Table of Contents



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



FORM 10-Q



(MARK ONE)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For The Quarterly Period Ended March 31, 2009ORo

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


Commission File Number 001-31825



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



Delaware(State or Other Jurisdiction of
Incorporation or Organization)

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

02199-8157(Zip Code)


Registrant's
telephone number, including area code:(617) 638-2000



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

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

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

Large accelerated filer ý

Accelerated filer o

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

Smaller reporting company o


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

As of May 7, 2009, the registrant had 99,125,008 shares of Common Stock, $0.01 par value per share, outstanding.



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Table of Contents

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES        Table of Contents



Part I. Financial InformationItem 1



Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2009 and
June 30, 2008

1Condensed Consolidated Statements of Operations for the three
months and nine months ended March 31, 2009 and 2008

2Condensed Consolidated Statement of Changes in Stockholders' Equity for
the nine months ended March 31, 2009

3Condensed Consolidated Statements of Cash Flows for the nine months ended
March 31, 2009 and 2008

4Notes to Unaudited Condensed Consolidated Financial
Statements

5Item 2



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

36Item 3



Quantitative and Qualitative Disclosures about Market
Risk

78Item 4



Controls and Procedures

79Part II. Other InformationItem 1



Legal Proceedings

80Item 1A



Risk Factors

80Item 2



Unregistered Sales of Equity Securities and Use of
Proceeds

104Item 6



Exhibits

104SIGNATURES

105EXHIBIT INDEX

106


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Table of Contents

Part I. Financial Information

Item 1    Financial Statements

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

March 31,
2009

June 30,
2008ASSETSCash and cash equivalents

$
109,205

$
70,280Federal funds sold


25,089


80,215Investments


75,587


70,629Loans held for sale


417,145


497,324Service receivables:Structural advisory fees


60,846


113,842Residuals


7,651


293,255Processing fees from The Education Resources Institute (TERI)


85


4,086Total service receivables


68,582


411,183Property and equipment


88,620


92,273Less accumulated depreciation and amortization


(64,787
)

(54,592
)Property and equipment, net


23,833


37,681Goodwill





1,701Intangible assets, net


2,139


1,956Other prepaid expenses


6,687


15,377Mortgage loans held to maturity, net


9,909


10,754Income taxes receivable


169,960


Other assets


5,880


3,798Total assets

$
914,016

$
1,200,898LIABILITIES AND STOCKHOLDERS' EQUITYLiabilities:Deposits

$
132,096

$
244,113Education loan warehouse facility


246,050


242,899Federal Reserve Bank borrowings


55,000


Accounts payable and accrued expenses


28,246


20,543Income taxes payable





31,275Net deferred income tax liability


2,928


10,385Other liabilities


9,695


14,071Total liabilities


474,015


563,286Commitments and contingenciesStockholders' equity:Preferred stock, par value $0.01 per share; 19,739 and 19,940 shares authorized at March 31, 2009 and June 30, 2008, respectively; no shares issued
or outstanding





Series A non-voting convertible preferred stock, par value $0.01 per share; 60 shares authorized at March 31, 2009 and June 30, 2008; no
shares issued or outstanding





Series B non-voting convertible preferred stock, par value $0.01 per share; 201 shares authorized at March 31, 2009 and June 30, 2008; 133
shares issued and outstanding at March 31, 2009 and no shares issued and outstanding at June 30, 2008


1


Common stock, par value $0.01 per share; 250,000 shares authorized at March 31, 2009 and June 30, 2008; 106,764 and 106,456 shares issued at
March 31, 2009 and June 30, 2008, respectively; 99,121 and 98,886 shares outstanding at March 31, 2009 and June 30, 2008, respectively


1,068


1,065Additional paid-in capital


429,935


300,498Retained earnings


192,995


519,933Treasury stock, 7,643 and 7,570 shares held at March 31, 2009 and June 30, 2008, respectively, at cost


(184,246
)

(183,993
)Accumulated other comprehensive income


248


109Total stockholders' equity


440,001


637,612Total liabilities and stockholders' equity

$
914,016

$
1,200,898


See accompanying notes to unaudited condensed consolidated financial statements.

1

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

Three months ended
March 31,

Nine months ended
March 31,2009

2008

2009

2008Service revenues:Up-front structural advisory fees

$


$
984

$


$
179,050Additional structural advisory fees:From new securitizations











24,304Trust updates


(4,063
)

(13,684
)

(51,466
)

(21,600
)Total additional structural advisory fees


(4,063
)

(13,684
)

(51,466
)

2,704Residuals:From new securitizations











116,972Trust updates


(136,366
)

(277,430
)

(285,604
)

(451,284
)Total residuals


(136,366
)

(277,430
)

(285,604
)

(334,312
)Processing fees from TERI


258


25,328


2,888


108,857Administrative and other fees


3,757


5,217


12,158


30,107Total service revenues


(136,414
)

(259,585
)

(322,024
)

(13,594
)Net interest income


5,798


7,797


20,409


18,571Total revenues


(130,616
)

(251,788
)

(301,615
)

4,977Non-interest expenses:Compensation and benefits


8,782


27,670


34,334


79,407General and administrative expenses


18,606


95,877


62,593


214,947Unrealized losses on loans held for sale


47,584





98,114


Total non-interest expenses


74,972


123,547


195,041


294,354(Loss) before income taxes


(205,588
)

(375,335
)

(496,656
)

(289,377
)Income tax (benefit)


(64,934
)

(145,785
)

(169,718
)

(110,972
)Net (loss)

$
(140,654
)
$
(229,550
)
$
(326,938
)
$
(178,405
)Net (loss) per share, basic

$
(1.42
)
$
(2.36
)
$
(3.30
)
$
(1.88
)Net (loss) per share, diluted


(1.42
)

(2.36
)

(3.30
)

(1.88
)Cash dividends declared per share











0.395Weighted average shares outstanding, basic


99,121


97,103


99,067


94,691Weighted average shares outstanding, diluted


99,121


97,103


99,067


94,691


See
accompanying notes to unaudited condensed consolidated financial statements.

2

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY        (unaudited)        (in thousands)

Series B
non-voting
convertible
preferred stock

Common stockIssued

Issued

In treasury





Accumulated
other
comprehensive
incomeAdditional
Paid-in
capital

Retained
earnings

Total
stockholders'
equityShares

Amount

Shares

Amount

Shares

AmountBalances at June 30, 2008








106,456

$
1,065


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

$
519,933

$
109

$
637,612Comprehensive income (loss)Net loss























(326,938
)




(326,938
)Accumulated other comprehensive income


























139


139Total comprehensive loss























(326,938
)

139


(326,799
)Issuance of preferred stock


133


1














125,857








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








308


3


(73
)

(253
)

(3
)







(253
)Stock-based compensation




















5,817








5,817Tax expense from stock-based compensation




















(2,234
)







(2,234
)Balances at March 31, 2009


133

$
1


106,764

$
1,068


(7,643
)
$
(184,246
)
$
429,935

$
192,995

$
248

$
440,001


See accompanying notes to unaudited condensed consolidated financial statements.

3

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

Nine months ended
March 31,2009

2008Cash flows from operating activities:Net loss

$
(326,938
)
$
(178,405
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


13,949


14,532Deferred income tax benefit


(7,457
)

(185,957
)Stock-based compensation


5,817


5,803Unrealized losses on loans held for sale


98,114


Loss on disposal of property and equipment


1,401


Structural advisory fee distributions


1,530


Goodwill impairment


1,701


Change in assets/liabilities:(Increase) in loans held for sale


(17,935
)

(470,553
)(Increase) decrease in structural advisory fees


51,466


(2,704
)Decrease in residuals


285,604


334,312Decrease in processing fees from TERI


4,001


10,909(Increase) decrease in income taxes receivable


(169,960
)

61,423Decrease in other prepaid expenses


8,690


15,437(Increase) decrease in other assets


(2,082
)

2,639(Decrease) in accounts payable and accrued expenses, income taxes payable and other liabilities


(25,190
)

(25,737
)Net cash used in operating activities


(77,289
)

(418,301
)Cash flows from investing activities:Net changes in federal funds sold


55,126


(73,138
)Dispositions of investments


28,781


44,511Purchases of investments


(33,600
)

(25,000
)Purchases of intangible assets


(750
)

Purchases of property and equipment


(935
)

(8,127
)Net change in loans held to maturity


845


Payments to TERI for loan database updates





(186
)Net cash provided by (used in) investing activities


49,467


(61,940
)Cash flows from financing activities:Increase (decrease) in deposits


(112,017
)

221,088Increase in education loan warehouse facility


3,151


242,900Increase in Federal Reserve Bank borrowings


55,000


Repayment of capital lease obligations


(2,758
)

(3,341
)Repayment of notes payable to TERI





(633
)Tax benefit (expense) from stock-based compensation


(2,234
)

662Issuances of common stock, net





900Issuance of non-voting convertible preferred stock, net


125,858


59,800Repurchases of common stock


(253
)

(900
)Cash dividends on common stock





(36,944
)Net cash provided by financing activities


66,747


483,532Net increase in cash and cash equivalents


38,925


3,291Cash and cash equivalents, beginning of period


70,280


95,937Cash and cash equivalents, end of period

$
109,205

$
99,228Supplemental disclosures of cash flow information:Interest paid

$
13,285

$
12,676Income taxes paid

$
41,207

$
49,868Supplemental disclosure of non-cash activities:Acquisition of property and equipment through capital leases

$


$
7,478Conversion of Series A non-voting convertible preferred stock to common stock

$


$
59,800Reclassification of mortgages from held for sale to held to maturity

$


$
11,327


See accompanying notes to unaudited condensed consolidated financial statements.

4

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

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

Nature of Business

The First Marblehead Corporation (FMC, and together with its subsidiaries, the Company) provides outsourcing services for private
education lending in the United States. The Company offers services to national and regional financial institutions and educational institutions for designing and implementing education loan programs
intended to help meet the demand for private education loans. FMC's subsidiary, Union Federal Savings Bank (Union Federal), is a federally chartered thrift that has offered private education loans
directly to consumers and offers residential retail mortgage loans, retail savings products, time deposit products, money market accounts and demand deposit accounts. As a result of its ownership of
Union Federal, FMC is a savings and
loan holding company subject to regulation, supervision and examination by the U.S. Office of Thrift Supervision (OTS).

Historically,
the Company has been entitled to receive structural advisory fees and residuals for its services in connection with securitizations of loans generated by the loan programs
that it has facilitated. In the past, the Company has also received reimbursement for marketing coordination services provided to certain clients, marketing premiums from its proprietary brands and
fees for administrative services provided to the discrete trust vehicles that the Company has formed for securitizations that it has facilitated. The Company has also historically received
reimbursement from The Education Resources Institute, Inc. (TERI) for outsourced services the Company performed on TERI's behalf. TERI is a not-for-profit organization
that functioned as a guarantor of education loans.

As
further described in Note 4 below, FMC sold the trust certificate (Trust Certificate) of its subsidiary NC Residuals Owners Trust, formerly known as GATE Holdings, Inc.,
effective as of March 31, 2009. NC Residuals Owners Trust owned residual interests in certain securitization trusts (NCSLT Trusts) facilitated by the Company. As a result of the sale of the
Trust Certificate, the Company is no longer entitled to residuals receivables from the NCSLT Trusts. The Company continues to have rights to additional structural advisory fees from the NCSLT Trusts,
as well as additional structural advisory fees and residuals from certain trusts other than the NCSLT Trusts. The sale of the Trust Certificate is expected to generate a refund for income taxes
previously paid and eliminate certain future tax liabilities of the Company.

Business Trends and Uncertainties

Education loan asset-backed securitizations have been the Company's sole source of permanent financing for its clients' private
education loan programs. The conditions of the debt capital markets generally, and the asset-backed securities (ABS) market specifically, rapidly deteriorated during the second quarter of fiscal 2008.
This deterioration accelerated during the third quarter of fiscal 2008 and has persisted through May 8, 2009. The Company's business has been and continues to be materially adversely impacted
by the current market dynamics, including an inability to access the securitization market or alternative interim financing facilities. The Company did not complete a securitization transaction during
the second, third or fourth quarters of fiscal 2008 or during the first, second or third quarters of fiscal 2009, and the Company does not expect to complete a securitization in the
near-term. In addition, it expects the structure and pricing terms in future securitizations, if any, to be substantially less favorable than in the past.

5

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

In
addition, credit performance of consumer-related loans generally, and the private education loans held by the various securitization trusts that the Company has facilitated, has been
adversely affected by general economic conditions in the United States, including increasing unemployment rates and less availability of consumer credit. During the third quarter of fiscal 2009, the
Company increased its weighted average gross default rate assumption to 17.85%, an increase of 302 basis points from June 30, 2008 and 847 basis points from June 30, 2007. Credit rating
agencies have taken negative rating actions with respect to certain securitizations that the Company has previously facilitated, including downgrades announced by Moody's Investors Service (Moody's)
on March 11, 2009. In addition, the interest rate, economic and credit environments may continue to have a material negative effect on the value of the Company's service receivables and
portfolio of private education loans.

On
April 7, 2008, TERI filed a voluntary petition for relief (TERI Reorganization) under Chapter 11 of the United States Bankruptcy Code (Bankruptcy Code) in the United
States Bankruptcy Court for the District of Massachusetts (Bankruptcy Court). As of May 8, 2009, TERI continued to operate its business as "debtor-in-possession" under
the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

The
Company's inability to access the securitization markets since September 2007, together with the TERI Reorganization, has had, and will likely continue to have, a material negative
effect on the Company's client relationships, its facilitated loan volume, its ability to structure loan securitizations, the value of its service receivables, and its ability to fully realize the
cost reimbursement and guaranty obligations of TERI. As a result of the TERI Reorganization, certain clients, including JPMorgan Chase Bank, N.A. (JPMorgan Chase), Bank of America, N.A. (Bank of
America) and RBS Citizens, N.A. (RBS), terminated some or all of their agreements with the Company, and the Company has not received processing fees totaling $16,025 from TERI that were due, but
unpaid, prior to the filing of TERI's petition for relief under the Bankruptcy Code. The Company has fully reserved for these processing fees. In addition, the Company's "master" agreements with TERI,
and the Company's agreements with certain clients, have been terminated in the context of the TERI Reorganization.

The
Company has developed, and continues to develop as of the date of this quarterly report, alternatives to the loan guaranty and loan origination services that TERI historically
provided to the Company's clients. The Company has implemented a private education loan program that does not require a third party guaranty. In addition, the Company provides outsourced loan
origination services and portfolio management services to a limited number of clients on a fee-for-service, stand-alone basis. The Company is developing a new private education
loan product that it expects to have available to prospective lender clients in the fourth quarter of fiscal 2009. The success of the product under development will be critical to growing and
diversifying the Company's revenues and client base in the future. Compared to past TERI-guaranteed education loan programs, the Company is designing this loan product to strengthen the
creditworthiness of the resulting assets, through redesigned risk-based pricing and enhanced co-signer participation, and by aligning risk and product options to promote a
greater proportion of immediate-repayment loans, or loans for which payment of principal and interest begins shortly after final disbursement, and interest-only loans, or loans for which
payment of interest begins shortly after disbursement but payment of principal is deferred during enrollment. The Company's near-term financial performance and future growth depend,
however, in large part on its ability to structure securitizations or alternative financings. The Company is uncertain whether

6

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

former,
current or prospective lender clients will be interested in the loan product under development, particularly in the current economic environment. Union Federal is not, as of the date of this
report, able to fund loan originations due to its current lack of funding capacity, and it will be necessary for Union Federal to obtain regulatory clearance before offering such a product. See
"Management's Discussion and Analysis of Financial Condition and Results of OperationsExecutive Summary."

Basis of Presentation

The Company's accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for
complete consolidated financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair statement of the results for
the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions, including the determination of the fair
value of expected future cash flows, that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Interim results are not necessarily indicative of
results to be expected for the entire fiscal year. All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited financial statements should be read in
conjunction with the audited consolidated financial statements and related notes for the fiscal year ended June 30, 2008 included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission (SEC) on August 28, 2008.

Education Loan Market Seasonality and Revenue Related to Securitization Transactions

Origination of education loans is generally subject to seasonal trends, with the volume of loan applications increasing with the
approach of tuition payment dates. Historically, the Company has processed 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 has also tended 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 semester. Historically, this seasonality of loan originations has impacted the timing and size of securitization transactions,
the amount of processing fees from TERI that the Company earned in a particular quarter, and the level of expenses incurred to market and process the higher origination activity.

The
Company expects to facilitate a significantly lower volume of loan applications during fiscal 2009 compared to past fiscal years as a result of, among other factors, conditions in
the debt capital markets and the TERI Reorganization. The Company processed a significantly lower application volume during the summer months of calendar 2008 compared to calendar 2007, as the
Company's clients instructed TERI to stop accepting applications or suspended their marketing of TERI-guaranteed loans and certain clients terminated their agreements with the Company.
During the first nine months of fiscal 2008, the Company facilitated loans with an aggregate principal balance of $4,732,066, of which $63,741 was not TERI-guaranteed. During the same
period, the Company received $108,857 in processing fees from TERI. During the first nine months of fiscal 2009, the Company

7

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

facilitated
loans with an aggregate principal balance of $248,091, of which $142,321 was not TERI-guaranteed. During the same period, the Company received $2,888 in processing fees from
TERI. Processing fees from TERI have historically consisted of reimbursement of expenses incurred by the Company relating to services performed on behalf of TERI under the terms of the master
servicing agreement between the Company and TERI (Master Servicing Agreement). In June 2008, the Bankruptcy Court entered an order approving a motion by TERI to reject the Master Servicing Agreement
effective May 31, 2008, and to enter into a transition services agreement (Transition Services Agreement), which expired on September 29, 2008.

If
the Company is able to facilitate the securitization of TERI-guaranteed loans in the future, its up-front structural advisory fee yields would likely decline
and market conditions would likely dictate that the Company obtain additional credit enhancement for such securitizations, the cost of which would result in lower revenues and additional cash
requirements. Variations in the size, timing and type of financing transactions the Company facilitates has in the past, and may in the future, contribute to variability in quarterly operating
results.

At
March 31, 2009, the principal balance of loans facilitated and available to FMC for securitization was $1,754,410. See Note 14. Under the terms of its purchase
agreements with lender clients, FMC generally has an obligation to use its best efforts to facilitate the purchase of the client's private education loans during a specified loan purchase period. The
length of the loan purchase period varies by client and generally ranges from 195 days to 555 days following final loan disbursement. Under the terms of certain of its purchase
agreements, if FMC fails to facilitate a purchase in breach of its obligations, FMC's liability would be limited to liquidated damages of one percent of the total principal amount of the loans as to
which the loan purchase period had expired. Those purchase agreements that limit FMC's liability to liquidated damages generally provide that FMC's obligation to close a securitization is subject to
the condition that no "market disruption event" has occurred. Under certain of these purchase agreements, the TERI Reorganization constitutes a "market disruption event," suspending FMC's contractual
obligation to close a securitization. Any liquidated damages would be due at expiration of the relevant loan purchase period, which would not occur for a period of time after the market disruption
event ceases. FMC's purchase agreements applicable to approximately $1,274,097 of FMC's facilitated loan volume available for securitization as of March 31, 2009 do not include a liquidated
damages provision in the event FMC fails to facilitate a securitization in breach of its obligations, and the amount of the Company's potential liability with respect to such loans is not determinable
at this time.

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

PHEAA

As of March 31, 2009, there were seven loan servicers servicing loans on behalf of the Company or the trusts. 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 March 31, 2009, Pennsylvania Higher Education Assistance Agency (PHEAA) serviced a significant majority of the loans

8

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Table of Contents

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

for
which the Company facilitated origination. PHEAA also operates under the name American Education Services (AES).

Revenue Concentration

The Company did not facilitate any securitizations in the first nine months of fiscal 2009. The Company earned $320,300 in
securitization-related revenues from the trusts used to securitize education loans in the first nine months of fiscal 2008. The securitization trusts facilitated during the first quarter of fiscal
2008 purchased private education loans from several lenders, including JPMorgan Chase, Bank of America, RBS and Union Federal. The Company did not recognize more than 10% of total revenue from any
other client in the first nine months of fiscal 2008.

Significant Accounting Policies and Estimates

The preparation of the Company's consolidated financial statements requires the Company to make estimates, assumptions and judgments
that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. The Company bases its estimates and judgments on historical
experience and on various other factors, and actual results may differ from these estimates under varying assumptions or conditions. On an ongoing basis, the Company evaluates its estimates and
judgments, particularly as they relate to accounting policies that the Company believes are most important to the portrayal of the Company's financial condition and results of operations, such as its
accounting policies involving the recognition and valuation of the Company's securitization-related service revenues and the valuation of the portfolio of private education loans held for sale by
Union Federal. For a discussion of the Company's critical accounting policies, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsExecutive
SummaryApplication of Critical Accounting Policies and Estimates." For a discussion of changes made during fiscal 2009 to the assumptions used to determine the fair value of the Company's
residual and additional structural advisory fees receivables, see Note 2.

Cash and Cash Equivalents

Cash and cash equivalents at March 31, 2009 included $106,522 held in money market funds and $2,683 in non-interest
bearing deposit accounts. Included in cash and cash equivalents are compensating balances held in money market funds supporting various financing arrangements of $2,056 and $7,550 at March 31,
2009 and June 30, 2008, respectively.

Investments

The Company classifies all of its short-term investments as either held-to-maturity or
available-for-sale investments. Held-to-maturity investments are carried at amortized cost. Available-for-sale investments are
carried at fair value. The Company reports unrealized gains and losses within comprehensive income. Investments at March 31, 2009 and June 30, 2008 primarily consisted of variable rate
demand notes. Variable rate demand notes may be redeemed as interest rates reset, which occurs at least weekly in the case of all securities held by the Company at March 31, 2009 and
June 30, 2008. The carrying value of available-for-sale securities was $75,587 and $70,629, including an unrealized gain of $248 and $109 as of March 31, 2009 and
June 30, 2008 respectively.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Loans Held for Sale

Loans held for sale at March 31, 2009 included outstanding principal balance and interest receivable of approximately $515,074
and $7,558, respectively, of variable-rate education loans, of which loans with a principal and interest receivable balance of $260,050 were pledged as collateral under the education loan
warehouse facility of UFSB Private Loan SPV, LLC (UFSB-SPV), a subsidiary of Union Federal. See Note 15. Interest income is recognized on the interest method. Loans held for
sale are carried at the lower of cost or fair value. The carrying value as of March 31, 2009 included a fair value adjustment of $105,486. A reduction in the carrying value of loans held for
sale of $98,114 was recorded during the nine-month period ended March 31, 2009. As of March 31, 2009, $14,188 of the loans held for sale were greater than 90 days past
due.

The
estimated fair value of loans held for sale is evaluated on a periodic basis and in the absence of readily determined market values, based on the present value of expected future
cash flows, using management's estimates. These estimates are based on historical and third party data and the Company's industry experience with assumptions for, among other things, default rate,
recovery rates on defaulted loans, buyer's equity and borrowing costs, investors' expected rate of return and discount rates commensurate with the risks involved. If readily determined market values
become available, or if actual performance were to vary appreciably from assumptions used, the evaluation of the loans may need to be further adjusted, which could result in material differences from
the recorded carrying amounts. See Note 15.

The
following table summarizes changes in the estimated fair value of the Company's loans held for sale during the first nine months of fiscal 2009 and fiscal 2008:

Nine months ended
March 31,2009

2008Fair value at beginning of period

$
497,324

$
37,052New loans issued





724,792Securitized loans





(214,063
)Accrued interest


30,385


22,343Cash receipts and cancellations


(12,450
)

(62,230
)Fair value adjustment


(98,114
)

Mortgage loans transferred to loans held to maturity





(11,616
)Fair value at end of period

$
417,145

$
496,278


Mortgage Loans Held to Maturity

Mortgage loans held to maturity at March 31, 2009 totaled approximately $10,633, $5,048 of which have a variable interest rate.
Mortgage loans held to maturity at March 31, 2009 were carried at cost net of an allowance for loan losses of $716 and net deferred fees of $8. Loan origination fees, net of certain direct
organization costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. If a mortgage loan is delinquent by greater than 90 days, the interest
income on that loan is discontinued until the loan is brought current or paid. Past due status is based on the

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

contractual
terms. An allowance for loan losses is established through a charge to operations. When management believes that the collection of a loan's principal balance is unlikely, the principal
amount is charged to the allowance. Recoveries are credited to the allowance as amounts are received.

Income Taxes

In determining a quarterly provision for income taxes, the Company uses an estimated annual effective tax rate which is based on its
expected annual income, statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it operates. The Company's estimated annual effective tax rate also
includes its best estimate of the ultimate outcome of tax audits. The tax effects of temporary differences between financial statement carrying amounts of existing assets and liabilities and their
respective tax bases give rise to deferred tax assets and deferred tax liabilities. The net deferred income tax liability as of June 30, 2008 changed to a deferred tax asset during the first
quarter of fiscal 2009 primarily as a result of the reduction of the estimated value of the Company's residuals and additional structural advisory fees receivables, and two Massachusetts tax law
changes that became effective in the first quarter of fiscal 2009, which reduced the beginning deferred tax liability by approximately $3,509.

As
a result of the sale of the Trust Certificate, the Company reversed $117,719 of deferred tax assets recorded as of December 31, 2008 that pertain to temporary differences
associated with its residual interests. The sale of the Trust Certificate is expected to change the Company's estimated taxable income for the year, to a taxable loss, which may allow the Company to
carry back the net operating losses generated by the sale to previous years for Federal income tax purposes. Accordingly, the Company recorded a $177,366 income tax receivable as of March 31,
2009.

During
the second quarter of fiscal 2009, the deferred tax asset continued to grow due primarily to the taxable income generated by the Company's service receivables. The Company
determined that a valuation allowance was necessary for certain deferred tax assets associated with its service receivables. As such, a valuation allowance totaling $6,433 was recorded during the
second quarter of fiscal 2009. The previously recorded valuation allowance was reversed during the third quarter of fiscal 2009 due to the sale of the Trust Certificate. The Company has determined
that a valuation allowance is not necessary for the remaining deferred tax assets, as it is more likely than not that these assets will be realized through future reversals of existing temporary
differences, and through future taxable income. The Company will continue to review the recognition of deferred tax assets on a regular basis.

Included
in the income tax receivable balance at March 31, 2009, were $21,627 of unrecognized tax benefits of which $14,058, if recognized, would favorably affect the effective
income tax rate. The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense. The Company recognizes penalties, if any, in income tax expense. During the first
nine months of fiscal 2009, the Company accrued interest of approximately $341 and had approximately $2,197 accrued for interest and no amount accrued for the payment of penalties at March 31,
2009.

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 completed an examination of the
Company's U.S. income tax return for the year ended June 30, 2004. All significant state and local income tax matters have been concluded through June 30, 2003. The Company's state
income tax returns for the year

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

ended
June 30, 2004, and state and federal income tax returns for the years ended June 30, 2005, 2006, 2007 and 2008 remain subject to examination.

(2) Service Receivables from NCSLT Trusts

Prior to March 31, 2009, additional structural advisory fees and residuals receivables represented the
estimated fair value of additional structural advisory fees and residuals expected to be collected over the life of the various separate securitization trusts, principally the NCSLT Trusts, that have
purchased education loans facilitated by the Company. The fees were expected to be paid from these various securitization trusts to the Company. Following the sale of the Trust Certificate, the
Company continues to have rights to additional structural advisory fees from these trusts, including the NCSLT Trusts. As of March 31, 2009, however, the Company was no longer entitled to
residuals receivables from the NCSLT Trusts, although it continued to be entitled to residuals receivables from certain securitization trusts other than the NCSLT Trusts. See Note 4.

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 the expected annual rate and timing of loan defaults and TERI's obligation and ability to pay default claims, expected recoveries on defaulted loans,
including use of recoveries to replenish the segregated reserve accounts pledged to the securitization trusts by TERI to secure its guaranty obligations (Pledged Accounts), the annual rate and timing
of education loan prepayment, the trend of interest rates over the life of the loan pool, including the forward London Interbank Offered Rate (LIBOR), and the cost of funding outstanding auction rate
notes.

The
following table shows the approximate weighted average assumptions for loan performance and discount rates at March 31, 2009, December 31, 2008, September 30,
2008 and June 30, 2008 for the NCSLT Trusts:

Percentage rate

Percentage discount rateDefault

Recovery

Prepayments

Structural
advisory fees

ResidualsMarch 31, 2009


17.85
%

48
%

8.01
%

12.66
%


%**December 31, 2008


16.58
%

48
%

8.12
%

12.21
%

18.40
%September 30, 2008


15.96
%

48
%

8.40
%

11.07
%

16.35
%June 30, 2008


14.83
%

48
%

8.40
%

9.72
%

14.88
%


---

Default Rates.During the second quarter of fiscal 2009, the Company increased the weighted average gross default rate assumptions used
to estimate
the fair value of its residuals and additional structural advisory fees receivables from 15.96% to 16.58%, as a result of the trusts' actual default experience and general economic pressure on all
consumer asset classes. The Company also increased its assumed weighted average net default rate from 8.30% to 8.62% during the second quarter of fiscal

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(2) Service Receivables from NCSLT Trusts (Continued)

2009.
These increases in the default rates assumptions resulted in a decrease in the estimated fair value of the Company's residuals receivables of $9,380 and a decrease in the estimated fair value of
its additional structural advisory fees receivable of $3,031.

During
the third quarter of fiscal 2009, the Company further increased the weighted average gross default rate assumptions from 16.58% to 17.85%, and its net default assumptions from
8.62% to 9.28%. The Company believes that defaults trended higher during the quarter primarily as a result of the continued adverse consumer credit trends. This increase resulted in a decrease in the
estimated fair value of the Company's additional structural advisory fees of $2,634 during the quarter.

Prepayment Rates.In response to a historically low prepayment rate, the current interest rate environment and limited availability of
consumer
credit, the Company adjusted its prepayment assumption during the second quarter of fiscal 2009 by extending the period during which decreased prepayments were expected to persist. At
December 31, 2008, the Company assumed that the then-current prepayment rate would generally persist until December 31, 2009 and eventually revert to historical norms during
the ensuing 12 months. This change resulted in a $11,336 increase in the value of the residuals and a $2,358 increase in the structural advisory fees.

During
the third quarter of fiscal 2009, the Company extended the period during which it assumed the current historically low prepayment rate would persist, as a result of the current
economic and interest rate environments, and limited availability of consumer credit. As a result, the Company assumed that the current prepayment rate will persist until March 31, 2010 and
then eventually revert to historical norms during the ensuing 12 months. These changes resulted in an increase in the estimated fair value of the Company's additional structural advisory fees
of $769 during the quarter.

Discount RateResiduals.In determining an appropriate discount rate for valuing its residuals, the Company historically has
considered a
number of factors, including market data made available to the Company on spreads on federally guaranteed loans and private education loans as well as rates used in the much broader ABS market. The
Company also evaluates yield curves for corporate
subordinated debt with maturities similar to the weighted average life of its residuals. During the second quarter of fiscal 2009, the Company increased the discount rate by 200 basis points, applying
a discount rate of 18.0% for purposes of estimating the fair value of residuals from securitization trusts that had not issued Triple B-rated securities and a discount rate of 19.0% for
purposes of estimating the fair value of residuals from securitization trusts that had issued Triple B-rated securities. In increasing the discount rate, the Company considered, among
other things, widening spreads in subordinate tranches of actual federal loan ABS issuances and actual transactions involving other ABS asset classes, as well as widening indicative spreads, not
supported by actual transactions, in subordinate tranches of private education loan ABS. The increase in the discount rate resulted in a decrease of $39,991 in the estimated fair value of the
Company's residuals during the second quarter of fiscal 2009.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(2) Service Receivables from NCSLT Trusts (Continued)

Discount RateAdditional Structural Advisory Fees.The Company has historically based the discount rate that it uses to estimate
the fair
value of its additional structural advisory fees on a spread over the 10-year U.S. Treasury Note rate. During the second quarter of fiscal 2009, the Company increased the discount rate
spread by 275 basis points, to 1,000 basis points. In increasing the discount rate spread, the Company considered, among other things, increasing yield curves for certain composite indices for
BBB- and BB-rated corporate bond indices with 10-year maturities, as well as increases in the broader ABS marketplace during the quarter. The 10-year
U.S. Treasury Note rate decreased by 161 basis points during the fiscal quarter, to 2.21% at December 31, 2008. As a result, the Company applied a discount rate of 12.21% for purposes of
estimating the fair value of the additional structural advisory fees, which resulted in a net decrease of $6,123 in the estimated fair value of the Company's additional structural advisory fees during
the second quarter of fiscal 2009.

During
the third quarter of fiscal 2009, the Company maintained the discount rate spread at 1,000 basis points. The 10-year U.S. Treasury Note rate increased by 45 basis
points during the third fiscal quarter, to 2.66% at March 31, 2009. As a result, the Company applied a discount rate of 12.66% for purposes of estimating the fair value of the additional
structural advisory fees, which resulted in a net decrease in their fair value of $2,925 during the third quarter of fiscal 2009.

Auction Rates.The Company has facilitated five securitization trusts that issued auction rate notes to finance the purchase of
education loans.
Interest rates for the auction rate notes are determined from time to time at auction. The Company uses a spread over LIBOR to project the future cost of funding of the auction rate notes issued by
each such trust. The spread over LIBOR used to estimate the future cost of funding is based on historical trends, then current auction rates for each trust and assumptions for future auction rates.

During
the second quarter of fiscal 2009, Moody's downgraded the insurance financial strength of Ambac Assurance Corporation (Ambac) to Baa1 from Aa3. Ambac has provided credit
enhancement for certain ABS issued in securitizations that the Company has facilitated, including with regard to certain auction rate notes. The downgrading of Ambac's ratings resulted in a
downgrading of the ratings assigned to certain of the Company's auction rate notes. As a result, the interest rate on certain of those auction rate notes increased from one-month LIBOR
plus 1.5% to one-month LIBOR plus 2.5% or, in some cases, to one-month LIBOR plus 3.5%, and the interest rate of certain of those auction rate notes increased from
one-month LIBOR plus 2.5% to one-month LIBOR plus 3.5%. The Company assumed at December 31, 2008 that those auction rate notes would continue to bear interest at their
respective increased rates until their expected maturity dates. The increased cost of funding of these notes resulted in a decrease of $13,087 in the estimated fair value of the Company's additional
structural advisory fees, and a decrease of $31,779 in the estimated fair value of the Company's residuals, during the second quarter of fiscal 2009.

The
Company made no adjustments to these assumptions during the third quarter of fiscal 2009.

Forward LIBOR Curve.LIBOR is the underlying rate for most of the trusts' assets and liabilities and can have a significant effect on
the cash flows
generated by each trust. Changes in the forward LIBOR curve affect the principal balances of education loans held by the trusts, particularly as interest is capitalized during loan deferment, which
affects the net interest margin that the trust generates. In addition, certain trusts have issued a tranche of ABS that bears a fixed interest rate. A decrease in the

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(2) Service Receivables from NCSLT Trusts (Continued)

forward
LIBOR may result in a reduced spread on the fixed-interest tranche, which in turn decreases the estimated fair value of the Company's service receivables. Significant changes to the forward
LIBOR curve can also affect the estimated fair value of the Company's additional structural advisory fees, which bear interest at the rate of LIBOR plus 150 basis points to the extent such fees are
accrued but unpaid by the trusts.

During
the second quarter of fiscal 2009, the forward LIBOR curve decreased by approximately 200 basis points, an unusually large change. The change reduced the estimated fair value of
the Company's residuals receivables by $16,129, primarily as a result of a reduced spread on the fixed interest ABS, and reduced the estimated fair value of the Company's additional structural
advisory fees by $15,396, primarily as a result of a lower interest rate applicable to accrued but unpaid fees.

During
the third quarter of fiscal 2009, the forward LIBOR curve increased by approximately 75 basis points, which increased the estimated fair value of the Company's additional
structural advisory fees by approximately $2,590.

The
following table summarizes changes in the estimated fair value of the Company's structural advisory fees receivables during the first nine months of fiscal 2009 and fiscal 2008:

Nine months ended
March 31,2009

2008Fair value at beginning of period

$
113,842

$
133,644Additions from new securitizations





24,304Cash received from trust distributions


(1,530
)

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


7,415


7,720Assumption changes:(Increase) decrease in average prepayment rate


3,127


(3,535
)Increase in discount rate assumption


(23,114
)

(11,818
)Increase in timing and average default rate


(8,798
)

(2,899
)Increase in auction rate notes spread


(13,087
)

(140
)Decrease in forward LIBOR curve


(16,941
)

(9,494
)Other factors


(68
)

(1,434
)Net change from trust updates


(51,466
)

(21,600
)Fair value at end of period

$
60,846

$
136,348


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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(2) Service Receivables from NCSLT Trusts (Continued)

The
following table summarizes the changes in the estimated fair value of the Company's residuals receivables during the first nine months of fiscal 2009 and fiscal 2008:

Nine months ended
March 31,2009

2008Fair value at beginning of period

$
293,255

$
665,115Additions from new securitizations





116,972Trust updates:Passage of time (fair value accretion)


20,107


63,923Assumption changes:(Increase) decrease in average prepayment rate


11,336


(46,597
)Increase in discount rate assumption


(83,634
)

(92,306
)Increase in timing and average default rate


(50,108
)

(42,223
)Increase in auction rate notes spread


(31,779
)

(93,813
)Decrease in forward LIBOR curve


(22,099
)

(20,883
)TERI's inability to pay claims





(219,553
)Decrease to reflect disposition


(134,481
)

Other factors


5,054


(168
)Net change from trust updates


(285,604
)

(451,284
)Fair value at end of period

$
7,651

$
330,803


For
a discussion of the sensitivity of the additional structural advisory fees, to variations in the Company's assumptions and estimates, see "Service Revenue and Receivables and the
Valuation of Education Loans Held for Sale" 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."

The
Company did not adjust its assumptions regarding TERI during the nine months ended March 31, 2009. TERI may seek to reject its guaranty obligations entirely in the context of
the TERI Reorganization. As of May 8, 2009, TERI had not rejected or otherwise indicated how it will treat its guaranty obligations to existing lenders. As a consequence, it is uncertain how
collateral securing such obligations will be treated or applied to satisfy TERI's obligations. In January 2009, the official committee of unsecured creditors of TERI (Creditors Committee), of which
the Company is not a member, filed an adversary complaint in the Bankruptcy Court against the owner trustee and indenture trustee of 17 securitization trusts, and against First Marblehead Data
Services, Inc. (FMDS), as administrator of such trusts. See "Commitments and ContingenciesTERIChallenge to Security Interests" in Note 14. The complaint
generally alleges that the security interests granted by TERI to the trusts, excluding the security interests in the Pledged Accounts, are unperfected or may otherwise be avoided under the Bankruptcy
Code. In particular, the complaint alleges that the trusts do not have enforceable rights to future recoveries on defaulted loans owned by TERI with an aggregate principal and accrued interest balance
of approximately $595,000 as of March 31, 2009, or in amounts owed or transferred by TERI to Pledged Accounts after the filing of TERI's petition for reorganization totaling approximately
$30,806 as of March 31, 2009. The Company cannot predict at this time the timing, costs

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(2) Service Receivables from NCSLT Trusts (Continued)

or
outcome of the adversary proceeding. For purposes of estimating the fair value of the Company's service receivables, the Company assumed at March 31, 2009 that the application of collateral
will continue in the ordinary course in accordance with existing agreements and that the trusts have rights to the amounts that are the subject of the Creditors Committee's complaint. A successful
challenge to the security interests could decrease materially the value of Company's additional structural advisory fees or its advisory fees pursuant to the asset services agreement dated as of
March 31, 2009 (Asset Services Agreement), among FMC, First Marblehead Education Resources, Inc., a wholly owned subsidiary of the Company (FMER), VCG Owners Trust, a newly formed
Delaware statutory trust (Purchaser) and VCG Securities, LLC, a Florida limited liability company (Vanquish Investor), which fees are based on the assets of the NCSLT Trusts and resulting cash
flows. See Note 4.

(3) Securitization Trusts and Related Revenue

The Company historically structured and facilitated securitization transactions for its clients through a
series of bankruptcy remote, qualified special purpose statutory trusts. Through the securitization process, the trusts obtain private education loans from the originating lenders or their assignees,
which relinquish to the trust their ownership interest in the loans. The debt instruments that the trusts issue to finance the purchase of these education loans are obligations of the trusts, rather
than the Company's obligations or those of originating lenders or their assignees. The NCSLT Trusts held substantially all of the TERI-guaranteed private education loans facilitated by the
Company.

At
March 31, 2009 and June 30, 2008, the aggregate outstanding principal balance of the debt issued by the NCSLT Trusts was $13,610,453 and $14,610,470, respectively.

The
underlying assets in the NCSLT Trusts were private education loans of which approximately 38.0% were in deferment, 7.0% were in forbearance and 55.0% were in repayment status as of
March 31, 2009. Approximately 88.0% of the loans in repayment status as of March 31, 2009 were current, 7.0% were between 31 and 90 days past due, 3.0% were between 91 and
180 days past due, and 2.0% were greater than 180 days past due. As of March 31, 2009, the cumulative gross default rate with regard to loans in, and loans that have previously
been in, repayment status was 9.5% for the aggregate loans in the NCSLT Trusts.

The
Company has received several types of fees in connection with its past securitization services:



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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(3) Securitization Trusts and Related Revenue (Continued)



In
the case of NCSLT Trusts, at March 31, 2009, the Company expects to receive the additional fees beginning five to 20 years after the date of a particular securitization
transaction. The stipulated parity ratio levels may be raised if certain trust characteristics change. The level applicable to a particular trust is determined at the time of securitization. Actual
parity ratios of the NCSLT Trusts as of March 31, 2009 ranged from 93.9% to 99.7%. For the three and nine months ended March 31, 2009 the Company collected $26 and $1,530, respectively
in additional structural advisory fees from the trusts.



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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



(4) Sale of the Trust Certificate and Related Transactions

On March 31, 2009, NC Residuals Owners Trust was formed by the statutory conversion of GATE Holdings, Inc., a Delaware corporation and wholly owned subsidiary of FMC. As a
result of the conversion, FMC became the sole legal and beneficial owner of the Trust Certificate of NC Residuals Owners Trust. On April 3, 2009, The National Collegiate Funding LLC, a
Delaware limited liability company and wholly owned subsidiary of NC Residuals Owners Trust (NCF), changed its name to NC Owners LLC (Owners LLC). NC Residuals Owners Trust and
Owners LLC together owned certain certificates of beneficial ownership interests (Residuals) of the NCSLT Trusts.

On
April 6, 2009, FMC entered into, among other agreements, a purchase agreement, dated as of March 31, 2009 (Purchase Agreement), among FMC, Purchaser, and Vanquish
Investor, the Asset Services Agreement and a data sharing and license agreement, dated as of March 31, 2009 (Data Agreement), between FMC and the Purchaser. The Purchaser and Vanquish Investor
are affiliates of Vanquish Capital Management LLC.

Pursuant
to the Purchase Agreement, FMC transferred the Trust Certificate to the Purchaser effective as of March 31, 2009. As a result, the Purchaser became the indirect owner of
the Residuals that were formerly owned by the Company indirectly through NC Residuals Owners Trust and Owners LLC. In consideration for the sale, the Purchaser and Vanquish Investor agreed to
bear all future federal and state tax liabilities associated with the Residuals. As a result of the sale, the Company expects to receive a refund for federal income taxes previously paid, as the
Company has been required to pay taxes on income from the NCSLT Trusts in excess of cash flows received.

Pursuant
to the Asset Services Agreement, FMC and FMER have agreed to provide certain advisory services to the Purchaser to support the Purchaser's ownership of the Residuals, including,
among others, analysis and valuation optimization services and services relating to funding strategy. As compensation for services, FMC and FMER are entitled to an advisory fee (Advisory Fee) payable
monthly at a rate equal to 1/12 of 0.63% of the aggregate outstanding principal balance of the education loans owned by the NCSLT Trusts as of the last day of the previous calendar
month. Although the Advisory Fee will be earned monthly, FMC and FMER will not have the right to receive the Advisory Fee except to the extent that amounts payable to the holder of the Residuals (Cash
Flows) are paid from distributions made by each of the NCSLT Trusts on each payment date. To the extent that FMC and FMER have earned but not received fees for any prior month, any Cash Flows that are
paid from distributions made by one or more of the NCSLT Trusts will be allocated as follows:



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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(4) Sale of the Trust Certificate and Related Transactions (Continued)



No
monthly Advisory Fee will be paid by the Purchaser unless the Purchaser has received Cash Flows.

Pursuant
to the Data Agreement, the Purchaser has agreed to share with and license to FMC certain deidentified student loan data. In consideration of a one-time license fee
of $750, the Purchaser granted to FMC a limited, exclusive, irrevocable, perpetual license to retain and use monthly updates to Deidentified Data (as defined in the Data Agreement) for any lawful
purpose. This license will survive the termination of the Asset Services Agreement or the Data Agreement for any reason. Unless sooner terminated by the Purchaser, the term of the Data Agreement will
continue until the earlier of (i) the date the Cash Flows equal zero or (ii) 25 years from the date of the Data Agreement.

(5) Fair Value Measurement

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 157,Fair Value Measurement, effective July 1,
2008. SFAS No. 157 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the
measurement date and establishes a framework for measuring fair value. It establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date and expands the disclosures about instruments measured at fair value. SFAS No. 157 requires consideration of a company's own creditworthiness when
valuing liabilities.

The
Company also adopted SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, effective
July 1, 2008. SFAS No. 159 provides an option to elect fair value as an alternative measurement basis for selected financial assets, financial liabilities, unrecognized firm commitments
and written loan commitments which are not subject to fair value under other accounting standards. The adoption of SFAS No. 159 did not result in the election by the Company of fair value
accounting for any other assets and liabilities not previously carried at fair value.



At March 31, 2009, the Company applied fair value to eligible assets based on quoted market prices, where available. For
financial instruments for which quotes from recent exchange transactions are not available, the Company determines fair value based on discounted cash flow analysis and comparison to similar
instruments. Discounted cash flow analysis is dependent upon estimated future cash flows and the level of interest rates. Valuation adjustments may be made to ensure that financial instruments are
recorded at fair value.

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

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(5) Fair Value Measurement (Continued)



SFAS No. 157 establishes a three-level valuation hierarchy for the use of fair value measurements based upon the transparency of
inputs to the valuation of an asset or liability as of the measurement date:

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

Level 2.Observable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities in active
markets, quoted
prices for identical or similar assets or liabilities in markets that are not active, and inputs that are observable or can be corroborated, either directly or indirectly, for substantially the full
term of the financial instrument. Level 2 assets and liabilities include debt instruments that are traded less frequently than exchange traded securities and derivative instruments whose model
inputs are observable in the market or can be corroborated by market observable data. Examples in this category are certain variable and fixed rate non-agency mortgage-backed securities,
corporate debt securities and derivative contracts.

Level 3.Inputs to the valuation methodology are unobservable but significant to the fair value measurement. Examples in this
category include
interests in certain securitized financial assets, certain private equity investments, and derivative contracts that are highly structured or long-dated.



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

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

Investments.As quoted prices are available in an active market for all securities that the Company holds, the Company classifies
investments within
Level 1 of the valuation hierarchy.

Loans Held for Sale.Market prices are not available for the Company's education loans held for sale. As a result, the Company bases the
fair value
utilizing an internally-developed discounted cash flow model which includes assumptions regarding prepayment rates, net default rates, the LIBOR forward interest rate curve, and buyer's equity and
borrowing costs. Loans held for sale are carried at lower of cost or fair value and are classified within Level 3 of the valuation hierarchy.

Structural Advisory Fees Receivable.Market prices are not available for the Company's additional structural advisory fees. As a result,
 the Company
estimates the fair value utilizing internally-developed discounted cash flow models that include assumptions regarding prepayment rates, net default rates,

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(5) Fair Value Measurement (Continued)

LIBOR
forward interest rate curve, TERI's obligation and ability to pay claims, operational expenses and the auction rate note interest rates which are discounted using an interest rate appropriate
for the estimated life of the asset. Additional structural advisory fees carried at fair value are classified within Level 3 of the valuation hierarchy.

Residuals Receivable.Market prices are not available for the Company's residuals receivable. As a result, the Company estimates the
fair value
utilizing internally-developed discounted cash flow models that include assumptions regarding prepayment rates, net default rates, LIBOR forward interest rate curve, TERI's obligation and ability to
pay claims, operational expenses and, the auction rate note interest rates which are discounted using an interest rate appropriate for the estimated life of the asset. Residuals receivable carried at
fair value are classified within Level 3 of the valuation hierarchy.

The
following table presents the financial instruments carried at fair value as of March 31, 2009, by caption on the consolidated balance sheet and by SFAS No. 157
valuation hierarchy described above.

Assets measured at fair value on a
recurring and nonrecurring basis
at March 31, 2009:

Level 1

Level 2

Level 3

Total carrying valueRecurring:Cash equivalents

$
95,059

$


$


$
95,059Investments


75,587








75,587Structural advisory fees








60,846


60,846Residuals








7,651


7,651Nonrecurring:Loans held for sale








417,145


417,145Total assets at fair value

$
170,646

$


$
485,642

$
656,288


Please
see Note (1) for a rollforward of the loans held for sale and Note (2) for a rollforward of the structural advisory fees and residuals receivables.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(6) Net Interest Income

The following table reflects the components of net interest income for the nine months ended March 31, 2009, and 2008.

Nine Months ended
March 31,2009

2008Interest IncomeCash and cash equivalentstaxable

$
677

$
3,020Cash and cash equivalentstax exempt


62


461Federal funds sold


465


1,309Investmentstaxable


361


446Investmentstax exempt


1,027


3,131Education loans


30,378


21,987Mortgage loans


424


567Total interest-earning assets


33,394


30,921Interest ExpenseSavings accounts

$
1,418

$
1,818Money market accounts


1,166


3Brokered deposits


1,946


3,427Warehouse line of credit


7,783


6,581Other short-term borrowings


103


Other interest-bearing liabilities


569


521Total interest-bearing liabilities


12,985


12,350Net Interest Income

$
20,409

$
18,571


(7) Related Party Transactions

At March 31, 2009, the Company had invested approximately $90,260 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 $71,550 of investments and cash equivalents 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 owned approximately 65% of Milestone Group Partners as of March 31, 2009.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(8) Deposits

The table below represents the Company's deposit balances as of March 31, 2009 and June 30, 2008, respectively:

March 31,
2009

June 30,
2008Savings accounts

$
14,339

$
14,887Money market and demand deposit accounts


52,222


31,447Time deposits


65,535


197,779$
132,096

$
244,113


The
aggregate amount of time deposits in denominations greater than $100 or more was $38,321 and $165,593 as of March 31, 2009 and June 30, 2008, respectively. Included in
time deposits above were brokered deposits totaling $25,000 and $150,194 at March 31, 2009 and June 30, 2008, respectively. Included in money market accounts at June 30, 2008 was
$31,323 deposited by TERI and pledged to Union Federal to secure TERI's guaranty obligations with regard to the TERI-guaranteed education loans held by Union Federal. In October 2008, the
Bankruptcy Court ordered that this TERI segregated reserve be moved from Union Federal to another depository bank. No amounts related to the TERI segregated reserve were included in money market
accounts at March 31, 2009.

A
summary of time deposits, by maturity at March 31, 2009 and June 30, 2008, is as follows:

March 31, 2009

June 30, 2008Amount

Weighted
average
rate

Amount

Weighted
average
rateWithin one year

$
65,301


2.70
%
$
197,579


3.13
%Over one year


234


3.00
%

200


3.58
%$
65,535




$
197,779


(9) Education Loan Warehouse Facility

In July 2007, UFSB-SPV, entered into a $300,000 education loan warehouse facility to fund the purchase of education loans from Union Federal. At March 31, 2009,
$246,050 was outstanding under the facility. UFSB-SPV has pledged the purchased education loans as collateral for the advances it received from the conduit lender.

The
TERI Reorganization, and subsequent TERI ratings downgrades, resulted in events of termination under the indenture relating to the facility. As a result, the facility termination
date was declared, UFSB-SPV is not eligible for further borrowings under the facility and the conduit lender may elect to accelerate repayment of notes outstanding under the facility. The
facility termination date had been scheduled to occur on July 16, 2008. Under the indenture, the facility termination date commences a liquidation period that ends on the date immediately
following the later of July 14, 2010 and the date on which the principal and interest on all outstanding notes, and all amounts otherwise payable by UFSB-SPV in connection with the
facility, are paid in full. In January, February and March 2009, additional events of termination occurred under the indenture relating to the one- and

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(9) Education Loan Warehouse Facility (Continued)

three-month
default ratios on the underlying portfolio. The conduit lender's recourse under the indenture is limited to education loans pledged as collateral. In connection with Union Federal's
settlement of claims against TERI's bankruptcy estate, approximately $15,714 of the settlement amount was allocated to the education loans pledged as collateral and was subsequently applied to reduce
amounts outstanding under the warehouse facility. See Note 15.

In
April 2008, UFSB-SPV entered into a letter agreement pursuant to which it agreed to pay higher fees to the conduit lender in consideration for an acknowledgement by the
conduit lender that interest on the notes issued under the facility would not be payable based on an alternative rate set forth in the indenture (Default Rate) unless and until the conduit lender
delivered further notice to UFSB-SPV. In April 2009, the conduit lender elected for interest on outstanding notes to become payable at the Default Rate for periods following delivery of
notice of such election. As a result, the interest rate on outstanding notes will increase beginning in the fourth quarter of fiscal 2009. UFSB-SPV will pay lower fees, however, as a
result of such election.

(10) Federal Reserve Bank Borrowings

The Company had $55,000 in other short-term borrowings outstanding at March 31, 2009 from the Federal Reserve Bank of Boston. Prior to April 27, 2009, Union
Federal could borrow up to
75% of the outstanding principal of education loans held by Union Federal, not including education loans held by UFSB-SPV, in a current repayment status. Effective April 27, 2009,
as a result of changes enacted by the Federal Reserve Bank of Boston, Union Federal can borrow up to 60% of the outstanding principal of education loans in a current repayment status. The
short-term borrowings will mature at various dates from April 1, 2009 to June 1, 2009.

(11) Stockholders' Equity

Investment Agreement

In December 2007, FMC entered into an investment agreement (Investment Agreement) with GS Parthenon A, L.P. and GS Parthenon
B, L.P., affiliates of GS Capital Partners (Parthenon Purchasers), pursuant to which the Company sold 60 shares of newly designated Series A Non-Voting Convertible Preferred
Stock, $0.01 par value per share (Series A Preferred Stock), at a purchase price of $1,000 per share. Pursuant to the Investment Agreement, the Company also agreed to sell, after receipt of
applicable regulatory approvals and determinations and satisfaction of other closing conditions, up to 201 shares of newly-created Series B Non-Voting Convertible Preferred Stock,
$0.01 par value per share (Series B Preferred Stock), at a purchase price of $1,000 per share. FMC granted to GS Parthenon A, L.P. the right to designate one representative to FMC's Board of
Directors and provided to the Parthenon Purchasers required and incidental rights to register under the Securities Act of 1933, as amended, any common stock of the Company (Common Stock) obtained from
the conversion of preferred stock.

The
total investment by the Parthenon Purchasers, including their initial investment of $59,800, was capped by the terms of the Investment Agreement at an amount not to exceed 25% of the
Company's total stockholders' equity, consistent with regulations of the OTS. As a result of a decrease in the Company's stockholders' equity after the time of the initial investment by the Parthenon
Purchasers,

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(11) Stockholders' Equity (Continued)

and
based on the Company's stockholders' equity as of June 30, 2008, the subsequent equity investment by the Parthenon Purchasers, which closed on August 18, 2008, was limited to
$132,700. See "Series B Non-Voting Convertible Preferred Stock" below. The Company received aggregate gross proceeds of approximately $192,500 from the sale of the Series A
Preferred Stock and the Series B Preferred Stock pursuant to the Investment Agreement. In January 2008, the Parthenon Purchasers elected to convert their Series A Preferred Stock into an
aggregate of 5,320 shares of Common Stock.

Series B Non-Voting Convertible Preferred Stock

On August 18, 2008, FMC issued 133 shares of newly designated Series B Preferred Stock at a purchase price of $1,000 per
share. The Series B Preferred Stock is convertible, at the option of the holders, into 8,847 shares of Common Stock, at a conversion price of $15.00 per share. Dividends would be paid on the
Series B Preferred Stock when, as and if, and in the same amounts (on an as-converted basis), declared on the Common Stock. Upon liquidation, dissolution or winding up of FMC,
holders of Series B Preferred Stock would have the right to receive an amount equal to $0.01 per share of Series B Preferred Stock, plus the amount of any declared but unpaid dividends
thereon. After payment of this amount, holders of the Series B Preferred Stock would be entitled to participate (on an as-converted basis) with the Common Stock in the distribution
of remaining assets.

2003 Stock Incentive Plan

In September 2003, the Board of Directors and stockholders approved the 2003 Stock Incentive Plan. A total of 4,050 shares of Common
Stock are authorized for issuance pursuant to awards under this plan. During the first nine months of fiscal 2009, the Company granted 21 fully vested stock units pursuant to the Company's stock unit
program for non-employee directors, each such stock unit representing the right to receive one share of Common Stock. As of March 31, 2009, there were 291 restricted stock
units outstanding and 3,258 shares available for future grant under 2003 Stock Incentive Plan.

2003 Employee Stock Purchase Plan

In October 2003, the Board of Directors and stockholders approved the 2003 Employee Stock Purchase Plan (Stock Purchase Plan). A total
of 600 shares of Common Stock were authorized for issuance under this plan. The Stock Purchase Plan permitted 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 was voluntary. Under the Stock Purchase Plan, 30 and 15 shares of Common Stock were issued in
January 2008 and July 2007, respectively. In April 2008, the Board of Directors, which administers the Stock Purchase Plan, terminated the offering period that began on January 1, 2008 and
indefinitely suspended the Stock Purchase Plan. At March 31, 2009, 406 shares were available for future purchase under the Stock Purchase Plan.

2008 Meyers' Option Plan

The Board of Directors elected Daniel Meyers as President and Chief Executive Officer and as a member of the Board of Directors,
effective September 1, 2008, subject to any required regulatory approvals. In connection with the election, the Board of Directors and a subcommittee of the

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(11) Stockholders' Equity (Continued)

Compensation
Committee of the Board of Directors approved the grant on August 18, 2008 (Grant Date) of stock options to Mr. Meyers to purchase (a) 2,000 shares of Common Stock, at
an exercise price of $6.00 per share, that will vest and become exercisable as to 25% of the shares underlying the stock option on each of the first, second, third and fourth anniversaries of the
Grant Date ($6.00 Stock Options); (b) 2,000 shares of Common Stock, at an exercise price of $12.00 per share, that vested and became exercisable in full on November 30, 2008; and
(c) 2,000 shares of Common Stock, at an exercise price of $16.00 per share, that vested and became exercisable in full on November 30, 2008. Any unvested stock options will vest and
become exercisable in full (a) if the closing sale price of the Common Stock is at least 150% of the exercise price of the applicable option for a period of five consecutive trading days
(assuming the trading on each day is not less than 90% of the average daily trading volume for the prior three months prior to such five day period), (b) in the event of Mr. Meyers's
death or disability, as defined in his employment agreement, or (c) in the event that Mr. Meyers's employment is terminated by the Company without Cause, as defined in his employment
agreement, or by Mr. Meyers with Good Reason, as defined in his employment agreement. In addition, subject to certain conditions set forth in his employment agreement, the $6.00 Stock Options
may be exercised beginning 90 days after the Grant Date prior to vesting, provided that the unvested shares issued will be held in escrow by the Company and will be subject to a repurchase
option by the Company. Each of the stock options will expire ten (10) years from the Grant Date. The stock options were not granted under any of the Company's existing stockholder-approved
incentive plans.

Share Repurchase Program

In April 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 March 31, 2009, the Company had repurchased an aggregate
of 1,169 shares of Common Stock under this program. The Company did not repurchase any shares of its Common Stock under this program during the first nine months of fiscal 2009.

Cash Dividends

The Board of Directors declared no cash dividends during the first nine months of fiscal 2009, and the Company does not expect to
declare any cash dividends in the foreseeable future. Any decision to pay future dividends will be made by the Board of Directors and will depend upon the Company's earnings, financial condition,
capital requirements and such other factors as the Board of Directors deems relevant.

(12) Union Federal Regulatory Capital Requirements

Union Federal is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Company's financial condition. Under capital adequacy
guidelines and the

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(12) Union Federal Regulatory Capital Requirements (Continued)

regulatory
framework for prompt corrective action, Union Federal must meet specific capital guidelines that involve quantitative measures of Union Federal's assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weighting and other factors. Additionally, Union Federal may not pay dividends to FMC or originate private education loans in the future without prior approval of the regulatory
authorities. UFSB's equity capital was $65,190 at March 31, 2009.

Quantitative
measures established by regulation to ensure capital adequacy require Union Federal to maintain minimum amounts and ratios of total capital and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined). As of March 31, 2009 and June 30, 2008, Union Federal met all quantitative capital adequacy requirements to
which it was subject and had total risk-based ratios of 10.94% and 22.14%, Tier 1 risk-based ratios of 10.93% and 22.08%, and Tier 1 core capital ratios of 10.50%
and 18.43%, respectively. As of March 31, 2009 and June 30, 2008, Union Federal was well capitalized under the regulatory framework for prompt corrective action. Union Federal's
regulatory authorities have from time to time requested that the Company provide additional capital to Union Federal in amounts linked to the amount of private education loans held by Union Federal,
and the Company is currently in discussions with regulators regarding, among other things, the provision by the Company of additional regulatory capital and the reduction of such loan balances.
Additional infusions of regulatory capital into Union Federal could adversely affect the Company's short-term liquidity.

(13) Net (Loss) per Share

The following table sets forth the computation of basic and diluted net (loss) per share of Common Stock for the three months and nine months ended March 31, 2009 and 2008:

Three months ended
March 31,

Nine months ended
March 31,2009

2008

2009

2008Net (loss)

$
(140,654
)
$
(229,550
)
$
(326,938
)
$
(178,405
)Shares used in computing net (loss) per common sharebasic


99,121


97,103


99,067


94,691Effect of dilutive securities:Stock options











Restricted stock units











Preferred stock











Dilutive potential common shares











Shares used in computing net (loss) per common sharediluted


99,121


97,103


99,067


94,691Net loss per common share:Basic

$
(1.42
)
$
(2.36
)
$
(3.30
)
$
(1.88
)Diluted

$
(1.42
)
$
(2.36
)
$
(3.30
)
$
(1.88
)


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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(13) Net (Loss) per Share (Continued)

The
Company did not include 376 dilutive shares underlying restricted stock units or 8,847 shares of Series B Preferred Stock in the computation of diluted net loss per share for
the three months ended March 31, 2009 as the effect would have been antidilutive. The Company did not include 4 dilutive shares underlying stock options, 550 dilutive shares underlying
restricted stock units or 7,297 shares of Series B Preferred Stock in the computation of diluted net loss per share for the nine months ended March 31, 2009 as the effect would have been
antidilutive.

(14) Commitments and Contingencies

TERI

TERI is a private, not-for-profit Massachusetts organization as described under section 501(c)(3) of the
Internal Revenue Code.
Incorporated in 1985, TERI is the oldest and largest guarantor of alternative, or private, education loans. In its role as guarantor in the private education lending market, TERI agreed to reimburse
lenders and securitization trusts for unpaid principal and interest on defaulted loans. Historically, TERI was the exclusive third party provider of borrower default guarantees for the Company's
clients' private education loans.

Historical Relationship.In 2001, the Company acquired TERI's historical database and loan processing operations, but not its
investment assets or
guaranty liabilities. In connection with the transaction, the Company entered into a series of agreements with respect to loan processing services, database updates and the securitization of
TERI-guaranteed loans. These included the Master Servicing Agreement, a database sale and supplementation agreement (Database Agreement) and a master loan guaranty agreement (Master Loan
Guaranty Agreement). Pursuant to the Master Servicing Agreement, TERI engaged the Company to provide loan origination, default prevention, claims and default management services. Under TERI's
agreements with lenders, lenders delegated their loan origination functions to TERI, and TERI had the right to subcontract these functions. Pursuant to the Database Agreement, TERI provided updated
information to the Company about the performance of the education loans it had guaranteed, so that the Company could continue to supplement and enhance the Company's database.

Under
the terms of the Master Loan Guaranty Agreement, the Company granted TERI a right of first refusal to provide a third party loan guaranty under existing and future private
education loan programs facilitated by the Company, as well as new loan programs jointly created by the Company and TERI. In addition, the Company agreed to provide a beneficial interest for TERI in a
portion of the residual value of securitization trusts that purchased TERI-guaranteed loans. The Master Loan Guaranty Agreement generally provided that the guaranty fees earned by TERI
upon the disbursement of education loans would be placed by TERI in segregated reserve accounts to be held as collateral to secure TERI's obligations to pay the principal and interest on defaulted
education loans. These accounts were generally held by third party financial institutions for the benefit of the program lender until the education loans were securitized, at which point the accounts
were pledged to the securitization trust that purchased the loans. The Master Loan Guaranty Agreement, as it had been implemented through guaranty agreements with individual lenders, entitled TERI to
retain a portion of its guaranty fees as an administrative fee rather than place them in the Pledged Accounts.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(14) Commitments and Contingencies (Continued)

TERI Reorganization.On April 7, 2008, TERI filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy
Code. The
TERI Reorganization has had, and will likely continue to have, a material negative effect on the Company's client relationships, its facilitated loan volume, its ability to structure loan
securitizations, the value of its service receivables and its ability to realize fully TERI's cost reimbursement and guaranty obligations.

In
April 2008, the Company received notice that Bank of America and RBS elected to terminate agreements with the Company, and certain of its clients in the case of RBS, as a result of
the TERI Reorganization. In addition, as further described below, JPMorgan Chase, Bank of America and Union Federal have entered into stipulations in the context of the TERI Reorganization relating to
the termination of their agreements with TERI and the settlement of related claims. As a result of these actions, Bank of America, JPMorgan Chase and Union Federal do not have any further obligations
to sell, and the Company does not have any further obligation to purchase, certain private education loans as of the date of this quarterly report. RBS and the Company generally no longer have any
further obligations to sell or purchase private education loans under the various loan programs formerly funded by RBS.

In
July 2008, the Bankruptcy Court entered an order granting a motion by TERI to terminate the loan origination agreement and guaranty agreement between TERI and JPMorgan Chase. Pursuant
to a stipulation in connection with the motion, TERI agreed to return to JPMorgan Chase a portion of the guaranty fees previously paid by JPMorgan Chase to TERI with regard to private education loans
funded and currently owned by JPMorgan Chase (JPMorgan Chase Program Loans), and JPMorgan Chase waived and relinquished any further guaranty claims against TERI with regard to the JPMorgan Chase
Program Loans. In March 2009 and April 2009, the Bankruptcy Court entered orders approving settlements relating to TERI's agreements with Bank of America and Union Federal. See Note 15.

The
Company had the right to facilitate securitization of the JPMorgan Chase Program Loans, subject to the terms and conditions of the note purchase agreement between the Company and
JPMorgan Chase (NPA). As a result of the terminations of the guaranty agreements, the NPA also terminated. As a result, JPMorgan Chase no longer has any further obligations to sell and the Company no
longer has any obligation to purchase JPMorgan Chase Program Loans pursuant to the NPA.

The
Company expects that the remaining guaranty agreements or loan origination agreements that TERI has with a significant number of the Company's clients will be terminated in the
context of the TERI Reorganization. Termination of a client's guaranty agreement or loan origination agreement with TERI would generally result in the termination of the Company's agreements with that
client. As a result, the Company expects its note purchase agreements with additional clients to terminate as the TERI Reorganization evolves. The Company also expects the TERI Reorganization to
continue to materially adversely affect FMC's ability to facilitate the securitization of
TERI-guaranteed loans. If FMC is able to facilitate securitizations of TERI-guaranteed loans in the future, FMC's up-front structural advisory fee yields would
decline and market conditions would likely dictate that FMC obtain additional credit enhancement for such securitizations, the cost of which would result in lower revenues and additional cash
requirements.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(14) Commitments and Contingencies (Continued)

Transition Services Agreement.In June 2008, the Bankruptcy Court entered an order approving a motion by TERI to reject the Master
Servicing
Agreement, the Master Loan Guaranty Agreement and the Database Agreement, as well as the marketing services agreement pursuant to which the Company provided certain marketing related services to TERI.
As a result of the order, each of the agreements, as amended or supplemented to date, was terminated effective as of May 31, 2008. The order also approved a motion by TERI to enter into the
Transition Services Agreement.

The
term of the Transition Services Agreement expired on September 29, 2008. In October 2008, the Company entered into a letter agreement with TERI, subject to subsequent approval
by the Bankruptcy Court, to provide limited additional transition services to TERI, including continued occupancy through December 15, 2008 of certain office space subleased by TERI from the
Company. TERI paid $194 of rent in advance in consideration for the continued occupancy, and the sublease relating to the office space terminated as of December 15, 2008.

Claims Estimation.In November 2008, FMER filed a motion with the Bankruptcy Court that proposed a framework for estimating all trust
and lender
guaranty claims against TERI's bankruptcy estate. The framework would have determined the amount of a trust's or lender's unsecured guaranty claim, based on certain information provided with regard to
its TERI-guaranteed loan portfolio and certain fixed assumptions applied across all portfolios. The motion, which was prompted by the Company's concern with the efficient administration of
the bankruptcy estate, argued that there would be no substantial progress toward a global settlement of claims or plan of reorganization without a uniform estimation procedure.

Both
TERI and the Creditors Committee formally objected to the motion, generally arguing that they had been developing an alternative framework for use in estimating creditors' guaranty
claims against TERI's estate. In addition, certain lenders objected to the Company's motion, generally arguing with substantive aspects of the estimation methodology that the Company proposed.

The
Bankruptcy Court continued the motion indefinitely in mid-December. The Company has subsequently provided comments to TERI, the Creditors Committee and their respective
advisors for use in developing their estimation framework. TERI had not resumed paying guaranty obligations with respect to defaulted loans of lenders holding TERI-guaranteed loans that
have not been securitized as of May 8, 2009.

Challenge to Security Interests.In June 2008, the Bankruptcy Court entered an order approving a motion by TERI to purchase defaulted
loans using
cash in the Pledged Accounts. The order was granted subject to the following:



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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(14) Commitments and Contingencies (Continued)



Neither
the Creditors Committee nor any other party challenged the trusts' security interests in the Pledged Accounts within the 14-day period following the order. As a
result, beginning in July 2008, TERI resumed paying its obligations under the guaranty agreements with respect to defaulted loans from the trusts, but only to the extent there is cash in the Pledged
Account established for the benefit of the specific trust that owned the defaulted loan.

The
Bankruptcy Court, upon motion of the Creditors Committee, subsequently extended until February 2, 2009 the parties' rights to challenge the trusts' security interests in the
collateral other than the Pledged Accounts. In January 2009, the Creditors Committee filed an adversary complaint in the Bankruptcy Court against the owner trustee and indenture trustee of 17
securitization trusts, and against FMDS, as administrator of such trusts. The complaint generally alleges that the security interests granted by TERI to the trusts, excluding the security interests in
the Pledged Accounts, are unperfected or may otherwise be avoided under the Bankruptcy Code. In particular, the complaint alleges that the trusts do not have enforceable rights to future recoveries on
defaulted loans owned by TERI with an aggregate principal and accrued interest balance of approximately $595,000 as of March 31, 2009, or in amounts owed or transferred by TERI to Pledged
Accounts after the filing of TERI's petition for reorganization totaling approximately $30,806 as of March 31, 2009. In March 2009, FMDS and the owner trustee filed a motion to dismiss the
Creditors Committee's adversary complaint. The indenture trustee also filed a motion to dismiss, joining the arguments made in the motion filed by FMDS and the owner trustee. The Creditors Committee
filed an opposition to the motions to dismiss on April 30, 2009, together with an amended complaint naming the trusts themselves as defendants. FMDS expects to file a response to the
opposition and amended complaint within the time frame allowed under the applicable bankruptcy rules. The Company cannot at this time predict the timing, costs or outcome of the adversary proceeding,
and has not adjusted its accounting assumptions as of March 31, 2009 in response to this development. To the extent the trusts continue to request that TERI make guaranty claims payments from
the Pledged Accounts and to transfer the defaulted loans to TERI in respect of the guaranty payments, the amount of defaulted loans the recoveries of which are subject to the Creditors Committee's
challenge will continue to increase.

If
the Creditors Committee or any other party is successful in challenging the trusts' security interests in the Post-Petition Transfers or other collateral, the amount of
pledged collateral available exclusively to a particular securitization trust to satisfy TERI's guaranty obligations to that trust would decrease materially. As a result, the trust's unsecured claims
against TERI would increase proportionately. For example, recoveries from defaulted education loans transferred to TERI, which have historically been used to replenish a particular trust's Pledged
Account, would instead become an asset of TERI's bankruptcy estate and available to satisfy administrative claims of TERI's bankruptcy estate and other holders of claims in accordance with the
priorities established by the Bankruptcy Code. Recoveries from defaulted loans not transferred to TERI, however, would remain available to the trusts.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(14) Commitments and Contingencies (Continued)

Beginning
in July 2008, TERI resumed paying its obligations under the guaranty agreements with respect to defaulted loans from the trusts, but only using cash in the Pledged Account
established for the benefit of the specific trust that owned the defaulted loan. As of May 8, 2009, TERI is not permitted to satisfy its guaranty obligations using funds from TERI's general
reserves. Funds in the Pledged Accounts of certain trusts have been exhausted, or are expected to be exhausted in the near term, at which point such trust will have a general unsecured claim against
TERI. A successful challenge to the security interests could therefore decrease materially the value of the Company's additional structural advisory fees or its advisory fees pursuant to the Asset
Services Agreement with
the Purchaser and Vanquish Investor, which fees are based on the assets and paid through the Cash Flows.

Securities Litigation

In April and May 2008, seven purported class action lawsuits were filed against the Company and certain of its current and former
officers and directors in the United States District Court for the District of Massachusetts. The plaintiffs allege, among other things, that the defendants made false and misleading statements and
failed to disclose material information in various SEC filings, press releases and other public statements. The complaints allege various claims under the Securities Exchange Act of 1934, as amended
(Exchange Act) and Rule 10b-5 promulgated thereunder. The complaints seek, among other relief, class certification, unspecified damages, fees and such other relief as the court may
deem just and proper. In August 2008, the court consolidated these cases and appointed lead plaintiffs and a lead counsel.

On
November 28, 2008, a consolidated amended complaint was filed by the lead plaintiffs and contained similar allegations as the earlier complaints. On February 9, 2009,
the Company filed a motion to dismiss the amended complaint. Plaintiffs filed an opposition to the Company's motion to dismiss on April 13, 2009. The Company plans to respond in May 2009. A
class had not been certified in the actions as of May 8, 2009.

In
addition, in May and June 2008, three federal derivative lawsuits were filed against certain of the Company's current and former officers and directors and nominally against it in the
United States District Court for the District of Massachusetts. The complaints are purportedly brought on behalf of the Company to remedy alleged violations of federal and state law, including
violations of the Exchange Act, breaches of fiduciary duties, waste of corporate assets and unjust enrichment, which allegedly occurred between August 2006 and May 2008 or June 2008, as applicable.
The complaints seek a monetary judgment, injunctive relief, restitution, disgorgement and a variety of purported corporate governance reforms. In August 2008, the court consolidated the federal
derivative cases and stayed them pending resolution of the purported class actions described above. A state derivative action was also filed in Massachusetts Superior Court in June 2008. The complaint
is purportedly brought on behalf of the Company to remedy alleged violations of federal and state law, including breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate
assets and unjust enrichment, which allegedly occurred between August 2006 and June 2008. The complaint seeks a monetary judgment, injunctive relief, restitution, disgorgement, and costs and
disbursements of the action. In January 2009, the court stayed the case until July 2009.

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(14) Commitments and Contingencies (Continued)

The
Company intends to vigorously assert its defenses in each of the actions. There can be no assurance, however, that the Company will be successful, and an adverse resolution of any of
the lawsuits could have a material adverse effect on the Company's consolidated financial position and results of operations in the period in which a lawsuit is resolved. In addition, although the
Company carries insurance for these types of claims, a judgment significantly in excess of its insurance coverage could materially and adversely affect the Company's financial condition, results of
operations and cash flows. The Company is not presently able to reasonably estimate potential losses, if any, related to the lawsuits.

(15) Subsequent Events



On April 7, 2009, the Bankruptcy Court entered an order (Order) authorizing TERI to enter into and perform a stipulation, dated
March 25, 2009 (Stipulation), among TERI, Union Federal and UFSB-SPV. Pursuant to the Stipulation:



FMC,
Union Federal and TERI had been party to certain agreements (Program Documents) pursuant to which, among other things, TERI was retained as originator for private education loans
funded by Union Federal (Student Loans) and TERI guaranteed the repayment of principal and interest on every Student Loan for which a "guaranty event" occurred. Pursuant to the Program Documents,
certain guaranty fees and other amounts had been deposited in a segregated reserve account (Pledged Account). TERI granted Union Federal a security interest in certain assets and property, including
funds in the Pledged Account, to secure TERI's obligations under the Program Documents.

Union
Federal agreed to the Compromise Payment in order to avoid the cost, delay and risk associated with litigating certain disputes with TERI regarding possible deficiencies in Union
Federal's security interests and potential preferential transfers involving the Pledged Account. The Overpayment

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(15) Subsequent Events (Continued)

Amount
represents amounts previously refunded to Union Federal by TERI from its operating account, rather than the Pledged Account, related to cancelled Student Loans.

On
April 9, 2009, Union Federal received $30,046 (Settlement Amount) from TERI. Of the Settlement Amount, $15,714 was allocated to the Student Loans held by UFSB-SPV
and subsequently applied to reduce amounts outstanding under the education loan warehouse facility. Based
on management assumptions as of March 31, 2009, the Company expects the aggregate principal and accrued interest balance of defaulted Student Loans over the life of the portfolio to exceed the
Settlement Amount.



On April 30, 2009, Union Federal received approval from the OTS to sell substantially all of its economic interest in
UFSB-SPV to The National Collegiate Funding II LLC (NCF II), a newly formed subsidiary of FMC. The transaction was effected on April 30, 2009 pursuant to a transfer and
assignment agreement among FMC, Union Federal and NCF II. Union Federal received $2,904 in consideration for the sale and granted NCF II an irrevocable proxy to exercise Union Federal's voting and
management rights as a member of UFSB-SPV. As part of the transaction, FMC agreed to indemnify Union Federal against certain claims and expenses, including potential master servicing fee
deficiencies and claims resulting from origination errors.

As
a result of the transaction, the private education loans held by UFSB-SPV, and the related indebtedness to the conduit lender, were eliminated from Union Federal's balance
sheet for financial presentation purposes under GAAP and for purposes of regulatory capital compliance under the regulations of the OTS. Among other objectives, the transaction was intended to reduce
the elevated balance of private student loans on Union Federal's balance sheet, increase Union Federal's capital ratio for regulatory reporting purposes and reduce the amount of Union Federal's assets
that are subject to fair value adjustments. Following the transaction, as of April 30, 2009, Union Federal had a total risk-based ratio of 39.46%, a Tier 1
risk-based ratio of 39.44% and a Tier 1 core capital ratio of 34.80%.

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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.

Factors That May Affect Future Results

In addition to historical information, this quarterly report includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Section 27A of the Securities Act of 1933, as amended, or the Securities Act. For this purpose,
any statements contained herein regarding our strategy, future
operations and products, financial position, future revenues and funding transactions, projected costs, prospects, plans and objectives of management, other than statements of historical facts, are
forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "observe," "plans," "projects," "will," "would," and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guaranty that we actually will achieve the plans, intentions or expectations
expressed or implied in our forward-looking statements, which involve risks, assumptions and uncertainties. There are a number of important factors that could cause actual results, levels of activity,
performance or the timing of events to differ materially from those expressed or implied in the forward-looking statements we make. These important factors include our "critical accounting estimates"
set forth below under "Application of Critical Accounting Policies and Estimates" and factors including, but not limited to, those set forth below under the caption "Risk Factors" in
Item 1A of Part II of this quarterly report. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our
estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to May 8, 2009.

Executive Summary

Recent Developments

Our inability to access the securitization markets as a result of market disruptions continued during the third quarter of fiscal 2009.
That inability, together with the reorganization in bankruptcy of The Education Resources Institute, Inc., or TERI, has strained our client relationships, resulted in the termination of several
material client agreements, reduced our facilitated loan volume and created uncertainty about our business prospects. During fiscal 2009, we have made significant changes in our senior leadership, and
have made significant expense reductions in an attempt to overcome the challenges currently facing us. In addition, we are developing a new private education loan product that we expect to have
available to prospective lender clients in the fourth quarter of fiscal 2009. We have summarized below developments affecting our business and financial results:



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Overview

We offer outsourcing services for private education lending in the United States. We offer services to national and regional financial
institutions and educational institutions for designing and implementing private education loan programs. In addition, our wholly owned subsidiary Union Federal is a federally chartered thrift
regulated by the Office of Thrift Supervision, or OTS, that has offered private education loans directly to consumers and currently offers residential retail mortgages, retail savings products, time
deposit products and demand deposit accounts.

We
offer services in connection with each of the five typical phases of the education loan lifecycle, enabling our clients to have a single point of interface
for:



Historically,
the primary driver of our results of operations and financial condition has been the volume of education loans for which we have provided outsourcing services from loan
origination through securitization. Securitization refers to the technique of pooling loans and selling them to a special purpose, bankruptcy remote entity, typically a trust, which issues securities
backed by those loans to investors. We have provided structural, advisory and other services for 38 securitization transactions since our formation in 1991, and education loan asset-backed
securitizations have historically been our sole source of permanent financing for our clients' private education loan programs.

We
have generally assisted the lenders in our loan programs in selecting their underwriting criteria used in deciding whether an education loan will be made to an applicant. However,
each lender has had ultimate control over the selection of these criteria, and in providing our services we have been obligated by contract to comply with them. Union Federal has funded a portion of
our proprietary loan programs in the past, although it is not doing so as of May 8, 2009. Union Federal held private education loans with an outstanding principal and interest balance of
approximately $522.6 million as of

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March 31,
2009, of which loans with a principal and interest receivable balance of $260.0 million were pledged as collateral under a warehouse facility provided by a conduit lender. Our
proprietary loan programs are Astrive Student Loans, Monticello Student Loans and Laurel Collegiate Loans.

Our
lender clients have previously had the opportunity to mitigate their credit risk through a loan repayment guaranty by TERI, pursuant to which TERI guaranteed repayment of the
borrower's loan principal, including capitalized interest together with accrued and unpaid interest, on defaulted loans. Lenders that wished to have TERI guaranty their loans were required to meet
TERI's underwriting criteria.

In
the past, we offered our clients a fully integrated suite of outsourcing services, but we did not charge separate fees for many of those services. Moreover, although we received 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, those fees represented
reimbursement of the direct expenses we incurred. Accordingly, we did not earn a profit on those fees in the past. Although we provided those 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 entered into agreements with the lender clients giving us the
exclusive right to securitize the education loans that they did not intend to hold. We received structural advisory fees and residuals for facilitating securitizations of those loans.

We
have been unable to access the securitization market since September 2007 as a result of market disruptions that began in the second quarter of fiscal 2008 and persist as of
May 8, 2009. That inability, together with the TERI Reorganization, has impacted our client relationships, resulted in the termination of certain material client agreements, reduced our
facilitated loan volume and challenged our business prospects. During the first nine months of fiscal 2008, we facilitated loans with an aggregate principal balance of $4.7 billion and received
$108.9 million in processing fees from TERI. In contrast, during the first nine months of fiscal 2009, we facilitated loans with an aggregate principal balance of $248.1 million and
received $2.9 million in processing fees from TERI.

We
have refined our products and services, made major changes in senior management and significantly reduced our operating expenses, in an attempt to overcome the challenges currently
facing us. We have developed, and continue to develop as of the date of this quarterly report, a new private education loan program that does not require a guaranty from a third party, as well as
outsourced loan origination services and portfolio management services on a stand alone fee basis. As a result, we are able to offer both a fully integrated suite of services for private education
loan programs, as well as certain services on a fee-for-service basis. We are developing a new private education loan product that we expect to have available to prospective
lender clients in the fourth quarter of fiscal 2009. The success of the product under development will be critical to growing and diversifying the Company's revenues and client base. As in the past,
we expect our level of profitability to continue to depend in the future on our ability to earn structural advisory fees, residuals for facilitating securitizations as well as reimbursement for
services performed on behalf of our clients.

Changes
in any of the following factors have materially affected, and may continue to materially affect, our financial results:



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Business Trends and Uncertainties; Outlook

Portfolio Funding.Dislocations in the debt capital markets persisted throughout the first nine months of fiscal 2009, and we did not
complete a
securitization during the period. We expect the TERI Reorganization to materially adversely affect our ability to facilitate the securitization of TERI-guaranteed loans. As a result, we do
not expect to complete a securitization in the near-term.

In
addition, we expect the structure and pricing terms in future securitizations, if any, to be substantially less favorable than in the past. If we are able to facilitate the
securitization of TERI-guaranteed loans in the future, our up-front structural advisory fee yields would likely decline and market conditions would likely dictate that we
obtain or provide additional credit enhancement for such securitizations, the cost of which would result in lower revenues and additional cash requirements.

Education
loan asset-backed securitizations have historically been our sole source of permanent financing for our clients' private education loan programs. We have pursued alternative
means to finance our clients' loans, but other sources of funding have not been available on acceptable terms, if
available at all. Recent conditions in the capital markets have generally resulted in a substantial widening of credit spreads and significantly more restrictive covenants, which have adversely
affected the pricing, terms and conditions of alternative funding mechanisms that we have pursued. In addition, the TERI Reorganization and subsequent TERI ratings downgrades resulted in events of
termination under the indenture relating to an education loan warehouse facility to fund the purchase of education loans from Union Federal. As a result, the facility is no longer available to finance
education loans originated by Union Federal on an interim basis.

We
believe that the TALF created by the Federal Reserve Board and the U.S. Department of Treasury has the potential to facilitate the issuance of ABS and improve market conditions for
ABS more generally. Under the TALF, which launched on March 3, 2009 and recorded subscriptions for the first funding on March 17, 2009, the Federal Reserve Bank of New York provides
non-recourse five-year loans to eligible borrowers owning eligible collateral, including ABS backed by private

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education
loans. We intend to participate in the TALF to the extent that we believe doing so is feasible and advantageous from a strategic or financial perspective.

General Trends Affecting Credit Performance.Beginning in late 2007 and continuing through the date of this quarterly report, general
economic
conditions in the United States have deteriorated. Credit performance of consumer-related loans generally, and the private education loans held by the various securitization trusts that we have
facilitated, have been adversely affected and are continuing to deteriorate. During the third quarter of fiscal 2009, we increased our weighted average gross default rate assumption to 17.85%, an
increase of 302 basis points from June 30, 2008, and 847 basis points from June 30, 2007.

In
the broader markets, the current conditions have remained challenging. Specifically,



Against
this backdrop, as discussed below, we sold the Trust Certificate.

Sale of the Trust Certificate.On April 6, 2009, we announced the sale of the Trust Certificate, representing our ownership
interest in NC
Residuals Owners Trust, formerly known as GATE Holdings, Inc., to affiliates of Vanquish Capital Management LLC. We believe the sale of the Trust Certificate has significantly improved
our near-term financial condition and liquidity. NC Residuals Owners Trust owned, directly and indirectly, certain certificates, which we refer to herein as the Trust Certificate, of
beneficial ownership interests, which we refer to herein as Residuals, of the NCSLT Trusts. The sale is expected to generate a cash refund for taxes previously paid, as we have been required to pay
taxes on the expected residual cash flows from the NCSLT Trusts before we actually receive those cash flows. Over the past seven years, we have paid more than $195 million on taxable income
associated with the Residuals. In addition, we estimate that we would have been required to pay approximately $430 million in additional taxes over the remaining life of the Residuals, with
approximately $370 million to be paid prior to the Residuals generating sufficient annual cash flows to offset the tax payments. As a result of the transaction, we expect to eliminate any tax
obligations from the Residuals in their entirety. The refund is expected to be received during fiscal 2010.

In
connection with the transaction, we entered into, among other agreements, a purchase agreement, dated as of March 31, 2009, with VCG Owners Trust, which we refer to herein as
the Purchaser, and VCG Securities LLC, which we refer to herein as Vanquish Investor, an asset services agreement with the Purchaser and Vanquish Investor and a data sharing and license
agreement with the Purchaser. Pursuant to the purchase agreement, we transferred the Trust Certificate to the Purchaser as of March 31, 2009. As a result, the Purchaser became the indirect
owner of the Residuals that were formerly owned by us indirectly through NC Residuals Owners Trust. In consideration for the sale, the Purchaser and Vanquish Investor agreed to bear all future federal
and state tax liabilities associated with the Residuals.

Pursuant
to the asset services agreement, we have agreed to provide certain advisory services to the Purchaser in connection with the Residuals, including, among others, analysis and
valuation optimization services and services relating to funding strategy. As compensation for these services, we are entitled to an advisory fee earned monthly at a rate equal to 1/12
of 0.63% of the aggregate outstanding principal balance of the education loans owned by the NCSLT Trusts as of the last day of the previous calendar month. Although the advisory fee will be earned
monthly, we will not have the right to receive the advisory fee except to the extent that amounts payable to the holder of the

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Residuals,
which we refer to herein as Cash Flows, are paid from distributions made by each of the NCSLT Trusts on each payment date. To the extent that we have earned but not received fees for any
prior month, any Cash Flows that are paid from distributions made by one or more of the NCSLT Trusts will be allocated as follows:



No
monthly advisory fee will be paid by the Purchaser unless the Purchaser has received Cash Flows.

Pursuant
to the data sharing and license agreement, the Purchaser has agreed to share with and license to us certain deidentified student loan data. In consideration of a
one-time license fee of $750,000, the Purchaser granted to us a limited, exclusive, irrevocable, perpetual license to retain and use monthly updates to Deidentified Data (as defined in the
data sharing and license agreement) for any lawful purpose. This license will survive the termination of the asset services agreement or the data sharing and license agreement for any reason. Unless
sooner terminated by the Purchaser, the term of
the data sharing and license agreement will continue until the earlier of (i) the date the Cash Flows equal zero or (ii) 25 years from the date of the agreement.

For
additional detail regarding the terms of the purchase agreement, the data sharing and license agreement and the several other agreements that we entered into in connection with the
sale of the Trust Certificate, as well as the asset services agreement we refer you to our current report on Form 8-K filed with the SEC on April 6, 2009.

TERI ReorganizationSettlement of Union Federal Claims.On April 7, 2009, the Bankruptcy Court entered an order authorizing
TERI
to enter into and perform a stipulation, among TERI, Union Federal and UFSB Private Loan SPV, or UFSB-SPV. UFSB-SPV is party to an education loan warehouse facility with a
conduit lender pursuant to which UFSB-SPV purchased private education loans from Union Federal using advances that UFSB-SPV received from the conduit lender. Pursuant to the
stipulation:



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We, Union Federal and TERI had been party to certain agreements, which we refer to herein as the Program Documents, pursuant to which, among other things, TERI
was retained as originator for private education loans funded by Union Federal, which we refer to herein as the Student Loans, and TERI guaranteed the repayment of principal and interest on every
Student Loan for which a "guaranty event" occurred. Pursuant to the Program Documents, certain guaranty fees and other amounts had been deposited in a segregated reserve account, which we refer to
herein as the Pledged Account. TERI granted Union Federal a security interest in certain assets and property, including funds in the Pledged Account, to secure TERI's obligations under the Program
Documents.

Union
Federal agreed to the Compromise Payment in order to avoid the cost, delay and risk associated with litigating certain disputes with TERI regarding possible deficiencies in Union
Federal's security interests and potential preferential transfers involving the Pledged Account. The Overpayment Amount represents amounts previously refunded to Union Federal by TERI from its
operating account, rather than the Pledged Account, related to cancelled Student Loans.

On
April 9, 2009, Union Federal received $30.0 million, which we refer to as the Settlement Amount, from TERI. Of the Settlement Amount, $15.7 million was allocated
to the Student Loans held by UFSB-SPV and subsequently applied to reduce amounts outstanding under the education loan warehouse facility. Based on management assumptions as of
March 31, 2009, we expect the aggregate principal and accrued interest balance of defaulted Student Loans over the life of the portfolio to exceed the Settlement Amount.

For
additional detail regarding the terms of the Union Federal settlement, we refer you to our current report on Form 8-K filed with the SEC on April 13, 2009.

TERI ReorganizationClaims Estimation and Plan of Reorganization.We remain uncertain about the amount of unsecured creditors'
claims,
including the unsecured claims of the securitization trusts, or the timing or content of TERI's plan of reorganization.

In
November 2008, we filed a motion with the Bankruptcy Court that proposed a framework for estimating all trust and lender claims against TERI's bankruptcy estate. The framework would
have determined the amount of a trust's or lender's unsecured guaranty claim, based on certain information provided with regard to its TERI-guaranteed loan portfolio and certain fixed
assumptions applied across all portfolios. The motion, which was prompted by our concern with the efficient administration of the bankruptcy estate, argued that there would be no substantial progress
toward a global settlement of claims or plan of reorganization without a uniform estimation procedure. Both TERI and the creditors committee formally objected to the motion, generally arguing that
they had been developing an alternative framework for use in estimating creditors' guaranty claims against TERI's estate. In addition, certain lenders objected to our motion, generally arguing with
substantive aspects of the estimation methodology that we proposed. The Bankruptcy Court continued the motion indefinitely in mid-December. We have subsequently provided comments to TERI,
the creditors committee and their respective advisors for use in developing their estimation framework, although we do not know the status of such framework as of the date of this quarterly report.
Until a framework is finalized and applied to all of TERI's creditors, we will not be able to estimate the amount of unsecured creditors' claims against TERI in the TERI Reorganization, or the
expected rate of recovery with regard to such claims.

On
April 7, 2009, the Bankruptcy Court granted a motion by TERI to further extend until May 22, 2009 the exclusive period during which TERI may file a plan of
reorganization. According to the motion, the creditors committee and TERI have made substantial progress on formulating a plan, the proposed timing or terms of which have not been disclosed to us.

TERI ReorganizationChallenge to Security Interests.The creditors committee is challenging certain security interests of the
securitization trusts. We cannot predict the timing, costs or outcome of

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the
challenges, which could decrease materially the collateral available to the trusts and the estimated fair value of our service receivables.

In
June 2008, the Bankruptcy Court entered an order approving a motion by TERI to purchase defaulted loans using cash in certain accounts, which we refer to as the pledged accounts. The
pledged accounts were funded with guaranty fees earned by TERI upon disbursement of education loans and held as collateral to secure TERI's obligations to pay the principal and interest on defaulted
education loans. The pledged accounts were generally held by third party financial institutions for the benefit of a program lender until the education loans were securitized, at which point the
accounts were pledged to the securitization trust that purchased the loans.

The
Bankruptcy Court's order was granted subject to the following:



Neither
the creditors committee nor any other party challenged the trusts' security interests in the pledged accounts within the 14-day period following the order. As a
result, beginning in July 2008, TERI resumed paying its obligations under the guaranty agreements with respect to defaulted loans from the trusts, but only to the extent there is cash in the pledged
account established for the benefit of the specific trust that owned the defaulted loan.

The
Bankruptcy Court, upon motion of the creditors committee, subsequently extended until February 2, 2009 the parties' rights to challenge the trusts' security interests in the
collateral other than the pledged accounts. In January 2009, the creditors committee filed an adversary complaint in the Bankruptcy Court against the owner trustee and indenture trustee of seventeen
securitization trusts, and against FMDS as administrator of such trusts. The complaint generally alleges that the security interests granted by TERI to the trusts, excluding the security interests in
the pledged accounts, are unperfected or may otherwise be avoided under the Bankruptcy Code. In particular, the complaint alleges that the trusts do not have enforceable rights to future recoveries on
defaulted loans owned by TERI with an aggregate principal and accrued interest balance of approximately $595.0 million as of March 31, 2009, or in amounts owed or transferred by TERI to
pledged accounts after the filing of TERI's petition for reorganization totaling approximately $30.8 million as of March 31, 2009. In March, 2009, FMDS and the owner trustee filed a
motion to dismiss the creditors committee's adversary complaint. The indenture trustee also filed a motion to dismiss, joining the arguments made in the motion filed by FMDS and the owner trustee. The
creditors committee filed an opposition to the motion to dismiss on April 30, 2009, together with an amended complaint naming the trusts themselves as defendants. FMDS expects to file a
response to the opposition and amended complaint within the time frame allowed under the applicable bankruptcy rules. We cannot at this time predict the timing, costs or outcome of the adversary
proceeding, and have not adjusted our accounting assumptions as of March 31, 2009 in response to this development. To the extent the trusts continue to request that TERI make guaranty claims
payments from the pledged accounts and to transfer the defaulted loans to TERI

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in
respect of the guaranty payments, the amount of defaulted loans, the recoveries of which are subject to the creditors committee's challenge, will continue to increase.

If
the creditors committee or any other party is successful in challenging the trusts' security interests in the post-petition transfers to the pledged accounts or other
collateral, the amount of pledged collateral available exclusively to a particular securitization trust to satisfy TERI's guaranty obligations to that trust would decrease materially. As a result, the
trust's unsecured claims against TERI would increase proportionately. For example, recoveries from defaulted education loans transferred to TERI, which have historically been used to replenish a
particular trust's pledged account, would instead become an asset of TERI's bankruptcy estate and available to satisfy administrative claims of TERI's bankruptcy estate and other holders of claims.
Recoveries from defaulted loans not transferred to TERI, however, would remain available to the trusts.

Funds
in the pledged accounts of certain trusts have been exhausted, or are expected to be exhausted in the near term, at which point such trust will have a general unsecured claim
against TERI. TERI has not resumed paying guaranty obligations using its general reserves or with respect to defaulted loans that have not been securitized and are held by program lenders that have
not otherwise agreed to settle their claims against TERI's bankruptcy estate.

TERI ReorganizationAccounting Assumptions.We did not adjust our accounting
assumptions during the nine months ended March 31, 2009 regarding TERI. As of May 8, 2009, TERI had not rejected or otherwise indicated how it will treat its guaranty obligations to
existing lenders. As a result, it is uncertain how collateral securing such obligations will be treated or applied to satisfy TERI's obligations. The adversary complaint filed by the creditors
committee creates further uncertainty regarding the trusts' rights to future recoveries on defaulted loans owned by TERI and amounts transferred by TERI to pledged accounts after April 7, 2008.
For purposes of estimating the fair value of our service receivables, we assumed at March 31, 2009 that the application of collateral will continue in the ordinary course in accordance with
existing agreements and that the trusts have rights to the amounts that are the subject of the creditors committee's complaint. A successful challenge to the security interests could decrease
materially the value of our additional structural advisory fees or our advisory fees pursuant to the asset services agreement with the Purchaser and Vanquish Investor, which fees are based on the
assets and Cash Flows of the NCSLT Trusts.

TERI ReorganizationClient Terminations.Certain of our agreements with clients provide for termination rights in the event of the
filing
by TERI of a voluntary petition under federal bankruptcy laws. As a result of the TERI Reorganization, certain clients, including JPMorgan Chase Bank, N.A., Bank of America, N.A. and RBS Citizens,
N.A. have terminated some or all of their agreements with us. These terminations will result in a significant reduction in our facilitated loan volumes during fiscal 2009 compared to prior fiscal
years. In addition, we expect that the guaranty agreements or loan origination agreements that a significant number of our clients have with TERI will be terminated in the context of the TERI
Reorganization. Termination of a client's guaranty agreement or loan origination agreement with TERI would generally result in the termination of our agreements with the client. As a result, we expect
to lose additional clients as the TERI Reorganization evolves unless we can develop an alternative to a TERI-guaranteed private education loan program acceptable to former, current and
prospective clients.

Prepayment and Default Trends.Although it can be difficult to discern trends in the overall portfolio, we observed that prepayment
rates continued
to decline during the third quarter of fiscal 2009. Prepayment rates generally rose for the first three quarters of fiscal 2008 and generally fell during the past four fiscal quarters. We estimate
that prepayment rates decreased by more than 50% since March 31, 2008, primarily due, we believe, to the current interest rate environment, limited availability of consumer credit and current
economic conditions. During the second quarter of fiscal 2009, we adjusted our prepayment assumptions to assume that the current historically low prepayment rate

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would
generally persist for 12 months and eventually revert to historical norms during the ensuing 12 months. During the third quarter of fiscal 2009, we maintained a
12-month period during which we assume that the current historically low prepayment rates would persist. We believe that current prepayment rates will persist until March 2010, and
eventually revert to historical norms during the ensuing 12 months.

During
the second quarter of fiscal 2009, defaults generally increased in our securitized loan portfolio, causing us to adjust upward our assumed gross default assumptions, from 15.96%
to 16.58%, and our net default assumptions, from 8.30% to 8.62%. We believe that defaults trended higher during the quarter primarily as a result of the continued adverse consumer credit trends and,
to a lesser extent, an increase in the number of loans entering repayment. Education loans tend to experience higher rates of delinquencies and defaults in the early years of repayment compared to
later years. Over the past eight months, we have implemented several collections initiatives, including "early awareness" campaigns and increased focus on early stage delinquencies, which we expect to
reduce delinquencies and, ultimately, defaults over the long term. However, in the short term we remain uncertain of their effect, and we have concluded that despite apparently positive initial
results, it would be premature to assume positive long term trends as of March 31, 2009.

During
the third quarter of fiscal 2009, defaults generally increased in our securitized loan portfolio, causing us to adjust upward our assumed gross default assumptions, from 16.58% to
17.85%, and our net default assumptions, from 8.62% to 9.28%. We believe that defaults trended higher during the quarter primarily as a result of the continued adverse consumer credit trends.

Write-down of Service Receivables and Loans Held for Sale.Our financial results for the third quarter of fiscal 2009 reflected our
inability to access the securitization market, as well as:



In
general, each of these adjustments was necessary as a result of conditions in the capital markets and performance trends. We believe that our portfolios of securitized and
unsecuritized loans may continue to be adversely affected by a negative consumer credit cycle that is affecting many other classes of consumer credit.

Liquidity and Capital Resources.In August 2008, we received $132.7 million in gross proceeds from the sale of shares of
series B
preferred stock to affiliates of GS Capital Partners, or GSCP. The proceeds provided us with liquidity and capital resources that will be critical to our short-term funding requirements.
We believe that the sale of the Trust Certificate will contribute to an improved liquidity position, as the sale is expected to eliminate any future federal and state tax liabilities associated with
the Residuals and result in a refund for federal income taxes previously paid. Our short-term needs, however, remain subject to uncertainties regarding regulatory capital requirements of
Union Federal. Union Federal's regulatory authorities have from time to time requested that we provide additional capital to Union Federal. If these authorities were to require us to make additional
infusions of regulatory capital into Union Federal, or if sale of the Trust Certificate does not actually generate the tax benefits that we currently expect, our short-term liquidity would
be adversely affected.

During
the last two quarters of fiscal 2008, we announced a reduction in our overall cost structure, including the reduction of headcount by over 600 employees. During the first two
quarters of fiscal

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2009,
we further reduced headcount by approximately 100 employees. Following these reductions, we had 231 full-time employees as of May 6, 2009, compared to 410
full-time employees as of May 6, 2008.

Product and Management Changes.We have developed, and continue to develop as of the date of this quarterly report, alternatives to the
loan guaranty
and loan origination services that TERI historically provided to our clients. We have implemented a private education loan program that does not include a third party guaranty. In addition, we provide
outsourced loan origination services and portfolio management services to a limited number of clients on a fee-for-service, stand alone basis. We are developing a new private
education loan product that we expect to have available to prospective lender clients in the fourth quarter of fiscal 2009. The success of the product under development will be critical to growing and
diversifying our revenues and client base in the future. Compared to past TERI-guaranteed loan programs, we are designing this loan product to strengthen the creditworthiness of the
resulting assets, through redesigned risk-based pricing and enhanced cosigner participation, and by aligning risk and product options to promote a greater portion of immediate repayment
loans, or loans for which payment of principal and interest begins shortly after final disbursement, and interest-only loans, or loans for which payment of interest begins shortly after
disbursement but payment of principal is deferred during enrollment. We are uncertain of the level of interest from former, current or prospective lender clients with regard to the new program or the
offered services, particularly in the current economic environment. Union Federal is not, as of the date of this report, able to fund loan originations in the private education loan program due to its
current lack of funding capacity, and it will be necessary for Union Federal to obtain regulatory clearance before offering such a product.

We
experienced significant changes in senior management during the first quarter of fiscal 2009. Daniel Meyers returned to the company as Chief Executive Officer and President, and as a
director, effective September 1, 2008. Mr. Meyers co-founded the company and served as our Chief Executive Officer and Chairman of the Board from our incorporation in 1994 to
September 2005 and as our President from November 2004 to September 2005. In addition, four executive vice presidents left our company as of September 30, 2008, including our chief financial
officer, who also headed our capital markets department, our chief administrative officer, our chief marketing officer and our chief information officer. We have reconstituted our senior management
team, however the loss of any key employees could adversely affect our business. If we are unable to manage our cost reductions, or if we lose key employees as a result, our operations and our
financial results could be adversely affected. These challenges are further discussed below under Item 1A, "Risk FactorsRisks Related to Our Industry, Business and Operations."

Outlook.Significant uncertainty exists regarding the success or market acceptance of our new products and services, regulatory
requirements
applicable to Union Federal and our ability to access the securitization markets. Nonetheless, we believe that the strategic realignment, our cost saving measures since May 2008 and management changes
that we have undertaken should position the company to lead the next product cycle and compete in a re-emerging private education loan marketplace. In that regard, we believe that two
developments this quarter, the sale of the Trust Certificate and Union Federal's settlement in the context of the TERI Reorganization, were significant. The expected tax consequences of the sale of
the Trust Certificate would significantly improve our liquidity position. We believe that Union Federal's settlement with TERI should improve our flexibility with regard to the sale or financing of
that portfolio, as the settlement definitively resolved the status of the segregated reserve account pledged by TERI to Union Federal.

The
information described under the caption "Risk Factors" in Item 1A of Part II of this quarterly report also contains important factors that you should consider in
assessing our business.

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Securitizations and Related Revenue

We have historically structured and facilitated securitization transactions for our clients through a series of bankruptcy remote,
qualified special purpose statutory trusts. Through the securitization process, the trusts obtain private education loans from the originating lenders or their assignees, which relinquish to the trust
their ownership interest in the loans. The debt instruments that the trusts issue to finance the purchase of these education 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 education loans as private label loan trusts.

At
March 31, 2009, the principal balance of loans facilitated and available to us for securitization was approximately $1.8 billion of which $83.5 million was
facilitated during the first nine months of fiscal 2009. Under the terms of our purchase agreements with lender clients, we generally have an obligation to use our best efforts to facilitate the
purchase of the client's loans during a specified loan purchase period. The length of the loan purchase period varies by client and generally ranges from 195 days to 555 days following
final loan disbursement. Under the terms of certain of our purchase agreements, if we fail to facilitate a purchase in breach of our obligations, our damages would be limited to liquidated damages of
one percent of the total principal amount of the loans as to which the loan purchase period
had expired. Certain other purchase agreements, however, do not include a liquidated damages provision.

Those
purchase agreements that limit our liability to liquidated damages generally provide that our obligation to close a securitization is subject to the condition that no "market
disruption event" has occurred. The TERI Reorganization constitutes a "market disruption event" under certain of these purchase agreements, suspending our contractual obligation to close a
securitization with respect to approximately $1.3 billion of our facilitated loan volume available for securitization as of March 31, 2009, excluding loan volume originated by Union
Federal for which the obligation to securitize ceased pursuant to a Bankruptcy Court order dated April 7, 2009. Any liquidated damages would be due at the expiration of the relevant loan
purchase period, which would not occur for a period of time after the market disruption event ceases. Our purchase agreements applicable to approximately $1.3 billion of the facilitated loan
volume available for securitization as of March 31, 2009 do not include a liquidated damages provision in the event that we fail to facilitate a securitization in breach of our obligations, and
the amount of our potential liability with respect to such loans is not determinable at this time.

We
have received several types of fees in connection with our past securitization services:



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At
March 31, 2009, we expect to receive the additional fees beginning five to 20 years after the date of a particular securitization transaction. The stipulated parity
ratio levels may be raised if certain trust characteristics change. The level applicable to a particular trust is determined at the time of securitization. Actual parity ratios of the NCSLT Trusts as
of March 31, 2009 ranged from 93.9% to 99.7%. Please refer to exhibit 99.2 to this quarterly report for additional information on actual trust parity ratios as of March 31, 2009.



Processing Fees from TERI

Historically, we provided 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 recognized as revenue the monthly reimbursement that TERI provided us for the expenses we incurred in
providing these services. During fiscal 2008, we received $126.5 million in processing fees from TERI pursuant to the master servicing agreement. In June 2008, in the context of the TERI
Reorganization, the Bankruptcy Court entered an order approving a motion by TERI to reject the master servicing agreement effective as of May 31, 2008. As a result of the termination, we will
not receive processing fees from TERI pursuant to the master servicing agreement for any period after May 31, 2008. In addition, we have a general unsecured claim with regard to
$16.0 million of processing fees from TERI that were due, but unpaid, prior to the filing of TERI's bankruptcy petition. The order, however, approved a motion by TERI to enter into a transition
services agreement with us with a term through September 29, 2008. In October 2008, we entered into a letter agreement with TERI, subject to subsequent approval by the Bankruptcy Court, to
provide limited additional services to TERI, including continued occupancy through December 15, 2008 of certain office space subleased by TERI from us. Processing fees from TERI during the
first nine months of fiscal 2009 in the amount of $2.9 million represented fees from TERI pursuant to the transition

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services
agreement or the subsequent letter agreement. We do not expect to receive a material amount of processing fees from TERI in the future.

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

Under
GAAP, we are required to estimate the fair value of the additional structural advisory fees and residuals as if they are investments in debt securities classified as
available-for-sale or trading, similar to retained interests in securitizations. Accordingly, we record additional structural advisory fees and residuals receivables 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 receivables, we use
certain key assumptions to estimate their values. See "Application of Critical Accounting Policies and EstimatesService Revenue and Receivables and the Valuation of Education
Loans Held for Sale." 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 or when the related expense is incurred.

Quarterly Fluctuations

Our revenue, operating results and profitability have varied on a quarterly basis in the past primarily as a result of the timing, size
and structure of any capital market transactions that we have facilitated and, to a lesser extent, the seasonality of education loan originations, which in the past has affected the amount of
processing fees from TERI that we earned in a particular quarter. In fiscal 2008, we facilitated two securitizations in the first quarter, but no securitizations during the remainder of the fiscal
year. We did not facilitate any securitization transactions during the first nine months of fiscal 2009 and do not expect to facilitate any in the near-term. The variability of our
quarterly revenue and operating results may continue on a quarterly basis, particularly as a result of conditions in the capital markets, developments in the TERI Reorganization and lower levels of
facilitated loan volumes. In particular, a continuing inability to access the capital markets, variations in the size, structure or economic terms of any future transactions, write-downs of our
service receivables, write-downs of Union Federal's loan portfolios, and the level of our facilitated loan volumes and operating expenses, could continue to materially adversely affect and result in
increased variability of our operating results on a quarterly basis.

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The
following tables set forth certain related quarterly financial and operating data for the first three quarters of fiscal 2009 and each quarter of fiscal 2008:

Fiscal 2009First
Quarter

Second
Quarter

Third
Quarter

Total(in thousands)Principal amount of education loans facilitated

$
128,089

$
65,283

$
54,719

$
248,091Principal amount of education loans facilitated that were also available to us for securitization

$
83,215

$
11,185

$
(10,933
)
$
83,467Total revenues

$
(84,904
)
$
(86,095
)
$
(130,616
)
$
(301,615
)Net (loss)

$
(92,897
)
$
(93,387
)
$
(140,654
)
$
(326,938
)




Fiscal 2008First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total(in thousands)Principal amount of education loans facilitated

$
2,401,541

$
1,081,324

$
1,249,201

$
271,934

$
5,004,000Principal amount of education loans facilitated that were also available to us for securitization

$
2,227,380

$
982,052

$
1,042,671

$
267,931

$
4,520,034Principal and accrued interest balance of education loans securitized

$
2,027,079










$
2,027,079Total revenues

$
379,837

$
(123,072
)
$
(251,788
)
$
(33,386
)
$
(28,409
)Net income (loss)

$
168,820

$
(117,675
)
$
(229,550
)
$
(56,671
)
$
(235,076
)


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,
2008, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on August 28, 2008. 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

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consider
our policy with respect to the determination of whether or not to consolidate the financial results of the securitization trusts that we facilitate and the valuation of the portfolio of
private education loans held by Union Federal to be critical accounting policies.



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

On
July 1, 2008, we adopted Statement of Financial Accounting Standards, or SFAS, No. 157, "Fair Value Measurement," effective July 1, 2008. SFAS No. 157
establishes a three-level valuation hierarchy for the use of fair value measurements based upon the transparency of inputs to the valuation of the asset or liability as of the measurement date.

Because
there are no quoted market prices for our additional structural advisory fees, residuals receivables or education loans held for sale, 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, publicly available 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 and
education loans at each balance sheet date. Because our estimates rely on quantitative and qualitative factors, including macroeconomic indicators to predict prepayment, default and recovery rates,
management's ability to determine which factors are more heavily weighted in our estimates, and our ability to accurately incorporate those factors into our estimates, can have a material effect on
our valuations.

We
have posted to our website, and filed as exhibit 99.1 to this quarterly report, static pool data as of March 31, 2009, including actual borrower payment status,
delinquency, cumulative loss and prepayment data as of March 31, 2009 for certain securitization trusts that we have facilitated. We have also posted to our website, and filed as
exhibit 99.2 to this quarterly report, a supplemental presentation of certain historical trust performance data, including channel-specific loans available for securitization by fiscal quarter,
parity ratios by trust, net recovery rates by trust, FICO score ranges by year of origination and by channel, FICO score distributions for loans disbursed since January 1, 2008, payment status
by trust and six-month rolling prepayment rates by trust.

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The
following table shows the approximate weighted average assumptions for loan performance and discount rates at March 31, 2009, December 31, 2008, September 30,
2008 and June 30, 2008 for our NCSLT Trusts:

Percentage rate

Percentage
discount rateDefault

Recovery

Prepayments

Structural
advisory fees

ResidualsMarch 31, 2009


17.85
%

48
%

8.01
%

12.66
%


%*December 31, 2008


16.58
%

48
%

8.12
%

12.21
%

18.40
%September 30, 2008


15.96
%

48
%

8.40
%

11.07
%

16.35
%June 30, 2008


14.83
%

48
%

8.40
%

9.72
%

14.88
%


---

In
selecting loan performance assumptions, we consider the underlying creditworthiness of the education 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. Past TERI-guaranteed private education loan programs,
under which approximately 77% of the borrowers had a creditworthy cosigner, typically a family member, had an extensive credit underwriting process.

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



A
securitization trust may have a life of over 24 years, based on a lifecycle for education loans that includes borrowers' in-school deferment, grace, repayment and
forbearance periods. Higher levels of loan defaults are generally expected to occur in the early years of a trust, as loans enter repayment. Recoveries on defaulted loans are expected to lag defaults
by months or years, with cumulative recoveries increasing gradually over an extended period of time later in the life of a trust. As a result, at a single point in time, particularly early in the life
of a trust, a trust may experience an actual net default rate that is higher than the estimated endpoint net default rate for that trust. For the same reason, we assess the actual current net default
rates against an expected default timing curve, which reflects the expected speed of defaults over the life of a trust. The shape of the default curve is based in part on our proprietary database of
more than 20 years of loan performance information, reflecting data through a variety of economic cycles, and influences the estimated endpoint defaults, which in turn influence the net default
rate.

During
the second quarter of fiscal 2009, we increased the weighted average gross default rate assumptions used to estimate the fair value of our residuals and additional structural
advisory fees receivables from 15.96% to 16.58%, as a result of the trusts' actual default experience and general economic pressure on all consumer asset classes. We also increased our assumed
weighted average net default rate from 8.30% to 8.62% during the second quarter of fiscal 2009. These increases in the default rates assumptions resulted in a decrease in the estimated fair value of
our residuals receivables of $9.4 million and a decrease in the estimated fair value of our additional structural advisory fees receivable of $3.0 million.

During
the third quarter of fiscal 2009, we further increased the weighted average gross default rate assumptions used to estimate the fair value of our residuals and additional
structural advisory fees

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receivables
from 16.58% to 17.85%, and our net default assumptions from 8.62% to 9.28%. We believe that defaults trended higher during the quarter primarily as a result of the continued adverse
consumer credit trends. The increases in default rates assumptions resulted in a decrease in the estimated fair value of our structural advisory fees receivable of $2.6 million. As of
March 31, 2009, we were no longer entitled to residuals receivables from the NCSLT Trusts.

TERI's Obligation and Ability to Pay Claims.The indentures relating to the securitization trusts specify certain circumstances, which
we refer to as
trigger events, in which payments that would otherwise be due in respect of additional structural advisory fees and residuals instead be directed to the holders of the notes issued by the trusts until
the conditions causing the trigger event cease to exist or all notes, and related interest, are paid in full. Under the indentures, a trigger event generally occurs when the cumulative gross defaults
of loans held by such trust exceed a specified level. Under certain of the indentures, a trigger event would not occur even if cumulative loan defaults exceed the specified level if TERI continues to
pay claims on defaulted loans and, in the case of certain indentures, is solvent. As a result of the TERI Reorganization, in the third quarter of fiscal 2008, we adjusted our assumptions to assume
that amounts available to pay a trust's default claims will be limited to amounts available from the trust's pledged account, assuming that recoveries on defaulted loans would replenish such pledged
account. Previously, we assumed that TERI would pay default claims on a timely basis and that no default trigger event would occur. Although the overall expected cash flows generated by the trusts
would improve as a result of the higher priority of repayment of the notes, the expected timing of cash payments to us with respect to additional structural advisory fees and residuals would be
delayed, reducing their estimated fair value. The change in our assumptions with regard to TERI's obligation and ability to pay claims resulted in a decrease in the estimated fair value of our
residuals receivables of $219.6 million and a decrease in the estimated fair value of our additional structural advisory fees receivable of $0.5 million during the third quarter of
fiscal 2008. We made no changes to our assumptions regarding TERI's obligation and ability to pay claims during the fourth quarter of fiscal 2008 or the first three quarters of fiscal 2009.

TERI
may seek to reject its guaranty obligations entirely in the context of the TERI Reorganization. As of May 8, 2009, TERI had not rejected or otherwise indicated how it will
treat its guaranty obligations to the trusts or lenders that had not settled their claims against TERI's bankruptcy estate. As a result, it is uncertain how collateral securing such obligations will
be treated or applied to satisfy TERI's obligations. In January 2009, the creditors committee filed an adversary complaint in the Bankruptcy Court against the owner trustee and indenture trustee of
seventeen securitization trusts, and against FMDS as administrator of such trusts. The complaint generally alleges that the security interests granted by TERI to the trusts, excluding the security
interests in the pledged accounts, are unperfected or may otherwise be avoided under the Bankruptcy Code. In particular, the complaint alleges that the trusts do not have enforceable rights to future
recoveries on defaulted loans owned by TERI with an aggregate principal and accrued interest balance of approximately $595.0 million as of March 31, 2009, or in amounts owed or
transferred by TERI to pledged accounts after the filing of TERI's petition for reorganization totaling approximately $30.8 million as of March 31, 2009. In March 2009, FMDS and the
owner trustee filed a motion to dismiss the creditors committee's adversary complaint. The indenture trustee also filed a motion to dismiss, joining the arguments made in the motion filed by FMDS and
the owner trustee. The creditors committee filed an opposition to the motion to dismiss on April 30, 2009, together with an amended complaint naming the trusts themselves as defendants. FMDS
expects to file a response to the opposition and amended complaint within the time frame allowed under the applicable bankruptcy rules. We cannot at this time predict the timing, costs or
outcome of the adversary proceeding. For purposes of estimating the fair value of our service receivables, we assumed at March 31, 2009 that the application of collateral will continue in the
ordinary course in accordance with existing agreements and that the trusts have rights to the amounts that are the subject of the creditors committee's complaint. A successful challenge to the
security interests could decrease materially the value of our additional structural advisory fees or our advisory

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fees
pursuant to the asset services agreement with the Purchaser and Vanquish Investor, which fees are based on the assets and Cash Flows of the NCSLT Trusts.

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

A
loan in deferment is expected to have a low likelihood of being prepaid. A loan is expected to have a higher likelihood of being repaid during the first, compared to the second, year
of repayment. However, after the second year, as a loan becomes more seasoned, the likelihood of a prepayment is expected to increase further, as borrowers increase their earnings power and their
ability to partially or
fully prepay their loans, or as they establish better credit and are offered more opportunities to consolidate their education loans.

Economic
conditions as of the date of this quarterly report are causing prepayment rates to vary significantly from historical rates. In response to a historically low prepayment rate,
the current interest rate environment and limited availability of consumer credit, we adjusted our prepayment assumption during the second quarter of fiscal 2009 by extending the period during which
decreased prepayments were expected to persist. At December 31, 2008, we assumed that the then current prepayment rate would generally persist for 12 months and eventually revert to
historical norms during the ensuing 12 months. This change resulted in a $11.3 million increase in the value of the residuals and a $2.4 million increase in the structural
advisory fees during the second quarter of fiscal 2009.

During
the third quarter of fiscal 2009, we extended by three months the period during which we assumed the current historically low prepayment rate would persist, as a result of the
current economic and interest rate environments, and limited availability of consumer credit. As a result, we assumed that the current prepayment rate will persist until March 31, 2010 and then
eventually revert to historical norms during the ensuing 12 months. These changes resulted in an increase in the estimated fair value of our additional structural advisory fees of
$0.8 million.

Discount RateResiduals.In determining an appropriate discount rate for valuing our residuals, we historically have considered a
number
of factors, including market data made available to us on spreads on federally guaranteed loans and private education loans, as well as rates used in the much broader ABS market. We also evaluate
yield curves for corporate subordinated debt with maturities similar to the weighted average life of our residuals. During the second quarter of fiscal 2009, we increased the discount rate by 200
basis points, applying a discount rate of 18.0% for purposes of estimating the fair value of residuals from securitization trusts that had not issued Triple B-rated securities and a
discount rate of 19.0% for purposes of estimating the fair value of residuals from securitization trusts that had issued Triple B-rated securities. In increasing the discount rate, we
considered, among other things, widening spreads in subordinate tranches of actual federal loan ABS issuances and actual transactions involving other ABS asset classes, as well as widening indicative
spreads, not supported by actual transactions, in subordinate tranches of private education loan ABS. The increase in the discount rate resulted in a decrease of $40.0 million in the estimated
fair value of our residuals during the second quarter of fiscal 2009.

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Discount RateAdditional Structural Advisory Fees.Historically, we have based the discount rate that we use to estimate the fair
value
of our additional structural advisory fees on a spread over the 10-year U.S. Treasury Note rate based on the priority payment status of additional structural advisory fees in the flow of
funds out of the securitization trusts and comparable spreads on structured and corporate debt securities. A decrease in the 10-year U.S. Treasury Note rate has the effect of increasing
the estimated fair value of our structural advisory fees receivable, while an increase in the rate has the opposite effect on our estimate of fair value. During the second quarter of fiscal 2009, we
increased the discount rate spread by 275 basis points, to 1,000 basis points. In doing so, we considered, among other things, increasing yield curves for certain composite indices for
BBB- and BB-rated corporate bond indices with ten year maturities, as well as increases in the broader ABS marketplace during the quarter. The 10-year U.S. Treasury
Note rate decreased by 161 basis points during the fiscal quarter, to 2.21% at December 31, 2008. As a result, the Company applied a discount rate of 12.21% for purposes of estimating the fair
value of the additional structural advisory fees, which resulted in a net decrease of $6.1 million in the estimated fair value of the Company's additional structural advisory fees during the
second quarter of fiscal 2009.

During
the third quarter of fiscal 2009, we maintained the discount rate spread at 1,000 basis points. The 10-year U.S. Treasury Note rate increased by 45 basis points during
the fiscal quarter, to 2.66% at March 31, 2009. As a result, we applied a discount rate of 12.66% for purposes of estimating the fair value of the additional structural advisory fees, which
resulted in a decrease of their fair value of $2.9 million during the third quarter of fiscal 2009.

Auction Rate Note Interest Rates.We have facilitated five private education loan trusts that issued auction rate notes to finance the
purchase of
education loans. Interest rates for the auction rate notes are determined from time to time at auction. We use a spread over LIBOR to project the future cost of funding of the auction rate notes
issued by each such trust. Historically, the spread over LIBOR used to estimate the future cost of funding was based on historical trends, then current auction rates for each trust and assumptions for
future auction rates.

Failed
auctions have occurred and persisted with respect to auction rate notes issued by each of the five securitization trusts that have issued auction rate notes. As a result of the
failed auctions, the auction rate notes bear interest at a maximum rate, which was calculated as of March 31, 2009, as one-month LIBOR plus 1.50%, in the case of auction rate notes
that were rated at least Aa3 by Moody's and AA- by S&P as of March 31, 2009, or one-month LIBOR plus 2.50%, in the case of auction rate notes that were rated at least A3
by Moody's and A- by S&P as of March 31, 2009. Auction rate notes issued by two securitization trusts are also rated by Fitch and bear interest at a maximum rate, which was
calculated as of March 31, 2009 as one-month LIBOR plus 1.50%, in the case of auction rate notes that were rated at least AA- by Fitch as of March 31, 2009, or
one-month LIBOR plus 2.50%, in the case of auction rate notes that were rated at least A- by Fitch as of March 31, 2009. In the event of certain ratings agency actions,
these maximum spreads increase further. If any auction rate note were to be rated below Aa3 but at least A3 by Moody's, and below AA- but at least A- by S&P and Fitch, as
applicable, it would bear an interest rate of one-month LIBOR plus 2.50%. Furthermore, if any auction rate note were to be rated below A3 by Moody's and below A- by S&P and
Fitch, as applicable, its maximum auction rate would be calculated as one-month LIBOR plus 3.50%.

In
October 2008, Moody's downgraded the ratings assigned to certain subordinated auction rate notes to below A3. As a result, the interest rate spread on these notes increased from
one-month LIBOR plus 1.50% to one-month LIBOR plus 3.50%. In November 2008, Moody's downgraded the insurance financial strength rating of Ambac to Baa1 from Aa3. Ambac has
provided credit enhancement for certain ABS issued in securitizations that we have facilitated, including certain auction rate notes. The downgrading of Ambac's ratings resulted in a downgrading of
the ratings assigned to certain of our auction rate notes. As a result, the interest rate on certain of those auction rate notes

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increased
from one-month LIBOR plus 1.50% to one-month LIBOR plus 2.50% or, in some cases, to one-month LIBOR plus 3.50%, and the interest rate of certain of those
auction rate notes increased from one-month LIBOR plus 2.50% to one-month LIBOR plus 3.50%. We assumed at March 31, 2009 that all outstanding auction rate notes would
continue to bear interest at the then-current maximum spreads over one-month LIBOR until their expected maturity dates. The increased cost of funding of these notes resulted in
a decrease of $13.1 million in the estimated fair value of our additional structural advisory fees, and a decrease of $31.8 million in the estimated fair value of our
residuals, during the second quarter of fiscal 2009. We made no adjustments to these assumptions during the third quarter of fiscal 2009. On April 14, 2009, Moody's downgraded the insurer
financial strength rating of Ambac, from Baa1 to Ba3, which resulted in a downgrading of the ratings assigned to certain auction rate notes issued in three securitizations that we facilitated. These
auction rate notes, however, already bore interest at the maximum rate.

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

Forward LIBOR Curve.LIBOR is the underlying rate for most of the trusts' assets and liabilities and can have a significant effect on
the cash flows
generated by each trust. Changes in the forward LIBOR curve affect the principal balances of education loans held by the trusts, particularly as interest is capitalized during loan deferment, which
affects the net interest margin that the trust generates. In addition, certain trusts have issued a tranche of ABS that bears a fixed interest rate. A decrease in the forward LIBOR may result in a
reduced spread on the fixed-interest tranche, which in turn decreases the estimated fair value of our service receivables. Significant changes to the forward LIBOR curve can also affect the estimated
fair value of our additional structural advisory fees, which bear interest at the rate of LIBOR plus 150 basis points to the extent such fees are accrued but unpaid by the trusts.

During
the second quarter of fiscal 2009, the forward LIBOR curve decreased by approximately 200 basis points, an unusually large change. The change reduced the estimated fair value of
our residuals receivables by $16.1 million, primarily as a result of a reduced spread on the fixed interest ABS, and reduced the estimated fair value of our additional structural advisory fees
by $15.4 million, primarily as a result of a lower interest rate applicable to accrued but unpaid fees.

During
the third quarter of fiscal 2009, the forward LIBOR curve increased by approximately 75 basis points. The increase resulted in a recovery of a portion of our additional structural
advisory fees that had been written down in the second quarter of fiscal 2009 as a result of the significant lowering of the forward LIBOR curve during that quarter. The change increased the estimated
fair value of our additional structural advisory fees by $2.6 million.

Fees and Expenses.Beginning in the fourth quarter of fiscal 2008, we took into account default prevention and other collections
related costs for
our estimates of the fair value of our additional structural advisory fees and residuals receivables. Previously, these costs were reimbursed by TERI pursuant to our master loan guaranty agreement and
were excluded from our valuation model. Due to the termination of the master loan guaranty agreement effective as of May 31, 2008, however, we no longer receive reimbursement for such expenses.
On March 1, 2009, FMER, U.S. Bank National Association and certain NCSLT Trusts entered into a special servicing agreement, pursuant to which FMER will continue to perform certain special
servicing duties with respect to default prevention for

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education
loans owned by the NCSLT Trusts. The relevant NCSLT Trusts will bear the costs of the special services to be provided by FMER, up to specified monthly limits.

At
June 30, 2008, we estimated the aggregate costs necessary to achieve our gross default rate assumption, which resulted in a decrease in the estimated fair value of our residual
receivable of $15.9 million and a decrease in the estimated fair value of our additional structural advisory fee receivable of $0.2 million during the fourth quarter of fiscal 2008. We
did not change these estimates during the first nine months of fiscal 2009.



Increases in our estimates of defaults, prepayments and discount rates, as well as decreases in default recovery rates and the
multi-year forward estimates of LIBOR, would have a negative effect on the value of our additional structural advisory fees. Education loan prepayments include either full or partial
payments by a borrower in advance of the maturity schedule specified in the credit agreement. If amounts in the pledged accounts were unavailable to pay the trusts' default claims or if recoveries on
defaulted loans were not used to replenish such pledged accounts, or if net defaults increase beyond the level of expected third party reimbursement assumptions, then these changes will have an
additional negative effect on the value of our additional structural advisory fees. LIBOR is the reference rate for a substantial majority of the loan assets and, we believe, a reasonable index for
borrowings of the trusts.

The
following table shows our loan performance and discount rate assumptions and service receivables balances at March 31, 2009 and estimated changes that would result from
changes in our assumptions. The effect on the fair value of the structural advisory fees are based on variations of 10% or 20%, except for the forward LIBOR rates, which are based on variations of 1%
and 2% from the forward LIBOR rates at March 31, 2009.

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

Percentage change
in assumptions

Management
assumption and
receivables
balance at
March 31, 2009

Percentage change
in assumptionsStructural advisory fees

Down 20%

Down 10%

Up 10%

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


15.85
%

16.86
%

17.85
%

18.83
%

19.78
%Total structural advisory fees

$
64,644

$
63,787

$
60,846

$
60,042

$
59,211Change in receivables balance


6.24
%

4.84
%




(1.32
)%

(2.69
)%Default recovery rate:Management assumption


38.40
%

43.20
%

48.00
%

52.80
%

57.60
%Total structural advisory fees

$
58,469

$
60,153

$
60,846

$
61,245

$
61,586Change in receivables balance


(3.91
)%

(1.14
)%




0.66
%

1.22
%Annual prepayment rate:Management assumption


6.41
%

7.21
%

8.01
%

8.81
%

9.61
%Total structural advisory fees

$
61,398

$
61,119

$
60,846

$
60,387

$
59,964Change in receivables balance


0.91
%

0.45
%




(0.75
)%

(1.45
)%Discount rate:Management assumption


10.13
%

11.39
%

12.66
%

13.93
%

15.19
%Total structural advisory fees

$
81,036

$
70,194

$
60,846

$
52,781

$
45,818Change in receivables balance


33.18
%

15.37
%




(13.25
)%

(24.70
)%




Change in assumption



Change in assumptionDown 200
basis points

Down 100
basis points

Receivables
balance

Up 100
basis points

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

$
50,065

$
55,286

$
60,846

$
66,705

$
73,028Change in receivables balance


(17.72
)%

(9.14
)%




9.63
%

20.02
%


---



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:



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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 March 31, 2009, 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, or FASB Statement No. 140. Accordingly, we did not consolidate these existing securitization trusts in our financial statements. In
addition, the securitization trusts created prior to January 31, 2003 in which we hold a variable interest that could result in us being considered the primary beneficiary of such trust, have
been amended in order for them to be considered QSPEs. The adoption of FIN No. 46R, which we began to apply in December 2003, did not have a material impact on our consolidated financial
condition, results of operations, earnings per share or cash flows.

The
FASB has embarked upon a project to amend FASB Statement No. 140 that would potentially remove the concept of the QSPE from such statement effective for fiscal years beginning
after November 15, 2009 and thereby eliminate gain on sale accounting as currently utilized. As a result of this, the FASB would then also remove the QSPE exception from FIN No. 46R. The
FASB collected exposure draft comments on this topic on November 14, 2008, however, a final ruling has not been issued as of May 8, 2009. The ultimate impact, if any, of these
deliberations on our accounting practices is uncertain at this time.

Results of Operations

Three and nine months ended March 31, 2009 and 2008

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.

We
facilitated two securitization transactions during the first quarter of fiscal 2008, but did not facilitate any securitization transactions during the second or third quarters of
fiscal 2008, or during the first, second or third quarters of fiscal 2009. Our estimates of the allocation by marketing channel of

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our
securitization revenues for the first quarter of fiscal 2008, expressed as a percentage of the total principal and accrued interest of private education loans securitized in each channel at the
date of securitization, are as follows:

Percentage yieldMonth and year of private
label loan securitization

Marketing channel

Volume of
loans
securitized(1)



Up-front
structural
advisory fees

Additional
structural
advisory fees

Residuals

Total(3)(dollars in millions)September 2007

Direct to consumer

$
1,640


81
%

9.6
%

1.2
%

6.6
%

17.3
%School channel


387


19


5.1


1.2


2.5


8.8Total

$
2,027Blended yield(2)








8.7


1.2


5.8


15.7


---

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

Market
demand for private education loan ABS has been volatile, and we believe does not exist for TERI-guaranteed loans as of May 8, 2009. This volatility, and absence
of demand for private education loan ABS, has negatively affected, and will likely 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 ABS. In addition, we are uncertain as of May 8, 2009, whether the fee structure that we
have historically used in facilitating securitization transactions will be used in any future securitizations. In particular, market conditions may dictate that we reduce or forgo our
up-front structural advisory fee in connection with securitizations, if any, that we are able to facilitate in the near-term.



We did not complete a securitization transaction in the second quarter of fiscal 2008 or the first nine months of fiscal 2009 and,
accordingly, did not generate any securitization
revenues during the periods. We generated $177.5 million in up-front structural advisory fees in the first quarter of fiscal 2008.

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The additional component of structural advisory fees decreased to $(51.5) million during the first nine months of fiscal 2009 from
$2.7 million during the first nine months of fiscal 2008. Additional structural advisory fees increased to $(4.1) million for the third quarter of fiscal 2009 from $(13.7) million for the third
quarter of fiscal 2008. The decrease in additional structural advisory fees between the nine-month and three-month periods was primarily due to the changes in assumptions we use to
estimate the fair value of our additional structural advisory fees, a decrease in LIBOR and decreased securitization volume between the fiscal 2009 and fiscal 2008 periods.

The
following table summarizes the changes in our estimate of the fair value of the structural advisory fees receivable for the nine and three months ended March 31, 2009 and
2008:

Nine months ended
March 31,2009

2008(in thousands)Fair value at beginning of period

$
113,842

$
133,644Additions from new securitizations





24,304Cash received from trust distributions


(1,530
)

Trust updates:Passage of time (present value accretion)


7,415


7,720Assumption changes:(Increase) decrease in average prepayment rate


3,127


(3,535
)Increase in discount rate assumption


(23,114
)

(11,818
)Increase in timing and average default rate


(8,798
)

(2,899
)Increase in auction rate notes spread


(13,087
)

(140
)(Decrease) in forward LIBOR curve


(16,941
)

(9,494
)Other factors


(68
)

(1,434
)Net change from trust updates


(51,466
)

(21,600
)Fair value at end of period

$
60,846

$
136,348




Three months ended
March 31,2009

2008(in thousands)Fair value at beginning of period

$
64,935

$
150,032Cash received from trust distributions


(26
)

Trust updates:Passage of time (present value accretion)


1,985


2,650Assumption changes:Decrease in average prepayment rate


769


Increase in discount rate assumption


(2,925
)

(11,196
)Increase in timing and average default rate


(2,634
)

(231
)Increase in auction rate notes spread





(54
)Increase (decrease) in forward LIBOR curve


2,590


(3,696
)Other factors


(3,848
)

(1,157
)Net change from trust updates


(4,063
)

(13,684
)Fair value at end of period

$
60,846

$
136,348


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On
a quarterly basis, we update our estimate of the fair value of our additional structural advisory fees, which we expect, as of May 8, 2009, to begin to receive approximately
five to 20 years after the date of a particular securitization transaction. In doing so, we give effect to the passage of time, which results in the accretion of the discounting inherent in the
fair value estimates, and we also adjust for any change in the discount rate and other assumptions that we use in estimating the fair value of these receivables. We monitor the performance of trust
assets, including default, recovery, prepayment and interest rate trend experience, which we also consider in our estimates. We also make assumptions about the pledged accounts, including periodic
replenishments thereof, the cumulative loan default rate of each securitization trust and the ability of TERI to pay guaranty claims out of its general reserves. We estimate the trend of interest
rates over the life of the loan pool using an implied forward LIBOR curve, and an assumed spread between LIBOR and auction rates, to estimate trust cash flows. For a discussion of the assumptions we
make in estimating our additional structural advisory fees, see "Executive SummaryApplication of Critical Accounting Policies and EstimatesService Revenue and
Receivables and the Valuation of Education Loans Held for Sale."

During
the first nine months of fiscal 2009, our estimate of the fair value of our additional structural advisory fees resulted in a decrease in their carrying value of approximately
$51.5 million. During the first nine months of fiscal 2008, our estimates of the fair value of our additional structural advisory fees resulted in a decrease in their carrying value of
approximately $21.6 million. The decrease during the first nine months of fiscal 2009 was primarily due to the impact of a decrease in the forward LIBOR curve and changes we made to the
assumptions we use to estimate the fair value of our additional structural advisory fees receivable, particularly an increase in our default and discount rate assumptions and the assumed cost of
funding for auction rate notes, which more than offset the accretion of discounting inherent in the fair value estimates and decreases in our prepayment rate assumptions. The decrease during the first
nine months of fiscal 2008 was primarily due to the impact of changes we made to the assumptions we use to estimate the fair value of our additional structural advisory fees receivable, particularly
an increase in our discount rate assumption, which more than offset additions from new securitizations and the accretion of discounting inherent in the fair value estimates.

During
the third quarter of fiscal 2009, our estimate of the fair value of our additional structural advisory fees resulted in a decrease in their carrying value of approximately
$4.1 million. The decrease during the third quarter of fiscal 2009 was due primarily to the impact of a change we made to the assumptions we use to estimate the fair value of our additional
structural advisory fees receivable, particularly an increase in our default rate assumption, which more than offset decreases in our prepayment rate assumptions and an increase in the forward LIBOR
curve. During the third quarter of fiscal 2008, our estimate of the fair value of our additional structural advisory fees resulted in a decrease in their carrying value of approximately
$13.7 million. The decrease during the third quarter of fiscal 2008 was due primarily to the impact of the increase in our discount rate assumption used to estimate the fair value of our
additional structural advisory fees receivable, offset in part by the accretion of the discounting inherent in the fair value estimates.

For
a discussion of changes we made during the first nine months of fiscal 2009 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 and the Valuation of Education Loans Held for Sale."



Service revenues from residuals increased by $48.7 million, to $(285.6) million for the first nine months of fiscal 2009 from
$(334.3) million for the first nine months of fiscal 2008. Service revenues from residuals increased by $141.0 million, to $(136.4) million for the third quarter of fiscal 2009, compared to
$(277.4) million for the third quarter of fiscal 2008. We did not conduct a securitization

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transaction
in the third quarter of fiscal 2008 or in the first nine months of fiscal 2009. As a result, we did not recognize any residuals from new securitizations in those periods. The improvement
in service revenues from residuals in the fiscal 2009 periods compared to the fiscal 2008 periods was primarily a result of the assumptions changes pertaining to TERI's inability to pay claims as a
result of its bankruptcy filing, partially offset by $117.0 million of revenues from new securitizations during the first nine months of fiscal 2008.

The
following table summarizes the changes in our estimate of the fair value of the residuals receivables for the nine and three months ended March 31, 2009 and 2008:

Nine months ended
March 31,2009

2008(in thousands)Fair value at beginning of period

$
293,255

$
665,115Additions from new securitizations





116,972Trust updates:Passage of time (present value accretion)


20,107


63,923Assumption changes:(Increase) decrease in average prepayment rates


11,336


(46,597
)Increase in discount rate assumption


(83,634
)

(92,306
)Increase in timing and average default rate


(50,108
)

(42,223
)Increase in auction rate notes spread


(31,779
)

(93,813
)(Decrease) in forward LIBOR curve


(22,099
)

(20,883
)Increase in trust expenses





6,920TERI's inability to pay claims





(219,553
)Decrease to reflect disposition


(134,481
)

Other factors


5,054


(6,752
)Net change from trust updates


(285,604
)

(451,284
)Fair value at end of period

$
7,651

$
330,803




Three months ended
March 31,2009

2008(in thousands)Fair value at beginning of period

$
144,017

$
608,233Trust updates:Passage of time (present value accretion)


355


20,353Assumption changes:Increase in discount rate assumption





(20,626
)Increase in timing and average default rate





(6,050
)Increase in auction rate notes spread





(59,491
)Increase (decrease) in forward LIBOR curve


14


(7,926
)Increase in trust expenses





6,920TERI's inability to pay claims





(219,553
)Decrease to reflect disposition


(134,481
)

Other factors


(2,254
)

8,943Net change from trust updates


(136,366
)

(277,430
)Fair value at end of period

$
7,651

$
330,803


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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 changes in the assumptions that we use in estimating
the fair value of these receivables. We monitor the performance of trust assets, including default, recovery, prepayment and interest rate trend experience, which we consider in our estimates. We also
make assumptions about the pledged accounts, including periodic replenishments thereof, the cumulative loan default rate of each securitization trust and the ability of TERI to pay guaranty claims out
of its general reserves. We estimate the trend of interest rates over the life of the loan pool using an implied forward LIBOR curve, and an assumed spread between LIBOR and auction rates, to estimate
trust cash flows. For a discussion of the assumptions we make in estimating our residuals, see "Executive SummaryApplication of Critical Accounting Policies and
EstimatesService Revenue and Receivables and the Valuation of Education Loans Held for Sale."

Our
estimates of the fair value of our residuals receivables resulted in a decrease in the aggregate carrying value of approximately $285.6 million during the first nine months of
fiscal 2009 and a decrease of $451.3 million during the first nine months of fiscal 2008. Our estimates of the fair value of our residuals receivables resulted in a decrease in the aggregate
carrying value of approximately $136.4 million during the third quarter of fiscal 2009 and a decrease of $277.4 million during the third quarter of fiscal 2008. The decreases during the
fiscal 2009 periods compared to the fiscal 2008 periods were due primarily to the sale of the Trust Certificate and, to a lesser extent, impact of changes we made to the assumptions we use to estimate
the fair value of our residuals receivable, particularly increases in discount rates, our weighted average gross default rates and, for the nine month periods, increases in auction note rate spreads.
The negative impact of these changes to our assumptions,
together with a decrease in securitization volumes between periods, more than offset the positive impact of the passage of time and decreases in our prepayment rate assumptions. For a discussion of
our decision during the first nine months of fiscal 2009 to change the assumptions we use to estimate the value of our residuals receivables see "Executive SummaryApplication
of Critical Accounting Policies and EstimatesService Revenue and Receivables and the Valuation of Education Loans Held for Sale." The decreases during the fiscal 2008 periods were due
primarily to the impact of changes we made to the assumptions we use to estimate the fair value of our residuals receivables, in particular, a change in our assumption relating to TERI's ability to
pay guaranty claims from its general reserves, an increase in discount rates and an increase in our projected cost of funding of auction notes. The negative impact of these changes to our assumptions,
together with a decrease in securitization volumes between periods, more than offset the positive impact of the passage of time.



Processing fees from TERI decreased to $2.9 million for the first nine months of fiscal 2009 from $108.9 million for the
first nine months of fiscal 2008. Processing fees from TERI decreased to $0.3 million for the third quarter of fiscal 2009 from $25.3 million for the third quarter of fiscal 2008. The
decreases during the fiscal 2009 periods compared to the fiscal 2008 periods were primarily due to the impact of the TERI Reorganization on our facilitated loan volume, including the termination of
the master servicing agreement effective May 31, 2008 and transition servicing agreement effective September 29, 2008. We do not expect to receive a material amount of processing fees
from TERI in the future.



Administrative and other fees decreased to $12.2 million for the first nine months of fiscal 2009 from $30.1 million for
the first nine months of fiscal 2008. Administrative and other fees decreased to $3.8 million for the third quarter of fiscal 2009 from $5.2 million for the third quarter of fiscal 2008.

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The
decrease during the nine month period was primarily due to a reduction in marketing fees earned by us and decreased reimbursable expenses that we generated between periods from marketing
coordination services provided to some of our clients. We generated approximately $4.7 million in marketing fees during the first nine months of fiscal 2009, compared to approximately
$24.6 million in marketing fees and reimbursable expenses from marketing coordination services during the first nine months of fiscal 2008. We earned administrative fees for the daily
management of the securitization trusts of approximately $5.5 million during the first nine months of fiscal 2009 and $5.5 million during
the first nine months of fiscal 2008. We earned administrative fees for the daily management of the securitization trusts of approximately $1.8 million during the third quarter of fiscal 2009
and $1.9 million during the third quarter of fiscal 2008.

Net Interest Income

Net interest income increased to $20.4 million for the first nine months of fiscal 2009 from $18.6 million for the first
nine months of fiscal 2008. Net interest income decreased to $5.8 million for the third quarter of fiscal 2009 from $7.8 million for the third quarter of fiscal 2008. The increase in the
nine-month periods were primarily due to higher average education loan balances outstanding at our subsidiary, Union Federal, during the first nine months of fiscal 2009 compared to the
first nine months of fiscal 2008. The decreases in the three-month periods were primarily due to a decrease in interest yields. Net interest income earned by Union Federal of $19.2 million and
$5.7 million during the first nine months of fiscal 2009 and the third quarter of fiscal 2009, respectively, and $13.0 million and $6.4 million during the first nine months of
fiscal 2008 and the third quarter of fiscal 2008, respectively, was primarily derived from education loans held for sale during each period.

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The
following tables reflect the rates earned on interest-earning assets and paid on interest-bearing liabilities for the three and nine months ended March 31, 2009 and 2008.

Consolidated Average Balance Sheet, Interest and Rates  (Taxable-Equivalent Interest and Rates, in thousands, except rates)

Three months ended March 31,2009

2008Average
Daily
Balance

Interest

Rate

Average
Daily
Balance

Interest

RateAssetsCash and cash equivalentstaxable

$
105,443

$
90


0.35
%
$
100,901

$
683


2.72
%Cash and cash equivalentstax exempt


2,238


2


0.59


20,517


150


4.54Federal funds sold


25,565


4


0.06


55,034


437


3.19Investmentstaxable


8,818


109


5.04


10,340


137


5.34Investmentstax exempt


69,278


138


1.24


116,899


818


4.33Education loans


511,486


8,541


6.77


432,668


10,710


9.96Mortgage loans


10,911


139


5.16


11,657


183


6.31Total interest-earning assets


733,739


9,023


5.16
%

748,016


13,118


7.54
%Cash and cash equivalents


1,863








438Service receivables


110,732








707,140Other assets


163,995








91,599Total assets

$
1,010,329







$
1,547,193LiabilitiesSavings accounts

$
55,709

$
405


2.95
%
$
55,840

$
629


4.53
%Money market accounts


46,651


338


2.93


339


3


3.45Brokered deposits


29,167


196


2.73


156,506


1,796


4.61Warehouse line of credit


246,089


2,046


3.37


243,861


2,710


4.47Other short-term borrowings


52,944


65


0.50








Other interest-bearing liabilities


11,152


175


6.41


11,515


183


6.39Total interest-bearing liabilities


441,712


3,225


2.96
%

468,061


5,321


4.57
%Non-interest bearing deposits


1,821








52All other liabilities


24,720








216,103Total liabilities


468,253








684,216Stockholders' equity


542,076








862,977Total liabilities and stockholders' equity

$
1,010,329







$
1,547,193Net interest margin

$
733,739

$
5,798


3.20
%
$
748,016

$
7,797


4.19
%


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Nine months ended March 31,2009

2008Average
Daily
Balance

Interest

Rate

Average
Daily
Balance

Interest

RateAssetsCash and cash equivalentstaxable

$
108,176

$
677


0.83
%
$
103,644

$
3,020


3.88
%Cash and cash equivalentstax exempt


4,881


62


2.60


18,093


461


5.22Federal funds sold


52,770


465


1.17


42,633


1,309


4.09Investmentstaxable


9,122


361


5.27


10,951


446


5.42Investmentstax exempt


71,136


1,027


2.96


123,729


3,131


5.18Education loans


507,933


30,378


7.97


284,708


21,987


10.28Mortgage loans


10,816


424


5.22


12,046


567


6.27Total interest-earning assets


764,834


33,394


6.03
%

595,804


30,921


7.54
%Cash and cash equivalents


1,123








470Service receivables


252,887








811,591Other assets


110,385








95,033Total assets

$
1,129,229







$
1,502,898LiabilitiesSavings accounts

$
58,499

$
1,418


3.23
%
$
50,345

$
1,818


4.81
%Money market accounts


43,611


1,166


3.56


112


3


3.45Brokered deposits


83,639


1,946


3.10


92,979


3,427


4.91Warehouse line of credit


244,954


7,783


4.23


171,652


6,581


5.10Other short-term borrowings


23,084


103


0.60








Other interest-bearing liabilities


12,593


569


6.02


9,950


521


6.97Total interest-bearing liabilities


466,380


12,985


3.71
%

325,038


12,350


5.06
%Non-interest bearing deposits


4,001








72All other liabilities


39,462








285,221Total liabilities


509,843








610,331Stockholders' equity


619,386








892,567Total liabilities and stockholders' equity

$
1,129,229







$
1,502,898Net interest margin

$
764,834

$
20,409


3.55
%
$
595,804

$
18,571


4.15
%


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Analysis of Changes in Net Interest Income  For the three months ended March 31, 2009 and  the three months ended March 31, 2008  (in thousands)

Due to Change inVolume

Rate

Net ChangeCash and cash equivalentstaxable

$
25

$
(618
)
$
(593
)Cash and cash equivalentstax exempt


(134
)

(14
)

(148
)Federal funds sold


(236
)

(197
)

(433
)Investmentstaxable


(21
)

(7
)

(28
)Investmentstax exempt


(337
)

(343
)

(680
)Education loans


1,846


(4,015
)

(2,169
)Mortgage loans


(13
)

(31
)

(44
)Total interest income








(4,095
)Savings accounts

$
(7
)
$
(217
)
$
(224
)Money market accounts


394


(59
)

335Brokered deposits


(1,464
)

(136
)

(1,600
)Warehouse line of credit


2


(666
)

(664
)Other short-term borrowings


65





65Other interest-bearing liabilities


(8
)




(8
)Total interest expense








(2,096
)Net increase in net interest income







$
(1,999
)


Analysis of Changes in Net Interest Income  For the nine months ended March 31, 2009 and  the nine months ended March 31, 2008  (in thousands)

Due to Change inVolume

Rate

Net ChangeCash and cash equivalentstaxable

$
129

$
(2,472
)
$
(2,343
)Cash and cash equivalentstax exempt


(337
)

(62
)

(399
)Federal funds sold


309


(1,153
)

(844
)Investmentstaxable


(75
)

(10
)

(85
)Investmentstax exempt


(1,332
)

(772
)

(2,104
)Education loans


17,203


(8,812
)

8,391Mortgage loans


(58
)

(85
)

(143
)Total interest income








2,473Savings accounts

$
292

$
(692
)
$
(400
)Money market accounts


1,126


37


1,163Brokered deposits


(347
)

(1,134
)

(1,481
)Warehouse line of credit


2,802


(1,600
)

1,202Other short-term borrowings


103





103Other interest-bearing liabilities


138


(90
)

48Total interest expense








635Net increase in net interest income







$
1,838


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Non-interest Expenses

Total non-interest expenses, including compensation and benefits expenses and general and administrative expenses but
excluding unrealized losses on loans held for sale, decreased to $96.9 million for the first nine months of fiscal 2009 from $294.4 million for the first nine months of fiscal 2008. On
the same basis, non-interest expenses decreased to $27.4 million for the third quarter of fiscal 2009 from $123.5 million for the third quarter of fiscal 2008. Compensation
and benefits decreased to $34.3 million for the first nine months of fiscal 2009 from $79.4 million for the first nine months of fiscal 2008. Compensation and benefits decreased to
$8.8 million for the third quarter of fiscal 2009 from $27.7 million for the third quarter of fiscal 2008. General and administrative expenses decreased to $62.6 million for the
first nine months of fiscal 2009
from $214.9 million for the first nine months of fiscal 2008. General and administrative expenses decreased to $18.6 million for the third quarter of fiscal 2009 from
$95.9 million for the third quarter of fiscal 2008.

The
decrease in compensation and benefits expense during the first nine months of fiscal 2009 and third quarter of fiscal 2009 as compared to the prior year periods was primarily the
result of a decrease in personnel and a decrease in incentive compensation accruals, offset in part by severance costs. During the last two quarters of fiscal 2008, we announced a reduction in our
overall cost structure, including the reduction of headcount by over 600 employees. In September 2008 and November 2008, we further reduced headcount by approximately 100 employees. Following these
reductions, we had 231 full-time employees as of May 6, 2009, compared to 410 employees as of May 6, 2008.

General
and administrative expenses decreased during the first nine months of fiscal 2009 as compared to the first nine months of fiscal 2008 as a result of decreases in several
categories of expenses. Marketing coordination expenses decreased to $3.4 million for the first nine months of fiscal 2009 from $94.9 million for the first nine months of fiscal 2008.
The decrease in marketing coordination expense was primarily due to the termination by clients of their marketing coordination agreements. External call center costs and temporary employment services
costs decreased to $1.2 million for the first nine months of fiscal 2009 from $29.0 million in the first nine months of fiscal 2008. The decrease in these costs was primarily due to
decreases in personnel necessary to process the decreasing volume of loans facilitated between periods. Equipment expenses decreased to $4.8 million for the first nine months of fiscal 2009
from $10.1 million for the first nine months of fiscal 2008 principally as a result of lower software license and maintenance costs. The decrease in equipment expenses are also due to
non-renewal of contracts and a decrease in spending due to a decrease in loan volumes and a lack of securitizations. Depreciation and amortization expense decreased to $13.9 million
for the first nine months of fiscal 2009 from $14.5 million for the first nine months of fiscal 2008. The decrease in depreciation is due to certain software assets being fully amortized and
fewer fixed asset additions. Professional fees decreased to $9.5 million for the first nine months of fiscal 2009 from $11.1 million for the first nine months of fiscal 2008 primarily
due to a decrease in the use of employment agency and placement services offset by an increase in premiums for directors and officers insurance. Occupancy expenses decreased to $7.4 million for
the first nine months of fiscal 2009 from $13.2 million in the first nine months of fiscal 2008 as a result of lower communications costs, utilities and office maintenance costs. Consulting
expenses decreased to $3.5 million for the first nine months of fiscal 2009 from $7.8 million for the first nine months of fiscal 2008. The decrease in consulting expenses is due to
reduction of IT projects and employees as well as cut backs in spending due to market disruption. Miscellaneous expenses decreased to $7.0 million for the first nine months of fiscal 2009 from
$21.4 million for the first nine months of fiscal 2008. The decrease in miscellaneous expenses reflects a $5.8 million decrease in loan origination expenses in fiscal 2009. Miscellaneous
fees in the fiscal 2008 period also reflected a $10.0 million commitment fee in connection with a warehouse line of credit.

General
and administrative expenses decreased during the third quarter of fiscal 2009 as compared to the third quarter of fiscal 2008 as a result of decreases in several categories of
expenses. Marketing

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coordination
expenses decreased to $(0.2) million for the third quarter of fiscal 2009 from $48.1 million for the third quarter of fiscal 2008. The decrease in marketing coordination expense
was primarily due to the termination by some clients of their marketing coordination agreements between periods and a refund by a client of certain advanced expenses. External call center costs and
temporary employment services costs decreased to $0.2 million for the third quarter of fiscal 2009 from $5.3 million in the third quarter of fiscal 2008. The decreases in temporary
employment services expense and external call center costs were primarily due to decreases in personnel necessary to process the decreasing volume of loans facilitated between periods. Equipment
expenses decreased to $1.0 million for the third quarter of fiscal 2009 from $3.2 million for the third quarter of fiscal 2008 principally as a result of nonrenewal of contracts and a
decrease in spending due to lower loan volume and lack of securitization. Occupancy expenses decreased to $2.4 million for the third quarter of fiscal 2009 from $6.2 million for the
third quarter of fiscal 2008 as a result of subleasing of office space and cancellation of a vendor transit contract. Miscellaneous expenses decreased to $1.0 million for the third quarter of
fiscal 2009 from $18.0 million for the third quarter of fiscal 2008. The decrease in miscellaneous expenses reflects a $5.8 million decrease in loan origination expenses in fiscal 2009.
Miscellaneous fees in the fiscal 2008 period also reflected a $10.0 million commitment fee in connection with a warehouse line of credit.

Unrealized Losses on Loans Held for Sale

Our loans held for sale at March 31, 2009 consisted of $417.1 million in education loans originated by Union Federal.
Under GAAP, we are required to reduce the carrying value of our education loans if their fair value decreases below our cost. In such an event, we are required to write-down the carrying
value of our education loans and may be required to provide additional regulatory capital to Union Federal. We recorded a reduction in the carrying value of loans held for sale of $98.1 million
and $47.6 million during the first nine months and the third quarter of fiscal 2009, respectively. In general, these adjustments were necessary as a result of adjustments to our portfolio
performance assumptions, including increases in the default rates, buyer's equity and borrowing costs, and discount rates, that we use in our discounted cash flow modeling. We did not adjust the
carrying value of loans held for sale during the first nine months of fiscal 2008. As of March 31, 2009, $14.2 million of the loans held for sale were greater than 90 days past
due.

Income Tax (Benefit)

Income tax benefit increased to $169.7 million for the first nine months of fiscal 2009 from an income tax benefit of
$111.0 million for the first nine months of fiscal 2008. The
increase in income tax benefit was primarily the result of a decrease in the amount of loss before income tax benefit between periods due to the decrease in securitization volume between periods and
the non cash adjustments to our service receivables and loans held for sale. During the first nine months of fiscal 2009, our effective tax rate, or the income tax (benefit) as a percentage of (loss)
before income tax (benefit), decreased to 34.2% from an effective tax rate of 38.3% for the first nine months of fiscal 2008. The decrease in our effective tax rate was due to the Company's inability
to utilize state net operating losses primarily in the state of Massachusetts. The structure of the sale of the Trust Certificate reduced the effective tax benefit rate below the statutory Federal
rate.

Financial Condition, Liquidity and Capital Resources

Our liquidity requirements have historically consisted of capital expenditures, working capital, business development expenses, costs
associated with alternative financing transactions, general corporate expenses, repurchases of our common stock, quarterly cash dividends and infusions of regulatory capital into Union Federal. In
order to preserve capital and maximize liquidity in challenging market conditions, our board of directors has eliminated regular quarterly cash dividends for the foreseeable future. In addition, we do
not expect to repurchase shares of common stock for the

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foreseeable
future. In fiscal 2009, we expect our overall operational cash spend to decrease on an annualized basis by approximately 70% compared to fiscal 2008, including reduction of marketing
coordination and operational expenses.

Short-term Funding Requirements

We expect to fund our short-term liquidity requirements through revenues from operations, cash, cash equivalents and
investments, and, subject to disposition of its current portfolio of education loans, various sources of funding that may be available to Union Federal to finance education loans. In August 2008, we
received aggregate gross proceeds of approximately $132.7 million from the sale of preferred stock to affiliates of GS Capital Partners LP. The proceeds from the sale of preferred stock
significantly improved our ability to meet our short-term liquidity requirements. In addition, the expected tax consequences of the sale of the Trust Certificate should significantly
improve our short-term funding requirements, as the sale is expected to eliminate any future federal and state tax liabilities associated with the Residuals and result in a refund for
income taxes previously paid. The tax consequences of the sale of the Trust Certificate are not certain, however, and we remain uncertain about future regulatory capital requirements relating to Union
Federal. We believe, based on our operating plan as of May 8,
2009 that the proceeds of the sale of preferred stock, our cash, cash equivalents and investments, and revenues from operations will be sufficient to fund our operations through fiscal 2010.

Our
business has been and continues to be adversely impacted by the current ABS market dynamics, including an inability to access the securitization market and alternative interim
financing facilities. We did not complete a securitization transaction during the first nine months of fiscal 2009, and we do not expect to complete a securitization in the near-term. Our
inability to generate up-front structural advisory fees has eroded our short-term liquidity position. We expect pricing terms in future securitizations, if any, to be
substantially less favorable than in the past. In particular, market conditions may dictate that we reduce or forgo our up-front structural advisory fee in connection with securitizations,
if any, that we are able to facilitate in the near term.

Historically,
TERI reimbursed us monthly for the expenses we incurred in providing outsourcing services to TERI pursuant to our master servicing agreement. As a result, TERI reimbursed
us for a significant portion of our operating expenses. Following termination of our master servicing agreement with TERI, and expiration of our transition services agreement, we do not expect to
receive a material amount of fees or reimbursement from TERI in the future. In addition, we expect to incur significant costs, including legal fees, in connection with the TERI Reorganization.

In
July 2007, UFSB-SPV entered into a $300.0 million education loan warehouse facility with a conduit lender to fund the purchase of education loans from Union
Federal. At March 31, 2009, $246.1 million was outstanding. Under the facility, UFSB-SPV pledged the purchased education loans as collateral for the advances it received from
the conduit lender. The TERI Reorganization, and subsequent TERI ratings downgrades, resulted in events of termination under the indenture relating to the facility. As a result, the facility
termination date was declared, UFSB-SPV is not eligible for further borrowings under the facility and the conduit lender may elect to accelerate payment of such notes. The facility
termination date had been scheduled to occur on July 16, 2008. Under the indenture, the facility termination date commences a liquidation period that ends on the date immediately following the
later of July 14, 2010 and the date on which the principal and interest on all outstanding notes, and all amounts otherwise payable by UFSB-SPV in connection with the facility, are
paid in full. In January, February and March 2009, additional events of termination occurred under the indenture relating to the one- and three-month default ratios on the underlying loan
portfolio. The conduit lender's recourse to us under the indenture is limited to education loans pledged as collateral. In connection with Union Federal's settlement of claims against TERI's
bankruptcy estate, approximately

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$15.7 million
of the settlement amount was allocated to the education loans pledged as collateral and was subsequently applied to reduce amounts outstanding under the warehouse facility.

In
April 2008, UFSB-SPV entered into a letter agreement pursuant to which it agreed to pay higher rates of fees to the conduit lender in consideration for an acknowledgement
by the conduit lender that interest on the notes issued under the facility would not be payable based on an alternative rate set forth in the indenture, or the Default Rate, unless and until the
conduit lender delivered further notice to UFSB-SPV. In April 2009, the conduit lender elected for interest on outstanding notes to become payable at the Default Rate for periods following
delivery of notice of such election. As a result, the interest rate on outstanding notes will increase in the fourth quarter of fiscal 2009; however UFSB-SPV will pay lower fees as a
result of such election.

In
November 2008, Union Federal entered into an agreement with the Federal Reserve Bank of Boston to provide a credit facility to fund operations. At March 31, 2009,
$55.0 million was outstanding under the facility. Union Federal has pledged education loans as collateral for the advances it received from the facility lender. Previously, Union Federal could
borrow up to 75% of the outstanding principal of education loans in a current repayment status. Effective April 27, 2009, as a result of changes enacted by the Federal Reserve Bank of Boston,
Union Federal can borrow up to 60% of the outstanding principal of education loans in a current repayment status. The interest rate on the facility is variable based on the Federal Reserve Bank of
Boston's stated rates, which was 0.50% at March 31, 2009.

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

Union
Federal's equity capital was $65.2 million at March 31, 2009. Quantitative measures established by regulation to ensure capital adequacy require Union Federal to
maintain minimum amounts and ratios of total capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined). Union Federal met all quantitative
capital adequacy requirements to which it was subject as of March 31, 2009 and June 30, 2008, and had a total risk-based ratio of 10.94% and 22.14%, a Tier 1
risk-based ratio of 10.93% and 22.08%, and a Tier 1 core capital ratio of 10.50% and 18.43%, respectively. As of March 31, 2009 and June 30, 2008, Union Federal was
well capitalized under the regulatory framework for prompt corrective action.

Union
Federal's regulatory authorities have from time to time requested that we provide additional capital to Union Federal in amounts linked to the amount of private education loans
held by Union Federal, and we are in discussions with regulators regarding, among other things, the provision by us of additional regulatory capital and the reduction of such loan balances. Additional
infusions of regulatory capital into Union Federal could adversely affect our short-term liquidity.

Long-term Funding Requirements

We expect to fund our business through revenues 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 were to enter into a strategic arrangement with another company, we may need to sell additional equity or debt securities. Any sale of additional equity or convertible debt
securities may result in additional dilution to our stockholders, and we cannot be

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certain
that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to
further delay, reduce the scope of, or eliminate one or more aspects of our operational activities, which could harm our business.

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



Treasury Stock

We had treasury stock of $184.2 million at March 31, 2009 and $184.0 million at June 30, 2008. 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 withheld from employees to satisfy statutory
minimum withholding obligations as equity compensation
awards vest. As of March 31, 2009, we had repurchased an aggregate of 7,525,800 shares at an average price, excluding commissions, of $24.27 per share, under various repurchase programs
approved by our board of directors.

On
April 24, 2007, our board of directors approved the repurchase of up to 10 million shares of our common stock. The 10 million shares authorized for repurchase
included 3.4 million shares available for repurchase as of April 24, 2007 under a previously authorized repurchase program. As of March 31, 2009, we had repurchased an aggregate
of 1.2 million shares at an average price, excluding commissions, of $36.17 per share, under this repurchase program. At March 31, 2009, a maximum of 8.8 million shares may be
repurchased under the repurchase program approved by the board of directors on April 24, 2007. We did not repurchase any shares of common stock pursuant to this program during the first nine
months of fiscal 2009.

Cash, Cash Equivalents, Federal Funds Sold and Investments

At March 31, 2009 and June 30, 2008, we had $209.9 million and $221.1 million, respectively, in cash, cash
equivalents, federal funds sold and investments. The decrease in cash, cash equivalents, federal funds sold and investments is primarily due to cash used to reduce deposits, fund operations, and pay
income taxes, which offset cash received from the issuance of series B preferred stock to affiliates of GSCP.

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Cash, cash equivalents, federal funds sold and investments at March 31, 2009 and June 30, 2008 primarily included investments in variable rate
demand notes, mortgage backed securities, Federal Home Loan Bank bonds, funds deposited in taxable or tax-exempt money market funds and federal funds sold by our subsidiary, Union Federal.

Loans Held for Sale

Our loans held for sale decreased to $417.1 million at March 31, 2009 from $497.3 million at June 30, 2008.
The decrease in loans held for sale is due to the fair value writedown of $98.1 million during the first nine months of fiscal 2009 partially offset by capitalized interest income. Our loans
held for sale at March 31, 2009 and June 30, 2008 were comprised of education loans.

Service Receivables

Our service receivables decreased to $68.6 million at March 31, 2009 from $411.2 million at June 30, 2008,
primarily as a result of the sale of the Trust Certificate and changes we made to assumptions we use to estimate the fair value of our service receivables. See "Executive
SummaryApplication of Critical Accounting Policies and EstimatesService Revenues and Receivables and the Valuation of Education Loans Held for Sale."

Property and Equipment, net

During the first nine months of fiscal 2009, our property and equipment, net decreased by $13.8 million to $23.8, primarily as a
result of $14.0 million of depreciation expense recorded during the period. During the first nine months of fiscal 2009, we had $1.0 million in acquisitions of equipment.

Other Prepaid Expenses

Our other prepaid expenses decreased to $6.7 million at March 31, 2009 from $15.4 million at June 30, 2008.
The balance at June 30, 2008 included $10.5 million provided to the trusts to cover preclaim collection costs. As of March 31, 2009, the trusts had used $6.1 million of the
$10.5 million provided to them. The remaining decrease in other prepaid expenses was primarily due to a decrease in prepaid maintenance of $0.9 million and prepaid insurance of
$1.4 million and other various prepaid items.

Other Assets

Other assets increased to $5.9 million at March 31, 2009 from $3.8 million at June 30, 2008 primarily due
to a receivable of $0.4 million for loan program coordination and collections management performed on behalf of clients, $0.5 million in legal expenses exceeding insurance deductibles
related to litigation matters, $0.8 million in client fees for pre-default services, and a rental deposit of $0.5 million.

Deposits

Deposits decreased to $132.1 million at March 31, 2009 from $244.1 million at June 30, 2008. Brokered
deposits decreased by $125.2 million and savings accounts decreased by $48.1 million, which were partially offset by an increase of $61.3 million in money market, savings
accounts, demand deposit accounts and time deposits.

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Education Loan Warehouse Facility

We had $246.1 million in borrowings outstanding at March 31, 2009 under the education loan warehouse facility between
Union Federal and a conduit lender. We had $242.9 million in borrowings outstanding under the facility at June 30, 2008. The facility provided interim financing which we used to fund the
disbursement of education loans by Union Federal. The TERI Reorganization, and subsequent TERI ratings downgrades, resulted in events of termination under the indenture relating to the facility. As a
result, the facility termination date was declared, UFSB-SPV is not eligible for further borrowings under the facility and the conduit lender may elect to accelerate payment of such notes.
The facility termination date had been scheduled to occur on July 16, 2008. Under the indenture, the facility termination date commences a liquidation period that ends on the date immediately
following the later of July 14, 2010 and the date on which the principal and interest on all outstanding notes, and all amounts otherwise payable by UFSB-SPV in connection with the
facility, are paid in full. In January, February and March 2009, additional events of termination occurred under the indenture relating to the one- and three-month default ratios on the
underlying loan portfolio. The conduit lender's recourse under the indenture is limited to education loans pledged as collateral. In connection with Union Federal's settlement of claims against TERI's
bankruptcy estate, approximately $15.7 million of the settlement amount was allocated to the education loans pledged as collateral and was subsequently applied to reduce amounts outstanding
under the warehouse facility.

In
April 2008, UFSB-SPV entered into a letter agreement pursuant to which it agreed to pay higher rates of fees to the conduit lender in consideration for an acknowledgement
by the conduit lender that interest on the notes issued under the facility would not be payable based on an alternative rate set forth in the indenture, the Default Rate, unless and until the conduit
lender delivered further notice to UFSB-SPV. In April 2009, the conduit lender elected for
interest on outstanding notes to become payable at the Default Rate for periods following delivery of notice of such election. As a result, the interest rate on outstanding notes will increase in the
fourth quarter of fiscal 2009, however, UFSB-SPV will pay lower fees as a result of such election.

Federal Reserve Bank Borrowings

We had $55.0 million in other short-term borrowings outstanding at March 31, 2009 from the Federal Reserve
Bank of Boston. Prior to April 27, 2009, Union Federal could borrow up to 75% of the outstanding principal of education loans held by Union Federal, not including education loans held by
UFSB-SPV, in a current repayment status. Effective April 27, 2009, as a result of changes enacted by the Federal Reserve Bank of Boston, Union Federal can borrow up to 60% of the
outstanding principal of education loans in a current repayment status. The short-term borrowings will mature at various dates from April 1, 2009 to June 1, 2009.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses increased to $28.2 million at March 31, 2009 from $20.5 million at
June 30, 2008. The increase between periods is primarily due to the sale of the Trust Certificate amounting to $2.5 million, pre-claim cost of $2.5 million and other
various accruals pertaining to legal and severance pay. Our accounts payable were $0.3 million higher at March 31, 2009 as compared to June 30, 2008 primarily due to the timing of
the receipt and processing of invoices.

Income Taxes Receivable/Payable

Our income taxes payable of $31.3 million at June 30, 2008 changed to an income tax receivable of $170.0 million
at March 31, 2009. The decrease in our income taxes payable is primarily due to income taxes expected to be recovered as a result of the sale of the NCSLT Trust residuals and tax payments from
fiscal 2008 made during the period.

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Net Deferred Income Tax Liability

Our net deferred income tax liability of $10.4 million at June 30, 2008 decreased to $3.0 million at
March 31, 2009. We have a net deferred income tax liability primarily because, under GAAP, we recognize additional structural advisory fees in our financial statements earlier than they are
recognized for income tax purposes. Our net deferred income tax liability decreased primarily as a result of the decrease in additional structural advisory fees plus the recording of a deferred tax
asset on a portion of the unrealized losses on loans held for sale that is not currently deductible for income tax purposes.

Other Liabilities

Other liabilities decreased to $9.7 million at March 31, 2009 from $14.1 million at June 30, 2008. Other
liabilities primarily include 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 a decrease in lease obligations and deferred rent.

Contractual Obligations

As of March 31, 2009, our contractual obligations had not changed materially from those described under the caption
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital ResourcesContractual
Obligations" in our annual report on Form 10-K for the fiscal year ended June 30, 2008.

Cash Flows

Our net cash used in operating activities decreased to $77.3 million for the first nine months of fiscal 2009, compared to cash
used in operating activities of $418.3 million for the first nine months of fiscal 2008. The decrease in cash used in operations resulted primarily from a $452.6 million reduction in the
funding of education loans.

Our
cash provided by investing activities was $49.5 million for the first nine months of fiscal 2009, compared to cash used in investing activities of $61.9 million for the
first nine months of fiscal 2008. Net cash provided by investing activities during the first nine months of fiscal 2009 was primarily a result of the decrease in federal funds sold of
$55.1 million which were used to repay brokered deposits.

Net
cash provided by financing activities decreased to $66.7 million during the first nine months of fiscal 2009, compared to net cash provided by financing activities of
$483.5 million during the first nine months of fiscal 2008. Net cash provided by financing activities decreased during the first nine months of fiscal 2009 primarily as a result of a lower
growth in deposits and less need to fund education loans.

We
expect that our capital expenditure requirements for the final quarter of fiscal 2009 will be approximately $0.2 million. We expect to use these funds primarily for
reconfiguration of systems for a new product set that we are developing.

Off-Balance Sheet Transactions

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

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

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

Inflation

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

Item 3    Quantitative and Qualitative Disclosures about Market Risk

Risks Related to Cash, Cash Equivalents, Federal Funds Sold 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 March 31, 2009, cash, cash equivalents, investments and federal funds
sold consisted primarily of investments in variable rate demand notes, Federal Home Loan Bank bonds, funds deposited in taxable or tax-exempt money market funds and federal funds sold by
Union Federal, all of which were due on demand or within one year, except the Federal Home Loan Bank bonds, which are due beginning in 2034. As a result, we do not believe a change in interest rates
would have a material impact on the fair value of cash, cash equivalents, federal funds sold or 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 March 31, 2009
consisted of $417.1 million in education loans originated by Union Federal. Our loans held for sale are recorded at lower of cost or fair value and as a result of their variable interest rates,
are not subject to interest rate sensitivity. Under GAAP, we are required to reduce the carrying value of our education loans if their fair value decreases below our cost. In such an event, we are
required to write-down the carrying value of our education loans and may be required to provide additional regulatory capital to Union Federal. At March 31, 2009, our education
loans had an average interest rate of approximately 6.25%. All of our education loans, and approximately 48% of our mortgage loans, have variable interest rates.

We
held deposits of $132.1 million at March 31, 2009. 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 March 31, 2009, our deposits had an average interest rate of approximately 1.81%. Less than 1% of our deposits
have fixed interest rates in excess of 12 months. Approximately 87% of our deposits have fixed interest rates of 6 months or less.

The
fair value of education loans held for sale will fluctuate as the debt costs or buyer's equity assumptions used in our cash flow model vary from the one-month LIBOR rates
used to calculate interest income from borrowers. We do not believe a change in interest rates would otherwise 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 resulting 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. We also monitor trends in loan performance over time and make adjustments we

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believe
are necessary to value properly our receivables balances at each balance sheet date. Because our estimates rely on quantitative and qualitative factors, including macroeconomic indicators to
predict
prepayment, default and recovery rates, management's ability to determine which factors are relevant to our estimates, and our ability to accurately incorporate those factors into our estimates, can
have a material effect on our valuations.

Our
assumptions regarding TERI's obligation and ability to pay claims on defaulted loans affects the expected timing of cash payments to us in respect of additional structural advisory
fees, which in turn affects our estimates of their fair value. If we were to determine that recoveries with respect to a trust's defaulted education loans would be unavailable to replenish the trust's
pledged account, the estimated value of our additional structural advisory fees would be reduced. In addition, 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. For an analysis of the estimated change in our structural
advisory fees balance at March 31, 2009 based on changes in our loan performance assumptions, see "Management's Discussion and Analysis of Financial Condition 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 March 31, 2009. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's
management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2009, our chief executive officer
and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No
change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, occurred during the fiscal
quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1    Legal Proceedings

In April and May 2008, seven purported class action lawsuits were filed against us and certain of our current and former officers and
certain of our directors in the United States District Court for the District of Massachusetts. The plaintiffs allege, among other things, that the defendants made false and misleading statements and
failed to disclose material information in various SEC filings, press releases and other public statements. The complaints allege various claims under the Exchange Act and
Rule 10b-5 promulgated thereunder. The complaints seek, among other relief, class certification, unspecified damages, fees and such other relief as the court may deem just and
proper. In August 2008, the court consolidated these cases and appointed lead plaintiffs and a lead counsel.

On
November 28, 2008, a consolidated amended complaint was filed by the lead plaintiffs and contained similar allegations as the earlier complaints. On February 9, 2009, we
filed a motion to dismiss the amended complaint. Plaintiffs filed an opposition to our motion to dismiss on April 13, 2009. We plan to respond in May 2009. A class had not been certified in the
actions as of May 8, 2009.

In
addition, three federal derivative lawsuits, and one state derivative lawsuit, have been filed against certain of our current and former officers and directors and nominally against
us in the United States District Court for the District of Massachusetts and Massachusetts Superior Court, respectively. The derivative complaints allege various violations of federal and state law,
including violations of the Exchange Act, breaches of fiduciary duties, waste of corporate assets and unjust enrichment. The derivative complaints seek a monetary judgment, injunctive relief,
restitution, disgorgement and a variety of purported corporate governance reforms. In August 2008, the federal court consolidated the federal derivative cases and stayed them pending resolution of the
purported class actions described above. In January 2009, the state court stayed the state derivative action until July 2009.

We
intend to vigorously assert our defenses in these actions. There can be no assurance, however, that we will be successful, and an adverse resolution of any of the lawsuits could have
a material effect on our consolidated financial position and results of operations in the period in which a lawsuit is resolved. In addition, although we carry insurance for these types of claims, a
judgment significantly in excess of our insurance coverage could materially and adversely affect our financial condition, results of operations and cash flows. We are not presently able to reasonably
estimate potential losses, if any, related to the lawsuits. We expect that this securities litigation, as well as any future litigation, could result in substantial costs and divert management's
attention and resources from our business.

Item 1A    Risk Factors

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

We
have updated certain of the following risk factors to reflect financial, operational and investment information for the most recently completed fiscal quarter, as well as
litigation-related updates. We have also added additional risk factors relating to the tax consequences of the sale of the Trust Certificate and current economic trends.

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Risks Related to Asset-Backed Securitizations and Other Funding Sources

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

Securitization refers to the technique of pooling loans and selling them to a special purpose, bankruptcy remote entity, typically a
trust, which issues securities backed by those loans to investors. 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 past securitizations, we have received compensation in the form of structural advisory fees, residuals and administrative fees for management of the trusts. The
amount and timing of the fees and residuals 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. We derived approximately $319.3 million in revenue from new securitizations in fiscal 2008.

We
did not complete a securitization during the second, third or fourth quarters of fiscal 2008 or during fiscal 2009, which contributed to our net losses for each quarter. Our
securitization volumes materially decreased in fiscal 2008 compared to fiscal 2007. We do not expect to complete a securitization in the near term. In addition, we expect the structure and pricing
terms in future securitizations, if any, to be substantially less favorable than in the past. The inability to access the securitization market, together with the TERI Reorganization, has impacted our
client relationships, reduced our facilitated loan volume and challenged our business prospects. If we continue to be unable to access the ABS market, our revenues may continue to decline and we may
continue to generate net losses, which would further erode our liquidity position. We will need to continue to adapt and gain market acceptance for our products and services, or develop alternative
means for generating revenues, in order to overcome the challenges we are facing.

In
addition, as a result of disruptions in the ABS market, we have been unable to facilitate the securitization of private education loans originated by Union Federal since
September 2007. As a result, Union Federal has had to rely on brokered deposits and other non-core deposit funding sources, including Federal Reserve borrowings, for unexpectedly long periods.
Interruption of, or limitations on, Union Federal's access to such funding sources could have a material adverse effect on Union Federal's liquidity or financial condition.

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

Our near-term financial performance and the success of our business depend in large part on our ability to structure
securitizations. Several factors have had, and may continue to have, a material adverse effect on both our ability to structure securitizations and the revenue we generate for providing our structural
advisory and other services, including the following:



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

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.

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

Our quarterly revenue, operating results and profitability have varied on a quarterly basis in the past primarily as a result of the
timing, size and structure of any capital markets transactions that we have facilitated and, to a lesser extent, the seasonality of education loan originations, which in the past has affected the
amount of processing fees from TERI that we earned in a particular quarter. Recent disruptions and volatility in the ABS market have adversely affected our ability to structure securitizations and
will affect the terms of any future capital markets transactions that we are able to structure. In fiscal 2008, we facilitated two securitizations in the first quarter, but no securitizations during
the remainder of fiscal 2008. We did not facilitate any securitization transactions during the first nine months of fiscal 2009 and do not expect to facilitate any in the near-term.
Conditions in the capital markets have also led to significant write-downs of our service receivables and the portfolio of private education loans held by Union Federal, which have contributed to the
variability of our quarterly revenue and operating results. Continuing dislocations in the capital markets, and the size, structure or economic terms of our future capital markets transactions, if
any, could increase the variability of our operating results on a quarterly basis. We are uncertain whether the fee structure that we have historically used will be used in any future securitization
transaction. In particular, market conditions may dictate that we reduce or forgo our up-front structural advisory fee in connection with securitizations, if any, that we are able to
facilitate in the near term. Developments in the TERI Reorganization, including legal challenges to the trusts' security interests and resulting write-downs in our service receivables, could also
contribute to increased variability of our operating results. Finally,

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our
operating results may continue to be affected by the seasonality of education loan applications and loan originations. Origination of education loans is generally subject to seasonal trends, with
the volume of loan applications increasing with the approach of tuition payment dates.

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

Education loan asset-backed securitizations have historically been our sole source of permanent financing for our clients' private
education loan programs. We were unable to complete a securitization transaction during the first nine months of fiscal 2009, and we do not expect to complete a securitization in the
near-term. In addition, we have been unsuccessful in obtaining alternatives to securitization to finance our clients' loans. Other sources of funding have not been available to us on
acceptable terms, if available at all. Recent conditions in the capital markets have generally resulted in a substantial widening of credit spreads and significantly more restrictive covenants, which
has adversely affected the pricing and terms and conditions of alternative funding mechanisms that we have pursued. In addition, we are uncertain as of May 8, 2009 whether it will be feasible
or advantageous for us to participate in the TALF. At March 31, 2009, the principal balance of
loans facilitated and available to us for securitization was approximately $1.8 billion of which $83.5 million was facilitated in the first nine months of 2009.

Under
the terms of our purchase agreements with lender clients, we generally have an obligation to use our best efforts to facilitate the purchase of a client's loans during a specified
loan purchase period. The length of the loan purchase period varies by client and generally ranges from 195 days to 555 days following final loan disbursement. Our purchase agreements
applicable to approximately $1.3 billion of the facilitated loan volume available for securitization as of March 31, 2009 do not include a liquidated damages provision in the event that
we fail to facilitate a securitization in breach of our obligations, and the amount of our potential liability with respect to such loans is not determinable at this time. If we do not honor our
contractual obligations, our value proposition to clients and prospective clients would be compromised, our relationships with current clients could terminate and our prospective clients may not be
interested in entering into business arrangements with us. In addition, our financial results would be adversely affected if we were required to pay damages.

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

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

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

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Risks Related to Our Financial Reporting and Liquidity

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

Historically, we have received structural advisory fees for our services in connection with securitization transactions. We have
received an up-front portion of these structural advisory fees when the securitization trust purchases the loans. We are entitled to 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 non-NCSLT Trusts create. As required under 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 receivables, 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: discount rates; the annual rate
and timing of education loan prepayments; the trend of interest rates over the life of the loan pool, including the forward LIBOR curve, and the spread between LIBOR and auction rates; the expected
annual rate and timing of loan defaults, and TERI's obligation and ability to pay default claims; expected recoveries of defaulted loans, including the use of recoveries to replenish trusts' pledged
funds; the source and amount of guaranty payments made on defaulted loans; and the fees and expenses of the securitization trusts. Our estimates rely on quantitative and qualitative factors, including
macroeconomic indicators to predict prepayment, default and recovery rates, and management's ability to determine which factors are more heavily weighted in our estimates, and to accurately
incorporate those factors into our estimates, are subjective and can have a material effect on valuations.

We
have adjusted our key accounting assumptions throughout fiscal 2008 and the first nine months of 2009:



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In
general, our adjustments during fiscal 2008 and the first nine months of fiscal 2009 were necessary because securitization trusts had performed below our range of expectations,
including with regard to delinquencies and defaults, dislocations in the capital markets that began in the second quarter of fiscal 2008 persisted through March 31, 2009 requiring significant
adjustments to our discount rate, TERI's claims paying ability is less certain as a result of the TERI reorganization, and the estimated cost of funding auction rate notes issued by several
securitization trusts was projected to be higher than previously estimated. For a discussion of 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."

If
the actual performance of some or all of the securitization trusts were to vary appreciably from the adjusted assumptions we use, we may need to adjust further our key assumptions,
which could adversely affect our earnings in the period in which our assumptions change, and the actual additional structural advisory fees and residuals that we receive from the trusts could be
significantly less than reflected in our current financial statements. In addition, our securitization yields, or our structural advisory fees and residuals from a new securitization transaction
expressed as a percentage of the total principal and accrued interest securitized, realized on future securitized transactions could decrease if the actual performance of some or all of the
securitization trusts varies from the key assumptions we have historically used. In particular, economic, regulatory, competitive and other factors affecting prepayment, default and recovery rates on
the underlying securitized loan portfolio, including full or partial prepayments and prepayments as a result of loan consolidation activity, could cause or contribute to differences between the actual
performance of the securitization trusts and our key assumptions. In addition, developments in the TERI Reorganization, including challenges to the trusts' security interests in collateral securing
TERI's guaranty obligations or TERI's rejection of its guaranty agreements could cause us to adjust further our key assumptions. As of May 8, 2009, TERI had not rejected or otherwise indicated
how it will treat its guaranty obligations, and for purposes of estimating the fair value of our service receivables, we assumed at March 31, 2009 that the application of collateral will
continue in the ordinary course in accordance with existing agreements. Finally, continuing dislocations in the capital markets have resulted in increased volatility in investors' demand and yield
requirements for ABS. If such conditions persist, we may need to adjust further our key assumptions.

While
we have no further obligation to support the obligations within the bankruptcy-remote securitization trusts, our residuals and additional structural advisory fees in each
securitization we have facilitated are subordinate to securities issued to investors in such securitizations and may fail to generate any cash flow for us if the securitized assets do not generate
enough cash flow to pay debt holders in full or only generate enough cash flow to pay the debt holders. Our projected cash flows from service receivables from several securitization trusts are
expected to be eliminated entirely if LIBOR remains at current rates or decreases, or if the future cost of funding auction rate notes does not decrease from the levels currently projected. As a
result of the TERI Reorganization, we expect as of March 31, 2009 to receive additional structural advisory fees and residuals (from trusts other than the NCSLT Trusts) beginning five to
20 years and five to 23 years, respectively, after the date of a particular securitization transaction. At March 31, 2008, we expected to receive such cash flows beginning five to
17 years after the date of a particular securitization.

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Our
loans held for sale at March 31, 2009 consisted of $417.1 million in education loans originated by Union Federal. Our loans held for sale are recorded at lower of cost
or fair value. The estimated fair value of loans held for sale is evaluated on a periodic basis and, in the absence of readily determined market values, is based on the present value of expected
future cash flows using management's estimates. Under GAAP, we are required to reduce the carrying value of our education loans if their fair value decreases below our cost. In such an event, we are
required to write-down the carrying value of our education loans, which would result in an increase in our general and administrative expenses, and we may be required to provide additional
regulatory capital to Union Federal. We recorded a valuation adjustment of approximately $7.3 million in fiscal 2008 and $98.1 million in the first nine months of fiscal 2009, and we may
be required to make additional adjustments in the future.

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

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

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

The
interest rate on each outstanding auction rate note is limited by a maximum rate. The maximum rate is the least of three rates: a floating interest rate (generally
one-month LIBOR plus a margin), a fixed interest rate and the maximum legally permissible rate. The margin applicable to the floating interest rate is dependent upon the then current
ratings of the notes subject to an auction. If the notes are downgraded, the applicable margin, and the maximum floating rate, would increase. If the interest rate determined pursuant to the auction
procedures would exceed the maximum rate, the interest rate for the applicable interest period would be set at the maximum rate, but the amount of
the "excess" interest would accrue as "carryover interest." A noteholder's right to receive carryover interest is superior to our interests in the applicable securitization trust. As a result, our
projected cash releases from securitization trusts that have issued auction rate notes, including the timing of receipt, could be materially adversely affected by increased costs of funding of auction
rate notes, including the extent to which a trust accrues carryover interest.

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

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During the third quarter of fiscal 2008, the auction rate securities market systematically failed. During the third and fourth quarters of fiscal 2008, and the
first, second and third quarters of fiscal 2009, failed auctions occurred with respect to auction rate notes issued by each of the five securitization trusts that have issued auction rate notes. As a
result of the failed auctions, the auction rate notes bear interest at a maximum rate, which was calculated as of March 31, 2009 as one-month LIBOR plus 1.50%, in the case of
auction rate notes that were rated at least Aa3 by Moody's and AA- by S&P as of March 31, 2009, or one-month LIBOR plus 2.50%, in the case of auction rate notes that
were rated at least A3 by Moody's and A- by S&P as of March 31, 2009. Auction rate notes issued by two securitization trusts are also rated by Fitch, and bear interest at a maximum
rate, which was calculated as of March 31, 2009 as one-month LIBOR plus 1.50%, in the case of auction rate notes that were rated at least AA- by Fitch as of
March 31, 2009, or one-month LIBOR plus 2.50%, in the case of auction rate notes that were rated at least A- by Fitch as of March 31, 2009. During the third
quarter of fiscal 2008, we revised our assumption with regard to the future cost of funding of auction rate notes. We assumed at March 31, 2008 that all outstanding auction rate notes would
continue to bear interest at the then-current spreads over one-month LIBOR until their expected maturity dates. As a result, during the third quarter of fiscal 2008, we
decreased the estimated fair value of our residuals receivables by $59.5 million and the estimated fair value of our additional structural advisory fees receivable by $54,000.

In
October 2008, Moody's downgraded the ratings assigned to certain subordinated auction rate notes to below A3. As a result, the interest rate spread on these notes increased from
one-month LIBOR plus 1.50% to one-month LIBOR plus 3.50%. In November 2008, Moody's downgraded the insurance financial strength rating of Ambac to Baa1 from
Aa3. Ambac has provided credit enhancement for certain ABS issued in securitizations that we have facilitated, including certain auction rate notes. The downgrading of Ambac's ratings resulted in a
downgrading of the ratings assigned to certain of our auction rate notes. As a result, the interest rate on certain of those auction rate notes increased from one-month LIBOR plus 1.50% to
one-month LIBOR plus 2.50% or, in some cases, to one-month LIBOR plus 3.50%, and the interest rate of certain of those auction rate notes increased from one-month
LIBOR plus 2.50% to one-month LIBOR plus 3.50%. We assumed at March 31, 2009 that all outstanding auction rate notes would continue to bear interest at the then-current
maximum spreads over one-month LIBOR until their expected maturity dates. The increased cost of funding of these notes resulted in a decrease of $13.1 million in the estimated fair
value of our additional structural advisory fees, and a decrease of $31.8 million in the estimated fair value of our residuals, during the second quarter of fiscal 2009. On April 14,
2009, Moody's downgraded the insurer financial strength rating of Ambac, from Baa1 to Ba3, which resulted in a downgrading of the ratings assigned to certain auction rate notes issued in three
securitizations that we facilitated. These auction rate notes, however, already bore interest at the maximum rate.

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

In April 2009, we announced the sale of the Trust Certificate, representing our ownership interest in NC Residuals Owners Trust, in a
transaction intended to improve our near-term financial condition and liquidity. The sale of the Trust Certificate is expected to generate a cash refund for taxes previously paid, as we
have been required to pay taxes on the expected residual cash flows from the NCSLT Trusts before we actually receive those cash flows. In addition, we estimate that we would have been required to pay
approximately $430 million in additional taxes over the remaining life of these residuals, with approximately $370 million to be paid prior to the residuals generating sufficient annual
cash flows to offset the tax payments. As a result of the transaction, we expect to eliminate any tax obligations from these residuals in their entirety. The U.S. federal and state income tax
consequences arising in connection with the sale of the Trust Certificate and the asset services agreement between the purchaser and us, however, are complex and uncertain. The Internal Revenue
Service or a state taxing

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authority
could challenge our tax positions in connection with the transactions. If such a challenge were successful, in whole or in part, we may not receive a refund for taxes previously paid, or we
may not eliminate our tax obligations relating to the residuals. In either case, our near-term financial condition and liquidity would be materially adversely affected. In addition, any
investigation, audit or suit relating to the sale of the Trust Certificate, including any such proceeding brought by the Internal Revenue Service, could result in substantial costs and divert
management's attention and resources from our business.

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. In particular, the FASB has embarked upon a project to amend FASB Statement No. 140,Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,that would potentially remove the concept of the QSPE from such statement effective for fiscal
years beginning after November 15, 2009 and thereby eliminate gain on sale accounting as currently utilized by us. As a result of this, the FASB would then also remove the QSPE exception from
FIN No. 46R,Consolidation of Variable Interest Entities. The FASB collected comments on an exposure draft on this topic on November 14,
2008. The ultimate impact, if any, of these deliberations on our accounting practices is uncertain as of May 8, 2009. If we were required to consolidate the financial results of one or more
trusts with our own financial results as a result of amendments or changes in accounting rules, or if the SEC or other accounting authorities do not agree with our current approach, our financial
results could be adversely affected. Our near-term financial results could also be adversely affected if we were to conduct future securitization transactions, or alternative funding
transactions, as "on balance sheet" financing transactions.

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

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

LIBOR
is the underlying rate for most of the trusts' assets and liabilities and changes in LIBOR can have a significant effect on the cash flows generated by each trust. Changes in the
forward LIBOR curve affect the principal balances of education loans held by the trusts, particularly as interest is capitalized during loan deferment, which affects the net interest margin that the
trust generates. In addition, certain trusts have issued a tranche of ABS that bears a fixed interest rate. A decrease in the

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forward
LIBOR may result in a reduced spread on the fixed-interest tranche, which in turn decreases the estimated fair value of our service receivables. Significant changes to the forward LIBOR curve
can also affect the estimated fair value of our additional structural advisory fees, which bear interest at the rate of LIBOR plus 150 basis points to the extent such fees are accrued but unpaid by
the trusts. For example, during the second quarter of fiscal 2009, the forward LIBOR curve decreased by approximately 200 basis points, an unusually large change. The change reduced the estimated fair
value of our residuals receivables by $16.1 million, primarily as a result of a reduced spread on the fixed interest ABS, and reduced the estimated fair value of our additional structural
advisory fees by $15.4 million, primarily as a result of a lower interest rate applicable to accrued but unpaid fees.

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

We may require additional funds for our programs, our operating expenses, the pursuit of regulatory approvals, acquisition
opportunities and the expansion of our capabilities. Historically, we have satisfied our funding needs primarily through education loan asset-backed securitizations. The securitization market has not
been available to us and may not be available to us when needed in the future, and, if available, the terms may not be acceptable to us. We have also satisfied our funding needs through equity
financings. Pursuant to an investment agreement with affiliates of GSCP, we received aggregate gross proceeds of approximately $192.5 million, $59.8 million of which was received in
December 2007 and $132.7 million of which was received in August 2008, in connection with the sale of equity securities to the purchasers. We cannot assure you that the proceeds of the equity
investment by affiliates of GSCP will be sufficient to satisfy our liquidity needs or capital funding requirements beyond fiscal 2010, particularly in the event of a prolonged dislocation in the
private education loan ABS market. Our short-term needs also remain subject to uncertainties regarding regulatory capital requirements of Union Federal. As a result of disruptions in the
ABS market, we have been unable to facilitate the securitization of private education loans originated by Union Federal since September 2007. As a result, Union Federal has an elevated balance
of education loans on its balance sheet and consequently has had to rely on brokered deposits and other non-core deposit funding sources, including Federal Reserve borrowings, for unexpectedly long
periods. Interruption of, or limitations on, Union Federal's access to such funding sources could have a material adverse effect on Union Federal's liquidity or financial condition. Union Federal's
regulatory authorities have from time to time requested that we provide additional capital to Union Federal in amounts linked to the amount of private education loans held by Union Federal, and we are
in discussions with regulators regarding, among other things, the provision by us of additional regulatory capital and the reduction of such loan balances. Additional infusions of regulatory capital
by us into Union Federal could adversely affect our short-term liquidity because such funds are not thereafter available to
us to meet our other liquidity needs. Insufficient funds could require us to delay, scale back or eliminate certain of our programs and further scale back our expenses.

Risks Related to the TERI Reorganization

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

We have historically structured and supported private education loan programs for commercial banks, including JPMorgan Chase, Bank of
America and RBS. Structural advisory fees and residuals from securitization of JPMorgan Chase loans represented approximately 34% of our total securitization-related fees from the trusts used to
securitize education loans during fiscal 2008 and approximately 29% of our total revenue for fiscal 2007. Structural advisory fees and residuals from securitization of Bank of America loans
represented approximately 20% of our total securitization-related fees from the trusts used to securitize education loans during fiscal 2008 and approximately 15% of total revenue for fiscal 2007. We
also historically structured and supported private education

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loan
programs for companies such as NextStudent Inc. that assisted lenders such as RBS in marketing their programs to customers. Structural advisory fees and residuals from securitization of
RBS loans, including loans funded by RBS but marketed by third parties on behalf of RBS, represented approximately 23% of our total securitization-related fees from the trusts used to securitize
education loans during fiscal 2008 and approximately 24% of total revenue for fiscal 2007.

Certain
of our client agreements provided for termination rights in the event of the filing by TERI of a voluntary petition under federal bankruptcy laws. Our clients that have not
terminated their agreements have suspended their marketing of TERI-guaranteed loan programs as a result of the TERI Reorganization or instructed TERI to stop accepting applications for
TERI-guaranteed loans. Union Federal, which in the past has funded our proprietary Astrive Student Loan Program, is not doing so as of the date of this report. These actions resulted in a
significant reduction in our facilitated loan volumes during the first nine months of fiscal 2009. In addition, we expect that the guaranty agreements and loan origination agreements that most or all
of our clients have with TERI will be terminated in the context of the TERI Reorganization. Termination of the client's guaranty agreement or loan origination agreement with TERI would generally
result in the termination of our agreements with the client.

The
termination of our agreements with Bank of America, RBS and JPMorgan Chase has materially reduced, and the termination of guaranty agreements or loan origination agreements between
TERI and our other clients would further materially reduce, the overall volume of loans we facilitate, which will be difficult to replace. Our revenue, business and financial results will continue to
suffer as a result.

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

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

To
the extent the pledged account or other reserves available to a particular securitization trust were exhausted, or in the event that the security interests granted by TERI to the
trusts are unperfected or otherwise enforceable or compromised, and loan defaults continued to occur, that trust would have a claim as an unsecured creditor of TERI in the context of the TERI
Reorganization. If TERI's general reserves are insufficient to satisfy the guaranty claims, loan defaults would have a further adverse affect on the amount or timing of cash flows that would otherwise
be expected to be generated by the trust, which would adversely affect the value of our service receivables and our advisory fees pursuant to our asset services agreement with affiliates of Vanquish
Capital Management LLC.

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

In April and May 2008, the Bankruptcy Court issued interim orders prohibiting TERI from withdrawing any amounts from its segregated
reserve accounts until further order by the Bankruptcy

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Court.
In June 2008, the Bankruptcy Court entered an order approving a motion by TERI to honor its guaranty agreement obligations using cash in pledged accounts established for the benefit of certain
securitization trusts. The order was granted subject to the following:



Neither
the creditors committee nor any other party challenged the trusts' security interests in the pledged accounts within the 14-day period following the order. As a
result, beginning in July 2008, TERI resumed paying its obligations under the guaranty agreements with respect to defaulted loans from the trusts, but only to the extent there is cash in the pledged
account established for the benefit of the specific trust that owned the defaulted loan.

The
Bankruptcy Court, upon motion of the creditors committee, subsequently extended until February 2, 2009 the parties' rights to challenge the trusts' security interests in the
collateral other than the pledged accounts. In January 2009, the creditors committee filed an adversary complaint in the Bankruptcy Court against the owner trustee and indenture trustee of 17
securitization trusts, and against FMDS as administrator of such trusts. The complaint generally alleges that the security interests granted by TERI to the trusts, excluding the security interests in
the pledged accounts, are unperfected
or may otherwise be avoided under the Bankruptcy Code. In particular, the complaint alleges that the trusts do not have enforceable rights to future recoveries on defaulted loans owned by TERI with an
aggregate principal and accrued interest balance of approximately $595.0 million as of March 31, 2009, or in amounts owed or transferred by TERI to pledged accounts after the filing of
TERI's petition for reorganization totaling approximately $30.8 million as of March 31, 2009. In March 2009, FMDS and the owner trustee filed a motion to dismiss the creditors
committee's adversary complaint. The indenture trustee also filed a motion to dismiss, joining the arguments made in the motion filed by FMDS and the owner trustee. The creditors committee filed an
opposition to the motion to dismiss on April 30, 2009, together with an amended complaint naming the trusts themselves as defendants. FMDS expects to file a response to the opposition
and amended complaint within the time frame allowed under the applicable bankruptcy rules. We cannot at this time predict the timing, costs or outcome of the adversary proceeding, and did not adjust
our accounting assumptions during the nine months ended March 31, 2009 regarding TERI. To the extent the trusts continue to request that TERI make guaranty claims payments from the pledged
accounts and to transfer the defaulted loans to TERI in respect of the guaranty payments, the amount of defaulted loans the recoveries of which are subject to the creditors committee's challenge will
continue to increase.

If
the creditors committee or any other party is successful in challenging the trusts' security interests in the post-petition transfers to the pledged accounts or other
collateral, the amount of pledged collateral available exclusively to a particular securitization trust to satisfy TERI's guaranty obligations to that trust would decrease materially. As a result, the
trust's unsecured claims against TERI would increase proportionately. For example, recoveries from defaulted education loans transferred to TERI, which have historically been used to replenish a
particular trust's pledged account, would instead become an asset of TERI's bankruptcy estate and available to satisfy administrative claims of TERI's bankruptcy estate and other holders of claims.

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Funds
in the pledged accounts of certain trusts have been exhausted, or are expected to be exhausted in the near term, at which point such trust will have a general unsecured claim
against TERI. TERI has not resumed paying guaranty obligations using its general reserves or with respect to defaulted loans that have not been securitized and are held by program lenders that have
not otherwise agreed to settle their claims against TERI's bankruptcy estate.

Risks Related to Our Industry, Business and Operations

Challenges exist in implementing revisions to our business model.

Historically, our net income has been derived almost exclusively from structuring securitizations of our clients' private education
loans. We have been unable to access the securitization market as a result of market disruptions that began in the second quarter of fiscal 2008, accelerated during the subsequent periods and persist
as of the date of this report. That inability, together with the TERI Reorganization, has impacted our client relationships, resulted in the termination of certain material client agreements, reduced
our facilitated loan volume and challenged our business prospects. We have refined our business model in order to address the challenges currently facing us. Our revised business model includes
fee-for-service sales of our capabilities, including loan origination and disbursement, program design, risk management and portfolio management. In addition, we are developing
a new loan product that we expect to have available to prospective lender clients in the fourth quarter of fiscal 2009. It will be necessary for Union Federal to obtain regulatory clearance before
offering such a product. Successful sales of these services will be critical in order to grow our revenues and client base in the future. We have limited experience with the new private education loan
program and our fee-for-service business strategy, and we are uncertain of the level of interest from former, current or prospective clients with regard to the new program or
offered services.

Commercial
banks have historically served as the initial funding sources for loans we manage and have been our principal clients. In the absence of securitizations, we are not able to
provide liquidity necessary to support long term funding of private education loans, and commercial banks are facing liquidity and credit challenges from other sources, in particular mortgage lending
losses. In addition, the synergies that previously existed between federal loan marketing and private education loan marketing have been reduced by both the compression of margins in the federal
program and regulatory restrictions on cross marketing of federal and private education loans. As a result, as of the date of this quarterly report the private education loan business may generally be
less attractive to commercial banks than in the past.

In
this environment, it is uncertain whether commercial banks will continue funding private education loans. Some of our former clients, including Bank of America, have exited the market
segment. To the extent that commercial banks exit the private education loan market, the number of our prospective clients diminishes.

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

We offer our clients and prospective clients, national and regional financial institutions and educational institutions, services in
structuring and supporting their private education loan programs. The outsourcing services market in which we operate includes a 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 we are to overcome capital markets dislocations, 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 or former clients if they choose, or acquire the

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ability
to provide directly the services that we provide, or formerly provided, to them. In addition, to the extent that Union Federal provides education loans directly to consumers, we would compete
directly with clients and former clients. 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 five
principal competitors, Sallie Mae, JPMorgan Chase Bank, Wells Fargo & Company, Discover Financial Services, and Student Loan Corporation, an 80% owned subsidiary of Citibank, N.A., that offer a
similar range of services and/or products. Our business could also be adversely affected if Sallie Mae's program to market private education 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 education loan programs that we provide or if Sallie Mae's private education loan consolidation product
results in increased consolidation of private education loans held by the securitization trusts we have facilitated. Sallie Mae has announced that it intends to focus increasingly on originating
private education loans both through the school channel and the direct to consumer channel. 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.

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

The growth of our business could be adversely affected by changes in government education loan programs or expansions in the population of students eligible for loans under
education 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 government originates or guarantees affects the demand for private education loans because students and
their families often rely on private education loans to bridge a gap between available funds, including family savings, grants and federal and state loans, and the costs of post-secondary
education. The federal government currently places both annual and aggregate limitations on the amount of federal loans that any student can receive and determines the criteria for student
eligibility. These guidelines are generally adjusted in connection with funding authorizations from the United States Congress for programs under the Higher Education Act. Recent federal legislation
expands federal grant and loan assistance, which could weaken the demand for private education loans. In addition, legislation such as the College Cost Reduction and Access Act of 2007 has
significantly reduced the profit margins of traditional providers of federal loans, which could result in increased competition in the market for private education loans, which could adversely affect
the volume of private education loans and the securitization transactions that we facilitate and structure and, as a result, the growth of our business.

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



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In
August 2008, President Bush signed the Higher Education Opportunity Act, which will:



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

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



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

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

During the past year, rising unemployment rates and the unsteady financial sector have adversely affected many consumers and borrowers
throughout the country. Some consumers may find that higher education is an unnecessary investment during turbulent economic times and defer enrollment in educational institutions until the economy
improves thus decreasing education loan application and funding volumes. In addition, current borrowers may experience more trouble in repaying credit obligations which could increase loan
delinquencies and defaults. Finally, many lending institutions have exited the private education loan business and may or may not seek our services to revive this line of business as the economy
improves. If the adverse economic environment continues, our financial condition may deteriorate for any one of the foregoing reasons.

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

We have in the past, and will continue in the future, to rely on our clients to market and fund 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. Certain of our clients have terminated their marketing coordination agreements with us, and additional clients that have not
terminated their agreements have suspended their marketing of TERI-guaranteed loan programs as a result of the TERI Reorganization or instructed TERI to stop accepting applications for
TERI-guaranteed loans.

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 education loans. Investigations by the New York Attorney General, the
Attorneys General of other states, the United States Congress or others could have a negative impact on the ability of our clients, and Union Federal, to market education loans. The Higher Education
Opportunity Act of 2008 creates significant additional restrictions on the marketing of private education loans.

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

During the last two quarters of fiscal 2008, we announced a reduction in our overall cost structure, including the reduction of
headcount by over 600 employees. In September 2008 and November 2008, we further reduced headcount by approximately 100 employees, including the departures of our former Chief Executive Officer, Chief
Financial Officer, Chief Administrative Officer, Chief Information Officer and Chief Marketing Officer. Following these reductions, we had 231 full-time employees at May 6, 2009,
compared to 410 full-time employees as of May 6, 2008. Our cost reduction measures will place a strain on our management, systems and resources at a critical point in our business
and industry. We must develop alternatives to the loan guaranty and origination services that TERI has historically provided to our clients, and we must refine our business development capabilities,
our systems and processes and our access to financing sources. We must retain, train, supervise and manage our remaining employees during this period of change in our business.

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 education loan volume. We rely on our vendors to provide high levels of service and support. Our reliance on these external vendors subjects us to risks associated with inadequate or
untimely service and could result in fewer loans than we would experience if we performed the service functions in-house.

We
cannot assure you that we will be able to:



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We
are dependent upon the retention of certain key employees and the loss of any such employees could adversely affect our business. If we are unable to manage our cost reductions, or if
we lose key employees as a result, our operations and our financial results could be adversely affected.

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

We own a proprietary database of historical information on private education loan performance that we use to help us 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, and continue to develop as of the date of this quarterly report, a proprietary loan information processing system to enhance our application processing
and loan origination capabilities. Our education loan database and loan information processing system provide us with a competitive advantage in offering our services. Third parties could create or
acquire databases and systems such as ours. For example, as lenders and other organizations in the education loan market originate or service loans, they compile over time information for their own
education loan performance database. If a third party creates or acquires an education loan database or develops a loan information processing system, our competitive positioning, ability to attract
new clients and business could be adversely affected. As a result of the termination of our agreements with TERI in the context of the TERI Reorganization, we have lost access to continuing updates to
the database of TERI-guaranteed loan performance data with regard to TERI-guaranteed loans that are neither held by securitization trusts facilitated by us nor Union Federal.

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

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

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

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

Our 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

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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.

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

As of March 31, 2009, PHEAA serviced a substantial majority of loans held by the securitization trusts that we administer. This
arrangement allows us to avoid the overhead investment in servicing operations but requires us to rely on PHEAA to adequately service the trusts' education loans, including collecting payments,
responding to borrower inquiries and communicating with borrowers whose loans have become delinquent. We periodically review the costs associated with establishing servicing operations to service
loans. Our reliance on an external service provider for loan servicing subjects us to risks associated with inadequate or untimely services, including notice of developments in prepayments,
delinquencies and defaults. A substantial increase in these rates could adversely affect our ability to access profitably the securitization markets for our clients' loans and the value of our
additional structural advisory fees and residuals receivables. In addition, if PHEAA were to fail to comply with TERI's servicing guidelines in servicing securitized TERI-guaranteed
education loans, TERI would not be obligated to make guaranty payments on such loans, in which case PHEAA would be obligated to cure the noncompliance or purchase the loans. Such an event could have a
negative impact on the value of our 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 loan servicer, which could be time consuming and costly. In such event, our business could be adversely affected.

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

We rely heavily upon communications and information systems to conduct our business. Our systems and operations are potentially
vulnerable to damage or interruption from network failure, hardware failure, software failure, power or telecommunications failures, computer viruses and worms, penetration of our network by hackers
or other unauthorized users and natural disasters. Any failure 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 a number of states 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.

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

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

Risks Relating to Regulatory Matters

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

As a result of our acquisition of Union Federal in November 2006, we became subject to regulation as a savings and loan holding company
and our business is limited to activities that are financial or real-estate related. 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 in certain circumstances to review and approve changes in management and compensation
arrangements, 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 FDIC. Such regulation covers all banking business, including activities and
investments, lending practices, safeguarding deposits, capitalization, risk management policies and procedures, relationships with affiliated companies, efforts to combat money laundering,
recordkeeping and conduct and qualifications of personnel. In particular, the failure to meet minimum capital requirements could initiate certain mandatory and possibly additional discretionary,
actions by regulators that, if undertaken, could have a direct material adverse effect on our operations and financial statements. As a result of disruptions in the ABS market, we have been unable to
facilitate the securitization of private education loans originated by Union Federal since September 2007. As a result, Union Federal has an elevated balance of education loans on its balance sheet
and consequently has had to rely on brokered deposits and other non-core deposit funding sources for unexpectedly long periods. We have in the past been required to make capital infusions
to Union Federal to support the increased amount of private education loans held by Union Federal. Regulatory authorities could require additional capital infusions or take other measures to correct
these conditions. Such actions could adversely impact our short term liquidity position, reputation and our ability adequately to execute on our new business plans. In addition, Union Federal will not
be permitted to serve as a meaningful funding lender in our new private education loan program until it improves its funding capacity.

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

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

Many states have statutes and regulations that require the licensure of small loan lenders, loan brokers and loan arrangers. Some of
these statutes are drafted or interpreted to cover a broad scope of activities. We have not taken formal action regarding licensing or registration with any regulatory body outside the Commonwealth of
Massachusetts, other than the OTS. While we believe that our prior consultations with regulatory counsel and, in some cases local counsel, have identified all material licensing, registration and
other regulatory requirements that could be applicable to us, legislative changes to state licensing schemes have recently raised potential concern in one state. Even if we are not physically present
in a state, its regulators may take the position that registration or licensing is required because we provide services by mail, telephone, the Internet or other remote means.

All
of our operations relating to education loan processing are located in Massachusetts. In 2001, we received determination letters from the Massachusetts Division of Banks confirming
that the loan origination outsourcing services provided under contract to TERI by FMER, was not subject to licensing under the Massachusetts Small Loan Act because FMER did not conduct a lending
business with consumers in its own name and its processing centers were not generally open to the public. In May 2008, following the TERI Reorganization, we received an additional determination letter
from the Massachusetts Division of Banks confirming that FMER's business of back office loan application processing, loan origination and loan underwriting functions on behalf of lenders was exempt
from licensing under the Massachusetts Small Loan Act. The Massachusetts Small Loan Act requires any person that is engaged, for compensation, in the business of making small loans, or in aiding or
assisting the borrower or the lender in procuring or making such loans, to obtain a license. Under the statute, the business of making small loans includes the making of loans of $6,000 or less with
interest
rates and expenses of more than 12% per year. The loans that we have facilitated include amounts as small as $1,000, and a portion of those loans have combined interest rates and fees exceeding 12%.

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

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



As
a federally chartered institution, Union Federal, including its operating subsidiary, FMLOS, may conduct its business without regard to such state licensing laws and requirements. We
currently provide outsourced education loan origination services through FMLOS on a fee-for-service basis. To the extent that these activities are conducted through Union
Federal or FMLOS, we believe state regulatory requirements affecting loan brokers, small lenders and credit services organizations will be less likely to be asserted. Operational restrictions imposed
by federal regulators could, however, limit our ability to offer services through FMLOS on a fee-for-service basis.

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 have done or may do business may be subject to state registration or licensing requirements and laws and regulations,
including those relating to small loans, loan brokers and credit services organizations. As a result of the activities that we conduct or may conduct for our clients, it may be asserted that we have
some responsibility for compliance by third parties with which we do business with the laws and regulations applicable to them, whether on contractual or other grounds. If it is determined that we
have failed to comply with our obligations with respect to these third parties, we could be subject to civil or criminal liability.

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

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

The
risk of noncompliance with regulatory requirements by our lender clients and their marketing partners has been highlighted by recent state and federal investigations into education
loan marketing

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practices,
particularly the payment of marketing fees directly to schools in exchange for loan referrals. None of our contracts with lenders or marketers involves the payment of fees to schools for
loan volume. State and federal regulatory authorities have sought information from some of our former clients and us regarding the loan programs we coordinated, and it is possible that some marketing
or underwriting practices associated with the programs we coordinated and assets we securitized will be challenged as a result of such investigations. 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
education loan industry. As of the date of this report, we continue to work with the New York Attorney General's office regarding the investigation.

The
regulatory actions described above have also prompted state and federal legislation that will affect our operations. 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, in March 2009, the Federal Reserve Board, which we refer to as the Board, proposed regulations to implement provisions of the Higher
Education Opportunity Act, which was signed into law in August 2008. The proposed regulations revise the number, timing, and content of disclosures required for private education loans by the
Truth-in-Lending Act, or TILA, and the Board's implementing regulation for TILA, Regulation Z found at 12 C.F.R. Part 226. Under the proposed regulations,
creditors that extend private education loans would provide disclosures about loan terms and features on or with the loan application and would also have to disclose information about federal
education loan programs that may offer less costly alternatives. Additional disclosures would have to be provided when the loan is approved and after loan acceptance but prior to loan disbursement.
The Board is also proposing model disclosure forms that creditors could use to comply with the new disclosure requirements. The public comment period on the proposed amendments ends May 26,
2009. The final regulations will become effective no later than February 14, 2010.

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

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

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

The
association between marketers of high-interest "payday" loans and tax-return anticipation loans, or TRAL, and out-of-state national
banks has come under recent scrutiny. Recent litigation asserts that payday loan and TRAL marketers use out-of-state lenders in order to evade the usury and interest rate caps,
and other consumer protection laws, imposed by the states where they do business. Such litigation has sought, successfully in some instances, to re-characterize the loan marketer as the
lender for purposes of state consumer protection law restrictions. Similar civil actions have been

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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.

Risks Relating to Ownership of Our Common Stock

The price of our common stock may be volatile.

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



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In
the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been brought against that company. Due to the
recent volatility of our stock price, we have become the target of securities litigation. In April and May 2008, seven purported class actions were filed against us and certain of our current and
former officers and certain of our directors in the United States District Court for the District of Massachusetts. The plaintiffs allege, among other things, that the defendants made false and
misleading statements and failed to disclose material information in various SEC filings, press releases and other public statements. The complaints allege various claims under the Exchange Act and
Rule 10b-5 promulgated thereunder. The complaints seek, among other relief, class certification, unspecified damages, fees and such other relief as the court may deem just and
proper. In August 2008, the court consolidated these cases and appointed lead plaintiffs and a lead counsel.

On
November 28, 2008, a consolidated amended complaint was filed by the lead plaintiffs and contained similar allegations as the earlier complaints. On February 9, 2009, we
filed a motion to dismiss the amended complaint. Plaintiffs filed an opposition to our motion to dismiss on April 13, 2009. We plan to respond in May 2009. A class had not been certified in the
actions as of May 8, 2009.

In
addition, three federal derivative lawsuits, and one state derivative lawsuit, have been filed against certain of our current and former officers and directors and nominally against
us in the United States District Court for the District of Massachusetts and Massachusetts Superior Court, respectively. The derivative complaints allege various violations of federal and state law,
including violations of the Exchange Act, breaches of fiduciary duties, waste of corporate assets and unjust enrichment. The derivative complaints seek a monetary judgment, injunctive relief,
restitution, disgorgement and a
variety of purported corporate governance reforms. In August 2008, the federal court consolidated the federal derivative cases and stayed them pending resolution of the purported class actions
described above. In January 2009, the state court stayed the state derivative action until July 2009.

We
intend to vigorously assert our defenses in these actions. There can be no assurance, however, that we will be successful, and an adverse resolution of any of the lawsuits could have
a material effect on our consolidated financial position and results of operations in the period in which a lawsuit is resolved. In addition, although we carry insurance for these types of claims, a
judgment significantly in excess of our insurance coverage could materially and adversely affect our financial condition, results of operations and cash flows. We are not presently able to reasonably
estimate potential losses, if any, related to the lawsuits. We expect that this securities litigation, as well as any future litigation, could result in substantial costs and divert management's
attention and resources from our business.

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

Our directors and executive officers, and entities affiliated with them, beneficially owned approximately 26% of the outstanding shares
of our common stock as of May 8, 2009, excluding shares of preferred stock held by affiliates of GSCP and convertible into additional shares of our common

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

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

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



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

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

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

Item 2    Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Purchases of Equity Securities

On
April 24, 2007, our board of directors authorized the repurchase of up to an aggregate of 10,000,000 shares of our common stock. The 10,000,000 shares authorized for repurchase
on April 24, 2007 included 3,393,300 shares available for repurchase under the previously authorized repurchase plan. The current repurchase program does not have a fixed expiration date. We
did not repurchase any shares of common stock pursuant to this program during the nine months ended March 31, 2009. Through March 31, 2009, we had 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 March 31, 2009, 8,830,900 shares of our common stock may yet be purchased under this
program.

During
the first nine months of fiscal 2009 we repurchased 72,452 shares from employees who elected to withhold such shares to satisfy statutory minimum tax withholding obligations in
connection with the vesting of restricted stock units.

Item 6    Exhibits

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

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SIGNATURES

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

THE FIRST MARBLEHEAD CORPORATIONDate: May 8, 2009

By:

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


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EXHIBIT INDEX

Exhibit
Number

Description10.1(1)

Purchase Agreement, entered into by and among the registrant, VCG Owners Trust and VCG Securities LLC on March 31, 200910.2(1)

Asset Services Agreement, entered into by and among the registrant, First Marblehead Education Resources, Inc., VCG Owners Trust and VCG Securities LLC on March 31, 200910.3(1)

Data Sharing and License Agreement, entered into by and between the registrant and VCG Owners Trust on March 31, 200910.4(1)

Indemnification Agreement, entered into by and among the registrant, VCG Owners Trust and VCG Securities LLC on March 31, 200910.5(1)

Letter agreement, entered into by and between the registrant and Vanquish Advisors LLC on March 31, 200910.6(2)

Order, dated April 7, 2009, entered by the United States Bankruptcy Court for the District of Massachusetts10.7(2)

Stipulation, dated March 25, 2009, among The Education Resources Institute, Inc., Union Federal Savings Bank and UFSB Private Loan SPV, LLC31.1

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

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

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

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

Trust static pool data as of March 31, 200999.2(3)

Supplemental presentation


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106

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