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 September 30, 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                                                          |  | 04-3295311                          
|----------------------------------------------------------------- |  | ------------------------------------
|(State or Other Jurisdiction of
Incorporation or Organization)    |  | (I.R.S. Employer
Identification No.)
|The Prudential Tower
800 Boylston Street, 34th Floor              |  |                                     
|Boston, Massachusetts                                             |  | 02199-8157                          
|(Address of Principal Executive Offices)                          |  | (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

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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 October 31, 2007, the registrant had 93,500,571 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 5  |   
|                                 | Item 6  |   
|SIGNATURES                       |         | 56
|EXHIBIT INDEX                    |         | 57

2

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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)

|                                                                                                                                                                                                                                                                                                                |                                                               | September 30,
2007          |          | June 30,
2007 |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | --------------------------- | -------- | ------------- | -------
|ASSETS                                                                                                                                                                                                                                                                                                          |                                                               |                             |          |               |        
|Cash and cash equivalents                                                                                                                                                                                                                                                                                       |                                                               | $                           | 227,072  |               | $      
|Investments                                                                                                                                                                                                                                                                                                     |                                                               |                             | 153,221  |               |        
|Loans held for sale                                                                                                                                                                                                                                                                                             |                                                               |                             | 200,911  |               |        
|Service receivables:                                                                                                                                                                                                                                                                                            |                                                               |                             |          |               |        
|                                                                                                                                                                                                                                                                                                                | Structural advisory fees                                      |                             |          | 160,807       |        
|                                                                                                                                                                                                                                                                                                                | Residuals                                                     |                             |          | 767,979       |        
|                                                                                                                                                                                                                                                                                                                | Processing fees from The Education Resources Institute (TERI) |                             |          | 14,304        |        
|                                                                                                                                                                                                                                                                                                                |                                                               |                             |          |               |        
|                                                                                                                                                                                                                                                                                                                |                                                               | Total service receivables   |          |               | 943,090
|                                                                                                                                                                                                                                                                                                                |                                                               |                             |          |               |        
|Property and equipment                                                                                                                                                                                                                                                                                          |                                                               |                             | 85,536   |               |        
|                                                                                                                                                                                                                                                                                                                | Less accumulated depreciation and amortization                |                             |          | (43,374       | )      
|                                                                                                                                                                                                                                                                                                                |                                                               |                             |          |               |        
|                                                                                                                                                                                                                                                                                                                |                                                               | Property and equipment, net |          |               | 42,162 
|                                                                                                                                                                                                                                                                                                                |                                                               |                             |          |               |        
|Goodwill                                                                                                                                                                                                                                                                                                        |                                                               |                             | 4,878    |               |        
|Intangible assets, net                                                                                                                                                                                                                                                                                          |                                                               |                             | 2,432    |               |        
|Prepaid income taxes                                                                                                                                                                                                                                                                                            |                                                               |                             |         |               |        
|Other prepaid expenses                                                                                                                                                                                                                                                                                          |                                                               |                             | 25,541   |               |        
|Other assets                                                                                                                                                                                                                                                                                                    |                                                               |                             | 14,553   |               |        
|                                                                                                                                                                                                                                                                                                                |                                                               |                             |          |               |        
|                                                                                                                                                                                                                                                                                                                | Total assets                                                  |                             | $        | 1,613,860     |        
|                                                                                                                                                                                                                                                                                                                |                                                               |                             |          |               |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                            |                                                               |                             |          |               |        
|Liabilities:                                                                                                                                                                                                                                                                                                    |                                                               |                             |          |               |        
|                                                                                                                                                                                                                                                                                                                | Deposits                                                      |                             | $        | 123,769       |        
|                                                                                                                                                                                                                                                                                                                | Education loan warehouse facility                             |                             |          | 94,000        |        
|                                                                                                                                                                                                                                                                                                                | Accounts payable and accrued expenses                         |                             |          | 49,781        |        
|                                                                                                                                                                                                                                                                                                                | Income taxes payable                                          |                             |          | 58,167        |        
|                                                                                                                                                                                                                                                                                                                | Net deferred income tax liability                             |                             |          | 289,346       |        
|                                                                                                                                                                                                                                                                                                                | Other liabilities                                             |                             |          | 10,625        |        
|                                                                                                                                                                                                                                                                                                                |                                                               |                             |          |               |        
|                                                                                                                                                                                                                                                                                                                |                                                               | Total liabilities           |          |               | 625,688
|                                                                                                                                                                                                                                                                                                                |                                                               |                             |          |               |        
|Commitments and contingencies                                                                                                                                                                                                                                                                                   |                                                               |                             |          |               |        
|Stockholders' equity:                                                                                                                                                                                                                                                                                           |                                                               |                             |          |               |        
|Preferred stock, par value $0.01 per share; 20,000 shares authorized; no
    shares issued or outstanding                                                                                                                                                                                                       |                                                               |                             |         |               |        
|Common stock, par value $0.01 per share; 150,000 shares authorized at
    September 30, 2007 and June 30, 2007; 101,053 and 100,874 shares
    issued at September 30, 2007 and June 30, 2007, respectively; 93,498
    and 93,342 shares outstanding at September 30, 2007 and June 30,
    2007, respectively |                                                               |                             | 1,011    |               |        
|Additional paid-in capital                                                                                                                                                                                                                                                                                      |                                                               |                             | 236,115  |               |        
|Retained earnings                                                                                                                                                                                                                                                                                               |                                                               |                             | 935,054  |               |        
|Treasury stock, 7,555 and 7,532 shares held at September 30, 2007 and
    June 30, 2007, respectively, at cost                                                                                                                                                                                                  |                                                               |                             | (183,825 | )             |        
|Accumulated other comprehensive income (loss)                                                                                                                                                                                                                                                                   |                                                               |                             | (183     | )             |        
|                                                                                                                                                                                                                                                                                                                |                                                               |                             |          |               |        
|                                                                                                                                                                                                                                                                                                                | Total stockholders' equity                                    |                             |          | 988,172       |        
|                                                                                                                                                                                                                                                                                                                |                                                               |                             |          |               |        
|                                                                                                                                                                                                                                                                                                                | Total liabilities and stockholders' equity                    |                             | $        | 1,613,860     |        
|                                                                                                                                                                                                                                                                                                                |                                                               |                             |          |               |        

See accompanying notes to unaudited condensed consolidated financial statements.

3

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

|                       |                                              | Three months ended
September 30,
|---------------------- | -------------------------------------------- | --------------------------------
|
|Service Revenues:      |                                              |                                 
|                       | Up-front structural advisory fees            |                                 
|                       | Additional structural advisory fees:         |                                 
|                       |                                              | From new securitizations        
|                       |                                              | Trust updates                   
|                       |                                              |                                 
|                       |                                              |                                 
|                       | Residuals:                                   |                                 
|                       |                                              | From new securitizations        
|                       |                                              | Trust updates                   
|                       |                                              |                                 
|                       |                                              |                                 
|                       | Processing fees from TERI                    |                                 
|                       | Administrative and other fees                |                                 
|                       |                                              |                                 
|                       |                                              |                                 
|                       | Net interest income                          |                                 
|                       |                                              |                                 
|                       |                                              |                                 
|                       |                                              |                                 
|Non-interest expenses: |                                              |                                 
|                       | Compensation and benefits                    |                                 
|                       | General and administrative expenses          |                                 
|                       |                                              |                                 
|                       |                                              |                                 
|                       |                                              |                                 
|Income before taxes    |                                              |                                 
|Income tax expense     |                                              |                                 
|                       |                                              |                                 
|Net income             |                                              | $                               
|                       |                                              |                                 
|                       | Net income per share, basic                  |                                 
|                       | Net income per share, diluted                |                                 
|                       | Cash dividends declared per share            |                                 
|                       | Weighted average shares outstanding, basic   |                                 
|                       | Weighted average shares outstanding, diluted |                                 

See
accompanying notes to unaudited condensed consolidated financial statements.

4

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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)

|                              |                                                               | Common stock |     |   |       |   |        | Accumulated
other
comprehensive
income
(loss), net
of tax |   |          |     
|----------------------------- | ------------------------------------------------------------- | ------------ | --- | - | ----- | - | ------ | --------------------------------------------------------- | - | -------- | ----
|
|
|
|Balance at June 30, 2007      |                                                               | 100,874      |     | $ | 1,009 |   | (7,532 | )                                                         | $ | (183,070 | )   
|Comprehensive income          |                                                               |              |     |   |       |   |        |                                                           |   |          |     
|                              | Net income                                                    |              |    |   |       |  |        |                                                          |   |          |    
|                              | Accumulated other
    comprehensive income (loss), net        |              |    |   |       |  |        |                                                          |   |          |    
|                              |                                                               |              |     |   |       |   |        |                                                           |   |          |     
|Total comprehensive income    |                                                               |             |     |   |      |   |       |                                                           |   |         |     
|                              | Options exercised                                             |              | 5   |   |       |  |        |                                                          |   |          |    
|                              | Stock issuance through employee
    stock purchase plan       |              | 15  |   |       |  |        |                                                          |   |          |    
|                              | Net stock issuance from vesting of
    restricted stock units |              | 159 |   |       | 2 |        | (23                                                       | ) |          | (755
|                              | Stock-based compensation                                      |              |    |   |       |  |        |                                                          |   |          |    
|                              | Cash dividends declared ($0.275
    per share)                |              |    |   |       |  |        |                                                          |   |          |    
|                              | Tax benefit from employee stock
    options                   |              |    |   |       |  |        |                                                          |   |          |    
|                              |                                                               |              |     |   |       |   |        |                                                           |   |          |     
|Balance at September 30, 2007 |                                                               | 101,053      |     | $ | 1,011 |   | (7,555 | )                                                         | $ | (183,825 | )   
|                              |                                                               |              |     |   |       |   |        |                                                           |   |          |     

See accompanying notes to unaudited condensed consolidated financial statements.

5

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

|                                                                                  |                                                              | Three months ended
September 30,                                        |                                                    
|--------------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------------------------------------------------------------------- | ---------------------------------------------------
|
|Cash flows from operating activities:                                             |                                                              |                                                                         |                                                    
|Net income                                                                        |                                                              | $                                                                       | 168,820                                            
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                              |                                                                         |                                                    
|                                                                                  | Depreciation and amortization                                |                                                                         |                                                    
|                                                                                  | Deferred income tax expense                                  |                                                                         |                                                    
|                                                                                  | Stock-based compensation                                     |                                                                         |                                                    
|                                                                                  | Change in assets/liabilities:                                |                                                                         |                                                    
|                                                                                  |                                                              | (Increase) in loans held for sale                                       |                                                    
|                                                                                  |                                                              | (Increase) in structural advisory fees                                  |                                                    
|                                                                                  |                                                              | (Increase) in residuals                                                 |                                                    
|                                                                                  |                                                              | (Increase) in processing fees from TERI                                 |                                                    
|                                                                                  |                                                              | Net change in income taxes                                              |                                                    
|                                                                                  |                                                              | Decrease in other prepaid expenses                                      |                                                    
|                                                                                  |                                                              | (Increase) decrease in other assets                                     |                                                    
|                                                                                  |                                                              | (Decrease) in accounts payable, accrued expenses, and other liabilities |                                                    
|                                                                                  |                                                              |                                                                         |                                                    
|                                                                                  |                                                              |                                                                         | Net cash provided by operating activities          
|                                                                                  |                                                              |                                                                         |                                                    
|Cash flows from investing activities:                                             |                                                              |                                                                         |                                                    
|                                                                                  | Dispositions of investments                                  |                                                                         |                                                    
|                                                                                  | Purchases of investments                                     |                                                                         |                                                    
|                                                                                  | Purchases of property and equipment                          |                                                                         |                                                    
|                                                                                  | Payments to TERI for loan database updates                   |                                                                         |                                                    
|                                                                                  |                                                              |                                                                         |                                                    
|                                                                                  |                                                              |                                                                         | Net cash (used in) provided by investing activities
|                                                                                  |                                                              |                                                                         |                                                    
|Cash flows from financing activities:                                             |                                                              |                                                                         |                                                    
|                                                                                  | Increase in deposits                                         |                                                                         |                                                    
|                                                                                  | Increase in education loan warehouse facility                |                                                                         |                                                    
|                                                                                  | Repayment of capital lease obligations                       |                                                                         |                                                    
|                                                                                  | Repayment of notes payable due to TERI                       |                                                                         |                                                    
|                                                                                  | Tax benefit from stock-based compensation                    |                                                                         |                                                    
|                                                                                  | Issuances of common stock                                    |                                                                         |                                                    
|                                                                                  | Repurchases of common stock                                  |                                                                         |                                                    
|                                                                                  | Cash dividends on common stock                               |                                                                         |                                                    
|                                                                                  |                                                              |                                                                         |                                                    
|                                                                                  |                                                              |                                                                         | Net cash provided by (used in) financing activities
|                                                                                  |                                                              |                                                                         |                                                    
|Net increase in cash and cash equivalents                                         |                                                              |                                                                         | 120,801                                            
|Cash and cash equivalents, beginning of period                                    |                                                              |                                                                         | 106,271                                            
|                                                                                  |                                                              |                                                                         |                                                    
|Cash and cash equivalents, end of period                                          |                                                              | $                                                                       | 227,072                                            
|                                                                                  |                                                              |                                                                         |                                                    
|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.

6

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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



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 also receives reimbursement from The Education Resources Institute, Inc. (TERI) for outsourced services the Company performs on TERI's behalf, 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, since April 2007, private student loans.



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.



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

7

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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. 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.



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 September 30, 2007, TERI had a Baa3 counterparty rating from Moody's Investors Service, which is the lowest investment grade rating, and an insurer financial
strength rating of A+ from Fitch Ratings, which was subsequently downgraded to a rating of A on October 25, 2007. TERI also had a rating of A from Dominion Bond Rating Service as of
September 30, 2007. Dominion Bond Rating Service initiated coverage of TERI on May 15, 2007. 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 the ratings TERI held in January 2003, or if Moody's
Investors Service or Fitch Ratings were to place a negative watch on TERI, FMC's agreement with Bank of America relating to the purchase of direct-to-consumer loans would
terminate. In January 2003, TERI had a Baa3 counterparty rating from Moody's Investors Service and an insurer strength rating of A from Fitch Ratings. If TERI experiences a material adverse
financial change such as a reduction of its credit rating below investment grade, 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

8

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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.

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 transactions 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.

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

9

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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 first quarter of fiscal 2008 and 2007, processing fees from TERI represented approximately 12% of the Company's total revenue.



As of September 30, 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 collecting and crediting payments received from
borrowers. As of September 30, 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 September 30, 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.



Securitization-related fees from the trusts used to securitize student loans in the first quarter of fiscal 2008 represented approximately 84% of total revenue.
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. 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 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.



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 revenue, and with respect to the determination of whether or not to consolidate the securitization trusts that it
facilitates. For a discussion of our critical accounting policies, see "Management's Discussion and Analysis of Financial Condition and Results of

10

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OperationsExecutive
SummaryApplication of Critical Accounting Policies and Estimates". For a discussion of a change made in the first quarter of fiscal 2008 to the discount
rate assumption used to determine the fair value of the Company's residual receivable see Note 2.



Cash and cash equivalents at September 30, 2007 included $182,606 held in money market funds owned by FMC and $44,466 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 $8,236 and $8,168 at September 30, 2007 and
June 30, 2007, respectively.



Loans held for sale at September 30, 2007 are comprised of education and mortgage loans. Loans held for sale are carried at the lower of cost or fair
value.



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 increased during the first quarter of fiscal 2008 primarily as a result of the increase
in residual and additional structural advisory fee revenue recognized during the first quarter of fiscal 2008, which more than offset the recognition of taxable income from the securitization trusts.

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 $25,708 of unrecognized tax
benefits at June 30, 2007. If recognized, approximately $16,710 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

11

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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 securitization trusts. The fees are expected to be paid to the Company from 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 trusts. Processing fees receivable from TERI represents amounts due from
TERI for expenses incurred by FMER on TERI's behalf.

The
Company conducted two securitization transactions in the first quarter of fiscal 2008 and one securitization transaction in the first quarter of fiscal 2007. 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.

During
fiscal 2007, the Company facilitated four securitization transactions involving the issuance of Triple B-rated securities, the only such issuances by any of the
Company's securitization trusts. Triple B-rated issuances, in effect, enabled the Company 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 market based 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 pre-fiscal 2007 private label trusts. That portion of the
residuals that the Company 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
securitization transactions facilitated in the first quarter of fiscal 2008 did not involve the issuance of Triple B-rated securities, and the Company believes, as of the
date of this quarterly report, that recent volatility in the asset-backed securities 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 has adjusted 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 our residual receivable of $25.2 million
which was recognized in the first quarter of fiscal 2008.

Except
for the changes to the discount rates applied to residuals and additional structural advisory fees, the Company did not materially change any valuation assumptions during the
first quarter of fiscal

12

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2008
or fiscal 2007. The Company will continue to monitor the performance of the trust assets against its expectations, as well as other inputs necessary to estimate the fair value of its structural
advisory fees and residuals receivables. The Company will make such adjustments to its estimates as it believes are necessary to value properly its receivables balances at each balance sheet date.

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

Three months ended
September 30,2007

2006Fair value at beginning of period

$
133,644

$
88,297Additions from new securitizations


24,304


16,586Trust updatesPassage of time (fair value accretion)


2,410


1,590Other factors


449


375Net accretion


2,859


1,965Fair value at end of period

$
160,807

$
106,848


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

Three months ended
September 30,2007

2006Fair value at beginning of period

$
665,115

$
452,823Additions from new securitizations


116,972


56,755Trust updatesPassage of time (fair value accretion)


19,903


13,709Increase in discount rate assumption


(25,182
)

Other factors


(8,829
)

(1,801
)Net accretion


(14,108
)

11,908Fair value at end of period

$
767,979

$
521,486


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

(3) Related Party Transaction

At September 30, 2007, the Company had invested approximately $151,763 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 $144,148 of investments

13

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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 conduit lenders. UFSB-SPV expects to repay advances it receives as education
loans held by UFSB-SPV are sold to securitization trusts in transactions facilitated by the Company.

(5) Stockholders' Equity



In September 2003, the Board of Directors and stockholders approved the 2003 Stock Incentive Plan. A total of 4,050 shares of FMC's common stock (Common
Stock) are authorized for issuance pursuant to awards under this plan. During the first quarter of fiscal 2008, the Company granted 366 restricted stock units, each such restricted stock unit
representing the right to receive one share of Common Stock upon vesting. As of September 30, 2007, there were 1,040 restricted stock units outstanding and 2,783 shares available for future
grant under this 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 at the end of each offering period. Participation is voluntary. Under the Stock Purchase Plan, 15 and 22 shares of Common Stock were issued in July 2007 and
July 2006, respectively. At September 30, 2007, 436 shares were available for future purchase under the Stock Purchase Plan.



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 September 30, 2007, the Company had repurchased an aggregate of 1,169
shares of its Common Stock under this program.

14

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During the first quarter of fiscal 2008 the Board of Directors declared a cash dividend of $0.275 per share on the Common Stock. The dividend was paid on
September 28, 2007 to stockholders of record at the close of business on September 24, 2007.



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 per Share

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

Three months ended
September 30,2007

2006Net income

$
168,820

$
141,008Shares used in computing net income per common sharebasic


93,437


94,290Effect of dilutive securities:Stock options


123


456Restricted stock units


236


204Dilutive potential common shares


359


660Shares used in computing net income per common sharediluted


93,796


94,950Net income per common share:Basic

$
1.81

$
1.50Diluted

$
1.80

$
1.49


(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.

15

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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.

16

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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

17

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

|                                                                                                          |  | Three months ended
September 30, |           |  |  
|--------------------------------------------------------------------------------------------------------- |  | -------------------------------- | --------- |  | -
|
|
|
|Approximate student loan applications processed                                                           |  |                                  | 811,000   |  |  
|Approximate number of student loans facilitated                                                           |  |                                  | 206,000   |  |  
|Approximate number of student loans facilitated that were also available to us for securitization         |  |                                  | 181,000   |  |  
|Principal amount of student loans facilitated                                                             |  | $                                | 2,401,541 |  | $
|Principal amount of student loans facilitated that were also available to us for securitization           |  | $                                | 2,227,380 |  | $
|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 |  | $                                | 1,103,539 |  | $

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 would not have the exclusive right to securitize the student loans that they originate.

18

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



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 some of our contracts with key lender clients, we have an obligation to securitize periodically the private student loans that these clients originate. If we do not
honor our obligations to these lenders, we may be required to pay liquidated damages, generally not exceeding an amount equal to 1% of the face amount of the loans available for securitization.

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



19

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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 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.

20

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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 and may continue to vary on a quarterly basis primarily because of the timing, size and
structure of the securitizations that we facilitate. We facilitated two securitization transactions in the first quarter of fiscal 2008. In fiscal 2007, we facilitated one securitization in each of
the first, second and third quarters and two securitizations in the fourth quarter. We expect to facilitate securitizations in each remaining quarter of fiscal 2008, although the timing, size or
structure of any capital markets transactions could be affected by recent volatility in the capital markets. Variations in the size or structure of each securitization transaction could continue to
result in variability of our operating results on a quarterly basis. The following tables set forth our quarterly revenue and net income for the first quarter of fiscal 2008 and each quarter of fiscal
2007:

First quarter
fiscal 2008(in thousands)Total revenues

$
379,962Net income


168,820


Fiscal 2007First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total(in thousands)Total revenues

$
302,945

$
197,766

$
180,163

$
199,830

$
880,704Net income


141,008


81,151


71,172


78,000


371,331


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

21

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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.

The
following table shows the approximate weighted average loan performance assumptions at September 30, 2007 for our private label loan trusts:

|                          |  |      |   |    |   |   |   | Percentage discount rate |  
|------------------------- |  | ---- | - | -- | - | - | - | ------------------------ | -
|
|
|
|Private label loan trusts |  | 9.68 | % | 40 | % | 8 | % | 12.25                    | %

22

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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.

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 annual rate of prepayments that we use to estimate the fair value of our residual and structural advisory fee receivables. The increase of this assumption from an
average over the life of the trusts of 7% to 8% resulted in a decrease in the fair value of the residual receivable of $36.2 million and a decrease in the fair value of the additional
structural advisory fee receivable of $3.5 million. We recognized both of these decreases in the third quarter of fiscal 2007.

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 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 residual 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, as of the date of
this quarterly report, 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 have
adjusted 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 residual receivable of $25.2 million which was recognized in the first quarter of
fiscal 2008.

Discount RateAdditional Structural Advisory Fees.We base the discount rate that we use to estimate the fair
value of our additional structural advisory fees on the 10-year U.S. Treasury Note rate plus 200 basis points. We believe that such a spread is 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 structural and corporate debt securities. Between the
first quarters of fiscal 2008 and 2007, the 10-year U.S. Treasury Note rate decreased four basis points. We applied a discount rate of 6.59% at September 30, 2007 and 6.63% at
September 30, 2006. An increase in the 10-year U.S. Treasury Note rate has the effect of decreasing the estimated fair value of

23

---



our
structural advisory fees receivable, while a decrease in the rate has the opposite effect on our estimate of fair value.

Four
private label loan trusts have issued auction rate notes to finance, in part, the purchase of student loans. Interest rates for the auction rate notes are determined from time to
time at auction. As of September 30, 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 considers both current auction rates for each trust and expected auction rates based on the historical performance of the auction rate market.

Except
for the changes to the discount rates applied to residuals and additional structural advisory fees, we did not materially change any valuation assumptions during the first
quarters of fiscal 2008 or 2007. We will continue to monitor the performance of the trust assets against our expectations, and will make such adjustments to our estimates as we believe are necessary
to value properly our receivables balances at each balance sheet date.



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 defaults generally have the same effect as
increases in prepayments. If defaults increase beyond the level of expected third-party reimbursement, then these changes will have an additional negative effect on the value of our additional
structural advisory fees and residuals. 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 September 30, 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 September 30, 2007, and changes in the assumed spread between

24

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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 |                                  | $ | 162,139 |   | $                                | 161,463
|                        | Change in receivables balance  |                                  |   | 0.83    | % |                                  | 0.41   
|Default recovery rate:  |                                |                                  |   |         |   |                                  |        
|                        | Total structural advisory fees |                                  | $ | 160,807 |   | $                                | 160,807
|                        | Change in receivables balance  |                                  |   | 0.00    | % |                                  | 0.00   
|Annual prepayment rate: |                                |                                  |   |         |   |                                  |        
|                        | Total structural advisory fees |                                  | $ | 168,726 |   | $                                | 164,637
|                        | Change in receivables balance  |                                  |   | 4.92    | % |                                  | 2.38   
|Discount rate:          |                                |                                  |   |         |   |                                  |        
|                        | Total structural advisory fees |                                  | $ | 172,902 |   | $                                | 166,621
|                        | Change in receivables balance  |                                  |   | 7.52    | % |                                  | 3.62   

|                     |                                | Change in assumption |   |         |    | Change in assumption |        
|-------------------- | ------------------------------ | -------------------- | - | ------- | -- | -------------------- | -------
|
|
|Forward LIBOR rates: |                                |                      |   |         |    |                      |        
|                     | Total structural advisory fees |                      | $ | 149,692 |    | $                    | 155,084
|                     | Change in receivables balance  |                      |   | (6.91   | )% |                      | (3.56  

|                        |                               | Percentage change in
assumptions |   |         |    | Percentage change in assumptions |        
|----------------------- | ----------------------------- | -------------------------------- | - | ------- | -- | -------------------------------- | -------
|
|
|
|Default rate:           |                               |                                  |   |         |    |                                  |        
|                        | Total residual fees           |                                  | $ | 784,980 |    | $                                | 776,286
|                        | Change in receivables balance |                                  |   | 2.21    | %  |                                  | 1.08   
|Default recovery rate:  |                               |                                  |   |         |    |                                  |        
|                        | Total residual fees           |                                  | $ | 767,822 |    | $                                | 767,901
|                        | Change in receivables balance |                                  |   | (0.02   | )% |                                  | (0.01  
|Annual prepayment rate: |                               |                                  |   |         |    |                                  |        
|                        | Total residual fees           |                                  | $ | 852,873 |    | $                                | 809,210
|                        | Change in receivables balance |                                  |   | 11.05   | %  |                                  | 5.37   
|Discount rate:          |                               |                                  |   |         |    |                                  |        
|                        | Total residual fees           |                                  | $ | 922,165 |    | $                                | 840,717
|                        | Change in receivables balance |                                  |   | 20.08   | %  |                                  | 9.47   

|                     |                               | Change in assumption |   |         |    | Change in assumption |        
|-------------------- | ----------------------------- | -------------------- | - | ------- | -- | -------------------- | -------
|
|
|Forward LIBOR rates: |                               |                      |   |         |    |                      |        
|                     | Total residual fees           |                      | $ | 734,731 |    | $                    | 751,394
|                     | Change in receivables balance |                      |   | (4.33   | )% |                      | (2.16  

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|                                                                 |                               | Change in assumption |   |         |   | Change in assumption |        
|---------------------------------------------------------------- | ----------------------------- | -------------------- | - | ------- | - | -------------------- | -------
|
|
|Change in assumed spread between LIBOR and auction rate indices: |                               |                      |   |         |   |                      |        
|                                                                 | Total residual fees           |                      | $ | 777,033 |   | $                    | 772,504
|                                                                 | Change in receivables balance |                      |   | 1.18    | % |                      | 0.59   

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.



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 September 30, 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.

26

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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 months ended September 30, 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 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.

Our
estimates of the allocation by marketing channel of our securitization revenues for the first quarters 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    |  |                    |  |   |       |     |    |                  |     
|September 2006 |  | Direct to consumer |  | $ | 973   |     | 70 |                  | 14.7
|               |  | School channel     |  |   | 413   |     | 30 |                  | 7.3 
|               |  |                    |  |   |       |     |    |                  |     
|               |  | Total              |  | $ | 1,386 |     |    |                  |     
|               |  |                    |  |   |       |     |    |                  |     
|               |  | Blended yield(2)   |  |   |       |     |    |                  | 12.5

---

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

27

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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.

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 increased to $177.5 million during the first quarter of fiscal 2008 from
$173.3 million during the first quarter of fiscal 2007. The increase in up-front structural advisory fees between periods was primarily due to an increase in the volume of loans
securitized offset by a decrease in the up-front structural advisory fees as a percentage of the private label loan volume securitized, or up-front structural advisory fee
yield. The securitization trust we facilitated in the first quarter 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. As of the date of this quarterly report, we
do not believe that the securitization trust we expect to facilitate in the second fiscal quarter will issue Triple B-rated securities.

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 first quarter of fiscal 2008:

|                                      |  | Up-front structural advisory fees
|------------------------------------- |  | ---------------------------------
|
|
|Three months ended September 30, 2007 |  | $                                

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 increased to $27.2 million during the first quarter of fiscal 2008 from $18.6 million during
the first quarter of fiscal 2007. The increase in additional structural advisory fees between periods was primarily due to increases in the aggregate securitization volume.

28

---



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 first quarter of fiscal 2008:

|                                      |  | Additional structural advisory fees
|------------------------------------- |  | -----------------------------------
|
|
|Three months ended September 30, 2007 |  | $                                  

The
following table summarizes the changes in our estimate of the fair value of the structural advisory fees receivable for the first quarters of fiscal 2008 and 2007:

Three months ended
September 30,2007

2006(in thousands)Fair value at beginning of period

$
133,644

$
88,297Additions from new securitizations


24,304


16,586Trust updatesPassage of time (fair value accretion)


2,410


1,590Other factors


449


375Net accretion


2,859


1,965Fair value at end of period

$
160,807

$
106,848


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 forward LIBOR rate experience, which we also consider in our estimates. We use an implied forward LIBOR curve 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 quarter of fiscal 2008, 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. During the first quarter 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 $2.0 million. The increase in both periods was primarily due to the accretion of discounting inherent in the fair value estimates.

For
a discussion of changes we made during 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 increased to $102.9 million during the first quarter of fiscal 2008 from $68.7 million during the first quarter of
fiscal 2007. The increase in service revenues from residuals during the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 was

29

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primarily
a result of a change in yield and loan mix, an increase in securitization volume, and the positive impact of accretion of the discounting inherent in the fair value estimates due to the
passage of time, offset in part by an increase in the discount rate assumption we use to value the residual receivable for certain securitization trusts. The issuance of Triple B-rated
securities in the securitization completed during the first quarter of fiscal 2007 resulted in a higher up-front structural advisory fee yield, but decreased the amount of residuals we
expect to receive, from the securitization trust compared to the securitization trusts we facilitated in the first quarter of fiscal 2008, which did not issue Triple B-rated securities.

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 quarter of fiscal 2008:

|                                      |  |   |           | Residuals
|------------------------------------- |  | - | --------- | ---------
|
|
|Three months ended September 30, 2007 |  | $ | 2,027,079 |          

The
following table summarizes the changes in our estimate of the fair value of the residuals receivable for the first quarters of fiscal 2008 and 2007:

Three months ended
September 30,2007

2006(in thousands)Fair value at beginning of period

$
665,115

$
452,823Additions from new securitizations


116,972


56,755Trust updatesPassage of time (fair value accretion)


19,903


13,709Increase in discount rate assumption


(25,182
)

Other factors


(8,829
)

(1,801
)Net accretion


(14,108
)

11,908Fair value at end of period

$
767,979

$
521,486


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 discount rate or other 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 forward LIBOR rates experience, which we also consider in our
estimates. We use an implied forward LIBOR curve 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 $14.1 million during the first quarter of
fiscal 2008 and an increase of $11.9 million during the first quarter of fiscal 2007. During the first quarter of fiscal 2008, the positive impact of the passage of time was more than offset by
an increase in our discount rate assumption. For a discussion of our decision during the first quarter of fiscal 2008 to increase our discount rate assumption to 12% for all securitization trusts
other than those four that have issued Triple B-rated

30

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securities,
see "Executive SummaryApplication of Critical Accounting Policies and EstimatesService Revenue and ReceivablesDiscount
RateResiduals." In addition, our estimate of the fair value of residuals decreased by approximately $8.8 million during the first quarter of fiscal 2008 as a result of other
factors, primarily a decrease in the forward LIBOR curve and prepayments on the underlying student loans. 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. While prepayment rates are still elevated, as of the date of this quarterly report we observe in general that prepayments have been
improving compared to prior actual levels. During the first quarter of fiscal 2007, the increase was primarily due to the positive impact of the passage of time.



Processing fees from TERI increased to $46.2 million for the first quarter in fiscal 2008 from $37.1 million for the first 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 period. The volume
of private label loans we actively disbursed increased to $2.2 billion for the first quarter of fiscal 2008 from $1.5 billion for the first quarter of fiscal 2007.



Administrative and other fees increased to $21.8 million for the first quarter of fiscal 2008 from $4.2 million for the first quarter of fiscal
2007. The increases were primarily due to marketing fees earned by us from the securitization of our proprietary brand loans and increased reimbursed expenses that we generated between periods from
marketing coordination services provided to some of our clients. We generated approximately $20.0 million in marketing fees and reimbursable expenses from marketing coordination services during
the first quarter of fiscal 2008, compared to approximately $2.9 million in marketing fees and reimbursable expenses from marketing coordination services during the first quarter of fiscal
2007. We earned administrative fees for the daily management of the
securitization trusts of approximately $1.7 million during the first quarter of fiscal 2008 and $1.3 million during the first quarter of fiscal 2007.

Net Interest Income

Net interest income increased to $4.4 million during the first quarter of fiscal 2008 from $1.1 million during the first quarter of fiscal 2007. The
increase in net interest income is primarily due to higher average cash balances available for investment and the net interest income of $2.3 million earned by our subsidiary, Union Federal, in
the current year period.

Non-interest Expenses

Total non-interest expenses increased to $97.5 million during the first quarter of fiscal 2008 from $65.6 million for the first quarter
of fiscal 2007. Compensation and benefits increased to $32.0 million for the first quarter of fiscal 2008 from $31.6 million for the first quarter of fiscal 2007. General and
administrative expenses increased to $65.5 million for the first quarter of fiscal 2008 from $34.0 million for the first quarter of fiscal 2007.

The
increase in compensation and benefits expense was primarily the result of an increase in personnel. Our average total number of employees was 12% higher during the first quarter of
fiscal 2008 than our average number of employees during the corresponding prior year period. We hired additional personnel to meet the needs of our growing loan processing and securitization
activities. Partially offsetting this increase was a decline in incentive compensation accruals for this quarter compared to the first quarter of fiscal 2007.

31

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General and administrative expenses increased during the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007 as a result of increases in several categories of
expenses. Marketing coordination expenses increased to $26.8 million for the first quarter of fiscal 2008 from $6.3 million for the first quarter of fiscal 2007. The increase in
marketing coordination expense was primarily due to the expansion of our marketing coordination services to a larger client base as well as the testing of our proprietary brands. Equipment expenses
increased to $3.9 million for the first quarter of fiscal 2008 from $2.9 million for the first quarter of fiscal 2007. Depreciation and amortization expense increased to
$4.4 million for the first quarter of fiscal 2008 from $3.9 million for the first quarter 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
$4.5 million for the first quarter of fiscal 2008 from $3.3 million for the first quarter of fiscal 2007 primarily due to an increase in legal costs. Temporary employment services costs
increased to $3.2 million for the first quarter of fiscal 2008 from $2.1 million for the first quarter of fiscal 2007. External call center costs increased to $10.6 million for
the first quarter of fiscal 2008 from $6.9 million for the first quarter of fiscal 2007. The increases in temporary employment services expense and external call center costs were primarily due
to increases in personnel 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.

We
expect that our annual operating expenses will continue to increase as we devote additional resources to marketing coordination services and the expected increasing loan volumes
facilitated for our existing and new clients.

Income Tax Expense

Income tax expense increased to $113.6 million for the first quarter of fiscal 2008 from $96.3 million for the first quarter of fiscal 2007. The
increase in income tax expense was primarily the result of an increase in the amount of income before income tax expense between periods. During the first quarter of fiscal 2008, our effective tax
rate, or the income tax expense as a percentage of income before income tax expense, decreased to 40.23% from an effective tax rate of 40.59% for the first quarter 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 quarter of fiscal 2008 as compared to the first quarter 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, and we expect that they will continue to consist of, capital expenditures, working capital, business
development expenses, general corporate expenses, repurchases of our common stock, quarterly cash dividends and potential acquisitions.

Short-term Funding Requirements

We expect to fund our short-term liquidity requirements through cash flow from operations and various sources of funding available to Union Federal or
us to finance education loans. We believe, based on our current operating plan, that our current cash and cash equivalents will be sufficient to fund our operations through at least fiscal 2008.

32

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Long-term Funding Requirements

We expect to fund the growth of 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 business development activities, which could harm the growth of
our business, or we may be required to reduce or eliminate our quarterly cash dividends to our stockholders.

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



Treasury Stock

We had treasury stock of $183.8 million at September 30, 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 September 30, 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 September 30, 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 September 30, 2007 and June 30, 2007, we had $380.3 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 2007 securitization transactions, offset by cash used to fund
operations and cash dividends. Cash, cash equivalents and investments at September 30, 2007 primarily included investments in variable rate demand notes, mortgage backed securities, Federal

33

---



Home
Loan Bank bonds and funds deposited in a money market fund that invests in short-term obligations of the U.S. Treasury and repurchase agreements fully collateralized by obligations of
the U.S. Treasury.

Loans Held for Sale

Our loans held for sale increased to $200.9 million at September 30, 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. Our loans held for sale at September 30, 2007 and June 30, 2007 were comprised of
education and mortgage loans.

Service Receivables

Our service receivables increased to $943.1 million at September 30, 2007 from $809.7 million at June 30, 2007, primarily as a result
of the additional structural advisory fees and residuals generated from the September 2007 securitization transactions.

Property and Equipment, net

During the first quarter of fiscal 2008, our property and equipment, net increased by $0.3 million, as $4.2 million of depreciation expense recorded
during the period was more than offset by $4.4 million we incurred on the expansion and improvement of our loan processing facilities and systems. In the first quarter 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 September 30, 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 decreased to $25.5 million at September 30, 2007 from $26.9 million at June 30, 2007. The decrease in other
prepaid expenses was primarily due to a decrease in prepaid marketing expenses of approximately $5.0 million, which was partially offset by an increase in prepaid maintenance expenses of
$2.6 million.

Other Assets

Other assets increased to $14.6 million at September 30, 2007 from $7.2 million at June 30, 2007 primarily due to $6.5 million
in principal and fees owed to Union Federal, as a result of cancelled loans from borrowers.

Deposits

Deposits increased to $123.8 million at September 30, 2007 from $53.5 million at June 30, 2007. The increase in deposits was primarily
due to an increase in brokered deposits of $65.0 million. Included in deposits at September 30, 2007 was $75.9 million of brokered deposits, primarily brokered certificates of
deposits issued to finance education loans.

34

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Education Loan Warehouse Facility

We had $94.0 million in borrowings outstanding at September 30, 2007 under the education loan warehouse facility maintained by our wholly owned
subsidiary 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 $49.8 million at September 30, 2007 from $59.0 million at June 30, 2007. Incentive
compensation accruals were approximately $17.1 million lower at September 30, 2007 as compared to June 30, 2007 as a result of our payment of 2007 accruals in the first quarter of
fiscal 2008. Our accounts payable were $8.2 million higher at September 30, 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 $58.2 million at September 30, 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 income earned during the first quarter of fiscal 2008.

Net Deferred Income Tax Liability

Our net deferred income tax liability increased to $289.3 million at September 30, 2007 from $247.7 million at June 30, 2007. We have
a net deferred income tax liability primarily because, under 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 increased primarily as a result of the increase in additional structural advisory fees and residual revenue
recognized during the first quarter of fiscal 2008, which more than offset the recognition of our share of taxable income from the securitization trusts.

Other Liabilities

Other liabilities decreased to $10.6 million at September 30, 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 quarter of fiscal 2008 on our note payable to TERI and capital lease obligations.

Contractual Obligations

As of September 30, 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-Finance Condition, Liquidity and Capital Resources-Contractual Obligations" in our annual report on Form 10-K for the
fiscal year ended June 30, 2007.

Cash Flows

Our net cash provided by operating activities decreased to $12.1 million for the first quarter of fiscal 2008, compared to cash provided by operating
activities of $146.3 million for the first quarter of fiscal 2007. The decrease in cash provided by operations resulted primarily from an increase of $164.1 million in loans held for
sale, the financing of which is categorized under cash flows from financing activities.

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Our
cash used in investing activities was $28.9 million for the first quarter of fiscal 2008, compared to $8.7 million provided by investing activities for the first
quarter of fiscal 2007. Net cash used in investing activities during the first quarter of fiscal 2008 was primarily a result of net purchases of investments.

Net
cash provided by financing activities increased to $137.6 million during the first quarter of fiscal 2008, compared to net cash used in financing activities of
$21.1 million during the first quarter of fiscal 2007. Net cash provided by financing activities increased during the first quarter of fiscal 2008 primarily as a result of an increase in cash
provided by deposits and the education loan warehouse facility, offset in part by an increase in cash used for dividends.

We
expect that our capital expenditure requirements for the final three quarters of fiscal 2008 will be approximately $21.4 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:



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, 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

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should
not rely on those forward-looking statements as representing our views as of any date subsequent to November 9, 2007.

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 September 30, 2007, cash, cash equivalents and investments consisted primarily of investments in
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 September 30, 2007 consisted of
$11.9 million in mortgage loans and $189.0 million in education loans. Our loans held for sale are recorded at lower of cost or fair value and are primarily sensitive to interest rates.
At September 30, 2007, our mortgage loans had an average interest rate of approximately 6.5% and our student loans had an average interest rate of approximately 11.2%. All of our education
loans and approximately 72% of our mortgage loans have variable interest rates. We held deposits of $123.8 million at September 30, 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 September 30, 2007, our deposits had an
average interest rate of approximately 5.1%. Less than 1% of our deposits have fixed interest rates in excess of 12 months. Approximately 95% 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 September 30, 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 September 30, 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

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information
required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the 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 September 30, 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 September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II.    Other Information

Item 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 risk factor entitled, "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," as compared to the
version disclosed in our annual report on Form 10-K for the fiscal year ended June 30, 2007.

We derive a significant portion of our revenue and substantially all of our income from structuring securitization transactions; our financial results
and future growth would 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
84% of our total revenue for the first quarter of fiscal 2008, 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.

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 financial performance and future growth depend in large part on our continued success in structuring 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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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.

Under
the terms of some of our contracts with key lender clients, we have an obligation to securitize loans originated by those lenders periodically. We may agree with other lenders to
securitize more frequently in the future. If we do not honor these obligations, we may be required to pay liquidating or other damages, which could adversely affect our results of operations.

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 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. If the actual performance of some or all of the securitization trusts were to vary from the key assumptions we use, we may need to adjust 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. As of the date of this quarterly report, loans in our securitization trusts have been experiencing higher
prepayment rates than we estimated would occur at certain points in the life of the loans. 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. During the third quarter of fiscal 2007 and the first quarter of fiscal 2008, we altered certain key
assumptions which could negatively impact future securitization yields. 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Application of Critical Accounting
Policies and Estimates." In particular, economic, regulatory, competitive and other factors affecting prepayment, default and recovery rates on the underlying

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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.

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.

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

Our quarterly revenue, operating results and profitability have varied and may continue to vary significantly on a quarterly basis. 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. Variations in the size or structure of each securitization
transaction, as well as the composition of the loan pools being securitized, will continue to result in variability of our operating results on a quarterly basis, even if we complete securitizations
each quarter. The timing, size and structure of our planned securitization activities may be affected by the seasonality of student loan applications and loan originations, conditions in the
asset-backed securities market, as well as the other factors that could adversely affect our securitization activities. Recent volatility in the asset-backed securities market could effect the timing,
size, structure or profitability of future capital markets transactions, including any capital markets transaction that we plan to facilitate in the remaining quarters of fiscal 2008. 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.

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.

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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 2008. 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 guarantee fees, the party proposing the modification has the option of terminating the guaranty agreement, effective as of May 1 of that
calendar year.

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. 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. On April 16, 2007, an investor group that included Bank of America and
JPMorgan Chase Bank, our two largest lender clients, announced that they signed a definitive agreement to purchase Sallie Mae. The investment in Sallie Mae by these lender clients could result in
reduction or possible

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termination
of future loan originations from these lenders. It may also impact our ability to negotiate favorable fees when negotiating future contracts with these lender clients. 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.

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 $46.2 million, or 12% of total revenue, for the first

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quarter
of fiscal 2008, and $37.1 million or 12% of total revenue, for the first quarter 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:



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 September 30, 2007, TERI had a Baa3 counterparty rating from Moody's Investors Service, which
is the lowest investment grade rating, and an insurer financial strength rating of A+ from Fitch Ratings, which was subsequently downgraded to a rating of A, outlook negative on October 25,
2007. TERI also held a rating of A from Dominion Bond Rating Service as of September 30, 2007. Dominion Bond Rating Service initiated coverage of TERI on May 15, 2007. 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. Finally, if TERI's
ratings were downgraded below the ratings TERI held in January 2003, or if Moody's Investors Service or Fitch Ratings were to place a negative watch on TERI, our agreement with Bank of America
relating to the purchase of direct-to-consumer loans would terminate. In January 2003, TERI had a Baa3 counterparty rating from Moody's Investors Service and an insurer
financial strength rating of A from Fitch Ratings. If TERI experiences a material adverse financial change such as a reduction of its credit rating below investment grade, Bank of America could
suspend the processing of new applications for school channel loans. In each such case, our business would be adversely affected.

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

As of September 30, 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 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 quarter 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:



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

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

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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.

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.

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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 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 September 30, 2007, our assets have grown to $1.6 billion. Our revenue increased to $380.0 million for the first
quarter of fiscal 2008 from $302.9 million for the first quarter of fiscal 2007. 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.

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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 the
time that has elapsed since our prior review. 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 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

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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.

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.

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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 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, proposed legislation 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.

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Recent litigation has sought to re-characterize certain loan marketers and other originators as lenders; if litigation on similar theories
were successful against us or any third-party marketer, 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 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:



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In
the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been brought against that company. 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 30% of the outstanding shares of our common stock. As a
result, these stockholders, if acting together, could substantially influence matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other
extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership
may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to 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 on November 30, 2006, we are now 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

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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:



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



None.



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

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of
approximately $8.9 million and expenses of the offering of approximately $2.5 million. From the effective date of the registration statement through September 30, 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.



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 three months ended September 30, 2007. Through September 30, 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 September 30, 2007, 8,830,900 shares of our common stock may yet be purchased under this program, which does not have a fixed expiration date.

Item 5Other Information

On September 25, 2007, we entered into an eleventh supplement to our master loan guaranty agreement with TERI, effective as of July 1, 2007. The additional
supplement provides that for each fiscal year between July 1, 2007 and June 30, 2011, TERI may make an annual election to adjust within certain parameters the amount of its administrative fee and the
amount deposited in the account that is subsequently pledged to the securitization trust that purchases the loans. TERI's election applies to all securitizations of TERI-guaranteed loans completed
during the applicable fiscal year, and we have
agreed to attempt in good faith to structure our securitization transactions to accommodate TERI's election.

The
foregoing summary is qualified in its entirety by the eleventh supplement, a copy of which is attached as exhibit 10.1 to this quarterly report on Form 10-Q.

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: November 9, 2007 |  | By:                             
|Date: November 9, 2007 |  | By:                             
|Date: November 9, 2007 |  | By:                             

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                                                                                                             
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1           |  | Eleventh Supplement to Master Loan Guaranty Agreement, dated as of July 1, 2007, by and between the registrant and The Education Resources Institute, Inc.                                              
|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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