted-average life of our residuals receivables. During the first quarter of
fiscal 2010, due to tightening of credit spreads in the debt
capital markets, we decreased our discount rate by 100 basis points, to 16.00%, for purposes of estimating the fair value of our asset servicing fees and residuals receivables. The decrease in the
discount rate resulted in an increase in residuals receivables of $1.2 million during the quarter.

During
the first quarter of fiscal 2009, due to widening credit spreads in the debt capital markets, we increased our discount rate by 147 basis points, to 16.35%. The increase in the
discount rate resulted in a decrease in the estimated fair value of our residuals receivables of $43.6 million during the quarter.

Default and Recovery Rates.During the first quarter of fiscal 2010, we increased the weighted-average gross default rate assumptions
used to
estimate the fair value of our service receivables from 19.00% to 20.11%. The 111 basis points increase reflects actual default experience in excess of

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projections.
The increase in the gross default rate resulted in an increase in the assumed weighted-average net default rate from 11.40% to 12.07% during the first quarter of fiscal 2010, with no
changes made to the assumptions for the recovery rate. The increase in the net default rate resulted in a decrease in the estimated fair value of our additional structural advisory fees receivable of
$1.7 million during the quarter. In addition, during the quarter we recorded a decrease of $4.7 million in the estimated fair value of additional structural advisory fees for potential
deviations in the collateral performance of securitized loans. Changes to the net default rate did not have a material impact on the estimated fair value of our residuals receivables.

During
the first quarter of fiscal 2009, we increased the net default rate as a result of higher default rates experienced by the trusts. The increase in the net default rate resulted in
a decrease in the estimated fair value of our additional structural advisory fees receivable of $3.1 million, and a decrease in the estimated fair value of our residuals receivables of
$40.7 million, as we did not sell the Trust Certificate until the third quarter of fiscal 2009.

Prepayment Rates.In response to a historically low prepayment rate, the current interest rate environment and limited availability of
consumer
credit, we adjusted our prepayment assumption during the first quarter of fiscal 2010 by extending the period during which decreased prepayments were expected to persist. As of September 30,
2009, we continued to assume that the current prepayment rate would persist until September 30, 2010 and then eventually revert to historical norms during the ensuing 12 months. These
changes did not have a material impact on the estimated fair value of our service receivables.

During
the first quarter of fiscal 2009, we did not adjust our assumptions for prepayments rates.

Forward LIBOR Curve.LIBOR is the underlying rate for most of the trusts' assets and liabilities and can have a significant effect on
the cash flows
generated by each trust. Changes in the forward LIBOR curve affect the principal balances of education loans held by the trusts, particularly as interest is capitalized during loan deferment, which
affects the net interest margin that the trust generates. In addition, certain trusts have issued a tranche of ABS that bears a fixed interest rate. A decrease in the forward LIBOR curve may result in
a reduced spread on the fixed-interest tranche, which in turn decreases the estimated fair value of our service receivables. Significant changes to the forward LIBOR curve can also affect the
estimated fair value of our additional structural advisory fees, which bear interest at the rate of LIBOR plus a spread to the extent such fees are accrued but unpaid by the trusts. During the first
quarters of fiscal 2010 and 2009, there was a tightening in the forward LIBOR curves, which resulted in a decrease to our additional structural advisory fees of $2.0 million during the first
quarter of fiscal 2010, and decreases to our additional structural advisory fees and residuals receivables of $4.1 million and $6.0 million, respectively, during the first quarter of
fiscal 2009.

Net Interest Income

Net interest income decreased to $4.4 million in the first quarter of fiscal 2010 from $7.1 million in the first quarter
of fiscal 2009. Interest income from cash equivalents, investments and federal funds sold decreased by $1.2 million, due primarily to sharp reductions in market rates period over period and
lower volume due to the use of cash for operating expenses. Interest income from loans held for sale decreased $2.4 million due to decreases in the LIBOR index rate by more than 200 basis
points. All education loans held for sale are variable-rate loans with interest rates based on a spread over LIBOR. Interest expense decreased period over period by $0.9 million,
due to lower volume and rates for deposits, partially offset by higher rates for the loan warehouse facility triggered by the events of termination in fiscal 2009.

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The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities:

Consolidated average balance sheet, interest and rates  (Taxable-equivalent rates(1))

Three months ended September 30,2009

2008Average
Daily
Balance

Interest

Rate

Average
Daily
Balance

Interest

Rate(in thousands, except rates)AssetsCash and cash equivalents

$
160,711

$
122


0.30
%
$
103,917

$
464


1.77
%Federal funds sold


9,323


2


0.07


89,703


421


1.86Investments


8,063


104


5.13


81,562


578


2.81Loans held for sale


525,147


8,125


6.14


502,900


10,485


8.27Mortgage loans held to maturity


9,763


129


5.24


10,916


151


5.50Total interest-earning assets


713,007


8,482


4.72


788,998


12,099


6.08Cash and cash equivalents


1,157








609Other assets


81,405








444,461Total assets

$
795,569







$
1,234,068LiabilitiesTime and savings accounts

$
102,331

$
471


1.83
%
$
205,205


1,690


3.27
%Money market accounts


49,448


228


1.83


43,636


375


3.41Warehouse line of credit


229,795


3,200


5.53


243,723


2,696


4.39Other interest-bearing liabilities


11,608


143


4.87


14,105


201


5.66Total interest-bearing liabilities


393,182


4,042


4.08


506,669


4,962


3.89Non-interest-bearing deposits


2,043








9All other liabilities


20,901








54,274Total liabilities


416,126








560,952Stockholders' equity


379,443








673,116Total liabilities and stockholders' equity

$
795,569







$
1,234,068Interest-bearing assets

$
713,007







$
788,998Net interest income




$
4,440







$
7,137Net interest margin








2.47
%







3.59
%


(1)Taxable-equivalent
rate is a method of presentation in which the tax savings achieved by investing in tax-exempt securities are included in
interest revenue for purposes of calculating the yield. This method facilitates the comparison of the performance of tax-exempt and taxable securities. The adjustment is computed using a
federal income tax rate of 35%.


Non-interest Expenses

Total non-interest expenses increased by $89.3 million, to $150.2 million, for the first quarter of fiscal
2010, up from $60.9 million for the first quarter of fiscal 2009. Excluding unrealized losses on

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loans
held for sale, non-interest expenses decreased by $13.4 million for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. The following table reflects
non-interest expenses:

Change between periodsThree months ended September 30,From 2008
to 20092009

2008(in thousands, except employee data)

(in thousands, except employee data)Compensation and benefits

$
8,137

$
15,257

$
(7,120
)General and administrative expenses:Depreciation and amortization


3,693


5,055


(1,362
)Third-party services


6,090


7,547


(1,457
)Occupancy and equipment


6,336


4,960


1,376Marketing coordination


14


3,428


(3,414
)Other


2,006


3,457


(1,451
)Subtotalgeneral and administrative expenses


18,139


24,447


(6,308
)Unrealized losses on loans held for sale


123,926


21,226


102,700Total non-interest expenses

$
150,202

$
60,930

$
89,272Total number of employees at fiscal quarter-end


223


333


(110
)


Compensation and Benefits Expenses.Compensation and benefits decreased to $8.1 million for the first quarter of fiscal 2010,
compared with
$15.3 million during the first quarter of fiscal 2009. The decrease between periods was primarily the result of a decrease in the number of employees and a decrease in severance accruals. We
reduced headcount by 110 employees between September 30, 2008 and 2009.

General and Administrative Expenses.General and administrative expenses decreased to $18.1 million during the first quarter of
fiscal 2010
from $24.4 million during the first quarter of fiscal 2009, primarily as a result of the termination of many of our marketing coordination contracts with clients and as a result of cost savings
initiatives. Occupancy and equipment expenses in the first quarter of fiscal 2010 included an accrual for unoccupied leased space of $2.7 million, which will reduce our future expenses for
rent.

Unrealized Losses on Loans Held for Sale.We recorded a write-down on loans held for sale of $123.9 million in the first quarter
of fiscal 2010, compared with $21.2 million in the first quarter of fiscal 2009. Subsequent to September 30, 2009, we received a bid for a private sale of all loans less than
31 days delinquent held by Union Federal. This bid served as the basis of our fair value estimate of all such loans held at September 30, 2009, including those securing the education
loan warehouse facility, adjusted for differences in the performance of loans sold versus those retained. On October 16, 2009, Union Federal sold 88% of its portfolio of private education loans
held for sale to a third party for proceeds of $121.5 million.

Income Tax Benefit

Income tax benefit decreased to $42.7 for the first quarter of fiscal 2010 from $52.9 million for the first quarter of fiscal
2009. The decrease in income tax benefit was primarily the result of a decrease in the amount of the loss before income tax expense between periods. In addition, during the first quarter of fiscal
2010, our effective tax rate, or the income tax benefit as a percentage of pre-tax loss, decreased to 31.2% from an effective tax rate of 36.3% for the first quarter of fiscal 2009. The
decrease in our effective tax rate was primarily due to certain permanent differences, expense accruals related to unrecognized tax benefits and the establishment of a deferred tax asset valuation
allowance.

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Financial Condition, Liquidity and Capital Resources

We expect to fund our short-term liquidity requirements primarily through cash and cash equivalents and revenues from
operations, and we expect to fund our long-term liquidity requirements through revenues from operations and issuances of common stock, promissory notes or other securities. We expect to
assess our financing alternatives periodically and access the capital markets opportunistically. If our existing resources are insufficient to satisfy our liquidity requirements, or if we were to
enter into a strategic arrangement with another company, we may need to sell additional equity or debt securities. Any sale of additional equity or convertible debt securities may result in additional
dilution to our stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this
additional financing, we may be required to further delay, reduce the scope of, or eliminate one or more aspects of our operational activities, which could harm our business.

Our
actual liquidity and capital funding requirements may depend on a number of factors, including:



Liquidity
would be required for capital expenditures, working capital, business development expenses, costs associated with alternative financing transactions, general corporate
expenses, and maintaining the regulatory capital of our bank subsidiary, Union Federal.

We
had combined cash, cash equivalents, federal funds sold and investments of $187.7 million and $181.5 million, at September 30, 2009 and June 30, 2009,
respectively. On October 1, 2009, we received $176.6 million from the Internal Revenue Service as a refund for federal income taxes previously paid
by us on prior taxable income. On October 16, 2009, Union Federal received $121.5 million from the sale of a portion of its loan portfolio.

Net
cash provided by operating activities was $5.9 million for the first quarter of fiscal 2010, reflecting the receipt of a state tax refund, lower expenses and the timing of
payments on accounts payable. Net cash used in operating activities was $42.3 million in the first quarter of fiscal 2009, reflecting the funding of operations.

Cash
provided by investing activities of $4.7 million for the first quarter of fiscal 2010 was primarily due to the net reduction in federal funds sold,
available-for-sale investments and mortgages held to maturity. Cash used in investing activities of $1.5 million in the first quarter of fiscal 2009 was primarily due to
the net purchases of federal funds sold, partially offset by sales of investments.

Cash
used in financing activities in the first quarter of fiscal 2010 reflected increases in the volume of deposits, partially offset by payments under capital leases and borrowings
under the education loan

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warehouse
facility. Cash provided by financing activities for the first quarter of fiscal 2009 reflected the net issuance proceeds of series B non-voting convertible preferred stock
of $125.9 million.

The
following table summarizes our time deposits >$100,000 by maturity at September 30, 2009:

(in thousands)Within three months

$
36,885Three to six months


1,713Six months to one year


4,589Over one year


689$
43,876


The
maturities of these deposits are not directly indicative of future timing of cash needed for financing activities because they do not take into account the clients that will rollover
their funds into new time deposits or into other types of deposit accounts.

Despite
the uncertainties discussed above, we believe, based on our operating plan, that we have sufficient liquidity to fund our operations through the next twelve months.

Support of Subsidiary Bank

Union Federal is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements would initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on our liquidity.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Union Federal must meet specific capital guidelines that involve quantitative measures of Union Federal's
assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification, however, are also subject to
qualitative judgments by the regulators about components, risk weighting and other factors.

Union
Federal's equity capital was $47.5 million at September 30, 2009, down from $84.3 million at June 30, 2009, due to the write-down of loans
held for sale during the quarter. Quantitative measures established by regulation to ensure capital adequacy require Union Federal to
maintain minimum amounts and ratios of total capital and Tier 1 capital to risk-weighted assets (each as defined in the regulations). See Note 13, "Union Federal Regulatory
MattersRegulatory Capital Requirements," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for
Union Federal quantitative measures. As of September 30, 2009 and June 30, 2009, Union Federal was well capitalized under the regulatory framework for prompt corrective action.

In
July 2009, FMC entered into the Supervisory Agreement and Union Federal consented to the Order, pursuant to which FMC and Union Federal agreed to comply with certain requirements
imposed by the OTS. The Order required Union Federal to, among other things, reduce its concentration of private education loans to Tier 1 capital plus allowances for loan losses below 50% by
December 31, 2009. On October 16, 2009, Union Federal sold approximately 88% of its portfolio of private education loans held for sale as of September 30, 2009 for
$121.5 million in proceeds. As a result of the sale, Union Federal achieved the reduction required by the concentration reduction plan. See Note 13, "Union Federal Regulatory
MattersSupervisory Agreement and Order to Cease and Desist," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this
quarterly report for additional details on the Supervisory Agreement and Order, and Note 14, "Subsequent EventsDisposition of Union Federal Private Education Loans," for additional
details on the sale of the loans.

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The
Supervisory Agreement requires us to, among other things, maintain Union Federal's regulatory capital ratios at the greater of: (1) the capital ratios specified in Union
Federal's business plan approved by the OTS in November 2006, (2) the capital ratios projected in a business plan found acceptable to OTS or (3) the minimum regulatory capital
requirements. The terms of the Supervisory Agreement and the Order will remain in effect until terminated, modified or suspended by the OTS.

Contractual Obligations

As of September 30, 2009, our contractual obligations had not changed materially from those described under the caption
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital ResourcesContractual
Obligations" in our annual report on Form 10-K filed with the SEC for the fiscal year ended June 30, 2009.

Off-Balance Sheet Transactions

We offer outsourcing services in connection with private education loan programs, from program design through securitization of the
loans. We have structured and facilitated the securitization of private education loans for our clients through a series of bankruptcy remote, special purpose trusts.

The
principal uses of these trusts have been to generate sources of liquidity for our clients' and Union Federal's assets sold into such trusts and make available more funds to students
and colleges. See "Executive SummaryApplication of Critical Accounting Policies and EstimatesConsolidation" for a discussion of our determination to not
consolidate these securitization trusts.

Inflation

Inflation was not a material factor in either revenue or operating expenses during the periods presented.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

In the ordinary course of business, we are subject to interest-rate risk and credit risk. Interest-rate risk
applies to all of our interest-bearing assets and liabilities as well as service revenue receivables. Credit risk is primarily related to loans held for sale, service revenue receivables, mortgage
loans, cash equivalents and investments.

Interest-Rate Risk

The interest-rate characteristics of our interest-bearing assets are driven by the nature, volume and duration of our
interest-bearing liabilities. Generally, our interest-bearing liabilities are either variable-rate instruments or are of a short duration and are subject to frequent repricing at maturity.

Less
than 3% of our customer deposits at Union Federal have fixed interest rates in excess of twelve months. Approximately 83% of the deposits have maturities of six months or less.
Deposit pricing is subject to weekly examination by a committee of senior managers from Union Federal and our Finance and Risk and Compliance Departments. The committee considers competitors' pricing,
inflows and outflows of deposit balances, and Union Federal's funding requirements to make pricing decisions on the desired volume of deposits in each given duration and product type.

Outstanding
borrowings under the education loan warehouse facility carry interest at prime plus 2% and reprice daily.

The
frequent repricing of our liabilities drives our investment decisions. All of our private education loans, and approximately 69% of our mortgage loans, have variable interest rates.
Excess

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cash
is primarily invested in money market funds, federal funds sold and U.S. federal agency mortgage-backed securities.

The
matching of the interest-rate characteristics and duration of assets and liabilities mitigates interest-rate risk with respect to net interest revenue.
However, we are still subject to interest-rate risk because as interest rates decline, the spreads between our assets and liabilities may narrow and net interest income may decline.

The
fair value of private education loans held for sale will fluctuate due to variance in prepayments and discount rates, as well as the multi-year forward estimates of the
LIBOR rate, which is the reference rate for the loan assets and assumed borrowings, and buyer's equity assumptions used in our cash flow model. We frequently monitor these assumptions and their effect
on the estimated fair value of these assets. We believe that we have adequately addressed interest-rate risks in our cash flow models.

Credit Risk

We manage cash and investment assets conservatively. The primary objective of our investment policy is the preservation of capital.
Therefore, cash, cash equivalents and short-term investments are placed in highly rated money market funds, federal funds sold or government agency mortgage-backed securities.

Union
Federal offers conventional conforming and non-conforming fixed- and variable-rate first and second residential mortgage loans, as well as commercial real
estate loans. We base our loan underwriting criteria primarily on credit score, consumer credit file information, and collateral characteristics. All mortgage loans are underwritten such that they are
saleable to institutional investors. Union Federal does not offer high loan-to-value second mortgages, option adjustable rate mortgages, or sub-prime mortgage
products.

Private
education loans are not currently offered by Union Federal and therefore we are not adding newly originated loans to the existing portfolio. We use default prevention and early
awareness procedures to mitigate credit risk on the portfolio.

Our
assumptions regarding defaults and recoveries of securitized loans and TERI's obligation to pay claims on defaulted loans affect the expected timing of cash payments to us in respect
of additional structural advisory fees, asset servicing fees and residual cash flows, and our estimates of their fair value.

If
recoveries with respect to a trust's defaulted education loans would be unavailable to replenish the trust's Pledged Account, the estimated value of our additional structural advisory
fees would be reduced. In the context of the TERI Reorganization, the Creditors Committee has alleged that the NCSLT Trusts do not have enforceable rights to future recoveries on defaulted loans with
an aggregate principal and accrued interest balance of more than $600 million as of September 30, 2009. The Creditors Committee's adversary proceeding may result in additional delay and
expense, as well as a significant reduction in collateral available to the trusts. See "Risks Related to the TERI Reorganization" in Part II, Item 1A of this quarterly report for
additional details. In addition, increases in our estimates of defaults, as well as decreases in default recovery rates would have a negative effect on the value of our additional structural advisory
fees and asset servicing fees.

Item 4.    Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of September 30, 2009. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are designed to ensure that

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information
required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules
and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of September 30, 2009, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective
at the reasonable assurance level.

No
change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, occurred during the fiscal
quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1.    Legal Proceedings

In April and May 2008, seven purported class action lawsuits were filed against us and certain of our current and former officers and
certain of our directors in the United States District Court for the District of Massachusetts. The plaintiffs alleged, among other things, that the defendants made false and misleading statements and
failed to disclose material information in various SEC filings, press releases and other public statements. The complaints alleged various claims under the Exchange Act and
Rule 10b-5 promulgated thereunder. The complaints sought, among other relief, class certification, unspecified damages, fees and such other relief as the court
deemed just and proper. In August 2008, the court consolidated these cases and appointed lead plaintiffs and a lead counsel. In November 2008, a consolidated amended complaint was filed by the lead
plaintiffs that contained allegations similar to the earlier complaints. In August 2009, the court issued an order granting our motion to dismiss the plaintiffs' consolidated amended complaint. The
court did not grant plaintiffs leave to re-plead, and the period during which the plaintiffs could appeal the dismissal has expired.

In
addition, in May and June 2008, three federal derivative lawsuits were filed against certain of our current and former officers and directors and nominally against us in the United
States District Court for the District of Massachusetts. The complaints were purportedly brought on our behalf to remedy alleged violations of federal and state law, including violations of the
Exchange Act, breaches of fiduciary duties, waste of corporate assets and unjust enrichment, which allegedly occurred between August 2006 and May 2008 or June 2008, as applicable. The complaints
sought a monetary judgment, injunctive relief, restitution, disgorgement and a variety of purported corporate governance reforms. In August, 2008, the court consolidated the federal derivative cases
and stayed them pending resolution of the purported class actions described above. On October 6, 2009, the court entered an order approving a stipulation for dismissal of the consolidated case
with prejudice. No compensation in any form passed directly or indirectly from any of the defendants to plaintiffs or any of plaintiffs' attorneys.

A
state derivative action was also filed in Massachusetts Superior Court in June 2008. The complaint was purportedly brought on our behalf to remedy alleged violations of federal and
state law, including breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment, which allegedly occurred between August 2006 and June 2008.
The complaint sought a monetary judgment, injunctive relief, restitution, disgorgement, and costs and disbursements of the action. On October 1, 2009, the court entered an order approving a
stipulation for dismissal of the case without prejudice. No compensation in any form passed directly or indirectly from any of the defendants to plaintiffs or any of plaintiffs' attorneys.

Also,
we are involved from time to time in routine legal proceedings occurring in the ordinary course of business. In the opinion of management, there are no matters outstanding that
would have a material adverse impact to our operations or financial condition.

Item 1A.    Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below
in addition to the other information included in this quarterly report. If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer.
In that case, the trading price of our common stock could fall. Although we have grouped risk factors by category, the categories are not mutually exclusive. Risks described under one category may
also apply to another category, and you should carefully read the entire risk factors section, not just any one category of risk factors.

We
have updated certain of the following risk factors to reflect financial and operational information for the most recently completed fiscal quarter, including developments in the TERI

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Reorganization
and actions taken pursuant to the OTS enforcement agreements. Since our last periodic report, we have added additional risk factors entitled:



In
addition, we have made material changes to the following risk factors as compared to the version disclosed in our annual report on Form 10-K for the fiscal year ended
June 30, 2009:



Risks Related to Our Industry, Business and Operations

Challenges exist in implementing revisions to our business model.

During fiscal 2009, we took several measures to adjust our business in response to economic conditions. Most significantly, we refined
our product offerings. In August 2009, we completed the development of our new Monogram product offering, which encompasses some or all of our service offerings, including program design and portfolio
management, and incorporates refinements to our origination process.

We
have limited experience with the new product offering, which is based on a new, proprietary origination risk score model and does not contemplate a third-party guaranty, and we are
uncertain of the level of interest from former or prospective clients. As of November 6, 2009, we have not fully deployed the product to any clients. Successful sales of the Monogram loan
product will be critical to growing and diversifying our revenues and client base in the future.

Commercial
banks have historically served as the initial funding sources for loans we facilitate and have been our principal clients. In the absence of securitizations, we have not been
able to provide these banks with the means of liquidity necessary to support long term funding of private education loans, and commercial banks are facing liquidity and credit challenges from other
sources, in particular mortgage and credit card lending losses. In addition, the synergies that previously existed between federal education loan marketing and private education loan marketing have
been reduced by both the compression of margins in the federal program and regulatory restrictions on cross marketing of federal and private education loans. In response to the these changes, as well
as proposed legislation that would eliminate the Federal Family Education Loan Program, or FFELP, many lenders have re-evaluated their business strategies related to education lending. In
light of general economic conditions, capital markets disruptions and the declining credit performance of consumer-related loans, the private education loan business may generally be less attractive
to commercial banks than in the past.

In
this environment, it is uncertain whether certain commercial banks will continue funding private education loans. Some of our former clients have exited the private education loan
market completely. To the extent that commercial banks exit the private education loan market, the number of our prospective clients diminishes. One of our primary challenges is to convince national
and regional lenders that they can address the market opportunity in a manner that meets their desired risk control and return objectives. A related challenge is to finance successfully loans
generated through our Monogram product offering through the capital markets.

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The outsourcing services market for education lending is competitive, and if we are not able to compete effectively, our results of operations may be adversely affected.

We offer our clients and prospective clients, national and regional financial institutions and educational institutions, services in
structuring and supporting their private education loan programs. The outsourcing services market in which we operate remains competitive with a number of active participants, some of which have
greater financial, technical or other competitive resources, larger customer bases, greater name recognition and more established relationships with their clients than we have. As a result, our
competitors or potential competitors may be better able than we are to overcome capital markets dislocations, adapt more quickly to new or emerging technologies and changes in customer preferences,
compete for skilled professionals, build upon efficiencies based on a larger volume of loan transactions, fund internal growth and compete for market share generally.

Based
on the range of services that we offer, we believe that SLM Corporation, also known as Sallie Mae, is our principal competitor. Our business could be adversely affected if Sallie
Mae's program to market private education loans continues to grow, or if Sallie Mae or Nelnet, Inc., which currently provides fee-based services for non-federally
guaranteed loans, seeks to market more aggressively to third parties the full range of services that we offer. Other private education loan originators include JPMorgan Chase Bank, N.A., Wells
Fargo & Company, Discover Financial Services, and Student Loan Corporation, an 80% owned subsidiary of Citibank, N.A.

We
may face competition from loan originators, including our clients or former clients, if they choose to develop an internal capability to provide any of the services that we currently
offer. For example, a loan originator that has, or decides to develop, a portfolio management or capital markets function may not choose to engage us for our services. Historically, lenders in the
education loan market have focused their lending activities on federal loans because of the relative size of the federal loan market and because the federal government guarantees repayment of these
loans, thereby significantly limiting the lenders' credit risk. The demand for our services could decline if lenders place additional emphasis on the private education loan market and offer the
services we provide in response to recent legislative initiatives affecting the availability and profitability of federal loans, including the proposed elimination of the FFELP. In addition, to the
extent that Union Federal provides private education loans directly to consumers, we could compete directly with clients and former clients.

We
cannot assure you that we will be able to compete successfully with new or existing competitors. If we are not able to compete effectively, our results of operations may be adversely
affected.

The growth of our business could be adversely affected by changes in government education loan programs or expansions in the population of students eligible for loans under
government education loan programs.

We focus our business exclusively on the market for private education loans, and substantially all of our business is concentrated in
products for post-secondary education. The availability and terms of loans that the government originates or guarantees affects the demand for private education loans because students and
their families often rely on private education loans to bridge a gap between available funds, including family savings, grants and federal and state loans, and the costs of post-secondary
education. The federal government currently places both annual and aggregate limitations on the amount of federal loans that any student can receive and determines the criteria for student
eligibility. These guidelines are generally adjusted in connection with funding authorizations from the United States Congress for programs under the Higher Education Act. Recent federal legislation
expands federal grant and loan assistance, which could weaken the demand for private education loans. In addition, legislation such as the College Cost Reduction and Access Act of 2007 has
significantly reduced the profit margins of traditional providers of federal education loans, which could result in increased competition in the market for private education loans. Increased
competition could

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adversely
affect the volume of private education loans and securitization transactions that we facilitate and impede the growth of our business.

In
May 2008, the "Ensuring Continued Access to Student Loans Act of 2008" was signed into law and contains provisions which might adversely impact the demand for private education loans
and outsourcing services provided by us, availability and flow of funds for private education loans, and our liquidity position. Among other things, the Act:



In
August 2008, the "Higher Education Opportunity Act" was signed into law, which will:



Access to alternative means of financing the costs of education may reduce demand for private education loans.

The demand for private education loans could weaken if student borrowers use other vehicles to bridge the gap between available funds
and the costs of post-secondary education. These vehicles include, among others:



If
demand for private education loans weakens, we could experience reduced demand for our services, which could have a material adverse effect on our results of operations.

Continuation of the current economic conditions could adversely affect the private education loan industry.

As a result of capital market dislocations that began during the second quarter of fiscal 2008, as well as the TERI Reorganization, we
have been unable to complete a securitization transaction since September 2007. In addition, rising unemployment rates and the unsteady financial sector have adversely affected many consumers and
borrowers throughout the country. Current borrowers may experience more trouble in repaying credit obligations, which could increase loan delinquencies and defaults. In addition, some consumers may
find that higher education is an unnecessary investment during turbulent economic times and defer enrollment in educational institutions until the economy improves, thus decreasing education loan
application and funding volumes. Finally, many lending

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institutions
have been reluctant to lend and several clients or potential clients have exited the private education loan business and may or may not seek our services as the economy improves. If the
adverse economic environment continues, our financial condition may deteriorate for any one of the foregoing reasons.

If our clients do not actively or successfully market and fund private education loans, our business will be adversely affected.

We have in the past relied on, and will continue in the future to rely on, our clients to market and fund private education loans to
student borrowers. If our clients do not devote sufficient time and resources to their marketing efforts or are not successful in these efforts,
then we may experience a reduction in the volume of loans that we facilitate, and our business will be adversely affected.

In
addition, if loans were marketed by our clients in a manner that is unfair or deceptive, or if the marketing, origination or servicing violated any applicable law, state unfair and
deceptive practices acts could impose liability on a securitization trust holding the loan or create defenses to the enforceability of the loan. Investigations by the New York Attorney General, the
Attorneys General of other states, the United States Congress or others could have a negative impact on lenders' desire to market private education loans. The Higher Education Opportunity Act of 2008
creates significant additional restrictions on the marketing of private education loans.

If we fail to manage effectively our cost reductions, our business could be disrupted and financial results could be adversely affected.

During fiscal 2008 and fiscal 2009, we reduced headcount by over 800 employees, including departures of our former Chief Executive
Officer, Chief Financial Officer, Chief Administrative Officer, Chief Information Officer and Chief Marketing Officer. Our cost reduction initiatives have placed and will continue to place a strain on
our management, systems and resources at a critical point in our business and industry. We must continue to develop alternatives to the loan guaranty and origination services that TERI has
historically provided to our clients, and we must refine our business development capabilities, our systems and processes and our access to financing sources. We must retain, train, supervise and
manage our remaining employees during this period of change in our business.

Based
on facilitated loan volumes, we may outsource some borrower services functions in an effort to reduce costs, take advantage of technologies and effectively manage the seasonality
associated with education loan volume. We rely on our vendors to provide high levels of service and support. Our reliance on these external vendors subjects us to risks associated with inadequate or
untimely service and could result in fewer loans than we would experience if we performed the service functions in-house.

We
cannot assure you that we will be able to:



We
are dependent upon the retention and motivation of certain key employees and the loss of any such employees could adversely affect our business. In addition, our future performance
will also depend upon our ability to attract skilled, new employees. If we are unable to manage our cost

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reductions,
or if we lose key employees or are unable to attract new employees as a result, our operations and our financial results could be adversely affected.

If competitors acquire or develop a private education loan database or advanced loan information processing systems, our business could be adversely affected.

We own a proprietary database of historical information on private education loan performance that we use to help us develop our
proprietary origination risk score model, determine the terms of portfolio funding transactions and establish the fair value of the structural advisory fees, asset servicing fees and residuals
receivables that we recognize as revenue. We also have developed, and continue to develop as of November 6, 2009, a proprietary loan information processing system to enhance our application
processing and loan origination capabilities. Our private education loan database and loan information processing system provide us with a competitive advantage in offering our services. Third parties
could create or acquire databases and systems such as ours. For example, as lenders and other organizations in the private education loan market originate or service loans, they compile over time
information for their own private education loan performance database. Our competitors and potential competitors may have originated or serviced a greater volume
of private education loans than us over the past two fiscal years, which may have provided them with comparatively greater borrower or loan data or insights, particularly during the most recent
economic cycle. If a third party creates or acquires a private education loan database or develops a loan information processing system, our competitive positioning, ability to attract new clients and
business could be adversely affected. As a result of the termination of our agreements with TERI in the context of the TERI Reorganization, we have lost access to continuing updates to the database of
TERI-guaranteed loan performance data with regard to TERI-guaranteed loans that are neither held by securitization trusts facilitated by us nor Union Federal.

If we are unable to protect the confidentiality of our proprietary database and information systems and processes, the value of our services and technology will be adversely
affected.

We rely on trade secret laws and restrictions on disclosure to protect our proprietary database and information systems and processes.
We have sought to limit TERI's rights to disclose its historical loan database in the context of the TERI Reorganization, and we have entered into confidentiality agreements with third parties and
with some of our employees to maintain the confidentiality of our trade secrets and proprietary information. These methods may neither effectively prevent disclosure of our confidential information
nor provide meaningful protection for our confidential information if there is unauthorized use or disclosure.

We
own no material patents. Accordingly, our technology, including our loan information processing systems, is not covered by patents that would preclude or inhibit competitors from
entering our market. Monitoring unauthorized use of the systems and processes that we have developed is difficult, and we cannot be certain that the steps that we have taken will prevent unauthorized
use of our technology. Furthermore, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our proprietary information. If we are
unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and services will be adversely affected.

The loan origination process is becoming increasingly dependent upon technological advancement, and we could lose clients and market share if we are not able to keep pace
with rapid changes in technology.

Our future success depends in part on our ability to process loan applications in an automated, error-free manner. The
volume of loan originations that we are able to process is based, in large part, on the systems and processes we have implemented and developed. The loan origination process is becoming increasingly
dependent upon technological advancement such as the ability to process loans

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over
the Internet, accept electronic signatures and provide initial decisions instantly. Our future success also depends, in part, on our ability to develop and implement technology solutions that
anticipate and keep pace with continuing changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely
basis. In addition, we expect to reduce our investment in technology during fiscal 2010 compared to past fiscal years. If competitors introduce products, services, systems and processes that are
better than ours or that gain greater market acceptance, those that we offer or use may become obsolete or noncompetitive. In addition, if we fail to execute our clients' origination requirements or
properly administer the clients' credit agreement templates or required disclosures, we could be subject to breach of contract claims and related damages. Any one of these circumstances could have a
material adverse effect on our business reputation and ability to obtain and retain clients.

We
may be required to expend significant funds to develop or acquire new technologies. If we cannot offer new technologies as quickly as our competitors, we could lose clients and market
share. We also could lose market share if our competitors develop more cost effective technologies than those we offer or develop.

Our business could be adversely affected if PHEAA fails to provide adequate or timely services or if our relationship with PHEAA terminates.

As of September 30, 2009, the Pennsylvania Higher Education Assistance Agency, or PHEAA, serviced a substantial majority of
loans held by the securitization trusts that we administer. This arrangement allows us to avoid the overhead investment in servicing operations but requires us to rely on PHEAA to adequately service
the trusts' education loans, including collecting payments, responding to borrower inquiries and communicating with borrowers whose loans have become delinquent. We periodically review the costs
associated with establishing servicing operations to service loans. Our reliance on an external service provider for loan servicing subjects us to risks associated with inadequate or untimely
services, including notice of developments in prepayments, delinquencies and defaults. A substantial increase in these rates could adversely affect our ability to access profitably the securitization
markets for our clients' loans and the value of our additional
structural advisory fees, asset servicing fees and residuals receivables. In addition, if PHEAA were to fail to comply with TERI's servicing guidelines in servicing securitized
TERI-guaranteed private education loans, TERI would not be obligated to make guaranty payments on such loans, in which case PHEAA would be obligated to cure the noncompliance or purchase
the loans. Such an event could have a negative impact on the value of our asset servicing fees and additional structural advisory fee receivables. If our relationship with PHEAA terminates, we would
either need to expand or develop a relationship with another loan servicer, which could be time consuming and costly. In such event, our business could be adversely affected.

An interruption in or breach of our information systems may result in lost business.

We rely heavily upon communications and information systems to conduct our business. Our systems and operations are potentially
vulnerable to damage or interruption from network failure, hardware failure, software failure, power or telecommunications failures, computer viruses and worms, penetration of our network by hackers
or other unauthorized users and natural disasters. Any failure, interruption or breach in security of our information systems or the third-party information systems on which we rely could cause
underwriting or other delays and could result in fewer loan applications being received, slower processing of applications and reduced efficiency in loan processing. A failure, interruption or breach
in security could also result in an obligation to notify clients in a number of states that require such notification, with possible civil liability resulting from such failure, interruption or
breach. Although we maintain and periodically test a business continuity and disaster recovery plan, the majority of our infrastructure and employees are located in the Boston metropolitan area. An
interruption in services for any reason could adversely affect our ability to activate our contingency plan if we are unable to communicate among locations or employees.

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We cannot assure you that failures, interruptions or breaches will not occur, or if they do occur that we or the third parties on whom we rely will adequately
address them. The precautionary measures that we have implemented to avoid systems outages and to minimize the effects of any data or telephone systems interruptions may not be adequate, and we may
not have anticipated or addressed all of the potential events that could threaten or undermine our information systems. The occurrence of any failure, interruption or breach could significantly impair
the reputation of our brand, diminish the attractiveness of our services and harm our business.

If we experience a data security breach and confidential customer information is disclosed, we may be subject to penalties imposed by regulators, civil actions for damages
and negative publicity, which could affect our customer relationships and have a material adverse effect on our business. In addition, current state and federal legislative proposals, if enacted, may
impose additional requirements on us to safeguard confidential customer information, which may result in increased compliance costs.

Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of
media attention, prompting state and federal legislative proposals and regulatory rule-making to address data privacy and security. If some of the current proposals are adopted, we may be
subject to more extensive requirements to protect the applicant and borrower information that we process in connection with the loans. Implementation of systems and procedures to address these
requirements would increase our
compliance costs. If we were to experience a data security breach, or if we or the securitization trusts that we administer otherwise improperly disclose confidential customer information, such breach
or other disclosure could generate negative publicity about us and could adversely affect our relationships with our clients, including the lenders and educational institutions with which we do
business. This could have a material adverse effect on our business. In addition, pending legislative proposals, if adopted, likely would result in substantial penalties for unauthorized disclosure of
confidential consumer information. Failure to comply with those requirements could result in regulatory sanctions imposed on our client lenders and loss of business for us.

Risks Related to Our Financial Reporting and Liquidity

If the estimates we make, or the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may vary materially from those
reflected in our financial statements.

As compensation for our past securitization activities, we received structural advisory fees and a portion of the residual interests in
the trusts. We received up-front structural advisory fees when the securitization trusts purchased the loans, and we continue to be entitled to receive additional structural advisory fees
over time, based on the amount of loans outstanding in the trust over the life of the trust. We sold our residual interests in the NCSLT Trusts, but continue to have residual interests in other
trusts. As required under GAAP, we recognized the estimated fair value of up-front and additional structural advisory fees and residuals receivables as revenue when the securitization
trusts purchased the loans because receipt of our fees is not contingent on any further service requirement by us. Quarterly, we update our estimate of the fair value of our receivables, and changes
to the fair value, less cash distributions, if any, are recorded as revenue (trust updates) in the period in which the change is made. We are entitled to asset servicing fees for additional services
that we are contractually obligated to perform relating to the residual interests in the NCSLT Trusts. We recognize the net present value of asset servicing fees as our services are performed. The
receipt of the fees is contingent, however, on distributions available to the owners of the NCSLT Trusts residuals. Quarterly, we update our assumptions with respect to the amount and timing of
receipt of these fees, and record the changes in our estimates as revenue (fee updates) in the period in which the change is made.

We
have no further obligation to support the obligations within the bankruptcy-remote securitization trusts with respect to our additional structural advisory fees or residuals in the

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securitizations
we have facilitated. However, our fees are subordinate to securities issued to investors in such securitizations, and the trusts may fail to generate any cash flow for us if the
securitized assets do not generate enough cash flow to pay debt holders in full or only generate enough cash flow to pay the debt holders. Our projected cash flows from service receivables from
certain securitization trusts are expected to be eliminated entirely, and our projected cash flows from other securitization trusts could be delayed, impaired or eliminated, if default rates increase
beyond our assumptions at September 30, 2009. We expect as of September 30, 2009 to receive additional structural advisory fees and residuals beginning five to 22 years after the
date of a particular securitization transaction. At June 30, 2009, we expected to receive such cash flows beginning five to 22 years after the date of a particular securitization.

Because
there are no quoted market prices for our service revenue receivables, we use discounted cash flow modeling techniques and certain assumptions to estimate fair value. Our key
assumptions to estimate fair value include: discount rates; the annual rate and timing of education loan prepayments; the trend of interest rates over the life of the loan pool, including the forward
LIBOR curve; the expected annual rate and timing of loan defaults, and TERI's obligation to pay default claims; expected amount and timing of recoveries of defaulted loans, including the use of
recoveries to replenish Pledged Accounts; the source and amount of guaranty payments made on defaulted loans; and the fees and expenses of the securitization trusts. Because our estimates rely on
quantitative and qualitative factors, including historical data and macroeconomic indicators to predict prepayment, default and recovery rates, management's ability to determine which factors should
be more heavily weighted in our estimates, and to accurately incorporate those factors into our loan performance assumptions, are subjective and can have a material effect on valuations.

We
adjusted our key accounting assumptions throughout fiscal 2009 and in the first quarter of fiscal 2010:



In
general, our adjustments during fiscal 2009 and the first quarter of fiscal 2010 were necessary because securitization trusts and our portfolio of loans held for sale had performed
below our range of expectations, including with regard to delinquencies and defaults. Other contributing factors included: dislocations in the capital markets that began in the second quarter of
fiscal 2008 persisted through September 30, 2009 requiring significant net adjustments to our discount rate; TERI's obligation to pay claims is uncertain as a result of the TERI Reorganization;
and the estimated cost of funding auction rate notes issued by several securitization trusts was projected to be higher than previously estimated. For a discussion of changes in the first quarter of
fiscal 2010 and the sensitivity of the additional

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structural
advisory fees to variations in our assumptions and estimates, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsExecutive
SummaryApplication of Critical Accounting Policies and Estimates."

If
the actual performance of our loan portfolio or the portfolios held by some or all of the securitization trusts were to vary appreciably from the adjusted assumptions we use, we may
need to adjust our key assumptions further. Such an adjustment could materially affect our earnings in the period in which our assumptions change, and the actual additional structural advisory fees
and residuals that we receive from the trusts, and the actual asset servicing fees that we receive from the owner of the Trust Certificate, could be significantly less than reflected in our current
financial statements. In particular, economic, regulatory, competitive and other factors affecting default and recovery rates on loan portfolios, could cause or contribute to differences between
actual performance of the portfolios and our key assumptions. In addition, developments in the TERI Reorganization, including resolution of challenges to the trusts' security interests in collateral
securing TERI's guaranty obligations or TERI's rejection of its guaranty agreements could cause us to adjust further our key assumptions. With regard to TERI, for purposes of estimating the fair value
of our service receivables, we assumed at June 30, 2009 and September 30, 2009 that the application of collateral will occur in accordance with existing agreements, including the
availability of future recoveries on defaulted loans held by TERI to replenish the Pledged Accounts. The Creditors Committee is challenging the enforceability of certain trusts' security interests,
which may result in a significant reduction of collateral available to the trusts.
Finally, dislocations in the capital markets have generally resulted in increases in investors' yield requirements for ABS. If such conditions degrade, we may need to further adjust our key
assumptions.

Our
loans held for sale at September 30, 2009 consisted of $232.8 million in private education loans originated by Union Federal, $127.6 million of which remained on
the balance sheet of Union Federal at the end of the quarter. Our loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is evaluated on a periodic
basis. In the absence of readily determined market values, the fair value is estimated by management based on the present value of expected future cash flow from the loans held for sale. Under GAAP,
we are required to reduce the carrying value of our private education loans if their fair value decreases below our cost. In such an event, we are required to write-down the carrying value
of our private education loans, which would result in an increase in our non-interest expenses. We may be required to make additional valuation adjustments in the future.

Our liquidity could be adversely affected if the sale of the Trust Certificate does not result in the tax consequences that we expect.

Effective March 31, 2009, we completed the sale of the Trust Certificate, representing our ownership interest in NC Residuals
Owners Trust, in a transaction intended to improve our financial condition and liquidity. The sale of the Trust Certificate generated a cash refund for income taxes previously paid, as we had been
required to pay income taxes on the expected residual cash flows from the NCSLT Trusts in excess of what we actually received. In addition, the transaction is expected to eliminate future tax
obligations relating to these residuals. We estimated that we would have been required to pay approximately $430 million in additional taxes over the remaining life of these residuals, with
approximately $370 million to be paid prior to the residuals generating sufficient annual cash flows to offset the tax payments based on performance assumptions at that date. The U.S. federal
and state income tax consequences of the sale of the Trust Certificate are complex and uncertain. The Internal Revenue Service or a state taxing authority could challenge our tax positions in
connection with the transactions, notwithstanding our receipt of any tax refund. If such a challenge were successful, in whole or in part, we may not keep all or a portion of the refund for taxes
previously paid, or we may not eliminate our tax obligations relating to the residuals. In either case, our near-term financial condition and liquidity would be materially adversely
affected. In addition, any investigation, audit or

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suit
relating to the sale, including any such proceeding brought by the Internal Revenue Service, could result in substantial costs.

We have guaranteed the performance of Union Federal's obligations under its loan purchase and sale agreement.

In connection with Union Federal's sale of private education loans in October 2009, we delivered a performance guarantee to the
purchaser of the loan portfolio. If Union Federal were to default in the performance of any of its obligations or agreements under the loan purchase and sale agreement, including its indemnification
or loan repurchase obligations, we would be required to perform such obligation or agreement. As a result, we may incur substantial costs pursuant to the performance guarantee if Union Federal is
unable to perform its obligations under the loan purchase and sale agreement.

Changes in interest rates could affect the value of our additional structural advisory fees, asset servicing fees and residuals receivables, as well as demand for private
education loans and our services.

Private education loans typically carry floating interest rates tied to prevailing short-term interest rates. Higher
interest rates would increase the cost of the loan to the borrower, which in turn, could cause an increase in default rates for outstanding education loans. In addition, higher interest rates, or the
perception that interest rates could increase in the future, could cause an increase in prepayments, including full or partial prepayments. If the prepayment or default rates increase for the
education loans held by us or the securitization trusts that we have previously facilitated, we may experience a decline in the value of our additional structural advisory fees, asset servicing fees
and residuals receivables, which could cause a decline in the price of our common stock and could cause future portfolio funding transactions to be less profitable for us. In addition, an increase in
interest rates could reduce borrowing for education generally, which, in turn, could cause the overall demand for our services to decline.

LIBOR
is the underlying rate for most of the trusts' assets and liabilities and changes in LIBOR can have a significant effect on the cash flows generated by each trust. Changes in the
forward LIBOR curve affect the principal balances of education loans held by the trusts, particularly as interest is capitalized during loan deferment, which affects the net interest margin that the
trust generates. In addition, certain trusts have issued a tranche of ABS that bears a fixed interest rate. A decrease in the forward LIBOR curve may result in a reduced spread on the fixed-interest
tranche, which in turn decreases the estimated fair value of our service receivables. Significant changes to the forward LIBOR curve can also affect the estimated fair value of our additional
structural advisory fees and asset servicing fees, which bear interest at the rate of LIBOR plus a spread to the extent such fees are accrued but unpaid by the trusts.

If sufficient funds to finance our business, including Union Federal, are not available to us when needed or on acceptable terms, then we may be required to delay, scale
back or alter our strategy.

We may require additional funds for our products, our operating expenses, the pursuit of regulatory approvals, acquisition
opportunities and the expansion of our capabilities. Historically, we have satisfied our funding needs primarily through private education loan asset-backed securitizations. The securitization market
has not been available to us and may not be available to us when needed in the future, and, if available, the terms may not be acceptable to us. We have also satisfied our funding needs through equity
financings. We cannot be certain that additional public or private financing would be available in amounts or on terms acceptable to us, if at all. We also cannot assure you that our capital resources
as of September 30, 2009 will be sufficient to satisfy our liquidity needs or capital funding requirements after fiscal 2010, particularly in the event of a prolonged dislocation in the private
education loan ABS market. Our short-term financing needs are subject to regulatory capital

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requirements
related to Union Federal, including the requirement imposed by the Supervisory Agreement that FMC maintain Union Federal's regulatory capital ratios at specified levels. See
Note 13, "Union Federal Regulatory MattersSupervisory Agreement and Order to Cease and Desist," in the notes to our unaudited condensed consolidated financial statements included
under Part I, Item 1 of this quarterly report for additional details. Our short-term financing needs are also subject to amounts that we may determine to be necessary or
appropriate to contribute to prospective clients related to new programs. Insufficient funds could require us to delay, scale back or eliminate certain of our products and further scale back our
expenses.

Our assumptions regarding the future cost of funding of auction rate notes affect the valuation of our service receivables.

We have facilitated five trusts that issued auction rate notes to finance, in whole or in part, the purchase of private education
loans. Interest rates for the auction rate notes are determined from time to time at auction. We use a spread over one-month LIBOR to project the future cost of funding of the auction rate
notes issued by each such trust in determining the value of our service receivables.

Prior
to the second quarter of fiscal 2008, the spread over one-month LIBOR that we used to estimate the future cost of funding was based on historical trends, then current
auction rates for each trust and assumptions for future auction rates. During the second quarter of fiscal 2008, material deterioration of the debt capital markets resulted in actual auction rates
that trended significantly higher than the rates we had assumed in the past. We also concluded that the higher actual auction rates would persist, resulting in a greater spread over LIBOR, for a
longer period of time than
we had previously estimated. Our assumption with regard to future auction rates, like our other key valuation assumptions, requires our subjective judgment and is susceptible to change.

The
interest rate on each outstanding auction rate note is limited by a maximum rate. The maximum rate is the least of three rates: a floating interest rate (generally
one-month LIBOR plus a margin), a fixed interest rate and the maximum legally permissible rate. The margin applicable to the floating interest rate is dependent upon the then current
ratings of the notes subject to an auction. If the notes are downgraded, the applicable margin, and the maximum floating rate, would increase.

During
fiscal 2009, the ratings assigned to the auction rate notes were downgraded, resulting in an increase in that maximum spread. In addition, the insurance financial strength rating
assigned to Ambac Assurance Corporation which provides credit enhancement for certain auction rate notes, was downgraded in fiscal 2009, resulting in further downgrading of the ratings assigned to
certain of our auction rate notes. We assumed at September 30, 2009, that all auction rate notes would continue to bear interest at their current maximum spreads until their expected maturity
dates. If auctions do not fail, but if the interest rate determined pursuant to the auction procedures would exceed the maximum rate, the interest rate for the applicable interest period would be set
at the maximum rate, but the amount of the "excess" interest would accrue as "carryover interest." A noteholder's right to receive carryover interest is superior to our interests in the applicable
securitization trust. As a result, our projected cash releases from securitization trusts that have issued auction rate notes, including the timing of receipt, could be materially adversely affected
by increased costs of funding of auction rate notes, including the extent to which a trust accrues carryover interest.

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Risks Related to Asset-Backed Securitizations and Other Portfolio Funding Sources

We have historically derived a significant portion of our revenue and substantially all of our income from structuring securitization transactions; our financial results and
future growth may continue to be adversely affected if we are unable to structure securitizations or alternative financings.

In
the past, we did not charge separate fees for many of our services, but generally entered into agreements with clients giving us the exclusive right to securitize the private
education loans that they did not intend to hold. As a result, we have historically derived a significant portion of our revenue and substantially all of our income from structuring securitization
transactions. We have not completed a securitization since the first quarter of fiscal 2008, contributing to our net losses for each subsequent quarter.

Although
our new Monogram product offering has been designed to reduce our dependence on the securitization market in order to generate revenue, as well as our dependence on credit
enhancement, we have limited experience with the new offering and had not fully deployed it to any clients as of November 6, 2009. In addition, our future financial results and growth may
continue to be affected by our ability to structure securitizations or alternative financing transactions involving private education loans. If we are able to facilitate securitizations in the future,
we expect the structure and economics of the transactions to be substantially different than our past transactions. We expect lower revenues and additional cash requirements on our part and limited,
if any, demand for subordinate tranches of ABS.

We
will need to gain market acceptance of our Monogram loan product, new fee structure and additional services, in order to improve our cash flow and reduce our dependence on credit
enhancement and the securitization markets. If we continue to be unable to access the ABS market, our revenues may continue to be adversely impacted, and we may continue to generate net losses, which
would further erode our liquidity position.

A number of factors, some of which are beyond our control, have adversely affected and may continue to adversely affect our portfolio funding activities and thereby
adversely affect our results of operations.

The
success of our business may depend on our ability to structure securitizations or other funding transactions for our clients' loan portfolios. Several factors have had, and may
continue to have, a material adverse effect on both our ability to structure funding transactions and the revenue we may
generate for providing our structural advisory and other services, including the following:



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We
have actually experienced, or are at particular risk of experiencing in the near term, the first seven factors listed above.

Capital markets dislocations, and the timing, size and structure of any future capital markets transactions, will greatly affect our quarterly financial results.

Continuing
dislocations in the capital markets, write-downs of our service receivables and the private education loans held by us and the size, structure or economic terms of our future
capital markets transactions, if any, could increase the variability of our operating results on a quarterly basis. We are uncertain whether the fee structure that we have historically used will be
used in any future capital markets transaction. We expect the structure and pricing terms in future transactions, if any, to be substantially less favorable than in the past. Developments in the TERI
Reorganization, including the outcome of legal challenges to the trusts' security interests and resulting write-downs in our service receivables, could also contribute to increased variability of our
operating results. In addition, the expected sale of Union Federal's remaining private education loan portfolio could negatively affect our operating results in the second quarter of fiscal 2010.
Finally, our operating results may continue to be affected by the seasonality of education loan applications, which could affect the amount of loan processing fees that we earn in a particular
quarter. Origination of education loans is generally subject to seasonal trends, with the volume of loan applications increasing with the approach of tuition payment dates.

We may need to pursue alternatives to securitizations, which may not be available or the terms of which may not be attractive.

We have been unsuccessful in obtaining alternatives to securitization to finance our clients' loans. Under the terms of our purchase
agreements with lender clients, we generally have an obligation to use our best efforts to facilitate the purchase of a client's TERI-guaranteed loans during a specified loan purchase
period. The length of the loan purchase period varies by client and generally ranges from 195 days to 555 days following final loan disbursement. Our purchase agreements applicable to
approximately $485.5 million of the facilitated loan volume available for securitization as of

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September 30,
2009 may be subject to liquidated damages provisions in the event that we fail to facilitate a securitization in breach of our obligations. Our loan purchase agreements applicable
to approximately $770.5 million of the facilitated loan volume available for securitization as of September 30, 2009 do not have liquidated damages limiting our liability for a breach of
our contractual obligations. Our potential liability under our loan purchase agreements is dependent, in part, upon the outcome of the TERI Reorganization and is not determinable at this time. If we
do not honor our contractual obligations, our value proposition would be compromised and prospective clients may not be interested in entering into business arrangements with us. In addition, our
financial results would be adversely affected if we were required to pay damages, whether liquidated or unliquidated.

In structuring and facilitating securitizations of our clients' loans, administering securitization trusts or as holders of rights to receive residual cash flows in
non-NCSLT Trusts, we may incur liabilities to investors in the asset-backed securities those trusts issue.

We have facilitated and structured a number of different special purpose trusts that have been used in securitizations to finance
private education loans that our clients originated, including trusts that have issued auction rate notes. Under applicable state and federal securities laws, if investors incur losses as a result of
purchasing ABS that those trusts have issued, we could be deemed responsible and could be liable to those investors for damages. If we failed to cause the trusts or other transaction parties to
disclose adequately all material information regarding an investment in the ABS or if the trust made statements that were misleading in any material respect in information delivered to investors, it
is possible that we could be held responsible for that information or omission. Recent investigations by state attorneys general, and private litigation, have focused on auction rate securities,
including the marketing and trading of such securities. It is possible that we could become involved in such matters in the future. In addition, under various agreements entered into with underwriters
or financial guaranty insurers of those ABS, as well as certain lenders, we are contractually bound to indemnify those persons if investors are successful in seeking to recover losses from those
parties and the trusts are found to have made materially misleading statements or to have omitted material information.

If
we are liable for losses investors incur in any of the securitizations that we facilitate or structure and any insurance that we may have does not cover this liability or proves to be
insufficient, our results of operations or financial position could be materially adversely affected.

Risks Related to the TERI Reorganization

The Creditors Committee is challenging the enforceability of certain of the trusts' security interests, which may result in additional delay and expense, as well as a
significant reduction in collateral available to the trusts.

As a result of the automatic stay under the Bankruptcy Code, TERI ceased purchasing defaulted loans, including defaulted loans from the
NCSLT Trusts, in April 2008. In June 2008, the Bankruptcy Court entered an order approving a motion by TERI to honor its guaranty agreement obligations using cash in Pledged Accounts established for
the benefit of certain securitization trusts. Beginning in July 2008, TERI resumed paying its obligations under the guaranty agreements with respect to defaulted loans from the trusts, but only using
cash in the Pledged Account
established for the benefit of the specific trusts that owned the defaulted loan. As of November 6, 2009, TERI is not permitted to satisfy its guaranty obligations using funds from TERI's
general reserves. Funds in the Pledged Accounts of certain trusts have been exhausted, or are expected to be exhausted in the near term, at which point such trust will have a general unsecured claim
against TERI.

The
Bankruptcy Court's June 2008 order granted parties rights to challenge the trusts' security interests in the collateral other than the Pledged Accounts. In January 2009, the
Creditors Committee filed an adversary complaint in the Bankruptcy Court against the owner trustee and indenture trustee

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of
17 securitization trusts, and against our subsidiary First Marblehead Data Services, Inc., or FMDS, as administrator of such trusts. The complaint generally alleges that the security
interests granted by TERI to the trusts, excluding the security interests in the Pledged Accounts, are unperfected or may otherwise be avoided under the Bankruptcy Code. In particular, the complaint
alleges that the trusts do not have enforceable rights to future recoveries on defaulted loans owned by TERI with an aggregate principal and accrued interest balance of more than $600 million
as of September 30, 2009, or in amounts owed or transferred by TERI to Pledged Accounts after the filing of TERI's petition for reorganization totaling more than $35 million as of
September 30, 2009. In February 2009, pending resolution of the issues raised in the Creditors Committee's complaint, the trusts generally suspended the transfer of defaulted loans to TERI and
generally suspended requests for default claim payments from amounts in the Pledged Accounts.

In
March 2009, FMDS and the owner trustee filed a motion to dismiss the Creditors Committee's adversary complaint. The indenture trustee also filed a motion to dismiss, joining the
arguments made in the motion filed by FMDS and the owner trustee. The Creditors Committee filed an opposition to the motion to dismiss in April 2009, together with an amended complaint naming the
trusts themselves as defendants. FMDS filed a response to the opposition and amended complaint in May 2009. In September 2009, the Bankruptcy Court denied the motions to dismiss. We cannot at this
time predict the timing, costs or outcome of the adversary proceeding, and did not adjust our accounting assumptions during the first quarter of fiscal 2010 regarding TERI.

If
the Creditors Committee or any other party is successful in challenging the trusts' security interests in the funds transferred to the Pledged Accounts after the filing of TERI's
petition for reorganization or other collateral, the amount of pledged collateral available exclusively to a particular securitization trust to satisfy TERI's guaranty obligations to that trust would
decrease materially. As a result, the trust's unsecured claims against TERI would increase proportionately. For example, recoveries from defaulted education loans transferred to TERI, which have
historically been used to replenish a particular trust's Pledged Account, would instead become an asset of TERI's bankruptcy estate and other holders of claims. The settlement of the adversary
complaint, in the context of a plan of reorganization or otherwise, could also result in a material decrease in the amount of pledged collateral available exclusively to a particular securitization
trust. A successful challenge to the security interests could decrease materially the value of our additional structural advisory fees or our asset servicing fees by decreasing the pledged collateral
available exclusively to the NCSLT Trusts.

On
September 22, 2009, a Joint Plan of Reorganization of TERI and the Creditors Committee was filed in the Bankruptcy Court. On October 22, 2009, a First Amended Joint Plan
of Reorganization of TERI and the Creditors Committee and an accompanying Disclosure Statement were filed. The Plan includes a proposed settlement of the adversary complaint and includes other
provisions that would affect the claims of the NCSLT Trusts. Approval of the plan of reorganization may not be solicited until an accompanying disclosure statement has been approved by the Bankruptcy
Court.

The TERI Reorganization has had, and will likely continue to have, a negative effect on our client relationships, which will adversely affect our revenue and results of
operations.

We have historically structured and supported private education loan programs for commercial banks, including JPMorgan Chase Bank,
N.A., Bank of America, N.A. and RBS Citizens, N.A. Following the TERI Reorganization, these clients elected to terminate some or all of their agreements with us. Our clients that have not terminated
their agreements have instructed TERI to stop accepting applications for TERI-guaranteed loans. These actions resulted in a significant reduction in our facilitated loan volumes during
fiscal 2009 compared to prior fiscal years. In addition, we expect that the guaranty agreements and loan origination agreements that TERI has with a significant number of our clients will be
terminated in the context of the TERI Reorganization. Termination of the client's guaranty agreement or loan origination agreement with TERI would generally result in the termination of our agreements
with that client.

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Our revenue, business and financial results will continue to suffer as a result until we can generate new origination volume. In addition, the TERI
Reorganization, together with our inability to access the securitization market, has resulted in many of our former clients holding private education loan portfolios for longer than they had expected,
which has negatively affected our client relationships and may affect market acceptance of our Monogram product offering or our stand-alone services. Finally, we may continue to incur significant
legal costs related to the TERI Reorganization.

The TERI Reorganization will adversely affect our ability to facilitate the securitization of TERI-guaranteed loans, and could adversely affect our cash flows
from the securitization trusts.

In its role as guarantor, TERI agreed to reimburse lenders for unpaid principal and interest on defaulted loans. TERI had historically
been the exclusive provider of borrower default guarantees for our clients' private education loans. We expect the TERI Reorganization to adversely affect our ability to facilitate the securitization
of TERI-guaranteed loans. In particular, we expect investors to ascribe little or no value to the TERI guaranty beyond a trust's Pledged Account. As a result, in structuring future
securitizations of loans guaranteed or formerly guaranteed by TERI, if any, we will likely be required to reduce or eliminate our up-front structural advisory fee in order to increase the
level of reserves available to the trust. In addition, it is likely that we would need to obtain additional credit enhancement for any future securitizations of such loans, the cost of which would
also result in lower revenues.

To
the extent the Pledged Account or other reserves available to a particular securitization trust were exhausted, or in the event that the security interests granted by TERI to the
trusts are unperfected or otherwise unenforceable or compromised, and loan defaults continued to occur, that trust would have a claim as an unsecured creditor of TERI in the context of the TERI
Reorganization. It is expected that TERI's general reserves will be insufficient to satisfy fully the claims of unsecured creditors, and therefore loan defaults would have a further adverse effect on
the amount or timing of cash flows that would otherwise be expected to be generated by the trust, which would adversely affect the value of our service receivables, including our asset servicing fees.

We
did not adjust our assumptions regarding TERI during the fiscal quarter ended September 30, 2009, including our assumption that all future recoveries on defaulted
TERI-guaranteed loans would be available to replenish trusts' Pledged Accounts. See Note 5, "Commitments and ContingenciesTERI ReorganizationChallenges to
Security Interests," in the notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional information.

Risks Relating to Regulatory Matters

We may become subject to new regulations which could increase our costs of compliance and alter our business practices.

Turbulence in the financial services industry beginning in the second quarter of fiscal 2008 has resulted in increased consumer and
governmental scrutiny. In response, regulators have increased diligence and enforcement efforts and new laws and regulations are under consideration in Congress. In particular, the Obama
Administration has proposed, and Congress is actively considering, legislation that would create a Consumer Financial Protection Agency and significantly weaken federal preemption of state regulations
currently enjoyed by federal savings and loans and their operating subsidiaries, such as Union Federal and its operating subsidiary, FM Loan Origination Services, LLC, or FMLOS. As proposed,
the Consumer Financial Protection Agency would have broad powers to regulate consumer financial services products, including education loans and would have rulemaking authority for numerous federal
laws including the Truth in Lending Act and Equal Credit Opportunity Act. The Agency is expected to also be vested with authority to examine certain banks and state licensed

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non-bank
entities. In addition, regulators and enforcement officials are taking increasingly expansive positions with respect to whether certain products or product terms may run afoul of
state and federal unfair or deceptive acts and practices laws. These and other regulatory changes could result in, among other things, increased compliance costs and alterations to our business
practices, which could have a material adverse effect on our business operations and financial results.

We are subject to regulation as a savings and loan holding company, and Union Federal Savings Bank is regulated extensively.

As a result of our acquisition of Union Federal in November 2006, we became subject to regulation as a savings and loan holding company
and our business is limited to activities that are financial or real-estate related. The OTS has certain types of enforcement authority over us, including the ability in certain
circumstances to review and approve changes in management and compensation arrangements, issue additional cease-and-desist orders, force divestiture of Union Federal and impose
civil and monetary penalties for violations of federal banking laws and regulations or for unsafe or unsound banking practices. Any such actions could adversely affect our reputation, liquidity or
ability to execute our business plan.

In
addition, Union Federal is subject to extensive regulation, supervision and examination by the OTS and the Federal Deposit Insurance Corporation. Such regulation covers all banking
business, including activities and investments, lending practices, safeguarding deposits, capitalization, risk management policies and procedures, relationships with affiliated companies, efforts to
combat money laundering,
recordkeeping and conduct and qualifications of personnel. In particular, the failure to meet minimum capital requirements could initiate certain mandatory and possibly additional discretionary,
actions by regulators that, if undertaken, could have a direct material adverse effect on our operations and financial statements. We have in the past been required to make capital infusions to Union
Federal to support the private education loan portfolio held by Union Federal, and regulatory authorities could require additional capital infusions or take other corrective measures in the future.

There
is a risk that we could incur additional costs in complying with regulations applicable to savings and loan holding companies and savings banks, or significant penalties if we fail
to comply. Our ability to comply with all applicable laws and rules depends largely on our establishment and maintenance of a system to ensure such compliance, as well as our ability to attract and
retain qualified compliance personnel. Further reductions in staffing levels could make it difficult to retain experienced personnel to maintain adequate internal controls related to regulatory
matters. If severe failures in internal controls occur, regulatory authorities could impose sanctions on Union Federal or us. We have relatively limited experience with these regulations, and we could
in the future be subject to additional supervisory orders to cease and desist, civil monetary penalties or other actions due to claimed noncompliance, which could have an adverse effect on our
business, financial condition and operating results.

Failure to comply with recent OTS enforcement agreements could adversely affect our business, financial condition and operating results.

In July 2009, we entered into the Supervisory Agreement with the OTS and Union Federal entered in to a stipulation consenting to the
issuance by the OTS of the Order to cease and desist. The Supervisory Agreement requires us to, among other things:



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Pursuant
to the requirements of the Order, Union Federal took the following actions during the quarter ended September 30, 2009:



The
Order further requires Union Federal to, among other things:



In
addition, the Order requires Union Federal to adopt a concentration reduction plan that would: (i) prevent Union Federal from originating private education loans until Union
Federal reduces the concentration of private education loans to Tier 1 capital plus allowances for loan losses below 50% and (ii) require Union Federal to achieve such a reduction by
December 31, 2009. On October 16, 2009, Union Federal sold approximately 88% of its portfolio of private education loans held for sale as of September 30, 2009. As a result, Union
Federal achieved the reduction required by the concentration reduction plan. See Note 14, "Subsequent EventsDisposition of Union Federal Private Education Loans," in the notes to
our unaudited condensed consolidated financial statements included under Part I, Item 1 of this quarterly report for additional details for additional information.

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The
terms of the Supervisory Agreement and the Order will remain in effect until terminated, modified or suspended by the OTS. These terms require a significant commitment from us of
capital and management attention, which could be otherwise deployed.

Although
we and Union Federal each intend to take such actions as may be necessary to enable us to comply with our respective requirements, there can be no assurance that we will be able
to comply fully with the provisions of the Supervisory Agreement or the Order, as applicable, or to do so within the timeframes required. Moreover, there can be no assurance that compliance with such
requirements will not be more time consuming or more expensive than anticipated, or that efforts to comply with such requirements will not have adverse effects on the operations and financial
condition of us or Union Federal. In addition, the limitations imposed on Union Federal's rates of private education loans to capital will preclude meaningful participation by Union Federal in our new
product offering in the near term.

Failure
to comply with the Supervisory Agreement or Order, or other supervisory directives, could subject us to further orders to cease and desist, significant civil monetary penalties,
recovery of severance payments made to former employees, or other mandatory actions. Accordingly, any material failure to comply could have a material adverse effect on our business, financial
condition and operating results.

We may become subject to state registration or licensing requirements. If we determine that we are subject to the registration or licensing requirements of any jurisdiction,
our compliance costs could increase significantly and other adverse consequences may result.

Many states have statutes and regulations that require the licensure of small loan lenders, loan brokers and loan arrangers. Some of
these statutes are drafted or interpreted to cover a broad scope of activities. We have not taken formal action regarding licensing or registration with any regulatory body outside the Commonwealth of
Massachusetts, other than the OTS. While we believe that our prior consultations with regulatory counsel and, in some cases local counsel, have identified all material licensing, registration and
other regulatory requirements that could be applicable to us based on current laws and the manner in which we currently conduct business, we may be subject to state licensing, registration and other
regulatory requirements in the future if we change our operations, regulators reconsider their prior guidance or federal or state laws or regulations are changed. In particular, we may become subject
to licensing and registration requirements in certain states if Congress passes legislation to create the Consumer Financial Protection Agency that includes a provision repealing federal preemption
available to operating subsidiaries of federal savings associations or if we do not conduct our loan processing activities through an operating subsidiary of Union
Federal. Even if we are not physically present in a state, its regulators may take the position that registration or licensing is required because we provide services by mail, telephone, the Internet
or other remote means.

All
of our operations relating to education loan processing are located in Massachusetts. In 2001, we received determination letters from the Massachusetts Division of Banks confirming
that the loan origination outsourcing services provided under contract to TERI by our subsidiary First Marblehead Education Resources, Inc., or FMER, were not subject to licensing under the
Massachusetts Small Loan Act because FMER did not conduct a lending business with consumers in its own name and its processing centers were not generally open to the public. In May 2008, following the
TERI Reorganization, we received an additional determination letter from the Massachusetts Division of Banks confirming that FMER's business of back office loan application processing, loan
origination and loan underwriting functions on behalf of lenders was exempt from licensing under the Massachusetts Small Loan Act. The Massachusetts Small Loan Act requires any person that is engaged,
for compensation, in the business of making small loans, or in aiding or assisting the borrower or the lender in procuring or making such loans, to obtain a license. Under the statute, the business of

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making
small loans includes the making of loans of $6,000 or less with interest rates and expenses of more than 12% per year. The loans that we have facilitated include amounts as small as $1,000, and
a portion of those loans have combined interest rates and fees exceeding 12%. We have historically provided outsourced private education loan origination services on a
fee-for-service basis through FMER and Union Federal's subsidiary FMLOS. Absent a change in federal legislation, as discussed above, to the extent that these services are
conducted through Union Federal or FMLOS, we believe it is less likely that state regulatory requirements affecting loan brokers, small lenders and credit services organizations will be asserted. As
noted above, Congress is actively considering legislation that could weaken preemption for federal savings associations and eliminate it for operating subsidiaries of federal savings associations. As
of November 6, 2009, we were not providing services through FMLOS.

We
will continue to review state registration and licensing requirements that may become applicable to us in the future. As a result of providing portfolio management services,
additional licensing schemes may apply to us. As a result of this continuing review, we may determine that registration or licensing is required in jurisdictions where we are not currently registered
or licensed. In such a case, we may proceed with licensing or registration in the affected state, or we may attempt to restructure our activities in a manner that we believe to be exempt from such
licensing or registration.

Compliance
with state licensing requirements could involve additional costs, which could have a material adverse effect on our business. Our failure to comply with these laws could lead
to, among other things:



We may be exposed to liability for failures of third parties with which we do business to comply with the registration, licensing and other requirements that apply to them.

Third parties with which we do, or have done, business, including federal and state chartered financial institutions,
non-bank loan marketers, as well as TERI, are subject to registration, licensing and extensive governmental regulations, including Truth-in-Lending laws and other
consumer protection laws and regulations. For example, some of the third-party marketers with which we have done or may do business may be subject to state registration or licensing requirements and
laws and regulations, including those relating to small loans, loan brokers and credit services organizations. As a result of the activities that we conduct or may conduct for our clients, it may be
asserted that we have some responsibility for compliance by third parties with which we do business with the laws and regulations applicable to them, whether on contractual or other grounds. If it is
determined that we have failed to comply with our obligations with respect to these third parties, we could be subject to civil or criminal liability. Even if we bear no legal liability for the
actions of these third parties, the imposition of licensing and registration requirements on them, or any sanctions against them for conducting business without a license or registration, may reduce
the volume of loans we process from them in the future.

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Failure to comply with consumer protection laws could subject us to civil and criminal penalties or litigation, including class actions, and have a material adverse effect
on our business.

The federal government and state governments regulate extensively the financial institutions and other entities that originate loans in
the private education loan market. These regulations include bankruptcy, tax, usury, disclosure, credit reporting, identity theft, privacy, fraud and abuse and other laws to protect borrowers. Changes
in consumer protection laws or related regulations, or in the prevailing interpretations thereof, may expose us to litigation, result in greater compliance costs, adversely affect the collection of
balances due on the loan assets held by securitization trusts or otherwise adversely affect our business. We could incur substantial additional expense complying with these requirements and may be
required to create new processes and information systems. Moreover, changes in the consumer protection laws and related regulations, or in the prevailing interpretations thereof, could invalidate or
call into question the legality of certain of our services and business practices.

The
risk of noncompliance with regulatory requirements by our lender clients and their marketing partners has been highlighted by recent state and federal investigations into education
loan marketing practices, particularly the payment of marketing fees directly to schools in exchange for loan referrals. None of our contracts with lenders or marketers involves the payment of fees to
schools for loan
volume. State and federal regulatory authorities have sought information from some of our former clients and us regarding the loan programs we coordinated, and it is possible that some marketing or
underwriting practices associated with the programs we coordinated and assets we securitized will be challenged as a result of such investigations. In August 2007, we announced that, as part of the
New York Attorney General's ongoing investigation of several lending, educational, and nonprofit institutions, we had received a subpoena for information regarding our role in the education loan
industry. During fiscal 2008, we worked with the New York Attorney General's office regarding the investigation.

The
regulatory actions described above have also prompted state and federal legislation that will affect our operations. In August 2009, the Federal Reserve Board issued regulations to
implement provisions of the Higher Education Opportunity Act, which was signed into law in August 2008. The regulations revise the number, timing, and content of disclosures required for private
education loans by the Truth-in-Lending Act, or TILA, and the Federal Reserve Board's implementing regulation for TILA, Regulation Z. Under the regulations, creditors
that extend private education loans will be required to provide disclosures about loan terms and features on or with the loan application and will also be required to disclose information about
federal education loan programs that may offer less costly alternatives to private education loans. Additional disclosures must be provided when the loan is approved and after loan acceptance but
prior to loan disbursement. The Federal Reserve Board has also proposed model disclosure forms that creditors could use to comply with the new disclosure requirements. Compliance with the new
regulations will be mandatory as of February 14, 2010.

Violations
of the laws or regulations governing our operations, or the operations of our clients, could result in the imposition of civil or criminal penalties, the cancellation of our
contracts to provide services or our exclusion from participating in education loan programs. These penalties or exclusions, were they to occur, would negatively impair our ability to operate our
business. In addition, the loan assets held by securitization trusts that we have structured could be adversely impacted by violation of tax or consumer protection laws. In such event, the value of
our residual interests or asset servicing fees could also be adversely impacted. In some cases, such violations may render the loan assets unenforceable.

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Recent litigation has sought to re-characterize certain loan marketers and other originators as lenders; if litigation on similar theories were successful
against us or any third-party marketer we have worked with in the past, the loans that we securitize would be subject to individual state consumer protection laws.

All of the lenders with which we work are federally-insured banks and credit unions and, therefore, are not subject to many state
consumer protection laws, including limitations on certain interest rates, fees and other charges. In providing our private education loan
services to our clients, we do not act as a lender, guarantor or loan servicer, and the terms of the loans that we securitize are regulated in accordance with the laws and regulations applicable to
the lenders.

The
association between marketers of high-interest "payday" loans and tax-return anticipation loans, or TRAL, and out-of-state national
banks has come under recent scrutiny. Recent litigation asserts that payday loan and TRAL marketers use out-of-state lenders in order to evade the usury and interest rate caps,
and other consumer protection laws, imposed by the states where they do business. Such litigation has sought, successfully in some instances, to re-characterize the loan marketer as the
lender for purposes of state consumer protection law restrictions. Similar civil actions have been brought in the context of gift cards. We believe that our activities, and the activities of third
parties whose marketing on behalf of lenders has been coordinated by us, are distinguishable from the activities involved in these cases.

Additional
state consumer protection laws would be applicable to the loans we facilitate if we, or any third-party loan marketer engaged by us or a bank whose loans we facilitate, were
re-characterized as a lender, and the loans (or the provisions governing interest rates, fees and other charges) could be unenforceable unless we or a third-party loan marketer had the
requisite licenses or other authority to make such loans. In addition, we could be subject to claims by consumers, as well as enforcement actions by regulators. Even if we were not required to cease
doing business with residents of certain states or to change our business practices to comply with applicable laws and regulations, we could be required to register or obtain licenses or regulatory
approvals that could impose a substantial cost to us. To date, there have been no actions taken or threatened against us on the theory that we have engaged in unauthorized lending. However, such
actions could have a material adverse effect on our business.

Risks Relating to Ownership of Our Common Stock

The price of our common stock may be volatile.

The trading price of our common stock may fluctuate substantially, depending on many factors, some of which are beyond our control and
may not be related to our operating performance. These fluctuations could cause you to lose part or all of your investment in our shares of common stock. Those factors that could cause fluctuations
include, but are not limited to, the following:



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In
the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been brought against that company. We have in the
past been the target of securities litigation. See Part II, Item 1 of this quarterly report, "Legal Proceedings," for additional detail. Any future litigation could result in substantial
costs and divert management's attention and resources from our business.

Insiders have substantial control over us and could limit your ability to influence the outcome of key transactions, including a change of control.

Our directors and executive officers, and entities affiliated with them, owned approximately 22% of the outstanding shares of our
common stock as of September 30, 2009, excluding shares issuable upon vesting of restricted stock units, shares issuable upon exercise of outstanding stock options and shares of preferred stock
held by affiliates of GSCP convertible into 8,846,733 additional shares of our common stock. Affiliates of GSCP have agreed not to convert shares of preferred stock if, after giving effect to any such
conversion, they and their affiliates would own more than 9.9% of our outstanding shares of common stock. Approximately 5.0 million additional shares of common stock could be issued to
affiliates of GSCP upon conversion of shares of preferred stock before they and their affiliates would own more that 9.9% of our outstanding shares of common stock. These stockholders, if acting
together, could substantially influence matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. They may
also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may have the effect of delaying,
preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to

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receive
a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

Some provisions in our restated certificate of incorporation and amended and restated by-laws may deter third-parties from acquiring us.

Our restated certificate of incorporation and amended and restated by-laws contain provisions that may make the acquisition
of our company more difficult without the approval of our Board of Directors, including the following:



These
anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy
contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire.

Section 203 of the Delaware General Corporation Law may delay, defer or prevent a change in control that our stockholders might consider to be in their best
interests.

We are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits "business
combinations" between a Delaware corporation and an "interested stockholder," which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation's
voting stock, for a three-year period following the date that such stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring or
preventing a change in control that our stockholders might consider to be in their best interests.

Item 2Unregistered Sales of Equity Securities and Use of Proceeds

(c)   Issuer Purchases of Equity Securities

In April 2007, our Board of Directors authorized the repurchase of up to an aggregate of 10,000,000 shares of our common stock. The 10,000,000 shares authorized
for repurchase included approximately 3,393,300 shares that remained available for repurchase under a previously authorized repurchase program. As of September 30, 2009, we repurchased an
aggregate of 1,169,100 shares under this program at an average price paid per share, excluding commissions, of $36.17.

We
did not repurchase any shares of common stock during the three months ended September 30, 2009. Future repurchases pursuant to this program may require regulatory approval.

Item 6Exhibits

See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this quarterly report
which Exhibit Index is incorporated herein by this reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

THE FIRST MARBLEHEAD CORPORATIONDate: November 6, 2009

By:

/s/ KENNETH KLIPPER Kenneth Klipper Managing Director, Chief Financial Officer, Treasurer and Chief Accounting Officer
(Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)


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EXHIBIT INDEX

Exhibit
Number

Description10.1(1)

Supervisory Agreement, dated as of July 2, 2009, between the Registrant and the Office of Thrift Supervision10.2(1)

Office of Thrift Supervision Order to Cease and Desist, dated as of July 2, 2009, in the matter of Union Federal Savings Bank10.3(1)

Office of Thrift Supervision Stipulation and Consent to Issuance of Order to Cease and Desist, dated as of July 2, 2009, in the matter of Union Federal Savings Bank10.4(2)

Loan Purchase and Sale Agreement, dated October 13, 2009, between Union Federal Savings Bank and Wells Fargo Bank, N.A.10.5(2)

Performance Guarantee, dated October 16, 2009, delivered by the Registrant to Wells Fargo Bank, N.A.31.1

Chief Executive OfficerCertification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Chief Financial OfficerCertification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Chief Executive OfficerCertification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2

Chief Financial OfficerCertification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
200299.1(3)

Trust static pool data as of September 30, 200999.2(3)

Supplemental presentation


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