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

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FORM 10-Q

|(MARK ONE)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For The Quarterly Period Ended December 31, 2007             
|OR                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission File Number 001-31825

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

|Delaware(State or Other Jurisdiction of
Incorporation or Organization)                                             |  | 04-3295311(I.R.S. Employer
Identification No.)
|------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------
|The Prudential Tower
800 Boylston Street, 34th Floor
Boston, Massachusetts(Address of Principal Executive Offices) |  | 02199-8157(Zip Code)                          
|Registrant's telephone number, including area code:(617) 638-2000                                                 

Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes ý No o

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

Large
accelerated filer ý                Accelerated
filer o                Non-accelerated filer o

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

As of January 31, 2008, the registrant had 98,851,461 shares of Common Stock, $0.01 par value per share, outstanding.



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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

Table of Contents

|Part I. Financial Information |         |   
|----------------------------- | ------- | --
|                              | Item 1  |  
|                              |         |   
|                              |         |   
|                              |         |   
|                              |         |   
|                              |         |   
|                              | Item 2  |  
|                              | Item 3  |  
|                              | Item 4  |  
|Part II. Other Information    |         |   
|                              | Item 1A |  
|                              | Item 2  |  
|                              | Item 4  |  
|                              | Item 5  |  
|                              | Item 6  |  
|SIGNATURES                    |         | 66
|EXHIBIT INDEX                 |         | 67

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Part I. Financial Information

Item 1Financial Statements

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

|                                                                                                                                                                                                                                                                                                                       |                                                               | December 31,
2007           |                           | June 30,
2007 |       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | --------------------------- | ------------------------- | ------------- | ------
|ASSETS                                                                                                                                                                                                                                                                                                                 |                                                               |                             |                           |               |       
|Cash and cash equivalents                                                                                                                                                                                                                                                                                              |                                                               | $                           | 243,170                   |               | $     
|Investments                                                                                                                                                                                                                                                                                                            |                                                               |                             | 107,851                   |               |       
|Loans held for sale                                                                                                                                                                                                                                                                                                    |                                                               |                             | 358,023                   |               |       
|Service receivables:                                                                                                                                                                                                                                                                                                   |                                                               |                             |                           |               |       
|                                                                                                                                                                                                                                                                                                                       | Structural advisory fees                                      |                             |                           | 150,032       |       
|                                                                                                                                                                                                                                                                                                                       | Residuals                                                     |                             |                           | 608,233       |       
|                                                                                                                                                                                                                                                                                                                       | Processing fees from The Education Resources Institute (TERI) |                             |                           | 12,175        |       
|                                                                                                                                                                                                                                                                                                                       |                                                               |                             |                           |               |       
|                                                                                                                                                                                                                                                                                                                       |                                                               |                             | Total service receivables |               |       
|                                                                                                                                                                                                                                                                                                                       |                                                               |                             |                           |               |       
|Property and equipment                                                                                                                                                                                                                                                                                                 |                                                               |                             | 88,748                    |               |       
|                                                                                                                                                                                                                                                                                                                       | Less accumulated depreciation and amortization                |                             |                           | (48,152       | )     
|                                                                                                                                                                                                                                                                                                                       |                                                               |                             |                           |               |       
|                                                                                                                                                                                                                                                                                                                       |                                                               | Property and equipment, net |                           |               | 40,596
|                                                                                                                                                                                                                                                                                                                       |                                                               |                             |                           |               |       
|Goodwill                                                                                                                                                                                                                                                                                                               |                                                               |                             | 4,878                     |               |       
|Intangible assets, net                                                                                                                                                                                                                                                                                                 |                                                               |                             | 2,274                     |               |       
|Prepaid income taxes                                                                                                                                                                                                                                                                                                   |                                                               |                             |                          |               |       
|Other prepaid expenses                                                                                                                                                                                                                                                                                                 |                                                               |                             | 41,707                    |               |       
|Other assets                                                                                                                                                                                                                                                                                                           |                                                               |                             | 15,625                    |               |       
|                                                                                                                                                                                                                                                                                                                       |                                                               |                             |                           |               |       
|                                                                                                                                                                                                                                                                                                                       | Total assets                                                  |                             | $                         | 1,584,564     |       
|                                                                                                                                                                                                                                                                                                                       |                                                               |                             |                           |               |       
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                                   |                                                               |                             |                           |               |       
|Liabilities:                                                                                                                                                                                                                                                                                                           |                                                               |                             |                           |               |       
|                                                                                                                                                                                                                                                                                                                       | Deposits                                                      |                             | $                         | 146,893       |       
|                                                                                                                                                                                                                                                                                                                       | Education loan warehouse facility                             |                             |                           | 245,400       |       
|                                                                                                                                                                                                                                                                                                                       | Accounts payable and accrued expenses                         |                             |                           | 30,754        |       
|                                                                                                                                                                                                                                                                                                                       | Income taxes payable                                          |                             |                           | 30,059        |       
|                                                                                                                                                                                                                                                                                                                       | Net deferred income tax liability                             |                             |                           | 201,139       |       
|                                                                                                                                                                                                                                                                                                                       | Other liabilities                                             |                             |                           | 9,269         |       
|                                                                                                                                                                                                                                                                                                                       |                                                               |                             |                           |               |       
|                                                                                                                                                                                                                                                                                                                       |                                                               |                             | Total liabilities         |               |       
|                                                                                                                                                                                                                                                                                                                       |                                                               |                             |                           |               |       
|Commitments and contingencies                                                                                                                                                                                                                                                                                          |                                                               |                             |                           |               |       
|Stockholders' equity:                                                                                                                                                                                                                                                                                                  |                                                               |                             |                           |               |       
|Preferred stock, par value $0.01 per share; 19,940 and 20,000 shares authorized at December 31, 2007 and June 30, 2007, respectively; no shares issued and outstanding                                                                                                                                                 |                                                               |                             |                          |               |       
|Series A non-voting convertible preferred stock, par value $0.01 per share, 60 shares authorized, issued and outstanding at December 31, 2007                                                                                                                                                                          |                                                               |                             | 59,800                    |               |       
|Common stock, par value $0.01 per share; 250,000 and 150,000 shares authorized at December 31, 2007 and June 30, 2007, respectively; 101,057 and 100,874 shares issued at December 31, 2007 and June 30,
2007, respectively; 93,501 and 93,342 shares outstanding at December 31, 2007 and June 30, 2007, respectively |                                                               |                             | 1,011                     |               |       
|Additional paid-in capital                                                                                                                                                                                                                                                                                             |                                                               |                             | 237,787                   |               |       
|Retained earnings                                                                                                                                                                                                                                                                                                      |                                                               |                             | 806,154                   |               |       
|Treasury stock, 7,556 and 7,532 shares held at December 31, 2007 and June 30, 2007, respectively, at cost                                                                                                                                                                                                              |                                                               |                             | (183,875                  | )             |       
|Accumulated other comprehensive income                                                                                                                                                                                                                                                                                 |                                                               |                             | 173                       |               |       
|                                                                                                                                                                                                                                                                                                                       |                                                               |                             |                           |               |       
|                                                                                                                                                                                                                                                                                                                       | Total stockholders' equity                                    |                             |                           | 921,050       |       
|                                                                                                                                                                                                                                                                                                                       |                                                               |                             |                           |               |       
|                                                                                                                                                                                                                                                                                                                       | Total liabilities and stockholders' equity                    |                             | $                         | 1,584,564     |       
|                                                                                                                                                                                                                                                                                                                       |                                                               |                             |                           |               |       

See accompanying notes to unaudited condensed consolidated financial statements.

1

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

|                             |                                              | Three months ended
December 31, |                                           | Six months ended
December 31,
|---------------------------- | -------------------------------------------- | ------------------------------- | ----------------------------------------- | -----------------------------
|
|Service Revenues:            |                                              |                                 |                                           |                              
|                             | Up-front structural advisory fees            |                                 | $                                         | 524                          
|                             | Additional structural advisory fees:         |                                 |                                           |                              
|                             |                                              | From new securitizations        |                                           |                              
|                             |                                              | Trust updates                   |                                           |                              
|                             |                                              |                                 |                                           |                              
|                             |                                              |                                 | Total additional structural advisory fees |                              
|                             | Residuals:                                   |                                 |                                           |                              
|                             |                                              | From new securitizations        |                                           |                              
|                             |                                              | Trust updates                   |                                           |                              
|                             |                                              |                                 |                                           |                              
|                             |                                              |                                 | Total residuals                           |                              
|                             | Processing fees from TERI                    |                                 |                                           | 37,280                       
|                             | Administrative and other fees                |                                 |                                           | 3,129                        
|                             |                                              |                                 |                                           |                              
|                             |                                              | Total service revenues          |                                           |                              
|                             | Net interest income                          |                                 |                                           | 6,778                        
|                             |                                              |                                 |                                           |                              
|                             |                                              | Total revenues                  |                                           |                              
|                             |                                              |                                 |                                           |                              
|Non-interest expenses:       |                                              |                                 |                                           |                              
|                             | Compensation and benefits                    |                                 |                                           | 19,734                       
|                             | General and administrative expenses          |                                 |                                           | 53,959                       
|                             |                                              |                                 |                                           |                              
|                             |                                              | Total non-interest expenses     |                                           |                              
|                             |                                              |                                 |                                           |                              
|Income (loss) before tax     |                                              |                                 | (196,503                                  | )                            
|Income tax expense (benefit) |                                              |                                 | (78,828                                   | )                            
|                             |                                              |                                 |                                           |                              
|Net income (loss)            |                                              | $                               | (117,675                                  | )                            
|                             |                                              |                                 |                                           |                              
|                             | Net income (loss) per share, basic           |                                 | $                                         | (1.26                        
|                             | Net income (loss) per share, diluted         |                                 |                                           | (1.26                        
|                             | Cash dividends declared per share            |                                 |                                           | 0.12                         
|                             | Weighted average shares outstanding, basic   |                                 |                                           | 93,500                       
|                             | Weighted average shares outstanding, diluted |                                 |                                           | 93,500                       

See
accompanying notes to unaudited condensed consolidated financial statements.

2

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(unaudited)

(in thousands, except per share amounts)

|                             |                                                           | Series A
non-voting
convertible
preferred stock |    |   |        |        |         |     |   |       |   |        |     |   |          |      |   |         |      
|---------------------------- | --------------------------------------------------------- | ----------------------------------------------- | -- | - | ------ | ------ | ------- | --- | - | ----- | - | ------ | --- | - | -------- | ---- | - | ------- | -----
|
|
|
|
|
|Balance at June 30, 2007     |                                                           |                                                |    | $ |       |        | 100,874 |     | $ | 1,009 |   | (7,532 | )   | $ | (183,070 | )    | $ | 232,664 |      
|Comprehensive income         |                                                           |                                                 |    |   |        |        |         |     |   |       |   |        |     |   |          |      |   |         |      
|                             | Net income                                                |                                                 |   |   |        |       |         |    |   |       |  |        |    |   |          |     |   |         |     
|                             | Accumulated other comprehensive income, net               |                                                 |   |   |        |       |         |    |   |       |  |        |    |   |          |     |   |         |     
|                             |                                                           |                                                 |    |   |        |        |         |     |   |       |   |        |     |   |          |      |   |         |      
|Total comprehensive income   |                                                           |                                                |    |   |       |        |        |     |   |      |   |       |     |   |         |      |   |        |      
|                             | Issuance of preferred stock                               |                                                 | 60 |   |        | 59,800 |         |    |   |       |  |        |    |   |          |     |   |         |     
|                             | Options exercised                                         |                                                 |   |   |        |       |         | 5   |   |       |  |        |    |   |          |     |   |         | 17   
|                             | Stock issuance through employee stock purchase plan       |                                                 |   |   |        |       |         | 15  |   |       |  |        |    |   |          |     |   |         | 490  
|                             | Net stock issuance from vesting of restricted stock units |                                                 |   |   |        |       |         | 163 |   |       | 2 |        | (24 | ) |          | (805 | ) |         | (2   
|                             | Stock-based compensation                                  |                                                 |   |   |        |       |         |    |   |       |  |        |    |   |          |     |   |         | 4,037
|                             | Cash dividends declared ($0.395 per share)                |                                                 |   |   |        |       |         |    |   |       |  |        |    |   |          |     |   |         |     
|                             | Tax benefit from employee stock options                   |                                                 |   |   |        |       |         |    |   |       |  |        |    |   |          |     |   |         | 581  
|                             |                                                           |                                                 |    |   |        |        |         |     |   |       |   |        |     |   |          |      |   |         |      
|Balance at December 31, 2007 |                                                           | 60                                              |    | $ | 59,800 |        | 101,057 |     | $ | 1,011 |   | (7,556 | )   | $ | (183,875 | )    | $ | 237,787 |      
|                             |                                                           |                                                 |    |   |        |        |         |     |   |       |   |        |     |   |          |      |   |         |      

See accompanying notes to unaudited condensed consolidated financial statements.

3

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

|                                                                                            |                                                                           | Six months ended
December 31,                                                    |                                                    
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ---------------------------------------------------
|
|Cash flows from operating activities:                                                       |                                                                           |                                                                                  |                                                    
|Net income                                                                                  |                                                                           | $                                                                                | 51,145                                             
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                                                           |                                                                                  |                                                    
|                                                                                            | Depreciation and amortization                                             |                                                                                  |                                                    
|                                                                                            | Deferred income tax (benefit) expense                                     |                                                                                  |                                                    
|                                                                                            | Stock-based compensation                                                  |                                                                                  |                                                    
|                                                                                            | Change in assets/liabilities:                                             |                                                                                  |                                                    
|                                                                                            |                                                                           | (Increase) decrease in loans held for sale                                       |                                                    
|                                                                                            |                                                                           | (Increase) in structural advisory fees                                           |                                                    
|                                                                                            |                                                                           | (Increase) decrease in residuals                                                 |                                                    
|                                                                                            |                                                                           | (Increase) in processing fees from TERI                                          |                                                    
|                                                                                            |                                                                           | Net change in income taxes                                                       |                                                    
|                                                                                            |                                                                           | (Increase) decrease in other prepaid expenses                                    |                                                    
|                                                                                            |                                                                           | (Increase) decrease in other assets                                              |                                                    
|                                                                                            |                                                                           | Increase (decrease) in accounts payable, accrued expenses, and other liabilities |                                                    
|                                                                                            |                                                                           |                                                                                  |                                                    
|                                                                                            |                                                                           |                                                                                  | Net cash provided by (used in) operating activities
|                                                                                            |                                                                           |                                                                                  |                                                    
|Cash flows from investing activities:                                                       |                                                                           |                                                                                  |                                                    
|                                                                                            | Dispositions of investments                                               |                                                                                  |                                                    
|                                                                                            | Purchases of investments                                                  |                                                                                  |                                                    
|                                                                                            | Net cash paid for acquisition                                             |                                                                                  |                                                    
|                                                                                            | Purchases of property and equipment                                       |                                                                                  |                                                    
|                                                                                            | Payments to TERI for loan database updates                                |                                                                                  |                                                    
|                                                                                            |                                                                           |                                                                                  |                                                    
|                                                                                            |                                                                           |                                                                                  | Net cash provided by (used in) investing activities
|                                                                                            |                                                                           |                                                                                  |                                                    
|Cash flows from financing activities:                                                       |                                                                           |                                                                                  |                                                    
|                                                                                            | Increase in deposits                                                      |                                                                                  |                                                    
|                                                                                            | Increase in education loan warehouse facilities and related costs         |                                                                                  |                                                    
|                                                                                            | Repayment of capital lease obligations                                    |                                                                                  |                                                    
|                                                                                            | Repayment of notes payable due to TERI                                    |                                                                                  |                                                    
|                                                                                            | Tax benefit from stock-based compensation                                 |                                                                                  |                                                    
|                                                                                            | Issuance of preferred stock                                               |                                                                                  |                                                    
|                                                                                            | Issuances of common stock                                                 |                                                                                  |                                                    
|                                                                                            | Repurchases of common stock                                               |                                                                                  |                                                    
|                                                                                            | Cash dividends on common stock and cash paid in lieu of fractional shares |                                                                                  |                                                    
|                                                                                            |                                                                           |                                                                                  |                                                    
|                                                                                            |                                                                           |                                                                                  | Net cash provided by (used in) financing activities
|                                                                                            |                                                                           |                                                                                  |                                                    
|Net increase in cash and cash equivalents                                                   |                                                                           |                                                                                  | 136,899                                            
|Cash and cash equivalents, beginning of period                                              |                                                                           |                                                                                  | 106,271                                            
|                                                                                            |                                                                           |                                                                                  |                                                    
|Cash and cash equivalents, end of period                                                    |                                                                           | $                                                                                | 243,170                                            
|                                                                                            |                                                                           |                                                                                  |                                                    
|Supplemental disclosures of cash flow information:                                          |                                                                           |                                                                                  |                                                    
|                                                                                            | Interest paid                                                             |                                                                                  | $                                                  
|                                                                                            |                                                                           |                                                                                  |                                                    
|                                                                                            | Income taxes paid                                                         |                                                                                  | $                                                  
|                                                                                            |                                                                           |                                                                                  |                                                    
|Supplemental disclosure of non-cash activities:                                             |                                                                           |                                                                                  |                                                    
|                                                                                            | Acquisition of property and equipment through capital leases              |                                                                                  | $                                                  
|                                                                                            |                                                                           |                                                                                  |                                                    

See accompanying notes to unaudited condensed consolidated financial statements.

4

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

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

Nature of Business

The First Marblehead Corporation (FMC, and together with its subsidiaries, the Company) 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, educational institutions, 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 private
student loan programs for undergraduate, graduate and professional education, and, to a lesser degree, on continuing education programs, the primary and secondary school market, career training and
study abroad programs. 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 receives reimbursement from The Education Resources Institute, Inc. (TERI) for outsourced services the Company performs on TERI's behalf. It also receives reimbursement
for marketing coordination services it provides to certain clients, marketing premiums it receives from its proprietary brands and fees for administrative services that the Company provides to the
discrete trust vehicles that the Company forms for securitizations it facilitates. FMC's subsidiary Union Federal Savings Bank (Union Federal) is a federally chartered thrift that offers residential
retail mortgage loans, retail savings products, time deposit products and private student loans.

Basis of Presentation

The Company's accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial
statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair statement of the results for the interim periods have been
included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions, including the determination of the fair value of expected future cash
flows, that affect the amounts
reported in the condensed consolidated financial statements and accompanying notes. Interim results are not necessarily indicative of results to be expected for the entire fiscal year. All significant
intercompany balances and transactions have been eliminated in consolidation. These unaudited financial statements should be read in conjunction with the audited consolidated financial statements and
related notes for the year ended June 30, 2007 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on August 28,
2007.

Student Loan Market Seasonality and Revenue Related to Securitization Transactions

Origination of student loans is generally subject to seasonal trends, with the volume of loan applications increasing with the approach of tuition payment dates.
In general, the Company processes the greatest application volume during the summer months, as students and their families seek to borrow money in order to pay tuition costs for the fall semester or
the entire school year. The Company also tends to process an increased volume of loan applications during November, December and January, as students and their families seek to borrow money to pay
tuition costs for the spring

5

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

semester.
This seasonality of loan originations impacts the timing and size of securitization transactions, the amount of processing fees from TERI that the Company earns in a particular quarter, and
the level of expenses incurred to process the higher origination activity.

The
Company closed two securitization transactions in the first quarter of fiscal 2008, but did not conduct a securitization transaction during the second quarter of fiscal 2008. During
fiscal 2007, the Company closed one securitization transaction in each of the first, second and third quarters and closed two securitization transactions in the fourth quarter. Variations in the size,
timing and type of financing transactions the Company facilitates will also contribute to variability in quarterly operating results.

Capital
markets conditions rapidly deteriorated during the second fiscal quarter. The Company's business has been and continues to be adversely impacted by the current market dynamics,
including an inability to access the securitization market and more onerous borrowing costs and facility structures. The Company did not complete a securitization transaction during its second fiscal
quarter, and it is uncertain about its ability to complete a securitization in the current fiscal year. The Company expects its securitization volumes to materially decrease in fiscal 2008 compared to
fiscal 2007, and it expects pricing terms substantially less favorable than in the past. In the near-term, it also expects investors to have limited or no demand for subordinate tranches
of asset-backed securities in securitization transactions that it facilitates.

Student
loan asset-backed securitizations have historically been the Company's sole source of financing its clients' private student loan programs. As its loans available for
securitization volume continues to grow, it may be important for the Company to pursue alternative means to finance its clients' loans. Other sources of funding, including the warehouse facility
offered by GS Capital Partners (GSCP), may
not be available on attractive terms. Recent conditions in the capital markets have generally resulted in widening credit spreads and more restrictive covenants, which will affect the pricing, terms
and conditions of any alternative funding mechanism the Company pursues.

Under
the terms of its agreements with lender clients, the Company generally has an obligation to use its best efforts to facilitate the purchase of the client's private student loans
during a specified loan purchase period. The length of the loan purchase period varies by client and generally ranges from 180 days to 540 days following loan disbursement. With respect
to approximately $1,614,000 of the Company's facilitated loan volume available for securitization as of December 31, 2007, the Company's liability for failure to facilitate a purchase in breach
of its obligations would be limited to liquidated damages of one percent of the total principal amount of the loans as to which the loan purchase period expired. Additional liquidated damages would
generally become payable at 30 day intervals as the loan purchase period expires as to additional loans. The Company estimated the maximum liquidated damages applicable to its facilitated loan
volume available for securitization as of December 31, 2007 to be approximately $16,136. Any liquidated damages would be due at expiration of the relevant loan purchase period. The Company's
agreements applicable to approximately $430,000 of the Company's facilitated loan volume available for securitization as of December 31, 2007 do not specify or limit the Company's liability to
liquidated damages for failure to facilitate a purchase in breach of its obligations. The amount of the Company's potential liability with respect to such loans is not determinable at this time. Under
certain of the Company's agreements, its obligations to facilitate the purchase of its clients' loans are suspended during a "market disruption event," as defined in the applicable agreement.

6

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Concentrations

TERI

TERI is a private, not-for-profit Massachusetts organization as described under section 501(c)(3) of the Internal Revenue Code.
Incorporated in 1985, TERI is the oldest and largest guarantor of alternative, or private, education loans. In its role as guarantor in the private education lending market, TERI agrees to reimburse
lenders or securitization trusts for unpaid principal and interest on defaulted loans. TERI is the exclusive third-party provider of borrower default guarantees for the Company's clients' private
education loans. As of December 31, 2007, TERI had a Baa3 counterparty rating from Moody's Investors Service, which is the lowest investment grade rating, an insurer financial strength rating
of A, negative outlook from Fitch Ratings and a rating of A from
Dominion Bond Rating Service. If these ratings are lowered, FMC's clients may not wish to enter into guarantee arrangements with TERI. In addition, FMC's up-front structural advisory fee
yields could decline or market conditions could dictate that FMC obtain additional credit enhancement for the asset-backed securitizations that it structures, the cost of which could result in lower
revenues. Finally, if TERI's ratings were downgraded below Baa3 by Moody's Investors Service or A by Fitch Ratings or, if Moody's Investors Service or Fitch Ratings were to publicly announce that TERI
had been placed on a watchlist for possible downgrade, Bank of America could elect to terminate its agreement with FMC relating to the purchase of direct-to-consumer loans. In
December 2007, Moody's Investors Service began reviewing TERI's rating for a possible downgrade. If TERI's ratings are downgraded below Baa3 by Moody's Investors Service or A by Fitch Ratings, or in
the event that a default by TERI for failure to pay a guaranty claim is declared under any TERI guaranty agreement with any lender, Bank of America could suspend the processing of new applications for
school channel loans.

In
February 2001, FMC and TERI entered into a Master Loan Guaranty Agreement, which granted TERI a right of first refusal to guarantee loans under existing and future private label loan
programs facilitated by FMC, as well as new loan programs jointly created by FMC and TERI. In addition, the Master Loan Guaranty Agreement provides a beneficial interest for TERI in a portion of the
residual value of securitization trusts that purchase TERI-guaranteed loans. In June 2001, the Company acquired TERI's loan processing operations and the Master Loan Guaranty Agreement was
automatically extended for a five-year term from the date of the acquisition closing. The loans guaranteed pursuant to the Master Loan Guaranty Agreement comprise a significant portion of
TERI's guarantee business, although the Master Loan Guaranty Agreement does not preclude TERI from continuing to provide its guarantees to loan originators not associated with FMC. In October 2004,
the Company renewed the Master Loan Guaranty Agreement and certain additional agreements with TERI, in each case for an additional term through June 2011.

The
Master Loan Guaranty Agreement generally provides that the guarantee fees earned by TERI upon the disbursement of student loans are placed in a segregated reserve account which is
held as collateral to secure TERI's obligation to purchase defaulted education loans. This account is held by a third-party financial institution for the benefit of the program lender until the
student loans are securitized, at which point the account is pledged to the securitization trust that purchases the loans. The Master Loan Guaranty Agreement, as implemented through guaranty
agreements with individual lenders, entitles TERI to retain a portion of its guaranty fees as an administrative fee rather than place them in the pledged account.

7

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

In
August 2006, the Company entered into a supplement to the Master Loan Guaranty Agreement that provided as follows:



In
September 2007, the Company entered into an additional supplement to the Master Loan Guaranty Agreement. This additional supplement provides that for each fiscal year between
July 1, 2007 and June 30, 2011, TERI may make an annual election to adjust the amount of its administrative fee, and the amount deposited into the pledged account, within the parameters
set forth in the August 2006 supplement. TERI's election applies to all securitizations of TERI-guaranteed loans completed during the applicable fiscal year. TERI elected to receive an
administrative fee of 240 basis points for any securitization transaction the Company completes in fiscal 2008. The Company has agreed to attempt in good faith to structure its securitization
transactions to accommodate TERI's election. TERI received an administrative fee of 182 basis points for the securitization transactions the Company completed in the first quarter of fiscal 2008.

Under
a Master Servicing Agreement with a term through June 2011, First Marblehead Education Resources, Inc. (FMER), a wholly owned subsidiary of FMC, provides to TERI
underwriting, documentation and other origination services, as well as technical support, disbursements, customer service, collections, default prevention, default processing, accounting services and
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 uses the acquired TERI assets, including historical loan data, to support the design and implementation of loan programs facilitated by FMC and loan programs jointly created
by FMC and TERI. In addition, TERI has the right to designate one of three representatives to serve on the board of directors of FMER. During the six months ended December 31, 2007, processing
fees from TERI represented approximately 32% of the Company's total revenue.

PHEAA

As of December 31, 2007, there were seven TERI-approved student loan servicers. Servicers provide administrative services relating to loans,
including processing deferment and forbearance requests, sending out account statements and accrual notices, responding to borrower inquiries, and

8

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

collecting
and crediting payments received from borrowers. As of December 31, 2007, the Company utilized six of these servicers. These arrangements allow the Company to avoid incurring the
overhead investment of servicing operations in administering loan-level activity. As with any external service provider, there are risks associated with inadequate or untimely services. As
of December 31, 2007, Pennsylvania Higher Education Assistance Agency (PHEAA) serviced a significant majority of the loans for which the Company facilitates origination. PHEAA also operates
under the name American Education Services (AES). If the Company's relationship with PHEAA terminates, the Company would either need to expand or develop a relationship with another
TERI-approved student loan servicer, which could be time-consuming and costly.

Revenue Concentration

The Company earned $319.3 million in securitization-related fees from the trusts used to securitize student loans during the first six months of fiscal
2008. These securitization trusts purchased private student loans from several lenders including JPMorgan Chase Bank, N.A., Bank of America, N.A., RBS Citizens, N.A. and Union Federal. RBS Citizens,
N.A. is the successor by merger of Charter One Bank, N.A. and Citizens Bank of Rhode Island, each of which originated loans sold in the securitizations completed in the first fiscal quarter. Other
than TERI, the Company did not recognize more than 10% of total revenue from any other customer. RBS Citizens, N.A. serves as a program lender for a portion of the Company's proprietary loan programs
as well as for additional education loan programs marketed by third parties and funded by RBS Citizens, N.A.

Significant Accounting Policies and Estimates

The preparation of the Company's consolidated financial statements requires the Company to make estimates, assumptions and judgments that affect the reported
amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. The Company bases its estimates and judgments on historical experience and on various
other factors, and actual results may differ from these estimates under varying assumptions or conditions. On an ongoing basis, the Company evaluates its estimates and judgments, particularly as they
relate to accounting policies that
the Company believes are most important to the portrayal of the Company's financial condition and results of operations, such as its accounting policies involving the recognition and valuation of the
Company's securitization-related service revenues, and with respect to the determination of whether or not to consolidate the securitization trusts that it facilitates. For a discussion of the
Company's critical accounting policies, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsExecutive SummaryApplication of Critical
Accounting Policies and Estimates". For a discussion of changes made during fiscal 2008 to the assumptions used to determine the fair value of the Company's residual and additional structural advisory
fees receivables see Note 2.

Cash and Cash Equivalents

Cash and cash equivalents at December 31, 2007 included $173,887 held in money market funds and $69,283 of federal funds sold held by Union Federal.
Included in cash and cash equivalents are compensating balances held in money market funds supporting various financing arrangements of $7,844 and $8,168 at December 31, 2007 and
June 30, 2007, respectively.

9

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Loans Held for Sale

Loans held for sale at December 31, 2007 were comprised of approximately $346,372 of education loans and approximately $11,651 of mortgage loans. Loans
held for sale are carried at the lower of cost or fair value.

Income Taxes

In determining a quarterly provision for income taxes, the Company uses an estimated annual effective tax rate which is based on its expected annual income,
statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it operates. The Company's estimated annual effective tax rate also includes its best estimate
of the ultimate outcome of tax audits. The Company has a net deferred income tax liability primarily because, under GAAP, it recognizes residuals and additional structural advisory fees in financial
statement income earlier than they are recognized for income tax purposes. The net deferred income tax liability decreased during the first six months of fiscal 2008 primarily as a result of the
reduction of the estimated value of the Company's residuals and additional structural advisory fees receivables and the recognition of taxable income from certain previous securitization transactions,
which more than offset the residual and additional structural advisory fee revenue recognized from more recent securitization transactions.

Effective
July 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109," which clarifies the accounting for income tax positions by prescribing a minimum recognition threshold that a tax position
is required to meet before being recognized in the financial statements. Under FIN 48, the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax position. The tax benefits
recognized in the Company's financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.

The
adoption of FIN 48 did not have a material impact on the Company's consolidated financial position or results of operations. The Company had approximately $32,319 of
unrecognized tax benefits at June 30, 2007. If recognized, approximately $21,008 of the unrecognized tax benefit would decrease the Company's effective income tax rate. The Company's policy is
to recognize interest and penalties related to unrecognized tax positions as components of income tax expense.

The
Company is subject to U.S. federal income tax, as well as income tax in multiple U.S. state and local jurisdictions. The Internal Revenue Service (IRS) completed an examination of
the Company's U.S. income tax return for the year ended June 30, 2004. All significant state and local income tax matters have been concluded through June 30, 2003. The Company's state
income tax returns for the year ended June 30, 2004, and state and federal income tax returns for the years ended June 30, 2005, 2006 and 2007 remain subject to examination.

(2) Service Receivables

Additional structural advisory fees and residuals receivables represent the estimated fair value of additional structural advisory fees and residuals expected to
be collected over the life of the various separate securitization trusts that have purchased student loans facilitated by the Company. Private label loans guaranteed by TERI have generally been
purchased by several separate private label loan

10

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(2) Service Receivables (Continued)

trusts.
Processing fees receivable from TERI represents amounts due from TERI for expenses incurred by FMER on TERI's behalf.

On
a quarterly basis, the Company updates its estimates of the fair value of its structural advisory fees and residuals receivables to reflect the passage of time, any change in discount
rates used to estimate their fair value, any changes in the estimated operational expenses for the separate securitization trusts and any changes to the trust performance assumptions that the Company
considers in its fair value
estimates, such as default, recovery, prepayment, auction, and forward London Interbank Offered Rate, or LIBOR, rates.

Net default rates.During the second quarter of fiscal 2008, the Company increased the net default rate assumptions used to
estimate the fair value of its residuals and additional structural advisory fees receivables. In response to an acceleration in default activity coupled with deterioration in overall consumer credit
quality, the Company increased its assumed net default rate from 5.81% to 7.68% on average for the portfolio. The Company believes the increased net default rate assumptions reflect the expected
default activity for the remaining life of each securitization trust. The increase in the net default rate assumptions resulted in a decrease in the estimated fair value of the Company's residuals
receivable of $36,173 and a decrease in the estimated fair value of the Company's additional structural advisory fees receivable of $2,668. Net defaults are calculated by reducing gross defaults by
the amount of recoveries received on previously defaulted loans. During the second quarter of fiscal 2008, the Company increased its assumed average gross default rate from 9.68% to 14.76%. During the
second quarter of fiscal 2008, the Company also increased, from 40% to 48%, the percentage of defaulted loans that it expects to recover.

Prepayment Rates.Loans in the securitization trusts have been experiencing higher prepayment rates than the Company had
estimated would occur at certain points in the life of the loans as a result of a number of factors, including a prolonged unfavorable interest rate environment. During the third quarter of fiscal
2007, the Company altered its assumption regarding the average annual rate of prepayments that it used to estimate the fair value of its residuals and structural advisory fees receivables. The Company
did not, at that time, make an adjustment to its assumption regarding the timing of prepayments expected to occur over the life of the trusts. The increase of the assumption from an average over the
life of the trusts of 7% to 8% resulted in a decrease in the fair value of the residuals receivable of $36,236 and a decrease in the fair value of the additional structural advisory fees receivable of
$3,529. The Company recognized both of these decreases in the third quarter of fiscal 2007. During the second quarter of fiscal 2008, the Company further altered its assumption by adjusting the timing
of prepayments expected to occur over the life of the trusts, in response to actual experience. The result was an increase in the assumed average prepayment rate over the life of the trusts from 8% to
8.4%. During the second quarter of fiscal 2008, the Company decreased the fair value of its residuals receivable by $46,597 and decreased the fair value of its additional structural advisory fees
receivable by $3,535 as a result of these changes.

Discount RateResiduals.In determining an appropriate discount rate for valuing its residuals, the Company
historically has reviewed the rates used by student loan securitizers as well as rates used in the much broader asset-backed securities, or ABS, market. Prior to fiscal 2007, the Company applied a
discount rate of 12% in estimating the present value of its residuals, based on the expected timing of cash flows and the maximum 24-year life of the trust assets and residuals.

11

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(2) Service Receivables (Continued)

During
fiscal 2007, the Company facilitated four securitization transactions involving the issuance of Triple B-rated securities, the only such issuances by any of its
securitization trusts. Triple B-rated issuances, in effect, allowed it to monetize a portion of its securitization-related revenues that previously would have been recognized as residuals.
Accordingly, the Company believed that market developments had provided it with a meaningful basis to revise its input for the discount rate to be applied in estimating the fair value of
pre-fiscal 2007 private label securitization trust residuals. Beginning with the third quarter of fiscal 2007, the Company applied a discount rate equal to the trailing
12-month average of the one-month LIBOR + 1.75% to value the portion of the residuals that it believed qualified as investment grade in the pre-fiscal
2007 private label trusts. That portion of the residuals that it believed did not qualify as investment grade was discounted at 13%, as it was in the securitization trusts that issued Triple
B-rated securities. This decrease in the aggregated average discount rate resulted in an increase in the fair value of the Company's residual receivable of $26,680 which the Company
recorded in the third quarter of fiscal 2007.

The
securitization transactions facilitated in the first quarter of fiscal 2008 did not involve the issuance of Triple B-rated securities and the Company believes that recent
volatility in the ABS market has resulted in an inability to issue Triple B-rated securities as the market for those securities does not presently exist. Accordingly, the Company adjusted
in the first fiscal quarter of fiscal 2008 its input in determining the discount rate applied in estimating the fair value of residuals from securitization trusts that have not issued Triple
B-rated securities to 12%. This increase in the aggregate average discount rate resulted in a decrease in the estimated fair value of the Company's residuals receivable of $25,182 which
was recognized in the first quarter of fiscal 2008. During the second quarter of fiscal 2008, in response to a continued deterioration in the asset-backed securities market, the Company increased the
discount rate used to estimate the fair value of residuals receivable by 100 basis points. As a result, the Company applied a discount rate of 13% for purposes of estimating the fair value of
residuals from securitization trusts that have not issued Triple B-rated securities and a discount rate of 14% for purposes of estimating the fair value of residuals from securitization
trusts that have issued Triple B-rated securities. The Company believes the revised discount rates result in a fair value estimate that reflects ABS market conditions and the subordinate
nature of the Company's residual interest in those trusts. This increase in the discount rate resulted in a decrease in the estimated fair value of the Company's residual receivable of $46,498 during
the second quarter of fiscal 2008.

Discount RateAdditional Structural Advisory Fees.The Company has historically based the discount rate that it
uses to estimate the fair value of its additional structural advisory fees on the 10-year U.S. Treasury Note rate plus 200 basis points. Prior to the second quarter of fiscal 2008, the
Company believed that such a spread was an appropriate discount rate based on the priority payment status of additional structural advisory fees in the flow of funds out of the securitization trusts
and comparable spreads on structured and corporate debt securities. Between September 30, 2007 and December 31, 2007, the 10-year U.S. Treasury Note rate decreased 57 basis
points. An increase in the 10-year U.S. Treasury Note rate has the effect of decreasing the estimated fair value of the Company's structural advisory fees receivable, while a decrease in
the rate has the opposite effect on the Company's estimate of fair value. During the second quarter of fiscal 2008, in response to continued deterioration in the market for structured and corporate
debt securities, the Company increased by 100 basis points the spread over the 10-year U.S. Treasury Note rate that it uses to estimate the fair value of its additional structural advisory
fees. As a result, the Company applied a discount rate of 7.02% at December 31, 2007, compared to a discount rate of 6.59% at September 30, 2007. The Company

12

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(2) Service Receivables (Continued)

believes
the revised discount rate results in a fair value that reflects market conditions and the priority of the additional structural advisory fees relative to other cash distributions from the
trust. The increase in the discount rate resulted in a decrease in the estimated fair value of the Company's additional structural advisory fees receivable of $8,110 during the second quarter of
fiscal 2008.

Auction Note Interest Rates.Five private label loan trusts have issued auction rate notes to finance, in whole or in part,
the purchase of student loans. Interest rates for the auction rate notes are determined from time to time at auction. The Company uses a spread over LIBOR to project the future cost of funding of the
auction rate notes issued by each trust. The spread over LIBOR used to estimate the future cost of funding is based on historical trends, current auction rates for each trust and assumptions for
future auction rates. During the second quarter of fiscal 2008, material deterioration of the debt capital markets resulted in actual auction rates that trended significantly higher than the rates
assumed by the Company in the past. The Company also concluded that the higher actual auction rates would persist, resulting in a larger spread over LIBOR, for a longer period of time than it had
previously estimated. As a result, the Company revised the spread over LIBOR that it uses to estimate the fair value of its residuals and additional structural advisory fees receivables to reflect the
expected spreads over LIBOR in the future. During the second quarter of fiscal 2008, the Company decreased the estimated fair value of its residual receivable by $34,323 and the estimated fair value
of its additional structural advisory fees receivable by $86 as a result of this change in the auction rate notes assumption.

The
following table summarizes changes in the estimated fair value of the Company's structural advisory fees receivable during the first six months of fiscal 2008 and fiscal 2007:

Six months ended
December 31,2007

2006Fair value at beginning of period

$
133,644

$
88,297Additions from new securitizations


24,304


25,447Trust updatesPassage of time (fair value accretion)


5,071


3,411Assumption changes:Increase in average prepayment rate


(3,535
)

Increase in discount rate


(8,110
)

Increase in default rate


(2,668
)

Increase in auction rate notes spread


(86
)

Other factors


1,412


(518
)Net change


(7,916
)

2,893Fair value at end of period

$
150,032

$
116,637


13

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(2) Service Receivables (Continued)

The
following table summarizes the changes in the estimated fair value of the Company's residuals receivable during the first six months of fiscal 2008 and fiscal 2007:

Six months ended
December 31,2007

2006Fair value at beginning of period

$
665,115

$
452,823Additions from new securitizations


116,972


105,070Trust updatesPassage of time (fair value accretion)


43,570


30,140Assumption changes:Increase in average prepayment rate


(46,597
)

Increase in discount rate


(71,680
)

Increase in default rate


(36,173
)

Increase in auction rate notes spread


(34,323
)

Other factors


(28,651
)

(4,367
)Net change


(173,854
)

25,773Fair value at end of period

$
608,233

$
583,666


For
a discussion of the sensitivity of the additional structural advisory fees and residuals receivable to variations in the Company's assumptions and estimates, see "Service Revenue and
Receivables" and "Sensitivity Analysis" under "Management's Discussion and Analysis of Financial Condition and Results of OperationsExecutive SummaryApplication of Critical
Accounting Policies and Estimates".

(3) Related Party Transaction

At December 31, 2007, the Company had invested approximately $113,012 of cash equivalents in a money market fund. The investment adviser for this fund is
Milestone Capital Management, LLC (MCM), an institutional money management firm. In addition, approximately $99,911 of investments were invested by MCM on behalf of the Company under an
investment management agreement. MCM receives a fee for services it performs under this agreement. MCM is a wholly owned subsidiary of Milestone Group Partners. Members of the immediate family of one
of the Company's directors own approximately 65% of Milestone Group Partners.

(4) Education Loan Warehouse Facility

In July 2007, UFSB Private Loan SPV, LLC (UFSB-SPV), a subsidiary of Union Federal, entered into a $300,000 education loan warehouse facility
to fund the purchase of education loans from Union Federal. The facility will terminate on July 16, 2008 or earlier if certain covenants are not maintained. Under the facility,
UFSB-SPV pledges the purchased education loans as collateral for the advances it receives from the conduit lender. UFSB-SPV expects to repay advances it receives as education
loans held by UFSB-SPV are sold to securitization trusts or other financing transactions facilitated by the Company.

14

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(5) Stockholders' Equity

Series A Non-Voting Convertible Preferred Stock

On December 21, 2007, the Company issued 60 shares of newly designated Series A Non-Voting Convertible Preferred Stock that was
convertible, at the option of the holders, into 5,320 shares of FMC common stock, $0.01 par value per share (Common Stock), at a conversion price of $11.24 per share. The purchase price of the
Series A Non-Voting Convertible Preferred Stock was $1,000 per share. Dividends would be paid on the Series A Non-Voting Convertible Preferred Stock when, as and
if, and in the same amounts (on an as-converted basis), declared on the Common Stock. Upon liquidation, dissolution or winding up of the Company, holders of Series A
Non-Voting Convertible Preferred Stock would have the right to receive an amount equal to $0.01 per share of Series A Non-Voting Convertible Preferred Stock, plus the
amount of any declared but unpaid dividends thereon. After payment of this amount, holders of the Series A Non-Voting Convertible Preferred Stock would be entitled to participate
(on an as-converted basis) with the Common Stock in the distribution of remaining assets.

On
January 30, 2008, the holders of the Series A Non-Voting Convertible Preferred Stock elected to convert such shares into an aggregate of 5,320 shares of
Common Stock.

Investment Agreement

On December 21, 2007, the Company entered into an Investment Agreement with GS Parthenon A, L.P. and GS Parthenon B, L.P., affiliates of GS
Capital Partners (Purchasers), pursuant to which the Company sold the Series A Non-Voting Convertible Preferred Stock and agreed to sell, after receipt of applicable regulatory
approvals and determinations and satisfaction of other closing conditions, 201 shares of newly-created Series B Non-Voting Convertible Preferred Stock, $0.01 par value per share, at
a purchase price of $1,000 per share. The shares of Series B Non-Voting Convertible Preferred Stock will be convertible, at the option of the holders,
into 13,380 shares of Common Stock at a conversion price of $15 per share. All other terms of the Series B Non-Voting Convertible Preferred Stock are identical to those of the
Series A Non-Voting Convertible Preferred Stock. The Company has also granted to GS Parthenon A, L.P. the right to designate one representative to the Company's Board of Directors
and has provided to the Purchasers required and incidental rights to register under the Securities Act of 1933, as amended, any Common Stock obtained from the conversion of preferred stock.

2003 Stock Incentive Plan

In September 2003, the Board of Directors and stockholders approved the 2003 Stock Incentive Plan. A total of 4,050 shares of Common Stock are authorized for
issuance pursuant to awards under this plan. During the first six months of fiscal 2008, the Company granted 383 restricted stock units, each such restricted stock unit representing the right to
receive one share of Common Stock upon vesting. As of December 31, 2007, there were 1,045 restricted stock units outstanding and 2,774 shares available for future grant under this plan.

2003 Employee Stock Purchase Plan

In October 2003, the Board of Directors and stockholders approved the 2003 Employee Stock Purchase Plan (Stock Purchase Plan). A total of 600 shares of Common
Stock are authorized for issuance under this plan. The Stock Purchase Plan permits eligible employees to purchase shares of Common Stock at the lower of 85% of the fair market value of the Common
Stock at the beginning or

15

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(5) Stockholders' Equity (Continued)

at
the end of each offering period. Participation is voluntary. Under the Stock Purchase Plan, 30 and 15 shares of Common Stock were issued in January 2008 and July 2007, respectively. At
December 31, 2007, 406 shares were available for future purchase under the Stock Purchase Plan.

Share Repurchase Program

On April 24, 2007, the Board of Directors authorized the repurchase of up to 10,000 shares of Common Stock from time to time on the open market or in
privately negotiated transactions. The 10,000 shares authorized for repurchase included 3,393 remaining shares available for repurchase as of April 24, 2007 under a previously authorized
repurchase program. The repurchase program approved on April 24, 2007 does not have a fixed expiration date. Through December 31, 2007, the Company had repurchased an aggregate of 1,169
shares of its Common Stock under this program.

Cash Dividend

During the first six months of fiscal 2008 the Board of Directors declared the following cash dividends:

Record Date

Dividend per shareSeptember 24, 2007

$0.275December 17, 2007

$0.12


Stock Split

On November 9, 2006, the Board of Directors approved a three-for-two split of Common Stock which was effected in the form of a
stock dividend distributed on December 4, 2006 to stockholders of record at the close of business on November 20, 2006. As such, all prior period share data have been retroactively
adjusted to reflect the stock split.

(6) Net Income (Loss) per Share

The following table sets forth the computation of basic and diluted net income (loss) per share of Common Stock:

|                                                             |                          | Three months ended
December 31,  |          | Six months ended
December 31,
|------------------------------------------------------------ | ------------------------ | -------------------------------- | -------- | -----------------------------
|
|Net income (loss)                                            |                          | $                                | (117,675 | )                            
|                                                             |                          |                                  |          |                              
|Shares used in computing net income per common sharebasic   |                          |                                  | 93,500   |                              
|Effect of dilutive securities:                               |                          |                                  |          |                              
|                                                             | Stock options            |                                  |          |                             
|                                                             | Restricted stock units   |                                  |          |                             
|                                                             | Series A preferred stock |                                  |          |                             
|                                                             |                          |                                  |          |                              
|                                                             |                          | Dilutive potential common shares |          |                              
|                                                             |                          |                                  |          |                              
|Shares used in computing net income per common sharediluted |                          |                                  | 93,500   |                              
|                                                             |                          |                                  |          |                              
|Net income (loss) per common share:                          |                          |                                  |          |                              
|                                                             | Basic                    |                                  | $        | (1.26                        
|                                                             |                          |                                  |          |                              
|                                                             | Diluted                  |                                  | $        | (1.26                        
|                                                             |                          |                                  |          |                              

16

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(6) Net Income (Loss) per Share (Continued)

The
Company did not include 115 dilutive shares underlying stock options, 195 dilutive shares underlying restricted stock units and 627 dilutive shares underlying Series
A Non-Voting Convertible Preferred Stock in the computation of diluted net loss per share for the three months ended December 31, 2007 as their effects would have been antidilutive.

(7) New Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, Fair Value Option for
Financial Assets and Financial Liabilities, an amendment of FASB Statements No. 115. SFAS No. 159 will be effective
for the Company beginning in the first quarter of fiscal 2009. The statement permits entities to measure many financial instruments and certain other items at fair value that are not currently
required to be measured at fair value. The adoption of SFAS No. 159 is not expected to have a material impact on the Company's consolidated financial condition or results of operations.

In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, which provides guidance for using fair value to measure
assets and liabilities. The statement also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require or permit assets or liabilities to be measured at fair
value. The standard does not expand the use of fair value in any new circumstances. Under SFAS No. 157, fair value refers to the price that would be received from the sale of an asset or paid
to transfer a liability in an orderly transaction between market participants in the market in which
the reporting entity transacts. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and
establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the
lowest priority to unobservable data, for example, the reporting entity's own data. Fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect the adoption of SFAS
No. 157 to have a material impact on our results of operations and financial position.

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

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited
condensed consolidated financial statements and accompanying notes included in this quarterly report. In addition to the historical information, the discussion contains certain forward-looking
statements that involve risks, assumptions and uncertainties. Our actual results could differ materially from those expressed or implied by the forward-looking statements due to applications of our
critical accounting policies and factors including, but not limited to, those set forth under the caption "Risk Factors" in Item 1A of Part II of this quarterly
report.

Executive Summary

Overview

We offer our clients, national and regional financial institutions and educational institutions, as well as businesses, education loan marketers and other
organizations, a suite of outsourcing services for private education lending in the United States. We currently focus on facilitating private student loans for undergraduate, graduate and professional
education, although we also provide service offerings for continuing education programs, the primary and secondary school market, career training and study abroad programs. We provide services in
connection with each of the five typical phases of the student loan lifecycle, offering our clients a single point of interface for:



We
receive fees for the services we provide in connection with our clients' private student loans, including processing and structuring and administering securitizations of those loans. Securitization
refers to the technique of pooling loans and selling them to a special purpose, bankruptcy remote entity, typically a trust, which issues securities to investors backed by those loans. We have
provided structural, advisory and other services for 38 securitization transactions since our formation in 1991.

We
do not take a direct ownership interest in the student loans our clients generate, nor do we serve as a guarantor with respect to any student loan programs that we facilitate. We
assist the lenders in our loan programs in selecting the underwriting criteria used in deciding whether a student loan will be made to an applicant. However, each lender has ultimate control over the
selection of these criteria, and in providing our services, we are obligated by contract to observe them. Our lender clients have the opportunity to mitigate their credit risk through a loan repayment
guarantee by TERI pursuant to which TERI guarantees repayment of the borrower's loan principal, together with capitalized or accrued interest, on defaulted loans. Lenders that wish to have their loans
guaranteed by TERI are required to meet TERI's underwriting criteria. Beginning in April 2007, our wholly-owned subsidiary Union Federal Savings Bank, began serving as an additional lender for our
proprietary brands of private student loans. Although we oversee loan servicing as a component of our administrative duties, we do not act as a loan servicer.

The
primary driver of our results of operations and financial condition is the volume of student loans for which we provide outsourcing services from loan origination through
securitization. The

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following
table presents certain financial and operating information for the first six months of fiscal 2008 and fiscal 2007.

|                                                                                                              |  | Six months ended December 31, |           |  |  
|------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | --------- |  | -
|
|
|
|Approximate number of student loan applications processed                                                     |  |                               | 1,205,000 |  |  
|Approximate number of student loans facilitated                                                               |  |                               | 318,000   |  |  
|Approximate number of student loans facilitated that were also
    available to us for securitization         |  |                               | 278,000   |  |  
|Principal amount of student loans facilitated                                                                 |  | $                             | 3,482,865 |  | $
|Principal amount of student loans facilitated that were also
    available to us for securitization           |  | $                             | 3,209,432 |  | $
|Principal and accrued interest balance of student loans
    securitized                                       |  | $                             | 2,027,079 |  | $
|Principal balance of student loans facilitated and available to us
    at period end for later securitization |  | $                             | 2,044,222 |  | $

The
principal balance of loans facilitated and available to us for later securitization fluctuates as a result of several factors including (a) the timing of securitizations,
(b) the cut off date for loan purchases as securitizations take place, (c) the loan purchase eligibility criteria included in the various note purchase agreements that govern the
purchase of loans for securitization and (d) the daily volume of loans facilitated prior to period end.

In
June 2001, we acquired TERI's loan processing operations, including its historical database, but not its investment assets or guarantee liabilities. In connection with this
acquisition, we entered into a master servicing agreement pursuant to which TERI engages us to provide loan origination and processing services with respect to the student loans generated through the
private label programs we facilitate, as well as other TERI-guaranteed loans. TERI reimburses us for the expenses we incur in providing these services. Under the terms of a master loan
guaranty agreement that we have entered into with TERI, we have also agreed to provide a beneficial interest for TERI in a portion of the residual value of securitization trusts that purchase
TERI-guaranteed loans, and granted to TERI a right of first refusal to provide a third-party guarantee of our private label clients' existing and future loan programs. In October 2004, we
renewed our master servicing agreement, master loan guaranty agreement and certain additional agreements with TERI, in each case for an additional term through June 2011.

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

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



Business Trends and Outlook

On December 21, 2007, we announced a definitive agreement with GS Capital Partners ("GSCP") relating to a strategic equity investment by GSCP. GSCP
invested $59.8 million to acquire preferred stock convertible into 5.3 million shares of our common stock at a conversion price of $11.24 per share. In addition, GSCP agreed to invest,
upon receipt of regulatory approval, up to $200.7 million to acquire additional shares of preferred stock convertible into 13.4 million shares of our common stock at a conversion price
of $15.00 per share. In conjunction with the equity investment, GSCP also committed to offer us a $1.0 billion warehouse facility, the terms of which are in the process of being negotiated. The
initial investment by GSCP provided us with additional capital resources, and the warehouse facility would provide a mechanism for financing on an interim basis a portion of the loan volume that our
clients generate. We expect the subsequent investment by GSCP to occur in the current fiscal year.

Capital
markets conditions rapidly deteriorated during the second fiscal quarter. Our business has been and continues to be adversely impacted by the current market dynamics, including
an inability to access the securitization market and more onerous borrowing costs and facility structures. We did not complete a securitization transaction during our second fiscal quarter, and we are
uncertain about our ability to complete a securitization in the current fiscal year. We expect our securitization volumes to materially decrease in fiscal 2008 compared to fiscal 2007, and we expect
pricing terms substantially less favorable than in the past. In the near-term, we also expect investors to have limited or no demand for subordinate tranches of asset-backed securities in
securitization transactions that we facilitate.

Student
loan asset-backed securitizations have historically been our sole source of financing our clients' private student loan programs. As our loans available for securitization volume
continues to grow, it may be important for us to pursue alternative means to finance our clients' loans. Other sources of funding, including the warehouse facility offered by GSCP, may not be
available on attractive terms. Recent conditions in the capital markets have generally resulted in widening credit spreads and

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more
restrictive covenants, which will affect the pricing, terms and conditions of any alternative funding mechanism we pursue.

In
addition, Fitch Ratings, Inc. lowered the insurer financial strength rating of TERI during the second fiscal quarter from A+ to A, outlook negative, and Moody's Investors
Service announced that it had placed the Baa3 issuer rating of TERI under review for possible downgrade in light of higher-than-expected loss experience of
TERI-guaranteed loans. Moody's also announced that it had placed on review for possible downgrade the ratings of eighteen student loan asset-backed notes issued in twelve securitizations
facilitated by us. On February 4, 2008, Fitch Ratings downgraded thirteen classes of student loan asset-backed notes issued in
seven securitizations facilitated by us, placed a negative watch on eleven classes of student loan asset-backed notes issued in two securitizations facilitated by us and reaffirmed the ratings of
other classes of notes. On January 18, 2008, Fitch Ratings downgraded the insurance financial strength rating of Ambac Assurance Corporation, which has provided credit enhancement in several
securitizations that we have facilitated, to AA, Credit Watch Negative. In addition, Standard & Poor's and Moody's placed Ambac's AAA rating on CreditWatch Negative in January 2008. Fitch
Ratings downgraded, and Standard & Poor's and Moody's placed on watch for possible downgrade, forty one classes of student loan asset-backed notes which have credit enhancement provided by
Ambac. These notes were issued by three securitization trusts facilitated by us. These rating agency actions could reduce demand for future securitizations that we structure, result in further
write-downs of our service receivables, or reduce revenues that we derive in connection with future transactions.

Our
financial results for the second fiscal quarter reflected our inability to access the securitization market, as well as a $178 million pre-tax
write-down of our service receivables. We believe that our portfolio of securitized loans will be adversely affected by a negative consumer credit cycle that is affecting many classes of
consumer loans. As further detailed below under the caption "Application of Critical Accounting Policies and EstimatesService Revenue and Receivables," we changed the assumptions we use
in estimating the fair value of our additional structural advisory fees and residuals receivables. In general, these adjustments were necessary because securitization trusts performed below our range
of expectations, including with regard to prepayments, delinquencies and defaults, and the estimated cost of funding auction rate notes issued by several securitization trusts is now expected to be
higher than previously estimated. We have posted to our website static pool data as of December 31, 2007, including trust inception data and borrower payment status, delinquency, cumulative
loss and prepayment data as of December 31, 2007 for certain securitization trusts that we have facilitated.

We
plan to adapt our business model to address the challenges facing our company in what could be a protracted dislocation in the U.S. economy and the financial markets. We expect these
actions to include collaborating with TERI and our lender clients to implement more selective underwriting criteria and increase borrower pricing to reflect current financing and market conditions;
collaborating with TERI and TERI-approved loan servicers to improve collection and recovery practices; pursuing alternatives for financing our clients' loans on an interim or permanent
basis; collaborating with TERI and rating agencies to ensure appropriate levels of reserves; growing our business to consumer platform by expanding our proprietary brands; and reducing our overall
cost structure on an annualized basis by approximately 15 to 20 percent. In order to preserve capital and maximize liquidity in challenging market conditions, our board of directors has
eliminated the regular quarterly cash dividend for the foreseeable future. We expect the implementation of more selective underwriting criteria to potentially reduce the volume of loans that we
facilitate.

In
July 2007, UFSB Private Loan SPV, LLC (UFSB-SPV), a subsidiary of Union Federal, entered into a $300.0 million education loan warehouse facility to fund the purchase of
education loans from Union Federal. At December 31, 2007, $245.4 million was outstanding. Under the facility, UFSB-SPV pledges the purchased education loans as collateral for the
advances it receives from the conduit lender. The facility will terminate on July 16, 2008 or earlier if certain covenants are not maintained.

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UFSB-SPV
expects to repay advances it receives as education loans held by UFSB-SPV are sold to securitization trusts or other financing transactions facilitated by us.

Despite
these trends and uncertainties we remain encouraged about the fundamentals of our business. Private student loans are an important and growing source of college funding. College
attendance is high, the overall cost of college continues to rise, government supported loans are limited and families are saving less. Added pressure for funding education may result from the
declining home values and the lack of equity that has been a source of funding for education. We believe that borrowers will need responsible private student loan solutions after exhausting all
available scholarships, grants and federal aid. Moreover, the College Cost Reduction and Access Act of 2007 has significantly reduced the profit margins of traditional non-governmental
providers of federal loans, and we believe that some of our competitors and potential competitors may exit the student loan industry as a result of the Act and current market conditions. In summary,
our view is that demand will be high for private student loans now and into the future, and First Marblehead is well-positioned, particularly following the strategic investment by GSCP, to
weather the challenges facing the company and the private student loan industry.

The
information described under the caption "Risk Factors" in this quarterly report also contains important factors that you should consider in assessing our business.

Securitizations and Related Revenue

We structure and facilitate securitization transactions for our clients through a series of bankruptcy remote, qualified special purpose statutory trusts. The
trusts obtain through the securitization process private student loans from the originating lenders or their assignees, which relinquish to the trust their ownership interest in the loans. The debt
instruments that the trusts issue to finance the purchase of these student loans are obligations of the trusts, rather than our obligations or those of originating lenders or their assignees. We refer
to the trusts utilized in the securitization of TERI-guaranteed private label loans as private label loan trusts.

Under
the terms of our agreements with lender clients, we generally have an obligation to use our best efforts to facilitate the purchase of the client's private student loans during a
specified loan purchase period. The length of the loan purchase period varies by client and generally ranges from 180 days to 540 days following loan disbursement. With respect to
approximately $1.6 billion of our facilitated loan
volume available for securitization as of December 31, 2007, our liability for failure to facilitate a purchase in breach of our obligations would be limited to liquidated damages of one
percent of the total principal amount of the loans as to which the loan purchase period expired. We estimated the maximum liquidated damages applicable to our facilitated loan volume available for
securitization as of December 31, 2007 to be approximately $16.1 million. Our agreements applicable to approximately $430 million of our facilitated loan volume available for
securitization as of December 31, 2007 do not specify or limit our liability to liquidated damages for failure to facilitate a purchase in breach of our obligations. The amount of our potential
liability with respect to such loans is not determinable at this time. Under certain of our agreements, our obligations to facilitate the purchase of our clients' loans are suspended during a "market
disruption event," as defined in the applicable agreement.

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



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Processing Fees from TERI

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

Recognition and Valuation of Service Revenue

We recognize up-front structural advisory fees as revenue at the time the securitization trust purchases the loans. In order for the securitization
trust to purchase the loans, all of the applicable services must be performed, rating agencies must deliver their ratings letters, transaction counsel must

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deliver
the required legal opinions and the underwriters must receive the debt securities issued by the securitization trust. These events indicate that the securitization transaction has been
properly structured and loans have been properly sold to the securitization trust.

As
required under GAAP, we also recognize the fair value of additional structural advisory fees and residuals as revenue at that time, as they are deemed to be earned at the time of the
securitization but before we actually receive payment. These amounts are deemed earned because evidence of an arrangement exists, we have provided the services, the fee is fixed and determinable based
upon a discounted cash flow analysis, there are no future contingencies or obligations and collection is reasonably assured.

Under
GAAP, we are required to estimate the fair value of the additional structural advisory fees and residuals as if they are investments in debt securities classified as
available-for-sale or trading, similar to retained interests in securitizations. Accordingly, we record additional structural advisory fees and residuals receivable on our
balance sheet at estimated fair value using a discounted cash flow model. Because there are no quoted market prices for our additional structural advisory fees and residuals receivable, we use certain
key assumptions to estimate their values. See "Application of Critical Accounting Policies and EstimatesService Revenue and Receivables." We estimate the fair value both
initially and at each subsequent quarter and reflect the change in the value in earnings for that period.

We
generally recognize administrative and other fees, as well as processing fees from TERI, as revenue at the time that we perform the underlying services. We recognize marketing
coordination fees and marketing premiums earned on proprietary brands, which are components of administrative and other fees, at the time the securitization trust purchases the loans derived from the
related marketing coordination services.

Quarterly Fluctuations

Our quarterly revenue, operating results and profitability have varied on a quarterly basis primarily because of the timing, size and structure of capital market
transactions that we have facilitated. In fiscal 2007, we facilitated one securitization in each of the first, second and third quarters and two securitizations in the fourth quarter. The variability
of our quarterly revenue and operating results will increase on a quarterly basis as a result of current conditions in the capital markets. We facilitated two securitization transactions in the first
quarter of fiscal 2008, but we did not conduct a securitization transaction during the second quarter of fiscal 2008. An inability to access the capital markets, and variations in the size or
structure of any future transactions, could continue to result in material variability of our operating results on a quarterly basis.

The
following tables set forth our quarterly revenue and net income (loss) for the first six months of fiscal 2008 and each quarter of fiscal 2007:

|                  |  | Fiscal 2008 |         |  |   |         
|----------------- |  | ----------- | ------- |  | - | --------
|
|
|Total revenues    |  | $           | 379,962 |  | $ | (122,810
|Net income (loss) |  |             | 168,820 |  |   | (117,675

|
|

|               |  | Fiscal 2007
|-------------- |  | -----------
|
|
|Total revenues |  | $          
|Net income     |  |            

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Application of Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates,
assumptions and judgments that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. We base our estimates, assumptions
and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or
conditions.

Our
significant accounting policies are more fully described in Note 2 of the notes to the audited consolidated financial statements for the fiscal year ended June 30,
2007, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on August 28, 2007. On an ongoing basis, we evaluate our
estimates and judgments, particularly as they relate to accounting policies that we believe are most important to the portrayal of our financial condition and results of operations. We regard an
accounting estimate or assumption underlying our financial statements to be a "critical accounting estimate" where:



We
have discussed our accounting policies with the audit committee of our board of directors, and we believe that our estimates relating to the recognition and valuation of our
securitization-related revenue and receivables, as described below, fit the definition of critical accounting estimates. We also consider our policy with respect to the determination of whether or not
to consolidate the financial results of the securitization trusts that we facilitate to be a critical accounting policy.



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

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



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

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The
following table shows the approximate weighted average assumptions for loan performance at December 31, 2007 for our private label loan trusts:

|                          |  | Percentage rate |   | Percentage discount rate |  
|------------------------- |  | --------------- | - | ------------------------ | -
|
|Private label loan trusts |  | 14.76           | % | 48                       | %

In
selecting loan performance assumptions, we consider the underlying creditworthiness of the student loan borrowers as well as the type of loans being securitized. We analyze
creditworthiness in several tiers, and select what we believe to be appropriate loan performance assumptions based on those tiers. Our private label loan programs, under which approximately 83% of the
borrowers have creditworthy co-borrowers, typically a family member, have an extensive credit underwriting process.

Net default rates.During the second quarter of fiscal 2008, we increased the net default rate assumptions used to estimate
the fair value of our residuals and additional structural advisory fees receivables. In response to an acceleration in default activity coupled with deterioration in overall consumer credit quality,
we increased the assumed net default rate from 5.81% to 7.68% on average for the portfolio. We believe the increased net default rate assumptions reflect the expected default activity for the
remaining life of each securitization trust. This increase in the net default rate assumptions resulted in a decrease in the estimated fair value of our residuals receivable of $36.2 million
and a decrease in the
estimated fair value of our additional structural advisory fees receivable of $2.7 million during the second quarter of fiscal 2008. Net defaults are calculated by reducing gross defaults by
the amount of recoveries received on previously defaulted loans. During the second quarter of fiscal 2008, we increased our assumed average gross default rate from 9.68% to 14.76%. During the second
quarter of fiscal 2008, we also increased, from 40% to 48%, the percentage of defaulted loans that we expect to recover.

Prepayment Rates.Loans in the securitization trusts have been experiencing higher prepayment rates than we had estimated
would occur at certain points in the life of the loans as a result of a number of factors, including a prolonged unfavorable interest rate environment. During the third quarter of fiscal 2007, we
altered our assumption regarding the average annual rate of prepayments that we use to estimate the fair value of our residuals and structural advisory fees receivables. We did not, at that time, make
an adjustment to our assumption regarding the timing of prepayments expected to occur over the life of the trusts. The increase of the assumption from an average over the life of the trusts of 7% to
8% resulted in a decrease in the fair value of the residuals receivable of $36.2 million and a decrease in the fair value of the additional structural advisory fees receivable of
$3.5 million. We recognized both of these decreases in the third quarter of fiscal 2007. During the second quarter of fiscal 2008, we further altered our assumption by adjusting the timing of
prepayments we expect to occur over the life of the trusts in response to actual experience. The result was an increase in the assumed average prepayment rate over the life of the trusts from 8% to
8.4%. This change in the prepayment rate assumption resulted in a decrease in the estimated fair value of our residuals receivable of $46.6 million and a decrease in the estimated fair value of
our additional structural advisory fees receivable of $3.5 million during the second quarter of fiscal 2008.

Discount RateResiduals.In determining an appropriate discount rate for valuing our residuals, we historically
have reviewed the rates used by student loan securitizers as well as rates used in the much broader asset-backed securities, or ABS, market. Prior to fiscal 2007, we applied a discount rate of 12% in
estimating the present value of our residuals, based on the expected timing of cash flows and the maximum 24-year life of the trust assets and residuals.

During
fiscal 2007, we facilitated four securitization transactions involving the issuance of Triple B-rated securities, the only such issuances by any of our securitization
trusts. Triple B-rated issuances, in effect, allowed us to monetize a portion of our securitization-related revenues that previously would

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have
been recognized as residuals. Accordingly, we believed that market developments had provided us with a meaningful basis to revise our input for the discount rate to be applied in estimating the
fair value of pre-fiscal 2007 private label securitization trust residuals. Beginning with the third quarter of fiscal 2007, we applied a discount rate equal to the trailing
12-month average of the one-month LIBOR + 1.75% to value the portion of the residuals that we believed qualified as investment grade in the pre-fiscal
2007 private label trusts. That portion of the residuals that we believed did not qualify as investment grade was discounted at 13%, as it was in the securitization trusts that issued Triple
B-rated securities. The decrease in the aggregated average discount rate resulted in an increase in the fair value of our residuals receivable of $26.7 million which we recorded in
the third quarter of fiscal 2007.

The
securitization transactions facilitated in the first quarter of fiscal 2008 did not involve the issuance of Triple B-rated securities and we believe that recent
volatility in the ABS market has resulted in an inability to issue Triple B-rated securities as the market for those securities does not presently exist. Accordingly, we adjusted in the
first fiscal quarter our input in determining the discount rate applied in estimating the fair value of residuals from securitization trusts that have not issued Triple B-rated securities
to 12%. This increase in the aggregate average discount rate resulted in a decrease in the estimated fair value of our residuals receivable of $25.2 million which was recognized in the first
quarter of fiscal 2008. During the second quarter of fiscal 2008, in response to continued deterioration in the asset-backed securities market, we increased the discount rate used to estimate the fair
value of residuals receivable by 100 basis points. As a result, we applied a discount rate of 13% for purposes of estimating the fair value of residuals from securitization trusts that have not issued
Triple B-rated securities and a discount rate of 14% for purposes of estimating the fair value of residuals from securitization trusts that have issued Triple B-rated
securities. We believe the revised discount rates result in a fair value that reflects ABS market conditions and the subordinate nature of our residual interest in those trusts. The increase in the
discount rate assumption resulted in a decrease in the estimated fair value of our residual receivable of $46.5 million during the second quarter of fiscal 2008.

Discount RateAdditional Structural Advisory Fees.Historically, we have based the discount rate that we use to
estimate the fair value of our additional structural advisory fees on the 10-year U.S. Treasury Note rate plus 200 basis points. Prior to the second quarter of fiscal 2008, we believed
that such a spread was an appropriate discount rate based on the priority payment status of additional structural advisory fees in the flow of funds out of the securitization trusts and comparable
spreads on structured and corporate debt securities. Between September 30, 2007 and December 31, 2007, the 10-year U.S. Treasury Note rate decreased 57 basis points. An increase in
the 10-year U.S. Treasury Note rate has the effect of decreasing the estimated fair value of our structural advisory fees receivable, while a decrease in the rate has the opposite effect
on our estimate of fair value. During the second quarter of fiscal 2008, in response to continued deterioration in the market for structured and corporate debt securities, we increased by 100 basis
points the spread over the 10-year U.S. Treasury Note rate that we use to estimate the fair value of our additional structural advisory fees. As a result, we applied a discount rate of
7.02% at December 31, 2007, compared to a discount rate of 6.59% at September 30, 2007. We believe the revised discount rate results in a fair value that reflects market conditions and
the priority of the additional structural advisory fees relative to other cash distributions from the trust. The increase in the discount rate assumption resulted in a decrease in the estimated fair
value of our additional structural advisory fee receivable of $8.1 million during the second quarter of fiscal 2008.

Auction Note Interest Rates.Five private label loan trusts have issued auction rate notes to finance, in whole or in part,
the purchase of student loans. Interest rates for the auction rate notes are determined from time to time at auction. As of December 31, 2007, we used a spread over LIBOR to project the future
cost of funding of the auction rate notes issued by each trust. The spread over LIBOR used to estimate the future cost of funding is based on historical trends, current auction rates for each trust
and assumptions for future auction rates. During the second quarter of fiscal 2008,

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material
deterioration of the debt capital markets resulted in actual auction rates that trended significantly higher than the rates we had assumed in the past. We also concluded that the higher
actual rates would persist, resulting in a larger spread over LIBOR for a longer period of time than we had previously estimated. As a result, we revised the spread over LIBOR that we use to estimate
the fair value of our residuals and additional structural advisory fees receivables to better reflect the expected spreads over LIBOR in the future. The change in our auction rate assumption resulted
in a decrease in the estimated fair value of our residual receivable of $34.3 million and a decrease in the estimated fair value of our additional structural advisory fee receivable of $86,000
during the second quarter of fiscal 2008.



Increases in our estimates of defaults, prepayments and discount rates, increases in the spread between LIBOR indices and auction rates, as well as decreases in
default recovery rates and the multi-year forward estimates of LIBOR, would have a negative effect on the value of our additional structural advisory fees and residuals. Student loan
prepayments include either full or partial payments by a borrower in advance of the maturity schedule specified in the credit agreement, including payments as a result of loan consolidation activity.
Because most credit defaults are reimbursable by third parties, increases in net defaults generally have the same effect as increases in prepayments. If net defaults increase beyond the level of
expected third-party reimbursement, then these changes will have an additional negative effect on the value of our additional structural advisory fees and residuals. LIBOR is the reference rate for a
substantial majority of the loan assets and, we believe, a reasonable index for borrowings of the trusts. Because the trusts' student loan assets earn interest based on LIBOR and some trusts have
outstanding securities that pay interest based on the results of auction rates, changes in the spread between LIBOR and the auction rate can affect the performance of the trusts which have issued
auction rate notes.

The
following table shows the estimated change in our structural advisory fees and residuals receivable balances at December 31, 2007 based on changes in our loan performance
assumptions. The effect on the fair value of the structural advisory fees and residuals receivables are based on variations of 10% or 20%, except for the forward LIBOR rates, which are based on
variations of 1% and 2% from the forward LIBOR rates at December 31, 2007, and changes in the assumed spread between 1-month LIBOR rates and auction rates, which are based on .05%
and .10% changes from the assumed levels for each key assumption:

|                        |                                | Percentage change in assumptions |   |         |   | Percentage change in assumptions |        
|----------------------- | ------------------------------ | -------------------------------- | - | ------- | - | -------------------------------- | -------
|
|
|
|Default rate:           |                                |                                  |   |         |   |                                  |        
|                        | Total structural advisory fees |                                  | $ | 151,805 |   | $                                | 150,919
|                        | Change in receivables balance  |                                  |   | 1.18    | % |                                  | 0.59   
|Default recovery rate:  |                                |                                  |   |         |   |                                  |        
|                        | Total structural advisory fees |                                  | $ | 150,032 |   | $                                | 150,032
|                        | Change in receivables balance  |                                  |   | 0.00    | % |                                  | 0.00   
|Annual prepayment rate: |                                |                                  |   |         |   |                                  |        
|                        | Total structural advisory fees |                                  | $ | 157,697 |   | $                                | 153,741
|                        | Change in receivables balance  |                                  |   | 5.11    | % |                                  | 2.47   
|Discount rate:          |                                |                                  |   |         |   |                                  |        
|                        | Total structural advisory fees |                                  | $ | 161,781 |   | $                                | 155,756
|                        | Change in receivables balance  |                                  |   | 7.83    | % |                                  | 3.82   

|
|

|                     |                                | Change in assumption |   |         |    | Change in assumption |        
|-------------------- | ------------------------------ | -------------------- | - | ------- | -- | -------------------- | -------
|
|
|Forward LIBOR rates: |                                |                      |   |         |    |                      |        
|                     | Total structural advisory fees |                      | $ | 139,864 |    | $                    | 144,803
|                     | Change in receivables balance  |                      |   | (6.78   | )% |                      | (3.49  

28

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|                        |                               | Percentage change in assumptions |   |         |    | Percentage change in assumptions |        
|----------------------- | ----------------------------- | -------------------------------- | - | ------- | -- | -------------------------------- | -------
|
|
|
|Default rate:           |                               |                                  |   |         |    |                                  |        
|                        | Total residual fees           |                                  | $ | 629,618 |    | $                                | 618,913
|                        | Change in receivables balance |                                  |   | 3.52    | %  |                                  | 1.76   
|Default recovery rate:  |                               |                                  |   |         |    |                                  |        
|                        | Total residual fees           |                                  | $ | 607,788 |    | $                                | 608,010
|                        | Change in receivables balance |                                  |   | (0.07   | )% |                                  | (0.04  
|Annual prepayment rate: |                               |                                  |   |         |    |                                  |        
|                        | Total residual fees           |                                  | $ | 686,293 |    | $                                | 646,177
|                        | Change in receivables balance |                                  |   | 12.83   | %  |                                  | 6.24   
|Discount rate:          |                               |                                  |   |         |    |                                  |        
|                        | Total residual fees           |                                  | $ | 736,257 |    | $                                | 668,437
|                        | Change in receivables balance |                                  |   | 21.05   | %  |                                  | 9.90   

|
|

|                     |                               | Change in assumption |   |         |    | Change in assumption |        
|-------------------- | ----------------------------- | -------------------- | - | ------- | -- | -------------------- | -------
|
|
|Forward LIBOR rates: |                               |                      |   |         |    |                      |        
|                     | Total residual fees           |                      | $ | 588,639 |    | $                    | 598,978
|                     | Change in receivables balance |                      |   | (3.22   | )% |                      | (1.52  

|
|

|                                                                 |                               | Change in assumption |   |         |   | Change in assumption |        
|---------------------------------------------------------------- | ----------------------------- | -------------------- | - | ------- | - | -------------------- | -------
|
|
|Change in assumed spread between LIBOR and auction rate indices: |                               |                      |   |         |   |                      |        
|                                                                 | Total residual fees           |                      | $ | 614,771 |   | $                    | 611,498
|                                                                 | Change in receivables balance |                      |   | 1.07    | % |                      | 0.54   

During
the second quarter of fiscal 2008, material deterioration of the debt capital markets resulted in actual auction rates that trended significantly higher than the
rates we had assumed in the past. As a result, we revised the spread over LIBOR that we use to estimate the future cost of funding of auction rate notes. If higher actual auction rates persist longer
then we currently estimate, our residual and structural advisory fee receivables could decrease more significantly than indicated in the sensitivity table above. The interest rate on each outstanding
auction rate note is limited by a maximum auction
rate. A widening in the assumed spread between LIBOR and the auction rates of 50 basis points, which would result in an interest rate equal to the maximum auction rate for some but not all outstanding
auction rate notes, would result in a decrease in the estimated fair value of our residuals of $29.3 million, or 4.82%, and a decrease in the estimated fair value of our additional structural
advisory fees of $0.06 million, or 0.04%. A widening in the assumed spread between LIBOR and auction rates to the maximum auction rate for each outstanding auction rate note would result in a
decrease in the estimated fair value of our residuals of $59.5 million, or 9.77%, and decrease in the estimated fair value of our additional structural advisory fees of $0.11 million, or
0.07%. See "Risk Factors" under Part II of this quarterly report for additional information regarding our trusts' auction rate notes.

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 assumptions may not in fact be independent, the net effect of simultaneous adverse changes in key assumptions may differ materially from the sum of the individual effects calculated
above.

29

---







Our consolidated financial statements include the accounts of The First Marblehead Corporation and its subsidiaries, after eliminating inter-company accounts and
transactions. We have not consolidated the financial results of the securitization trusts purchasing loans that we have facilitated. Prior to July 1, 2003, this accounting treatment was in
accordance with various Emerging Issues Task Force issues and related interpretations. We 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, we applied Financial Accounting Standards Board, or FASB, Interpretation
No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51," or FIN No. 46, in assessing consolidation. FIN No. 46
provided 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.

On
December 24, 2003, the FASB issued FIN No. 46 (revised December 2003), "Consolidation of Variable Interest Entities," or FIN No. 46R, which addressed how a
business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN No. 46R has
replaced FIN No. 46. At December 31, 2007, each securitization trust created after January 31, 2003 has met the criteria to be a qualified special-purpose entity, or QSPE, as
defined in paragraph 35 of FASB Statement No. 140, "Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Accordingly, we did not
consolidate these existing securitization trusts in our financial statements. In addition, the securitization trusts created prior to January 31, 2003 in which we hold a variable interest that
could result in us being considered the primary beneficiary of such trust, have been amended in order for them to be considered QSPEs. The adoption of FIN No. 46R, which we began to apply in
December 2003, did not have a material impact on our consolidated financial condition, results of operations, earnings per share or cash flows.

The
FASB has issued an exposure draft that would amend FASB Statement No. 140. The proposed amendment would, among other things, change the requirements that an entity must meet
to be considered a QSPE. We are monitoring the status of the exposure draft to assess its impact, if any, on our financial statements.

Results of Operations

Three and six months ended December 31, 2007 and 2006

Revenue Related to Securitization Transactions

We primarily offer services in connection with private label loan products offered through two marketing channels: (a) direct to consumer, which generally
refers to programs that lenders market

30

---



directly
to prospective borrowers and their families, and (b) school channel, which refers to programs that lenders market indirectly to student borrowers and their families through educational
institutions. In either case, lenders may engage third parties that are not themselves lenders but which market loans on behalf of lenders that fund the loans. We refer to these third parties as loan
marketers, and we refer to the lenders that fund these loans as program lenders.

We
facilitated two securitization transactions in the first quarter of fiscal 2008 and no securitizations during the second fiscal quarter. During fiscal 2007, we facilitated one
securitization in each of the first and second fiscal quarters. Our estimates of the allocation by marketing channel of our securitization revenues for the first six months of fiscal 2008 and 2007,
expressed as a percentage of the total principal and accrued interest of private label loans securitized in each channel at the date of securitization, are as follows:

|                                          |  |                    |  |   |       |     |    | Percentage yield |     
|----------------------------------------- |  | ------------------ |  | - | ----- | --- | -- | ---------------- | ----
|
|
|Fiscal 2008                               |  |                    |  |   |       |     |    |                  |     
|September 2007                            |  | Direct to consumer |  | $ | 1,640 | (1) | 81 | %                | 9.6 
|                                          |  | School channel     |  |   | 387   | (1) | 19 |                  | 5.1 
|                                          |  |                    |  |   |       |     |    |                  |     
|                                          |  | Total              |  | $ | 2,027 | (1) |    |                  |     
|                                          |  |                    |  |   |       |     |    |                  |     
|                                          |  | Blended yield(2)   |  |   |       |     |    |                  | 8.7 
|Fiscal 2007                               |  |                    |  |   |       |     |    |                  |     
|December 2006                             |  | Direct to consumer |  | $ | 676   |     | 93 |                  | 12.6
|                                          |  | School channel     |  |   | 48    |     | 7  |                  | 7.3 
|                                          |  |                    |  |   |       |     |    |                  |     
|                                          |  | Total              |  | $ | 724   |     |    |                  |     
|                                          |  |                    |  |   |       |     |    |                  |     
|                                          |  | Blended yield(2)   |  |   |       |     |    |                  | 12.2
|September 2006                            |  | Direct to consumer |  | $ | 973   |     | 70 |                  | 14.7
|                                          |  | School channel     |  |   | 413   |     | 30 |                  | 7.3 
|                                          |  |                    |  |   |       |     |    |                  |     
|                                          |  | Total              |  | $ | 1,386 |     |    |                  |     
|                                          |  |                    |  |   |       |     |    |                  |     
|                                          |  | Blended yield(2)   |  |   |       |     |    |                  | 12.5
|Total for first six months of fiscal 2007 |  |                    |  | $ | 2,110 |     |    |                  | 12.4
|                                          |  |                    |  |   |       |     |    |                  |     

---

These yields by marketing channel represent an approximate allocation of revenues and costs based on various estimates and assumptions regarding
the relative profitability of these loans, and should be read with caution. Furthermore, these yields are dependent on a number of factors, including the mix of loans between marketing channels that
are included in a particular securitization, the average life of loans, which can be impacted by prepayments, the time of year that the loans are securitized and the relative mix of loans from
students with various expected terms to graduation, the structure of, and prevailing market conditions at the time of, a securitization, the marketing fees which our clients earn on loans we
securitize for them, along with a number of other factors. Therefore, readers are cautioned that the approximated blended yields and yields by marketing channel above may not be indicative of yields
that we may be able to achieve in future securitizations.

31

---



Market
demand for asset-backed securities has been volatile. This volatility has negatively affected, and may continue to negatively affect, the cost and availability of certain
financing structures previously
utilized in the securitization transactions that we have facilitated, including the issuance of subordinate classes of asset-backed securities.



The up-front component of structural advisory fees decreased to $178.1 million during the first six months of fiscal 2008 from
$261.9 million for the first six months of fiscal 2007. Up-front structural advisory fees decreased to $0.5 million for the second quarter of fiscal 2008 from
$88.6 million for the second quarter of fiscal 2007. The decrease in up-front structural advisory fees between periods was primarily due to a change in fee yield and loan mix
between the periods. The securitization trusts we facilitated in the first and second quarters of fiscal 2007 issued Triple B-rated securities, resulting in a higher up-front
structural advisory fee yield compared to the securitization trusts we facilitated in the first quarter of fiscal 2008, which did not issue Triple B-rated securities.

Up-front
structural advisory fees for the second quarter of fiscal 2008 decreased compared to the second quarter of fiscal 2007 because we did not complete a securitization
transaction during the second quarter of fiscal 2008. Up-front structural advisory fees for the second quarter of fiscal 2008 consisted solely of receipt of cost of issuance funds from
earlier securitization transactions.

The
following table reflects the changes in up-front structural advisory fees attributable to the changes in securitization volume, changes in the fee yield and loan mix, and
the receipt of cost of issuance funds for the six months ended December 31, 2007 and 2006:

|                                                                          |  | Up-front structural advisory fees |          
|------------------------------------------------------------------------- |  | --------------------------------- | ---------
|
|
|Six months ended December 31, 2007 vs. six months ended December 31, 2006 |  | $                                 | 2,027,079

The
receipt of cost of issuance funds represents the receipt of remaining funds in a trust's cost of issuance account once the trust has paid all costs associated with its issuance of
asset-backed securities.



The additional component of structural advisory fees decreased to $16.4 million for the first six months of fiscal 2008 from $28.3 million for the
first six months of fiscal 2007. Additional structural advisory fees decreased to negative $10.8 million for the second quarter of fiscal 2008 from $9.8 million for the second quarter of
fiscal 2007. The decrease in additional structural advisory fees between the six-month periods and the three-month periods was primarily due to the changes in assumptions we use to
estimate the fair value of our additional structural advisory fees.

32

---



The
following table reflects the changes in additional structural advisory fees attributable to the changes in securitization volume, changes in fee yield and loan mix, and the updates
to prior trusts for the six months ended December 31, 2007 and 2006:

|                                                                          |  | Additional structural advisory fees |          
|------------------------------------------------------------------------- |  | ----------------------------------- | ---------
|
|
|Six months ended December 31, 2007 vs. six months ended December 31, 2006 |  | $                                   | 2,027,079

The
following table summarizes the changes in our estimate of the fair value of the structural advisory fees receivable for the six and three months ended December 31, 2007 and
2006:

Six months ended
December 31,2007

2006(in thousands)Fair value at beginning of period

$
133,644

$
88,297Additions from new securitizations


24,304


25,447Trust updatesPassage of time (present value accretion)


5,071


3,411Assumption changes:Increase in average prepayment rate


(3,535
)

Increase in discount rate


(8,110
)

Increase in default rate


(2,668
)

Increase in auction rate notes spread


(86
)

Other factors


1,412


(518
)Net change


(7,916
)

2,893Fair value at end of period

$
150,032

$
116,637


|
|

Three months ended
December 31,2007

2006(in thousands)Fair value at beginning of period

$
160,807

$
106,848Additions from new securitizations





8,861Trust updatesPassage of time (present value accretion)


2,662


1,821Assumption changes:Increase in average prepayment rate


(3,535
)

Increase in discount rate


(8,110
)

Increase in default rate


(2,668
)

Increase in auction rate notes spread


(86
)

Other factors


962


(893
)Net change


(10,775
)

928Fair value at end of period

$
150,032

$
116,637


33

---



On
a quarterly basis, we update our estimate of the fair value of our additional structural advisory fees, which we expect to begin to receive approximately five to seven years after the
date of a particular securitization transaction. In doing so, we give effect to the passage of time, which results in the accretion of the discounting inherent in the fair value estimates, and we also
adjust for any change in the discount rate and other assumptions that we use in estimating the fair value of these receivables. We monitor the performance of trust assets, including default, recovery,
prepayment and interest rate trend experience, which we also consider in our estimates. We estimate the trend of interest rates over the life of the loan pool using an implied forward LIBOR curve, and
an assumed spread between LIBOR and auction rates, to estimate trust cash flows. For a discussion of the assumptions we make in estimating our additional structural advisory fees, see
"Executive SummaryApplication of Critical Accounting Policies and EstimatesService Revenue and Receivables."

During
the first six months of fiscal 2008, our estimates of the fair value of our additional structural advisory fees resulted in a decrease in their carrying value of approximately
$7.9 million. During the first six months of fiscal 2007, our estimates of the fair value of our additional structural advisory fees resulted in an increase in their carrying value of
approximately $2.9 million. The decrease during the first six months of fiscal 2008 was primarily due to the impact of changes we made to the assumptions we use to estimate the fair value of
our additional structural advisory fees receivable. The increase during the first six months of fiscal 2007 was primarily due to the accretion of the discounting inherent in the fair value estimates
and the impact of a decrease in the 10-year U.S. Treasury note rate, offset in part by the effect of higher prepayment rates than we had estimated would occur during the period.

During
the second quarter of fiscal 2008, our estimate of the fair value of our additional structural advisory fees resulted in a decrease in their carrying value of approximately
$10.8 million. The decrease during the second quarter of fiscal 2008 was due primarily to the impact of changes we made to the assumptions we use to estimate the fair value of our additional
structural advisory fees receivable. During the second quarter of fiscal 2007, our estimate of the fair value of our additional structural advisory fees resulted in an increase in their carrying value
of approximately $0.9 million. The increase was due primarily to the discounting inherent in the fair value estimates.

For
a discussion of changes we made during the first six months of fiscal 2008 and fiscal 2007 to certain assumptions we use to estimate the fair value of our additional structural
advisory fees receivable, see
"Executive SummaryApplication of Critical Accounting Policies and EstimatesService Revenue and Receivables."



Service revenues from residuals decreased by $187.7 million, to negative $56.9 million for the first six months of fiscal 2008 from
$130.8 million for the first six months of fiscal 2007. Service revenues from residuals decreased by $221.9 million, to negative $159.7 million for the second quarter of fiscal
2008, compared to $62.2 million for the second quarter of fiscal 2007. We did not conduct a securitization transaction in the second quarter of fiscal 2008. As a result, we did not recognize
any residuals from new securitizations in the current period. The decrease in service revenues from residuals in the first six months of fiscal 2008 compared to the first six months of fiscal 2007 was
primarily a result of changes we made to certain assumptions we use to estimate the value of our residual receivable in the first six months of fiscal 2008.

34

---



The
following table reflects the changes in residuals attributable to the changes in securitization volume, changes in the fee yield and loan mix, and the updates to prior trusts for the
first six months ended December 31, 2007 and 2006:

|                                                                          |  |   |           | Residuals |  
|------------------------------------------------------------------------- |  | - | --------- | --------- | -
|
|
|Six months ended December 31, 2007 vs. six months ended December 31, 2006 |  | $ | 2,027,079 |           | $

The
following table summarizes the changes in our estimate of the fair value of the residuals receivable for the six and three months ended December 31, 2007 and 2006:

|                                  |                                    | Six months ended
December 31,             |                                      
|--------------------------------- | ---------------------------------- | ----------------------------------------- | -------------------------------------
|
|
|Fair value at beginning of period |                                    | $                                         | 665,115                              
|                                  | Additions from new securitizations |                                           |                                      
|                                  | Trust updates                      |                                           |                                      
|                                  |                                    | Passage of time (present value accretion) |                                      
|                                  |                                    | Assumption changes:                       |                                      
|                                  |                                    |                                           | Increase in average prepayment rates 
|                                  |                                    |                                           | Increase in discount rate            
|                                  |                                    |                                           | Increase in default rate             
|                                  |                                    |                                           | Increase in auction rate notes spread
|                                  |                                    | Other factors                             |                                      
|                                  |                                    |                                           |                                      
|                                  |                                    |                                           | Net change                           
|                                  |                                    |                                           |                                      
|Fair value at end of period       |                                    | $                                         | 608,233                              
|                                  |                                    |                                           |                                      

|
|

|                                  |                                    | Three months ended
December 31,           |                                      
|--------------------------------- | ---------------------------------- | ----------------------------------------- | -------------------------------------
|
|
|Fair value at beginning of period |                                    | $                                         | 767,979                              
|                                  | Additions from new securitizations |                                           |                                      
|                                  | Trust updates                      |                                           |                                      
|                                  |                                    | Passage of time (present value accretion) |                                      
|                                  |                                    | Assumption changes:                       |                                      
|                                  |                                    |                                           | Increase in average prepayment rates 
|                                  |                                    |                                           | Increase in discount rate            
|                                  |                                    |                                           | Increase in default rate             
|                                  |                                    |                                           | Increase in auction rate notes spread
|                                  |                                    | Other factors                             |                                      
|                                  |                                    |                                           |                                      
|                                  |                                    |                                           | Net change                           
|                                  |                                    |                                           |                                      
|Fair value at end of period       |                                    | $                                         | 608,233                              
|                                  |                                    |                                           |                                      

35

---



As we do with our additional structural advisory fees, on a quarterly basis, we update our estimate of the fair value of our residuals. In doing so, we give effect to the passage of
time, which results in the accretion of the discounting inherent in these fair value estimates, and we also adjust for any change in the assumptions that we use in estimating the fair value of these
receivables. We also monitor the performance of trust assets, including default, recovery, prepayment and interest rate trend experience, which we also consider in our estimates. We estimate the trend
of interest rates over the life of the loan pool using an implied forward LIBOR curve, and an assumed spread between LIBOR and auction rates, to estimate trust cash flows. For a discussion of the
assumptions we make in estimating our residuals, see "Executive SummaryApplication of Critical Accounting Policies and EstimatesService Revenue and Receivables."

Our
estimates of the fair value of our residuals receivable resulted in a decrease in their aggregate carrying value of approximately $173.9 million during the first six months of
fiscal 2008 and an increase of $25.8 million during the first six months of fiscal 2007. Our estimates of the fair value of our residuals receivable resulted in a decrease in the aggregate
carrying value of approximately $159.7 million during the second quarter of fiscal 2008 and an increase of $13.9 million during the second quarter of fiscal 2007. The decrease during the
first six months of fiscal 2008 and the second quarter of fiscal 2008 was due primarily to the impact of changes we made to the assumptions we use to estimate the fair value of our residual
receivable. For a discussion of our decision during the first six months of fiscal 2008 to change the assumptions we use to estimate the value of our residual receivable see "Executive
SummaryApplication of Critical Accounting Policies and EstimatesService Revenue and Receivables." During the first six months of fiscal 2007, the increase was primarily due
to the positive impact of the passage of time.



Processing fees from TERI increased to $83.5 million for the first six months of fiscal 2008 from $66.7 million for the first six months of fiscal
2007 and increased to $37.3 million for the second quarter of fiscal 2008 from $29.6 million for the second quarter of fiscal 2007. The increase was primarily due to increased
reimbursable expenses required to process the increased volume of private label loans that we actively disbursed during the fiscal 2008 periods. The volume of private label loans we actively disbursed
increased to $3.2 billion for the first six months of fiscal 2008 from $2.2 billion for the first six months of fiscal 2007 and to $1.0 billion for the second quarter of fiscal
2008 from $0.7 billion for the second quarter of fiscal 2007.



Administrative and other fees increased to $24.9 million for the first six months of fiscal 2008 from $9.0 million for the first six months of
fiscal 2007 and decreased to $3.1 million for the second quarter of fiscal 2008 from $4.7 million for the second quarter of fiscal 2007. The increase during the six month period was
primarily due to increased reimbursed expenses that we generated between periods from marketing coordination services provided to some of our clients and marketing fees earned by us from the
securitization of our proprietary brand loans. We generated approximately $20.0 million in marketing fees and reimbursable expenses from marketing coordination services during the first six
months of fiscal 2008, compared to approximately $6.2 million in marketing fees and reimbursable expenses from marketing coordination services during the first six months of fiscal 2007. We
earned administrative fees for the daily management of the securitization trusts of approximately $3.6 million during the first six months of fiscal 2008 and $2.7 million during the
first six months of fiscal 2007. During the second quarter of fiscal 2008 we did not conduct a securitization transaction therefore, we did not generate reimbursable expenses from marketing
coordination services. We generated approximately $3.3 million in reimbursable expenses from marketing coordination services during the second quarter of fiscal 2007. We earned administrative
fees for the daily management of the

36

---



securitization
trusts of approximately $1.9 million during the second quarter of fiscal 2008 and $1.4 million during the second quarter of fiscal 2007.

Net Interest Income

Net interest income increased to $11.2 million for the first six months of fiscal 2008 from $4.0 million for the first six months of fiscal 2007.
Net interest income increased to $6.8 million for the second quarter of fiscal 2008 from $2.8 million for the second quarter of fiscal 2007. The increases in the current year periods
were primarily due to higher average cash balances available for investment and the net interest income of $6.6 million and $4.3 million earned by our subsidiary, Union Federal, during
the first six months of fiscal 2008 and second quarter of fiscal 2008, respectively.

Non-interest Expenses

Total non-interest expenses increased to $171.2 million for the first six months of fiscal 2008 from $124.6 million for the first six
months of fiscal 2007 and increased to $73.7 million for the second quarter of fiscal 2008 from $59.0 million for the second quarter of fiscal 2007. Compensation and benefits decreased
to $51.7 million for the first six months of fiscal 2008 from $57.5 million for the
first six months of fiscal 2007 and decreased to $19.7 million for the second quarter of fiscal 2008 from $25.9 million for the second quarter of fiscal 2007. General and administrative
expenses increased to $119.5 million for the first six months of fiscal 2008 from $67.1 million for the first six months of fiscal 2007 and increased to $54.0 million for the
second quarter of fiscal 2008 from $33.1 million for the second quarter of fiscal 2007.

The
decrease in compensation and benefits expense during the first six months of fiscal 2008 and second quarter of fiscal 2008 as compared to the prior year periods was primarily the
result of a decrease in incentive compensation accruals, partially offset by increased salary costs due to higher average headcount during the current year periods.

General
and administrative expenses increased during the first six months of fiscal 2008 as compared to the first six months of fiscal 2007 as a result of increases in several categories
of expenses. Marketing coordination expenses increased to $46.9 million for the first six months of fiscal 2008 from $15.2 million for the first six months of fiscal 2007. The increase
in marketing coordination expense was primarily due to the increased media costs related to increased advertising efforts. Equipment expenses increased to $6.9 million for the first six months
of fiscal 2008 from $5.8 million for the first six months of fiscal 2007. Depreciation and amortization expense increased to $9.5 million for the first six months of fiscal 2008 from
$7.9 million for the first six months of fiscal 2007. The increase in equipment, depreciation and amortization expense was due to the expansion of our loan processing operations which resulted
in additional purchases of fixed assets as well as the amortization of capitalized software development costs. Professional fees increased to $7.5 million for the first six months of fiscal
2008 from $5.6 million for the first six months of fiscal 2007 primarily due to an increase in legal costs. Outsourced operations expense increased to $31.7 million for the first six
months of fiscal 2008 from $17.3 million for the first six months of fiscal 2007. The increase is primarily due to increases in temporary employment and external call center costs necessary to
process the increasing volume of loans facilitated between periods and the expansion of our marketing expenses in the television medium that need call center support.

General
and administrative expenses increased during the second quarter of fiscal 2008 as compared to the second quarter of fiscal 2007 as a result of increases in several sub categories
of expenses. Marketing coordination expenses increased to $20.1 million for the second quarter of fiscal 2008 from $9.0 million for the second quarter of fiscal 2007. The increase in
marketing coordination expenses was primarily due to the increased media costs related to increased advertising efforts. Outsourced operations costs increased to $14.0 million for the second
quarter of fiscal 2008 from $6.9 million for the second quarter of fiscal 2007. The increase is primarily due to increases in temporary employment and external call center costs necessary to
process the increasing volume of

37

---



loans
facilitated between periods and the expansion of our marketing expenses in the television medium that need call center support.

Income Tax (Benefit) Expense

Income tax expense decreased to $34.8 million for the first six months of fiscal 2008 from $154.0 million for the first six months of fiscal 2007.
The decrease in income tax expense was primarily the result of a decrease in the amount of income before income tax expense between periods. During the first six months of fiscal 2008, our effective
tax rate, or the income tax expense as a percentage of income before income tax expense, decreased to 40.5% from an effective tax rate of 40.9% for the first six months of fiscal 2007. The decrease in
our effective tax rate was primarily due to the change in the relative sources of total revenues as our up-front structural advisory fees decreased and our residual revenues increased
during the first six months of fiscal 2008 as compared to the first six months of fiscal 2007. Our effective tax rate applicable to up-front structural advisory fees is greater than our
effective tax rate applicable to residual revenues.

Financial Condition, Liquidity and Capital Resources

Our liquidity requirements have historically consisted of capital expenditures, working capital, business development expenses, costs associated with alternative
financing transactions, general corporate expenses, repurchases of our common stock, quarterly cash dividends and potential acquisitions. In order to preserve capital and maximize liquidity in
challenging market conditions, our board of directors has eliminated the regular quarterly cash dividend for the foreseeable future. In addition, we do not expect to repurchase shares of common stock.
We expect to reduce by the end of fiscal 2008 our overall cost structure on an annualized basis by approximately 15 to 20 percent, including by reducing business development and operational
expenses.

Short-term Funding Requirements

We expect to fund our short-term liquidity requirements through cash flow from operations, cash and cash equivalents, various capital raising
activities, and various sources of funding available to Union Federal or us to finance education loans. In July 2007, UFSB-SPV entered into a $300.0 million education loan warehouse facility to
fund the purchase of education loans from Union Federal. At December 31, 2007, $245.4 million was outstanding. Under the facility, UFSB-SPV pledges the purchased education loans as
collateral for the advances it receives from the conduit lender. The facility will terminate on July 16, 2008 or earlier if certain covenants are not maintained. UFSB-SPV expects to repay
advances it receives as education loans held by UFSB-SPV are sold to securitization trusts or other financing transactions facilitated by the Company. On December 21, 2007, we announced a
definitive agreement with GS Capital Partners, or GSCP, relating to a strategic equity investment by GSCP. GSCP invested $59.8 million to acquire preferred stock convertible into
5.3 million shares of our common stock at a conversion price of $11.24 per share. We believe, based on our current operating plan, that our current cash and cash equivalents will be sufficient
to fund our operations well into fiscal 2009. In addition, GSCP agreed to invest, upon receipt of regulatory approval, up to $200.7 million to
acquire additional shares of preferred stock convertible into 13.4 million shares of our common stock. We expect the subsequent investment by GSCP to occur prior to the end of the current
fiscal year.

Long-term Funding Requirements

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

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



Treasury Stock

We had treasury stock of $183.9 million at December 31, 2007 and $183.1 million at June 30, 2007. Our treasury stock balance was
primarily derived from the repurchases of our common stock in open market transactions. Treasury stock also includes shares of our stock forfeited by employees to satisfy statutory minimum withholding
obligations as equity compensation awards vest. On April 24, 2007, our board of directors approved the repurchase of up to 10,000,000 shares of our common stock. The 10,000,000 shares
authorized for repurchase included 3,393,300 shares available for repurchase as of April 24, 2007 under a previously authorized repurchase program. At December 31, 2007, a maximum of
8,830,900 shares may be repurchased under the repurchase program approved by the board of directors on April 24, 2007.

As
of December 31, 2007, we had repurchased an aggregate of 7,525,800 shares at an average price, excluding commissions, of $24.27 per share.

Cash, Cash Equivalents and Investments

At December 31, 2007 and June 30, 2007, we had $351.0 million and $234.9 million, respectively, in cash, cash equivalents and
investments. The increase in cash, cash equivalents and investments is primarily due to cash generated from our September securitization transactions and cash received from the issuance of
Series A non-voting convertible preferred stock, offset by cash used to fund operations and payment of cash dividends.

Cash,
cash equivalents and investments at December 31, 2007 and June 30, 2007 primarily included investments in variable rate demand notes, mortgage backed securities,
Federal Home Loan Bank bonds and funds deposited in taxable or tax-exempt money market funds.

Loans Held for Sale

Our loans held for sale increased to $358.0 million at December 31, 2007 from $37.1 million at June 30, 2007. The increase in loans
held for sale is due to an increase in education loans originated by our subsidiary, Union Federal, and the lack of a securitization in the second quarter of fiscal 2008. Our loans held for sale at
December 31, 2007 and June 30, 2007 were comprised of education and mortgage loans.

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Service Receivables

Our service receivables decreased to $770.4 million at December 31, 2007 from $809.7 million at June 30, 2007, primarily as a result
of changes we made to assumptions we use to estimate the value of our residual and additional structural advisory fee receivables. See "Executive SummaryApplication of
Critical Accounting Policies And EstimatesService Revenues and Receivables."

The
following chart illustrates the amount and timing of cash flows expected to be released to us from additional structural advisory fees and residuals. The information presented
reflects our key valuation assumptions and cash flow estimates from outstanding securitization trusts as of December 31, 2007. See "Executive SummaryApplication of
Critical Accounting Policies and EstimatesService Revenue and Receivables" for a discussion of our key assumptions, as well as a sensitivity analysis of hypothetical changes to those
assumptions. You are cautioned that the valuation assumptions require our subjective judgment and are susceptible to change. The actual cash releases from additional structural advisory fees and
residuals that we receive from the trusts, and the actual timing of receipt, could be materially different than reflected in the chart below as a result of variances between the actual performance of
the securitization trusts and the assumptions as of December 31, 2007.

GRAPHIC

The
information above is intended to supplement the financial information prepared and presented in accordance with GAAP appearing elsewhere in this quarterly report. We have provided
the cash flow projections in order to assist investors in assessing our liquidity needs and to provide additional information related to our existing additional structural advisory fees and residuals
receivables. See "Risk Factors" under Part II of this quarterly report for additional factors you should consider in evaluating the cash flow projections.

Property and Equipment, net

During the first six months of fiscal 2008, our property and equipment, net decreased by $1.3 million, as $9.0 million of depreciation expense
recorded during the period more than offset $7.6 million we incurred on the expansion and improvement of our loan processing facilities and

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systems.
During the first six months of fiscal 2008, we financed the acquisition of $0.2 million in equipment through capital leases.

Prepaid Income Taxes

We had no prepaid income taxes at December 31, 2007 as compared to $49.3 million at June 30, 2007. At June 30, 2007, this balance was
primarily due to a favorable ruling from the Internal Revenue Service regarding the timing of our recognition of additional structural advisory fees as income for tax purposes. As a result of the
ruling, we recognize additional structural advisory fees in financial statement income earlier than they are recognized for income tax purposes.

Other Prepaid Expenses

Our other prepaid expenses increased to $41.7 million at December 31, 2007 from $26.9 million at June 30, 2007. The increase in other
prepaid expenses was primarily due to the payment of a commitment fee related to the warehouse facility offered by GSCP in connection with its strategic investment in December 2007.

Other Assets

Other assets increased to $15.6 million at December 31, 2007 from $7.2 million at June 30, 2007 primarily due to $2.5 million
in principal and fees owed to Union Federal, as a result of cancelled loans from borrowers.

Deposits

Deposits increased to $146.9 million at December 31, 2007 from $53.5 million at June 30, 2007. The increase in deposits was primarily
due to an increase in brokered deposits at Union Federal of $84.1 million. Included in deposits at December 31, 2007 was $95.0 million of brokered deposits, primarily brokered
certificates of deposits issued to fund the disbursement of education loans.

Education Loan Warehouse Facility

We had $245.4 million in borrowings outstanding at December 31, 2007 under the education loan warehouse facility maintained by Union Federal. We had
no amounts outstanding under the facility at June 30, 2007, having entered into it in July 2007. The facility provides interim financing which we use to fund the disbursement of education loans
by Union Federal.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses decreased to $30.8 million at December 31, 2007 from $59.0 million at June 30, 2007. Incentive
compensation accruals were approximately $21.8 million lower at December 31, 2007 as compared to June 30, 2007 as a result of the decrease in expected incentive compensation for
fiscal 2008. Our accounts payable were $3.9 million lower at December 31, 2007 as compared to June 30, 2007 primarily due to the timing of the receipt and processing of invoices.

Income Taxes Payable

We had income taxes payable of $30.1 million at December 31, 2007. We had no income taxes payable at June 30, 2007. The increase in our
income taxes payable is primarily due to the accrual of income tax as a result of taxable income earned during the first six months of fiscal 2008.

Net Deferred Income Tax Liability

Our net deferred income tax liability decreased to $201.1 million at December 31, 2007 from $247.7 million at June 30, 2007. We have a
net deferred income tax liability primarily because, under

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GAAP,
we recognize additional structural advisory fees and residuals in financial statement income earlier than they are recognized for income tax purposes. Our net deferred income tax liability
decreased primarily as a result of the decrease in additional structural advisory fees and residual revenue recognized during the first six months of fiscal 2008 and the recognition of our share of
taxable income from the securitization trusts.

Other Liabilities

Other liabilities decreased to $9.3 million at December 31, 2007 from $11.5 million at June 30, 2007. Other liabilities primarily
includes our note payable to TERI, capital lease obligations and deferred rent related to several operating leases for office space. The decrease in other liabilities is primarily due to scheduled
principal payments made during the first six months of fiscal 2008 on our note payable to TERI and capital lease obligations.

Contractual Obligations

As of December 31, 2007, our contractual obligations had not changed materially from those described under the caption "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital ResourcesContractual Obligations" in our annual report on
Form 10-K for the fiscal year ended June 30, 2007. In addition to the contractual commitments identified in the annual report on Form 10-K, however, we
have additional payment obligations to certain clients in the amount of approximately $13.1 million for fiscal 2008, $3.5 million in fiscal 2009 and $2.9 million in fiscal
2010.

In
December 2007, we advanced marketing fees to certain education loan marketer clients in the aggregate amount of approximately $7.3 million. The fees were advanced on behalf of
lender clients that retained the marketers, and the parties will credit amounts paid pursuant to these agreements against amounts that would otherwise be due from lenders to the marketers as a result
of future securitizations.

We
also entered into agreements with certain lender clients during December 2007 pursuant to which we paid a portion of the purchase price with respect to loans that would have qualified
for purchase in a securitization transaction as of November 30, 2007. With respect to such loans, we paid the lenders the marketing fee and loan premium, as well as reimbursement for certain
origination fees, that otherwise would have been due upon the closing of a securitization transaction. The aggregate amount of payments to these lenders was approximately $2.1 million.

In
consideration of the payments, we generally received the right to purchase the loans in one or more securitizations until the later of (i) December 31, 2008 and
(ii) the date that our right to purchase loans would otherwise expire pursuant to our note purchase agreement with such lender. The parties will credit amounts paid pursuant to these agreements
against amounts that would otherwise be due to the lenders as a result of future securitizations. We did not enter into such an agreement with J.P. Morgan Chase Bank, N.A., Bank of America, N.A. or
RBS Citizens, N.A.

Cash Flows

Our net cash used in operating activities decreased to $225.9 million for the first six months of fiscal 2008, compared to cash provided by operating
activities of $135.2 million for the first six months of fiscal 2007. The decrease in cash provided by operations resulted primarily from an increase of $321.0 million in loans held for
sale, the financing of which is categorized under cash flows from financing activities and a decrease of $46.6 million in our deferred income tax liability, offset in part by an increase in our
current income tax liability of $79.4 million and a decrease of $56.9 million in residuals.

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Our
cash provided by investing activities was $13.3 million for the first six months of fiscal 2008, compared to $21.3 million used in investing activities for the first
six months of fiscal 2007. Net cash provided by investing activities during the first six months of fiscal 2008 was primarily a result of net dispositions of investments.

Net
cash provided by financing activities increased to $349.4 million during the first six months of fiscal 2008, compared to net cash used in financing activities of
$29.2 million during the first six months of fiscal 2007. Net cash provided by financing activities increased during the first six months of fiscal 2008 primarily as a result of an increase in
cash provided by deposits, the education loan warehouse facility and the issuance of preferred stock, offset in part by an increase in cash used for dividends.

We
expect that our capital expenditure requirements for the final two quarters of fiscal 2008 will be approximately $9.2 million. We expect to use these funds primarily for the
expansion of our loan processing operations and the purchase of computer and office equipment.

Off-Balance Sheet Transactions

We offer outsourcing services in connection with the lifecycle of a private student loan, from program design and marketing coordination through loan
administration and, ultimately, to the sale and securitization of the loans. We also structure and facilitate the securitization of student loans for our clients through a series of bankruptcy remote,
qualified special purpose trusts.

The
principal uses of these trusts are to generate sources of liquidity for our clients' and Union Federal's assets sold into such trusts and make available more funds to students and
colleges.

See
"Executive SummaryApplication of Critical Accounting Policies and EstimatesConsolidation" for a discussion of our determination to not
consolidate these securitization trusts.

Inflation

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

Factors That May Affect Future Results

This quarterly report includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained herein regarding our strategy, future operations, financial position, future
revenues and funding transactions, projected costs, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words "anticipates,"
"believes," "estimates," "expects," "intends," "may," "observe," "plans," "projects," "will," "would," and similar expressions are intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations
expressed or implied in our forward-looking statements. There are a number of important factors that could cause actual results, levels of activity, performance or events to differ materially from
those expressed or implied in the forward-looking statements we make. These important factors include our "critical accounting estimates" set forth above under "Application of Critical
Accounting Policies and Estimates" and the risk factors set forth below under Item 1A of Part II. Although we may elect to update forward-looking statements in the future, we
specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to
February 11, 2008.

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Item 3Quantitative and Qualitative Disclosures about Market Risk

Risks Related to Cash, Cash Equivalents and Investments

We have market risk exposure related to changes in interest rates applicable to our cash, cash equivalents and investments. We manage our market risk through a
conservative investment policy, the primary objective of which is preservation of capital. At December 31, 2007, cash, cash equivalents and investments consisted primarily of investments in
seven day variable rate demand notes and money market funds, all of which were due on demand or within one year. As a result, we do not believe a change in interest rate would have a material impact
on the fair value of cash, cash equivalents and investments.

Risks Related to Loans Held for Sale and Deposits

We also have market risk exposure related to our loans held for sale and deposits. Our loans held for sale at December 31, 2007 consisted of
$11.6 million in mortgage loans and $346.4 million in education loans. Our loans held for sale are recorded at lower of cost or fair value and are sensitive to interest rates and changes
in the fair value of loans. Under GAAP, we would be required to reduce the carrying value of our educations loans if their fair value decreases below our cost. At December 31, 2007, our
mortgage loans had an average interest rate of approximately 6.5% and our student loans had an average interest rate of approximately 10.3%. All of our education loans and approximately 71% of our
mortgage loans have variable interest rates. We held deposits of $146.9 million at December 31, 2007. Our deposits are recorded at the amount owed. Our deposit balances are subject to
changes in economic value based on varying market conditions, primarily changes in the levels of interest rates. At December 31, 2007, our deposits had an average interest rate of approximately
5.0%. Less than 1% of our deposits have fixed interest rates in excess of 12 months. Approximately 97% of our deposits have fixed interest rates of 6 months or less. We do not believe a
change in interest rates would have a material impact on the fair value of our loans held for sale or deposits since the majority of these
assets and liabilities carry interest rates that are variable and any loss we may incur would not be material relative to our consolidated financial statements.

Risk Related to Structural Advisory Fees and Residuals

Because there are no quoted market prices for our additional structural advisory fees and residuals receivables, we use discounted cash flow modeling techniques
and various assumptions to estimate their values. We base these estimates on our proprietary historical data, third-party data and our industry experience, adjusting for specific program and borrower
characteristics such as loan type and borrower creditworthiness. Increases in our estimates of defaults, prepayments and discount rates, increases in the spread between LIBOR indices and auction
rates, as well as decreases in default recovery rates and the multi-year forward estimates of the LIBOR rate, which is the reference rate for the loan assets and borrowings of the
securitization trusts, would have a negative effect on the value of our additional structural advisory fees and residuals. For an analysis of the estimated change in our structural advisory fees and
residuals receivables balance at December 31, 2007 based on changes in these loan performance assumptions, see "Management's Discussion and Analysis of Financial Conditions and Results of
OperationsExecutive SummaryApplication of Critical Accounting Policies and EstimatesSensitivity Analysis."

Item 4Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2007. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means
controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act

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is
recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management,
including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2007, our chief executive officer and chief financial
officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No
change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, occurred during the fiscal
quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1A.    Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below in addition to the other
information included in this quarterly report. If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer. In that case, the trading
price of our common stock could fall.

We
have updated certain of the following risk factors to reflect financial and operational information for the most recently completed fiscal quarter. In addition we have made material
changes to the following risk factors as compared to the version disclosed in our quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2007:



In
addition, we added the following risk factors:



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We derive a significant portion of our revenue and substantially all of our income from structuring securitization transactions; our financial results
and future growth will continue to be adversely affected if we are unable to structure securitizations.

Securitization refers to the technique of pooling loans and selling them to a special purpose, bankruptcy remote entity, typically a trust, which issues
securities to investors backed by those loans. As of the date of this report, we have provided structural advisory and other services for 38 loan securitizations since our formation in 1991. In
connection with securitizations, we receive compensation in the form of structural advisory fees, residuals and administrative fees for management of the trusts. The amount and timing of the fees we
recognize are affected, in part, by the timing, size and structure of the securitization transactions, as well as the composition of loan pools to be securitized, the return expectations of investors
and assumptions we make regarding loan portfolio performance, including defaults, recoveries, prepayments and the cost of funding. Revenue from new securitizations constituted
78% of our total revenue for fiscal 2007 and 74% of our total revenue for fiscal 2006. Substantially all of our net income in those fiscal periods was attributable to securitization-related revenue.
We did not complete a securitization in the second quarter of fiscal 2008, which contributed to our net loss for the quarter. We expect our securitization volumes to decrease materially in fiscal 2008
compared to fiscal 2007, and we expect pricing terms substantially less favorable than in the past. We are uncertain about our ability to complete a securitization in the current fiscal year. If we
are unable to access the asset-backed securitization market, our revenues will decline and we will continue to generate net losses.

A number of factors, some of which are beyond our control, may adversely affect our securitization activities and thereby adversely affect our results
of operations.

Our near-term financial performance and future growth depend in large part on our ability to structure securitizations. Several factors may affect
both our ability to structure securitizations and the revenue we generate for providing our structural advisory and other services, including the following:



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We
have actually experienced, or are at particular risk of experiencing in the near term, the first five factors listed above. See "Management's Discussion and Analysis of Financial
Condition and Results of OperationsExecutive SummaryBusiness Trends and Outlook."

A
portion of the securities issued since 1998 in securitization transactions that we structured were sold to asset-backed commercial paper conduits. If these or similar asset-backed
conduits cease to purchase securities in the securitizations that we structure, we may experience a delay in the timing of our securitizations as we seek to find alternate channels of distribution.

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

Student loan asset-backed securitizations have historically been our sole source of financing our clients' private student loan programs. We were unable to
complete a securitization transaction during the second fiscal quarter, and we are uncertain about our ability to complete a securitization in the current fiscal year. As a result, we may need to
pursue alternatives to securitization to finance our clients' loans. Other sources of funding may not be available on attractive terms, if available at all. Recent conditions in the capital markets
have generally resulted in widening credit spreads and more restrictive covenants, which will affect the pricing and terms and conditions of any alternative funding mechanism we pursue. Our
facilitated loan volume available for securitization has continued to grow since the securitization transactions we completed in the first fiscal quarter of 2008. Under the terms of our agreements
with lender clients, we generally have an obligation to use our best efforts to facilitate the purchase of the client's private student loans during a specified loan purchase period. The length of the
loan purchase period varies by client and may be as short as 180 days following loan disbursement. If we were unable to facilitate a purchase of a client's loan prior to the end of the relevant
loan purchase
period, we would lose the exclusive right to purchase the loans and the client would typically have the right to terminate our agreement. In addition, we could have liability to the client if we
breached our obligations. With respect to approximately $1.6 billion of our facilitated loan volume available for securitization as of December 31, 2007, our agreements provide that our
liability for failure to facilitate a purchase in breach of our obligations would be liquidated damages of one percent of the total principal amount of the loans as to which the loan purchase period
expired. Additional liquidated damages would generally become payable at 30 day intervals as the loan purchase period expires as to additional loans. We estimated the maximum liquidated damages
applicable to our facilitated loan volume available for securitization as of December 31, 2007 to be approximately $16.1 million. Our agreements applicable to approximately
$430 million of our facilitated loan volume available for securitization as of December 31, 2007 do not specify or limit our liability to liquidated damages for failure to facilitate a
purchase in breach of our obligations. The amount of our potential liability with respect to such loans is not determinable at this time. As a result, if we do not honor our contractual obligations,
our value proposition to clients and prospective clients would be compromised, our relationships with current clients could terminate and our prospective clients may not be interested in entering into
business arrangements with us. In addition, our financial results would be adversely affected if we were required to pay liquidated damages.

In connection with our recognition of revenue from securitization transactions, if the estimates we make, or the assumptions on which we rely, in
preparing our financial statements prove inaccurate, our actual results may vary materially from those reflected in our financial statements.

We receive structural advisory fees for our services in connection with securitization transactions. We receive an up-front portion of these
structural advisory fees when the securitization trust purchases the loans. We receive an additional portion of these structural advisory fees over time, based on the amount of loans outstanding in
the trust from time to time over the life of the trust. We also have the right to receive a portion of any residual interests that the trust creates. As required under accounting principles generally
accepted in the United States of America, or GAAP, we recognize as revenue an estimate of the fair value of the additional portion of the structural advisory fees and residuals at the

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time
the securitization trust purchases the loans because these revenues are deemed to be earned before they are actually paid to us. We record additional structural advisory fees and residuals as
receivables on our balance sheet at our estimate of their fair value. Because there are no quoted market prices for our additional structural advisory fees or residuals receivable, accounting rules
require that we use discounted cash flow modeling techniques and certain assumptions to estimate fair value. We estimate the fair value both initially and in each subsequent quarter and reflect the
change in our estimate of fair value in earnings for that period. Our key assumptions to estimate the fair value include prepayment and discount rates, interest rates and the expected credit losses
from the underlying securitized loan portfolio, net of recoveries taking into consideration the TERI guarantee. During the second quarter of fiscal 2008, we changed our key accounting assumptions,
which resulted in a $178 million pre-tax decrease in the value of our additional structural advisory fees and residuals receivables. In general, these adjustments were necessary
because securitization trusts had performed below our range of expectations, including with regard to delinquencies and defaults, and the estimated cost of funding auction rate notes issued by several
securitization trusts is now expected to be higher than previously estimated. For a discussion of these changes and the sensitivity of the additional structural advisory fees and residuals to
variations in our assumptions and estimates, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsExecutive Summary." We also made adjustments to
certain key assumptions during the third quarter of fiscal 2007. If the actual performance of some or all of the securitization trusts were to vary from the adjusted assumptions we use, we may need to
adjust further our key assumptions, which could adversely affect our earnings in the period in which our assumptions change, and the actual additional structural advisory fees and residuals that we
receive from the trusts could be significantly less than reflected in our current financial statements. In addition, our securitization yields, or our structural advisory fees and residuals from a new
securitization transaction expressed as a percentage of the total principal and accrued interest securitized, realized on future securitized transactions could decrease if the actual performance of
some or all of the securitization trusts varies from the key assumptions we have historically used. In particular, economic, regulatory, competitive and other factors affecting prepayment, default and
recovery rates on the underlying securitized loan portfolio, including full or partial prepayments and prepayments as a result of loan consolidation activity, could cause or contribute to differences
between the actual performance of the securitization trusts and our key assumptions.

While
we have no further obligation to support the obligations within the bankruptcy-remote securitization trusts, our residuals and additional structural advisory fees in each
securitization we have facilitated are subordinate to securities issued to investors in such securitizations and may fail to generate any cash flow for us if the securitized assets only generate
enough cash flow to pay the debt holders.

Our assumptions regarding the future cost of funding of auction rate notes are highly uncertain and greatly affect the valuation of our service
receivables.

Five private label loan trusts have issued auction rate notes to finance, in whole or in part, the purchase of student loans. Interest rates for the auction rate
notes are determined from time to time at auctions. We use a spread over LIBOR to project the future cost of funding of the auction rate notes issued by each trust in determining the value of our
service receivables.

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

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The
interest rate on each outstanding auction rate note is limited by a maximum rate. The maximum rate is the least of three rates: a floating interest rate (generally one month LIBOR
plus a margin), a fixed interest rate and the maximum legally permissible rate. The margin applicable to the floating interest rate is dependent upon the then current ratings of the notes subject to
an auction. If the notes are downgraded, the applicable margin, and the maximum floating rate, would increase. If the interest rate determined pursuant to the auction procedures would exceed the
maximum rate, the interest rate for the applicable interest period would be set at the maximum rate, but the amount of the "excess" interest would accrue as "carryover interest." A noteholder's right
to receive carryover interest is superior to our residual interest in the applicable securitization trust. As a result, our projected cash releases from securitization trust that have issued auction
rate notes, including the timing of receipt, could be materially adversely affected by increased costs of funding of auction rate notes, including the extent to which a trust accrues carryover
interest. At December 31, 2007, we assumed that each trust that issued auction rate notes would incur average funding costs on such notes below the maximum rate and that no trust would accrue
carry-over interest for purposes of the assumptions we made in estimating our additional structural advisory fees and residuals receivable, see "Management's Discussion and Analysis of
Financial Condition and Results of OperationsExecutive SummaryApplication of Critical Accounting
Policies and EstimatesService Revenue and Receivables", and in the securitization trust cash flow projections included under "Management's Discussion and Analysis of Financial Condition
and Results of OperationsFinancial Condition, Liquidity and Capital ResourcesService Receivables."

Broker-dealers
may submit orders in auctions for their own account. As a result of such bidding, a broker-dealer may prevent a failed auction, or the interest rate resulting from an
auction may be lower than the rate that would have prevailed had the broker-dealer not bid. A failed auction occurs when an existing owner does not have its notes purchased through the auction
procedures because the amount of notes submitted for sale exceeds the amount of purchase orders. Broker-dealers, some of which have served as underwriters of the securitizations that we have
facilitated, have bid, and may continue to bid, in auctions relating to our trusts' auction rate notes. These bids in the past have both prevented failed auctions and supported interest rates
determined at auction. Broker-dealers have no obligation to submit orders in auctions, and to the extent broker-dealers do not submit such bids in the future, the interest rates on our trusts' auction
rate notes could be higher than they have been historically, including higher than the maximum rate, which would result in carryover interest, and there could be failed auctions for such notes.

Auctions
have historically provided a liquid market for our trusts' outstanding auction rate notes. On February 7, 2008, a failed auction occurred. Illiquidity as a result of
failed auctions could result in higher interest rates determined by future auctions, derogatory rating agency action, including ratings downgrades, and impairment charges by the holders of the
outstanding auction rate notes, each of which could materially adversely affect future demand for auction rate notes that we facilitate and limit a financing structure that we have used as recently as
the first quarter of fiscal 2008.

The timing of our securitization activities and size and structure of our securitization transactions will greatly affect our quarterly financial
results.

The variability of our quarterly revenue, operating results and profitability will increase on a quarterly basis as a result of current conditions in the
asset-based securitization market. In fiscal 2007, we recognized 35%, 22%, 20% and 23% of our total revenue in the respective fiscal quarters of fiscal 2007. We facilitated one securitization in the
first, second and third quarters, and two securitizations in the fourth quarter of fiscal 2007. Our quarterly revenue varied primarily because of the size of the securitizations that we structured. We
facilitated two securitizations in the first fiscal quarter of 2008, but no securitizations in the second fiscal quarter. Recent volatility in the asset-backed securities market has affected our
ability to structure securitizations and could affect the timing, size, structure or profitability of future capital markets transactions, including any capital markets transaction that we

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plan
to facilitate in the remaining quarters of fiscal 2008. Variations in the size or structure of any securitization transaction, as well as the composition of the loan pools being securitized,
could result in material variability of our operating results on a quarterly basis, even if we complete securitizations in each remaining quarter of fiscal 2008. The timing, size and structure of our
planned securitization activities may also be affected by the seasonality of student loan applications and loan originations, as well as the other factors that could materially adversely affect our
securitization activities. Origination of student loans is generally subject to seasonal trends, with the volume of loan applications increasing with the approach of tuition payment dates. In fiscal
2007, we processed 39% of our total loan facilitation volume in the first quarter ended September 2006, and 18%, 24% and 19% of our total loan facilitation volume in the respective successive
quarters.

Our financial results could be adversely affected if we were required to consolidate the financial results of the entities that we use for
securitizations that we facilitate.

We provide structural advisory and other services for loan securitizations undertaken through statutory trusts. We do not consolidate the financial results of the
trusts with our own financial results. For a discussion of our decision not to consolidate, see "Management's Discussion and Analysis of Financial Condition and Results of
OperationsExecutive SummaryApplication of Critical Accounting Policies and EstimatesConsolidation" included in this quarterly report. Some of the accounting
rules relevant to this issue are in the process of being amended. If we were required to consolidate the financial results of one or more trusts with our own financial results as a result of
amendments or changes in accounting rules, or if the SEC or other accounting authorities do not agree with our current approach, our financial results could be adversely affected. Our
near-term financial results could also be adversely affected if we were to conduct future securitization transactions, or alternative funding transactions, as "on balance sheet" financing
transactions.

If our relationships with key clients terminate, our revenue and results of operations would be adversely affected.

We structure and support private student loan programs for commercial banks, including JPMorgan Chase Bank and Bank of America. Structural advisory fees and
residuals from securitization of JPMorgan Chase Bank loans represented approximately 29% of our total revenue for fiscal 2007 and approximately 26% of our total revenue for fiscal 2006. Structural
advisory fees and residuals from securitization of Bank of America loans represented approximately 15% of total revenue for fiscal 2007 and approximately 16% of total revenue for fiscal 2006. We also
structure and support private student loan programs for companies that assist lenders such as RBS Citizens, N.A. in marketing their programs to customers.

We
have agreements with lenders that govern the purchase of loans for securitization. Our agreement with JPMorgan Chase Bank is scheduled to terminate in March 2010. Our agreements
pursuant to which RBS Citizens, N.A. serves as a program lender are generally scheduled to terminate in April 2009. Our agreement with Bank of America governing the purchase of
direct-to-consumer loans expires on May 31, 2008, provided that either party may terminate this agreement upon 90 days notice. Our agreement with Bank of America
governing the purchase of school channel loans expires on June 30, 2008, provided that the agreement automatically renews for successive one-year terms after that date and can be
terminated at any time upon 180 days notice. Each client above has the right to terminate its agreement on short notice, generally 30 days or less, if we materially breach our agreement,
including our failure to perform at service levels specified in those contracts, or if the client's guaranty agreement with TERI terminates or expires. In addition, under the terms of our lender
clients' guaranty agreements with TERI, both the lender and TERI may propose modifications to loan program guidelines during the first calendar quarter of each year. If the parties are unable to agree
on a proposed modification, such as an adjustment of the underwriting criteria, product pricing or guarantee fees, the party proposing the modification has the option of terminating the guaranty

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agreement,
effective as of May 1 of that calendar year. TERI expects to propose modifications to program guidelines in the third fiscal quarter, including more stringent underwriting
guidelines. If TERI and a lender client cannot reach agreement on the proposed modifications, TERI may terminate its guaranty agreement with such client, which would also trigger termination of our
note purchase agreement with such client. We expect the implementation of more selective underwriting criteria to potentially reduce our facilitated loan volume.

A
significant decline in services to JPMorgan Chase Bank, Bank of America, or RBS Citizens N.A., or the termination of guaranty agreements between those lenders and TERI, could reduce
the overall volume of loans we facilitate, which could be difficult to replace through arrangements with other lenders. Our revenue, business and financial results could suffer as a result.

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

We assist national and regional financial institutions and educational institutions, as well as businesses, education loan marketers and other enterprises, in
structuring and supporting their private education loan programs. The outsourcing services market in which we operate includes a large number of service providers, some of which have greater
financial, technical and marketing resources, larger customer bases, greater name recognition and more established relationships with their clients than we have. Larger competitors with greater
financial resources may be better able than us to respond to the need for technological changes, compete for skilled professionals, build upon efficiencies based on a larger volume of loan
transactions, fund internal growth and compete for market share generally. We may face competition from our clients if they choose, or acquire the ability, to provide directly the services that we
provide. In addition, we may face competition from third parties who decide to expand their services to include the suite of services that we provide. We are aware of three principal competitors,
Sallie Mae, Servus Financial Corporation, an affiliate of Wells Fargo Company, and Student Loan Corporation, an 80% owned subsidiary of Citibank, N.A., that offer a similar range of services to
lenders. Our business could also be adversely affected if Sallie Mae's program to market private student loans directly to consumers continues to grow, if Sallie Mae seeks to market more aggressively
to third parties the full range of services for private loan programs that we provide or if Sallie Mae's private loan consolidation product results in increased consolidation of private student loans
held by the securitization trusts we have facilitated. Sallie Mae has announced that it intends to focus increasingly on originating private student loans both through the school channel and the
direct to consumer channel. We are also aware of smaller privately held venture backed companies that are developing systems and expertise with plans to compete directly with us. If we are not able to
compete effectively, our revenue and results of operations may be adversely affected. In addition, if third parties choose to provide the range of services that we provide, pricing for our services
may become more competitive, which could lower our profitability.

In
addition, there has been significant consolidation within the banking and financial services industry. Further consolidation could result in a loss of business if one or more of our
clients were acquired by a competitor or a lender that is not our client.

Historically,
lenders in the education loan market have focused their lending activities on federal loans because of the relative size of the federal loan market and because the federal
government guarantees repayment of these loans, thereby significantly limiting the lenders' credit risk. The demand for our services could decline if lenders place additional emphasis on the private
education loan market and offer the services we provide, including in response to recent legislative initiatives affecting the availability and profitability of federal loans.

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If our clients do not successfully market and originate student loans, our business will be adversely affected.

We rely on our clients to market and originate education loans to student borrowers. If they do not devote sufficient time and resources to their marketing
efforts, or if they are otherwise not successful in these efforts, then we may experience a reduction in the volume of loans that we process and securitize, and our business will be adversely
affected. In addition, if the loans were marketed by our clients in a manner that is unfair or deceptive, or if the marketing, origination or servicing violated any applicable law, state unfair and
deceptive practices acts could impose liability on a securitization trust holding the loan or create defenses to the enforceability of the loan. In response to recent legislative initiatives, lenders
may increasingly focus on the direct to consumer marketing channel, increasing competition within the channel for private student loans. Investigations by the New York Attorney General, the Attorneys
General of other states, the United States Congress or a recently announced federal task force into the relationship between lenders and college financial aid officers could have a negative impact on
the ability of our clients, and Union Federal, to market student loans.

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

We have facilitated and structured a number of different special purpose trusts that have been used in securitizations to finance student loans that our clients
originate. Under applicable state and federal securities laws, if investors incur losses as a result of purchasing asset-backed securities that those trusts issue, we could be deemed responsible and
could be liable to those investors for damages. If we failed to cause the trusts to disclose adequately all material information regarding an investment in the asset-backed securities or if the trust
made statements that were misleading in any material respect in information delivered to investors, it is possible that we could be held responsible for that information or omission. In addition,
under various agreements entered into with underwriters or financial guarantee insurers of those asset-backed securities, as well as certain lenders, we are contractually bound to indemnify those
persons if investors are successful in seeking to recover losses from those parties and the trusts are found to have made materially misleading statements or to have omitted material information.

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

If our relationship with TERI terminates, our business could be adversely affected.

TERI is the exclusive third-party provider of borrower default guarantees for our clients' private label loans. In addition, we have entered into an agreement to
provide various services for TERI and received fees from TERI for services performed of $83.5 million, or 32% of total revenue, for the first six months of fiscal 2008, and $66.7 million
or 13% of total revenue, for the first six months of fiscal 2007. We also have entered into an agreement to receive from TERI updated information about the performance of the student loans it has
guaranteed, to allow us to supplement our database. Each of these agreements with TERI had an initial term through June 2006. In October 2004, we exercised our option to renew each agreement for an
additional five-year term, through June 2011. If our agreements with TERI terminate for any reason, or if TERI fails to comply with its obligations to us or our lender clients, our
business would be adversely affected and the value of our intangible assets could be impaired for the following reasons:



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In
such events, demand for our services, including opportunities to structure and facilitate securitization transactions, could decline, which would adversely affect our business. In
addition, the value of the loans in the securitization transactions we facilitate could decline and the value of our residuals could be reduced.

Our business could be adversely affected if TERI's ratings were downgraded or if TERI were placed on a negative watch by a rating agency.

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 label loans. As of December 31, 2007, TERI had a Baa3 counterparty rating from Moody's Investors Service, which is
the lowest investment grade rating, an insurer financial strength rating of A from Fitch Ratings and an A rating from Dominion Bond Rating Service, which initiated coverage of TERI in May 2007. In the
second fiscal quarter, Fitch Ratings downgraded TERI's rating from A+ to A, outlook negative, and Moody's began reviewing TERI's rating for a possible downgrade. Moody's review is ongoing as of the
date of this quarterly report, focused on TERI's reserve adequacy and liquidity in light of higher-than-expected loss experience of TERI-guaranteed loans. If TERI's
ratings were downgraded, including as a result of increased defaults on the loans held in the securitization trusts we have facilitated, our clients may not wish to enter into guarantee arrangements
with TERI, our upfront structural advisory fee yields could decline, or market conditions could dictate that we obtain additional credit enhancement for the asset-backed securitizations that we
structure, the cost of which could result in lower revenues. In addition, the inability of TERI as student loan guarantor to meet its guaranty obligations could reduce the amount of principal or
interest paid to the holders of asset-backed securities, which could adversely affect our residual interests in securitization trusts or harm our ability to structure securitizations in the future,
and could result in the termination of the guaranty agreement between our lender clients and TERI, which could also trigger termination of our note purchase agreements with lender clients. Finally, if
TERI's ratings were downgraded below Baa3 by Moody's Investors Service or A by Fitch Ratings, or if Moody's or Fitch were to publicly announce that TERI had been placed on a watchlist for possible
downgrade, Bank of America could elect to terminate our agreement relating to the purchase of direct-to-consumer loans. Bank of America could also suspend the processing of new
applications for school channel loans. In each such case, our business would be adversely affected.

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

As of December 31, 2007, PHEAA serviced a substantial majority of loans held by the securitization trusts that we administer. This arrangement allows us to
avoid the overhead investment in servicing operations but requires us to rely on PHEAA to adequately service the trust student loans, including collecting payments, responding to borrower inquiries
and communicating with borrowers whose loans have become delinquent. Our reliance on an external service provider for loan servicing subjects us to risks associated with inadequate or untimely
services, including notice of developments in prepayments, delinquencies and defaults. A substantial increase in these rates could adversely affect our

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ability
to access profitably the securitization markets for our clients' loans and the value of our additional structural advisory fees and residuals receivables. In addition, if PHEAA were to fail to
comply with TERI's servicing guidelines in servicing trust student loans, TERI would not be obligated to make guaranty payments on the loans, in which case PHEAA would be obligated to cure the
noncompliance or purchase the loans, which could have a negative impact on the value of our residuals and additional structural advisory fee receivables. If our relationship with PHEAA terminates, we
would either need to expand or develop a relationship with another TERI-approved loan servicer, which could be time consuming and costly. In such event, our business could be adversely
affected. Although we periodically review the costs associated with establishing servicing operations to service loans, we have no plans to establish and perform servicing operations at this time.

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

We focus our business exclusively on the market for private education loans, and more than 90% of our business is concentrated in loan programs for
post-secondary education. The availability and terms of loans that the federal government originates or guarantees affects the demand for private student loans because students and their
families often rely on private loans to bridge a gap between available funds, including family savings, grants and federal and state loans, and the costs of post-secondary education. The
federal government currently places both annual and aggregate limitations on the amount of federal loans that any student can receive and determines the criteria for student eligibility. These
guidelines are adjusted in connection with funding authorizations from the United States Congress for programs under the Higher Education Act. The Deficit Reduction Act of 2005 increased amounts that
first and second year college students may borrow and made Parent Loans for Undergraduate Students, or PLUS, loans available to graduate and professional students. Loans to fund graduate level
education represented approximately 10% during the first six months of fiscal 2008, 11% during fiscal 2007 and 15% during fiscal 2006 of our total loan facilitation volume. The loan limit increases
took effect July 1, 2007 while most other provisions took effect July 1, 2006. Recent state and federal legislation, as well as future legislation, could weaken the demand for private
student loans, or result in increased competition in the market for private student loans which could adversely affect the volume of private loans and the securitization transactions that we
facilitate and structure and, as a result, the growth of our business.

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

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



If
demand for private student loans weakens, we would experience reduced demand for our services, which would seriously harm our financial results.

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

We own a proprietary database of historical information on private student loan performance that we use to help us establish the pricing provisions of new loan
programs on behalf of lenders, determine the terms of securitization transactions and establish the fair value of the structural advisory fees and residuals that we recognize as revenue. We also have
developed a proprietary loan information processing system to enhance our application processing and loan origination capabilities. Our student loan database and loan information processing system
provide us with a competitive advantage in offering our services. Third parties could create or acquire databases and systems such as ours. For example, as lenders and other organizations in the
student loan market originate or service loans, they compile over time information for their own student loan performance database. If a third party creates or acquires a student loan database or
develops a loan information processing system, our competitive positioning, ability to attract new clients and business could be adversely affected.

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

Private student loans typically carry floating interest rates. Higher interest rates would increase the cost of the loan to the borrower, which in turn, could
cause an increase in default rates for outstanding student loans. In addition, higher interest rates, or the perception that interest rates could increase in the future, could cause an increase in
prepayments, including full or partial prepayments or prepayments as a result of loan consolidation activity. In particular, prepayments may increase during periods in which long-term
interest rates, such as interest rates on mortgages, are lower than short-term interest rates, including rates on student loans. If the prepayment or default rates increase for the student
loans held by the securitization trusts, we may experience a decline in the value of our additional structural advisory fees and residuals receivable, which could cause a decline in the price of our
common stock and could cause future securitization transactions to be less profitable for us. In addition, most of the student loans that our clients originate carry floating rates of interest tied to
prevailing short-term interest rates. An increase in interest rates could reduce borrowing for education generally, which, in turn, could cause the overall demand for our services to
decline.

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

We rely on trade secret laws and restrictions on disclosure to protect our proprietary database and information systems and processes. We have entered into
confidentiality agreements with third parties and with some of our employees to maintain the confidentiality of our trade secrets and proprietary information. These methods may neither effectively
prevent disclosure of our confidential information
nor provide meaningful protection for our confidential information if there is unauthorized use or disclosure.

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

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

We rely heavily upon communications and information systems to conduct our business. As we implement our growth strategy and increase our volume of business, that
reliance will increase. Our systems and operations are potentially vulnerable to damage or interruption from network failure, hardware failure, software failure, power or telecommunications failures,
computer viruses and worms, penetration of our network by hackers or other unauthorized users and natural disasters. Any failure or interruption, or breach in security, of our information systems or
the third-party information systems on which we rely could cause underwriting or other delays and could result in fewer loan applications being received, slower processing of applications and reduced
efficiency in loan processing. A failure, interruption or breach in security could also result in an obligation to notify clients in states such as California that require such notification, with
possible civil liability resulting from such failure, interruption or breach. We cannot assure you that such failures, interruptions or breaches will not occur, or if they do occur that we or the
third parties on whom we rely will adequately address them. The precautionary measures that we have implemented to avoid systems outages and to minimize the effects of any data or telephone systems
interruptions may not be adequate, and we may not have anticipated or addressed all of the potential events that could threaten or undermine our information systems. Key backup and recovery
capabilities have been implemented, however, we have not instituted redundancy for all key systems. The occurrence of any failure, interruption or breach could significantly impair the reputation of
our brand, diminish the attractiveness of our services and harm our business.

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

Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting
state and federal legislative proposals addressing data privacy and security. If some of the current proposals are adopted, we may be subject to more extensive requirements to protect the borrower
information that we process in connection with the loans. Implementation of systems and procedures to address these requirements would increase our compliance costs. If we were to experience a data
security breach, or if we or the securitization trusts that we administer otherwise improperly disclose confidential customer information, such breach or other disclosure could generate negative
publicity about us and could adversely affect our relationships with our clients, including the lenders and educational institutions with which we do business. This could have a material adverse
effect on our business. In addition, pending legislative proposals, if adopted, likely would result in substantial penalties for unauthorized disclosure of confidential consumer information. New
requirements issued by the Federal Financial Institutions Examination Council regarding authentication of customers accessing account information became effective January 1, 2007. Those
requirements have posed technology challenges for us, and we have implemented additional authentication procedures in order to comply with those requirements. Failure to comply with those requirements
could result in regulatory sanctions imposed on our client lenders and loss of business for us.

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

Our ability to handle an increasing volume of transactions is based in large part on the systems and processes we have implemented and developed. The loan
origination process is becoming increasingly dependent upon technological advancement such as the ability to process loans over the

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Internet,
accept electronic signatures and provide process updates instantly. Our future success depends in part on our ability to develop and implement technology solutions that anticipate and keep
pace with these and other continuing changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely basis.
If competitors introduce products, services, systems and processes that are better than ours or that gain greater market acceptance, those that we offer or use may become obsolete or noncompetitive.
Any one of these circumstances could have a material adverse effect on our ability to obtain and retain key clients.

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

We have expanded our operations rapidly in recent years, and if we fail to manage effectively our growth, our financial results could be adversely
affected.

From our inception to December 31, 2007, our assets have grown to $1.6 billion. Our growth may place a strain on our management, systems and
resources. We must continue to refine and expand our business development capabilities, our systems and processes and our access to financing sources. As we grow, we must continue to hire, train,
supervise and manage new employees.

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

In
fiscal 2007 we completed our acquisition of Union Federal Savings Bank, North Providence, Rhode Island. We may face challenges in integrating our products, services and employees.

We
cannot assure you that we will be able to:



If
we are unable to manage our growth, our operations and our financial results could be adversely affected.

We may be subject to state registration or licensing requirements in jurisdictions where we are not currently registered or licensed. If we determine
that we are subject to the registration or licensing requirements of any jurisdiction, our compliance costs could increase significantly and other adverse consequences may result.

Based on the advice of our regulatory counsel and, in some states, additional local counsel opinions and informal advice from state regulators, we have been
operating on the basis that no registrations or licenses are required of us under laws applicable to loan brokers, small lenders and loan arrangers, and other similar laws. We will continue to review
state registration and licensing requirements that may become applicable to us in the future, in view of the expansion of the scope of the services we provide, our plans for future activities and
changes in state legislation and regulatory interpretation. As a result of this continuing review, we may determine that registration or licensing is required in jurisdictions where we are not
currently registered or licensed. Even if we are not physically

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present
in a state, its regulators may take the position that registration or licensing is required because we provide services by mail, telephone, the Internet or other remote means. If we identify
any states in which registration or licensing is required, we will proceed with registration or licensing in the affected state. If any state asserts jurisdiction over our business, we will consider
whether to challenge the assertion or proceed with registration or licensing in the affected state. Compliance with such requirements could involve additional costs, which could have a material
adverse effect on our business. Our failure to comply with these laws could lead to, among other things:



Our
new wholly owned subsidiary, Union Federal, may conduct business without regard to such state licensing laws and requirements, because it is chartered by the federal Office of Thrift
Supervision, or OTS. Certain of our advertising and marketing coordination employees who focus on our proprietary brand loans have become employees of Union Federal, and will support those brands. To
the extent that our engagement in marketing related activities becomes part of the business of Union Federal, the likelihood of assertion of state regulatory requirements affecting loan brokers, small
lenders and credits services organizations will be reduced.

If the regulatory exemptions or rulings that allow us to conduct our business without registration or licensing are modified or revoked, or the
statutory and regulatory requirements change in the future, our compliance costs could increase substantially.

The Massachusetts Division of Banks ruled that our business with TERI is not subject to licensing because, as a provider of loan origination outsourcing services,
we do not conduct a lending business with consumers in our own name and our processing centers are not generally open to the public. The Massachusetts Small Loan Act requires any person that is
engaged, for compensation, in the business of making small loans, or in aiding or assisting the borrower or the lender in procuring or making such loans, to obtain a license. Under the statute, the
business of making small loans includes the making of loans of $6,000 or less with interest rates and expenses of more than 12% per year. The TERI-guaranteed loans that we facilitate
include amounts as small as $1,000, and a portion of those loans have combined interest rates and fees exceeding 12%. We could therefore become subject to the Small Loan Act with respect to these
loans if the Massachusetts Division of Banks revokes its previous determination that our operations are exempt or determines that our activities exceed the scope of the determination.

We
could also become subject to registration or licensing requirements due to changes in existing federal and state laws and regulations. The Massachusetts legislature could, for
example, modify the statutory requirements under the Small Loan Act. If the Massachusetts legislature, or any other state or federal regulatory authority, changes existing laws and rules, or enacts
new laws or rules, we could be forced to make changes in our relationships with lenders, educational institutions, guarantors, servicers or the trusts involved in the securitizations that we
facilitate. Specifically, changes in existing laws and rules could also require us to implement additional or different programs and information technology
systems and could impose licensing, capital and reserve requirements and additional costs, including administrative, compliance and third-party service costs.

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

Third parties with which we do business, including federal and state chartered financial institutions, non-bank loan marketers, as well as TERI, are
subject to registration, licensing and extensive governmental regulations, including Truth-in-Lending laws and other consumer protection laws and regulations. For example, some
of the third-party marketers with which we do business may be subject to state registration or licensing requirements and laws and regulations, including those relating to small loans, loan brokers
and credit services organizations. As a result of the activities that we conduct for our clients, it may be asserted that we have some responsibility for compliance by third parties with which we do
business with the laws and regulations applicable to them, whether on contractual or other grounds. If it is determined that we have failed to comply with our obligations with respect to these third
parties, we could be subject to civil or criminal liability.

We could also become subject to registration or licensing and other regulatory requirements in Massachusetts and other states by expanding the scope or
extent of our services.

We are in the process of expanding the scope of the services we provide on behalf of lenders to include certain advertising and marketing coordination functions.
As a result of this expansion of our services, or if we expand our services in the future to include, among others, loan guarantees or direct solicitation of consumers, our current exemption from the
Massachusetts Small Loan Act could be invalidated, and consequently, we may need to obtain a license from the Massachusetts Division of Banks or secure an alternative exemption. In addition, we may
become subject to the laws and regulations of other states governing such expanded services. We may also become subject to state regulatory requirements if the extent of the activities that we conduct
in a particular state expands. Compliance with such requirements could involve additional costs, which could have a material adverse effect on our business. To the extent that our engagement in
marketing related activities becomes part of the business of Union Federal, such activities will not be subject to licensing requirements imposed under the laws of the Commonwealth of Massachusetts or
other state laws.

Failure to comply with consumer protection laws could subject us to civil and criminal penalties and have a material adverse effect on our business.

The federal government and state governments regulate extensively the financial institutions and other entities that originate loans in the student loan market.
These regulations include bankruptcy, tax, usury, disclosure, credit reporting, identity theft, privacy, fraud and abuse and other laws to protect borrowers. Changes in consumer protection laws or
related regulations, or in the prevailing interpretations thereof, may expose us to litigation, result in greater compliance costs, adversely affect the collection of balances due on the loan assets
held by securitization trusts or otherwise adversely affect our business. For example, the federal banking regulators comprising the Federal Financial Institutions Examination Council approved in
October 2007 final rules implementing identity theft prevention requirements from the Fair and Accurate Credit Transactions Act of 2003. The Federal Trade Commission issued similar rules in October
2007 and other agencies are expected to follow. We could incur substantial additional expense complying with these requirements and may be required to create new processes and information systems.
Moreover, changes in the consumer protection laws and related regulations, or in the prevailing interpretations thereof, could invalidate or call into question the legality of certain of our services
and business practices.

The
risk of noncompliance with regulatory requirements by our lender clients and their marketing partners has been highlighted by recent state and federal investigations into school
channel and direct-to-consumer marketing practices, particularly the payment of marketing fees directly to schools in exchange for loan referrals. None of our contracts with
lenders or marketers involves the payment of fees to schools for loan volume. We are not aware of any judgments or consent decrees entered into by

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any
of our lender or marketer clients with respect to any of the loan products we coordinate. However, state and federal regulatory authorities have sought information from some of our clients and us
regarding the loan programs we coordinate, and it is possible that some marketing or underwriting practices associated with the programs we coordinate and assets we securitize will be challenged as a
result of such investigations. On August 31, 2007 we announced that, as part of the New York Attorney General's ongoing investigation of several lending, educational, and nonprofit
institutions, we had received a subpoena for information regarding our role in the student loan industry.

The
regulatory actions described above have also prompted state and federal legislation that will affect our operations. The State of New York has enacted legislation that may impede
accepted marketing practices in the school channel, such as school endorsement of loan products that the school believes are beneficial to students. In addition, the New York legislation will require
additional disclosures that will increase our costs. Similarly, legislation recently passed in the United States Senate and The Student Loan Sunshine Act already passed by the U.S. House of
Representatives would impose significant additional disclosure and processing burdens on our loan origination operations. Other proposals, which have not yet passed in either house of Congress, would
reduce protection of the loans we securitize in bankruptcy proceedings.

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

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

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

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

Additional
state consumer protection laws would be applicable to the loans we facilitate if we, or any third-party loan marketer whose activities we coordinate, were
re-characterized as a lender, and the loans (or the provisions governing interest rates, fees and other charges) could be unenforceable. In addition, we could be subject to claims by
consumers, as well as enforcement actions by regulators. Even if we were not required to cease doing business with residents of certain states or to change our business practices to comply with
applicable laws and regulations, we could be required to register or obtain licenses or regulatory approvals that could impose a substantial cost on us. To date, there have

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been
no actions taken or threatened against us on the theory that we have engaged in unauthorized lending. However, such actions could have a material adverse effect on our business.

The price of our common stock may be volatile.

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



In
the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been brought against that company. Due to the
potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management's
attention and resources from our business.

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

Our directors and executive officers, and entities affiliated with them, beneficially own approximately 34% of the outstanding shares of our common stock. These
stockholders, if acting together, could substantially influence matters requiring approval by our stockholders, including the

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election
of directors and the approval of mergers or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may
be adverse to your interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

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

As a result of our acquisition of Union Federal Savings Bank in November 2006, we became subject to regulation as a savings and loan holding company and our
business is limited to activities that are financial or real-estate related. We have registered with the OTS and are required to file periodic reports. In addition, we are subject to
examination by the OTS, which has certain types of enforcement powers over us, including the ability to issue cease-and-desist orders, force divestiture of Union Federal and
impose civil and monetary penalties for violations of federal banking laws and regulations or for unsafe or unsound banking practices.

In
addition, Union Federal is subject to extensive regulation, supervision and examination by the OTS and the Federal Deposit Insurance Corporation. Such regulation covers all banking
business, including activities and investments, lending practices, safeguarding deposits, capitalization, risk management policies and procedures, relationships with affiliated companies,
recordkeeping and conduct and qualifications of personnel. In particular, the failure to meet minimum capital requirements could initiate certain mandatory and possibly additional discretionary,
actions by regulators that, if undertaken, could have a direct material adverse effect on our operations and financial statements.

There
is a risk that we could incur additional costs in complying with regulations applicable to savings and loan holding companies and savings banks, or significant penalties if we fail
to comply. Our ability to comply with all applicable laws and rules will depend largely on our establishment and maintenance of a system to ensure such compliance, as well as our ability to attract
and retain qualified compliance personnel. We have relatively limited experience with these regulations, and we could be subject to
disciplinary or other actions due to claimed noncompliance in the future, which could have an adverse effect on our business, financial condition and operating results.

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

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



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

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

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

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

(a)   Recent Sales of Unregistered Securities

We refer you to our current report on Form 8-K filed with the SEC on December 27, 2007.

(b)   Use of Proceeds from Registered Securities

In our initial public offering or IPO, we sold 11,859,375 shares of common stock, including an over-allotment option of 1,547,625 shares, pursuant to
a registration statement on Form S-1 (File No. 333-108531) that was declared effective by the SEC on October 30, 2003. We received in aggregate net
proceeds of approximately $115.1 million, after deducting underwriting discounts and commissions of approximately $8.9 million and expenses of the offering of approximately
$2.5 million. From the effective date of the registration statement through December 31,
2007, we have not spent any of the net proceeds from the IPO, which have been invested in cash, cash equivalents and investments. Accordingly, none of the net proceeds of the IPO has been paid by us,
directly or indirectly, to any director, officer, or general partner of us, or any of their associates, or to any person owing ten percent or more of any class of our equities securities or any of our
affiliates.

(c)   Issuer Purchases of Equity Securities

On April 24, 2007, we announced a repurchase program of up to 10,000,000 shares of our common stock. The 10,000,000 shares now authorized for repurchase
includes 3,393,300 shares available for repurchase as of April 24, 2007 under a previously authorized repurchase program. We did not repurchase any shares of common stock pursuant to this
program during the six months ended December 31, 2007. Through December 31, 2007, we repurchased an aggregate of 1,169,100 shares under this program at an average price paid per share,
excluding commissions, of $36.17. As of December 31, 2007, 8,830,900 shares of our common stock may yet be purchased under this program, which does not have a fixed expiration date.

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Item 4Submission of Matters to a Vote of Security Holders

On November 8, 2007 the following proposals were voted on at our 2007 annual meeting of stockholders:

|Proposal                                                                                                                                                                                                                              |  | For        |  | Against/Withheld |  | Abstentions |  | Broker Non-Votes
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | ---------------- |  | ----------- |  | ----------------
|To elect the following nine persons to serve as directors until the next annual meeting of stockholders and until their successors are duly elected and qualified (subject to such director's earlier death, resignation or
removal): |  |            |  |                  |  |             |  |                 
|Jack L. Kopnisky                                                                                                                                                                                                                      |  | 82,225,033 |  | 1,084,968        |  | N/A         |  | N/A             
|Peter B. Tarr                                                                                                                                                                                                                         |  | 82,118,339 |  | 1,191,662        |  | N/A         |  | N/A             
|Stephen E. Anbinder                                                                                                                                                                                                                   |  | 82,117,104 |  | 1,192,897        |  | N/A         |  | N/A             
|Leslie L. Alexander                                                                                                                                                                                                                   |  | 82,199,894 |  | 1,110,107        |  | N/A         |  | N/A             
|William R. Berkley                                                                                                                                                                                                                    |  | 81,771,949 |  | 1,538,052        |  | N/A         |  | N/A             
|Dort A. Cameron III                                                                                                                                                                                                                   |  | 81,397,258 |  | 1,912,743        |  | N/A         |  | N/A             
|George G. Daly                                                                                                                                                                                                                        |  | 82,221,181 |  | 1,088,820        |  | N/A         |  | N/A             
|Peter S. Drotch                                                                                                                                                                                                                       |  | 82,227,305 |  | 1,082,696        |  | N/A         |  | N/A             
|William D. Hansen                                                                                                                                                                                                                     |  | 82,226,945 |  | 1,083,056        |  | N/A         |  | N/A             
|To approve an amendment to First Marblehead's restated certificate of incorporation to increase the authorized number of shares of common stock from 150,000,000 to 250,000,000                                                       |  | 78,043,635 |  | 5,074,550        |  | 191,815     |  | N/A             
|To ratify the appointment of KPMG LLP as First Marblehead's independent registered public accounting firm for the fiscal year ending June 30, 2008                                                                                    |  | 83,083,170 |  | 149,304          |  | 77,526      |  | N/A             

Item 5Other Information



On February 7, 2008, we entered into a fourth amendment (the "Fourth Amendment") to amended and restated program agreements with Bank of America, N.A. The
Fourth Amendment modifies the definition of "TERI Insolvency Event" and "Termination Date" for purposes of the program agreements relating to Bank of America's
direct-to-consumer loan program. The amended definition of "TERI Insolvency Event" includes the downgrading of TERI's creditworthiness below "A" by Fitch Ratings ("Fitch"),
below Baa3 by Moody's Investors Service, Inc. ("Moody's"), or public announcement of the placement of TERI on a watchlist for possible downgrade by Fitch or Moody's. The amended definition of
"Termination Date" includes the 30th calendar day after delivery of a written notice that Bank of America has elected to terminate the program agreements because a TERI Insolvency Event has
occurred. Previously, the program agreements would have terminated automatically, rather than at Bank of America's election, following a TERI Insolvency Event.

On
February 7, 2008 we also entered into a fifth amendment (the "Fifth Amendment") to amended and restated program agreements with Bank of America. The Fifth Amendment clarifies
the circumstances in which the processing of new applications for Bank of America school channel loans may be suspended. Pursuant to the Fifth Amendment, either Bank of America or we may suspend the
processing of such applications in the event that TERI's creditworthiness is downgraded below "A" by Fitch or below Baa3 by Moody's, or in the event that a default by TERI for failure to pay a
guaranty

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claim
is declared under any TERI guaranty agreement with any lender. Any such suspension will continue, at the discretion of the party declaring it, until the condition creating the right to suspend
is cured.

Each
of the Fourth Amendment and the Fifth Amendment also include a representation by us that we will not diminish borrower benefits under the applicable Bank of America loan program
guidelines following the securitization of the loans by us.



Auctions have historically provided a liquid market for auction rate notes issued by five securitization trusts that we have facilitated. On February 7,
2008, a failed auction occurred with respect to one class of the notes issued by a securitization trust that we facilitated in the first quarter of fiscal 2008.

Illiquidity
as a result of failed auctions for our trusts' auction rate notes could result in higher interest rates determined by future auction, derogatory rating agency actions,
including ratings downgrades, and impairment charges by the holders of the outstanding auction rate notes, each of which could materially adversely affect demand for future auction rate notes that we
facilitate and limit a financing structure that we have used as recently as the first quarter of fiscal 2008. Future ratings downgrades on the auction rate notes could result in a higher maximum rate
paid to the holders of the outstanding auction rate notes, in the event of future failed auctions. For more information about risks relating to auction rate notes, we refer you to the information
disclosed in Item 1A of Part II of the quarter report under the caption "Our assumptions regarding the future cost of funding of auction rate notes are highly uncertain and greatly
affect the valuation of our service receivables."

Item 6Exhibits

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

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SIGNATURES

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

|                        |  | THE FIRST MARBLEHEAD CORPORATION
|----------------------- |  | --------------------------------
|Date: February 11, 2008 |  | By:                             
|Date: February 11, 2008 |  | By:                             
|Date: February 11, 2008 |  | By:                             

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EXHIBIT INDEX

|Exhibit Number |  | Description                                                                                                                                                                                             
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1           |  | Fourth Amendment to Amended and Restated Program Agreements (Education Maximizer Direct-to-Consumer Loan Program), dated as of January 31, 2008, by and between the registrant and Bank of America, N.A.
|10.2           |  | Fifth Amendment to Amended and Restated Program Agreements (School Channel Loan Programs), dated as of February 7, 2008, by and between the registrant and Bank of America, N.A.                        
|31.1           |  | Chief Executive OfficerCertification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                           
|31.2           |  | Chief Financial OfficerCertification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                           
|32.1           |  | Chief Executive OfficerCertification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|32.2           |  | Chief Financial OfficerCertification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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