Use these links to rapidly review the documentINDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Exhibit 99.1

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                  |                                                                                                             | Page
|------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ----
|The First Marblehead Corporation and Subsidiaries |                                                                                                             |     
|                                                  | Independent Auditors' Report                                                                                |     
|                                                  | Consolidated Balance Sheets as of June 30, 2003 and 2002                                                    |     
|                                                  | Consolidated Statements of Income for the years ended June 30, 2003, 2002 and 2001                          |     
|                                                  | Consolidated Statements of Changes in Stockholders' Equity for the years ended
June 30, 2003, 2002 and 2001 |     
|                                                  | Consolidated Statements of Cash Flows for the years ended June 30, 2003, 2002 and 2001                      |     
|                                                  | Notes to Consolidated Financial Statements                                                                  |     

F-1

---



INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
The First Marblehead Corporation:

We
have audited the accompanying consolidated balance sheets of The First Marblehead Corporation and subsidiaries (the Company) as of June 30, 2003 and 2002, and the related
consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 2003. These financial statements are
the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The First Marblehead Corporation and
subsidiaries as of June 30, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2003 in
conformity with accounting principles generally accepted in the United States of America.

/s/
KPMG LLP

September
4, 2003, except as to note 15,
which is as of October 29, 2003

Boston,
Massachusetts

F-2

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS    June 30, 2003 and 2002

|                                             |                                                                                                                                                                         | 2003                                       |                                 | 2002       |           
|-------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------- | ---------- | ----------
|ASSETS                                       |                                                                                                                                                                         |                                            |                                 |            |           
|Cash and other short-term investments        |                                                                                                                                                                         | $                                          | 16,756,653                      |            | $         
|Securities purchased under resale agreements |                                                                                                                                                                         |                                            | 1,570,365                       |            |           
|                                             |                                                                                                                                                                         |                                            |                                 |            |           
|                                             |                                                                                                                                                                         |                                            | Total cash and cash equivalents |            |           
|                                             |                                                                                                                                                                         |                                            |                                 |            |           
|Service receivables:                         |                                                                                                                                                                         |                                            |                                 |            |           
|                                             | Structural advisory fees                                                                                                                                                |                                            |                                 | 10,785,583 |           
|                                             | Residuals                                                                                                                                                               |                                            |                                 | 43,600,465 |           
|                                             | Processing fees from The Education Resources Institute (TERI)                                                                                                           |                                            |                                 | 2,519,435  |           
|                                             |                                                                                                                                                                         |                                            |                                 |            |           
|                                             |                                                                                                                                                                         |                                            | 56,905,483                      |            |           
|Other receivables                            |                                                                                                                                                                         |                                            | 142,818                         |            |           
|                                             |                                                                                                                                                                         |                                            |                                 |            |           
|Property and equipment                       |                                                                                                                                                                         |                                            | 6,255,181                       |            |           
|                                             | Less accumulated depreciation and amortization                                                                                                                          |                                            |                                 | (1,839,319 | )         
|                                             |                                                                                                                                                                         |                                            |                                 |            |           
|                                             |                                                                                                                                                                         | Property and equipment, net                |                                 |            | 4,415,862 
|Goodwill                                     |                                                                                                                                                                         |                                            | 3,176,497                       |            |           
|Intangible assets, net                       |                                                                                                                                                                         |                                            | 3,608,538                       |            |           
|Prepaid and other assets                     |                                                                                                                                                                         |                                            | 477,019                         |            |           
|                                             |                                                                                                                                                                         |                                            |                                 |            |           
|                                             |                                                                                                                                                                         | Total assets                               |                                 | $          | 87,053,235
|                                             |                                                                                                                                                                         |                                            |                                 |            |           
|LIABILITIES AND STOCKHOLDERS' EQUITY         |                                                                                                                                                                         |                                            |                                 |            |           
|Liabilities:                                 |                                                                                                                                                                         |                                            |                                 |            |           
|                                             | Accounts payable and accrued expenses                                                                                                                                   |                                            | $                               | 13,558,897 |           
|                                             | Net deferred tax liability                                                                                                                                              |                                            |                                 | 14,395,985 |           
|                                             | Notes payable to related parties                                                                                                                                        |                                            |                                 |           |           
|                                             | Notes payable to TERI                                                                                                                                                   |                                            |                                 | 6,674,020  |           
|                                             |                                                                                                                                                                         |                                            |                                 |            |           
|                                             |                                                                                                                                                                         | Total liabilities                          |                                 |            | 34,628,902
|                                             |                                                                                                                                                                         |                                            |                                 |            |           
|Commitments and contingencies                |                                                                                                                                                                         |                                            |                                 |            |           
|Stockholders' equity:                        |                                                                                                                                                                         |                                            |                                 |            |           
|                                             | Preferred stock, par value $0.01 per share; 20,000,000 shares authorized; no shares issued or outstanding                                                               |                                            |                                 |           |           
|                                             | Common stock, par value $0.01 per share; 100,000,000 shares authorized; 53,185,440 and 51,121,760 shares issued and outstanding at June 30, 2003 and 2002, respectively |                                            |                                 | 531,854    |           
|                                             | Additional paid-in capital                                                                                                                                              |                                            |                                 | 13,239,353 |           
|                                             | Retained earnings                                                                                                                                                       |                                            |                                 | 38,653,126 |           
|                                             |                                                                                                                                                                         |                                            |                                 |            |           
|                                             |                                                                                                                                                                         | Total stockholders' equity                 |                                 |            | 52,424,333
|                                             |                                                                                                                                                                         |                                            |                                 |            |           
|                                             |                                                                                                                                                                         | Total liabilities and stockholders' equity |                                 | $          | 87,053,235
|                                             |                                                                                                                                                                         |                                            |                                 |            |           

See
accompanying notes to consolidated financial statements.

F-3

---

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME    Years ended June 30, 2003, 2002 and 2001

|                        |                                     | 2003                                         |            | 2002       |            | 2001       |           
|----------------------- | ----------------------------------- | -------------------------------------------- | ---------- | ---------- | ---------- | ---------- | ----------
|Service revenue:        |                                     |                                              |            |            |            |            |           
|                        | Structural advisory fees            |                                              | $          | 39,336,698 |            | $          | 14,760,226
|                        | Residuals                           |                                              |            | 30,027,105 |            |            | 11,831,993
|                        | Administrative and other fees       |                                              |            | 1,414,617  |            |            | 474,878   
|                        | Processing fees from TERI           |                                              |            | 20,577,486 |            |            | 14,191,952
|                        |                                     |                                              |            |            |            |            |           
|                        |                                     | Total service revenue                        |            |            | 91,355,906 |            |           
|                        |                                     |                                              |            |            |            |            |           
|Operating expenses:     |                                     |                                              |            |            |            |            |           
|                        | Compensation and benefits           |                                              |            | 19,815,912 |            |            | 11,488,563
|                        | General and administrative expenses |                                              |            | 16,072,928 |            |            | 10,651,639
|                        |                                     |                                              |            |            |            |            |           
|                        |                                     | Total operating expenses                     |            |            | 35,888,840 |            |           
|                        |                                     |                                              |            |            |            |            |           
|Income from operations  |                                     |                                              | 55,467,066 |            |            | 19,118,847 |           
|                        |                                     |                                              |            |            |            |            |           
|Other (income) expense: |                                     |                                              |            |            |            |            |           
|                        | Interest expense                    |                                              |            | 1,561,105  |            |            | 1,804,493 
|                        | Interest income                     |                                              |            | (104,782   | )          |            | (91,219   
|                        | Other income                        |                                              |            | (2,400     | )          |            | (130,737  
|                        |                                     |                                              |            |            |            |            |           
|                        |                                     | Total other (income) expense, net            |            |            | 1,453,923  |            |           
|                        |                                     |                                              |            |            |            |            |           
|                        |                                     | Income before income tax expense             |            |            | 54,013,143 |            |           
|Income tax expense      |                                     |                                              | 22,514,388 |            |            | 5,306,933  |           
|                        |                                     |                                              |            |            |            |            |           
|                        |                                     | Net income                                   |            | $          | 31,498,755 |            | $         
|                        |                                     |                                              |            |            |            |            |           
|                        |                                     | Net income per share, basic                  |            | $          | 0.59       |            | $         
|                        |                                     | Net income per share, diluted                |            |            | 0.51       |            |           
|                        |                                     | Weighted average shares outstanding, basic   |            |            | 53,099,116 |            |           
|                        |                                     | Weighted average shares outstanding, diluted |            |            | 61,560,992 |            |           

See
accompanying notes to consolidated financial statements.

F-4

---



THE FIRST MARBLEHEAD CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY    Years ended June 30, 2003, 2002 and 2001

|                         |                       | Common
stock |         | Additional
paid-in
capital |   | Retained
earnings |           | Total
stockholders'
equity
|------------------------ | --------------------- | ------------ | ------- | -------------------------- | - | ----------------- | --------- | --------------------------
|Balance at June 30, 2000 |                       | $            | 511,218 |                            | $ | 10,303,509        |           | $                         
|                         | Net income            |              |         |                           |   |                   |          |                           
|                         |                       |              |         |                            |   |                   |           |                           
|Balance at June 30, 2001 |                       |              | 511,218 |                            |   | 10,303,509        |           |                           
|                         | Warrants exercised    |              |         |                           |   |                   | 666,000   |                           
|                         | Net income            |              |         |                           |   |                   |          |                           
|                         |                       |              |         |                            |   |                   |           |                           
|Balance at June 30, 2002 |                       |              | 511,218 |                            |   | 10,969,509        |           |                           
|                         | Warrants exercised    |              |         | 19,996                     |   |                   | 1,313,684 |                           
|                         | Options exercised     |              |         | 640                        |   |                   | 56,160    |                           
|                         | Non-cash compensation |              |         |                           |   |                   | 900,000   |                           
|                         | Net income            |              |         |                           |   |                   |          |                           
|                         |                       |              |         |                            |   |                   |           |                           
|Balance at June 30, 2003 |                       | $            | 531,854 |                            | $ | 13,239,353        |           | $                         
|                         |                       |              |         |                            |   |                   |           |                           

See
accompanying notes to consolidated financial statements.

F-5

---

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS    Years ended June 30, 2003, 2002 and 2001

|                                                                                  |                                                    | 2003                                                               |                                                      | 2002       |             | 2001       |          
|--------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------------------------ | ---------------------------------------------------- | ---------- | ----------- | ---------- | ---------
|Cash flows from operating activities:                                             |                                                    |                                                                    |                                                      |            |             |            |          
|Net income                                                                        |                                                    | $                                                                  | 31,498,755                                           |            | $           | 12,229,377 |          
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                    |                                                                    |                                                      |            |             |            |          
|                                                                                  | Depreciation                                       |                                                                    |                                                      | 1,434,505  |             |            | 510,139  
|                                                                                  | Amortization                                       |                                                                    |                                                      | 1,017,995  |             |            | 868,523  
|                                                                                  | Non-cash compensation                              |                                                                    |                                                      | 900,000    |             |            |         
|                                                                                  | Change in assets/liabilities:                      |                                                                    |                                                      |            |             |            |          
|                                                                                  |                                                    | Increase in processing fees from TERI and other receivables        |                                                      |            | (254,090    | )          |          
|                                                                                  |                                                    | Increase in structural advisory fees                               |                                                      |            | (6,025,115  | )          |          
|                                                                                  |                                                    | Increase in residuals                                              |                                                      |            | (30,027,105 | )          |          
|                                                                                  |                                                    | Increase in prepaid and other assets                               |                                                      |            | (138,128    | )          |          
|                                                                                  |                                                    | Increase in deferred tax liability                                 |                                                      |            | 9,130,922   |            |          
|                                                                                  |                                                    | Increase in accounts payable and accrued expenses                  |                                                      |            | 10,266,658  |            |          
|                                                                                  |                                                    |                                                                    |                                                      |            |             |            |          
|                                                                                  |                                                    |                                                                    | Net cash provided by operating activities            |            |             | 17,804,397 |          
|                                                                                  |                                                    |                                                                    |                                                      |            |             |            |          
|                                                                                  | Cash flows from investing activities:              |                                                                    |                                                      |            |             |            |          
|                                                                                  |                                                    | Purchases of property and equipment                                |                                                      |            | (2,287,336  | )          |          
|                                                                                  |                                                    | Net cash paid for acquisition of TERI's loan processing operations |                                                      |            | (747,528    | )          |          
|                                                                                  |                                                    |                                                                    |                                                      |            |             |            |          
|                                                                                  |                                                    |                                                                    | Net cash flow used for investing activities          |            |             | (3,034,864 | )        
|                                                                                  |                                                    |                                                                    |                                                      |            |             |            |          
|                                                                                  | Cash flows from financing activities:              |                                                                    |                                                      |            |             |            |          
|                                                                                  |                                                    | Repayment on notes payable to TERI                                 |                                                      |            | (631,328    | )          |          
|                                                                                  |                                                    | Repayment on notes payable to related parties                      |                                                      |            | (4,518,000  | )          |          
|                                                                                  |                                                    | Proceeds from notes payable to related parties                     |                                                      |            |            |            |          
|                                                                                  |                                                    | Stock warrants and options exercised                               |                                                      |            | 1,390,480   |            |          
|                                                                                  |                                                    |                                                                    |                                                      |            |             |            |          
|                                                                                  |                                                    |                                                                    | Net cash provided by (used for) financing activities |            |             | (3,758,848 | )        
|                                                                                  |                                                    |                                                                    |                                                      |            |             |            |          
|                                                                                  | Net increase in cash and cash equivalents          |                                                                    |                                                      | 11,010,685 |             |            | 541,392  
|                                                                                  | Cash and cash equivalents, beginning of year       |                                                                    |                                                      | 7,316,333  |             |            | 6,774,941
|                                                                                  |                                                    |                                                                    |                                                      |            |             |            |          
|                                                                                  | Cash and cash equivalents, end of year             |                                                                    | $                                                    | 18,327,018 |             | $          | 7,316,333
|                                                                                  |                                                    |                                                                    |                                                      |            |             |            |          
|                                                                                  | Supplemental disclosures of cash flow information: |                                                                    |                                                      |            |             |            |          
|                                                                                  |                                                    | Interest paid                                                      |                                                      | $          | 1,561,105   |            | $        
|                                                                                  |                                                    |                                                                    |                                                      |            |             |            |          
|                                                                                  |                                                    | Income taxes paid                                                  |                                                      | $          | 7,099,099   |            | $        
|                                                                                  |                                                    |                                                                    |                                                      |            |             |            |          
|                                                                                  | Supplemental disclosure of noncash activities:     |                                                                    |                                                      |            |             |            |          
|                                                                                  |                                                    | Structural advisory fees and residuals                             |                                                      | $          | 36,052,220  |            | $        
|                                                                                  |                                                    |                                                                    |                                                      |            |             |            |          
|                                                                                  |                                                    | Non-cash compensation                                              |                                                      | $          | 900,000     |            | $        
|                                                                                  |                                                    |                                                                    |                                                      |            |             |            |          

In
conjunction with the purchase acquisition detailed in Note 5 to the consolidated financial statements, assets were acquired and liabilities were assumed as follows:

|Fair value of assets acquired |  | $ |  |  | $ | 132,966 |  | $ | 9,230,456
|----------------------------- |  | - | - |  | - | ------- |  | - | ---------
|Liabilities assumed           |  |   |  |  |   |        |  |   | 739,871  

See
accompanying notes to consolidated financial statements.

F-6

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    June 30, 2003, 2002 and 2001

(1)   Nature of Business

The First Marblehead Corporation (FMC, and together with its subsidiaries, the Company), which was incorporated under the laws of the State of Delaware on August
13, 1994, provides outsourcing services for private education lending in the United States. The Company helps meet the growing demand for private education loans by providing national and regional
financial institutions and educational institutions, as well as businesses and other enterprises, with an integrated suite of services for designing and implementing student loan programs for their
respective customers, students, employees and members. The Company focuses primarily on loan programs for undergraduate, graduate and professional education, and, to a lesser degree, on the primary
and secondary school market. The Company is entitled to receive structural advisory fees and residuals for its services in connection with securitizations of loans generated by the loan programs that
it facilitates. The Company also receives fees for administrative services for The National Collegiate Master Student Loan Trust I (NCMSLT) and for The National Collegiate Trust (NCT) and the separate
securitization trusts established by NCT (NCT trusts).

The
Company offers services in connection with loan programs in two major marketing channels, private label and Guaranteed Access to Education, or GATE. To date, the Company has used
discrete trust vehicles, depending on the marketing channel, for the securitizations that it facilitates. TERI-guaranteed private label loans have generally been purchased by NCMSLT. GATE loans, and a
limited number of TERI-guaranteed and other loans, have been purchased by the NCT trusts.

FMC
has four wholly-owned subsidiaries:



On
June 20, 2001, FMC and TERI completed a purchase and sale agreement that provided for FMC to acquire TERI's loan processing operations, including its historical database and
workforce in place. FMER provides to TERI, under a Master Servicing Agreement, outsourced services including loan origination, customer service, default prevention, default processing and
administrative services. TERI reimburses FMER on a monthly basis for expenses incurred relating to the service being performed on TERI's behalf based on the terms of the Master Servicing Agreement
(see Note 5).

F-7

---

(2)   Summary of Significant Accounting Policies



Cash and cash equivalents include balances in money market funds and securities purchased under resale agreements with original maturities of three months or
less. Securities purchased under resale agreements matured on July 1, 2003 and were collateralized by asset-backed securities owned by the bank that has provided the Company with its letters of
credit (see Note 9). These asset-backed securities had a market value of $2,499,100 at June 30, 2003.



The Company provides for depreciation by the straight-line or accelerated methods at rates adequate to depreciate the appropriate assets over their
estimated useful lives. Leasehold improvements are amortized over the shorter of the lease terms or the estimated useful lives of the improvements.

2003

2002

Useful lifeEquipment

$
3,911,373

$
3,249,059

35 yearsSoftware


1,072,442


373,249

3 yearsLeasehold improvements


498,836


83,531

5 years or lease termCapital lease


404,968


55,688

lease termFurniture and fixtures


367,562


470,054

57 years6,255,181


4,231,581Less accumulated depreciation


(1,839,319
)

(668,551
)Total property and equipment, net

$
4,415,862

$
3,563,030




The preparation of financial statements in accordance with accounting standards generally accepted in the United States of America requires management to make
estimates and assumptions (including the determination of the present value of expected future cash flows) that affect the reported amounts of assets and liabilities and the 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. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to change relate to the recognition and valuation of structural advisory fees and residuals, and the valuation of goodwill and intangible assets.
The Company considers the methods by which it makes these estimates and assumptions, as well as its policy with respect to the determination of whether or not to consolidate the securitization
vehicles that it facilitates, to be critical accounting policies.



Structural advisory fees are paid to the Company from NCMSLT and the NCT trusts for structuring and facilitating the securitization of the student loans and are
recognized in service revenue when the loans are securitized. A portion of such fees is paid to the Company upon securitization and is based upon a percentage of the loan balance in the loan pool
securitized. During fiscal 2003, the structural advisory fees paid at the time of the two fiscal 2003 NCMSLT securitizations, as a percentage of actual loans securitized, were 5.8% and 6.7%, and the
structural advisory fee paid at the time of the fiscal 2003 NCT trust securitization, as a percentage of actual loans securitized, was 7.4% (of which 37% of the fee, or $1,983,192, was invested in the
2003 NCT trust and, on a discounted basis, is included in residuals). During fiscal 2002, the structural advisory fees paid at the time of the fiscal 2002

F-8

---

NCMSLT
securitization and 2002 NCT trust securitization, as a percentage of actual loans securitized, were 4.0% and 5.4%, respectively (of which 31% of the NCT trust securitization fee, or $1,751,290,
was invested in the 2002 NCT trust and, on a discounted basis, is included in residuals). During fiscal 2001, the structural advisory fee paid at the time of the fiscal 2001 NCT trust securitization,
as a percentage of actual loans securitized, was 6.95% (of which 25% of the fee, or $1,231,087, was invested in the 2001 NCT trust and, on a discounted basis, is included in residuals).

These
investments in the NCT trusts were accounted for as a reduction in our structural advisory fees collected upon securitization and were recognized as residuals, accounted for in
accordance with Accounting Principles Board Opinion No. 21, " Interest on Receivables and Payables."

Further,
the Company collects additional structural advisory fees over the life of the student loan once the assets of a securitization trust exceed its liabilities by amounts stipulated
in the related indenture agreement, which excess ranges from 3.5% to 5.0%. For the securitizations conducted in fiscal 2003, 2002 and 2001, this fee amounts to 0.15% of the student loan balances
outstanding in the trusts from time to time over the life of the student loans securitized.



The Company is entitled to receive in NCMSLT 75% of the residuals representing its interests, once the balance of the loans in NCMSLT exceeds the balance of the
debt by 3.5%. The Company is also entitled to receive from the NCT trusts a fee of 10% of the residuals of GATE loans plus a share of the residuals (primarily determined by the percentage of
securitized loans related to FMC's investment) based on its beneficial interests in the fiscal 2003, 2002, 2001, 2000 and 1999 securitizations in each NCT trust after all bondholders have been repaid.
The Company's investment in the NCT trusts was made in order to eliminate the default risk exposure of a limited number of schools. In exchange, the
Company received the rights to residual interests that these schools would otherwise hold in the trust. The value of this residual is primarily affected by the loan performance at these schools.



The estimated present value of the additional structural advisory fees and residuals, net of prepayment, default and recovery assumptions, is deemed earned at the
time a securitization transaction is completed because evidence of an arrangement exists, services have been provided, the fee is fixed and determinable based on discounted cash flow analyses, and
collectibility is reasonably assured.

Structural
advisory fees and residuals receivables are carried on the balance sheet at fair value and are evaluated on a periodic basis based on the present value of expected future cash
flows, using management's best estimates. These estimates are based on historical and third-party data, and the Company's industry experience with the assumptions for default, prepayments, recoveries
and discount rates commensurate with the risk involved, considering current student loan balances and current outstanding balances of borrowings in the securitization trusts.



Administrative fees are paid from NCMSLT and the NCT trusts to FMDS as of each trust payment date for the daily management of the securitization trusts and the
services provided in obtaining information from the servicers and reporting to parties related to a securitization. The fee is based upon a percentage of the outstanding principal balance of each of
the debt of the NCT trusts and NCMSLT. The fee varies with each separate securitization and can range from 5 basis points to 20 basis points. The fee was 20 basis points for the fiscal 2003 NCT trust
securitization and 10 basis points for the two fiscal 2003 NCMSLT securitizations, and 10 basis points for all of the fiscal 2002 and 2001 securitizations. The Company recognizes such fees in service
revenue when earned, as administrative services are provided.

F-9

---

Other
fees are based upon a fixed dollar amount per loan and/or a percentage of the loan balance and are recognized in service revenue upon origination by the third-party financial
institution. Other fees include fee income to FMER relating to a supplement to the Master Servicing Agreement that entitles FMER to 50% of fee income earned by TERI on an accrual basis based upon loan
origination as stipulated in the loan origination agreement between TERI and a third-party financial institution.



Processing fees from TERI consist of reimbursement of expenses incurred by FMER relating to services performed on behalf of TERI under the terms of the Master
Servicing Agreement and are recognized as services are performed.

Interest
income is accrued based on the expected rate to be paid by the financial institution multiplied by the cash or short term investment balance.



Goodwill has been recorded as the excess of the purchase price paid over the fair value of net assets of the business acquired. The goodwill consists of the fair
value of workforce-in-place as well as certain direct acquisition costs and a fair value adjustment for liabilities assumed. The fair value of the
workforce-in-place was based upon an appraisal obtained from an independent third-party.

Goodwill
is not amortized but is evaluated for impairment at least annually, and the Company has concluded that goodwill was not impaired as of June 30, 2003. The Company
early-adopted Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets," during fiscal 2001. The Company considers the following factors in assessing
goodwill for impairment: an appraisal obtained from a third-party, increases in private label loan volume facilitated and securities, the number of private label customers, and revenues and
profitability related to private label loans. Impairment, if any, would be determined based upon a discounted cash flow analysis, using a discount rate commensurate with the risks involved.



Intangible assets were also recorded in connection with the TERI acquisition and consist of the cost of the acquired loan database. This database tracks
information such as borrower credit characteristics, borrowing practices, interest rates, fees and default rates, and provides several significant competitive advantages. The data allow the Company to
analyze risk trends and the amount of risk specific to the loans that become part of the securitizations that it structures. Additionally, the data assist in the Company's default prevention efforts
by providing a basis by which it monitors borrower default experiences. The Company also utilizes the database information to monitor and analyze student loan information in order to customize loan
products for the Company's third-party lender clients and to assist them in the risk-based pricing of the loan products.

This
loan database was valued based upon an appraisal obtained from an independent third-party. Intangible assets are amortized over their estimated useful life of five years, using the
straight-line method. Capitalized costs paid to TERI for monthly database updates are amortized over five years from the date of capitalization. Intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

As
of June 30, 2003, the Company had approximately $3.6 million in unamortized identifiable intangible assets. During the year ended June 30, 2003, $747,528 of
additional intangible assets were recognized relating to updates which add significant value and extend the useful life of the loan database purchased.

F-10

---

Total
amortization expense associated with these intangible assets in fiscal 2003 and 2002 was $1,017,995 and $868,523, respectively. Estimated future amortization expense for these
assets during the next five fiscal years is as follows:

2004

$
1,167,5342005


1,317,0402006


1,466,5452007


679,0382008


529,499




The consolidated financial statements include the accounts of FMC and its subsidiaries, after eliminating intercompany accounts and transactions. Prior to
July 1, 2003, excluding securitization trusts created after January 31, 2003, in accordance with various Emerging Issues Task Force issues and related interpretations, the Company did
not consolidate the NCMSLT and the NCT trusts created for securitization purposes. The Company considered, among other things, the following factors in assessing consolidation of the securitization
trusts:



Beginning
July 1, 2003, and for securitization trusts created after January 31, 2003, the Company applies FASB Interpretation (FIN) No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51," in assessing consolidation. FIN No. 46 provides a new framework for identifying variable interest entities and determining when a
company should include the assets, liabilities, non-controlling interests and results of activities of a variable interest entity in its consolidated financial statements. At June 30,
2003, the existing securitization trusts created after January 31, 2003 have either met the criteria to be a qualified special-purpose entity (QSPE), as defined in paragraph 35 of SFAS
No. 140, "Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," or the Company has determined that it is not the primary beneficiary of the
securitization trusts, as defined by FIN No. 46. Accordingly, the Company did not consolidate these existing securitization trusts in these financial statements. The Company is currently
evaluating the securitization trusts created prior to January 31, 2003 to determine if the Company is the primary beneficiary. If the Company determines that it is the primary beneficiary of
any of these securitization trusts, the Company expects the parties to the trust documents to amend them in order for these securitization trusts to be considered QSPEs.

In
June 2003, the FASB issued an Exposure Draft, "Qualifying Special-Purpose Entities and Isolation of Transferred Assetsan amendment of FASB Statement
No. 140." This proposal would, among other things, change the requirements that an entity must meet to be considered a QSPE. The Company is monitoring the status of this Exposure Draft to
assess the impact to the Company's financial condition and results of operations.

F-11

---



The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. 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 on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.



Effective January 1, 2002, FMER has a non-contributory defined benefit pension plan, funded through group annuities, that covers substantially
all FMER employees. The pension plan benefit obligation for FMER employees accrued under the TERI plan was transferred to the FMER plan. Plan costs are charged to expense and funded annually. The
expense relating to the pension plan is reimbursed by TERI under the terms of Master Servicing Agreement. FMER uses a June 30 measurement date to determine its pension expense and related
financial statement disclosure information.



The Company applies SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the
fair value of stock-based awards on the date of grant. For employee stock-based awards, SFAS No. 123 allows entities to continue to apply the provisions of Accounting Principles Board (APB)
Opinion No. 25 and provide pro forma net earnings disclosures as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the
provisions of APB No. 25 and provide the pro forma disclosures of SFAS No. 123.

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

For
purposes of pro forma disclosures, the estimated fair value of the stock options is amortized to expense over the vesting period of the options. The Company's consolidated pro forma
net income and net income per share for the years ended June 30, 2003, 2002 and 2001, had the Company elected to

F-12

---

recognize
compensation expense for the granting of options under SFAS No. 123 using the Black-Scholes option pricing model, are as follows for the years ended June 30, 2003, 2002 and 2001:

|                                                                                                                           |  | 2003 |            | 2002 |   | 2001      
|-------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|Net incomeas reported                                                                                                     |  | $    | 31,498,755 |      | $ | 12,229,377
|Less: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of tax |  |      | (459,931   | )    |   | (275,548  
|                                                                                                                           |  |      |            |      |   |           
|Net incomepro forma                                                                                                       |  | $    | 31,038,824 |      | $ | 11,953,829
|                                                                                                                           |  |      |            |      |   |           
|Net income per sharebasicas reported                                                                                     |  | $    | 0.59       |      | $ | 0.24      
|Net income per sharebasicpro forma                                                                                       |  |      | 0.58       |      |   | 0.23      
|Net income per sharedilutedas reported                                                                                   |  |      | 0.51       |      |   | 0.20      
|Net income per sharedilutedpro forma                                                                                     |  |      | 0.50       |      |   | 0.19      

The fair value of the options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended June 30, 2003, 2002 and 2001:

|Assumption                       |  | 2003  |  | 2002  |  | 2001 
|-------------------------------- |  | ----- |  | ----- |  | -----
|Expected risk-free interest rate |  | 3.91% |  | 4.95% |  | 6.10%
|Expected dividend yield          |  |      |  |      |  |     
|Expected average life in years   |  | 7     |  | 7     |  | 7    

The
weighted average grant date fair market value of stock options granted during fiscal 2003, 2002 and 2001 was $5.22, $12.91 and $0, respectfully.

Option
pricing models require the input of highly subjective assumptions. Because the Company's employee stock has characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.



The
Company accounts for software costs in accordance with Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP
98-1 requires computer software costs that are incurred in the preliminary project stage to be expensed as incurred. Once the capitalization criteria of SOP 98-1 have been met during the other stages
of the software's development, directly attributable costs should be capitalized. During fiscal 2003, 2002 and 2001, the Company capitalized $410,335, $118,027 and $0, respectively, of software costs.

The
Company accounts for its web site development costs consistent with EITF Issue No. 00-2, "Accounting for Web Site Development Costs." Issue 00-2 requires that planning costs
be expensed as incurred, costs to develop web site application and infrastructure and graphics be capitalized once the capitalization criteria of SOP 98-1 have been met, and operating costs such as
training and maintenance, unless such costs add new functionality, be expensed as incurred. During fiscal 2003, 2002 and 2001, the Company capitalized $288,859, $0 and $0, respectively, of web site
development costs.

The
capitalized software and web site development costs are being amortized over their useful life of three years.

F-13

---



Basic net income per share is computed by dividing net income by the basic weighted-average number of shares outstanding for the periods presented. Diluted net
income per share is computed by dividing net income by the diluted weighted average shares outstanding and common equivalent shares outstanding during the period. The weighted average shares
outstanding and common equivalent shares outstanding has been determined in accordance with the treasury stock method. Common stock equivalents consist of stock issuable upon the exercise of
outstanding stock options.

F-14

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    June 30, 2003, 2002 and 2001

(2)   Summary of Significant Accounting Policies



The Company has no sources of other comprehensive income. Therefore, comprehensive income consists solely of net income.



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

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition when companies elect to change from the intrinsic method to the fair value method of accounting
for stock-based employee compensation, including stock options. In addition, this statement amends the disclosure requirement of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the fair value based method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective
for fiscal years ended after December 15, 2002 and the disclosures to be provided in interim financial reports are required for interim periods beginning after December 15, 2002. We
currently use the intrinsic method of accounting for stock options and have not yet determined if we will change to the fair value method of accounting for employee stock options.

In
November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others."
This Interpretation requires the recording at fair value of the issuance of certain guarantees, which would include FMC's guarantee to TERI for the full and timely performance by FMER under the terms
of the Master Servicing Agreement (see note 5). The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. Adoption of the Interpretation did not materially affect our financial condition, results of operations, earnings per share or cash flows.

In
July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires the recognition of certain
costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This Statement is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. Adoption of this standard did not materially affect our financial condition, results of operations, earnings per share or cash flows.

In
April 2002, the FASB issued SFAS No. 145 which rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax effect. Additionally, SFAS No. 145 amends SFAS No. 13 to require that

F-15

---

certain
lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. We adopted
SFAS No. 145 in 2003. Adoption of this standard did not materially affect our financial condition, results of operations, earnings per share or cash flows.



Certain amounts in prior years have been reclassified to conform to the 2003 consolidated financial statement presentation.

(3)   Industry Segment Information

The Company's activities are considered to be in a single industry segment for financial reporting purposes. The Company is engaged in the business of private
education finance services and related activities. Substantially all income is derived from these activities.

(4)   Service Receivables



Structural advisory fees and residuals receivables represent the present value of additional structural advisory fees and residuals expected to be collected over
the life of the student loan, net of prepayment, default and recovery estimates. The fees are paid from the various NCT trusts and NCMSLT to the Company. Processing fees receivable from TERI
represents amounts due from TERI for expenses incurred by FMER on TERI's behalf.

At June 30,2003

20022003 securitizations

$
32,951,154

$
2002 securitizations


17,888,866


14,795,3692001 securitization


1,890,130


1,767,9062000 securitization


1,212,471


1,219,2991999 securitization


443,427


551,254Total structural advisory fees and residuals


54,386,048


18,333,828Processing fees receivable from TERI


2,519,435


2,059,560Total service receivables

$
56,905,483

$
20,393,388


The
following table summarizes the changes in the fair value of the structural advisory fees receivable for the years ended June 30, 2003 and 2002, respectively:

2003

2002Fair value at beginning of year

$
4,760,468

$
1,547,072Additions from structuring new securitizations


5,452,550


3,143,161Fair market value adjustments


572,565


70,235Fair value at end of year

$
10,785,583

$
4,760,468


F-16

---

The
following table summarizes the changes in the fair value of the residuals receivable for the years ended June 30, 2003 and 2002, respectively:

2003

2002Fair value at beginning of year

$
13,573,360

$
1,741,367Additions from structuring new securitizations


27,498,604


11,652,208Fair market value adjustments


2,528,501


179,785Fair value at end of year

$
43,600,465

$
13,573,360


The
cash flows on structural advisory fees receivable from scheduled securitization trust cash flows were discounted at a rate equal to the 10-year Treasury rate at
June 30, 2003 and 2002 plus 2.0%. The discount rate used at June 30, 2003 and 2002 for the fiscal 2003 and 2002 securitizations was 5.33% and 6.86%, respectively, for the structural
advisory fees receivable. The discount rate used to measure the fair value of the residuals receivable was 12% for the years ended June 30, 2003 and 2002. Prepayment assumptions used on private
label loans were 7% in fiscal 2003 and 2002, and on GATE loans were 4% in fiscal 2003 and 3% in fiscal 2002. Default assumptions used on private label loans were 8.1% in fiscal 2003 and ranged from
6.9% to 9.0% in fiscal 2002. Default assumptions used on GATE loans were 25% in fiscal 2003 and 2002. Recovery rate assumptions used on private label loans were 40% in fiscal 2003 and ranged from 40%
to 50% in fiscal 2002. Recovery rate assumptions used on GATE loans were 50% in fiscal 2003 and 2002.

In
connection with the three most recent securitizations of GATE loans, in order to accommodate a limited number of schools, the Company invested approximately $2.0 million,
$1.8 million, and $1.2 million, respectively, of the Company's up-front structural advisory fees in the NCT trusts. These investments entitle the Company to additional
interest in the residuals of the NCT trusts and are included in residuals receivable on the consolidated balance sheets.

The
above receivables are anticipated to be collected over the estimated lives of the securitization trusts. For the 2003 securitizations, the cash flows of the securitization trusts are
expected to be collected over approximately 20 to 24 years and, based on the assumptions used, the structural advisory fees and residuals receivables are anticipated to be collected beginning
in 2008. For the 2002 securitizations, the cash flows of the securitization trusts are expected to be collected over approximately 17 to 20 years and, based on the assumptions used, the
structural advisory fees and residuals receivables are anticipated to be collected beginning in 2008. As the receivables are determined using various assumptions and factors, actual results may differ
from these estimates.

F-17

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    June 30, 2003, 2002 and 2001

(4)   Service Receivables

The
effect on the fair value of the structural advisory fees and residuals receivables 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 June 30, 2003, from the assumed levels for each key assumption is as follows:

|Structural advisory fees receivables, June 30, 2003 |      | $ | 10,785,583 |          |                       |      |  |   |         
|--------------------------------------------------- | ---- | - | ---------- | -------- | --------------------- | ---- |  | - | --------
|                                                    |      |   |            |          |                       |      |  |  
|Default rate                                        |      |   |            |          | Default rate          |      |  |   |         
|                                                    | +10% |   | $          | (179,000 | )                     | -10% |  | $ | 114,000 
|                                                    | +20% |   |            | (261,000 | )                     | -20% |  |   | 244,000 
|Default recovery rate                               |      |   |            |          | Default recovery rate |      |  |   |         
|                                                    | +10% |   |            | 11,000   |                       | -10% |  |   | (60,000 
|                                                    | +20% |   |            | 35,000   |                       | -20% |  |   | (60,000 
|Prepayment rate                                     |      |   |            |          | Prepayment rate       |      |  |   |         
|                                                    | +10% |   |            | (354,000 | )                     | -10% |  |   | 318,000 
|                                                    | +20% |   |            | (637,000 | )                     | -20% |  |   | 659,000 
|Discount rate                                       |      |   |            |          | Discount rate         |      |  |   |         
|                                                    | +10% |   |            | (374,000 | )                     | -10% |  |   | 389,000 
|                                                    | +20% |   |            | (730,000 | )                     | -20% |  |   | 798,000 
|Forward LIBOR rates                                 |      |   |            |          | Forward LIBOR rates   |      |  |   |         
|                                                    | +1%  |   |            | 274,000  |                       | -1%  |  |   | (251,000
|                                                    | +2%  |   |            | 575,000  |                       | -2%  |  |   | (555,000

|Residuals receivables,
June 30, 2003 |      | $ | 43,600,465 |            |                       |      |  |   |           
|------------------------------------ | ---- | - | ---------- | ---------- | --------------------- | ---- |  | - | ----------
|                                     |      |   |            |            |                       |      |  |  
|Default rate                         |      |   |            |            | Default rate          |      |  |   |           
|                                     | +10% |   | $          | (1,387,000 | )                     | -10% |  | $ | 367,000   
|                                     | +20% |   |            | (3,412,000 | )                     | -20% |  |   | 691,000   
|Default recovery rate                |      |   |            |            | Default recovery rate |      |  |   |           
|                                     | +10% |   |            | 273,000    |                       | -10% |  |   | (351,000  
|                                     | +20% |   |            | 492,000    |                       | -20% |  |   | (1,226,000
|Prepayment rate                      |      |   |            |            | Prepayment rate       |      |  |   |           
|                                     | +10% |   |            | (2,029,000 | )                     | -10% |  |   | 2,131,000 
|                                     | +20% |   |            | (3,974,000 | )                     | -20% |  |   | 4,361,000 
|Discount rate                        |      |   |            |            | Discount rate         |      |  |   |           
|                                     | +10% |   |            | (4,324,000 | )                     | -10% |  |   | 4,885,000 
|                                     | +20% |   |            | (8,154,000 | )                     | -20% |  |   | 10,424,000
|Forward LIBOR rates                  |      |   |            |            | Forward LIBOR rates   |      |  |   |           
|                                     | +1%  |   |            | 1,070,000  |                       | -1%  |  | $ | (1,313,000
|                                     | +2%  |   |            | 1,906,000  |                       | -2%  |  |   | (2,890,000

These
sensitivities 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

F-18

---

assumptions
may not in fact be independent, the net effect of simultaneous adverse changes in key assumptions may be less than the sum of the individual effects above.

The
principal balance and accrued interest of loans securitized in fiscal 2003 and 2002 totaled approximately $560.3 million and $298.4 million, respectively.



Service revenue recognized in the year of securitization on loans securitized and other service revenue for the years ended June 30, 2003, 2002 and 2001 is
as follows:

2003

2002

2001Service revenue recognized related to current year securitization:Structural advisory fees collected upon securitization

$
33,311,583

$
11,546,830

$
3,433,394Structural advisory fees accrued


5,452,550


3,143,161


654,679Residuals accrued


27,498,604


11,652,208


991,966Administrative and other fees accrued


207,285


150,546


139,046Administrative and other fees collected


696,068


67,605


21,808Service revenue recognized in the year of securitization


67,166,090


26,560,350


5,240,893Other service revenue:Income from prior securitizationsStructural advisory fees on loans sold by trusts (see below)








1,111,778Structural advisory fees


572,565


70,235


55,699Residuals


2,528,501


179,785


144,074Administrative and other fees


511,264


256,729


199,317Processing fees from TERI


20,577,486


14,191,950


$
91,355,906

$
41,259,049

$
6,751,761


The
principal balance of loans facilitated but unsecuritized, and owned by third-party financial institutions at June 30, 2003, 2002, and 2001 totaled $220.4 million,
$65.1 million, and $27.3 million, respectively.

During
fiscal 2001, the Company received $1.1 million, or 2.75% of the principal balance sold, in structural advisory fees for structuring the securitization of student loans held
by a third-party financial institution. Additional fees of $111,000 related to this securitization were collected subsequent to year-end and were included in other receivables at
June 30, 2001. In addition, certain loans that had been originated by this third-party financial institution and that had been held in the 2000 and 1999 NCT trusts were also sold in return for
a fee of 4.5% of the unpaid principal balance of the loans. The Company was entitled to receive this 4.5% fee for the 2000 securitization from the residuals in the 2000 NCT trust, plus accrued
interest. The third-party financial institution was also released from its obligation to guarantee the unsecuritized loans and sell them to the NCT trust.

(5)   Acquisition

On June 20, 2001, the Company acquired for $9,230,456, certain fixed and intangible assets in addition to the loan processing operations of TERI. During
2002, additional fixed assets of $132,966 were purchased as part of the acquisition. This transaction was accounted for as an acquisition of a business. As part of the transaction, the Company
established a new subsidiary, FMER, to provide

F-19

---

certain
services for the benefit of TERI. TERI continues to be a provider of private student loan guarantee services, education information and counseling services for young people from families where
neither parent is a college graduate, and manager of national initiatives related to college access and financing.

On
February 2, 2001, FMC and TERI entered into a two-year Master Loan Guarantee Agreement which grants TERI a right of first refusal to guarantee existing and future
FMC private label loan programs, as well as new, jointly created loan programs during the term of the Agreement. In June 2001, as a result of the closing of the Company's acquisition of TERI's
loan processing operations, the Master Loan Guaranty Agreement was automatically extended to a five year term from the date of the acquisition closing, with a further five year renewal option
exercisable by either party. Under the Agreement, FMC granted to TERI a right of first refusal to guarantee FMC's private label clients' existing and future loan programs with certain exceptions, such
as loan programs which do not require the type of credit enhancement provided by TERI. The loans guaranteed pursuant to the Master Loan Guaranty Agreement comprise only a portion of TERI's guarantee
business, and the Master Loan Guaranty Agreement does not preclude TERI from continuing to provide its guarantees to loan originators not associated with FMC. Under the terms of the Master Loan
Guaranty Agreement, FMC has agreed to create a market for lenders to sell TERI-guaranteed loans through FMC-facilitated securitizations, and TERI receives a 25% interest in the
residuals of the securitizations of TERI-guaranteed loans, in exchange for TERI's agreement to guarantee those loans.

FMER
provides to TERI, under a Master Servicing Agreement, underwriting, documentation and other origination services, technical support, disbursements, customer service, collections,
accounting services, guarantee claims management and administrative services, in support of TERI's loan guarantee
function. FMC guarantees the full and timely performance by FMER of its obligations pursuant to this Master Servicing Agreement. FMC also benefits from use of the acquired TERI assets, including
historical loan data, to support the design and implementation of future FMC loan programs and new jointly created loan programs. In addition, TERI has the right to designate one of three
representatives to serve on the board of directors of FMER.

TMSI
and TERI entered into a Marketing Services Agreement whereby TMSI, for and on behalf of TERI, has developed a marketing plan and marketing materials which are used to solicit new
and existing lenders to enter into loan origination agreements and guarantee agreements with TERI. In order to ensure the proper performance of the Marketing Services Agreement, TMSI has the right to
review and approve the marketing plans, including the related budget. In addition, TERI has the right to designate one of three representatives to serve on the board of directors of TMSI. The
Marketing Services Agreement has a five-year term, with one five-year renewal option, at the election of either party.

In
addition to two notes payable, totaling $7.9 million, and cash of $1.0 million paid by FMC in June 2001 to acquire the loan processing operations of TERI, FMC
pays a monthly fee of $62,294, in advance, which began on July 20, 2001 for a term of five years as consideration for the rights to receive updates and queries about TERI's loan database. This
agreement for future updates and queries of the loan database can be renewed by either party for one, five-year renewal term. If this agreement is renewed, FMC will pay a monthly purchase
fee of $20,627 for sixty months. FMC has paid $747,528 during the year ended June 30, 2003 related to such fees, which has increased the balance of intangible assets.

The
fixed and intangible assets were sold to allow the services required under the Master Servicing Agreement by FMER to be performed as effectively and efficiently as possible. FMC also
benefits from use of the assets, including historical loan data, to support the design and implementation of future FMC loan programs and new jointly created loan programs.

F-20

---

(6)   Related Party Transactions

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

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

(7)   Borrowings from Related Parties



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

The
Company entered into a $975,000 revolving line of credit with a bank effective April 24, 2002 of which none is outstanding at June 30, 2003. The line of credit matured
on April 24, 2003 and was renewed through December 31, 2003 subject to the same terms and conditions, with interest payable at 1% above the highest publishedWall
Street Journalprime rate. The terms of the line of credit require that: the Company maintain accurate books and records; the assets be free of all liens, encumbrances and
financing not approved by the lender; and when there is a balance outstanding under the line, no dividends or payments of principal and interest on any loans held by any guarantor, officer, director
or stockholder may be made. A member of the board of directors of the Company is also a director and significant stockholder of a company that owns the bank. The Company believes that the line of
credit is on substantially the same terms as those prevailing at the same time for comparable transactions with third parties. The Company does not expect to renew this revolving line of credit.



In connection with the acquisition of TERI's loan processing operations, the Company entered into a Note Payable Agreement with TERI on June 20, 2001,
amounting to $3.9 million, $2 million of which relates to the acquisition of TERI's software and network assets and $1.9 million of which relates to the
workforce-in-place. Principal and interest at an annual rate of 6% are payable in 120 monthly installments of $43,298 commencing on July 20, 2001 and ending on
June 20, 2011. The note payable is secured by the software and network assets and workforce-in-place intangible assets. The outstanding balance of this note payable at
June 30, 2003 amounted to $3.3 million.

The
Company also entered into a second note payable, amounting to $4.0 million, with TERI on June 20, 2001 to fund the acquisition of TERI's loan database. Principal and
interest at an annual rate of 6% are payable in 120 monthly installments of $44,408 commencing on July 20, 2001 and ending on

F-21

---

June 20,
2011. The note payable is secured by the loan database. The outstanding balance of this note payable at June 30, 2003 amounted to $3.4 million.

Principal
payments due on notes payable to TERI in each of the five fiscal years and thereafter subsequent to June 30, 2003 are as follows:

2004

$
670,2702005


711,6052006


755,4942007


802,0932008


851,565Thereafter


2,882,993$
6,674,020


F-22

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  June 30, 2003, 2002 and 2001

(8)   Retirement Plans



FMC offers all its employees, age 21 and older, the opportunity to participate in a contributory 401(k) retirement plan. Employee contributions vest immediately.
FMC, at its option, can contribute to the plan for the benefit of its employees. However, FMC made no contributions to the plan during the years ended June 30, 2003, 2002, and 2001. Expenses
incurred by FMC for administrative costs totaled $3,200, $325, and $4,000 for the years ended June 30, 2003, 2002 and 2001, respectively.

FMER
has a defined contribution plan which is funded through group fixed and variable annuity contracts and covers substantially all employees. FMER offers eligible employees the
opportunity to participate in the defined contribution plan which is intended to qualify under Section 401(k) of the Internal Revenue Code. Employees are eligible to be a participant in the
plan after one month of service and are eligible for employer contributions after one year of service and 1,000 hours of service. Most employer contributions are fully vested after five years.
Employees vest in these employer contributions based on the following percentages: year 1 - 0%; year 2 - 20%; year 3 - 30%;
year 4 - 60%; and year 5 - 100%. Further, FMER may make other discretionary contributions, which amounted to $244,067 and $218,819 for the years
ended June 30, 2003 and 2002, respectively. This expense was reimbursed by TERI under the terms of the Master Servicing Agreement.



The following table sets forth the amounts recognized related to FMER's defined benefit pension plan in the Company's consolidated financial statements for the
years ended June 30, 2003 and 2002:

2003

2002Change in benefit obligation:Benefit obligation at beginning of year

$
1,809,646

$
Transfer from TERI Plan





1,320,813Benefits paid


(761
)

Service cost


293,410


120,442Interest on projected benefit obligations


134,011


49,531Actuarial loss


880,183


318,860Benefit obligation at end of year

$
3,116,489

$
1,809,646


F-23

---

Change in plan assets:Fair value of plan assets at beginning of year

$
873,076

$
Employer contributions


480,000


Expenses and benefits paid


(8,185
)

Transfer from TERI plan





739,129Actual return on plan assets


36,416


133,947Fair value of plan assets at end of year

$
1,381,307

$
873,076Funded status:Unrecognized net actuarial (gain) loss

$
(993,742
)
$
(58,139
)Unrecognized prior service cost





Prepaid (accrued) benefit cost


(741,440
)

(878,431
)$
(1,735,182
)
$
(936,570
)Components of net periodic pension cost:Service cost

$
293,410

$
120,442Interest on projected benefit obligations


134,011


49,531Expected return on plan assets


(84,412
)

(31,413
)Net periodic pension cost

$
343,009

$
138,560


Assumptions
used in determining the actuarial present value of the projected benefit obligation as of June 30, 2003 and 2002 were as follows:

2003

2002Discount rate

5.85%

7.00%Salary increase

5.50

5.50Long-term rate of return

8.50

8.50


(9)   Commitments and Contingencies



The Company leases office space and equipment under non-cancelable operating leases expiring through November 2007. Rent expense pursuant to
these operating leases for the periods ended June 30, 2003, 2002 and 2001 was approximately $1,556,000, $932,000 and $155,880, respectively.

Furniture
included on the balance sheet as of June 30, 2003 at a cost of $404,968 and accumulated depreciation of $46,066 was financed through non-cancelable capital
leases.

F-24

---

The
future minimum lease payments required under these leases for each of the five fiscal years subsequent to June 30, 2003 are approximately as follows:

|                                               |                              | Capital
leases |         | Operating
leases
|---------------------------------------------- | ---------------------------- | -------------- | ------- | ----------------
|2004                                           |                              | $              | 86,683  |                 
|2005                                           |                              |                | 63,902  |                 
|2006                                           |                              |                | 63,902  |                 
|2007                                           |                              |                | 63,902  |                 
|2008                                           |                              |                | 26,626  |                 
|                                               |                              |                |         |                 
|                                               | Total minimum lease payments |                |         | 305,015         
|                                               |                              |                |         |                 
|Less amounts representing interest             |                              |                | (42,940 | )               
|                                               |                              |                |         |                 
|Present value of future minimum lease payments |                              |                | 262,075 |                 
|Less current portion                           |                              |                | (86,683 | )               
|                                               |                              |                |         |                 
|                                               |                              | $              | 175,392 |                 
|                                               |                              |                |         |                 



On March 27, 2002, a bank issued an Irrevocable Letter of Credit on behalf of the Company with a third-party as the beneficiary in the amount of $56,250.
On October 31, 2002 and March 20, 2003, this bank issued two additional Irrevocable Letters of Credit on behalf of the Company with another third-party as the beneficiary in the amounts
of $113,750 and $273,000, respectively. The three Letters of Credit were issued in lieu of security deposits for the sublease of office space. As of June 30, 2003, the Letters of Credit had not
been drawn upon. A member of the board of directors of the Company is also a director and significant stockholder of the company that owns this bank.



Under the terms of the Database Purchase and Supplementation Agreement between the Company and TERI, the Company pays a monthly purchase fee of $62,294. The
payments commenced on July 20, 2001 and will be paid as consideration for the rights to receive updates and queries to the loan database acquired in June 2001 for a term of five years, and can
be renewed by either party for one five-year renewal term for monthly payments of $20,627.



During fiscal 2003, the Company entered into commitments with two senior executives that provide for guaranteed levels of severance upon a change in control. The
first executive is entitled to $1 million, net of pre-tax profit on stock options, if the change of control occurs within the first 18 months of his employment and the sale of shares
upon exercise of stock options does not yield a $1 million, pre-tax profit. If the second executive is not offered employment with comparable scope, compensation and
responsibilities within 35 miles of his current residence, he is entitled to accelerated vesting of stock options and to continuation of salary and benefits for six months following the change of
control.



The Company is involved in routine legal proceedings occurring in the ordinary course of business. In the opinion of management, final disposition of these
proceedings will not have a material adverse effect on the financial condition or results of operations of the Company.

F-25

---



Under the terms of some of FMC's contracts with key lender clients, FMC has an obligation to securitize loans originated by those lenders periodically, typically
twice per year. FMC may agree with certain lenders to securitize more frequently in the future. If FMC does not honor these obligations, FMC may be required to pay liquidated damages, generally not to
exceed 1% of the face amount of
the loans available for securitization. FMC has complied with the terms of these contracts and, accordingly, no liability has been accrued.



The Company has capital expenditure commitments for fiscal 2004 of approximately $0.5 million. Such expenditures are expected to relate to the expansion of
the Company's facilities and improvement of our loan processing infrastructure.

(10) Concentrations



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



There are currently six TERI-approved loan servicers. The Company currently utilizes three of these servicers. Pennsylvania Higher Education Assistance Agency
(PHEAA) currently services substantially all loans for which the Company facilitates origination. This arrangement allows the Company to increase the volume of loans in the Company's clients' loan
programs without incurring the overhead investment in servicing operations. As with any external service provider, there are risks associated with inadequate or untimely services. In addition, if the
Company's relationship with PHEAA terminates, the Company would either need to expand or develop a relationship with another TERI-approved loan servicer, which could be time-consuming and costly.



In 2003, processing fees from TERI represented approximately 23% of total service revenue, and securitization related fees from NCMSLT represented approximately
71% of total service revenue. The Company did not recognize more than 10% of total service revenue from any other customer.

F-26

---

(11) Income Taxes

Components of income tax expense for the years ended June 30, 2003, 2002 and 2001 were as follows:

2003

2002

2001Current:Federal

$
10,937,195

$
31,550

$
43,361State


2,446,271


10,320


13,725Total current tax expense


13,383,466


41,870


57,086Deferred:Federal


6,815,312


6,124,633


625,763State


2,315,610


1,013,525


Change in valuation allowance





(1,873,095
)

(669,124
)Total deferred income tax expense


9,130,922


5,265,063


(43,361
)Income tax expense

$
22,514,388

$
5,306,933

$
13,725


The
following table reconciles the expected federal income tax expense (computed by applying the federal statutory tax rate to income before taxes) to recorded income tax expense for the
years ended June 30, 2003, 2002 and 2001:

2003

2002

2001Computed federal tax expense

$
18,904,600

$
6,137,708

$
703,203State tax, net of federal benefits


3,095,300


832,368


9,141Change in valuation allowance





(1,873,095
)

(669,124
)Other


514,488


209,952


(29,495
)Income tax expense

$
22,514,388

$
5,306,933

$
13,725


The
tax effects of temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases that give rise to significant
deferred income tax assets and deferred tax liabilities at June 30, 2003, 2002 and 2001 were as follows:

|                        |                                             | 2003                         |   | 2002        |             | 2001 |           
|----------------------- | ------------------------------------------- | ---------------------------- | - | ----------- | ----------- | ---- | ----------
|Deferred tax assets:    |                                             |                              |   |             |             |      |           
|                        | Tax net operating loss carryforward         |                              | $ |            |             | $    |          
|                        | Depreciation                                |                              |   |            |             |      | 18,682    
|                        | Other                                       |                              |   |            |             |      |          
|                        | AMT credit                                  |                              |   |            |             |      |          
|                        | Valuation allowance                         |                              |   |            |             |      |          
|                        |                                             |                              |   |             |             |      |           
|                        |                                             | Total net deferred tax asset |   |             |            |      |           
|                        |                                             |                              |   |             |             |      |           
|Deferred tax liability: |                                             |                              |   |             |             |      |           
|                        | Structural advisory fees and residuals, net |                              |   | (13,705,066 | )           |      | (5,283,745
|                        | Depreciation                                |                              |   | (471,721    | )           |      |          
|                        | Other                                       |                              |   | (219,198    | )           |      |          
|                        |                                             |                              |   |             |             |      |           
|                        |                                             | Total deferred tax liability |   |             | (14,395,985 | )    |           
|                        |                                             |                              |   |             |             |      |           
|                        |                                             | Net deferred tax liability   |   | $           | (14,395,985 | )    | $         
|                        |                                             |                              |   |             |             |      |           

F-27

---

The
net deferred tax liability will be recognized when the Company realizes the residuals for tax purposes.

(12) Stockholders' Equity and Stock Options



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

On
July 9, 2002, 1,999,680 warrants related to a 1997 Rights Offering were exercised. A portion of the proceeds, amounting to $1.00 per share, was received in June 2002 and
recorded as additional paid-in capital in the June 30, 2002 consolidated financial statements. Shares related to these warrants were issued during fiscal 2003 and the par value of the stock was
reclassified from additional paid-in capital to common stock.

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

F-28

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    June 30, 2003, 2002 and 2001

(12) Stockholders' Equity and Stock Options



Under the 1996 Stock Option Plan (the 1996 Plan), the Company may grant either incentive stock options (pursuant to Section 422 of the Internal Revenue
Code) or nonstatutory stock options to its officers and employees, and non-statutory stock options to consultants, for up to 7,000,000 shares of common stock. Options are granted at the
discretion of the Stock Option Committee (the Committee), a sub-committee of the board of directors. The Committee also determines the terms of the option, the exercise price of the
options, the terms of vesting, and requirements of any other agreements which may be conditions as to the grant or exercise of the options. The options generally vest ratably over four years in five
equal installments beginning on the date of grant and the term of each Incentive Stock Option granted under the Plan cannot exceed a period of ten years from the date of its grant. The Plan
stipulates, however, that the exercise price with respect to incentive stock options shall not be less than the fair market value of the stock on the day of grant as determined in good faith by the
Committee. On May 16, 2002, the Board approved an increase in the number of shares of capital stock in the pool reserved for the Company's stock option plan by 2,000,000 shares, and on
April 7, 2003 the Board approved a further increase in the number of shares of capital stock in the pool by 1,000,000.

Under
the 2002 Director Stock Plan, the Company may grant Nonstatutory Stock Options to non-employee members of its Board of Directors for up to 200,000 shares of
common stock. Starting in September 2002, one thousand options were granted (i) to each non-employee director then serving, (ii) to new directors upon election to the
Board, and (iii) annually each September 20 if on that date the non-employee director shall have served on the Board for at least 180 days. The term of the option is
ten years, and is immediately exercisable. The exercise price is set at the fair market value of the common stock as determined by the Board in good faith on the date of grant.

The
following table summarizes information about stock options outstanding at June 30, 2003:

|Range of exercise prices |  | Number
outstanding |  | Weighted-
average
remaining
contractual
life |  | Weighted-
average
exercise
price |      | Number
exercisable |           | Weighted-
average
exercise
price
|------------------------ |  | ------------------ |  | -------------------------------------------- |  | -------------------------------- | ---- | ------------------ | --------- | --------------------------------
|$0.50  0.68             |  | 1,680,000          |  | 4.09                                         |  | $                                | 0.59 |                    | 1,680,000 |                                 
|$0.80                    |  | 1,392,000          |  | 5.58                                         |  |                                  | 0.80 |                    | 1,292,800 |                                 
|$1.00                    |  | 558,000            |  | 7.09                                         |  |                                  | 1.00 |                    | 380,400   |                                 
|$1.88                    |  | 1,780,000          |  | 8.09                                         |  |                                  | 1.88 |                    | 712,000   |                                 
|$5.00  7.00             |  | 1,008,000          |  | 9.34                                         |  |                                  | 5.89 |                    | 214,400   |                                 
|                         |  |                    |  |                                              |  |                                  |      |                    |           |                                 
|$0.50  7.00             |  | 6,418,000          |  | 6.61                                         |  |                                  | 1.86 |                    | 4,279,600 |                                 
|                         |  |                    |  |                                              |  |                                  |      |                    |           |                                 

F-29

---

The
following table presents stock option activity for the years ended June 30, 2003, 2002 and 2001:

|                                     |           | Number
of options |           | Weighted-
average
exercise price
per share
|------------------------------------ | --------- | ----------------- | --------- | ------------------------------------------
|Outstanding options at June 30, 2000 |           | 3,098,000         |           | $                                         
|                                     | Granted   |                   | 726,000   |                                           
|                                     | Exercised |                   |          |                                           
|                                     | Canceled  |                   | (152,000  | )                                         
|                                     |           |                   |           |                                           
|Outstanding options at June 30, 2001 |           | 3,672,000         |           |                                           
|                                     | Granted   |                   | 1,890,000 |                                           
|                                     | Exercised |                   |          |                                           
|                                     | Canceled  |                   | (52,000   | )                                         
|                                     |           |                   |           |                                           
|Outstanding options at June 30, 2002 |           | 5,510,000         |           |                                           
|                                     | Granted   |                   | 1,008,000 |                                           
|                                     | Exercised |                   | (64,000   | )                                         
|                                     | Canceled  |                   | (36,000   | )                                         
|                                     |           |                   |           |                                           
|Outstanding options at June 30, 2003 |           | 6,418,000         |           |                                           
|                                     |           |                   |           |                                           

(13) Fair Value of Financial Instruments

The estimated fair value amounts below have been determined by using available quoted market information or other appropriate methodologies. The aggregate fair
value amounts presented do not represent the underlying value of the Company taken as a whole.

The
fair value estimates provided are made at a specific point in time, based on relevant market information and the characteristics of the financial instrument. The estimates do not
provide for any premiums or discounts that could result from the concentrations of ownership of a financial instrument. Because no active market exists for some of the Company's financial instruments,
certain fair value estimates are based on subjective judgments regarding current economic conditions, risk characteristics of the financial instruments, future expected loss experience, prepayment
assumptions, and other factors. The resulting estimates involve uncertainties and, therefore, cannot be determined with precision. Changes made to any of the underlying assumptions could significantly
affect the estimates. The book values and fair values for the Company's financial instruments at June 30, 2003 and 2002 are as follows:

|             |                                              | 2003 |   | 2002      
|------------ | -------------------------------------------- | ---- | - | ----------
|
|Assets:      |                                              |      |   |           
|             | Cash and other short term investments        |      | $ | 16,756,653
|             | Securities purchased under resale agreements |      |   | 1,570,365 
|             | Service receivables                          |      |   | 56,905,483
|Liabilities: |                                              |      |   |           
|             | Notes payable to TERI                        |      |   | 6,674,020 
|             | Notes payable to related parties             |      |   |          

F-30

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  June 30, 2003, 2002 and 2001

(13) Fair Value of Financial Instruments



The carrying values reported on the balance sheet for cash and other short-term investments approximate their fair values because of the short-term nature of
these instruments.



The carrying values reported on the balance sheet for securities purchased under resale agreements approximate their fair values because of the
short-term nature of these instruments.



The carrying values reported on the balance sheet for service receivables equal their fair value.



The fair value reported for notes payable is estimated based on the discounted value of contractual cash flows. The discount rate used is based on the Company's
estimated current incremental borrowing rate for similar borrowings of similar maturities.

(14) Unaudited Quarterly Information

The table below summarizes unaudited quarterly information for each of the three months in the fiscal year ended June 30, 2003:

|                             |         | Three months ended
|---------------------------- | ------- | ------------------
|
|
|Service revenue              |         | $                 
|Operating expenses           |         |                   
|Other expense, net           |         |                   
|Income tax expense (benefit) |         |                   
|                             |         |                   
|Net income (loss)            |         | $                 
|                             |         |                   
|Net income (loss) per share: |         |                   
|                             | Basic   |                   
|                             | Diluted |                   

(15) Subsequent Events



On October 9, 2003, the Board of Directors approved a 4:1 stock split to be effected as a stock dividend immediately prior to the effectiveness of the
initial public offering. On October 29, 2003, the stockholders became entitled to payment of such stock dividend. All share data has been retroactively adjusted to reflect this stock split.

F-31

---



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



On September 2, 2003, the Board of Directors authorized management to proceed with an initial public offering. Immediately prior to the closing of this
offering, the Company plans to establish a 2003 Incentive Plan which will provide for the granting of incentive stock options, nonstatutory stock options, restricted stock and other stock based
awards.

The
costs associated with the initial public offering will be capitalized and will be deducted from the proceeds upon the sale and issuance of stock. In the event this offering is not
consummated, costs incurred will be charged to expense. At June 30, 2003, capitalized offering costs amounted to $72,298.

After
the offering, the Company may not declare or pay dividends on its stock if such declaration and payment would violate statutory or regulatory requirements.



On August 28, 2003, the Company entered into an agreement with Fleet National Bank to establish a revolving line of credit in the amount of $10 million,
which will include a sub-limit for letters of credit. The proceeds will be used for working capital and general corporate purposes. The revolving credit facility matures on
August 28, 2005, with interest currently payable, at the Company's option, at the bank's prime rate or the London Interbank Offered Rate, or LIBOR, plus 2%. The revolving credit line contains
financial covenants, including minimum trailing 12-month up-front structural advisory fees, minimum tangible net worth, maximum liabilities to net worth ratios and minimum cash flow to
debt service ratios, as well as certain financial reporting covenants. This agreement restricts the Company's ability to pay cash dividends in the event it is in default.

F-32

---