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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(MARK ONE)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For The Quarterly Period Ended March 31, 2011

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to

Commission File Number 001-31825





The First Marblehead Corporation

(Exact Name of Registrant as Specified in Its Charter)







|                                                                           |  |                                    
|-------------------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                                   |  | 04-3295311                         
|(State or other jurisdiction ofincorporation or organization)              |  | (I.R.S. EmployerIdentification No.)
|                                                                           | 
|The Prudential Tower 800 Boylston Street, 34th Floor Boston,
Massachusetts |  | 02199-8157                         
|(Address of principal executive offices)                                   |  | (Zip Code)                         

(800) 895-4283

(Registrants telephone number, including area code)





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  x    No   ̈

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   ̈    No   ̈

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 |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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

As of May 13, 2011, the registrant had 101,177,635 shares of Common Stock, $0.01 par value per share, outstanding.









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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

Table of Contents



|                              |  |   |    |                                                                                                              |  |  |    | 
|----------------------------- |  | - | -- | ------------------------------------------------------------------------------------------------------------ |  |  | -- | 
|Part I. Financial Information |  |   | 1  |                                                                                                             
|                              |  |  |    | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  |  | 1  | 
|                              |  |  |    | Quantitative and Qualitative Disclosures About Market Risk                                                   |  |  | 30 | 
|                              |  |  |    | Controls and Procedures                                                                                      |  |  | 32 | 
|                              |  |  |    | Consolidated Statements of Operations for the three and nine months ended March 31, 2011 and 2010            |  |  | 34 | 
|                              |  |  |    | Consolidated Balance Sheets as of March 31, 2011 and June 30, 2010                                           |  |  | 35 | 
|                              |  |  |    | Consolidated Statements of Changes in Stockholders Equity for the nine months ended March 31, 2011 and 2010 |  |  | 36 | 
|                              |  |  |    | Consolidated Statements of Cash Flows for the nine months ended March 31, 2011 and 2010                      |  |  | 37 | 
|                              |  |  |    | Notes to Unaudited Consolidated Financial Statements                                                         |  |  | 38 | 
|                              |  |  |    | FORM 10-Q PART 1 CROSS-REFERENCE INDEX                                                                       |  |  | 69 | 
|Part II. Other Information    |  |   | 70 |                                                                                                             
|Item 1                        |  |  |    | Legal Proceedings                                                                                            |  |  | 70 | 
|Item 1A                       |  |  |    | Risk Factors                                                                                                 |  |  | 70 | 
|Item 2                        |  |  |    | Unregistered Sales of Equity Securities and Use of Proceeds                                                  |  |  | 92 | 
|Item 6                        |  |  |    | Exhibits                                                                                                     |  |  | 92 | 
|SIGNATURES                    |  |   |    |                                                                                                              |  |  | 93 | 
|EXHIBIT INDEX                 |  |   | 94 |                                                                                                             



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PART I. FINANCIAL INFORMATION

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
consolidated financial statements and accompanying notes included in Part I of this quarterly report and in conjunction with our audited financial statements included in our Form 10-K, or Annual Report, filed with the Securities and
Exchange Commission, or SEC, on September 2, 2010.

Unless otherwise indicated, or unless the context of the discussion requires
otherwise, we use the terms we, us, our or similar references to refer to The First Marblehead Corporation and its subsidiaries and consolidated variable interest entities, or VIEs, on a consolidated basis. We use
the terms First Marblehead or FMD to refer to The First Marblehead Corporation on a stand-alone basis.

Factors
That May Affect Future Results

In addition to historical information, this quarterly report includes forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained herein regarding our strategy,
future operations and products, financial performance, future funding transactions, projected costs, projected trust or loan portfolio performance, future market position, prospects, plans and outlook of management, other than statements of
historical facts, are forward-looking statements. The words anticipates, believes, estimates, expects, intends, may, observe, plans,
projects, will, would, and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guaranty that we actually
will achieve the plans, intentions or expectations expressed or implied in our forward-looking statements, which involve risks, assumptions and uncertainties. There are a number of important factors that could cause actual results, timing, levels of
activity, performance or events to differ materially from those expressed or implied in the forward-looking statements we make. These important factors include our critical accounting estimates set forth below under
Application of Critical Accounting Policies and Estimates and factors including, but not limited to, those set forth under the caption Risk Factors in Item 1A of Part II of this quarterly report. 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 16, 2011.

Executive Summary

Overview

The presentation of our financial results beginning in fiscal 2011
significantly differs from prior fiscal years due to our adoption, effective July 1, 2010, of Accounting Standards Update, or ASU, 2009-16, Transfers and Servicing (Topic 860)Accounting for Transfers of Financial Assets, or
ASU 2009-16, and ASU 2009-17, Consolidation (Topic 810)Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities, or ASU 2009-17. Effective July 1, 2010, we consolidated 14 securitization
trusts that we facilitated and previously accounted for off-balance sheet, and we deconsolidated our indirect subsidiary UFSB Private Loan SPV, LLC, or UFSB-SPV. As a result, in fiscal 2011, we began reporting two lines of business for segment
reporting purposes. Our determination of the activities that constitute a segment is based on the manner in which our chief operating decision makers measure profits or losses, assess performance and allocate resources.

The financial results of FMD and its subsidiaries that we historically reported in our consolidated results prior to July 1, 2010, with the
exception of the deconsolidation of UFSB-SPV, are referred to as Education Financing throughout this quarterly report and for segment reporting purposes. The financial results of our Education Financing segment have generally been
derived from our services relating to private education loans, which we refer to as education loans, and after January 1, 2011, tuition billing and collections services. On December 31, 2010, we completed our acquisition of Tuition
Management Systems LLC, which we refer to as TMS, formerly a division of KeyBank National Association, which we refer to as KeyBank. We purchased the assets, net of assumed liabilities, systems, trademarks and employees of TMS for $47.0 million in
cash. In addition, we may be entitled to a payment of up to $1.3 million from KeyBank based on certain performance metrics of TMS through July 1, 2011. See Note 5, Acquisition of TMS, in the notes to our unaudited consolidated
financial statements included in Part I of this quarterly report for additional information.

The VIEs consolidated upon our adoption of
ASU 2009-16 and ASU 2009-17 at July 1, 2010 consist of 14 securitization trusts that purchased portfolios of education loans facilitated by us during our fiscal years 2004 through 2007, although not all securitization trusts facilitated by
us during that period were consolidated. The securitization trusts financed purchases of education loans by issuing debt to third-party investors. The education loans purchased by certain of these securitization



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trusts, which we refer to as the Trusts, were initially subject to a default repayment guaranty by The Education Resources Institute, Inc., or TERI, while the education loans purchased by
other securitization trusts, which we refer to as the NCT Trusts, were, with limited exceptions, not TERI-guaranteed. Of the 14 consolidated securitization trusts, 11 are Trusts and three are NCT Trusts. We refer to the consolidated Trusts as the
NCSLT Trusts, and the consolidated NCT Trusts as the GATE Trusts, throughout this quarterly report. We present the financial results of the consolidated securitization trusts as a single segment, referred to as Securitization Trusts
throughout this quarterly report and for segment reporting purposes. The administration of these trusts, including investor reporting and default prevention and collection management services, is provided by our Education Financing segment.

We made our determination of entities to consolidate at July 1, 2010 using assumptions about the expected financial performance of VIEs
and our variable interests in them at that date. ASU 2009-17 requires us to continuously reassess whether consolidation of VIEs is appropriate. As a result, we may be required to consolidate or deconsolidate VIEs in future periods. Changes in our
determinations of which VIEs to consolidate may lead to increased volatility in our financial results and make comparisons of results between time periods challenging.

See Note 2, Summary of Significant Accounting PoliciesConsolidation, and Note 4, Consolidation, in the notes to our unaudited consolidated financial statements included
in Part I of this quarterly report for additional information.

Changes to Presentation

In prior interim periods of fiscal 2011, in consultation with KPMG LLP, our independent registered public accounting firm, we presented the equity
interests in the NCSLT Trusts, which are owned by an unrelated third party, as non-controlling interests in our balance sheets, as a separate component of stockholders equity. In addition, in our statements of operations, we
allocated the net losses generated by the NCSLT Trusts to non-controlling interests. The net losses of the NCSLT Trusts did not, therefore, directly impact the net loss, loss per share or equity available to First Marblehead stockholders. In May
2011, KPMG LLP reported to our board of directors and our audit committee that our allocations to non-controlling interests were not consistent with U.S. generally accepted accounting principles, or GAAP. Instead, under GAAP, the NCSLT Trusts
financial performance, including losses, should be allocated to us until either the trusts are deconsolidated or trust liabilities are extinguished.

As a result, we have eliminated the allocation of losses generated by the NCSLT Trusts to non-controlling interests in our statements of operations and have included the losses from the NCSLT Trusts in
our net loss, net loss per share and accumulated deficit. Our balance sheet at March 31, 2011 reflects in accumulated deficit, rather than as a separate component of stockholders equity, the deficit generated by the NCSLT Trusts, although
we have no obligation to fund such deficit. For additional information on these changes, please see the Current Report on Form 8-K that we filed with the SEC on May 10, 2011 as well as Amendment No. 1 to our Quarterly Reports on Form 10-Q
for the quarterly periods ended September 30, 2010 and December 31, 2010, each of which was filed with the SEC on May 16, 2011.

Business Trends and Uncertainties

The following discussion of business trends and uncertainties is focused on our Education Financing segment. We have no ownership interest in the NCSLT
Trusts as a result of our sale in fiscal 2009 to a third party owner of the trust certificate, or Trust Certificate, of NC Residuals Owners Trust, which held our residual interests in the Trusts. Although we are required under GAAP to reflect the
net deficit of the consolidated securitization trusts in our accumulated deficit, and the revenues and expenses of these trusts in our statements of operations and earnings or loss per share, the financial performance of the NCSLT Trusts will
ultimately inure to the third-party owners of the residual interests. Our accumulated deficit as of March 31, 2011 included a deficit of $1.06 billion related to the NCSLT Trusts. Any accumulated deficit generated by a consolidated trust will
reverse out of our accumulated deficit or retained earnings, and be recorded as a non-cash gain, when the trusts liabilities are extinguished or the trust is deconsolidated by us. With respect to the NCSLT Trusts, the economic exposure for our
stockholders is limited to the value of our service revenue receivables due from these trusts or their third-party owner, which constitute our variable interests, recorded by our Education Financing segment. At March 31, 2011, our Education
Financing segment had service revenue receivables of $15.9 million due from the on- and off-balance sheet Trusts and the third-party owner of the Trust Certificate. With respect to the GATE Trusts, we own 100% of the residual interests. As such, any
cumulative profits generated by the GATE Trusts would ultimately be realized by our stockholders in the form of residual cash flow payments.

As a result of economic conditions, we undertook a number of measures in fiscal 2010 to adjust our business model. These measures are described in
Item 7 of Part II of our Annual Report filed with the SEC on September 2, 2010, under the heading Executive SummaryBusiness Trends and Uncertainties.

We have summarized below certain recent developments affecting our Education Financing segment since the beginning of fiscal 2011:



| |  |  | In October 2010, we received a federal tax refund of $45.1 million, which included $21.2 million attributable to our bank subsidiary,
Union Federal Savings Bank, or Union Federal, and distributed to Union Federal
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | pursuant to our tax sharing agreement. In addition, in October 2010, the U.S. Office of Thrift Supervision, or OTS, Union Federals regulator, approved a cash dividend from Union
Federal to FMD of up to $29.0 million, which Union Federal paid to FMD in November 2010.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In October 2010, the United States Bankruptcy Court for the District of Massachusetts, or Bankruptcy Court, entered an order confirming the
Modified Fourth Amended Joint Plan of Reorganization of The Education Resources Institute, Inc. and the Official Committee of Unsecured Creditors as of August 26, 2010, which we refer to as the Modified Plan of Reorganization, which became
effective in November 2010, and granted a stipulation, which we refer to as the Stipulation, among TERI, the Official Committee of Unsecured Creditors of TERI, or Creditors Committee, FMD and its subsidiaries, First Marblehead Education
Resources, Inc., or FMER, and First Marblehead Data Services, Inc., or FMDS, settling certain claims between TERI and FMD, FMER and FMDS. Our Education Financing segment recognized gains of $8.1 million related to the claims of FMD and
FMER during the second quarter of fiscal 2011.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On December 31, 2010, we completed our acquisition of the assets, liabilities and operations of TMS from KeyBank for $47.0 million. Following the
closing of the acquisition, TMS has retained its separate brand identity and operations. See Note 5, Acquisition of TMS, in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for
additional information.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the third quarter of fiscal 2011, we completed our previously announced review of strategic alternatives for Union Federal. After an extensive
analysis of a broad range of alternatives by a special committee of independent directors and FMDs financial and legal advisors, we have decided to retain our ownership of Union Federal at this time. We believe our acquisition of TMS, along
with our desire to implement our own private education loan programs (subject to regulatory constraints) built upon our
Monogram® loan product service platform, which we refer to as the Monogram platform, creates potential synergies
with Union Federal.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Portfolio Performance. Credit performance of consumer-related loans generally, as well as
education loan portfolios included in our consolidated balance sheet and those held by other VIEs not consolidated by us, have been adversely affected by general economic conditions in the United States, including increased unemployment rates,
higher levels of education loan defaults and lower recoveries on such defaults. While there have been some recent improvements, these conditions have had, and may continue to have, a material adverse effect on legacy loan portfolio performance and
the estimated value of our service revenue receivables associated with the securitization trusts that we have previously facilitated. During the third quarter of fiscal 2011, we completed a review based on accumulation of information associated with
the impact of these conditions on our post-default recovery performance.

Changes in post-default recovery performance often lag behind most
of the other loan performance assumptions due to the fact that over the life-cycle of an education loan, recovery performance data is typically among the last performance data to become available. During the third quarter of fiscal 2010, we
retroactively scored education loans held by the Trusts into three risk segments using our proprietary risk score modeling, origination data and additional credit bureau data made available following origination, with education loans in Segment 1
expected to perform better than education loans in Segment 2, and education loans in Segment 2 expected to perform better than education loans in Segment 3. We believe we now have sufficient recovery data on education loans having defaulted during
the recent stressed economic environment to suggest a change to our net recovery rate assumption on a segmented basis and are now applying net recovery rates of 36.3% for Segment 1 education loans, 32.1% for Segment 2 education loans and 22.1% for
Segment 3 education loans. See Note 9, Service Revenue Receivables and Related IncomeEducation Loan Performance Assumption Overview, in the notes to our unaudited consolidated financial statements included in Part I of this
quarterly report for additional information about the changes.

Capital Markets.We believe that conditions in the capital markets
generally continued to improve in fiscal 2011 compared with recent prior years. In particular, investors in asset-backed securities, or ABS, have begun to demonstrate increased interest in ABS backed by private education loans that exhibit a strong
credit profile. Additionally, investors have once again begun to demonstrate interest in longer duration ABS in the sector. As a result, we believe that there may again be an opportunity to finance private education loans in the ABS market. We
believe, however, that the structure and economics of any near-term financing transaction would be materially different from prior transactions that we sponsored. Such differences include, but are not limited to, the potential for lower revenues,
additional cash requirements on our part and a higher likelihood that we would be required to consolidate any new securitization trust in our financial statements. We continue to opportunistically evaluate efficient portfolio funding strategies,
including warehouse lending facilities and term securitization transactions.

Loan Origination.During the first quarter of fiscal
2011, we began performing services under loan program agreements for two clients, each related to school-certified education loan programs to be funded by these clients based on our Monogram platform. Under the terms of the credit enhancement
provisions in the loan program agreements, we may facilitate up to an aggregate of $275.0 million in education loans over the life of these programs. Our Monogram platform provides us with an opportunity, through our Education Financing
segment, to originate, administer, manage and finance education loans, and we believe that the two loan program agreements we have entered into are a significant step in our return to the education lending marketplace.



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The near-term financial performance and future growth of our Education Financing segment depends in large
part on our ability to successfully market our Monogram platform and successfully integrate TMS into our operations so that we may transition to more fee-based revenues, while growing and diversifying our client base. We believe that the size and
quality of TMS customer base provides us with an opportunity to expand our school relationships and offer complementary products and services in the future. While we continue to seek additional lender clients, we are also in the process of
developing additional loan programs based on our Monogram platform, which we expect to be offered by Union Federal later this calendar year, subject to regulatory constraints. We are uncertain as to the degree of market acceptance our Monogram
platform will have, particularly in the current economic environment where many lenders continue to evaluate their education lending business models. We are also uncertain of the volume of education loans to be generated by our two clients during
the remainder of fiscal 2011 in light of seasonal trends. The volume of education loan applications typically increases with the approach of tuition payment due dates, and we have historically processed the greatest application volume during the
summer months. The seasonality of education loan originations will likely impact the timing and size of fees that we earn in the remainder of fiscal 2011.

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



| |  |  | The extent to which our services and products, including our Monogram platform, gain market share and remain competitive at pricing favorable to us;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The amount of education loan volume that we are able to generate under our Monogram-based loan programs;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Demand for education financing, which may be affected by changes in limitations established by the federal government on the amount of federal loans
that a student can receive, the terms and eligibility criteria for loans and grants under the federal governments programs and legislation recently passed or currently under consideration;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Competition for providing education financing and reluctance by lenders to participate in the education lending market;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to successfully integrate TMS into our business model and realize the anticipated financial benefits of our acquisition of TMS;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Conditions in the education loan financing market, including the costs or availability of financing, rating agency assumptions or actions, and market
receptivity to education loan asset-backed securitizations;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest rates, unemployment rates and the general consumer credit environment, including their effects on our assumed discount, default and prepayment
rates, the forward London Interbank Offered Rate, or LIBOR, curve and the securitization trusts ability to recover principal and interest from borrowers, including the effectiveness of various risk mitigation strategies;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Challenges relating to the federal income tax treatment of our sale of the Trust Certificate to a third party in fiscal 2009, or our asset services
agreement, which we refer to as the Asset Services Agreement, with the purchaser of the Trust Certificate, including proceedings related to federal tax refunds previously received, as a result of the audit currently being conducted by the Internal
Revenue Service, or IRS, or otherwise;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The resolution of the litigation pertaining to our Massachusetts state income tax returns for fiscal years 2004 through 2006;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Application of critical accounting policies and estimates, which impact the carrying value of assets and liabilities, as well as our determinations to
consolidate or deconsolidate VIEs;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Regulatory requirements applicable to Union Federal, TMS and us, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank
Act, enacted in July 2010, which could require changes to our operational and compliance practices, as well as increased costs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our success in appealing an order entered by the Bankruptcy Court in December 2010 relating to the TERI database dispute as set forth under the
caption Legal ProceedingsTERI Database Dispute in Item 1 of Part II of this quarterly report;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Applicable laws and regulations, which may affect the terms upon which lenders agree to make education loans, the terms of future portfolio funding
transactions, including disclosure and risk retention requirements, recovery rates on defaulted education loans and the cost and complexity of our loan facilitation operations; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Departures or long-term unavailability of key personnel.
| | - |  | --------------------------------------------------------

Results of OperationsThree and Nine Months Ended March 31, 2011 and 2010

Financial Results Summary

We, in
conjunction with our independent registered public accounting firm, identified certain errors in the levels of reserves recorded for deferred tax assets in fiscal 2010 and fiscal 2009. We have assessed the materiality of the errors and
concluded, based on qualitative and quantitative considerations, that they are not material to the prior period financial statements taken as a whole. The correction of these amounts is reflected in the table below, and in our consolidated
statements of operations and our consolidated balance sheets included in this quarterly report, and will continue to be reflected in our future reports that we file pursuant to the Exchange Act. See Note 3, Corrections of Immaterial
Errors in Prior Fiscal Years, in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for the impact of the corrections on previously reported consolidated statements of operations by quarter
for fiscal 2010, and for full years fiscal 2010 and for fiscal 2009, and our consolidated balance sheets at June 30, 2010 and 2009.

The
following table summarizes our results of operations by reporting segment:



|                                                           |  |                                                             |         |   |                      |   |        |              |  |   |        |  |  |                    |         |   |                                |   |         |       |  |   |        |   |  |   |         |  
|---------------------------------------------------------- |  | ----------------------------------------------------------- | ------- | - | -------------------- | - | ------ | ------------ |  | - | ------ |  |  | ------------------ | ------- | - | ------------------------------ | - | ------- | ----- |  | - | ------ | - |  | - | ------- | -
|                                                           |  | Three months ended March 31,                                |        
|                                                           |  | 2011                                                        |         |   | 2010                 |  
|                                                           |  | EducationFinancing                                          |         |   | SecuritizationTrusts |   |        | Eliminations |  |   | Total  |  |  | EducationFinancing |         |   | DeconsolidationandEliminations |   |         | Total | 
|                                                           | 
|                                                           |  | (dollars and shares in thousands, except per share amounts) |        
|Revenues:                                                  |  |                                                             |         |   |                      |   |        |              |  |   |        |  |  |                    |         |   |                                |   |         |       |  |   |        |   |  |   |         |  
|Net interest income (loss) after provision for loan losses |  | $                                                           | 341     |   |                      | $ | (9,303 | )            |  | $ | 9      |  |  | $                  | (8,953  | ) |                                | $ | (162    | )     |  | $ | 666    |   |  | $ | 504     |  
|Total non-interest revenues                                |  |                                                             | (14,958 | ) |                      |   | 1,818  |              |  |   | 19,278 |  |  |                    | 6,138   |   |                                |   | (17,308 | )     |  |   | (164   | ) |  |   | (17,472 | )
|                                                           |  |                                                             |         |   |                      |   |        |              |  |   |        |  |  |                    |         |   |                                |   |         |       |  |   |        |   |  |   |         |  
|Total revenues                                             |  |                                                             | (14,617 | ) |                      |   | (7,485 | )            |  |   | 19,287 |  |  |                    | (2,815  | ) |                                |   | (17,470 | )     |  |   | 502    |   |  |   | (16,968 | )
|Total non-interest expenses                                |  |                                                             | 27,178  |   |                      |   | (9,724 | )            |  |   | 19,157 |  |  |                    | 36,611  |   |                                |   | 24,122  |       |  |   | 3,738  |   |  |   | 27,860  |  
|                                                           |  |                                                             |         |   |                      |   |        |              |  |   |        |  |  |                    |         |   |                                |   |         |       |  |   |        |   |  |   |         |  
|Income (loss) before other income and income taxes         |  |                                                             | (41,795 | ) |                      |   | 2,239  |              |  |   | 130    |  |  |                    | (39,426 | ) |                                |   | (41,592 | )     |  |   | (3,236 | ) |  |   | (44,828 | )
|Other income  gain from TERI settlement                   |  |                                                             |        |   |                      |   | 18     |              |  |   |       |  |  |                    | 18      |   |                                |   |        |       |  |   |       |   |  |   |        |  
|                                                           |  |                                                             |         |   |                      |   |        |              |  |   |        |  |  |                    |         |   |                                |   |         |       |  |   |        |   |  |   |         |  
|Income (loss) before income taxes                          |  |                                                             | (41,795 | ) |                      |   | 2,257  |              |  |   | 130    |  |  |                    | (39,408 | ) |                                |   | (41,592 | )     |  |   | (3,236 | ) |  |   | (44,828 | )
|Income tax expense (benefit)                               |  |                                                             | (82     | ) |                      |   |       |              |  |   |       |  |  |                    | (82     | ) |                                |   | (4,647  | )     |  |   | 302    |   |  |   | (4,345  | )
|                                                           |  |                                                             |         |   |                      |   |        |              |  |   |        |  |  |                    |         |   |                                |   |         |       |  |   |        |   |  |   |         |  
|Net income (loss)                                          |  | $                                                           | (41,713 | ) |                      | $ | 2,257  |              |  | $ | 130    |  |  | $                  | (39,326 | ) |                                | $ | (36,945 | )     |  | $ | (3,538 | ) |  | $ | (40,483 | )
|                                                           |  |                                                             |         |   |                      |   |        |              |  |   |        |  |  |                    |         |   |                                |   |         |       |  |   |        |   |  |   |         |  
|Net income (loss) per basic and diluted share              |  | $                                                           | (0.41   | ) |                      | $ | 0.02   |              |  | $ | 0.00   |  |  | $                  | (0.39   | ) |                                | $ | (0.37   | )     |  | $ | (0.04  | ) |  | $ | (0.41   | )
|                                                           |  |                                                             |         |   |                      |   |        |              |  |   |        |  |  |                    |         |   |                                |   |         |       |  |   |        |   |  |   |         |  
|Basic and diluted weighted-average shares outstanding      |  |                                                             |         |   |                      |   |        |              |  |   |        |  |  |                    | 100,834 |   |                                |   |         |       |  |   |        |   |  |   | 99,248  |  

Net loss for the three months ended
March 31, 2011 was $39.3 million, or $0.39 per diluted share, including $598 thousand of income from the NCSLT Trusts. The remaining $1.7 million of net income for our Securitization Trusts segment, or $0.02 per diluted share, was derived from
the GATE Trusts, for which we own 100% of the residuals. The net loss for the three months ended March 31, 2010 reflects net losses attributable to UFSB-SPV, which was deconsolidated on July 1, 2010, of $3.5 million.

With respect to our Education Financing segment, total revenues for the three months ended March 31, 2011 improved by $2.9 million compared to total
revenues for the third quarter of fiscal 2010. The increase in non-interest revenues reflects TMS revenues of $7.1 million, partially offset by the $4.5 million decline in asset servicing fees. Non-interest revenues for the third quarter of fiscal
2011 reflected a $21.4 million loss on trust updates for decreases in the estimated fair value of additional structural advisory fees and residuals compared with a loss of $21.5 million a year earlier. Both periods reflect changes to assumptions
about the performance of education loans held by the securitization trusts. The increase in net interest income after provision for loan losses reflects lower interest expenses on deposits at Union Federal in the fiscal 2011 period. Non-interest
expenses were up $3.1 million for the quarter due to TMS expenses of $7.7 million, partially offset by lower depreciation, occupancy and stock compensation expenses. The tax benefit for the three months ended March 31, 2011 principally reflects
accruals related to unrecognized tax benefits offset by a decrease in deferred tax liabilities. The tax benefit for the three months ended March 31, 2010 reflects the recognition of tax benefits that became available to FMD as a result of the
passage in November 2009 of the Worker, Homeownership and Business Assistance Act of 2009, or WHBAA, offset by accruals related to unrecognized tax benefits.



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##### Table of Contents

With respect to our Securitization Trusts segment, total revenues for the third quarter of fiscal 2011
reflect net interest income of $64.4 million and a provision for loan losses of $73.7 million. Total non-interest expenses reflect general operating expenses of $11.8 million, more than offset by a gain of $21.5 million on the fair value adjustment
to additional structural advisory fees due to our Education Financing segment. The consolidated securitization trusts carry their liabilities for additional structural advisory fees at fair value in their balance sheets. Our Securitization Trusts
gain is eliminated in consolidation, as well as the loss recorded in revenue by our Education Financing segment.



|                                                           |  |                                                             |         |   |                      |   |          |              |  |   |       |   |  |                    |          |   |                                |   |          |       |  |   |         |   |  |   |          |  
|---------------------------------------------------------- |  | ----------------------------------------------------------- | ------- | - | -------------------- | - | -------- | ------------ |  | - | ----- | - |  | ------------------ | -------- | - | ------------------------------ | - | -------- | ----- |  | - | ------- | - |  | - | -------- | -
|                                                           |  | Nine months ended March 31,                                 |        
|                                                           |  | 2011                                                        |         |   | 2010                 |  
|                                                           |  | EducationFinancing                                          |         |   | SecuritizationTrusts |   |          | Eliminations |  |   | Total |   |  | EducationFinancing |          |   | DeconsolidationandEliminations |   |          | Total | 
|                                                           |  | (dollars and shares in thousands, except per share amounts) |        
|Revenues:                                                  |  |                                                             |         |   |                      |   |          |              |  |   |       |   |  |                    |          |   |                                |   |          |       |  |   |         |   |  |   |          |  
|Net interest income (loss) after provision for loan losses |  | $                                                           | 378     |   |                      | $ | (103,307 | )            |  | $ | 29    |   |  | $                  | (102,900 | ) |                                | $ | 4,181    |       |  | $ | 2,311   |   |  | $ | 6,492    |  
|Total non-interest revenues                                |  |                                                             | (691    | ) |                      |   | 2,393    |              |  |   | 9,074 |   |  |                    | 10,776   |   |                                |   | 715      |       |  |   | (498    | ) |  |   | 217      |  
|                                                           |  |                                                             |         |   |                      |   |          |              |  |   |       |   |  |                    |          |   |                                |   |          |       |  |   |         |   |  |   |          |  
|Total revenues                                             |  |                                                             | (313    | ) |                      |   | (100,914 | )            |  |   | 9,103 |   |  |                    | (92,124  | ) |                                |   | 4,896    |       |  |   | 1,813   |   |  |   | 6,709    |  
|Total non-interest expenses                                |  |                                                             | 67,728  |   |                      |   | 17,083   |              |  |   | 9,538 |   |  |                    | 94,349   |   |                                |   | 134,026  |       |  |   | 75,332  |   |  |   | 209,358  |  
|                                                           |  |                                                             |         |   |                      |   |          |              |  |   |       |   |  |                    |          |   |                                |   |          |       |  |   |         |   |  |   |          |  
|Income (loss) before other income and income taxes         |  |                                                             | (68,041 | ) |                      |   | (117,997 | )            |  |   | (435  | ) |  |                    | (186,473 | ) |                                |   | (129,130 | )     |  |   | (73,519 | ) |  |   | (202,649 | )
|Other income  gain from TERI settlement                   |  |                                                             | 8,112   |   |                      |   | 42,587   |              |  |   |      |   |  |                    | 50,699   |   |                                |   |         |       |  |   |        |   |  |   |         |  
|                                                           |  |                                                             |         |   |                      |   |          |              |  |   |       |   |  |                    |          |   |                                |   |          |       |  |   |         |   |  |   |          |  
|Loss before income taxes                                   |  |                                                             | (59,929 | ) |                      |   | (75,410  | )            |  |   | (435  | ) |  |                    | (135,774 | ) |                                |   | (129,130 | )     |  |   | (73,519 | ) |  |   | (202,649 | )
|Income tax expense (benefit)                               |  |                                                             | 1,957   |   |                      |   |         |              |  |   |      |   |  |                    | 1,957    |   |                                |   | (27,666  | )     |  |   | 299     |   |  |   | (27,367  | )
|                                                           |  |                                                             |         |   |                      |   |          |              |  |   |       |   |  |                    |          |   |                                |   |          |       |  |   |         |   |  |   |          |  
|Net income (loss)                                          |  | $                                                           | (61,886 | ) |                      | $ | (75,410  | )            |  | $ | (435  | ) |  | $                  | (137,731 | ) |                                | $ | (101,464 | )     |  | $ | (73,818 | ) |  | $ | (175,282 | )
|                                                           |  |                                                             |         |   |                      |   |          |              |  |   |       |   |  |                    |          |   |                                |   |          |       |  |   |         |   |  |   |          |  
|Net income (loss) per basic and diluted share              |  | $                                                           | (0.61   | ) |                      | $ | (0.75    | )            |  | $ | (0.01 | ) |  | $                  | (1.37    | ) |                                | $ | (1.02    | )     |  | $ | (0.75   | ) |  | $ | (1.77    | )
|                                                           |  |                                                             |         |   |                      |   |          |              |  |   |       |   |  |                    |          |   |                                |   |          |       |  |   |         |   |  |   |          |  
|Basic and diluted weighted-average shares outstanding      |  |                                                             |         |   |                      |   |          |              |  |   |       |   |  |                    | 100,809  |   |                                |   |          |       |  |   |         |   |  |   | 99,232   |  

Net loss for the nine months ended
March 31, 2011 was $137.7 million, or $1.37 per diluted share, including $80.3 million of losses, or $0.80 per diluted share, from the NCSLT Trusts. The remaining $4.9 million of net income, or $0.05 per diluted share, from our Securitization
Trusts segment relates to the GATE Trusts, for which we own 100% of the residuals. The net loss for the nine months ended March 31, 2010 reflects net losses attributable to UFSB-SPV, which was deconsolidated on July 1, 2010, of $73.8
million.

For our Education Financing segment, net interest income after provision for loan losses for the nine months ended March 31,
2011, declined $3.8 million compared to the comparable period in fiscal 2010. The decrease was primarily attributable to $4.9 million earned on education loans held for sale by Union Federal prior to their sale in the second quarter of fiscal 2010,
partially offset by a decrease in interest expenses on leases and deposits of $1.4 million during the fiscal 2011 period. Non-interest revenues declined $1.4 million, reflecting an $8.0 million decline in asset servicing fees and a $2.5 million
decline in administrative and other fees excluding TMS, in part offset by increases attributable to TMS revenues of $7.1 million and a decrease of $2.0 million in losses on trust updates for decreases in the estimated fair value of additional
structural advisory fees and residuals.

Non-interest expenses for our Educations Financing segment declined $66.3 million for the nine months
ended March 31, 2011 compared with a year earlier due to losses on education loans held for sale by Union Federal of $63.6 million recorded in fiscal 2010 and lower occupancy, equipment and depreciation costs of $10.4 million in fiscal 2011,
partially offset by TMS expenses recorded in fiscal 2011 of $7.7 million. Other income in fiscal 2011 reflects the gain on the settlement with TERI in the second quarter of fiscal 2011. Tax expense for the nine months ended March 31, 2011
principally reflects accruals related to unrecognized tax benefits, offset by a decrease in deferred tax liabilities. The tax benefit for the nine months ended March 31, 2010 reflects tax benefits that became available to FMD as a result of the
enactment in November 2009 of the WHBAA, offset by accruals related to unrecognized tax benefits.

With respect to our Securitization Trusts
segment, total revenues for the third quarter of fiscal 2011 reflect net interest income of $202.4 million and a provision for loan losses of $305.7 million. Total non-interest expenses reflect general operating expenses of $34.1 million, partially
offset by a gain on the fair value adjustment to additional structural advisory fees due to our Education Financing segment of $17.0 million.



6



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##### Table of Contents

The following sections provide more detail on the products and financial results of our reporting segments:

Education Financing

In our Education Financing segment, we offer outsourcing services to national and regional financial and educational institutions for designing and
implementing education loan programs. These school-certified loan programs are designed to be marketed through educational institutions or to prospective student borrowers and their families directly and to generate portfolios intended to be held by
the originating lender or financed in the capital markets. Starting in fiscal 2011, we began offering a fully integrated suite of services through our Monogram platform, as well as certain services on a stand-alone, fee-for-service basis. In
addition, we provide administrative and other services to securitization trusts that we facilitated and asset servicing to the third-party owner of the Trust Certificate, which we sold in fiscal 2009.

As of January 1, 2011, we provide outsourced tuition planning, tuition billing and payment technology services for universities, colleges and
secondary schools through TMS. TMS is one of the largest U.S. providers of such services, operating in 47 states and serving over 1,100 schools. TMS provides students and their families with the opportunity to structure tuition payment plans that
meet their financial needs while providing a broad array of tuition payment options. See Note 5, Acquisition of TMS, in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for
information on the pro forma financial results of our operations including TMS as if the acquisition had occurred on July 1, 2009.

We offer clients the opportunity to outsource key components of their education loan programs to us by offering the following services on a stand-alone,
fee-for-service basis or as an integrated part of our Monogram platform:



| |  |  | Loan originationWe offer loan processing services to schools and lenders, from application intake through loan disbursement. We are able
to customize our services to meet the specific branding, pricing and underwriting requirements of our clients.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Portfolio managementWe manage education loan portfolios on behalf of their owners, including securitization trusts facilitated by us, by
employing risk analytics to monitor and manage the performance of the portfolio over time. As part of this service offering, we monitor portfolio performance metrics, manage the performance of third-party vendors and interface with rating agencies.
Our infrastructure enables comprehensive analytics, based on validated data, and we are able to customize collections strategies as needed to optimize loan performance.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Trust administrationAs administrator for securitization trusts that we facilitated, we perform various administrative functions, including
preparation of financial statements and monitoring of the performance of loan servicers and third-party collection agencies. We are responsible for reconciliation of funds among the third parties and the trusts, and we also provide regular reporting
to investors in these securitization trusts as well as other related parties.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Asset servicingOur experience enables us to offer asset servicing such as residual analysis and valuation optimization services and
strategies relating to asset funding to holders of a residual interest in education loan securitizations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Tuition payment plansEffective with our acquisition of the assets, liabilities and operations of TMS on December 31, 2010, we have
expanded our service offerings to include tuition planning, tuition billing and payment technology services for educational institutions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Monogram platform enables a lender to customize some or all of our service offerings based on its particular needs, including its risk control and return objectives. Specifically, in consultation with
us, the lender can customize the range of loan terms offered to its qualified applicants, such as borrower repayment options, repayment terms and borrower pricing. Our Monogram platform is based on our proprietary origination risk score model, which
uses borrower and cosigner attributes, as well as distribution channel variables, to assign a specific level of credit risk to the application at the time of initial credit decisioning. A score is assigned to each application and governs the loan
terms and features offered to applicants who pass the credit review. Lenders may provide all loan repayment options to all applicants who pass the credit review or restrict repayment options based on applicants scores. For example, higher risk
applicants may not be eligible to defer principal and interest while in school. Our online application also provides a qualified applicant with some ability to configure loan terms, showing the financial effects of the choices using a real-time
repayment calculator. A Monogram-based loan program can be structured so that lenders hold the education loans through the scheduled repayment, prepayment or default, or for some limited period of time before disposing of the loans in a capital
markets transaction. We believe



7



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##### Table of Contents

that the education loans generated through our Monogram platform will generally have shorter repayment periods and an increased percentage of borrowers making payments while in school, in each
case when compared to loans generated under programs that we previously facilitated, as well as high cosigner participation rates. The success of our Monogram platform will be a key driver of our future financial results and will be critical to
growing and diversifying our revenues and client base.

Development of our Monogram platform was completed in August 2009, and the first
education loans based on our Monogram platform were disbursed during the first quarter of fiscal 2011. In connection with our two initial Monogram-based loan programs, we agreed to provide credit enhancement to each of our lender clients by funding
deposits in participation interest accounts, which we refer to as participation accounts, up to dollar limits specified in the agreements, to serve as first-loss reserves for defaulted program loans. We have provided initial deposits into the
participation accounts, and we will further fund the participation accounts on a quarterly basis during the term of the loan program agreements based on the volume and credit tiering of disbursed program loans. As consideration for providing the
credit enhancement, we are entitled to receive a share of the interest generated on the loans. During the first nine months of fiscal 2011, we funded $8.5 million to participation accounts.

Historically, the driver of our results of operations and financial condition for our Education Financing segment was the volume of education loans for
which we provided outsourcing services from loan origination through securitization. Securitization refers to the technique of pooling education loans and selling them to a special purpose entity, typically a trust, which issues notes backed by
those loans to investors. For our past securitization services, we are entitled over time to receive additional structural advisory fees and residual cash flows from certain securitization trusts.

We also include in our Education Financing segment the financial results of our bank subsidiary, Union Federal. Union Federal is a federally-chartered
thrift regulated by the OTS that offers residential and commercial mortgage loans and retail savings, money market and time deposit products. As a result of our ownership of Union Federal, we are a savings and loan holding company subject to
regulation, supervision and examination by the OTS.

Prior period financial results for our Education Financing segment do not include the
financial results of UFSB-SPV, which has been presented separately in Deconsolidation and Eliminations for segment reporting purposes.

The following are the results of operations for our Education Financing segment:



|                                                                  |  |                             |         |   |                      |   |         |                            |  |   |                      |   |  |      |         |   |             |   |          |   |  |   |         |  
|----------------------------------------------------------------- |  | --------------------------- | ------- | - | -------------------- | - | ------- | -------------------------- |  | - | -------------------- | - |  | ---- | ------- | - | ----------- | - | -------- | - |  | - | ------- | -
|                                                                  |  | Three months endedMarch 31, |         |   | Changebetweenperiods |   |         | Nine months endedMarch 31, |  |   | Changebetweenperiods |  
|                                                                  |  | 2011                        |         |   | 2010                 |   |         | 2011 - 2010                |  |   | 2011                 |   |  | 2010 |         |   | 2011 - 2010 |  
|                                                                  |  | (dollars in thousands)      |        
|Revenues:                                                         |  |                             |         |   |                      |   |         |                            |  |   |                      |   |  |      |         |   |             |   |          |   |  |   |         |  
|Net interest income:                                              |  |                             |         |   |                      |   |         |                            |  |   |                      |   |  |      |         |   |             |   |          |   |  |   |         |  
|Interest income                                                   |  | $                           | 557     |   |                      | $ | 605     |                            |  | $ | (48                  | ) |  | $    | 1,478   |   |             | $ | 6,505    |   |  | $ | (5,027  | )
|Interest expense                                                  |  |                             | (206    | ) |                      |   | (615    | )                          |  |   | 409                  |   |  |      | (823    | ) |             |   | (2,219   | ) |  |   | 1,396   |  
|                                                                  |  |                             |         |   |                      |   |         |                            |  |   |                      |   |  |      |         |   |             |   |          |   |  |   |         |  
|Net interest income                                               |  |                             | 351     |   |                      |   | (10     | )                          |  |   | 361                  |   |  |      | 655     |   |             |   | 4,286    |   |  |   | (3,631  | )
|Provision for loan losses                                         |  |                             | (10     | ) |                      |   | (152    | )                          |  |   | 142                  |   |  |      | (277    | ) |             |   | (105     | ) |  |   | (172    | )
|                                                                  |  |                             |         |   |                      |   |         |                            |  |   |                      |   |  |      |         |   |             |   |          |   |  |   |         |  
|Net interest income (loss) after provision for loan losses        |  |                             | 341     |   |                      |   | (162    | )                          |  |   | 503                  |   |  |      | 378     |   |             |   | 4,181    |   |  |   | (3,803  | )
|Non-interest revenues:                                            |  |                             |         |   |                      |   |         |                            |  |   |                      |   |  |      |         |   |             |   |          |   |  |   |         |  
|Asset servicing fees                                              |  |                             | (4,959  | ) |                      |   | (502    | )                          |  |   | (4,457               | ) |  |      | (4,236  | ) |             |   | 3,740    |   |  |   | (7,976  | )
|Additional structural advisory fees and residuals - trust updates |  |                             | (21,413 | ) |                      |   | (21,531 | )                          |  |   | 118                  |   |  |      | (16,654 | ) |             |   | (18,613  | ) |  |   | 1,959   |  
|Administrative and other fees                                     |  |                             | 11,414  |   |                      |   | 4,725   |                            |  |   | 6,689                |   |  |      | 20,199  |   |             |   | 15,588   |   |  |   | 4,611   |  
|                                                                  |  |                             |         |   |                      |   |         |                            |  |   |                      |   |  |      |         |   |             |   |          |   |  |   |         |  
|Total non-interest revenues                                       |  |                             | (14,958 | ) |                      |   | (17,308 | )                          |  |   | 2,350                |   |  |      | (691    | ) |             |   | 715      |   |  |   | (1,406  | )
|                                                                  |  |                             |         |   |                      |   |         |                            |  |   |                      |   |  |      |         |   |             |   |          |   |  |   |         |  
|Total revenues                                                    |  |                             | (14,617 | ) |                      |   | (17,470 | )                          |  |   | 2,853                |   |  |      | (313    | ) |             |   | 4,896    |   |  |   | (5,209  | )
|Total non-interest expenses                                       |  |                             | 27,178  |   |                      |   | 24,122  |                            |  |   | 3,056                |   |  |      | 67,728  |   |             |   | 134,026  |   |  |   | (66,298 | )
|                                                                  |  |                             |         |   |                      |   |         |                            |  |   |                      |   |  |      |         |   |             |   |          |   |  |   |         |  
|Loss before other income and income taxes                         |  |                             | (41,795 | ) |                      |   | (41,592 | )                          |  |   | (203                 | ) |  |      | (68,041 | ) |             |   | (129,130 | ) |  |   | 61,089  |  
|Other income - gain from TERI settlement                          |  |                             |        |   |                      |   |        |                            |  |   |                     |   |  |      | 8,112   |   |             |   |         |   |  |   | 8,112   |  
|                                                                  |  |                             |         |   |                      |   |         |                            |  |   |                      |   |  |      |         |   |             |   |          |   |  |   |         |  
|Loss before income taxes                                          |  |                             | (41,795 | ) |                      |   | (41,592 | )                          |  |   | (203                 | ) |  |      | (59,929 | ) |             |   | (129,130 | ) |  |   | 69,201  |  
|Income tax expense (benefit)                                      |  |                             | (82     | ) |                      |   | (4,647  | )                          |  |   | 4,565                |   |  |      | 1,957   |   |             |   | (27,666  | ) |  |   | 29,623  |  
|                                                                  |  |                             |         |   |                      |   |         |                            |  |   |                      |   |  |      |         |   |             |   |          |   |  |   |         |  
|Net loss                                                          |  | $                           | (41,713 | ) |                      | $ | (36,945 | )                          |  | $ | (4,768               | ) |  | $    | (61,886 | ) |             | $ | (101,464 | ) |  | $ | 39,578  |  
|                                                                  |  |                             |         |   |                      |   |         |                            |  |   |                      |   |  |      |         |   |             |   |          |   |  |   |         |  



8



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##### Table of Contents

Net Interest Income

For the three months ended March 31, 2011, net interest income after provision for loan losses was a gain of $341 thousand, up from a loss of $162 thousand for the same period a year earlier,
reflecting lower interest expense on lower volumes of deposits at Union Federal and a lower provision for loan losses.

For the nine months
ended March 31, 2011, net interest income after provision for loan losses declined to $378 thousand from $4.2 million for the same period a year earlier. This decline reflected the decrease in our education loans held for sale following the
sale, which was completed during the second quarter of fiscal 2010, of 88% of the education loans held for sale by Union Federal. Loans held for sale generated $4.9 million of interest income in the fiscal 2010 period prior to their sale. To a
lesser extent, we experienced a decline in interest expense, primarily on deposits, attributable to both lower rates and lower deposit volumes. See Financial ConditionConsolidated Average Balance Sheet below for additional
information on our consolidated average balance sheet and rates earned and paid.

Non-Interest Revenues

Non-interest revenues for our Education Financing segment include asset servicing fees due from the third-party owner of the Trust Certificate,
stand-alone fee-for-service revenues for loan origination, program support and other services due from unrelated third parties, and starting in fiscal 2011, fees related to our Monogram platform, which was deployed to two clients during the first
quarter of fiscal 2011. Non-interest revenues for the third quarter of fiscal 2011 also include $7.1 million of revenues generated by TMS. In addition, non-interest revenues for our Education Financing segment include trust updates for additional
structural advisory fee and residual receivables, as well as administration and other fees for services provided to securitization trusts that we facilitated, including but not limited to those trusts that we consolidated effective July 1,
2010, prior to intercompany eliminations.

Non-Interest RevenuesAsset Servicing Fees

In March 2009, we entered into the Asset Services Agreement with the third-party owner of the Trust Certificate. Pursuant to the Asset Services
Agreement, we provide ongoing services, including analysis and valuation optimization and services relating to funding strategy, to support their ownership of certain residual interests of the Trusts. As compensation for our services, we are
entitled to a monthly asset servicing fee, based on the aggregate outstanding principal balance of the education loans owned by the Trusts, limited to the total cash flows expected to be generated by residuals. Although this fee is earned monthly,
our right to receive the fee is contingent on distributions made to the holder of the Trust Certificate. Under no circumstance will we receive cash for our asset servicing fees until residual cash flows are distributed from the Trusts. Our asset
servicing fee receivables were $1.5 million and $5.8 million at March 31, 2011 and June 30, 2010, respectively, recorded at fair value in our balance sheet based on the estimated net present value of future cash flows. See
Note 9, Service Revenue Receivables and Related IncomeEducation Loan Performance Assumption Overview, in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for a
description of the significant observable and unobservable inputs used to develop our fair value estimates.

During the third quarters of
fiscal 2011 and 2010, we recorded $170 thousand and $2.1 million as fee income, respectively, which represented our estimate of the net present value of fees to be received for services specifically provided during those reporting periods. During
the first nine months of fiscal 2011 and 2010, we recorded $1.9 million and $6.0 million as fee income, respectively. For the third quarter and first nine months of fiscal 2011, we recognized fee update losses of $5.1 million and $6.2 million,
respectively, compared to fee update losses of $2.6 million and $2.3 million for the comparable periods in fiscal 2010. The lower fee income and higher fee update losses in fiscal 2011 reflect reductions in our estimates of the volume of residual
cash flows to be paid to the third-party owner of the Trust Certificate, largely due to a change in our assumed recovery rates on defaulted education loans. Fee update losses in fiscal 2010 reflect reductions in our estimates of the volume of
residual cash flows, largely due to a change in our assumed default rates.

Non-Interest RevenuesAdditional Structural Advisory Fee
and Residual Trust Updates

We record additional structural advisory fee and residual receivables at fair value in our balance sheet. Such
receivables represent the estimated fair value of service receivables expected to be collected over the life of the various separate securitization trusts that have purchased education loans facilitated by us, with no further service obligations on
our part. Absent readily obtainable market values, fair value is estimated as the net present value of fees to be received, based on estimated cash flows of the securitization trusts from which the receivables are due, which include but are not
limited to the NCSLT Trusts.



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##### Table of Contents

We recognize changes in estimated fair value, less cash received, as trust updates in non-interest revenue.
A significant portion of additional structural advisory fee and residual receivables recognized by our Education Financing segment are due from securitization trusts consolidated effective July 1, 2010 upon our adoption of ASU 2009-16 and ASU
2009-17, and are eliminated in consolidation but continue to be recognized by Education Financing for segment reporting purposes. The following table summarizes the details of trust updates to additional structural advisory fee and residual
receivables:



|                                                       |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------ |  | --------------------------- | ------- | - | -------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                       |  | Three months endedMarch 31, |         |   | Nine months endedMarch 31, |  
|                                                       |  | 2011                        |         |   | 2010                       |   |         | 2011 |  |   | 2010    |  
|                                                       |  | (dollars in thousands)      |        
|Trust updates:                                         |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Additional structural advisory fees:                   |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Due from off-balance sheet VIEs                        |  | $                           | 72      |   |                            | $ | (21,440 | )    |  | $ | 885     |   |  | $ | (20,799 | )
|Due from Securitization Trusts                         |  |                             | (21,525 | ) |                            |   |        |      |  |   | (17,016 | ) |  |   |        |  
|                                                       |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Total additional structural advisory fee trust updates |  |                             | (21,453 | ) |                            |   | (21,440 | )    |  |   | (16,131 | ) |  |   | (20,799 | )
|Residuals:                                             |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Due from off-balance sheet VIEs                        |  |                             | 161     |   |                            |   | (91     | )    |  |   | (987    | ) |  |   | 2,186   |  
|Due from Securitization Trusts                         |  |                             | (121    | ) |                            |   |        |      |  |   | 464     |   |  |   |        |  
|                                                       |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Total residual trust updates                           |  |                             | 40      |   |                            |   | (91     | )    |  |   | (523    | ) |  |   | 2,186   |  
|                                                       |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Total trust updates  Education Financing              |  | $                           | (21,413 | ) |                            | $ | (21,531 | )    |  | $ | (16,654 | ) |  | $ | (18,613 | )
|                                                       |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  

Additional Structural Advisory Fees.The decreases in the estimated fair value of our additional structural advisory
fee receivables during fiscal 2011 were primarily related to the decreases in our recovery rate assumptions at March 31, 2011. The changes to our assumptions reduced the estimated fair value of additional structural advisory fees due from
consolidated securitization trusts by $21.5 million during the third quarter of fiscal 2011. For the nine months ended March 31, 2011, losses were partially offset by gains recorded earlier in the fiscal year related to a decrease in our
discount rate assumptions and accretion for the passage of time.

Losses recorded during the three and nine months ended March 31, 2010
reflected increases to our discount rate and default rate assumptions, partially offset by a lower prepayment rate assumption as a result of enhancements we made in the third quarter of fiscal 2010 to the financial models that we use to estimate the
fair value of our service receivables. These enhancements provided for the inclusion of certain prospective macroeconomic factors in our default and prepayment assumptions for those education loans securitized in the Trusts. In addition, we
developed the ability to provide performance information on a segmented basis rather than merely on a weighted-average basis. As a result, during the third quarter of fiscal 2010, we increased our projected overall end-point default rates, and
decreased our overall projected prepayment rates, which had the effect of lengthening the term over which we are entitled to receive additional structural advisory fees. Due to the longer term of the fees, we determined that it was appropriate to
apply a higher discount rate.

The following table summarizes changes in the estimated fair value of our additional structural advisory fee
receivables recognized by our Education Financing segment:



|                                                                          |  |                              |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | --------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                          |  | Three months ended,March 31, |         |   | Nine months ended,March 31, |  
|                                                                          |  | 2011                         |         |   | 2010                        |   |         | 2011 |  |   | 2010    |  
|                                                                          |  | (dollars in thousands)       |        
|Fair value, beginning of period:                                          |  |                              |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Due from Securitization Trusts                                            |  | $                            | 37,982  |   |                             | $ |        |      |  | $ | 33,473  |   |  | $ |        |  
|Due from off-balance sheet VIEs                                           |  |                              | 1,588   |   |                             |   | 55,724  |      |  |   | 1,203   |   |  |   | 55,130  |  
|                                                                          |  |                              |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total additional structural advisory fee receivables, beginning of period |  |                              | 39,570  |   |                             |   | 55,724  |      |  |   | 34,676  |   |  |   | 55,130  |  
|Cash received from trust distributions of off-balance sheet VIEs          |  |                              | (32     | ) |                             |   | (382    | )    |  |   | (460    | ) |  |   | (429    | )
|Trust updatesoff-balance sheet VIEs                                      |  |                              | 72      |   |                             |   | (21,440 | )    |  |   | 885     |   |  |   | (20,799 | )
|Trust updatesSecuritization Trusts                                       |  |                              | (21,525 | ) |                             |   |        |      |  |   | (17,016 | ) |  |   |        |  
|                                                                          |  |                              |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Fair value, end of period:                                                |  |                              |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Due from Securitization Trusts                                            |  |                              | 16,457  |   |                             |   |        |      |  |   | 16,457  |   |  |   |        |  
|Due from off-balance sheet VIEs                                           |  |                              | 1,628   |   |                             |   | 33,902  |      |  |   | 1,628   |   |  |   | 33,902  |  
|                                                                          |  |                              |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total additional structural advisory fee receivables,end of period        |  | $                            | 18,085  |   |                             | $ | 33,902  |      |  | $ | 18,085  |   |  | $ | 33,902  |  
|                                                                          |  |                              |         |   |                             |   |         |      |  |   |         |   |  |   |         |  

Residuals. At March 31, 2011, Education Financing residual receivables were $12.3 million, of which
$5.7 million was due from the GATE Trusts included in our Securitization Trusts segment and $6.6 million was due from off-balance sheet VIEs. We did not receive any cash distributions from residual interests in the three or nine months
ended March 31, 2011 or 2010.



10



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Trust update income related to residual receivables was $40 thousand in the third quarter of fiscal 2011,
compared to a loss of $91 thousand for the comparable period a year earlier. Trust update losses of $523 thousand for the nine months ended March 31, 2011 reflected losses recorded in the first fiscal quarter due to the general performance of
off-balance sheet VIEs, in part offset by gains in the second quarter and a decrease in the discount rate used for off-balance sheet VIEs for which the performance characteristics and shorter estimated weighted-average lives of the trusts indicated
a lower discount rate was appropriate. Gains of $2.2 million for the comparable period a year earlier reflected a decrease in the discount rate from 17% to 16%, in addition to accretion and an increase in the forward LIBOR curve.

See Note 9, Service Revenue Receivables and Related IncomeEducation Loan Performance Assumption Overview in the notes to our
unaudited consolidated financial statements included in Part I of this quarterly report for a description of the significant observable and unobservable inputs used to develop our estimates of the fair value of additional structural advisory
fee and residual receivables.

Non-Interest RevenuesAdministrative and Other Fees

Administrative and other fees for the three months ended March 31, 2011 reflect $7.1 million of fee revenues from TMS operations. The remaining $4.3
million of fees for the third quarter and $13.1 million for the first nine months of fiscal 2011 are primarily attributable to fees for trust administration and default prevention and management services provided to the securitization trusts
facilitated by us, including $2.4 million and $7.5 million of fees from our Securitization Trusts segment for the three and nine months ended March 31, 2011, respectively, as well as loan origination fees for services provided to unrelated
third parties. In addition, fees for loan origination, program support and portfolio management related to Monogram-based loan programs are included in our Education Financing segment revenues. During the first nine months of fiscal 2011 and fiscal
2010, administrative and other fees were $20.2 million and $15.6 million, respectively. TMS revenue during fiscal 2011 largely offset declines in origination services not related to our Monogram platform during this period.

Non-Interest Expenses

The following
table reflects non-interest expenses for our Education Financing segment:



|                                                                   |  |                             |        |  |                      |   |        |                            |  |   |                      |   |  |      |        |  |                  |   |         |  |  |   |         |  
|------------------------------------------------------------------ |  | --------------------------- | ------ |  | -------------------- | - | ------ | -------------------------- |  | - | -------------------- | - |  | ---- | ------ |  | ---------------- | - | ------- |  |  | - | ------- | -
|                                                                   |  | Three months endedMarch 31, |        |  | Changebetweenperiods |   |        | Nine months endedMarch 31, |  |   | Changebetweenperiods |  
|                                                                   |  | 2011                        |        |  | 2010                 |   |        | From 2011to 2010           |  |   | 2011                 |   |  | 2010 |        |  | From 2011to 2010 |  
|                                                                   |  | (dollars in thousands)      |       
|Compensation and benefits                                          |  | $                           | 11,615 |  |                      | $ | 8,594  |                            |  | $ | 3,021                |   |  | $    | 27,640 |  |                  | $ | 24,937  |  |  | $ | 2,703   |  
|General and administrative expenses:                               |  |                             |        |  |                      |   |        |                            |  |   |                      |   |  |      |        |  |                  |   |         |  |  |   |         |  
|Third-party services                                               |  |                             | 6,377  |  |                      |   | 5,445  |                            |  |   | 932                  |   |  |      | 17,779 |  |                  |   | 15,251  |  |  |   | 2,528   |  
|Depreciation and amortization                                      |  |                             | 2,126  |  |                      |   | 3,355  |                            |  |   | (1,229               | ) |  |      | 6,573  |  |                  |   | 10,648  |  |  |   | (4,075  | )
|Occupancy and equipment                                            |  |                             | 3,241  |  |                      |   | 4,919  |                            |  |   | (1,678               | ) |  |      | 8,249  |  |                  |   | 14,606  |  |  |   | (6,357  | )
|Servicer fees                                                      |  |                             | 166    |  |                      |   | 200    |                            |  |   | (34                  | ) |  |      | 494    |  |                  |   | 729     |  |  |   | (235    | )
|Other                                                              |  |                             | 3,653  |  |                      |   | 1,609  |                            |  |   | 2,044                |   |  |      | 6,993  |  |                  |   | 4,282   |  |  |   | 2,711   |  
|                                                                   |  |                             |        |  |                      |   |        |                            |  |   |                      |   |  |      |        |  |                  |   |         |  |  |   |         |  
|Total general and administrative expenses                          |  |                             | 15,563 |  |                      |   | 15,528 |                            |  |   | 35                   |   |  |      | 40,088 |  |                  |   | 45,516  |  |  |   | (5,428  | )
|Losses on education loans held for sale                            |  |                             |       |  |                      |   |       |                            |  |   |                     |   |  |      |       |  |                  |   | 63,573  |  |  |   | (63,573 | )
|                                                                   |  |                             |        |  |                      |   |        |                            |  |   |                      |   |  |      |        |  |                  |   |         |  |  |   |         |  
|Total non-interest expenses                                        |  | $                           | 27,178 |  |                      | $ | 24,122 |                            |  | $ | 3,056                |   |  | $    | 67,728 |  |                  | $ | 134,026 |  |  | $ | (66,298 | )
|                                                                   |  |                             |        |  |                      |   |        |                            |  |   |                      |   |  |      |        |  |                  |   |         |  |  |   |         |  
|Total number of full and part-time employees at fiscal quarter-end |  |                             | 361    |  |                      |   | 225    |                            |  |   | 136                  |   |  |      |        |  |                  |   |         |  |  |   |         |  

Compensation and Benefits Expenses. Compensation and benefits expense increased $3.0 million for the third
quarter, and $2.7 million for the first nine months, of fiscal 2011, compared with the same periods a year earlier. The increases were primarily the result of an increase in headcount following our acquisition of TMS, partially offset by lower stock
compensation expenses.

General and Administrative Expenses. General and administrative expenses were flat in the third quarter of
fiscal 2011, compared with the same period a year earlier. The increase attributable to the operations of TMS were almost entirely offset by lower depreciation and amortization expense for certain fixed assets that were fully depreciated, and lower
occupancy costs due to sub-lease losses recorded in the prior year and lower on-going rent expense in the current year. For the nine months ended March 31, 2011, general and administrative expenses decreased $5.4 million from a year earlier due
to lower depreciation and amortization expense and lower occupancy costs, partially offset by TMS expenses and an increase in third-party services expense of the $1.1 million related to transaction costs for our TMS acquisition.



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##### Table of Contents

Losses on Education Loans Held for Sale. We did not have any education loans held for sale during the
first nine months of fiscal 2011. We recorded write-downs on education loans held for sale of $63.6 million during the first and second quarters of fiscal 2010. In October 2009, Union Federal completed the sale of 88% of its portfolio of
education loans directly held by it for sale, excluding loans held by UFSB-SPV, to a third party for proceeds of $121.5 million.

Other IncomeGain from TERI Settlement.In April 2008, TERI filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code, which we refer to as the TERI Reorganization. Our Education Financing segment recorded gains during the three months ended December 31, 2010 due to resolution of certain matters related to the TERI Reorganization.
These gains represented the forgiveness of notes payable and other liabilities, and cash distributions from the liquidating trust under the Modified Plan of Reorganization. No additional gains were recorded in the third quarter of fiscal 2011.



|                                                |  |                     |       | 
|----------------------------------------------- |  | ------------------- | ----- | 
|                                                |  | Education Financing |      
|Cash received in excess of recorded receivables |  | $                   | 3,091 | 
|Reversal of recorded liabilities                |  |                     | 5,021 | 
|                                                |  |                     |       | 
|Total other income  gain from TERI settlement  |  | $                   | 8,112 | 
|                                                |  |                     |       | 

Income Taxes

Our effective income tax rate is calculated on a consolidated basis. For segment reporting, we record all income tax benefit or expense in our Education
Financing segment because the securitization trusts are considered pass-through entities for tax purposes and, accordingly, the net income or loss of the trusts is included in the tax returns of the trust owners rather than the trusts entities.

Income tax benefit for the third quarter of fiscal 2011 was $82 thousand, and total expense for the first nine months of fiscal 2011 was $2.0
million. The income tax benefit was $4.6 million for the third quarter of fiscal 2010 and $27.7 million for the first nine months of fiscal 2010. Due to enactment of the WHBAA, described below, we recorded an income tax benefit for certain
losses in fiscal 2010, as the legislation permitted the carryback of these losses to offset taxable income in earlier periods. Beginning in fiscal 2011, we no longer have any carrybacks to offset taxable income in prior periods. As a result, we
recorded a net operating loss carryforward asset as of March 31, 2011, for which we recorded a full valuation allowance. The net effect is that we had no tax expense or benefit from our operating losses for the three and nine months ended March 31,
2011, and we recorded accruals related to unrecognized tax benefits.

Under current law, we do not have remaining taxes paid within available
net operating loss carryback periods, and it is more likely than not that our deferred tax assets will not be realized through future reversals of existing temporary differences or available tax planning strategies. Accordingly, we have determined
that a valuation allowance is necessary for all of our deferred tax assets not scheduled to reverse against existing deferred tax liabilities as of March 31, 2011. We will continue to review the recognition of deferred tax assets on a quarterly
basis.

Net unrecognized tax benefits were $30.9 million at March 31, 2011 and June 30, 2010. At March 31, 2011, we had
$7.7 million accrued for interest and no amounts accrued for the payment of penalties. At June 30, 2010, we had $5.8 million accrued for interest and no amounts accrued for the payment of penalties.

In November 2009, the WHBAA was signed into law. Under the WHBAA, we were permitted to carry back the taxable losses from either fiscal 2009 or 2010
for five years instead of two years. We filed our fiscal 2010 tax return and elected to carry that taxable loss back for five years. As a result of the WHBAA and pre-existing net operating loss carryback rules, we recorded an income tax receivable
at September 30, 2010 of $45.1 million, which was received on October 1, 2010. The tax refund included $21.2 million that was attributable to Union Federal, which we distributed to Union Federal pursuant to our tax sharing
agreement. On October 22, 2010, the OTS approved a cash dividend to be declared and paid by Union Federal to FMD of up to $29.0 million. In November 2010, Union Federal paid to FMD a dividend of $29.0 million.

As a result of the sale of the Trust Certificate, which was effective March 31, 2009, as well as our operating losses incurred in fiscal 2009, we
recorded an income tax receivable for federal income taxes paid on taxable income in prior taxable years. In fiscal 2010, we received a total of $189.3 million in federal and state income tax refunds related to our income tax receivables. In
April 2010, the IRS commenced an audit of our tax returns for taxable years 2007, 2008 and 2009. Such audits are consistent with the practice of the Joint Committee of Taxation, which requires the IRS to audit a taxpayer who claims and receives
a tax refund of a specified magnitude. In connection with this audit, the IRS is reviewing, among other things, the tax treatment of the sale of the Trust Certificate, including the related income tax refund previously received by us. The IRS has
also expanded its audit to include our fiscal 2010 tax return in light of the $45.1 million tax refund that we received in October 2010. We cannot predict the timing or outcome of the IRS audit. As of March 31, 2011, the IRS has not
proposed any adjustments in connection with its audit.



12



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##### Table of Contents

We are involved in several matters before the Massachusetts Appellate Tax Board, or ATB, relating to the
Massachusetts tax treatment of GATE Holdings, Inc., which we refer to as GATE, a former subsidiary of FMD. We have taken the position in these proceedings that GATE is properly taxable as a financial institution and is entitled to
apportion its income under applicable provisions of Massachusetts tax law. The Massachusetts Commissioner of Revenue, or Commissioner, has taken alternative positions with FMD: that GATE is properly taxable as a business corporation, or that
GATE is taxable as a financial institution, but is not entitled to apportionment or is subject to 100% Massachusetts apportionment. In September 2007, we filed a petition with the ATB seeking a refund of state taxes paid for our taxable
year ended June 30, 2004, all of which taxes had previously been paid as if GATE were a business corporation. In December 2009, the Commissioner made additional assessments of tax, along with accrued interest, of approximately $11.9
million for GATEs taxable years ended June 30, 2004, 2005 and 2006, and approximately $8.1 million for our taxable years ended June 30, 2005 and 2006. In March 2010, we filed petitions with the ATB contesting the additional
assessments against GATE and us. The assessments against GATE are in the alternative to the assessments against us, and if the assessments against GATE for the taxable year ended June 30, 2004 are valid, then we would be entitled to an income
tax refund of approximately $1.1 million for the same fiscal year. In April 2011, the ATB held an evidentiary hearing on the foregoing. We cannot predict the timing or outcome of these matters, but an adverse outcome may have a material
impact on our state tax liability not only for the taxable years at issue, but also for the taxable years 2007 through 2009. We believe we have recorded adequate reserves for these proceedings in our balance sheet for all of the potentially affected
taxable years.



13



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##### Table of Contents

Securitization Trusts

Our results of operations for our Securitization Trusts segment includes the 14 securitization trusts consolidated upon our adoption of ASU 2009-16 and ASU 2009-17 as of July 1, 2010. Financial
results for our Securitization Trusts segment are only presented prospectively, as of the effective date of our adoption. Interest income is generated on the education loan portfolios held by the securitization trusts included in our Securitization
Trusts segment, and interest expense relates to the debt issued by these trusts to finance the purchase of education loans. General and administrative expenses include amounts paid to our Education Financing segment for additional structural
advisory fees, trust administration and default prevention and collections management, as well as collection costs and trust expenses paid to unrelated third parties.

Consolidated securitization trusts are managed in accordance with their applicable indentures, as amended, and their tangible assets are limited to cash, allowable investments, and education loan
principal, as well as the related interest income receivables and recoverables on defaults. Liabilities are limited to the debt issued to finance the education loans purchased and payables accrued in the normal course of operations, all of which
have been structured to be non-recourse to the general credit of FMD.

The majority of our consolidated securitization trusts are NCSLT
Trusts, for which we have no ownership interest. Although the cumulative deficit of these trusts is reflected in our consolidated accumulated deficit, the financial performance of such trusts will ultimately inure to the third-party owners of the
residual interests, and any deficit generated by a consolidated trust will reverse out of our accumulated deficit or retained earnings, and be recorded as a non-cash gain, when the trusts liabilities are extinguished or the trust is
deconsolidated by us. As such, the financial performance of the NCSLT Trusts does not directly impact the long-term equity available to our stockholders, but the financial performance of all of the Trusts, both on- and off-balance sheet, impacts the
ability of our Education Financing segment to recover service revenue receivables due from these trusts and the third-party owner of the Trust Certificate. The remaining three consolidated securitization trusts are GATE Trusts, for which we own 100%
of the residual interests. To the extent that the GATE Trusts have residual cash flows, profits will ultimately be realized by our stockholders when those residual payments are made; however, if cash flows of these trusts were insufficient to pay
off the long-term borrowings and other legal obligations of the trusts, our stockholders would not be responsible for those losses.

The NCSLT
Trusts hold education loans that were subject to a loan repayment guaranty by TERI. In addition, one of our consolidated GATE Trusts holds a limited number of TERI-guaranteed loans. Under the Modified Plan of Reorganization, which became effective
in the second quarter of fiscal 2011, TERI rejected its guaranty agreements and settled claims with the securitization trusts, including contingent guaranty claims based on future loan defaults. As a result, our Securitization Trusts segment
recognized gains of $42.6 million, as more fully described in Note 16, Other Income  Gain from TERI Settlement, in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report. All but
$51 thousand of this gain was applicable to the NCSLT Trusts. The TERI Reorganization, combined with higher levels of defaults than we initially projected, has had a material adverse effect on the financial condition of our Securitization Trusts
segment.



14



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##### Table of Contents

The following table reflects the financial results of our Securitization Trusts segment for the three and
nine months ended March 31, 2011:



|                                                  |  |                                  |         |   |                                 |   |          |  
|------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | - | -------- | -
|                                                  |  | Three months endedMarch 31, 2011 |         |   | Nine months endedMarch 31, 2011 |  
|                                                  |  | (dollars in thousands)           |        
|Revenues:                                         |  |                                  |         |   |                                 |   |          |  
|Net interest income:                              |  |                                  |         |   |                                 |   |          |  
|Interest income                                   |  | $                                | 79,323  |   |                                 | $ | 251,346  |  
|Interest expense                                  |  |                                  | (14,881 | ) |                                 |   | (48,974  | )
|                                                  |  |                                  |         |   |                                 |   |          |  
|Net interest income                               |  |                                  | 64,442  |   |                                 |   | 202,372  |  
|Provision for loan losses                         |  |                                  | (73,745 | ) |                                 |   | (305,679 | )
|                                                  |  |                                  |         |   |                                 |   |          |  
|Net interest loss after provision for loan losses |  |                                  | (9,303  | ) |                                 |   | (103,307 | )
|Administrative and other fees                     |  |                                  | 1,818   |   |                                 |   | 2,393    |  
|                                                  |  |                                  |         |   |                                 |   |          |  
|Total revenues                                    |  |                                  | (7,485  | ) |                                 |   | (100,914 | )
|Total general and administrative expenses         |  |                                  | (9,724  | ) |                                 |   | 17,083   |  
|                                                  |  |                                  |         |   |                                 |   |          |  
|Income (loss) before gain from TERI settlement    |  |                                  | 2,239   |   |                                 |   | (117,997 | )
|Other income  gain from TERI settlement          |  |                                  | 18      |   |                                 |   | 42,587   |  
|                                                  |  |                                  |         |   |                                 |   |          |  
|Net income (loss)                                 |  | $                                | 2,257   |   |                                 | $ | (75,410  | )
|                                                  |  |                                  |         |   |                                 |   |          |  

Net Interest Income

For the three and nine months ended March 31, 2011, net interest income for our Securitization Trusts segment was $64.4 million and $202.4 million, respectively. Net interest income from our
Securitization Trusts segment is generated by education loans held to maturity, and to a lesser extent interest earned on restricted cash and guaranteed investment contracts. Interest income on education loans held to maturity is primarily generated
by variable rate loans, indexed to the one-month LIBOR rate, adjusted for the amortization of loan acquisition costs and origination fees, using the effective interest method. Interest expense relates to the interest paid on long-term borrowings
used to finance the purchase of education loans, which are primarily variable rate notes indexed to the one-month LIBOR rate, and to a lesser extent, interest-only securities that bear a fixed interest rate based on contractual notional principal
values over the period they are outstanding, adjusted for the amortization of capitalized debt issuance and underwriting costs and the proceeds from interest-only strips, using the effective interest method. See Financial
ConditionContractual Obligations below and Note 10, Long-term Borrowings, in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information on the
rates paid on long-term borrowings.

See Financial ConditionConsolidated Average Balance Sheet below for additional
information on our consolidated average balance sheet and rates earned and paid. Long-term borrowings in our consolidated average balance sheet relate only to our Securitization Trusts segment, and consolidated education loans held to maturity are
almost entirely related to our Securitization Trusts segment. See Financial ConditionRestricted Cash and Guaranteed Investment Contracts below for additional information.

Provision for Loan Losses

We recorded a
provision for loan losses of $73.7 million and $305.7 million for the three and nine months ended March 31, 2011, respectively, for the education loans held by our Securitization Trusts segment. The allowance for loan losses is adjusted
for credit losses through a charge to a provision for loan losses. See Financial ConditionLoans below for a discussion of the allowance for loan losses and the implied credit quality of the related loans.

General and Administrative Expenses

The
following table presents general and administrative expenses for the three and nine months ended March 31, 2011:



|                                                                                                         |  |                                  |         |   |                                 |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | - | ------- | -
|                                                                                                         |  | Three months endedMarch 31, 2011 |         |   | Nine months endedMarch 31, 2011 |  
|                                                                                                         |  | (dollars in thousands)           |        
|General and administrative expenses:                                                                     |  |                                  |         |   |                                 |   |         |  
|Additional structural advisory feestrust updates (due to Education Financing)                           |  | $                                | (21,525 | ) |                                 | $ | (17,016 | )
|Trust administration and default prevention and collections management fees (due to Education Financing) |  |                                  | 2,367   |   |                                 |   | 7,478   |  
|Servicer fees                                                                                            |  |                                  | 6,147   |   |                                 |   | 18,251  |  
|Trust collection costs and other trust expenses                                                          |  |                                  | 3,287   |   |                                 |   | 8,370   |  
|                                                                                                         |  |                                  |         |   |                                 |   |         |  
|Total general and administrative expenses                                                                |  | $                                | (9,724  | ) |                                 | $ | 17,083  |  
|                                                                                                         |  |                                  |         |   |                                 |   |         |  



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The consolidated securitization trusts carry liabilities for additional structural advisory fees due to our
Education Financing segment at fair value in our balance sheet. General and administrative expenses for the third quarter of fiscal 2011 reflect a gain of $21.5 million due to the reduction in the estimated fair value of the liability for additional
structural advisory fees payable. The decrease in the fair value of the liability is primarily attributable to the lower net recovery rate assumptions for defaulted education loans. This gain is eliminated in consolidation, as well as the loss
recorded in revenue by our Education Financing segment. See Note 9, Service Revenue Receivables and Related IncomeEducation Loan Performance Assumption Overview, in the notes to our unaudited consolidated financial statements
included in Part I of this quarterly report for a discussion of the determination of additional structural advisory feestrust updates.

Trust administration fees are based on the volume of education loans outstanding. Our Securitization Trusts segment recognizes default prevention and collections management expenses based, in part, on the
actual expenses incurred by our subsidiary, FMER, in its capacity as special servicer, and in part on the dollar volume of education loans outstanding. FMERs reimbursement for expenses as special servicer is capped at monthly and aggregate
amounts, and FMERs financial results are included in our Education Financing segment. Servicer fees are based on the dollar volume of education loans outstanding. Trust collection costs vary with the collection activities pursued on defaulted
loans. Other securitization trust expenses are generally fixed indenture costs.

Other IncomeGain from TERI Settlement.Our Securitization Trusts segment recorded gains during the three and nine months ended March 31, 2011 as a result of the resolution of certain matters related to the TERI Reorganization. These gains represented the transfer of assets
to the trusts in excess of their recorded receivables, the forgiveness of guaranty fees and other liabilities and cash distributions from the liquidating trust under the Modified Plan of Reorganization.



|                                                |  |                                  |    |  |                                 |   |        | 
|----------------------------------------------- |  | -------------------------------- | -- |  | ------------------------------- | - | ------ | 
|                                                |  | Three months endedMarch 31, 2011 |    |  | Nine months endedMarch 31, 2011 |  
|                                                |  | (dollars in thousands)           |   
|Cash received in excess of recorded receivables |  | $                                | 5  |  |                                 | $ | 30,834 | 
|Reversal of recorded liabilities                |  |                                  | 13 |  |                                 |   | 11,753 | 
|                                                |  |                                  |    |  |                                 |   |        | 
|Total other income  gain from TERI settlement  |  | $                                | 18 |  |                                 | $ | 42,587 | 
|                                                |  |                                  |    |  |                                 |   |        | 

Eliminations and Deconsolidation

For the three and nine months ended March 31, 2011, the revenues and expenses included in Eliminations for segment reporting purposes related to revenues earned by our Education Financing
segment, and the related expenses incurred by our Securitization Trusts segment, relating to intercompany life-of-trust fees for securitization structuring and on-going fees for trust administration and default prevention and management, as well as
elimination of the residual interest ownership held by our Education Financing segment in the GATE Trusts.

For the three and nine months
ended March 31, 2010, the revenues and expenses included in Deconsolidation and Eliminations for segment reporting purposes represented the financial results of UFSB-SPV, as well as related adjustments to deferred tax assets and
intercompany eliminations that were recorded due to consolidation of UFSB-SPV in prior periods. UFSB-SPV was deconsolidated on July 1, 2010 with our adoption of ASU 2009-16 and ASU 2009-17. The financial results of UFSB-SPV have been separately
presented in Deconsolidation and Eliminations for segment reporting purposes to allow for comparability between periods.

Application of Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP for interim financial information. The preparation of these financial statements requires management to make estimates,
assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the
reporting period. We base our estimates, assumptions and judgments on our historical experience, economic conditions and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates
under varying assumptions or conditions.

Our significant accounting policies are more fully described in Note 2, Summary of
Significant Accounting Policies, in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report. 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:



| |  |  | The nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or
the susceptibility of such matters to change; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The impact of the estimates and assumptions on our financial condition or operating performance is material.
| | - |  | ------------------------------------------------------------------------------------------------------------

We have discussed our accounting policies with the Audit Committee of our Board of Directors. As a result of our adoption of new accounting
pronouncements in the first quarter of fiscal 2011, we re-evaluated which policies were deemed to be critical accounting policies and we determined that our judgments and estimates regarding whether or not to consolidate the financial results of
VIEs fit the definition of a critical accounting policy, as well as our estimates relating to the allowance for loan losses and the related provision for loan losses and recognition of interest income on delinquent and defaulted loans. The
recognition of asset servicing fees and trust updates to our service revenue receivables also fit the definition of critical accounting estimates.

Consolidation

Our consolidated financial statements include the accounts of FMD,
its subsidiaries and certain VIEs, as applicable, after eliminating intercompany accounts and transactions. Prior to July 1, 2010, we did not consolidate the financial results of any securitization trusts purchasing education loans that we
facilitated because each of the securitization trusts created after January 31, 2003 met the criteria to be a qualified special purpose entity, or QSPE, as defined by Accounting Standards Codification, or ASC, 860-40, Transfers and
ServicingTransfers to Qualifying Special Purpose Entities, or ASC 860-40. Prior to July 1, 2010, a QSPE was exempt from consolidation. In addition, the securitization trusts created prior to January 31, 2003 in which we held a
variable interest that could have resulted in our being considered the primary beneficiary of such trusts were amended in order for those trusts to be considered QSPEs and were, therefore, exempt from consolidation.

Effective July 1, 2010, we adopted ASU 2009-16 and ASU 2009-17. ASU 2009-16 removed the concept of a QSPE from ASC 860-40 and removed the exemption
from consolidation for QSPEs from ASC 810, Consolidation, or ASC 810. ASU 2009-17 updated ASC 810 to require that enterprises perform analyses to determine if they are the primary beneficiary of a VIE. A primary beneficiary of a VIE is the
enterprise that has both:



| |  |  | The power to direct the activities of a VIE that most significantly impact that VIEs economic performance; and
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | The obligation to absorb losses of the VIE that could potentially be significant to that VIE or the right to receive benefits from the VIE that could
potentially be significant to that VIE.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result, on July 1, 2010, we consolidated 14 securitization trusts
facilitated by us because we determined that our services related to default prevention and collections management, for which we can only be removed for cause, combined with the variability that we absorb as part of our securitization fee structure,
made us the primary beneficiary of those trusts. In addition, we deconsolidated UFSB-SPV because we determined that we do not have the power to direct activities that most significantly impact UFSB-SPVs economic performance.

In addition, ASU 2009-17 requires us to continuously reassess whether consolidation of VIEs is appropriate, as opposed to the trigger-based assessment
allowed under previous guidance. As a result, we continually reassess our involvement with VIEs, both on- and off-balance sheet, and our determination of whether consolidation or deconsolidation of VIEs is appropriate. We monitor matters related to
our ability to control economic performance, such as contractual changes in the services we provide, the extent of our ownership and the rights of third parties to terminate us as a service provider. In addition, we monitor the financial performance
of the VIEs for indications that we may or may not have the right to absorb benefits or the obligation to absorb losses associated with variability in the financial performance of the VIE that could potentially be significant to that VIE. If, for
any reason, we determine that we can no longer be considered the primary beneficiary, we would be required to deconsolidate the VIE. Deconsolidation of a VIE is accounted for in the same manner as the sale of a subsidiary, with a gain or loss
recorded in our statement of operations to the extent that proceeds, if any, are more or less than the net assets of the VIE.

In addition to
our consolidated VIEs, we monitor our involvement with 19 other off-balance sheet VIEs for which we have determined that we are not the primary beneficiary due to the sole, unilateral rights of other parties to terminate us in our role as service
provider or due to a lack of obligation on our part to absorb benefits or losses of the VIE that would be significant to that VIE. Significant changes to the pertinent rights of other parties or significant changes to the ranges of possible
financial performance outcomes used in our assessment of the variability of cash flows due to us could cause us to change our determination of whether or not a VIE should be consolidated in future periods. Our determination to consolidate or
deconsolidate VIEs may lead to increased volatility in our financial results and make comparisons of results between time periods challenging.

ASU 2009-17 was applied through a cumulative-effect adjustment to the opening balance of retained earnings at the effective date. Assets and liabilities
of the consolidated VIEs were measured as if they had been consolidated at the time we became the primary beneficiary. All intercompany transactions are eliminated. See Note 4, Consolidation, in the notes to our unaudited
consolidated financial statements included in Part I of this quarterly report for additional information.



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Effective with our consolidation of VIEs, our non-interest revenues no longer reflect the additional
structural advisory feestrust updates and administrative and other fees due from the consolidated VIEs, but continue to reflect such fees due from other off-balance sheet VIEs. We do not recognize gains or losses related to the residual
receivables due from the three consolidated GATE Trusts in our consolidated statement of operations, but we do recognize revaluation gains and losses on residual receivables from off-balance sheet VIEs.

We recognize interest income associated with securitized assets of the consolidated securitization trusts in the same line item as interest income from
non-securitized assets, and we recognize interest expense associated with debt issued by the consolidated securitization trusts to third-party investors on the same line item as other interest-bearing liabilities of FMD.

Education Loans Held to Maturity and the Related Allowance for Loan Losses, Provision for Loan Losses and Charge-Offs

We maintain allowances for loan losses at an amount believed to be sufficient to absorb credit losses inherent in our portfolios of loans held to
maturity at our balance sheet date, based on a one year loss confirmation period. We adjust allowances for loan losses through charges to the provision for loan losses in our statement of operations. Inherent credit losses include losses for loans
in default that have not been charged-off and loans that have a high probability of default, less any amounts expected to be recoverable from borrowers or third parties, as applicable.

We consider an education loan to be in default when it is 180 days past due as to either principal or interest, based on the timing of cash receipts from the borrower. We use projected cash flows to
determine the allowance amount deemed necessary for education loans with a high probability of default at our balance sheet date. We base such default estimates on a loss confirmation period of one year, which we believe to be the approximate amount
of time that it would take a loss inherent in the education loan portfolios at our balance sheet date to ultimately default and be charged-off. The estimates used in the calculation of the allowance for education loan losses are subject to a number
of assumptions, including default and recovery rates and the effects of basic forbearance and alternative payment plans available to borrowers. These assumptions are the same as those used for the estimated fair value of our service revenue
receivables, as described more fully below under Service Revenue Receivables and the Related RevenuesEducation Loan Performance and Other Assumptions. These assumptions are based on the status of education loans at our
balance sheet date, as well as macroeconomic indicators and our historical experience. If actual future loan performance were to differ significantly from the assumptions used, the impact on the allowance for loan losses and the related provision
for loan losses for education loans recorded in our statement of operations could be material.

Effective beginning the second quarter of
fiscal 2011, we began charging-off education loans in the month immediately subsequent to the month in which they become 180 days past due. During the first quarter of fiscal 2011, based on the guaranty claims process for TERI-guaranteed loans, we
charged-off education loans in the month immediately subsequent to the month in which they became 270 days past due. Following the rejection by TERI of its guaranty agreements under the Modified Plan of Reorganization, we modified our charge-off
policy. Charge-offs are recorded as both a decrease in the outstanding principal of the education loan and a decrease in the allowance for loan losses, and, therefore, the change in our charge-off policy did not have an impact on our statement of
operations. We record cash recoveries on charged-off loans as an increase to the allowance for loan losses.

Recognition of Interest
Income on Education Loans

We recognize interest income using the effective interest method.

We recognize interest income on education loans as earned, adjusted for the amortization of loan acquisition costs and origination fees, based on the
expected yield of the loan over its life, which includes the effect of expected prepayments. Our estimate of the effects of expected prepayments on education loans reflects voluntary prepayments based on our historical experience and macroeconomic
indicators. When changes to assumptions occur, we adjust amortization on a cumulative basis to reflect the change since acquisition of the education loan portfolio.

We place education loans held to maturity on non-accrual status when they become 120 days past due as to either principal or interest, or earlier when full collection of principal or interest is not
considered probable. When we place an education loan on non-accrual status, we discontinue the accrual of interest, and previously recorded but unpaid interest is reversed and charged against interest revenue. For education loans on non-accrual
status but not yet charged-off, we recognize interest revenue on a cash basis. If a borrower makes payments sufficient to become current on principal and interest prior to being charged-off, or cures the education loan delinquency, we
remove the loan from non-accrual status and continue to recognize interest revenue. Once a loan has been charged-off, we apply any payments made by the borrower to outstanding principal, and we only record income on a cash basis when all principal
has been recovered.



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Service Revenue Receivables and the Related Revenues

Asset Servicing Fees

We are entitled to
receive asset servicing fees from the third-party owner of the Trust Certificate for services that we provide on an ongoing basis. We earn asset servicing fees as the services are performed; however, our receipt of the fees is contingent on
distributions from the Trusts available to the third-party owner of the Trust Certificate. We record asset servicing fee income at fair value, based on the estimated present value of the fees earned during the reporting period, and we record changes
in the estimated fair value of fees earned in prior periods as asset servicing fee updates.

Asset servicing fees are based on the outstanding
assets of the Trusts, and our receipt of such fees is contingent on the performance of the Trusts, a number of which we consolidate. The fees, however, are due from the third-party owner of the Trust Certificate for services performed on its behalf,
and as such, we do not eliminate these fees in consolidation.

Additional Structural Advisory Fees and Residuals

We have historically structured and facilitated securitization transactions for our clients through a series of special purpose statutory trusts. In
connection with its prior securitization activities, our Education Financing segment is entitled to receive additional structural advisory fees over the lives of the trusts from the majority of securitization trusts that we facilitated, based on the
amount of education loans outstanding in the trusts from time to time. For certain trusts, our Education Financing segment is also entitled to residual interests.

The majority of our additional structural advisory fees and a significant portion of our residuals are due from consolidated securitization trusts and are eliminated upon consolidation. We have no
ownership interest in the Trusts, but the financial performance of the Trusts, both the NCSLT Trusts and off-balance sheet Trusts, impacts the ability of our Education Financing segment to recover service revenue receivables due from the Trusts and
the third-party owner of the Trust Certificate. Accordingly, we continue to report additional structural advisory fees and residualstrust updates, prior to elimination, under Education Financing in our segment results.

We recognized the fair value of additional structural advisory fee and residual receivables as revenue at the time the securitization trust purchased the
education loans, but before we actually received payment, as these revenues were deemed to be earned at the time of the securitization. These amounts were deemed earned at securitization because (i) evidence of an arrangement existed,
(ii) we provided the services, (iii) the fee was fixed and determinable based upon a discounted cash flow analysis, and (iv) there were no future contingencies or obligations due on our part. On a quarterly basis, we update our
estimate of the fair value of these receivables as if they are investments in securities classified as trading. We recognize changes in fair value, less cash received, if any, as trust updates in servicing revenue in the period in which the change
in estimate occurs.

Education Loan Performance and Other Assumptions

Because there are no quoted market prices for our service revenue receivables, we use discounted cash flow modeling techniques and the following key assumptions to estimate fair value:



| |  |  | Expected annual rate and timing of education loan defaults, including the effects of various risk mitigation strategies, such as forbearance programs
and alternative payment plans;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expected amount and timing of recoveries of defaulted education loans;
| | - |  | ----------------------------------------------------------------------



| |  |  | Discount rate, which we use to calculate the present value of our future cash flows;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Trend of interest rates over the life of the loan pool, including the forward LIBOR curve and expected auction rates, if applicable;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Annual rate and timing of education loan prepayments; and
| | - |  | ---------------------------------------------------------



| |  |  | Fees and expenses of the securitization trusts.
| | - |  | -----------------------------------------------



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We base our estimates on certain macroeconomic indicators and our historical experience adjusted for
specific product and borrower characteristics such as loan type and borrower creditworthiness. We monitor trends in education loan performance over time and make adjustments we believe are necessary to value properly our service revenue receivables
at each balance sheet date. Managements ability to determine which factors should be more heavily weighted in our estimates, and our ability to accurately incorporate those factors into our loan performance assumptions and projections, can
have a material effect on our valuations. See Note 9, Service Revenue Receivables and Related IncomeEducation Loan Performance Assumption Overview, in the notes to our unaudited consolidated financial statements included in
Part I of this quarterly report for information on the assumptions used in our estimates of fair value.

Financial Condition

Cash, Cash Equivalents and Investments

We had combined cash, cash equivalents, federal funds sold, short-term investments and investments available for sale of $282.3 million and $385.5 million, at March 31, 2011 and June 30, 2010,
respectively. Of this total, FMD and its non-bank subsidiaries held interest-bearing and non-interest-bearing deposits, money market funds and certificates of deposit of $221.0 million with highly rated financial institutions at March 31,
2011. Union Federal held a total of $61.3 million in interest-bearing and non-interest-bearing deposits and money market funds with highly rated financial institutions, federal funds sold and investments in federal agency mortgage-backed
securities at March 31, 2011. Assets of Union Federal are subject to restrictions on the payment of dividends without prior approval from the OTS.

Restricted Cash and Guaranteed Investment Contracts

At March 31, 2011,
restricted cash and guaranteed investment contracts in our balance sheet included cash and investments held by consolidated securitization trusts of $129.6 million, restricted cash held by TMS of $92.8 million and restricted cash held by FMD
and its other non-bank subsidiaries of $4.6 million. The use of cash and investments held by securitization trusts is restricted to making payments for trust expenses, interest payments and principal paydowns on the debt of the particular trust
holding the cash and guaranteed investment contracts, and is not available to any other securitization trust, FMD or any other subsidiary of FMD. The investment of cash held by each trust is subject to the investment guidelines per the applicable
indenture. Allowable investments include but are not limited to obligations of the United States of America, guaranteed investment contracts issued by highly rated institutions, which do not have stated maturities, and money market funds. Restricted
cash held by TMS represents tuition payments collected from families on behalf of educational institutions. The cash is held in trust on behalf of our clients in a highly-rated depository institution. Restricted cash held by our other subsidiaries
relates to recoveries on defaulted education loans collected on behalf of clients and undistributed loan proceeds. These funds are maintained in segregated bank accounts with highly-rated depository institutions. We classify changes in the balances
of restricted cash and guaranteed investment contracts as investing activities in our consolidated statement of cash flows.

Loans

At March 31, 2011, we classified all education loans and substantially all mortgage loans as held to maturity. At June 30,
2010, our consolidated financial statements included a portfolio of education loans held for sale by UFSB-SPV, which was deconsolidated effective July 1, 2010 in connection with a change in accounting principle.

The net carrying value of loans consisted of the following, as of the dates indicated:



|                                       |  |                        |           |  |               |   |         | 
|-------------------------------------- |  | ---------------------- | --------- |  | ------------- | - | ------- | 
|                                       |  | March 31, 2011         |           |  | June 30, 2010 |  
|                                       |  | (dollars in thousands) |          
|Education loans held to maturity       |  | $                      | 7,134,944 |  |               | $ | 391     | 
|Mortgage loans held to maturity        |  |                        | 6,915     |  |               |   | 8,118   | 
|Education loans held for saleUFSB-SPV |  |                        |          |  |               |   | 105,082 | 

Education Loans Held to Maturity

Almost all education loans held to maturity at March 31, 2011 were held by the 14 securitizations trusts that we consolidated
effective July 1, 2010. Through the securitization process, these special purpose statutory trusts purchased education loans from the originating lenders or their assignees, which relinquished to the trusts their ownership interest in the
education loans. The debt instruments issued by the securitization trusts to finance the purchase of these education loans are collateralized by the purchased loan portfolios. The majority of the loans held by our Securitization Trusts segment are
held by the NCSLT Trusts and were formerly guaranteed by TERI. Generally, the GATE Trusts hold education loans that were not guaranteed by TERI, but benefit from other credit enhancement arrangements from the borrowers educational institutions
or with a lender that has provided a guaranty on behalf of certain educational institutions, up to specified limits.



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Education loans held to maturity at June 30, 2010 consisted of loans originated by Union Federal that
we were unable to securitize. These loans were originally classified as held for sale because we were actively seeking a buyer or an opportunity to securitize them. During the third quarter of fiscal 2010, these loans were sold by Union Federal to
one of our non-bank subsidiaries and upon sale were reclassified as held to maturity. These loans are not subject to collateral restrictions or otherwise encumbered.

The following table summarizes the composition of the net carrying value of our education loans held to maturity:



|                                                                              |  |                        |           |   |               |   |         |  
|----------------------------------------------------------------------------- |  | ---------------------- | --------- | - | ------------- | - | ------- | -
|                                                                              |  | March 31, 2011         |           |   | June 30, 2010 |  
|                                                                              |  | (dollars in thousands) |          
|Education loans held to maturity:                                             |  |                        |           |   |               |   |         |  
|Gross loan principal outstanding                                              |  | $                      | 7,306,797 |   |               | $ | 25,195  |  
|Net unamortized loan acquisition costs and origination fees                   |  |                        | 276,087   |   |               |   |        |  
|                                                                              |  |                        |           |   |               |   |         |  
|Gross loans outstanding                                                       |  |                        | 7,582,884 |   |               |   | 25,195  |  
|Allowance for loan losses                                                     |  |                        | (447,940  | ) |               |   | (24,804 | )
|                                                                              |  |                        |           |   |               |   |         |  
|Education loans held to maturity, net of allowance                            |  | $                      | 7,134,944 |   |               | $ | 391     |  
|                                                                              |  |                        |           |   |               |   |         |  
|Principal outstanding of loans serving as collateral for long-term borrowings |  | $                      | 7,305,224 |   |               | $ |        |  

We maintain an allowance for
education loan losses at an amount believed to be sufficient to absorb credit losses inherent in our education loan portfolio at our balance sheet date, based on a one year loss confirmation period. We adjust allowances for loan losses through
charges to the provision for loan losses in our statement of operations. Inherent credit losses include losses for loans in default that have not been charged-off, and loans that have a high probability of default, less any amounts expected to be
recoverable from borrowers or third parties, over the confirmation period.

We consider an education loan to be in default when it is
180 days past due as to either principal or interest, based on the timing of cash receipts from the borrower. We use projected cash flows to determine the allowance amount deemed necessary for education loans with a high probability of default
at our balance sheet date. We base such default estimates on a loss confirmation period of one year, which we believe to be the approximate amount of time that it would take a loss inherent in the education loan portfolios at our balance sheet date
to ultimately default and be charged-off. The estimates used in the calculation of the allowance for education loan losses are subject to a number of assumptions, including default and recovery rates and the effects of basic forbearance and
alternative payment plans available to borrowers. These assumptions are the same as those used for the estimated fair value of our service revenue receivables, as described more fully above under the caption Application of Critical
Accounting Policies and EstimatesService Revenue Receivables and the Related RevenuesEducation Loan Performance and Other Assumptions. These assumptions are based on the status of education loans at our balance sheet date, as well
as macroeconomic indicators and our historical experience. If actual future loan performance were to differ significantly from the assumptions used, the impact on the allowance for loan losses and the related provision for loan losses for education
loans recorded in our statement of operations could be material.

Effective beginning the second quarter of fiscal 2011, we began charging-off
education loans in the month immediately subsequent to the month in which they become 180 days past due. During the first quarter of fiscal 2011, based on the guaranty claims process for TERI-guaranteed loans, we charged-off education loans in the
month immediately subsequent to the month in which they became 270 days past due. Following the rejection by TERI of its guaranty agreements under the Modified Plan of Reorganization, we modified our charge-off policy. Charge-offs are recorded as
both a decrease in the outstanding principal of the education loan and a decrease in the allowance for loan losses, and, therefore, the change in our charge-off policy did not have an impact on our statement of operations. We record cash recoveries
on charged-off loans as an increase to the allowance for loan losses.



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The following is a roll forward of the net carrying value of education loans held to maturity during the
third quarter and first nine months of fiscal 2011:



|                                                                                               |  |                                   |           |   |                                  |   |          |                   |  |   |                        |   |  |                         |           |   |                   |   |          |   |  |   |           |  
|---------------------------------------------------------------------------------------------- |  | --------------------------------- | --------- | - | -------------------------------- | - | -------- | ----------------- |  | - | ---------------------- | - |  | ----------------------- | --------- | - | ----------------- | - | -------- | - |  | - | --------- | -
|                                                                                               |  | Three months ended March 31, 2011 |           |   | Nine months ended March 31, 2011 |  
|                                                                                               |  | Gross loansoutstanding            |           |   | Allowancefor loanlosses          |   |          | Net carryingvalue |  |   | Gross loansoutstanding |   |  | Allowancefor loanlosses |           |   | Net carryingvalue |  
|                                                                                               |  | (dollars in thousands)            |          
|Balance, beginning of period                                                                   |  | $                                 | 7,777,489 |   |                                  | $ | (500,429 | )                 |  | $ | 7,277,060              |   |  | $                       | 25,195    |   |                   | $ | (24,804  | ) |  | $ | 391       |  
|Cumulative effect of a change in accounting principle (consolidation of securitization trusts) |  |                                   |          |   |                                  |   |         |                   |  |   |                       |   |  |                         | 8,118,622 |   |                   |   | (517,804 | ) |  |   | 7,600,818 |  
|                                                                                               |  |                                   |           |   |                                  |   |          |                   |  |   |                        |   |  |                         |           |   |                   |   |          |   |  |   |           |  
|Balance, beginning of period after cumulative effect                                           |  |                                   | 7,777,489 |   |                                  |   | (500,429 | )                 |  |   | 7,277,060              |   |  |                         | 8,143,817 |   |                   |   | (542,608 | ) |  |   | 7,601,209 |  
|Receipts of principal from borrowers                                                           |  |                                   | (93,915   | ) |                                  |   |         |                   |  |   | (93,915                | ) |  |                         | (252,241  | ) |                   |   |         |   |  |   | (252,241  | )
|Interest capitalized on loans in deferment and forbearance                                     |  |                                   | 33,993    |   |                                  |   |         |                   |  |   | 33,993                 |   |  |                         | 115,410   |   |                   |   |         |   |  |   | 115,410   |  
|Amortization of loan acquisition costs and origination fees                                    |  |                                   | (8,449    | ) |                                  |   |         |                   |  |   | (8,449                 | ) |  |                         | (23,755   | ) |                   |   |         |   |  |   | (23,755   | )
|Interest capitalized on defaulted loans                                                        |  |                                   | 4,762     |   |                                  |   | (4,762   | )                 |  |   |                       |   |  |                         | 16,606    |   |                   |   | (16,606  | ) |  |   |          |  
|Provision for loan losses                                                                      |  |                                   |          |   |                                  |   | (73,745  | )                 |  |   | (73,745                | ) |  |                         |          |   |                   |   | (305,679 | ) |  |   | (305,679  | )
|Net charge-offs:                                                                               |  |                                   |           |   |                                  |   |          |                   |  |   |                        |   |  |                         |           |   |                   |   |          |   |  |   |           |  
|Charge-offs                                                                                    |  |                                   | (139,923  | ) |                                  |   | 139,923  |                   |  |   |                       |   |  |                         | (438,301  | ) |                   |   | 438,301  |   |  |   |          |  
|Recoveries on defaulted loans                                                                  |  |                                   | 8,927     |   |                                  |   | (8,927   | )                 |  |   |                       |   |  |                         | 21,348    |   |                   |   | (21,348  | ) |  |   |          |  
|                                                                                               |  |                                   |           |   |                                  |   |          |                   |  |   |                        |   |  |                         |           |   |                   |   |          |   |  |   |           |  
|Net charge-offs                                                                                |  |                                   | (130,996  | ) |                                  |   | 130,996  |                   |  |   |                       |   |  |                         | (416,953  | ) |                   |   | 416,953  |   |  |   |          |  
|                                                                                               |  |                                   |           |   |                                  |   |          |                   |  |   |                        |   |  |                         |           |   |                   |   |          |   |  |   |           |  
|Balance, end of period                                                                         |  | $                                 | 7,582,884 |   |                                  | $ | (447,940 | )                 |  | $ | 7,134,944              |   |  | $                       | 7,582,884 |   |                   | $ | (447,940 | ) |  | $ | 7,134,944 |  
|                                                                                               |  |                                   |           |   |                                  |   |          |                   |  |   |                        |   |  |                         |           |   |                   |   |          |   |  |   |           |  

We use the following terms to describe borrowers payment status:

In School/Deferment. Under the terms of a majority of the education loans held by our securitization trusts, borrowers are eligible to defer
principal and interest payments while carrying a specified academic course load and may be eligible to defer payments for an additional six months after graduation during a grace period. Either quarterly or at the end of the deferment period,
depending on the terms of the loan agreement, any accrued but unpaid interest is capitalized and added to principal outstanding. With respect to our consolidated securitization trusts, we expect the number of borrowers in deferment status to decline
in the future because we do not expect to add new loans to the portfolios of the consolidated securitization trusts.

Forbearance.
Under the terms of the education loans, borrowers may apply for forbearance, which is a temporary reprieve from making full contractual payments. Forbearance can take many forms, at the option of the creditor. The most common forms of forbearance
include the following:



| |  |  | Basic forbearanceCessation of all contractual payments for a maximum allowable forbearance period of one year, granted in three-month
increments.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Alternative payment plansUnder alternative payment plans, a borrower can make a reduced payment for a limited period of time. The amount
of the payment varies under different programs available and may be set at a fixed dollar amount, a percentage of contractual required payments or interest-only payments. Generally, approval for alternative payment plans is granted for a maximum of
six to 24 months, depending on the program.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under both basic forbearance and alternative payment plans, the education
loan continues to accrue interest. When forbearance ceases, unpaid interest is capitalized and added to principal outstanding, and the borrowers required payments are recalculated at a higher amount to pay off the loan, plus the additional
accrued and capitalized interest, at the original stated interest rate by the original maturity date. There is no forgiveness of principal or interest, reduction in the interest rate or extension of the maturity date.

Forbearance programs result in a delay in the timing of payments received from borrowers, but at the same time, assuming the collection of the forborne
amounts, provide for an increase in the gross volume of cash receipts over the term of the education loan due to the additional accrued interest capitalized while in forbearance. Forbearance programs may have the effect of delaying default
emergence, and alternative payment plans may reduce the utilization of basic forbearance.

In repayment. We determine the repayment
status of borrowers, including borrowers making payments pursuant to alternative payment plans, by contractual due dates. A borrower making reduced payments for a limited period of time pursuant to an alternative payment plan will be considered
current if such reduced payments are timely made.



22



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##### Table of Contents

Over the last nine months, we have seen a decline in the balance of loans in deferment from $1.59 billion,
or 20.3% of gross loan principal outstanding at July 1, 2010, to $960.2 million, or 13.1% at March 31, 2011. Loans in forbearance have declined from $380.0 million to $320.5 million over the same period. The following table provides
additional information on the status of education loans outstanding:



|                                                                                   |  |                        |           |   |                         |  |       |  
|---------------------------------------------------------------------------------- |  | ---------------------- | --------- | - | ----------------------- |  | ----- | -
|                                                                                   |  | March 31, 2011         |           |   | As a percentageof total | 
|                                                                                   |  | (dollars in thousands) |           |   |                         | 
|Principal of loans outstanding:                                                    |  |                        |           |   |                         |  |       |  
|In basic forbearance                                                               |  | $                      | 320,498   |   |                         |  | 4.4   | %
|In school/deferment                                                                |  |                        | 960,167   |   |                         |  | 13.1  |  
|In repayment, including alternative payment plans(1), classified as:               |  |                        |           |   |                         |  |       |  
|Current: <30 days past due                                                         |  |                        | 5,564,389 |   |                         |  | 76.2  |  
|Current: >30 days past due, but <120 days past due                                 |  |                        | 312,857   |   |                         |  | 4.3   |  
|Delinquent: >120 days past due, but <180 days past due                             |  |                        | 104,438   |   |                         |  | 1.4   |  
|In default: >180 days past due, but not charged-off                                |  |                        | 44,448    |   |                         |  | 0.6   |  
|                                                                                   |  |                        |           |   |                         |  |       |  
|Total gross loan principal outstanding                                             |  | $                      | 7,306,797 |   |                         |  | 100.0 | %
|                                                                                   |  |                        |           |   |                         |  |       |  
|Non-accrual loan principal (>120 days past due, but not in default or charged-off) |  | $                      | 148,886   |   |                         |  | 2.0   | %
|Past due loan principal (>90 days, but <120 days past due still accruing interest) |  |                        | 88,227    |   |                         |  | 1.2   |  
|End of period allowance as a percentage of gross loan principal outstanding        |  |                        | 6.1       | % |                         |  |       |  



|(1) | At March 31, 2011, borrowers in repayment with loan principal outstanding of approximately $1.40 billion were making reduced payments under alternative payment
plans.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table provides additional information about education loans held to maturity at our balance sheet date:



|                                                                                               |  |                        |           |   |                   |   |           |  
|---------------------------------------------------------------------------------------------- |  | ---------------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                               |  | Three months ended     |           |   | Nine months ended |  
|                                                                                               |  | March 31, 2011         |          
|                                                                                               |  | (dollars in thousands) |          
|Average gross loan principal outstanding                                                       |  | $                      | 7,403,289 |   |                   | $ | 7,588,648 |  
|Average loan principal in repayment, including alternative payment plans                       |  |                        | 6,018,202 |   |                   |   | 5,934,053 |  
|                                                                                               |  |                       
|Ratios(1):                                                                                     |  |                        |           |   |                   |   |           |  
|Net charge-offs as a percentage of average loan principal outstanding(2)                       |  |                        | 7.1       | % |                   |   | 5.6       | %
|Net charge-offs as a percentage of average loan principal in repayment(2)                      |  |                        | 8.7       |   |                   |   | 7.2       |  
|Non-accrual and past due loan principal as a percentage of average loan principal in repayment |  |                        | 3.9       |   |                   |   | 4.0       |  



|(1) | Ratios for the three and nine months ended March 31, 2011 are on an annualized basis.
|--- | -------------------------------------------------------------------------------------

|(2) | Charge-off ratios for the nine months ended March 31, 2011 exclude charge-offs of $22.9 million recorded in the first quarter of fiscal 2011 that relate to
charge-offs that would have been recorded in fiscal 2010 if we had adopted our charge-off policy in that fiscal year. Charge-off ratios for the nine months ended March 31, 2011 also exclude $75.6 million of charge-offs recorded in the second
quarter of fiscal 2011 that resulted from the change in our charge-off policy. We began charging off at 180 days rather than 270 days in the second quarter of fiscal 2011. Including the $75.6 million of charge-offs recorded in the second fiscal
quarter and the $22.9 million of charge-offs recorded in the first fiscal quarter, the net annualized charge-offs as a percentage of average loan principal in repayment would have been 9.4% for the nine months ended March 31, 2011.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our management monitors the credit quality of educations loans based on loan status, as outlined above. The allowance for loan
losses at March 31, 2011 included a specific allowance for education loans greater than 180 days past due, but not yet charged-off, of $44.4 million. In addition, we established a general allowance of $403.5 million for estimated projected
defaults, net of recoveries and third party guarantees, for the twelve months following our balance sheet date, which we refer to as the confirmation period. To estimate defaults for the first six months of the confirmation period, we applied
delinquency roll rates to education loans currently past due. We based the applied roll rates on roll rates that we observed over the preceding 24 months. For the second six months of the confirmation period, we based net default
projections on default and recovery rates determined using the same models used in our estimates of the fair value of service receivables. We based our default and recovery curves on macroeconomic indicators and our historical observations. See Note
9, Service Revenue Receivables and Related IncomeEducation Loan Performance Assumption Overview, in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for more information
on default and recovery rates.

Education Loans Held for Sale

Education loans held for sale at June 30, 2010 consisted of the education loans held by UFSB-SPV, which was deconsolidated as a result of our adoption of ASU 2009-16 and ASU 2009-17, effective
July 1, 2010. We classified these loans as held for sale because they are pledged as collateral to the indenture trustee, for the benefit of the third-party conduit lender under the education loan warehouse facility, and the lender has the
right to call the loans at any time; therefore, we did not have the ability to hold these loans to maturity. The facility has been structured to limit the conduit lenders recourse to the assets pledged as collateral, which consists almost
exclusively of the education loans.



23



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##### Table of Contents

We carried education loans held for sale at the lower of cost or fair value. In the absence of a readily
determined market value, fair value was estimated by management based on the present value of expected future cash flows of the education loans. Management based its estimates of future cash flows on macroeconomic indicators and historical
experience with assumptions for, among other things, default rates, recovery rates on defaulted loans, prepayment rates and a discount rate commensurate with the risks involved. We recorded changes in the carrying value of loans held for sale and
the related interest receivable in our statement of operations.

Mortgage Loans Held to Maturity

Through our bank subsidiary, Union Federal, we hold a portfolio of mortgage loans to maturity. We maintain an allowance for mortgage loans held to
maturity on a specific-identification basis when the loan becomes 30 days past due or the borrower makes modified payments. We set the allowance for loan losses at an amount believed to be adequate so that the net carrying value of the mortgage
loan does not exceed the net realizable value of the collateral. In addition, we establish a general allowance for loan losses for mortgage loans with certain characteristics attributable to the collateral. Mortgage loans for which we have
foreclosed on the property and the related allowance are reclassified to other real estate owned, a component of other assets, and are carried at estimated net realizable value. We do not have any mortgage loans greater than 90 days past due
that are accruing interest.

Contractual Obligations

Our consolidated contractual obligations include deposits of Union Federal, tuition payment obligations of TMS, commitments under operating and capital leases, including the lease assumed in our
acquisition of TMS, and, effective with our adoption of ASU 2009-16 and ASU 2009-17 effective July 1, 2010, the long-term borrowings of the consolidated securitization trusts. Contractual obligations no longer include the education loan
warehouse facility of UFSB-SPV, which was deconsolidated upon our adoption of the new accounting guidance.

Deposits

Union Federal has liabilities for retail time, money market and savings deposits accounts. The following table summarizes Union Federals time
deposits greater than $100 thousand by maturity at March 31, 2011:



|                                   |  |                        |        | 
|---------------------------------- |  | ---------------------- | ------ | 
|                                   |  | (dollars in thousands) |       
|Within three months                |  | $                      | 5,040  | 
|Three to six months                |  |                        | 5,618  | 
|Six months to one year             |  |                        | 271    | 
|                                   |  |                        |        | 
|Total time deposits >$100 thousand |  | $                      | 10,929 | 
|                                   |  |                        |        | 

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

Restricted Funds Due to Clients

As part of our newly acquired TMS operations, we collect
tuition payments from students or their families on behalf of educational institutions. In addition, we have cash on our balance sheet that represents recoveries on defaulted education loans due to our portfolio management clients (primarily
securitization trusts facilitated by us) and undisbursed education loan proceeds for our loan origination clients. These cash balances are recorded as restricted cash on our balance sheet because they are deposited in segregated depository accounts
and are not available for our use. We record an equal and offsetting liability in our balance sheet representing tuition payments due to our TMS clients, recoveries on defaults due to securitization trusts and education loan proceeds due to students
or schools.

Education Loan Warehouse Facility

The education loan warehouse facility is an obligation of UFSB-SPV, a VIE which was reflected in our consolidated financial statements for fiscal 2010 but deconsolidated effective July 1, 2010 upon
our adoption of ASU 2009-16 and ASU 2009-17. The education loan warehouse facility represented borrowings from a third-party conduit lender. Such borrowings were used to finance the purchase of education loans originated by Union Federal. Neither
FMD nor Union Federal was a borrower or co-borrower under the facility. The facility has been structured to limit the conduit lenders recourse to the assets of UFSB-SPV, which consist almost exclusively of the purchased education loans.



24



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##### Table of Contents

Other Liabilities

Notes due to TERI. We entered into two ten-year 6.0% fixed notes payable agreements with TERI in June 2001 to fund the acquisition of TERIs loan processing operations and loan database.
Under the terms of the Stipulation, the amounts outstanding under the notes, as well as other liabilities, have been fully released by TERI. We recorded a resulting gain of $3.1 million in the second quarter of fiscal 2011 related to the outstanding
principal balances and accrued interest of the notes as of October 10, 2010, which we included in other income in our statement of operations.

Borrowings Under Lines of Credit. At March 31, 2011, through Union Federal we had $5.0 million available for borrowing under an unused line of credit with the Federal Home Loan Bank of
Boston. There were no borrowings outstanding under this line of credit at March 31, 2011 or June 30, 2010.

Long-term Operating
and Capital Leases. We have future cash obligations under long-term capital leases for office equipment expiring in fiscal 2011, and under operating leases for office space and office equipment expiring at various dates in fiscal 2011 through
fiscal 2017. In November 2010, we amended the operating lease relating to our Medford, Massachusetts location to, among other things, reduce the rented space by 60,000 square feet by March 31, 2011. The effective date of this amendment was
July 1, 2010. In connection with our acquisition of TMS, FMD assumed TMS lease for approximately 27,250 square feet of office space in Warwick, Rhode Island. We expect to pay $347 thousand per fiscal year pursuant to the lease, which has
a term expiring in April 2012. We have an option to extend the term of the Warwick lease for a three year period, expiring in April 2015 and expect to pay $325 thousand per fiscal year during the extension period. As of May 16, 2011,
we were in negotiations for the sublease of a portion of our office space at our corporate headquarters in Boston, Massachusetts.

Long-term Borrowings

Through the
securitization process, the consolidated securitization trusts issued debt instruments to finance the purchase of education loans obtained from originating lenders or their assignees. The debt securities issued are obligations of the trusts. Holders
of these debt securities generally have recourse only to the assets of the particular trust that issued the debt, and not to any other securitization trusts, FMD, its operating subsidiaries, or the originating lenders or their assignees.

The following table provides additional information on long-term borrowings:



|                                                                                                 |  |                        |           |  |                                                                           |  |               |                       |  |  |           | 
|------------------------------------------------------------------------------------------------ |  | ---------------------- | --------- |  | ------------------------------------------------------------------------- |  | ------------- | --------------------- |  |  | --------- | 
|                                                                                                 |  | March 31, 2011         |          
|                                                                                                 |  | Carrying value         |           |  | Range of spreads overindex or range of fixedinterest 
rates (annualbasis) |  |               | Distributionfrequency | 
|                                                                                                 |  | (dollars in thousands) |          
|Principal outstanding on variable-rate ABS, indexed to one-month LIBOR(1)unless otherwise noted: |  |                        |           |  |                                                                           |  |               |                       |  |  |           | 
|Senior notes and certificates                                                                    |  | $                      | 6,536,411 |  |                                                                           |  | +0.03 to 0.48 | %                     |  |  | Monthly   | 
|Senior notes indexed to three-month LIBOR(1)                                                     |  |                        | 250,000   |  |                                                                           |  | +0.48         | %                     |  |  | Quarterly | 
|Subordinated notes                                                                               |  |                        | 1,446,118 |  |                                                                           |  | +0.32 to 1.35 |                       |  |  | Monthly   | 
|Senior and subordinated auction rate notes                                                       |  |                        | 114,550   |  |                                                                           |  | +3.50         | (2)                   |  |  | Quarterly | 
|Unamortized proceeds of senior fixed-rate interest-only securities(3)                            |  |                        | 63,732    |  |                                                                           |  | 4.80 to 9.75  |                       |  |  | Monthly   | 
|                                                                                                 |  |                        |           |  |                                                                           |  |               |                       |  |  |           | 
|Total long-term debt                                                                             |  | $                      | 8,410,811 |  |                                                                           |  |               |                       |  |  |           | 
|                                                                                                 |  |                        |           |  |                                                                           |  |               |                       |  |  |           | 



|(1) | The averages of one-month LIBOR for the three and nine months ended March 31, 2011 were 0.26% and 0.27%, respectively. The averages of three-month LIBOR for the
three and nine months ended March 31, 2011 were 0.29% and 0.34%, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Failed auctions occurred and have persisted with respect to a consolidated securitization trust that issued auction rate notes. When failed auctions occur, the notes
bear interest at a spread over one-month LIBOR as specified in the applicable indenture, based on the ratings assigned to the notes by independent rating agencies. Deterioration in securitization trust performance has resulted in downgrades to the
ratings assigned to these notes, and, as a result, these notes bear interest at the maximum allowable spread over one-month LIBOR.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Interest-only securities had a combined notional value of $1.50 billion at March 31, 2011 and have varying maturity dates from April 2011 to
October 2012.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Interest payments and principal paydowns on the debt are made from collections on the purchased loans, or
from the release of trust cash reserves, on a monthly or quarterly basis, as indicated in the table above. Within any given securitization trust, there may exist multiple classes of notes, certificates or interest-only securities. Typically, notes
within a given class are sequentially ordered based upon their original scheduled maturities. Interest payments and principal paydowns are made each distribution period based on cash available to the trust in accordance with the subordination
priorities established in the trust indentures. Payments on interest-only strips are made based on notional values and have scheduled maturity dates. Principal payments are not based on scheduled maturity dates. Each securitization trust is a
standalone, bankruptcy remote entity, meaning that collateral performance, cash flow, credit enhancement and subordination for a given trust is independent from any other trust.

Total Stockholders Equity

Effective July 1, 2010, upon our adoption of
ASU 2009-16 and ASU 2009-17, we recorded a decrease to opening retained earnings of $880.1 million as the cumulative effect of a change in accounting principle. This amount represented the net deficit attributable to the 14 consolidated
securitization trusts, including $979.0 million for the NCSLT Trusts, as well as the reversal of residual interests recognized in prior periods for entities consolidated, partially offset by deconsolidation of the net deficit of UFSB-SPV and the
reversal of certain related deferred tax asset valuation allowances. Total stockholders equity at March 31, 2011 includes in retained earnings the deficit of the NCSLT Trusts of $1.06 billion, which will never be realized by our
stockholders because we have no ownership interest in these trusts.

Off-Balance Sheet Arrangements

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

The
principal uses of the securitization trusts we facilitated have been to generate sources of liquidity for our clients and Union Federals assets sold into such trusts and make available more funds to students and colleges. See
Application of Critical Accounting Policies and EstimatesConsolidation for a discussion of our determination to not consolidate these securitization trusts as of June 30, 2010 and the impact new accounting standards had
on our determination to consolidate certain of these trusts and deconsolidate UFSB-SPV effective July 1, 2010.

Consolidated
Average Balance Sheet

The following tables reflect our consolidated average balance sheet, net interest income, and rates earned and
paid on interest-earning assets and interest-bearing liabilities:



|                                                                      |  |                              |           |   |          |   |        |      |  |  |                |   |  |          |          |   |      |   |       |  |  |  |      |  
|--------------------------------------------------------------------- |  | ---------------------------- | --------- | - | -------- | - | ------ | ---- |  |  | -------------- | - |  | -------- | -------- | - | ---- | - | ----- |  |  |  | ---- | -
|                                                                      |  | Three months ended March 31, |          
|                                                                      |  | 2011                         |           |   | 2010     |  
|                                                                      |  | Averagebalance               |           |   | Interest |   |        | Rate |  |  | Averagebalance |   |  | Interest |          |   | Rate |  
|                                                                      |  | (dollars in thousands)       |          
|                                                                      |  |                              |           |   |          |  
|Assets:                                                               |  |                              |           |   |          |   |        |      |  |  |                |   |  |          |          |   |      |   |       |  |  |  |      |  
|Interest-bearing cash and cash equivalents                            |  | $                            | 229,115   |   |          | $ | 115    |      |  |  | 0.20           | % |  | $        | 381,105  |   |      | $ | 148   |  |  |  | 0.17 | %
|Short-term investments and federal funds sold                         |  |                              | 52,002    |   |          |   | 63     |      |  |  | 0.49           |   |  |          | 52,384   |   |      |   | 74    |  |  |  | 0.57 |  
|Interest-bearing restricted cash and guaranteed investment contracts  |  |                              | 210,745   |   |          |   | 171    |      |  |  | 0.32           |   |  |          |         |   |      |   |      |  |  |  |     |  
|Investments available for sale                                        |  |                              | 3,554     |   |          |   | 43     |      |  |  | 4.91           |   |  |          | 5,923    |   |      |   | 74    |  |  |  | 5.06 |  
|Education loans held for sale                                         |  |                              |          |   |          |   |       |      |  |  |               |   |  |          | 262,031  |   |      |   | 3,778 |  |  |  | 6.09 |  
|Education loans held to maturity                                      |  |                              | 7,706,756 |   |          |   | 79,398 |      |  |  | 4.18           |   |  |          | 24,404   |   |      |   | 194   |  |  |  | 3.22 |  
|Mortgage loans held to maturity                                       |  |                              | 9,692     |   |          |   | 99     |      |  |  | 4.14           |   |  |          | 8,950    |   |      |   | 114   |  |  |  | 5.18 |  
|                                                                      |  |                              |           |   |          |   |        |      |  |  |                |   |  |          |          |   |      |   |       |  |  |  |      |  
|Total interest-earning assets                                         |  |                              | 8,211,864 |   |          |   | 79,889 |      |  |  | 3.95           |   |  |          | 734,797  |   |      |   | 4,382 |  |  |  | 2.42 |  
|Non-interest-bearing cash                                             |  |                              | 2,583     |   |          |   |        |      |  |  |                |   |  |          | 3,075    |   |      |   |       |  |  |  |      |  
|Allowance for loan losses and lower of cost or fair value adjustments |  |                              | (474,308  | ) |          |   |        |      |  |  |                |   |  |          | (168,043 | ) |      |   |       |  |  |  |      |  
|Other assets                                                          |  |                              | 233,852   |   |          |   |        |      |  |  |                |   |  |          | 76,984   |   |      |   |       |  |  |  |      |  
|                                                                      |  |                              |           |   |          |   |        |      |  |  |                |   |  |          |          |   |      |   |       |  |  |  |      |  
|Total assets                                                          |  | $                            | 7,973,991 |   |          |   |        |      |  |  |                |   |  | $        | 646,813  |   |      |   |       |  |  |  |      |  
|                                                                      |  |                              |           |   |          |   |        |      |  |  |                |   |  |          |          |   |      |   |       |  |  |  |      |  
|Liabilities:                                                          |  |                              |           |   |          |   |        |      |  |  |                |   |  |          |          |   |      |   |       |  |  |  |      |  
|Time and savings account deposits                                     |  | $                            | 40,144    |   |          | $ | 81     |      |  |  | 0.82           | % |  | $        | 94,679   |   |      | $ | 313   |  |  |  | 1.34 | %
|Money market account deposits                                         |  |                              | 15,169    |   |          |   | 39     |      |  |  | 1.04           |   |  |          | 42,979   |   |      |   | 123   |  |  |  | 1.16 |  
|Education loan warehouse facility                                     |  |                              |          |   |          |   |       |      |  |  |               |   |  |          | 228,293  |   |      |   | 3,110 |  |  |  | 5.53 |  
|Other interest-bearing liabilities                                    |  |                              | 5,776     |   |          |   | 86     |      |  |  | 6.04           |   |  |          | 12,916   |   |      |   | 180   |  |  |  | 5.64 |  
|Long-term borrowings                                                  |  |                              | 8,489,118 |   |          |   | 14,881 |      |  |  | 0.70           |   |  |          |         |   |      |   |      |  |  |  |     |  
|                                                                      |  |                              |           |   |          |   |        |      |  |  |                |   |  |          |          |   |      |   |       |  |  |  |      |  
|Total interest-bearing liabilities                                    |  |                              | 8,550,207 |   |          |   | 15,087 |      |  |  | 0.69           |   |  |          | 378,867  |   |      |   | 3,726 |  |  |  | 3.99 |  
|Non-interest-bearing deposits                                         |  |                              | 43        |   |          |   |        |      |  |  |                |   |  |          | 1,759    |   |      |   |       |  |  |  |      |  
|All other liabilities                                                 |  |                              | 195,284   |   |          |   |        |      |  |  |                |   |  |          | 33,630   |   |      |   |       |  |  |  |      |  
|                                                                      |  |                              |           |   |          |   |        |      |  |  |                |   |  |          |          |   |      |   |       |  |  |  |      |  
|Total liabilities                                                     |  |                              | 8,745,534 |   |          |   |        |      |  |  |                |   |  |          | 414,256  |   |      |   |       |  |  |  |      |  
|                                                                      |  |                              |           |   |          |  
|Stockholders equity                                                  |  |                              | (771,543  | ) |          |   |        |      |  |  |                |   |  |          | 232,557  |   |      |   |       |  |  |  |      |  
|                                                                      |  |                              |           |   |          |   |        |      |  |  |                |   |  |          |          |   |      |   |       |  |  |  |      |  
|Total liabilities and stockholders equity                            |  | $                            | 7,973,991 |   |          |   |        |      |  |  |                |   |  | $        | 646,813  |   |      |   |       |  |  |  |      |  
|                                                                      |  |                              |           |   |          |   |        |      |  |  |                |   |  |          |          |   |      |   |       |  |  |  |      |  
|Total interest-earning assets                                         |  | $                            | 8,211,864 |   |          |   |        |      |  |  |                |   |  | $        | 734,797  |   |      |   |       |  |  |  |      |  
|                                                                      |  |                              |           |   |          |   |        |      |  |  |                |   |  |          |          |   |      |   |       |  |  |  |      |  
|Net interest income                                                   |  |                              |           |   |          | $ | 64,802 |      |  |  |                |   |  |          |          |   |      | $ | 656   |  |  |  |      |  
|                                                                      |  |                              |           |   |          |   |        |      |  |  |                |   |  |          |          |   |      |   |       |  |  |  |      |  
|Net interest margin                                                   |  |                              |           |   |          |   |        |      |  |  | 3.20           | % |  |          |          |   |      |   |       |  |  |  | 0.36 | %



26



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|                                                                      |  |                             |           |   |          |   |         |      |  |  |                |   |  |          |          |   |      |   |        |  |  |  |      |  
|--------------------------------------------------------------------- |  | --------------------------- | --------- | - | -------- | - | ------- | ---- |  |  | -------------- | - |  | -------- | -------- | - | ---- | - | ------ |  |  |  | ---- | -
|                                                                      |  | Nine months ended March 31, |          
|                                                                      |  | 2011                        |           |   | 2010     |  
|                                                                      |  | Averagebalance              |           |   | Interest |   |         | Rate |  |  | Averagebalance |   |  | Interest |          |   | Rate |  
|                                                                      |  | (dollars in thousands)      |          
|Assets:                                                               |  |                             |           |   |          |   |         |      |  |  |                |   |  |          |          |   |      |   |        | 
|Interest-bearing cash and cash equivalents                            |  | $                           | 274,950   |   |          | $ | 452     |      |  |  | 0.22           | % |  | $        | 311,524  |   |      | $ | 437    |  |  |  | 0.19 | %
|Short-term investments and federal funds sold                         |  |                             | 52,070    |   |          |   | 212     |      |  |  | 0.54           |   |  |          | 35,049   |   |      |   | 127    |  |  |  | 0.48 |  
|Interest-bearing restricted cash and guaranteed investment contracts  |  |                             | 187,349   |   |          |   | 341     |      |  |  | 0.24           |   |  |          |         |   |      |   |       |  |  |  |     |  
|Investments available for sale                                        |  |                             | 3,859     |   |          |   | 141     |      |  |  | 4.87           |   |  |          | 6,999    |   |      |   | 268    |  |  |  | 5.10 |  
|Education loans held for sale                                         |  |                             |          |   |          |   |        |      |  |  |               |   |  |          | 368,366  |   |      |   | 16,754 |  |  |  | 6.06 |  
|Education loans held to maturity                                      |  |                             | 7,796,030 |   |          |   | 251,437 |      |  |  | 4.30           |   |  |          | 13,378   |   |      |   | 313    |  |  |  | 3.12 |  
|Mortgage loans held to maturity                                       |  |                             | 8,163     |   |          |   | 270     |      |  |  | 4.41           |   |  |          | 9,125    |   |      |   | 419    |  |  |  | 6.12 |  
|                                                                      |  |                             |           |   |          |   |         |      |  |  |                |   |  |          |          |   |      |   |        |  |  |  |      |  
|Total interest-earning assets                                         |  |                             | 8,322,421 |   |          |   | 252,853 |      |  |  | 4.05           |   |  |          | 744,441  |   |      |   | 18,318 |  |  |  | 3.28 |  
|Non-interest-bearing cash                                             |  |                             | 1,513     |   |          |   |         |      |  |  |                |   |  |          | 3,365    |   |      |   |        |  |  |  |      |  
|Allowance for loan losses and lower of cost or fair value adjustments |  |                             | (507,422  | ) |          |   |         |      |  |  |                |   |  |          | (184,594 | ) |      |   |        |  |  |  |      |  
|Other assets                                                          |  |                             | 348,380   |   |          |   |         |      |  |  |                |   |  |          | 131,742  |   |      |   |        |  |  |  |      |  
|                                                                      |  |                             |           |   |          |   |         |      |  |  |                |   |  |          |          |   |      |   |        |  |  |  |      |  
|Total assets                                                          |  | $                           | 8,164,892 |   |          |   |         |      |  |  |                |   |  | $        | 694,954  |   |      |   |        |  |  |  |      |  
|                                                                      |  |                             |           |   |          |   |         |      |  |  |                |   |  |          |          |   |      |   |        |  |  |  |      |  
|Liabilities:                                                          |  |                             |           |   |          |   |         |      |  |  |                |   |  |          |          |   |      |   |        |  |  |  |      |  
|Time and savings account deposits                                     |  | $                           | 51,156    |   |          | $ | 381     |      |  |  | 0.99           | % |  | $        | 98,954   |   |      | $ | 1,169  |  |  |  | 1.57 | %
|Money market account deposits                                         |  |                             | 20,712    |   |          |   | 100     |      |  |  | 0.64           |   |  |          | 47,449   |   |      |   | 550    |  |  |  | 1.54 |  
|Education loan warehouse facility                                     |  |                             |          |   |          |   |        |      |  |  |               |   |  |          | 229,060  |   |      |   | 9,501  |  |  |  | 5.53 |  
|Other interest-bearing liabilities                                    |  |                             | 8,051     |   |          |   | 342     |      |  |  | 5.66           |   |  |          | 12,368   |   |      |   | 501    |  |  |  | 5.39 |  
|Long-term borrowings                                                  |  |                             | 8,720,289 |   |          |   | 48,974  |      |  |  | 0.74           |   |  |          |         |   |      |   |       |  |  |  |     |  
|                                                                      |  |                             |           |   |          |   |         |      |  |  |                |   |  |          |          |   |      |   |        |  |  |  |      |  
|Total interest-bearing liabilities                                    |  |                             | 8,800,208 |   |          |   | 49,797  |      |  |  | 0.74           |   |  |          | 387,831  |   |      |   | 11,721 |  |  |  | 4.03 |  
|Non-interest-bearing deposits                                         |  |                             | 36        |   |          |   |         |      |  |  |                |   |  |          | 1,077    |   |      |   |        |  |  |  |      |  
|All other liabilities                                                 |  |                             | 102,254   |   |          |   |         |      |  |  |                |   |  |          | 27,792   |   |      |   |        |  |  |  |      |  
|                                                                      |  |                             |           |   |          |   |         |      |  |  |                |   |  |          |          |   |      |   |        |  |  |  |      |  
|Total liabilities                                                     |  |                             | 8,902,498 |   |          |   |         |      |  |  |                |   |  |          | 416,700  |   |      |   |        |  |  |  |      |  
|                                                                      |  |                             |           |   |          |  
|Stockholders equity                                                  |  |                             | (737,606  | ) |          |   |         |      |  |  |                |   |  |          | 278,254  |   |      |   |        |  |  |  |      |  
|                                                                      |  |                             |           |   |          |   |         |      |  |  |                |   |  |          |          |   |      |   |        |  |  |  |      |  
|Total liabilities and stockholders equity                            |  | $                           | 8,164,892 |   |          |   |         |      |  |  |                |   |  | $        | 694,954  |   |      |   |        |  |  |  |      |  
|                                                                      |  |                             |           |   |          |   |         |      |  |  |                |   |  |          |          |   |      |   |        |  |  |  |      |  
|Total interest-earning assets                                         |  | $                           | 8,322,421 |   |          |   |         |      |  |  |                |   |  | $        | 744,441  |   |      |   |        |  |  |  |      |  
|                                                                      |  |                             |           |   |          |   |         |      |  |  |                |   |  |          |          |   |      |   |        |  |  |  |      |  
|Net interest income                                                   |  |                             |           |   |          | $ | 203,056 |      |  |  |                |   |  |          |          |   |      | $ | 6,597  |  |  |  |      |  
|                                                                      |  |                             |           |   |          |   |         |      |  |  |                |   |  |          |          |   |      |   |        |  |  |  |      |  
|Net interest margin                                                   |  |                             |           |   |          |   |         |      |  |  | 3.25           | % |  |          |          |   |      |   |        |  |  |  | 1.18 | %

Changes in net interest income between the
periods presented in the tables above, particularly as they relate to education loans held for sale, education loans held to maturity, education loan warehouse facility and long-term borrowings, are almost entirely related to changes in VIEs
included in consolidation. Changes in restricted cash and guaranteed investment contracts are due both to changes in entities consolidated and the acquisition of TMS. An analysis of changes in interest income and expense due to changes in rates and
volumes is not meaningful as a result.

Liquidity and Capital Resources

Sources and Uses of Cash

The following is a discussion of sources and uses of cash
on a GAAP basis as presented in our consolidated statements of cash flows included in our unaudited consolidated financial statements included in Part I of this quarterly report. We also use a non-GAAP financial metric, net operating cash
usage when evaluating our cash and liquidity position, discussed in detail under Net Operating Cash Usage below.

Net cash
provided by operating activities for the nine months ended March 31, 2011 was $212.8 million, compared with cash provided by operating activities of $281.1 million for the nine months ended March 31, 2010. During the second quarter of
fiscal 2011, we received $45.1 million in tax refunds as a result of our ability to carry back taxable losses from either fiscal 2009 or 2010 for five years instead of two years due to the enactment of the WHBAA. In addition, our Securitization
Trusts segment received $136.4 million in pledged account distributions from TERI. These cash inflows were partially offset by our funding of $8.5 million to participation accounts during the first nine months of fiscal 2011 as we began processing
loans based on our Monogram platform. Cash provided by operating activities for the nine months ended March 31, 2010 reflected the receipt of tax refunds of $189.3 million and $121.6 million of proceeds from the sale of Union Federals
education loans held for sale.



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We anticipate continuing to receive administrative and other fees related to our daily management and
information gathering and reporting services for parties related to securitization trusts. We also expect to receive fees related to loan origination and portfolio management services to other clients, and fees related to Monogram-based loan
programs. Starting January 1, 2011, we also began to receive fees related to the operations of TMS. We believe that these fees, as well as management of our expenses, coupled with our significant cash, cash equivalents and investments will be
adequate to fund our operations in the short term as we seek to expand our client base over the short and long term. While we believe that we may be successful in completing negotiations with respect to the sale of our Monogram platform to
additional lenders, we are uncertain as to how much loan volume may be originated by current or any such additional lenders in fiscal 2011.

Cash provided by investing activities of $248.7 million for the nine months ended March 31, 2011 was primarily due to $252.2 million in principal
collections on education loans and a decrease of $96.5 million in restricted cash, partially offset by the net $47.0 million of cash used for our acquisition of the assets, liabilities and operations of TMS and the payment of $52.3 million of
restricted funds due to clients. Cash used in investing activities of $34.9 million for the first nine months of fiscal 2010 was primarily due to $50.0 million of cash invested in short-term investments, partially offset by a net reduction in
federal funds sold of $12.3 million.

Cash used in financing activities was $563.9 million during the first nine months of fiscal 2011,
primarily reflecting the principal paydowns on long-term borrowings by securitization trusts of $510.4 million. In addition, deposit volumes decreased $51.5 million, particularly in time and online money market accounts, as a result of a planned
reduction in deposit liabilities at Union Federal as we better align deposit rates to the yields available on Union Federals assets. In connection with the completion of our review of strategic alternatives for Union Federal, we ceased our
deposit reduction strategy during the third quarter of fiscal 2011. Cash used in financing activities of $32.8 million for the first nine months of fiscal 2010 reflected decreases in the volume of deposits and payments under capital leases and
borrowings under the education loan warehouse.

The OTS regulates all capital distributions by Union Federal directly or indirectly to us,
including dividend payments. Union Federal is required to file a notice with the OTS at least 30 days before the proposed declaration of a dividend or approval of a proposed capital distribution by Union Federals board of directors.
Union Federal must file an application to receive the approval of the OTS for a proposed capital distribution when, among other circumstances, the total amount of all capital distributions (including the proposed capital distribution) for the
applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years.

A notice or
application to make a capital distribution by Union Federal may be disapproved or denied by the OTS if it determines that, after making the capital distribution, Union Federal would fail to meet minimum required capital levels or if the capital
distribution raises safety or soundness concerns or is otherwise restricted by statute, regulation or agreement between Union Federal and the OTS or the Federal Deposit Insurance Corporation, or FDIC, or a condition imposed by an OTS agreement.
Under the Federal Deposit Insurance Act, or FDIA, an FDIC-insured depository institution such as Union Federal is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution
would become undercapitalized (as such term is used in the FDIA).

Sources and Uses of Liquidity

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

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



| |  |  | Cash requirements necessary to fund our operations, including the operations of Union Federal and TMS, and capital expenditures;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | The extent to which our services and products, including Monogram-based loan programs, gain market share and remain competitive at pricing favorable to
us;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The amount and timing of receipt of revenues from our Monogram-based loan program, which is dependent on, among other things, the amount of loan volume
we are able to generate;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The extent to which we fund participation accounts or contribute to credit facility providers in connection with our Monogram platform;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The regulatory capital requirements applicable to Union Federal (see Support of Subsidiary Bank below for additional information) as
well as any capital contributions FMD may make to Union Federal;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The results of the audit conducted by the IRS of our tax returns for fiscal years 2007 through 2010, which could result in adjustments to tax refunds
previously received in connection with the sale of the Trust Certificate;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The timing, size, structure and terms of any securitization or other funding transactions that we structure, as well as the composition of the loan
pool being securitized;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The results of litigation pending before the ATB relating to state tax returns for fiscal years 2004 to 2006; and
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | The timing, size, structure and terms of acquisitions, if any.
| | - |  | --------------------------------------------------------------

Liquidity is required for capital expenditures and business acquisitions, working capital, business development expenses, costs associated with alternative financing transactions, general corporate
expenses, credit enhancement provided in connection with Monogram-based loan programs and maintaining the regulatory capital of our bank subsidiary, Union Federal. In order to preserve capital and maximize liquidity in challenging market conditions,
we have taken certain broad measures to reduce the risk related to education loans and residual receivables on our balance sheet, to change our fee structure and to add new products and reduce our overhead expenses. See Item 7 of Part II
of our Annual Report filed with the SEC on September 2, 2010, under the heading Executive SummaryBusiness Trends and Uncertainties, for an expanded description of actions taken by us since fiscal 2009 in response to the
economic challenges facing us. In addition, our Board of Directors has eliminated regular quarterly cash dividends and repurchases of our common stock for the foreseeable future.

Support of Subsidiary Bank

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

Union Federals equity capital was $12.5 million at March 31, 2011, down significantly from $43.4 million at
June 30, 2010, principally due to the payment in November 2010 of a cash dividend from Union Federal to First Marblehead of $29.0 million, which was approved by the OTS. Quantitative measures established by regulation to ensure capital adequacy
require Union Federal to maintain minimum amounts and ratios of total capital and Tier 1 capital to risk-weighted assets (each as defined in the regulations). As of March 31, 2011 and June 30, 2010, Union Federal was well capitalized
under the regulatory framework for prompt corrective action.

In March 2010, our Board of Directors adopted resolutions required by the
OTS undertaking to support the implementation by Union Federal of its business plan, so long as Union Federal is owned or controlled by FMD, and to notify the OTS in advance of any distributions to our stockholders in excess of $1.0 million per
fiscal quarter and any incurrence or guarantee of debt in excess of $5.0 million.

FMD is subject to extensive regulation, supervision
and examination by the OTS as a savings and loan holding company and Union Federal is subject to extensive regulation, supervision and examination by the OTS and FDIC.

Union Federals regulatory capital ratios were as follows as of the dates below:



|                          |  |                       |     |   |                 |  |      |               |  |  |              |   |  |  |       |  
|------------------------- |  | --------------------- | --- | - | --------------- |  | ---- | ------------- |  |  | ------------ | - |  |  | ----- | -
|                          |  | Regulatory Guidelines |     |   |                 |  |      |               | 
|                          |  | Minimum               |     |   | WellCapitalized |  |      | March 31,2011 |  |  | June 30,2010 |  
|Capital ratios:           |  |                       |     |   |                 |  |      |               |  |  |              |   |  |  |       |  
|Tier 1 risk-based capital |  |                       | 4.0 | % |                 |  | 6.0  | %             |  |  | 104.6        | % |  |  | 124.8 | %
|Total risk-based capital  |  |                       | 8.0 |   |                 |  | 10.0 |               |  |  | 105.9        |   |  |  | 125.5 |  
|Tier 1 (core) capital     |  |                       | 4.0 |   |                 |  | 5.0  |               |  |  | 17.2         |   |  |  | 27.9  |  

Net Operating Cash Usage

In addition to providing financial measurements based on GAAP, we present below an additional financial metric that we refer to as
net operating cash usage and that was not prepared in accordance with GAAP. We define net operating cash usage to approximate cash requirements to fund operations. Net operating cash usage is not directly comparable to our
consolidated statement of cash flows prepared in accordance with GAAP. Legislative and regulatory guidance discourage the use of and emphasis on non-GAAP financial metrics and require companies to explain why a non-GAAP financial metric is relevant
to management and investors.



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Management and our board of directors use this non-GAAP financial metric, in addition to GAAP financial
measures, as a basis for measuring and forecasting our core operating performance and comparing such performance to that of prior periods. This non-GAAP financial measure is also used by us in our financial and operational decision-making.

We believe that the inclusion of this non-GAAP financial metric helps investors to gain a better understanding of our quarterly and annual
results, including our non-interest expenses and quarter-end liquidity position, particularly in light of dislocations in the private education loan industry and the capital markets that have affected us. In addition, our presentation of this
non-GAAP financial measure is consistent with how we expect that analysts may calculate their estimates of our financial results in their research reports and with how investors, analysts and financial news media may evaluate financial results.

There are limitations associated with reliance on any non-GAAP financial measure because it is specific to our operations and financial
performance, which makes comparisons with other companies financial results more challenging. Nevertheless, by providing both GAAP and non-GAAP financial measures, we believe that investors are able to compare our GAAP results to those of
other companies, while also gaining a better understanding of our operating performance, consistent with managements evaluation.

Net operating cash usage should be considered in addition to, and not as a substitute for, or superior to, financial information prepared in
accordance with GAAP. Net operating cash usage relates solely to our Education Financing segment, and excludes the effects of income taxes, acquisitions, participation account funding and changes in other assets and other liabilities that are solely
related to short-term timing of cash payments or receipts.

In accordance with the requirements of Regulation G promulgated by the SEC, the
table below presents the most directly comparable GAAP financial measure, loss before income taxes, for the three and nine months ended March 31, 2011 and 2010, and reconciles the GAAP measure to the comparable non-GAAP financial metric:



|                                                                                 |  |                              |         |   |                             |   |         |      |  |   |          |   |  |   |          |  
|-------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | --------------------------- | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                                 |  | Three months ended March 31, |         |   | Nine months ended March 31, |  
|                                                                                 |  | 2011                         |         |   | 2010                        |   |         | 2011 |  |   | 2010     |  
|                                                                                 |  | (dollars in thousands)       |        
|Loss before income taxes                                                         |  | $                            | (39,408 | ) |                             | $ | (44,828 | )    |  | $ | (135,774 | ) |  | $ | (202,649 | )
|(Income) loss and related eliminations attributable to:                          |  |                              |         |   |                             |   |         |      |  |   |          |   |  |   |          |  
|NCSLT Trusts                                                                     |  |                              | (607    | ) |                             |   |        |      |  |   | 80,287   |   |  |   |         |  
|GATE Trusts                                                                      |  |                              | (1,780  | ) |                             |   |        |      |  |   | (4,442   | ) |  |   |         |  
|UFSB-SPV                                                                         |  |                              |        |   |                             |   | 3,236   |      |  |   |         |   |  |   | 73,519   |  
|                                                                                 |  |                              |         |   |                             |   |         |      |  |   |          |   |  |   |          |  
|Net loss before income taxes  Education Financing                               |  |                              | (41,795 | ) |                             |   | (41,592 | )    |  |   | (59,929  | ) |  |   | (129,130 | )
|Adjustments for non-cash revenues and expenses:                                  |  |                              |         |   |                             |   |         |      |  |   |          |   |  |   |          |  
|Trust update (gains) losses  additional structural advisory fees and residuals: |  |                              |         |   |                             |   |         |      |  |   |          |   |  |   |          |  
|Securitization Trusts segment                                                    |  |                              | 21,646  |   |                             |   |        |      |  |   | 16,552   |   |  |   |         |  
|Off-balance sheet VIEs                                                           |  |                              | (233    | ) |                             |   | 21,531  |      |  |   | 102      |   |  |   | 18,613   |  
|Asset servicing fees                                                             |  |                              | 4,959   |   |                             |   | 502     |      |  |   | 4,236    |   |  |   | (3,740   | )
|Non-cash gains from TERI settlements                                             |  |                              |        |   |                             |   |        |      |  |   | (5,021   | ) |  |   |         |  
|Depreciation and amortization                                                    |  |                              | 2,125   |   |                             |   | 3,355   |      |  |   | 6,573    |   |  |   | 10,648   |  
|Stock-based compensation expense                                                 |  |                              | 1,276   |   |                             |   | 1,492   |      |  |   | 3,526    |   |  |   | 4,531    |  
|Losses on education loans held for sale of Union Federal                         |  |                              |        |   |                             |   |        |      |  |   |         |   |  |   | 63,573   |  
|TMS deferred revenue                                                             |  |                              | 558     |   |                             |   |        |      |  |   | 558      |   |  |   |         |  
|Cash receipts from education loans, net of interest income accruals              |  |                              | 118     |   |                             |   | 101     |      |  |   | 413      |   |  |   | (2,078   | )
|Cash receipts from trust distributions                                           |  |                              | 32      |   |                             |   | 382     |      |  |   | 460      |   |  |   | 429      |  
|Other                                                                            |  |                              | (1,778  | ) |                             |   | 1,588   |      |  |   | (4,511   | ) |  |   | 596      |  
|                                                                                 |  |                              |         |   |                             |   |         |      |  |   |          |   |  |   |          |  
|Non-GAAP net operating cash usage                                                |  | $                            | (13,092 | ) |                             | $ | (12,641 | )    |  | $ | (37,041  | ) |  | $ | (36,558  | )
|                                                                                 |  |                              |         |   |                             |   |         |      |  |   |          |   |  |   |          |  

Operating-basis cash used in operations for the third quarter of fiscal 2011 was relatively flat, year over year. The
positive cash flow of the TMS operations of $524 thousand during the quarter was offset by other cash used, none of which was material on a stand-alone basis. Cash used for the nine months ended March 31, 2011 was relatively flat compared with
the same period a year earlier, as well.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

Market risk is separately managed between our Education Financing segment and our Securitization Trusts segment. For a
description of the activities that constitute our Education Financing segment and our Securitization Trusts segment, see Note 1, Nature of Business, in the notes to our unaudited consolidated financial statements included in
Part I of this quarterly report.





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Education Financing

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

Interest Rate Risk

The interest rate characteristics of our interest-bearing assets are driven by the nature, volume and duration of our interest-bearing liabilities.
Generally, our interest-bearing liabilities are either variable-rate instruments or are of a short duration and are subject to frequent re-pricing for demand liabilities or at maturity in the case of time deposits.

Less than 1% of our fixed-rate customer deposits at Union Federal have maturities in excess of 12 months from March 31, 2011. Approximately 96%
of the deposits have variable interest rates or fixed interest rates with maturities of six months or less from March 31, 2011. As a result of our decision in the third quarter of fiscal 2011 to retain ownership of Union Federal, we expect to
begin lengthening the average maturities of our customer deposits, and we expect to convert a large portion of Union Federals cash and cash equivalents into higher earning, longer maturity assets. This shift will create a higher level of
interest rate risk at Union Federal, which we expect to partially mitigate by purchasing assets with a relatively short weighted-average life of approximately two years or less.

Deposit pricing is subject to weekly examination by a committee of senior managers from Union Federal and FMDs Finance and Risk and Compliance Departments. The committee considers competitors
pricing, inflows and outflows of deposit balances and Union Federals funding requirements to make pricing decisions in order to attain the desired volume of deposits in each given duration and product type.

The frequent re-pricing of our liabilities drives our investment decisions. Approximately 68% of our mortgage loans have variable interest rates. Excess
cash is primarily invested in money market funds, federal funds sold, time deposits with original maturities of less than one year and U.S. federal agency mortgage-backed securities.

The matching of the interest rate characteristics and duration of assets and liabilities mitigates interest rate risk with respect to net interest revenue. We frequently monitor these assumptions and
their effect on the estimated fair value of service revenue receivables and net interest income. We believe that we have adequately addressed interest rate risks in our cash flow models.

Credit Risk

We manage cash, cash equivalents and investment assets conservatively.
The primary objective of our investment policy is the preservation of capital. Therefore, cash, cash equivalents, short-term investments and investments available for sale are invested with the Board of Governors of the Federal Reserve System, or
Federal Reserve, in deposits and money market funds at highly rated institutions or U.S. government agency mortgage-backed securities.

Union
Federal offers conventional conforming and non-conforming fixed- and variable-rate first and second residential mortgage loans, as well as commercial real estate loans. We base our loan underwriting criteria primarily on credit score, consumer
credit file information and collateral characteristics. Since our acquisition of Union Federal in 2006, all mortgage loans have been underwritten such that they are saleable to institutional investors. Union Federal does not offer high loan-to-value
second mortgages, option adjustable-rate mortgages or sub-prime mortgage products.

Our assumptions regarding defaults and recoveries of
securitized loans both on- and off-balance sheet affect the expected timing of cash payments to us in respect of additional structural advisory fees, asset servicing fees and residual cash flows and our estimates of their fair value. See
Note 9, Service Revenue Receivables and Related Income, in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report. We believe that we have adequately addressed credit risks in
our cash flow models.

Securitization Trusts

As a result of our adoption of ASU 2009-16 and ASU 2009-17, our consolidated balance sheet includes portfolios of education loans, restricted cash and guaranteed investment contracts and long-term
borrowings that subject our results of operations to market risk. Our results of operations include interest income associated with securitized assets, a provision for loan losses and interest expense associated with the debt issued from the
securitization trusts to third parties. Many aspects of market risk are mitigated by the design of the trusts per the applicable indentures. In our role as trust administrator, we monitor compliance with the indentures. Market risk is largely borne
by the holders of the debt or the third-party owner of the residual interests of these trusts, and not by our stockholders, because we have no ownership interest in the majority of the trusts that we consolidate. The net deficit of the consolidated
trusts included in our retained earnings is a non-cash adjustment that will reverse over the lives of these trusts or at such time as our variable interests in these trusts are fully satisfied or eliminated.

Interest Rate Risk

We do not
have the ability to actively manage interest rate risk for our consolidated securitization trusts. Interest rate risk is somewhat mitigated by the design of the trusts at the time of securitization. Generally, the securitization trusts financed the
purchase of education loans with long-term borrowings that have the same underlying index type and index reset frequency as the purchased loans, or using an index that would behave similarly to that of the purchased loans. All of the education loans
included in our Securitization Trusts segment have variable rates based on the one-month LIBOR rate, as do the majority of long-term borrowings. The trusts remain subject to interest rate risk to the extent that the outstanding principal on
performing education loans does not match the outstanding principal on outstanding debt, but such risk will ultimately be borne by the holders of the debt or the third-party owners of the trusts.

Credit Risk

Following our
adoption of ASU 2009-16 and ASU 2009-17, our consolidated balance sheet includes the restricted cash and guaranteed investment contracts of the consolidated securitization trusts. Credit risk related to cash and investments is managed through the
design of the trust. Cash may only be invested in allowable investments per the applicable indentures, including U.S. Treasury obligations, or deposits, money market accounts or guaranteed investment contracts of highly rated institutions. Trust
administration performed by our Education Financing segment includes monitoring the placement of cash and investments in allowable investments per the applicable indenture.

With respect to the education loans included in our Securitization Trusts segment, default prevention and collections management is performed on the trusts behalf by our FMER subsidiary in
accordance with the applicable trust administration and special servicing agreements. Our portfolio management services for the securitization trusts, for a fee, puts us in a position to have power over the economic performance of the trusts, which
in turn is a significant factor in our determination to consolidate these trusts. We employ risk analytics to monitor and manage the performance of the portfolio over time. As part of this service offering, we monitor portfolio performance metrics,
manage the performance of third-party vendors and interface with rating agencies. Our infrastructure provides us with data that enables comprehensive analytics, and we are able to customize collections strategies as needed to optimize loan
performance. The financial results of FMER are included in our Education Financing segment.



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CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the
effectiveness of our disclosure controls and procedures as of March 31, 2011.

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 the company in the reports that it files or
submits 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.

Based on the evaluation of our
disclosure controls and procedures as of March 31, 2011, 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. In
reaching this conclusion, they considered the impact of the significant deficiency in internal control over financial reporting discussed below, and determined that this significant deficiency did not indicate a material failure in our processes for
recording, processing, summarizing and reporting information in our periodic SEC filings.

Inherent Limitations on Internal Control

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of
simple errors. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.

A material weakness (as defined in Rule 12b-2 under the Exchange
Act) in internal control over financial reporting is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a companys annual or
interim financial statements will not be prevented or detected on a timely basis. A significant deficiency (as defined in Rule 12b-2 under the Exchange Act) is deficiency, or a combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a companys financial reporting.

Internal Control Relating to Evaluation of Deferred Tax Assets

Management has identified a
significant deficiency in internal control over financial reporting relative to the evaluation of the realizability of certain of our deferred tax assets.

The process of evaluating the realizability of deferred tax assets is a subjective one. It involves, among other things, scheduling the expected reversals of existing temporary differences that give rise
to deferred tax assets and liabilities. In connection with our quarterly review of the realizability of deferred tax assets, we identified a deficiency in our controls. Specifically, the review of our deferred tax asset analysis was not operating at
a level of precision sufficient to provide reasonable assurance that all existing deferred tax assets would be considered in evaluating the realizability of deferred tax assets.

We determined that it was necessary to increase our deferred tax asset valuation allowances by approximately $5.4 million for certain deferred tax benefits recognized in the first and second quarters of
fiscal 2011 related primarily to federal tax net operating loss carryforwards. In addition, we increased the deferred tax asset valuation allowances established in periods prior to July 1, 2010 by approximately $27 million for fiscal 2009 and $25
million for fiscal 2010. The affected deferred tax assets related to federal income tax



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benefits created by an uncertain state income tax position and unrealized losses included in our financial statements for decreases in the estimated fair value of education loans held for sale by
UFSB-SPV, which was deconsolidated upon the adoption of ASU 2009-16 and ASU 2009-17 on July 1, 2010. The adjusted valuation allowance of $37 million pertaining to UFSB-SPV for prior periods has been credited to retained earnings as of July 1,
2010, the effective date of the deconsolidation of UFSB-SPV. The overall net effect to retained earnings as a result of these changes was a reduction of approximately $16 million.

Management has discussed these matters, and its conclusion, with the audit committee of our board of directors and KPMG LLP, our independent registered public accounting firm.

Internal Control Related to Adoption of ASU 2009-16 and ASU 2009-17

We have restated the unaudited financial statements contained in our quarterly reports for the quarters ended September 30, 2010 and December 31, 2010. The restatements were necessary because our
financial statement presentation following the adoption of ASU 2009-16 and ASU 2009-17 on July 1, 2010 was inconsistent with GAAP. Specifically, under GAAP, the NCSLT Trusts asset performance, including losses, should have been allocated to
FMDs stockholders until such time as the trusts are deconsolidated or the trust liabilities are extinguished, rather than being allocated to non-controlling interests.

Management has evaluated whether this error indicates a deficiency in internal control over financial reporting. Management has consistently recognized that, as a result of certain factors, including our
sale of the Trust Certificate to a third party in prior periods, the determination of the financial statement presentation of the consolidation of the NCSLT Trusts is very complex and involves interpretation and application of new and highly
technical accounting standards.

In connection with the implementation of these new accounting standards during the six-month period leading
up to the adoption as of July 1, 2010, we developed and executed a comprehensive adoption plan, which included: training key members of our accounting function; reviewing the requirements of the pronouncements and their application to various VIEs;
adopting and implementing new accounting policies and procedures; reviewing legal agreements relating to the VIEs; preparing cash flow variability analyses; considering the financial statement presentation required by the pronouncements;
communicating the progress of the implementation effort to senior management and the audit committee of the board of directors; and consulting with KPMG LLP.

While ASU 2009-16 and ASU 2009-17 do not specifically address the allocation of losses to non-controlling interests, in April 2010 we reached a judgment that it was appropriate in our circumstances to
present the equity interests in the NCSLT Trusts as non-controlling interests in our balance sheets, as a separate component of stockholders equity, and to allocate the net losses generated by the NCSLT Trusts to non-controlling
interests in our statements of operations. The net losses of the NCSLT Trusts did not, therefore, directly impact the net loss, loss per share or equity available to First Marbleheads stockholders.

On May 9, 2011, KPMG LLP reported to our board of directors and audit committee that our allocations to non-controlling interests were not consistent
with GAAP. As a result, we restated the unaudited financial statements contained in the Original Q1 and the Original Q2, to eliminate the allocation of losses generated by the NCSLT Trusts to non-controlling interests in our consolidated
statements of operations. Our restated financial results included the losses generated by the NCSLT Trusts in our net losses and net losses per share for the three and six months ended September 30, 2010 and December 31, 2010, respectively, and
our consolidated deficit as of September 30, 2010 and December 31, 2010. Our restated consolidated balance sheets as of September 30, 2010 and December 31, 2010 now reflect in accumulated deficit, rather than as a separate component of
stockholders equity, the deficit generated by the NCSLT Trusts, although we have no obligation to fund such deficit.

Management has
evaluated whether this matter resulted from a deficiency in internal control over financial reporting and has concluded that it did not. The primary factors considered in making this determination were that the accounting for this matter is highly
complex and involves interpretation and application of new and highly technical accounting standards, and that the Company developed and executed a comprehensive implementation plan (including developing an adequate level of knowledge in the subject
matter, communicating with the audit committee of the board of directors and consulting with subject matter experts as appropriate). In managements view, First Marblehead took reasonable steps to implement the new accounting standards, and the
fact that our initial judgment regarding the appropriate presentation of the consolidation of the NCSLT Trusts was subsequently determined not to be consistent with the new standard does not indicate that our controls surrounding the accounting for
the NCSLT Trusts were deficient.

Management has discussed these matters, and its conclusion, with the audit committee of our board of
directors and KPMG LLP, our independent registered public accounting firm.

Changes to Internal Control and Remediation Plan for the
Significant Deficiency

We have implemented remediation efforts to address the significant deficiency in our control over financial
reporting as of March 31, 2011 with regard to deferred tax assets. We are in the process of strengthening and enhancing the reviews of our determination of the deferred tax asset valuation allowance. We have also appointed a new Chief Accounting
Officer, who will have responsibility for, among other things, internal control over income tax accounting.

Other than as described above,
there have not been any other changes in our internal control over financial reporting during the three months ended March 31, 2011, which materially affected, or are reasonably likely to materially affect our internal control over financial
reporting.



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FINANCIAL STATEMENTS

THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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



|                                                                |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|--------------------------------------------------------------- |  | --------------------------- | ------- | - | -------------------------- | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                |  | Three months endedMarch 31, |         |   | Nine months endedMarch 31, |  
|                                                                |  | 2011                        |         |   | 2010                       |   |         | 2011 |  |   | 2010     |  
|Revenues:                                                       |  |                             |         |  
|Net interest income:                                            |  |                             |         |  
|Interest income                                                 |  | $                           | 79,889  |   |                            | $ | 4,382   |      |  | $ | 252,853  |   |  | $ | 18,318   |  
|Interest expense                                                |  |                             | (15,087 | ) |                            |   | (3,726  | )    |  |   | (49,797  | ) |  |   | (11,721  | )
|                                                                |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Net interest income                                             |  |                             | 64,802  |   |                            |   | 656     |      |  |   | 203,056  |   |  |   | 6,597    |  
|Provision for loan losses                                       |  |                             | (73,755 | ) |                            |   | (152    | )    |  |   | (305,956 | ) |  |   | (105     | )
|                                                                |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Net interest income (loss) after provision for loan losses      |  |                             | (8,953  | ) |                            |   | 504     |      |  |   | (102,900 | ) |  |   | 6,492    |  
|Non-interest revenues:                                          |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Asset servicing fees:                                           |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Fee income                                                      |  |                             | 170     |   |                            |   | 2,133   |      |  |   | 1,929    |   |  |   | 6,012    |  
|Fee updates                                                     |  |                             | (5,129  | ) |                            |   | (2,635  | )    |  |   | (6,165   | ) |  |   | (2,272   | )
|                                                                |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Total asset servicing fees                                      |  |                             | (4,959  | ) |                            |   | (502    | )    |  |   | (4,236   | ) |  |   | 3,740    |  
|Additional structural advisory fees and residualstrust updates |  |                             | 233     |   |                            |   | (21,531 | )    |  |   | (102     | ) |  |   | (18,613  | )
|Administrative and other fees                                   |  |                             | 10,864  |   |                            |   | 4,561   |      |  |   | 15,114   |   |  |   | 15,090   |  
|                                                                |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Total non-interest revenues                                     |  |                             | 6,138   |   |                            |   | (17,472 | )    |  |   | 10,776   |   |  |   | 217      |  
|                                                                |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Total revenues                                                  |  |                             | (2,815  | ) |                            |   | (16,968 | )    |  |   | (92,124  | ) |  |   | 6,709    |  
|Non-interest expenses:                                          |  |                             |         |  
|Compensation and benefits                                       |  |                             | 11,615  |   |                            |   | 8,594   |      |  |   | 27,640   |   |  |   | 24,937   |  
|General and administrative expenses                             |  |                             | 24,996  |   |                            |   | 15,086  |      |  |   | 66,709   |   |  |   | 45,627   |  
|Losses on education loans held for sale                         |  |                             |        |   |                            |   | 4,180   |      |  |   |         |   |  |   | 138,794  |  
|                                                                |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Total non-interest expenses                                     |  |                             | 36,611  |   |                            |   | 27,860  |      |  |   | 94,349   |   |  |   | 209,358  |  
|                                                                |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Loss before other income and income taxes                       |  |                             | (39,426 | ) |                            |   | (44,828 | )    |  |   | (186,473 | ) |  |   | (202,649 | )
|Other income  gain from TERI settlement                        |  |                             | 18      |   |                            |   |        |      |  |   | 50,699   |   |  |   |         |  
|                                                                |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Loss before income taxes                                        |  |                             | (39,408 | ) |                            |   | (44,828 | )    |  |   | (135,774 | ) |  |   | (202,649 | )
|Income tax expense (benefit)                                    |  |                             | (82     | ) |                            |   | (4,345  | )    |  |   | 1,957    |   |  |   | (27,367  | )
|                                                                |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Net loss                                                        |  | $                           | (39,326 | ) |                            | $ | (40,483 | )    |  | $ | (137,731 | ) |  | $ | (175,282 | )
|                                                                |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|                                                                | 
|Net loss per share:                                             |  |                             |         |  
|Basic                                                           |  | $                           | (0.39   | ) |                            | $ | (0.41   | )    |  | $ | (1.37    | ) |  | $ | (1.77    | )
|Diluted                                                         |  |                             | (0.39   | ) |                            |   | (0.41   | )    |  |   | (1.37    | ) |  |   | (1.77    | )
|                                                                |  |                             |         |  
|Weighted average shares outstanding:                            |  |                             |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Basic                                                           |  |                             | 100,834 |   |                            |   | 99,248  |      |  |   | 100,809  |   |  |   | 99,232   |  
|Diluted                                                         |  |                             | 100,834 |   |                            |   | 99,248  |      |  |   | 100,809  |   |  |   | 99,232   |  

See accompanying notes
to unaudited consolidated financial statements.



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THE FIRST MARBLEHEAD CORPORATION AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

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



|                                                                                                                                                                                                |  |                |            |   |               |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | ------------- | - | -------- | -
|                                                                                                                                                                                                |  | March 31, 2011 |            |   | June 30, 2010 |  
|ASSETS                                                                                                                                                                                          |  |                |            |   |               |   |          |  
|Cash and cash equivalents                                                                                                                                                                       |  | $              | 226,709    |   |               | $ | 329,047  |  
|Short-term investments and federal funds sold, at cost                                                                                                                                          |  |                | 52,000     |   |               |   | 52,000   |  
|Restricted cash and guaranteed investment contracts, at cost                                                                                                                                    |  |                | 227,012    |   |               |   | 1,026    |  
|Investments available for sale, at fair value                                                                                                                                                   |  |                | 3,559      |   |               |   | 4,471    |  
|Education loans held for sale, at lower of cost or fair value                                                                                                                                   |  |                |           |   |               |   | 105,082  |  
|Education loans held to maturity, net of allowance of $447,940 and $24,804                                                                                                                      |  |                | 7,134,944  |   |               |   | 391      |  
|Mortgage loans held to maturity, net of allowance of $612 and $367                                                                                                                              |  |                | 6,915      |   |               |   | 8,118    |  
|Interest receivable                                                                                                                                                                             |  |                | 73,570     |   |               |   | 2,457    |  
|Deposits for participation interest accounts, at fair value                                                                                                                                     |  |                | 8,505      |   |               |   |         |  
|Service revenue receivables, at fair value                                                                                                                                                      |  |                | 9,789      |   |               |   | 53,279   |  
|Income taxes receivable                                                                                                                                                                         |  |                |           |   |               |   | 7,665    |  
|Goodwill                                                                                                                                                                                        |  |                | 22,170     |   |               |   |         |  
|Intangible assets, net of accumulated amortization                                                                                                                                              |  |                | 27,820     |   |               |   | 1,194    |  
|Other assets                                                                                                                                                                                    |  |                | 46,189     |   |               |   | 16,830   |  
|                                                                                                                                                                                                |  |                |            |   |               |   |          |  
|Total assets                                                                                                                                                                                    |  | $              | 7,839,182  |   |               | $ | 581,560  |  
|                                                                                                                                                                                                |  |                |            |   |               |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                  |  |                |            |   |               |   |          |  
|Liabilities:                                                                                                                                                                                    |  |                |            |   |               |   |          |  
|Deposits                                                                                                                                                                                        |  | $              | 57,258     |   |               | $ | 108,732  |  
|Restricted funds due to clients                                                                                                                                                                 |  |                | 94,698     |   |               |   |         |  
|Accounts payable, accrued expenses and other liabilities                                                                                                                                        |  |                | 32,925     |   |               |   | 36,764   |  
|Income taxes payable                                                                                                                                                                            |  |                | 40,336     |   |               |   |         |  
|Net deferred tax liability                                                                                                                                                                      |  |                | 876        |   |               |   | 753      |  
|Education loan warehouse facility                                                                                                                                                               |  |                |           |   |               |   | 218,059  |  
|Long-term borrowings                                                                                                                                                                            |  |                | 8,410,811  |   |               |   |         |  
|                                                                                                                                                                                                |  |                |            |   |               |   |          |  
|Total liabilities                                                                                                                                                                               |  |                | 8,636,904  |   |               |   | 364,308  |  
|Commitments and contingencies                                                                                                                                                                   |  |                |            |   |               |   |          |  
|Stockholders equity:                                                                                                                                                                           |  |                |            |   |               |   |          |  
|Preferred stock, par value $0.01 per share; 20,000 shares authorized; 133 shares issued and outstanding                                                                                         |  |                | 1          |   |               |   | 1        |  
|Common stock, par value $0.01 per share; 250,000 shares authorized; 109,094 and 108,975 shares issued; 100,839 and 100,736 shares
outstanding                                                   |  |                | 1,091      |   |               |   | 1,090    |  
|Additional paid-in capital                                                                                                                                                                      |  |                | 446,262    |   |               |   | 443,290  |  
|Accumulated deficit                                                                                                                                                                             |  |                | (1,059,025 | ) |               |   | (41,174  | )
|Treasury stock, 8,255 and 8,239 shares held, at cost                                                                                                                                            |  |                | (186,254   | ) |               |   | (186,218 | )
|Accumulated other comprehensive income                                                                                                                                                          |  |                | 203        |   |               |   | 263      |  
|                                                                                                                                                                                                |  |                |            |   |               |   |          |  
|Total stockholders equity (deficit)                                                                                                                                                            |  |                | (797,722   | ) |               |   | 217,252  |  
|                                                                                                                                                                                                |  |                |            |   |               |   |          |  
|Total liabilities and stockholders equity (deficit)                                                                                                                                            |  | $              | 7,839,182  |   |               | $ | 581,560  |  
|                                                                                                                                                                                                |  |                |            |   |               |   |          |  
|Supplemental InformationAssets and liabilities of consolidated variable interest entities (VIEs) included in the
consolidated balance sheet above, after elimination of intercompany balances. |  |                |            |   |               |   |          |  
|Assets available to settle obligations of consolidated VIEs:                                                                                                                                    |  |                |            |   |               |   |          |  
|Restricted cash and guaranteed investment contracts, at cost                                                                                                                                    |  | $              | 129,576    |   |               | $ |         |  
|Education loans held to maturity, net of allowance of $446,367                                                                                                                                  |  |                | 7,134,944  |   |               |   |         |  
|Interest receivable                                                                                                                                                                             |  |                | 73,502     |   |               |   |         |  
|Other assets                                                                                                                                                                                    |  |                | 32,766     |   |               |   |         |  
|                                                                                                                                                                                                |  |                |            |   |               |   |          |  
|Total assets                                                                                                                                                                                    |  | $              | 7,370,788  |   |               | $ |         |  
|                                                                                                                                                                                                |  |                |            |   |               |   |          |  
|Liabilities to third parties of consolidated VIEs, for which creditors do not have recourse to the general credit of First
Marblehead:                                                          |  |                |            |   |               |   |          |  
|Accounts payable, accrued expenses and other liabilities                                                                                                                                        |  | $              | 11,422     |   |               | $ |         |  
|Long-term borrowings                                                                                                                                                                            |  |                | 8,410,811  |   |               |   |         |  
|                                                                                                                                                                                                |  |                |            |   |               |   |          |  
|Total liabilities                                                                                                                                                                               |  | $              | 8,422,233  |   |               | $ |         |  
|                                                                                                                                                                                                |  |                |            |   |               |   |          |  

See accompanying notes to unaudited consolidated financial statements.



35



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##### Table of Contents

THE FIRST MARBLEHEAD CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(unaudited)

(dollars and shares in thousands)



|                                                                  |  |                            |     |  |              |   |   |             |  |  |                  |  |  |                  |       |  |               |  |        |               |  |   |          |   |  |        |         |   |                  |   |            |   |  |   |     |   |  |   |          |  
|----------------------------------------------------------------- |  | -------------------------- | --- |  | ------------ | - | - | ----------- |  |  | ---------------- |  |  | ---------------- | ----- |  | ------------- |  | ------ | ------------- |  | - | -------- | - |  | ------ | ------- | - | ---------------- | - | ---------- | - |  | - | --- | - |  | - | -------- | -
|                                                                  |  | Non-voting                 |     |  |              |   |   |             |  |  |                  |  |  |                  |       |  |               |  |        |               |  |   |          |   |  |        |        
|                                                                  |  | convertiblepreferred stock |     |  | Common stock |   |   | Additional  |  |  | RetainedEarnings |  |  | Accumulatedother |       |  | Total         | 
|                                                                  |  | issued                     |     |  | Issued       |   |   | In treasury |  |  | paid-in          |  |  | (accumulated     |       |  | comprehensive |  |        | stockholders | 
|                                                                  |  | Shares                     |     |  | Amount       |   |   | Shares      |  |  | Amount           |  |  | Shares           |       |  | Amount        |  |        | capital       |  |   | deficit) |   |  | income |         |   | equity (deficit) |  
|Balance at June 30, 2009                                          |  |                            | 133 |  |              | $ | 1 |             |  |  | 106,768          |  |  | $                | 1,068 |  |               |  | (7,643 | )             |  | $ | (184,246 | ) |  | $      | 431,461 |   |                  | $ | 129,727    |   |  | $ | 268 |   |  | $ | 378,279  |  
|Comprehensive loss:                                               |  |                            |     |  |              |   |   |             |  |  |                  |  |  |                  |       |  |               |  |        |               |  |   |          |   |  |        |         |   |                  |   |            |   |  |   |     |   |  |   |          |  
|Net loss                                                          |  |                            |    |  |              |   |  |             |  |  |                 |  |  |                  |      |  |               |  |       |               |  |   |         |   |  |        |        |   |                  |   | (175,282   | ) |  |   |    |   |  |   | (175,282 | )
|Accumulated other comprehensive loss                              |  |                            |    |  |              |   |  |             |  |  |                 |  |  |                  |      |  |               |  |       |               |  |   |         |   |  |        |        |   |                  |   |           |   |  |   | (20 | ) |  |   | (20      | )
|                                                                  |  |                            |     |  |              |   |   |             |  |  |                  |  |  |                  |       |  |               |  |        |               |  |   |          |   |  |        |         |   |                  |   |            |   |  |   |     |   |  |   |          |  
|Total comprehensive loss                                          |  |                            |    |  |              |   |  |             |  |  |                 |  |  |                  |      |  |               |  |       |               |  |   |         |   |  |        |        |   |                  |   | (175,282   | ) |  |   | (20 | ) |  |   | (175,302 | )
|Stock issuance from vesting of stock units                        |  |                            |    |  |              |   |  |             |  |  | 123              |  |  |                  | 1     |  |               |  |       |               |  |   |         |   |  |        | (1      | ) |                  |   |           |   |  |   |    |   |  |   |         |  
|Stock-based compensation                                          |  |                            |    |  |              |   |  |             |  |  |                 |  |  |                  |      |  |               |  |       |               |  |   |         |   |  |        | 4,531   |   |                  |   |           |   |  |   |    |   |  |   | 4,531    |  
|Tax expense from stock-based compensation                         |  |                            |    |  |              |   |  |             |  |  |                 |  |  |                  |      |  |               |  |       |               |  |   |         |   |  |        | (830    | ) |                  |   |           |   |  |   |    |   |  |   | (830     | )
|                                                                  |  |                            |     |  |              |   |   |             |  |  |                  |  |  |                  |       |  |               |  |        |               |  |   |          |   |  |        |         |   |                  |   |            |   |  |   |     |   |  |   |          |  
|Balance at March 31, 2010                                         |  |                            | 133 |  |              | $ | 1 |             |  |  | 106,891          |  |  | $                | 1,069 |  |               |  | (7,643 | )             |  | $ | (184,246 | ) |  | $      | 435,161 |   |                  | $ | (45,555    | ) |  | $ | 248 |   |  | $ | 206,678  |  
|                                                                  |  |                            |     |  |              |   |   |             |  |  |                  |  |  |                  |       |  |               |  |        |               |  |   |          |   |  |        |         |   |                  |   |            |   |  |   |     |   |  |   |          |  
|                                                                  |  |                            |     |  |              |   |   |             |  | 
|Balance at June 30, 2010                                          |  |                            | 133 |  |              | $ | 1 |             |  |  | 108,975          |  |  | $                | 1,090 |  |               |  | (8,239 | )             |  | $ | (186,218 | ) |  | $      | 443,290 |   |                  | $ | (41,174    | ) |  | $ | 263 |   |  | $ | 217,252  |  
|Cumulative effect of a change in accounting principle, net of tax |  |                            |    |  |              |   |  |             |  |  |                 |  |  |                  |      |  |               |  |       |               |  |   |         |   |  |        |        |   |                  |   | (880,120   | ) |  |   |    |   |  |   | (880,120 | )
|Comprehensive loss:                                               |  |                            |     |  |              |   |   |             |  |  |                  |  |  |                  |       |  |               |  |        |               |  |   |          |   |  |        |         |   |                  |   |            |   |  |   |     |   |  |   |          |  
|Net loss                                                          |  |                            |    |  |              |   |  |             |  |  |                 |  |  |                  |      |  |               |  |       |               |  |   |         |   |  |        |        |   |                  |   | (137,731   | ) |  |   |    |   |  |   | (137,731 | )
|Accumulated other comprehensive loss                              |  |                            |    |  |              |   |  |             |  |  |                 |  |  |                  |      |  |               |  |       |               |  |   |         |   |  |        |        |   |                  |   |           |   |  |   | (60 | ) |  |   | (60      | )
|                                                                  |  |                            |     |  |              |   |   |             |  |  |                  |  |  |                  |       |  |               |  |        |               |  |   |          |   |  |        |         |   |                  |   |            |   |  |   |     |   |  |   |          |  
|Total comprehensive loss                                          |  |                            |    |  |              |   |  |             |  |  |                 |  |  |                  |      |  |               |  |       |               |  |   |         |   |  |        |        |   |                  |   | (137,731   | ) |  |   | (60 | ) |  |   | (137,791 | )
|Net stock issuance from vesting of stock units                    |  |                            |    |  |              |   |  |             |  |  | 119              |  |  |                  | 1     |  |               |  | (16    | )             |  |   | (36      | ) |  |        | (1      | ) |                  |   |           |   |  |   |    |   |  |   | (36      | )
|Stock-based compensation                                          |  |                            |    |  |              |   |  |             |  |  |                 |  |  |                  |      |  |               |  |       |               |  |   |         |   |  |        | 3,526   |   |                  |   |           |   |  |   |    |   |  |   | 3,526    |  
|Tax expense from stock-based compensation                         |  |                            |    |  |              |   |  |             |  |  |                 |  |  |                  |      |  |               |  |       |               |  |   |         |   |  |        | (553    | ) |                  |   |           |   |  |   |    |   |  |   | (553     | )
|                                                                  |  |                            |     |  |              |   |   |             |  |  |                  |  |  |                  |       |  |               |  |        |               |  |   |          |   |  |        |         |   |                  |   |            |   |  |   |     |   |  |   |          |  
|Balance at March 31, 2011                                         |  |                            | 133 |  |              | $ | 1 |             |  |  | 109,094          |  |  | $                | 1,091 |  |               |  | (8,255 | )             |  | $ | (186,254 | ) |  | $      | 446,262 |   |                  | $ | (1,059,025 | ) |  | $ | 203 |   |  | $ | (797,722 | )
|                                                                  |  |                            |     |  |              |   |   |             |  |  |                  |  |  |                  |       |  |               |  |        |               |  |   |          |   |  |        |         |   |                  |   |            |   |  |   |     |   |  |   |          |  

See accompanying notes to unaudited consolidated financial statements.



36



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##### Table of Contents

THE FIRST MARBLEHEAD CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)



|                                                                                                               |  |                             |          |   |      |   |          |  
|-------------------------------------------------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                               |  | Nine months ended March 31, |         
|                                                                                                               |  | 2011                        |          |   | 2010 |  
|Cash flows from operating activities:                                                                          |  |                             |          |   |      |   |          |  
|Net loss                                                                                                       |  | $                           | (137,731 | ) |      | $ | (175,282 | )
|Adjustments to reconcile net loss to net cash provided by operating activities, net of effects of acquisition: |  |                             |          |   |      |   |          |  
|Provision for loan losses                                                                                      |  |                             | 305,956  |   |      |   | 105      |  
|Amortization of long-term borrowings, net of issuance costs                                                    |  |                             | (64,013  | ) |      |   |         |  
|Net amortization of loan acquisition costs and origination fees                                                |  |                             | 23,755   |   |      |   |         |  
|Non-cash gain from TERI settlement                                                                             |  |                             | (16,774  | ) |      |   |         |  
|Depreciation and amortization expense                                                                          |  |                             | 6,573    |   |      |   | 10,648   |  
|Deferred income tax expense (benefit)                                                                          |  |                             | (601     | ) |      |   | 89       |  
|Stock-based compensation                                                                                       |  |                             | 3,526    |   |      |   | 4,531    |  
|Losses on education loans                                                                                      |  |                             |         |   |      |   | 138,794  |  
|Proceeds from the sale of education loans held for sale                                                        |  |                             |         |   |      |   | 121,585  |  
|Service revenue receivable distributions                                                                       |  |                             | 460      |   |      |   | 429      |  
|TERI pledged account distributions                                                                             |  |                             | 136,446  |   |      |   |         |  
|Other non-cash losses                                                                                          |  |                             | 60       |   |      |   | 102      |  
|Change in assets/liabilities:                                                                                  |  |                             |          |  
|Asset servicing fees                                                                                           |  |                             | 4,236    |   |      |   | (3,740   | )
|Additional structural advisory fees and residualstrust updates                                                |  |                             | 102      |   |      |   | 18,613   |  
|Deposits for participation interest accounts                                                                   |  |                             | (8,505   | ) |      |   |         |  
|Education loans held for sale                                                                                  |  |                             |         |   |      |   | (12,612  | )
|Interest receivable                                                                                            |  |                             | (86,007  | ) |      |   | 3,650    |  
|Income taxes                                                                                                   |  |                             | 48,001   |   |      |   | 162,587  |  
|Other assets                                                                                                   |  |                             | 185      |   |      |   | 1,934    |  
|Accounts payable, accrued expenses and other liabilities                                                       |  |                             | (2,889   | ) |      |   | 9,712    |  
|                                                                                                               |  |                             |          |   |      |   |          |  
|Net cash provided by operating activities                                                                      |  |                             | 212,780  |   |      |   | 281,145  |  
|Cash flows from investing activities, net of effects of acquisition:                                           |  |                             |          |   |      |   |          |  
|Net cash paid for acquisition                                                                                  |  |                             | (46,959  | ) |      |   |         |  
|Net decrease in federal funds sold                                                                             |  |                             |         |   |      |   | 12,323   |  
|Purchases of short-term investments                                                                            |  |                             |         |   |      |   | (50,000  | )
|Principal receipts from education loans held to maturity                                                       |  |                             | 252,241  |   |      |   | 119      |  
|Net decrease in restricted cash and guaranteed investment contracts                                            |  |                             | 96,489   |   |      |   |         |  
|Net decrease in restricted funds due to clients                                                                |  |                             | (52,291  | ) |      |   |         |  
|Principal prepayments from investments available for sale                                                      |  |                             | 852      |   |      |   | 2,677    |  
|Net change in mortgage loans held to maturity                                                                  |  |                             | 926      |   |      |   | 751      |  
|Purchases of property and equipment                                                                            |  |                             | (2,523   | ) |      |   | (720     | )
|                                                                                                               |  |                             |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                                                            |  |                             | 248,735  |   |      |   | (34,850  | )
|Cash flows from financing activities, net of effects of acquisition:                                           |  |                             |          |  
|Net decrease in deposits                                                                                       |  |                             | (51,474  | ) |      |   | (27,107  | )
|Payments on capital lease obligations                                                                          |  |                             | (1,396   | ) |      |   | (2,622   | )
|Payments on long-term borrowings                                                                               |  |                             | (510,394 | ) |      |   |         |  
|Payments on education loan warehouse facility                                                                  |  |                             |         |   |      |   | (2,243   | )
|Tax expense from stock-based compensation                                                                      |  |                             | (553     | ) |      |   | (830     | )
|Repurchase of common stock                                                                                     |  |                             | (36      | ) |      |   |         |  
|                                                                                                               |  |                             |          |   |      |   |          |  
|Net cash used in financing activities                                                                          |  |                             | (563,853 | ) |      |   | (32,802  | )
|                                                                                                               |  |                             |          |   |      |   |          |  
|Net (decrease) increase in cash and cash equivalents                                                           |  |                             | (102,338 | ) |      |   | 213,493  |  
|Cash and cash equivalents, beginning of period                                                                 |  |                             | 329,047  |   |      |   | 158,770  |  
|                                                                                                               |  |                             |          |   |      |   |          |  
|Cash and cash equivalents, end of period                                                                       |  | $                           | 226,709  |   |      | $ | 372,263  |  
|                                                                                                               |  |                             |          |   |      |   |          |  
|                                                                                                               |  |                            
|Supplemental disclosures of cash flow information:                                                             |  |                             |          |   |      |   |          |  
|Interest paid                                                                                                  |  | $                           | 112,399  |   |      | $ | 6,387    |  
|Income taxes paid                                                                                              |  |                             | 177      |   |      |   | 109      |  
|                                                                                                               |  |                            
|Supplemental disclosure of non-cash investing and financing activities:                                        |  |                             |          |   |      |   |          |  
|Interest receivable capitalized to loan principal                                                              |  | $                           | 115,410  |   |      | $ |         |  
|Extinguishment of TERI note payable                                                                            |  |                             | 3,101    |   |      |   |         |  
|Reclassification of education loan principal from held for sale to held to maturity                            |  |                             |         |   |      |   | 785      |  

See accompanying notes
to unaudited consolidated financial statements.



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##### Table of Contents

THE FIRST MARBLEHEAD CORPORATION AND
SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) Nature of Business

Overview

Unless otherwise
indicated, or unless the context of the discussion requires otherwise, all references in these notes to we, us, our or similar references mean The First Marblehead Corporation and its subsidiaries and consolidated
variable interest entities (VIEs) on a consolidated basis. All references in these notes to First Marblehead or FMD mean The First Marblehead Corporation on a stand-alone basis.

The presentation of our financial results beginning in fiscal 2011 significantly differs from prior fiscal years due to our adoption, effective
July 1, 2010, of Accounting Standards Update (ASU) 2009-16, Transfers and Servicing (Topic 860)Accounting for Transfers of Financial Assets (ASU 2009-16), and ASU 2009-17, Consolidation (Topic 810)Improvements to Financial
Reporting by Enterprises Involved With Variable Interest Entities (ASU 2009-17). Effective July 1, 2010, we consolidated 14 securitization trusts that we facilitated and previously accounted for off-balance sheet, and we deconsolidated our
indirect subsidiary UFSB Private Loan SPV, LLC (UFSB-SPV). As a result, in fiscal 2011, we began reporting two lines of business for segment reporting purposes. Our determination of the activities that constitute a segment is based on the
manner in which our chief operating decision makers measure profits or losses, assess performance and allocate resources.

The financial
results of FMD and its subsidiaries that we historically reported in our consolidated results prior to July 1, 2010, with the exception of the deconsolidation of UFSB-SPV, are referred to as Education Financing throughout these
notes and for segment reporting purposes. The financial results of our Education Financing segment have generally been derived from our services relating to private education loans (education loans) and after January 1, 2011, tuition billing
and collections services. On December 31, 2010, we completed our acquisition of Tuition Management Systems LLC (TMS), formerly a division of KeyBank National Association (KeyBank). We purchased the assets, net of assumed liabilities, systems,
trademarks and employees of TMS for $47.0 million in cash. In addition, we may be entitled to a payment of up to $1.3 million from KeyBank based on certain performance metrics of TMS through July 1, 2011. See Note 5, Acquisition of
TMS, for additional information.

The VIEs consolidated upon our adoption of ASU 2009-16 and ASU 2009-17 at July 1, 2010
consist of 14 securitization trusts that purchased portfolios of education loans facilitated by us during our fiscal years 2004 through 2007, although not all securitization trusts facilitated by us during that period were consolidated. See
Note 2, Summary of Significant Accounting PoliciesConsolidation, for a discussion of the basis on which certain securitization trusts are consolidated. The securitization trusts financed purchases of education loans by issuing debt
to third-party investors. The education loans purchased by certain of these securitization trusts (Trusts) were initially subject to a default repayment guaranty by The Education Resources Institute, Inc. (TERI), while the education loans
purchased by other securitization trusts (NCT Trusts) were, with limited exceptions, not TERI-guaranteed. Of the 14 consolidated securitization trusts, 11 are Trusts and three are NCT Trusts. We refer to the consolidated Trusts as NCSLT Trusts, and
the consolidated NCT Trusts as the GATE Trusts, throughout this quarterly report. We present the financial results of the 14 consolidated securitization trusts as a single segment, referred to as Securitization Trusts throughout these
notes and for segment reporting purposes. The administration of these trusts, including investor reporting and default prevention and collection management services, is provided by our Education Financing segment.

We made our determination of entities to consolidate at July 1, 2010 using assumptions about the expected financial performance of VIEs and our
variable interests in them at that date. ASU 2009-17 requires us to continuously reassess whether consolidation of VIEs is appropriate. As a result, we may be required to consolidate or deconsolidate VIEs in future periods. Changes in our
determinations of which VIEs to consolidate may lead to increased volatility in our financial results and make comparisons of results between time periods challenging.

See Note 2, Summary of Significant Accounting PoliciesConsolidation, and Note 4, Consolidation, for additional information.

Education Financing

In our Education Financing segment, we offer outsourcing services to national and regional financial and educational institutions for designing and implementing education loan programs. These
school-certified loan programs are designed to be marketed through educational institutions or to prospective student borrowers and their families directly and to generate portfolios intended to be held by the originating lender or financed in the
capital markets. Starting in fiscal 2011, we began offering a fully integrated suite of services through our
Monogram® loan product service platform (Monogram platform), as well as certain services on a stand-alone,
fee-for-service basis. In addition, we provide administrative and other services to securitization trusts that we facilitated and asset servicing to the third-party owner of the trust certificate (Trust Certificate) of NC Residuals Owners Trust. NC
Residuals Owners Trust held our residual interests in the Trusts, and we sold the Trust Certificate in fiscal 2009.



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##### Table of Contents

As of January 1, 2011, we provide outsourced tuition planning, tuition billing and payment technology
services for universities, colleges and secondary schools through TMS. TMS is one of the largest U.S. providers of such services, operating in 47 states and serving over 1,100 schools. TMS provides students and their families with the opportunity to
structure tuition payment plans that meet their financial needs while providing a broad array of tuition payment options. See Note 5, Acquisition of TMS, for information on the pro forma financial results of our operations
including TMS as if the acquisition had occurred on July 1, 2009.

Historically, the driver of our results of operations and financial
condition for our Education Financing segment was the volume of education loans for which we provided outsourcing services from loan origination through securitization. Securitization refers to the technique of pooling education loans and selling
them to a special purpose entity, typically a trust, which issues notes backed by those loans to investors. For our past securitization services, we are entitled over time to receive additional structural advisory fees and residual cash flows from
certain securitization trusts.

We also include in our Education Financing segment the financial results of our bank subsidiary, Union Federal
Savings Bank (Union Federal). Union Federal is a federally-chartered thrift regulated by the U.S. Office of Thrift Supervision (OTS) that offers residential and commercial mortgage loans and retail savings, money market and time deposit products. As
a result of our ownership of Union Federal, we are a savings and loan holding company subject to regulation, supervision and examination by the OTS.

Securitization Trusts

Our results of operations for our Securitization Trusts
segment includes the 14 securitization trusts consolidated upon our adoption of ASU 2009-16 and ASU 2009-17 as of July 1, 2010. Financial results for our Securitization Trusts segment are only presented prospectively, as of the effective date
of our adoption. Interest income is generated on the education loan portfolios held by the securitization trusts included in our Securitization Trusts segment, and interest expense relates to the debt issued by these trusts to finance the purchase
of education loans. General and administrative expenses include amounts paid to our Education Financing segment for additional structural advisory fees, trust administration and default prevention and collections management, as well as collection
costs and trust expenses paid to unrelated third parties.

Consolidated securitization trusts are managed in accordance with their applicable
indentures, as amended, and their tangible assets are limited to cash, allowable investments, and education loan principal, as well as the related interest income receivables and recoverables on defaults. Liabilities are limited to the debt issued
to finance the education loans purchased and payables accrued in the normal course of operations, all of which have been structured to be non-recourse to the general credit of FMD.

The majority of our consolidated securitization trusts are NCSLT Trusts, for which we have no ownership interest. Although the cumulative deficit of these trusts is reflected in our consolidated
accumulated deficit, the financial performance of such trusts will ultimately inure to the third-party owners of the residual interests, and any deficit generated by a consolidated trust will reverse out of our accumulated deficit or retained
earnings, and be recorded as a non-cash gain, when the trusts liabilities are extinguished or the trust is deconsolidated by us. As such, the financial performance of the NCSLT Trusts does not directly impact the long-term equity available to
our stockholders, but the financial performance of all of the Trusts, both on- and off-balance sheet, impacts the ability of our Education Financing segment to recover service revenue receivables due from these trusts and the third-party owner of
the Trust Certificate. The remaining three consolidated securitization trusts are GATE Trusts, for which we own 100% of the residual interests. To the extent that the GATE Trusts have residual cash flows, profits will ultimately be realized by our
stockholders when those residual payments are made; however, if cash flows of these trusts were insufficient to pay off the long-term borrowings and other legal obligations of the trusts, our stockholders would not be responsible for those losses.

The NCSLT Trusts hold education loans that were subject to a loan repayment guaranty by TERI. In addition, one of our consolidated GATE
Trusts holds a limited number of TERI-guaranteed loans. In April 2008, TERI filed a voluntary petition for relief (TERI Reorganization) under Chapter 11 of the United States Bankruptcy Code. Under the Modified Fourth Amended Joint Plan of
Reorganization of The Education Resources Institute, Inc. and the Official Committee of Unsecured Creditors as of August 26, 2010 (Modified Plan of Reorganization), which became effective in the second quarter of fiscal 2011, TERI rejected
its guaranty agreements and settled claims with the securitization trusts, including contingent guaranty claims based on future loan defaults. As a result, our Securitization Trusts segment recognized gains of $42.6 million, as more fully described
in Note 16, Other Income  Gain from TERI Settlement. All but $51 thousand of this gain was applicable to the NCSLT Trusts. The TERI Reorganization, combined with higher levels of defaults than we initially projected, has had a
material adverse effect on the financial condition of our Securitization Trusts segment.



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Eliminations and Deconsolidation

For the three and nine months ended March 31, 2011, the revenues and expenses included in Eliminations for segment reporting purposes relate to revenues earned by our Education Financing
segment, and the related expenses incurred by our Securitization Trusts segment, relating to intercompany life-of-trust fees for securitization structuring and on-going fees for trust administration and default prevention and management, as well as
elimination of the residual interest ownership held by our Education Financing segment in the GATE Trusts.

UFSB-SPV was deconsolidated on
July 1, 2010 with our adoption of ASU 2009-16 and ASU 2009-17. For the three and nine months ended March 31, 2010, the revenues and expenses included in Deconsolidation and Eliminations for segment reporting purposes
represented the financial results of UFSB-SPV, as well as related adjustments to deferred tax assets and intercompany eliminations that were recorded due to consolidation of UFSB-SPV in prior periods, have been separately presented in
Deconsolidation and Eliminations for segment reporting purposes to allow for comparability between periods.

Business
Trends, Uncertainties and Outlook

The following discussion of business trends, uncertainties and outlook is focused on our Education
Financing segment. We have no ownership interest in the NCSLT Trusts as a result of our sale of the Trust Certificate to a third party in fiscal 2009. Although we are required under U.S. generally accepted accounting principles (GAAP) to reflect the
net deficit of the consolidated securitization trusts in our accumulated deficit, and the revenues and expenses of these trusts in our statements of operations and earnings or loss per share, the financial performance of the NCSLT Trusts will
ultimately inure to the third-party owners of the residual interests. Our accumulated deficit as of March 31, 2011 included a deficit of $1.06 billion related to the NCSLT Trusts. Any accumulated deficit generated by a consolidated trust will
reverse out of our accumulated deficit or retained earnings and be recorded as a non-cash gain, when the trusts liabilities are extinguished or the trust is deconsolidated by us. With respect to the NCSLT Trusts, the economic exposure for our
stockholders is limited to the value of our service revenue receivables due from these trusts, which constitute our variable interests, recorded by our Education Financing segment. At March 31, 2011, our Education Financing segment had service
revenue receivables of $15.9 million due from the on- and off-balance sheet Trusts and the third-party owner of the Trust Certificate. With respect to the GATE Trusts, we own 100% of the residual interests. As such, any cumulative profits generated
by the GATE Trusts would ultimately be realized by our stockholders in the form of residual cash flow payments.

As a result of economic
conditions, we undertook a number of measures in fiscal 2010 to adjust our business model. These measures are described in Item 7 of Part II of our annual report filed with the Securities and Exchange Commission on September 2, 2010,
under the heading Executive SummaryBusiness Trends and Uncertainties.

We have summarized below certain recent developments
affecting our Education Financing segment since the beginning of fiscal 2011:



| |  |  | In October 2010, we received a federal tax refund of $45.1 million, which included $21.2 million attributable to Union Federal and
distributed to Union Federal pursuant to our tax sharing agreement. In addition, in October 2010, the OTS approved a cash dividend from Union Federal to FMD of up to $29.0 million, which Union Federal paid to FMD in November 2010.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In October 2010, the United States Bankruptcy Court for the District of Massachusetts (Bankruptcy Court) entered an order confirming the Modified
Plan of Reorganization, which became effective in November 2010, and granted a stipulation (Stipulation) among TERI, the Official Committee of Unsecured Creditors of TERI (Creditors Committee), FMD and its subsidiaries, First Marblehead Education
Resources, Inc. (FMER) and First Marblehead Data Services, Inc. (FMDS), settling certain claims between TERI and FMD, FMER and FMDS. Our Education Financing segment recognized gains of $8.1 million related to the claims of FMD and FMER
during the second quarter of fiscal 2011.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On December 31, 2010, we completed our acquisition of the assets, liabilities and operations of TMS from KeyBank for $47.0 million. Following the
closing of the acquisition, TMS has retained its separate brand identity and operations. See Note 5, Acquisition of TMS, for additional information.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the third quarter of fiscal 2011, we completed our previously announced review of strategic alternatives for Union Federal. After an extensive
analysis of a broad range of alternatives by a special committee of independent directors and FMDs financial and legal advisors, we have decided to retain our ownership of Union Federal at this time. We believe our acquisition of TMS, along
with our desire to implement our own private education loan programs (subject to regulatory constraints) built upon our Monogram platform, creates potential synergies with Union Federal.
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Portfolio Performance. Credit performance of consumer-related loans generally, as well as education
loan portfolios included in our consolidated balance sheet and those held by other VIEs not consolidated by us, have been adversely affected by general economic conditions in the United States, including increased unemployment rates, higher levels
of education loan defaults and lower recoveries on such defaults. While there have been some recent improvements, these conditions have had, and may continue to have, a material adverse effect on legacy loan portfolio performance and the estimated
value of our service revenue receivables associated with the securitization trusts that we have previously facilitated. During the third quarter of fiscal 2011, we completed a review based on accumulation of information associated with the impact of
these conditions on our post-default recovery performance.

Changes in post-default recovery performance often lag behind most of the other
loan performance assumptions due to the fact that over the life-cycle of an education loan, recovery performance data is typically among the last performance data to become available. During the third quarter of fiscal 2010, we retroactively scored
education loans held by the Trusts into three risk segments using our proprietary risk score modeling, origination data and additional credit bureau data made available following origination, with education loans in Segment 1 expected to perform
better than education loans in Segment 2, and education loans in Segment 2 expected to perform better than education loans in Segment 3. We believe we now have sufficient recovery data on education loans having defaulted during the recent stressed
economic environment to suggest a change to our net recovery rate assumption on a segmented basis and are now applying net recovery rates of 36.3% for Segment 1 education loans, 32.1% for Segment 2 education loans and 22.1% for Segment 3 education
loans. See Note 9, Service Revenue Receivables and Related IncomeEducation Loan Performance Assumption Overview, for additional information about the changes.

Capital Markets.We believe that conditions in the capital markets generally continued to improve in fiscal 2011 compared with recent prior years. In particular, investors in asset-backed
securities (ABS) have begun to demonstrate increased interest in ABS backed by private education loans that exhibit a strong credit profile. Additionally, investors have once again begun to demonstrate interest in longer duration ABS in the sector.
As a result, we believe that there may again be an opportunity to finance private education loans in the ABS market. We believe, however, that the structure and economics of any near-term financing transaction would be materially different from
prior transactions that we sponsored. Such differences include, but are not limited to, the potential for lower revenues, additional cash requirements on our part and a higher likelihood that we would be required to consolidate any new
securitization trust in our financial statements. We continue to opportunistically seek efficient portfolio funding strategies, including warehouse lending facilities and term securitization transactions.

Loan Origination.During the first quarter of fiscal 2011, we began performing services under loan program agreements for two clients, each
related to school-certified education loan programs to be funded by these clients based on our Monogram platform. Under the terms of the credit enhancement provisions in the loan program agreements, we may facilitate up to an aggregate of
$275.0 million in education loans over the life of these programs. Our Monogram platform provides us with an opportunity, through our Education Financing segment, to originate, administer, manage and finance education loans, and we believe that
the two loan program agreements we have entered into are a significant step in our return to the education lending marketplace.

The near term
financial performance and future growth of our Education Financing segment depends in large part on our ability to successfully market our Monogram platform and successfully integrate TMS into our operations so that we may transition to more
fee-based revenues, while growing and diversifying our client base. We believe that the size and quality of TMS customer base provides us with an opportunity to expand our school relationships and offer complementary products and services in
the future. While we continue to seek additional lender clients, we are also in the process of developing additional loan programs based on our Monogram platform, which we expect to be offered by Union Federal later this calendar year, subject to
regulatory constraints. We are uncertain as to the degree of market acceptance our Monogram platform will have, particularly in the current economic environment where many lenders continue to evaluate their education lending business models. We are
also uncertain of the volume of education loans to be generated by our two clients during the remainder of fiscal 2011 in light of seasonal trends. The volume of education loan applications typically increases with the approach of tuition payment
due dates, and we have historically processed the greatest application volume during the summer months. This seasonality of education loan originations will likely impact the timing and size of fees that we earn in the remainder of fiscal 2011.

(2) Summary of Significant Accounting Policies

Our accompanying unaudited consolidated financial statements have been prepared in accordance with 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 those related to changes in accounting principles, acquisitions and normal recurring accruals) considered
necessary for a fair statement of the results for the interim periods have been included.

Use of Estimates

The preparation of these consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. We base our estimates,
assumptions and judgments on our historical experience, economic conditions and on various other factors that we believe are reasonable under the



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circumstances. Actual results may differ from these estimates under varying assumptions or conditions. On an ongoing basis, we evaluate our estimates and judgments, particularly as they relate to
accounting policies that we believe are most important to the portrayal of our financial condition and results of operations. Material estimates that are particularly susceptible to change relate to the allowance for loan losses, recognition of
interest income on delinquent and defaulted loans and recognition of asset servicing fees and trust updates to our service revenue receivables. Interim results are not necessarily indicative of results to be expected for the entire fiscal year.

(a) Consolidation

Our consolidated financial statements include the accounts of FMD, its subsidiaries and certain VIEs, as applicable, after eliminating intercompany
accounts and transactions. Prior to July 1, 2010, we did not consolidate the financial results of any securitization trusts purchasing education loans that we facilitated because each securitization trust created after January 31, 2003 met
the criteria to be a qualified special purpose entity (QSPE) as defined by Accounting Standards Codification (ASC) 860-40, Transfers and ServicingTransfers to Qualifying Special Purpose Entities (ASC 860-40). Prior to July 1, 2010,
a QSPE was exempt from consolidation. In addition, the securitization trusts created prior to January 31, 2003 in which we held a variable interest that could have resulted in our being considered the primary beneficiary of such trusts were
amended in order for those trusts to be considered QSPEs and were, therefore, exempt from consolidation.

Effective July 1, 2010, we
adopted ASU 2009-16 and ASU 2009-17. ASU 2009-16 removed the concept of a QSPE from ASC 860-40 and removed the exemption from consolidation for QSPEs from ASC 810, Consolidation (ASC 810). ASU 2009-17 updated ASC 810 to require that
enterprises perform analyses to determine if they are the primary beneficiary of a VIE. A primary beneficiary of a VIE is the enterprise that has both:



| |  |  | The power to direct the activities of a VIE that most significantly impact that VIEs economic performance; and
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | The obligation to absorb losses of the VIE that could potentially be significant to that VIE or the right to receive benefits from the VIE that could
potentially be significant to that VIE.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result, on July 1, 2010, we consolidated 14 securitization trusts
facilitated by us because we determined that our services related to default prevention and collections management, for which we can only be removed for cause, combined with the variability that we absorb as part of our securitization fee structure,
made us the primary beneficiary of those trusts. In addition, we deconsolidated UFSB-SPV because we determined that we do not have the power to direct activities that most significantly impact UFSB-SPVs economic performance.

In addition, ASU 2009-17 requires us to continuously reassess whether consolidation of VIEs is appropriate, as opposed to the trigger-based assessment
allowed under previous guidance. As a result, we continually reassess our involvement with VIEs, both on- and off-balance sheet, and our determination of whether consolidation or deconsolidation of VIEs is appropriate. We monitor matters related to
our ability to control economic performance, such as contractual changes in the services we provide, the extent of our ownership and the rights of third parties to terminate us as a service provider. In addition, we monitor the financial performance
of the VIEs for indications that we may or may not have the right to absorb benefits or the obligation to absorb losses associated with variability in the financial performance of the VIE that could potentially be significant to that VIE. If, for
any reason, we determine that we can no longer be considered the primary beneficiary, we would be required to deconsolidate the VIE. Deconsolidation of a VIE is accounted for in the same manner as the sale of a subsidiary, with a gain or loss
recorded in our statement of operations to the extent that proceeds, if any, are more or less than the net assets of the VIE. Our determination to consolidate or deconsolidate VIEs may lead to increased volatility in our financial results and make
comparisons between time periods challenging.

ASU 2009-17 was applied through a cumulative-effect adjustment to the opening balance of
retained earnings at the effective date. Assets and liabilities of the consolidated VIEs were measured as if they had been consolidated at the time we became the primary beneficiary. All intercompany transactions are eliminated. See Note 4,
Consolidation, for additional information.

(b) Reclassifications

In order to be consistent with the classifications adopted in fiscal 2011, we have made certain reclassifications to the balances as of June 30, 2010
and for the three and nine months ended March 31, 2010.

(c) Cash Equivalents

We consider highly liquid debt instruments purchased with original maturities of three months or less on the date of purchase and investments in money
market funds to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.



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(d) Investments

We classify investments with original maturities greater than three months and remaining maturities of less than one year at the date of purchase as short-term investments and carry such short-term
investments at cost, which approximates fair value.

We classify investments in marketable debt securities as available for sale, trading or
held to maturity. We carry available-for-sale investments at fair value, with net unrealized gains and losses recorded in other comprehensive income, a component of stockholders equity. Trading securities are securities held in anticipation of
short-term market movements, and are carried at fair value with net unrealized gains and losses recorded in our statement of operations. We classify investments as held to maturity when we have both the ability and intent to hold the securities
until maturity. We carry held-to-maturity investments at amortized cost.

(e) Loans

We classify loans as held to maturity when we have both the ability and intent to hold the loans for the foreseeable future. All education loans held by
the securitization trusts that we consolidate are classified as held to maturity, as well as education loans held by a non-bank subsidiary of FMD and substantially all mortgage loans held by Union Federal. We carry loans held to maturity at
amortized cost, less an allowance for loan losses, described more fully below. Amortized cost includes principal outstanding plus net unamortized loan acquisition costs and origination fees, the amortization of which is recognized as an adjustment
of the related loan yield using the effective interest method.

Education loans held for sale at June 30, 2010 consisted solely of the
education loans held by UFSB-SPV, which was deconsolidated as a result of our adoption of ASU 2009-16 and ASU 2009-17, effective July 1, 2010. We classified these education loans as held for sale because they are pledged as collateral to the
indenture trustee, for the benefit of the third-party conduit lender under the education loan warehouse facility, and the lender has the right to call the loans at any time. We carried loans held for sale at the lower of cost or fair value. In the
absence of a readily determinable market value, fair value was estimated by management based on the net present value of expected future cash flows of the loans. Management based its estimates of future cash flows on macroeconomic indicators and
historical experience with assumptions for, among other things, default rates, recovery rates on defaulted loans, prepayment rates and a discount rate commensurate with the risks involved. We recorded changes in the carrying value of education loans
held for sale and the related interest receivable in our statement of operations.

(f) Allowance for Loan Losses, the Related
Provision for Loan Losses and Charge-Offs

We maintain allowances for loan losses at an amount believed to be sufficient to absorb
credit losses inherent in our portfolios of loans held to maturity at our balance sheet date. We adjust allowances for loan losses through charges to the provision for loan losses in our statement of operations. Inherent credit losses include losses
for loans in default that have not been charged-off or foreclosed and loans that have a high probability of default, less any amounts expected to be recoverable from borrowers or third parties, or for mortgage loans, sale of the collateral, as
applicable.

We consider an education loan to be in default when it is 180 days past due as to either principal or interest, based on the
timing of cash receipts from the borrower. We use projected cash flows to determine the allowance amount deemed necessary for education loans with a high probability of default at our balance sheet date. We base such default estimates on a loss
confirmation period of one year, which we believe to be the approximate amount of time that it would take a loss inherent in the education loan portfolios at our balance sheet date to ultimately default and be charged-off. The estimates used in the
calculation of the allowance for education loan losses are subject to a number of assumptions, including default and recovery rates and the effects of basic forbearance and alternative payment plans available to borrowers. These assumptions are the
same as those used for the estimated fair value of our service revenue receivables, as described more fully in Note 9, Service Revenue Receivables and Related IncomeEducation Loan Performance Assumption Overview. These assumptions
are based on the status of education loans at our balance sheet date, as well as macroeconomic indicators and our historical experience. If actual future loan performance were to differ significantly from the assumptions used, the impact on the
allowance for loan losses and the related provision for loan losses for education loans recorded in our statement of operations could be material.

Effective beginning the second quarter of fiscal 2011, we began charging-off education loans in the month immediately subsequent to the month in which they become 180 days past due. During the first
quarter of fiscal 2011, based on the guaranty claims process for TERI-guaranteed loans, we charged-off education loans in the month immediately subsequent to the month in which they became 270 days past due. Following the rejection by TERI of its
guaranty agreements under the Modified Plan of Reorganization, we modified our charge-off policy. Charge-offs are recorded as both a decrease in the outstanding principal of the education loan and a decrease in the allowance for loan losses, and,
therefore, the change in our charge-off policy did not have an impact on our statement of operations. We record cash recoveries on charged-off loans as an increase to the allowance for loan losses.



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We maintain an allowance for mortgage loans held to maturity on a specific-identification basis when the
loan becomes 30 days past due or the borrower makes modified payments. We set the allowance for loan losses at an amount believed to be adequate so that the net carrying value of the mortgage loan does not exceed the net realizable value of the
collateral. In addition, we establish a general allowance for loan losses for mortgage loans with certain characteristics attributable to the collateral. Mortgage loans for which we have foreclosed on the property and the related allowance are
reclassified to other real estate owned, a component of other assets, and are carried at estimated net realizable value.

(g) Deposits for Participation Interest Accounts

We account for deposits for participation interest accounts (participation accounts) similar to trading account assets and carry such deposits at fair value on our balance sheet. We estimate fair value
based on the net present value of cash flows into and out of the account, based on the education loans originated by participating lenders at our balance sheet date. We record changes in estimated fair value, excluding cash funded by us or
distributed out of the participation accounts to us, if any, in non-interest revenues as part of Administrative and other fees. See Note 8, Deposits for Participation Interest Accounts, for additional information.

(h) Service Revenue Receivables

Service revenue receivables consist of our asset servicing fee, additional structural advisory fee and residual receivables, which we carry at fair value in our balance sheet. We eliminate any additional
structural advisory fee and residual receivables due from consolidated securitization trusts.

As required under GAAP, we recognized the fair
value of additional structural advisory fee and residual receivables as revenue at the time the securitization trust purchased the education loans, but before we actually received payment, as these revenues were deemed to be earned at the time of
the securitization. These amounts were deemed earned at securitization because (i) evidence of an arrangement existed, (ii) we provided the services, (iii) the fee was fixed and determinable based upon a discounted cash flow analysis,
and (iv) there were no future contingencies or obligations due on our part. We earn asset servicing fees as the services are performed; however, the receipt of the fees is contingent on distributions from the Trusts available to the third-party
owner of the Trust Certificate.

Payment of these receivables is contingent upon the following:



| |  |  | The receipt of asset servicing fees due from the third-party owner of the Trust Certificate is contingent on residual interest distributions from the
Trusts.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Additional structural advisory fees are paid to us over time, based on the payment priorities established in the applicable indenture for each of the
securitization trusts. We generally become entitled to receive these additional fees, plus interest, if applicable, once the parity ratio of securitization trust assets to securitization trust liabilities reaches a stipulated level, which ranges
from 103.0% to 105.5% for the Trusts, or after all noteholders have been paid in full. The indentures relating to certain of the securitization trusts specify certain circumstances (each a Trigger Event) upon the occurrence of which payments that
would otherwise be due with respect to additional structural advisory fees would instead be directed to the holders of the notes issued by the securitization trusts until the condition causing the Trigger Event ceases to exist or all notes and
related interest are paid in full.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Residuals associated with any securitization trusts that we facilitated are typically junior in priority to the rights of the holders of the ABS issued
in the securitizations and any additional structural advisory fees. For certain securitization trusts, upon a Trigger Event, payments that would otherwise be due with respect to residuals would instead be directed to the holders of the notes issued
by the securitization trusts until the condition causing the Trigger Event ceases to exist or all notes and related interest are paid in full.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the absence of readily determinable market values, we update our estimates of the fair value of service revenue receivables on a quarterly basis, based on the present value of expected future cash
flows. Such estimates include assumptions regarding discount, default, net recovery, prepayment and forward interest rates, among others. 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.



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(i) Goodwill and Intangible Assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the net tangible and other intangible assets acquired. Other
intangible assets represent purchased assets that can be distinguished from goodwill because of contractual rights or because the asset can be exchanged on its own or in combination with a related contract, asset or liability. In connection with our
acquisition of TMS, we recorded other intangible assets related to customer relationships and the TMS tradename, amortized on a straight-line basis over 15 years, and technology, amortized on a straight-line basis over six years. Core deposit
intangible assets of Union Federal are amortized over five years. We record amortization in general and administrative expenses.

Goodwill is
not amortized, but is subject to annual evaluation for impairment or more frequently if indicators of impairment exist. Impairment of goodwill is deemed to exist if the carrying value of a reporting unit, including its allocation of goodwill and
other intangible assets, exceeds its estimated fair value. Impairment of other intangible assets is deemed to exist if the balance of the other intangible assets exceeds the cumulative expected net cash inflows related to the asset over its
remaining estimated useful life. If we determine that goodwill or other intangible assets are impaired based on our periodic reviews, we write down the values of these assets through a charge included in general and administrative expenses.

(j) Fair Value of Financial Instruments

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



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



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



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

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

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

(k) Revenue Recognition

Net Interest Income. We recognize interest income and expense using the effective interest method.

We recognize interest income on education and mortgage loans held to maturity as earned, adjusted for the amortization of loan acquisition costs and
origination fees, based on the expected yield of the loan over its life, which for education loans includes the effect of expected prepayments. Our estimate of the effects of expected prepayments on education loans reflects voluntary prepayments
based on our historical experience and macroeconomic indicators. When changes to assumptions occur, we adjust amortization on a cumulative basis to reflect the change since acquisition of the education loan portfolio.

We place education loans held to maturity on non-accrual status when they become 120 days past due as to either principal or interest, or earlier
when full collection of principal or interest is not considered probable. When we place an education loan on non-accrual status, we discontinue the accrual of interest, and previously recorded but unpaid interest is reversed and charged against
interest



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revenue. For education loans on non-accrual status but not yet charged-off, we recognize interest revenue on a cash basis. If a borrower makes payments sufficient to become current on principal
and interest prior to being charged-off, or cures the education loan delinquency, we remove the loan from non-accrual status and continue to recognize interest revenue. Once a loan has been charged-off, we apply any payments made by the
borrower to outstanding principal, and we only record income on a cash basis when all principal has been recovered.

We place mortgage loans
on non-accrual status when they become 90 days past due as to either principal or interest. Once a loan has been placed on non-accrual status, we do not resume recognition of interest until the borrower has become current on the loan as to both
principal and interest for a consecutive period of 12 months.

We adjust interest expense on long-term borrowings for the amortization of
debt issuance costs and underwriting fees as well as amortization of the proceeds from interest-only strips using an effective yield over the projected life of the related borrowings.

Asset Servicing Fees. We earn asset servicing fees as the services are performed. We record asset servicing fee income at fair value, based on the estimated present value of the fees earned during
the reporting period, and we record changes in the estimated fair value of fees earned in prior periods as asset servicing fee updates.

Asset
servicing fees are based on outstanding assets of the Trusts, and our receipt of such fees is contingent on the performance of the Trusts, a number of which we consolidate. The fees, however, are due from the third-party owner of the Trust
Certificate for services performed on its behalf, and as such, we do not eliminate these fees in consolidation.

Additional Structural
Advisory Fees and ResidualsTrust Updates. We record changes to the fair value of additional structural advisory fee and residual receivables in revenue in our statement of operations. To the extent such fees are due from VIEs that we
consolidate, the changes in fair value have been eliminated in consolidation, but continue to be recognized by our separate reporting segments as revenue or expense, as applicable. We record changes in assumptions used to estimate fair value in our
statement of operations in the periods in which the changes are made.

Administrative and Other Fees. Trust administration fees, which
are based on the volume of education loans outstanding in securitization trusts facilitated by us, are recognized in the period in which the services are rendered. Trust administration includes the daily management of the trusts, coordination of
loan servicers and reporting information to the parties related to the trusts. Master servicing and special servicing fees due from certain trusts represent compensation to us for managing the performance of default prevention services and education
loan collections. Such fees are based, in part, upon the volume of assets under management, and in part, upon the reimbursement of expenses. We recognize such fees as the services are performed or as the reimbursable expenses are incurred, as
applicable.

Effective January 1, 2011, administrative and other fees include revenue generated by TMS, including program enrollment
fees, late fees, convenience fees and tuition billing fees. Program enrollment fees are up-front nonrefundable fees, the recognition of which is deferred and amortized into revenue over the period that services are provided. Late fees and
convenience fees are recognized in the period in which the transactions occur and tuition billing fees are recognized in the period that the services are provided.

In addition, we provide other services on a stand-alone, fee-for-service basis that may be based on the volume of education loans disbursed, number of applications processed or other contractual terms.
Our recognition of such fees is based on these contractual terms. To the extent that trust administration, default prevention and default management services have been provided by our Education Financing segment to our Securitization Trusts segment,
the revenue earned by our Education Financing segment and the expenses incurred by our Securitization Trusts segment have been eliminated in consolidation, but continue to be recognized by each reporting segment on a stand-alone basis.

Beginning in the first quarter of fiscal 2011, we began to receive fees related to our Monogram platform offering. Revenue recognition associated with
our Monogram platform is subject to accounting guidance under ASU 2009-13, Revenue Recognition-Multiple-Deliverable Revenue Arrangements (ASU 2009-13), which is effective prospectively for contracts entered into or materially
modified in fiscal years beginning on or after June 15, 2010. ASU 2009-13 requires that revenue under a contract be allocated to separately-identifiable deliverables based on fair value analysis and prohibits separate recognition for each
element of a contract unless certain criteria are met. We have applied the guidance in ASU 2009-13 to our recognition of revenues related to our Monogram platform.

(l) Income Taxes

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



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We use the asset and liability method of accounting for recognition of deferred income taxes. Under the
asset and liability method, we recognize deferred tax assets and liabilities in connection with the tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carrybacks and carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. We recognize the effect of a change in tax rates on deferred tax assets and liabilities as tax expense (benefit) in the period that includes the enactment date. We establish a deferred tax asset valuation allowance if we consider it more
likely than not that all or a portion of the deferred tax assets will not be realized.

(m) Net Loss Per Share

We compute basic net income or loss per share by dividing net income or loss by the weighted average number of shares of common stock outstanding for the
periods presented. We compute diluted net income or loss per share by dividing net income or loss by weighted average shares and, if dilutive, common stock equivalent shares outstanding during the period. To the extent net income is a loss, we
assume all common stock equivalents to be anti-dilutive, and they are excluded from diluted weighted average shares outstanding. We determine common stock equivalent shares outstanding in accordance with the treasury stock method.

(n) New Accounting Pronouncements

ASU 2010-18, Receivables-Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, is applicable only to loans acquired with a deterioration in
credit quality, and did not have an impact on our financial results.

ASU 2010-20, Receivables-Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses(ASU 2010-20), was effective for interim or annual periods ended on or after December 15, 2010. We have included in our quarterly reports, to the extent applicable, the provisions of
ASU 2010-20, which clarify the disclosure requirements applicable to the credit quality of loans and the allowance for loan losses on a disaggregated, or portfolio segment basis. In January 2011, the Financial Accounting Standards Board issued ASU
2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, which deferred the required disclosures contained in ASU 2010-20 related to troubled debt restructurings, with adoption of
those disclosures to be concurrent with adoption of ASU 2011-02, Receivables (Topic 310): Clarifications to Accounting for Troubled Debt Restructurings by Creditors (ASU 2011-02). ASU 2011-02 was issued in April 2011 and is effective for the
first interim or annual period beginning on or after June 15, 2011, to be applied retrospectively to the beginning of the annual period of adoption. ASU 2011-02 provides additional guidance for determining whether changes made to a loan
constitute a concession by the lender. We are still evaluating the impact, if any, that ASU 2011-02 will have on our financial statements.

ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts(ASU 2010-28), is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. We will adopt ASU 2010-28 during the first quarter of fiscal 2012. We do not expect adoption to have any impact on our financial statements.

ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations(ASU 2010-29), was effective for interim or
annual periods ended on or after December 15, 2010. ASU 2010-29 requires that pro forma information be presented as if the business combination occurred at the beginning of the prior annual reporting period for purposes of calculating
both the current and prior reporting period pro forma financial information. ASU 2010-29 also requires that this disclosure be accompanied by a narrative description of the amount and nature of material non-recurring pro forma
adjustments. We adopted ASU 2010-29 during the second quarter of fiscal 2011 with respect to the pro forma disclosures for the TMS transaction.

We do not expect any other recently issued, but not yet effective, accounting pronouncements to have a material impact on our financial statements.

(3) Corrections of Immaterial Errors in Prior Fiscal Years

We, in conjunction with our independent registered public accounting firm, identified certain errors in the levels of reserves recorded for deferred tax assets in fiscal 2010 and fiscal 2009. We have
assessed the materiality of these errors and concluded, based on qualitative and quantitative considerations, that they are not material to the prior period financial statements taken as a whole. The correction of these amounts is reflected in
our statements of operations included in this quarterly report and will continue to be reflected in our future reports that we file pursuant to the Securities Exchange Act of 1934, as amended. The impact of the correction on previously reported
consolidated statements of operations is provided below.



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|                                     |  |                                                  |         |   |                   |   |          |                |  |   |         |   |  |          |         |   |         |   |         |   |  |   |         |  
|------------------------------------ |  | ------------------------------------------------ | ------- | - | ----------------- | - | -------- | -------------- |  | - | ------- | - |  | -------- | ------- | - | ------- | - | ------- | - |  | - | ------- | -
|                                     |  | Three months ended                               |        
|                                     |  | September 30, 2009                               |         |   | December 31, 2009 |   |          | March 31, 2010 | 
|                                     |  | Reported                                         |         |   | Revised           |   |          | Reported       |  |   | Revised |   |  | Reported |         |   | Revised |  
|                                     |  | (dollars in thousands, except per share amounts) |        
|Income tax benefit                   |  | $                                                | (42,650 | ) |                   | $ | (5,391   | )              |  | $ | (9,386  | ) |  | $        | (17,631 | ) |         | $ | (15,439 | ) |  | $ | (4,345  | )
|Net loss                             |  |                                                  | (94,066 | ) |                   |   | (131,325 | )              |  |   | (11,719 | ) |  |          | (3,474  | ) |         |   | (29,389 | ) |  |   | (40,483 | )
|Basic and diluted net loss per share |  |                                                  | (0.95   | ) |                   |   | (1.32    | )              |  |   | (0.12   | ) |  |          | (0.04   | ) |         |   | (0.30   | ) |  |   | (0.41   | )



|                                     |  |                                                  |          |   |               |   |          |          |  |   |          |   |  |   |          |  
|------------------------------------ |  | ------------------------------------------------ | -------- | - | ------------- | - | -------- | -------- |  | - | -------- | - |  | - | -------- | -
|                                     |  | Fiscal years ended                               |         
|                                     |  | June 30, 2009                                    |          |   | June 30, 2010 |  
|                                     |  | Reported                                         |          |   | Revised       |   |          | Reported |  |   | Revised  |  
|                                     |  | (dollars in thousands, except per share amounts) |         
|Income tax benefit                   |  | $                                                | (187,819 | ) |               | $ | (160,634 | )        |  | $ | (70,320  | ) |  | $ | (44,942  | )
|Net loss                             |  |                                                  | (363,020 | ) |               |   | (390,205 | )        |  |   | (145,524 | ) |  |   | (170,902 | )
|Basic and diluted net loss per share |  |                                                  | (3.66    | ) |               |   | (3.94    | )        |  |   | (1.46    | ) |  |   | (1.72    | )

As a result of the corrections noted
above, our balance sheets at June 30, 2009 and June 30, 2010 reflect the following adjustments:



|                                        |  |                        |         |  |               |   |         |          |  |   |         |  |  |   |         |  
|--------------------------------------- |  | ---------------------- | ------- |  | ------------- | - | ------- | -------- |  | - | ------- |  |  | - | ------- | -
|                                        |  | June 30, 2009          |         |  | June 30, 2010 |  
|                                        |  | Reported               |         |  | Revised       |   |         | Reported |  |   | Revised | 
|                                        |  | (dollars in thousands) |        
|Net deferred tax asset                  |  | $                      | 13,124  |  |               | $ |        |          |  | $ | 41,915  |  |  | $ |        |  
|Income taxes receivable                 |  |                        | 166,410 |  |               |   | 154,474 |          |  |   | 17,560  |  |  |   | 7,665   |  
|Deferred tax liability                  |  |                        |        |  |               |   | 2,126   |          |  |   |        |  |  |   | 753     |  
|Retained earnings (accumulated deficit) |  |                        | 156,913 |  |               |   | 129,727 |          |  |   | 11,389  |  |  |   | (41,174 | )

(4) Consolidation

(a) Change in Accounting Principle  Adoption of ASU 2009-16 and ASU 2009-17

Effective July 1, 2010, we adopted ASU 2009-16 and ASU 2009-17. As a result, on July 1, 2010, we consolidated 14 securitization trusts facilitated by us because we determined that our services
related to default prevention and collections management, for which we can only be removed for cause, combined with the variability that we absorb as part of our securitization fee structure, made us the primary beneficiary of those trusts. In
addition, we deconsolidated UFSB-SPV because we determined that we do not have the power to direct activities that most significantly impact UFSB-SPVs economic performance. The ASUs were adopted prospectively, and we recorded a
cumulative-effect adjustment to the opening balance of retained earnings at the effective date. The following adjustments were made to our balance sheet at the effective date:



|                                                               |  |                        |           |   |                                                    |   |          |                        |  |   |           |  
|-------------------------------------------------------------- |  | ---------------------- | --------- | - | -------------------------------------------------- | - | -------- | ---------------------- |  | - | --------- | -
|                                                               |  | July 1, 2010           |          
|                                                               |  | NewlyconsolidatedVIEs  |           |   | DeconsolidatedVIE,eliminationsand otheradjustments |   |          | Net impactuponadoption | 
|                                                               |  | (dollars in thousands) |          
|Assets:                                                        |  |                        |           |   |                                                    |   |          |                        |  |   |           |  
|Restricted cash and guaranteed investment contracts, at cost   |  | $                      | 176,512   |   |                                                    | $ | (1,026   | )                      |  | $ | 175,486   |  
|Education loans held for sale, at fair value                   |  |                        |          |   |                                                    |   | (105,082 | )                      |  |   | (105,082  | )
|Education loans held to maturity, net of allowance of $517,804 |  |                        | 7,601,237 |   |                                                    |   | (419     | )                      |  |   | 7,600,818 |  
|Receivable from TERI for pledged accounts                      |  |                        | 136,446   |   |                                                    |   |         |                        |  |   | 136,446   |  
|Interest receivable                                            |  |                        | 102,868   |   |                                                    |   | (2,352   | )                      |  |   | 100,516   |  
|Service revenue receivables, at fair value                     |  |                        |          |   |                                                    |   | (38,692  | )                      |  |   | (38,692   | )
|Other assets                                                   |  |                        | 36,254    |   |                                                    |   | (2,561   | )                      |  |   | 33,693    |  
|                                                               |  |                        |           |   |                                                    |   |          |                        |  |   |           |  
|Total assets                                                   |  | $                      | 8,053,317 |   |                                                    | $ | (150,132 | )                      |  | $ | 7,903,185 |  
|                                                               |  |                        |           |   |                                                    |   |          |                        |  |   |           |  
|Liabilities:                                                   |  |                        |           |   |                                                    |   |          |                        |  |   |           |  
|Education loan warehouse facility                              |  | $                      |          |   |                                                    | $ | (218,059 | )                      |  | $ | (218,059  | )
|Accounts payable, accrued expenses and other liabilities       |  |                        | 56,407    |   |                                                    |   | (42,953  | )                      |  |   | 13,454    |  
|Net deferred tax liability                                     |  |                        |          |   |                                                    |   | 724      |                        |  |   | 724       |  
|Long-term borrowings                                           |  |                        | 8,987,186 |   |                                                    |   |         |                        |  |   | 8,987,186 |  
|                                                               |  |                        |           |   |                                                    |   |          |                        |  |   |           |  
|Total liabilities                                              |  |                        | 9,043,593 |   |                                                    |   | (260,288 | )                      |  |   | 8,783,305 |  
|Stockholders equity (deficit)                                 |  |                        | (990,276  | ) |                                                    |   | 110,156  |                        |  |   | (880,120  | )
|                                                               |  |                        |           |   |                                                    |   |          |                        |  |   |           |  
|Total liabilities and stockholders equity (deficit)           |  | $                      | 8,053,317 |   |                                                    | $ | (150,132 | )                      |  | $ | 7,903,185 |  
|                                                               |  |                        |           |   |                                                    |   |          |                        |  |   |           |  



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We did not retrospectively adjust our statement of operations for the three and nine months ended
March 31, 2010 or our balance sheet as of June 30, 2010 to reflect the updates to ASC 810 and ASC 860-40; however, prior period amounts may have been reclassified to conform to the presentation adopted in fiscal 2011. The total
deficit from the NCSLT Trusts, for which we have no ownership interest, was $979.0 million as of July 1, 2010. Any deficit generated by a consolidated trust, including an NCSLT Trust, would reverse out of our accumulated deficit or retained
earnings, and be recorded as a non-cash gain, if the trusts liabilities were extinguished or the trust were deconsolidated by us. The assets of each securitization trust can only be used to settle the obligations of that particular trust and
are not available to other securitization trusts, FMD or its other subsidiaries, or their respective creditors. The trusts have been structured to provide creditors or beneficial interest holders of securitization trusts recourse only to the assets
of that particular securitization trust, and not to the assets of FMD, its subsidiaries or other VIEs.

(b) Reassessment of
Consolidation of VIEs

ASC 810 requires us to continuously reassess whether consolidation is appropriate, as opposed to the
trigger-based assessment allowed under previous guidance. As a result, we continually reassess our involvement with VIEs, both on- and off-balance sheet, and our determination of whether consolidation or deconsolidation of VIEs is appropriate. We
monitor matters related to our ability to control economic performance, such as contractual changes in the services we provide, the extent of our ownership and the rights of third parties to terminate us as a service provider. In addition, we
monitor the financial performance of the VIEs for indications that we may or may not have the right to absorb benefits or the obligation to absorb losses associated with variability in the financial performance of the VIE that could potentially be
significant to that VIE.

As a result, we may be required to consolidate or deconsolidate VIEs in future periods. If we determine that our
variable interests in trusts have been fully eliminated under all possible economic conditions, then we can no longer be considered the primary beneficiary of these trusts, and we will have to deconsolidate such trusts. Deconsolidation of VIEs is
treated in the same manner as a sale of a subsidiary, and we would record a gain or loss in our statements of operations.

In addition to our
consolidated VIEs, we monitor our involvement with 19 other off-balance sheet VIEs for which we have determined that we are not the primary beneficiary due to the sole, unilateral rights of other parties to terminate us in our role as service
provider or due to a lack of obligation on our part to absorb benefits or losses of the VIE that would be significant to that VIE. Significant changes to the pertinent rights of other parties or significant changes to the ranges of possible
financial performance outcomes used in our assessment of the variability of cash flows due to us could cause us to change our determination of whether or not a VIE should be consolidated in future periods. Our determination to consolidate or
deconsolidate VIEs may lead to increased volatility in our financial results and make comparisons of results between time periods challenging.

(c) Comparability Between Periods

We recognize assets, liabilities, income and expense related to consolidated VIEs in the same line items used by FMD and its consolidated subsidiaries
prior to the effective date of ASU 2009-16 and ASU 2009-17. Effective with our consolidation of VIEs, our non-interest revenues no longer reflect the additional structural advisory feestrust updates and administrative and other fees due from
consolidated VIEs, but continue to reflect such fees due from other off-balance sheet VIEs. We do not recognize gains or losses related to the residual receivables due from the three consolidated GATE Trusts in our consolidated statement of
operations, but we do recognize revaluation gains and losses on residual receivables due from off-balance sheet VIEs.

Current period results
and balances may not be comparable to amounts reported in prior fiscal years or prior quarters due to changes in entities consolidated. In addition, determinations of whether or not to consolidate a VIE are made on an entity-by-entity basis,
requiring a high level of subjectivity and judgment. Given the size of our VIEs, decisions to consolidate or deconsolidate VIEs could result in significant changes to our reported assets and liabilities and results of operations during the quarter
in which the change occurs, and makes comparisons of our financial performance between periods challenging to investors, particularly with regard to the assets, liabilities and equity components included in the table above under Change
in Accounting PrincipleAdoption of ASU 2009-16 and ASU 2009-17, as well as the following in our statement of operations:



| |  |  | Net interest income;
| | - |  | --------------------



| |  |  | Provision for loan losses;
| | - |  | --------------------------



| |  |  | Additional structural advisory fees and residualstrusts updates;
| | - |  | -----------------------------------------------------------------



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| |  |  | Administrative and other fees;
| | - |  | ------------------------------



| |  |  | General and administrative expenses;
| | - |  | ------------------------------------



| |  |  | Losses on education loans held for sale; and
| | - |  | --------------------------------------------



| |  |  | Net loss and net loss per share.
| | - |  | --------------------------------

(5) Acquisition of TMS

On December 31, 2010, we completed our acquisition of the
assets, liabilities and operations of TMS, formerly a division of KeyBank. TMS is headquartered in Warwick, Rhode Island. The purchase price, net of post-closing adjustments made in March 2011, was $47.0 million. In addition, we may be entitled
to a payment of up to $1.3 million from KeyBank based on certain performance metrics through July 1, 2011. Following the closing of the acquisition, TMS has retained its separate brand identity and operations. We did not record any
material exit or termination liabilities as a result of the acquisition.

Following the post-closing adjustments made in March 2011, the book
value of the net assets acquired was $139 thousand. During the third quarter of fiscal 2011, we increased the estimated value of the goodwill associated with the TMS acquisition by $3.0 million to reflect our estimate of the fair value of the
deferred revenue liability acquired. Our estimated allocation of the purchase price is still subject to review of the fair values assigned to assets acquired and liabilities assumed and the potential payment of up to $1.3 million from
KeyBank. Our preliminary allocation of purchase price is as follows:



|                                                                            |  |                        |          |  
|--------------------------------------------------------------------------- |  | ---------------------- | -------- | -
|                                                                            |  | (dollars in thousands) |         
|Allocation of purchase price:                                               |  |                        |          |  
|Assets acquired:                                                            |  |                        |          |  
|Restricted cash                                                             |  | $                      | 146,989  |  
|Other assets                                                                |  |                        | 925      |  
|                                                                            |  |                        |          |  
|Total assets                                                                |  |                        | 147,914  |  
|Liabilities assumed:                                                        |  |                        |          |  
|Restricted funds due to clients                                             |  |                        | (146,989 | )
|Other liabilities                                                           |  |                        | (786     | )
|                                                                            |  |                        |          |  
|Total liabilities                                                           |  |                        | (147,775 | )
|                                                                            |  |                        |          |  
|Book value of net assets acquired                                           |  |                        | 139      |  
|Fair value adjustment to other liabilities for deferred revenue             |  |                        | (3,000   | )
|                                                                            |  |                        |          |  
|Fair value of net liabilities acquired                                      |  |                        | (2,861   | )
|Allocation of excess purchase price over fair value of net assets acquired: |  |                        |          |  
|Intangible assets:                                                          |  |                        |          |  
|Customer list                                                               |  |                        | 22,050   |  
|Technology                                                                  |  |                        | 3,650    |  
|Tradename                                                                   |  |                        | 1,950    |  
|                                                                            |  |                        |          |  
|Total intangible assets                                                     |  |                        | 27,650   |  
|Goodwill                                                                    |  |                        | 22,170   |  
|                                                                            |  |                        |          |  
|Total purchase price                                                        |  | $                      | 46,959   |  
|                                                                            |  |                        |          |  

The customer list intangible asset relates to over 1,100 educational institutions with which TMS had existing tuition
programs in place as of December 31, 2010. The tradename intangible asset relates to the name and reputation of TMS in the industry. Intangible assets attributable to technology represent the replacement cost of software and systems acquired
that are necessary to support operations, net of an obsolescence factor. We will amortize the customer list and tradename intangible assets over 15 years. We will amortize technology intangible assets on a straight-line basis over six years. We
expect amortization expense related to TMS intangible assets to be $2.2 million for each of the next five fiscal years. Goodwill of $22.2 million represents the value ascribed to the business that cannot be separately ascribed to an intangible
asset. For federal income tax purposes, we will amortize intangibles and goodwill on a straight-line basis over a 15-year period.

The
acquisition was completed on December 31, 2010, and, accordingly, our consolidated statements of operations for the three and six months ended December 31, 2010 do not reflect any income or expense from the operations of TMS. During the
three months ended March 31, 2011, we recorded total revenue and expenses from TMS of $7.1 million and $7.7 million, respectively, and TMS generated positive cash flows of $524 thousand for the period. We recorded acquisition related
third-party service costs of $1.1 million during the second quarter of fiscal 2011 consisting of legal, accounting and consulting expenses, which we have included in general and administrative expenses.



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In the table that follows, we present the unaudited pro forma condensed combined statements of
operations for the three and nine months ended March 31, 2011 and 2010. This pro forma information is based on our historical consolidated financial statements and gives effect to our acquisition of TMS as if TMS had been acquired on
July 1, 2009. We describe our assumptions and adjustments in the footnotes to the table of unaudited pro forma condensed combined financial information.

This unaudited pro forma condensed combined financial information is presented for informational purposes only and has been derived from, and should be read in conjunction with, our historical
consolidated financial statements, including the notes thereto. We have based the pro forma adjustments, as described in the footnotes to the table, on current available information and certain adjustments that management believes are
reasonable. They are not necessarily indicative of our consolidated financial position or results of operations that would have occurred had the acquisition taken place on the date indicated, nor are they necessarily indicative of our future
consolidated results of operations.



|                                         |  |                                                 |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|---------------------------------------- |  | ----------------------------------------------- | ------- | - | -------------------------- | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                         |  | Three months endedMarch 31,                     |         |   | Nine months endedMarch 31, |  
|                                         |  | 2011                                            |         |   | 2010                       |   |         | 2011 |  |   | 2010     |  
|                                         |  | (dollars in thousands except per share amounts) |        
|Total revenues:                          |  |                                                 |         |  
|FMD(1)                                   |  | $                                               | (2,815  | ) |                            | $ | (16,968 | )    |  | $ | (92,124  | ) |  | $ | 6,709    |  
|TMS(2)                                   |  |                                                 |        |   |                            |   | 8,020   |      |  |   | 15,879   |   |  |   | 22,867   |  
|                                         |  |                                                 |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Total pro forma revenues                 |  |                                                 | (2,815  | ) |                            |   | (8,948  | )    |  |   | (76,245  | ) |  |   | 29,576   |  
|                                         | 
|Total expenses:                          |  |                                                 |         |  
|FMD(1)                                   |  |                                                 | 36,611  |   |                            |   | 27,860  |      |  |   | 94,349   |   |  |   | 209,358  |  
|TMS(2)                                   |  |                                                 |        |   |                            |   | 7,444   |      |  |   | 15,916   |   |  |   | 23,000   |  
|Timing of acquisition costs              |  |                                                 |        |   |                            |   |        |      |  |   | (1,080   | ) |  |   | 1,080    |  
|Other expense adjustments(3)             |  |                                                 |        |   |                            |   | 640     |      |  |   | 1,279    |   |  |   | 1,919    |  
|                                         |  |                                                 |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Total pro formaexpenses                  |  |                                                 | 36,611  |   |                            |   | 35,944  |      |  |   | 110,464  |   |  |   | 235,357  |  
|                                         |  |                                                 |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Pro formaloss before income taxes        |  |                                                 | (39,426 | ) |                            |   | (44,892 | )    |  |   | (186,709 | ) |  |   | (205,781 | )
|Other income  gain from TERI settlement |  |                                                 | 18      |   |                            |   |        |      |  |   | 50,699   |   |  |   |         |  
|                                         |  |                                                 |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Pro formaloss before income taxes        |  |                                                 | (39,408 | ) |                            |   | (44,892 | )    |  |   | (136,010 | ) |  |   | (205,781 | )
|Pro formaincome tax expense (benefit)(4) |  |                                                 | (82     | ) |                            |   | 1,251   |      |  |   | 1,952    |   |  |   | (38,614  | )
|                                         |  |                                                 |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Pro formanet loss                        |  | $                                               | (39,326 | ) |                            | $ | (46,143 | )    |  | $ | (137,962 | ) |  | $ | (167,167 | )
|                                         |  |                                                 |         |   |                            |   |         |      |  |   |          |   |  |   |          |  
|Pro forma basic and diluted net loss(5)  |  | $                                               | (0.39   | ) |                            | $ | (0.46   | )    |  | $ | (1.37    | ) |  | $ | (1.68    | )



|(1) | Based on our historical results of operations, which include TMS for the third quarter of fiscal 2011.
|--- | ------------------------------------------------------------------------------------------------------

|(2) | Based on the pre-acquisition historical financial results of TMS, adjusted for certain intercompany revenue sharing and transfer pricing adjustments that will not
continue to be recorded subsequent to the acquisition.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Other expense adjustments include an increase to amortization expense for intangible assets acquired and an increase to compensation and benefits for restricted stock
units granted to certain key employees of TMS effective January 1, 2011.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Income taxes were calculated using the historical tax benefit or expense of FMD, adjusted for the state tax benefit expected to be realized on the additional loss from
TMS.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Basic and diluted weighted average shares outstanding used to calculate pro forma per share amounts are equal to the amounts reported in our statement of
operations for the applicable periods.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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(6) Cash and Cash Equivalents

The following table summarizes our cash and cash equivalents:



|                                                        |  |                        |         |  |              |   |         | 
|------------------------------------------------------- |  | ---------------------- | ------- |  | ------------ | - | ------- | 
|                                                        |  | March 31,2011          |         |  | June 30,2010 |  
|                                                        |  | (dollars in thousands) |        
|Cash equivalents (money market funds)                   |  | $                      | 176,299 |  |              | $ | 216,050 | 
|Interest-bearing deposits with the Federal Reserve Bank |  |                        | 33,963  |  |              |   | 92,545  | 
|Interest-bearing deposits with other banks              |  |                        | 15,043  |  |              |   | 15,285  | 
|Non-interest-bearing deposits with banks                |  |                        | 1,404   |  |              |   | 5,167   | 
|                                                        |  |                        |         |  |              |   |         | 
|Total cash and cash equivalents                         |  | $                      | 226,709 |  |              | $ | 329,047 | 
|                                                        |  |                        |         |  |              |   |         | 

Cash and cash equivalents of Union Federal of $55.7 million and $115.1 million at March 31, 2011 and
June 30, 2010, respectively, are not available for dividends without prior approval from the OTS.

(7) Education Loans Held to
Maturity

(a) Gross Education Loans Outstanding

At March 31, 2011, education loans held to maturity consisted primarily of loans held by our consolidated securitization trusts. Through the securitization process, a series of special purpose
statutory trusts purchased education loans from the originating lenders or their assignees, which relinquished to the trusts their ownership interest in the education loans. The debt instruments issued by the securitization trusts to finance the
purchase of these education loans are collateralized by the purchased loan portfolios. The majority of the loans held by our Securitization Trusts segment are held by the NCSLT Trusts and were formerly guaranteed by TERI. Under the Modified Plan of
Reorganization, TERI rejected its guaranty agreements and settled claims with these securitization trusts, including contingent guaranty claims based on future loan defaults. The remaining securitized loans are held by GATE Trusts that benefit from
credit enhancement arrangements with the borrowers educational institutions or with a lender that has provided a guaranty on behalf of certain educational institutions, up to specified limits. In addition, to a much lesser extent, education
loans held to maturity include loans originated by Union Federal that we were unable to securitize or sell to a third party. Such loans were sold by Union Federal to a non-bank subsidiary of FMD and are unencumbered.

The following table summarizes the composition of the net carrying value of our education loans held to maturity:



|                                                                              |  |                        |           |   |              |   |         |  
|----------------------------------------------------------------------------- |  | ---------------------- | --------- | - | ------------ | - | ------- | -
|                                                                              |  | March 31,2011          |           |   | June 30,2010 |  
|                                                                              |  | (dollars in thousands) |          
|Education loans held to maturity:                                             |  |                        |           |   |              |   |         |  
|Gross loan principal outstanding                                              |  | $                      | 7,306,797 |   |              | $ | 25,195  |  
|Net unamortized acquisition costs and origination fees                        |  |                        | 276,087   |   |              |   |        |  
|                                                                              |  |                        |           |   |              |   |         |  
|Gross loans outstanding                                                       |  |                        | 7,582,884 |   |              |   | 25,195  |  
|Allowance for loan losses                                                     |  |                        | (447,940  | ) |              |   | (24,804 | )
|                                                                              |  |                        |           |   |              |   |         |  
|Education loans held to maturity, net of allowance                            |  | $                      | 7,134,944 |   |              | $ | 391     |  
|                                                                              |  |                        |           |   |              |   |         |  
|Principal outstanding of loans serving as collateral for long-term borrowings |  | $                      | 7,305,224 |   |              | $ |        |  

(b) Education Loan
Allowance for Loan Losses and the Related Provision for Loan Losses

We recorded the following activity in the allowance for loan
losses for education loans:



|                                                                        |  |                                  |          |   |                                 |   |          |  
|----------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ------------------------------- | - | -------- | -
|                                                                        |  | Three months endedMarch 31, 2011 |          |   | Nine months endedMarch 31, 2011 |  
|                                                                        |  | (dollars in thousands)           |         
|Balance, beginning of period                                            |  | $                                | 500,429  |   |                                 | $ | 24,804   |  
|Cumulative effect of a change in accounting principle                   |  |                                  |         |   |                                 |   | 517,804  |  
|                                                                        |  |                                  |          |   |                                 |   |          |  
|Balance, beginning of period after cumulative effect                    |  |                                  | 500,429  |   |                                 |   | 542,608  |  
|Provision for loan losses                                               |  |                                  | 73,745   |   |                                 |   | 305,679  |  
|Reserves reclassified from interest receivable for capitalized interest |  |                                  | 4,762    |   |                                 |   | 16,606   |  
|Charge-offs                                                             |  |                                  | (139,923 | ) |                                 |   | (438,301 | )
|Recoveries from borrowers                                               |  |                                  | 8,927    |   |                                 |   | 21,348   |  
|                                                                        |  |                                  |          |   |                                 |   |          |  
|Balance, end of period                                                  |  | $                                | 447,940  |   |                                 | $ | 447,940  |  
|                                                                        |  |                                  |          |   |                                 |   |          |  



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(c) Credit Quality of Education Loans

We use the following terms to describe borrowers payment status:

In School/Deferment. Under the terms of a majority of the education loans held by our securitization trusts, borrowers are eligible to defer principal and interest payments while carrying a
specified academic course load and may be eligible to defer payments for an additional six months after graduation during a grace period. Either quarterly or at the end of the deferment period, depending on the terms of the loan agreement, any
accrued but unpaid interest is capitalized and added to principal outstanding. With respect to our consolidated securitization trusts, we expect the number of borrowers in deferment status to decline in the future because we do not expect to add new
loans to the portfolios of the consolidated securitization trusts.

Forbearance. Under the terms of the education loans, borrowers may
apply for forbearance, which is a temporary reprieve from making full contractual payments. Forbearance can take many forms, at the option of the creditor. The most common forms of forbearance include the following:



| |  |  | Basic forbearanceCessation of all contractual payments for a maximum allowable forbearance period of one year, granted in three-month
increments.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Alternative payment plansUnder alternative payment plans, a borrower can make a reduced payment for a limited period of time. The amount
of the payment varies under different programs available and may be set at a fixed dollar amount, a percentage of contractual required payments or interest-only payments. Generally, approval for alternative payment plans is granted for a maximum of
six to 24 months, depending on the program.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under both basic forbearance and alternative payment plans, the education
loan continues to accrue interest. When forbearance ceases, unpaid interest is capitalized and added to principal outstanding, and the borrowers required payments are recalculated at a higher amount to pay off the loan, plus the additional
accrued and capitalized interest, at the original stated interest rate by the original maturity date. There is no forgiveness of principal or interest, reduction in the interest rate or extension of the maturity date.

Forbearance programs result in a delay in the timing of payments received from borrowers, but at the same time, assuming the collection of the forborne
amounts, provide for an increase in the gross volume of cash receipts over the term of the education loan due to the additional accrued interest capitalized while in forbearance. Forbearance programs may have the effect of delaying default
emergence, and alternative payment plans may reduce the utilization of basic forbearance.

In repayment. We determine the repayment
status of borrowers, including borrowers making payments pursuant to alternative payment plans, by contractual due dates. A borrower making reduced payments for a limited period of time pursuant to an alternative payment plan will be considered
current if such reduced payments are timely made.

The following table provides information on the status of education loans outstanding:



|                                                                                   |  |                        |           |  |                         |  |       |  
|---------------------------------------------------------------------------------- |  | ---------------------- | --------- |  | ----------------------- |  | ----- | -
|                                                                                   |  | March 31, 2011         |           |  | As a percentageof total | 
|                                                                                   |  | (dollars in thousands) |           |  |                         | 
|Principal of loans outstanding:                                                    |  |                        |           |  |                         |  |       |  
|In basic forbearance                                                               |  | $                      | 320,498   |  |                         |  | 4.4   | %
|In school/deferment                                                                |  |                        | 960,167   |  |                         |  | 13.1  |  
|In repayment, including alternative payment plans(1), classified as:               |  |                        |           |  |                         |  |       |  
|Current: <30 days past due                                                         |  |                        | 5,564,389 |  |                         |  | 76.2  |  
|Current: >30 days past due, but <120 days past due                                 |  |                        | 312,857   |  |                         |  | 4.3   |  
|Delinquent: >120 days past due, but <180 days past due                             |  |                        | 104,438   |  |                         |  | 1.4   |  
|In default: >180 days past due, but not charged-off                                |  |                        | 44,448    |  |                         |  | 0.6   |  
|                                                                                   |  |                        |           |  |                         |  |       |  
|Total gross loan principal outstanding                                             |  | $                      | 7,306,797 |  |                         |  | 100.0 | %
|                                                                                   |  |                        |           |  |                         |  |       |  
|Non-accrual loan principal (>120 days past due, but not in default or charged-off) |  | $                      | 148,886   |  |                         |  | 2.0   | %
|Past due loan principal (>90 days, but <120 days past due still accruing interest) |  |                        | 88,227    |  |                         |  | 1.2   |  



|(1) | At March 31, 2011, borrowers in repayment with loan principal outstanding of approximately $1.40 billion were making reduced payments under alternative payment
plans.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our management monitors the credit quality of educations loans based on loan status, as outlined above. The allowance
for loan losses at March 31, 2011 included a specific allowance for education loans greater than 180 days past due, but not yet charged-off, of



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$44.4 million. In addition, we established a general allowance of $403.5 million for estimated projected defaults, net of recoveries and third party guarantees, for the twelve months following
our balance sheet date, which we refer to as the confirmation period. To estimate defaults for the first six months of the confirmation period, we applied delinquency roll rates to education loans currently past due. We based the applied
roll rates on roll rates that we observed over the preceding 24 months. For the second six months of the confirmation period, we based net default projections on default and recovery rates determined using the same models used in our estimates of
the fair value of service receivables. We based our default and recovery curves on macroeconomic indicators and our historical observations. See Note 9, Service Revenue Receivables and Related IncomeEducation Loan Performance Assumption
Overview, for more information on default and recovery rates.

(8) Deposits for Participation Interest Accounts

During the first quarter of fiscal 2011, we began performing services under Monogram loan program agreements with two clients. In connection with these
two loan programs based on our Monogram platform, we have agreed to provide credit enhancement by funding deposits in participation accounts for each lender. Subject to contractual maximums specified in the applicable loan program agreements, we
make quarterly deposits into participation accounts based on a percentage of projected credit losses for the expected volume and credit tiering of education loans to be originated over the term of the agreement. Our funding is adjusted during the
origination period for changes to expected loan volumes and credit tiering based on loan distribution. At the end of each origination period, the final funding is determined, and we have no further funding requirements under that applicable loan
program agreement. Separate participation accounts are applicable to each loan program agreement and are not co-mingled between clients. During the first nine months of fiscal 2011, we funded an aggregate of $8.5 million to the participation
accounts. We may agree to invest specified amounts of capital as a credit enhancement feature in connection with future Monogram-based loan programs, although the amount and structure offered to a particular lender would be negotiated in light of
the anticipated size of the lenders program, the underwriting guidelines of the program, the terms of our business relationship with the lender and market conditions.

Participation accounts serve as first-loss reserves to the originating lenders for defaults experienced in Monogram program loan portfolios. As defaults occur, our lender clients withdraw the outstanding
balance of defaulted principal and interest from the participation account applicable to their respective programs. As amounts are recovered from borrowers, those amounts are deposited back into the participation accounts. Legal ownership of the
defaulted education loan may be transferred to us or continue to be owned by the client, depending on the terms of the loan program agreement. Defaulted education loans transferred to us are immediately charged-off and the recoveries are deposited
back to the participation accounts regardless of our ownership of the education loan. We expect education loans originated under our Monogram platform to perform better in general than the education loans held by the NCSLT Trusts as a result of the
relative credit characteristics of the loan portfolios.

The cash balances in participation accounts earn interest at market rates applicable
to commercial interest-bearing deposit accounts. In addition, participation account administration fees are deposited directly by our lender clients to the participation accounts. These fees represent compensation to us for providing the credit
enhancement, and are distributed from the participation account to us monthly. Interest and fees deposited to the participation accounts are not recognized as revenue in our statement of operations, but are included as components in the change in
fair value recognized in revenue.

To the extent that the credit enhancement balance in participation accounts is in excess of contractually
required amounts, as a result of declining loan balances or default experience lower than our participation account funding, we are eligible to receive distributions from the participation accounts, in addition to the monthly participation account
administration fee, pursuant to the terms of the applicable loan program agreement.

We carry participation accounts at fair value in our
balance sheet. Fair value is equal to the amount of cash on deposit in the account plus unrealized gains or losses. The cash value of the interest-bearing deposit reflects the realized costs of the credit enhancement offset by interest and fees
earned. Due to the lack of availability of market prices for financial instruments of this type, we estimate unrealized gains and losses related to the participation accounts based on the net present value of expected future cash flows into and out
of the account related to education loans originated as of our balance sheet date, using a discount rate commensurate with the risks and durations involved. We record changes in estimated fair value of participation accounts, excluding cash funding
by us or distributions from the participation accounts to us, if any, in non-interest revenues as part of Administrative and other fees.

(9) Service Revenue Receivables and Related Income

We record our service revenue
receivables at fair value in our balance sheet. Asset servicing fee receivables represent the estimated fair value of service revenues earned as of our balance sheet date from the third-party owner of the Trust Certificate. Additional structural
advisory fees and residual receivables represent the estimated fair value of service receivables expected to be collected over the life of the various separate securitization trusts that have purchased education loans facilitated by us, with no
further service obligations on our part.



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(a) Asset Servicing Fee Receivables and Related Fees

In March 2009, we entered into an asset services agreement (Asset Services Agreement) with the third-party owner of the Trust Certificate. Pursuant
to the Asset Services Agreement, we provide ongoing services, including analysis and valuation optimization and services relating to funding strategy, to support their ownership of certain residual interests of the Trusts. As compensation for our
services, we are entitled to a monthly asset servicing fee based on the aggregate outstanding principal balance of the education loans owned by the Trusts, limited to the total cash flows expected to be generated by residuals. Although the fee is
earned monthly, our right to receive the fee is contingent on distributions made to the holder of the Trust Certificate. Under no circumstance will we receive cash for our asset servicing fees until residual cash flows are distributed from the
Trusts. Our asset servicing fee receivables were $1.5 million and $5.8 million at March 31, 2011 and June 30, 2010, respectively, recorded at fair value in our balance sheet based on the estimated net present value of future cash
flows. See Education Loan Performance Assumption Overview below for a description of the significant observable and unobservable inputs we use to develop our fair value estimates.

During the third quarters of fiscal 2011 and 2010, we recorded $170 thousand and $2.1 million as fee income, respectively, which represented
our estimate of the net present value of fees to be received for services specifically provided during those reporting periods. During the first nine months of fiscal 2011 and 2010, we recorded $1.9 million and $6.0 million as fee income,
respectively. For the third quarter and first nine months of fiscal 2011, we recognized fee update losses of $5.1 million and $6.2 million, respectively, compared to fee update losses of $2.6 million and $2.3 million for the comparable periods in
fiscal 2010. The lower fee income and higher fee update losses in fiscal 2011 reflect reductions in our estimates of the volume of residual cash flows to be paid to the third-party owner of the Trust Certificate, largely due to our change in assumed
recovery rates on defaulted education loans. Fee update losses in fiscal 2010 reflect reductions in our estimates of the volume of residual cash, largely due to a change in our assumed default rates.

(b) Additional Structural Advisory Fee and Residual Receivables and Related Trust Updates

The following table summarizes the details of trust updates to additional structural advisory fee and residual receivables:



|                                    |  |                             |     |  |                            |   |         |      |  |   |      |   |  |   |         |  
|----------------------------------- |  | --------------------------- | --- |  | -------------------------- | - | ------- | ---- |  | - | ---- | - |  | - | ------- | -
|                                    |  | Three months endedMarch 31, |     |  | Nine months endedMarch 31, |  
|                                    |  | 2011                        |     |  | 2010                       |   |         | 2011 |  |   | 2010 |  
|                                    |  | (dollars in thousands)      |    
|Trust updates:                      |  |                             |     | 
|Additional structural advisory fees |  | $                           | 72  |  |                            | $ | (21,440 | )    |  | $ | 885  |   |  | $ | (20,799 | )
|Residuals                           |  |                             | 161 |  |                            |   | (91     | )    |  |   | (987 | ) |  |   | 2,186   |  
|                                    |  |                             |     |  |                            |   |         |      |  |   |      |   |  |   |         |  
|Total trust updates                 |  | $                           | 233 |  |                            | $ | (21,531 | )    |  | $ | (102 | ) |  | $ | (18,613 | )
|                                    |  |                             |     |  |                            |   |         |      |  |   |      |   |  |   |         |  

Additional Structural Advisory Fees. At June 30, 2010, additional structural advisory fee receivables were
primarily due from the securitization trusts that we consolidated effective July 1, 2010 upon our adoption of ASU 2009-16 and ASU 2009-17. As such, these receivables, as well as the payables recorded by the trusts from which they are due, have
been eliminated upon consolidation and are not reflected in our consolidated balance sheet at March 31, 2011. In addition, changes in the estimated fair value of receivables due from consolidated securitization trusts recorded in revenues, as
well as the changes in the liabilities recorded in expense by the consolidated securitization trusts, are also eliminated and do not appear in our consolidated statement of operations. The remaining receivables included in our consolidated balance
sheet and trust updates in our consolidated statement of operations are due from other off-balance sheet VIEs.

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



|                                                        |  |                             |       |   |                            |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | --------------------------- | ----- | - | -------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                        |  | Three months endedMarch 31, |       |   | Nine months endedMarch 31, |  
|                                                        |  | 2011                        |       |   | 2010                       |   |         | 2011 |  |   | 2010    |  
|                                                        |  | (dollars in thousands)      |      
|Fair value, beginning of period                         |  | $                           | 1,588 |   |                            | $ | 55,724  |      |  | $ | 34,676  |   |  | $ | 55,130  |  
|Cumulative effect of a change in accounting principle   |  |                             |      |   |                            |   |        |      |  |   | (33,473 | ) |  |   |        |  
|                                                        |  |                             |       |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Fair value, beginning of period after cumulative effect |  |                             | 1,588 |   |                            |   | 55,724  |      |  |   | 1,203   |   |  |   | 55,130  |  
|Cash received from trust distributions                  |  |                             | (32   | ) |                            |   | (382    | )    |  |   | (460    | ) |  |   | (429    | )
|Trust updates:                                          |  |                             |       |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Passage of timefair value accretion                    |  |                             | 40    |   |                            |   | 1,686   |      |  |   | 141     |   |  |   | 5,015   |  
|Increase in timing and weighted average default rate    |  |                             |      |   |                            |   | (39,144 | )    |  |   |        |   |  |   | (42,616 | )
|Increase in discount rate assumptions                   |  |                             |      |   |                            |   | (14,727 | )    |  |   |        |   |  |   | (11,029 | )
|Decrease in weighted average prepayment rate            |  |                             |      |   |                            |   | 25,338  |      |  |   |        |   |  |   | 25,338  |  
|Increase in forward LIBOR curve                         |  |                             |      |   |                            |   | 175     |      |  |   |        |   |  |   | 1,738   |  
|Other factors, net                                      |  |                             | 32    |   |                            |   | 5,232   |      |  |   | 744     |   |  |   | 755     |  
|                                                        |  |                             |       |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Total trust updates                                     |  |                             | 72    |   |                            |   | (21,440 | )    |  |   | 885     |   |  |   | (20,799 | )
|                                                        |  |                             |       |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Fair value, end of period                               |  | $                           | 1,628 |   |                            | $ | 33,902  |      |  | $ | 1,628   |   |  | $ | 33,902  |  
|                                                        |  |                             |       |   |                            |   |         |      |  |   |         |   |  |   |         |  



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Residuals. At June 30, 2010, $5.2 million of our residual receivables were due from
securitization trusts that we consolidated effective July 1, 2010 upon our adoption of ASU 2009-16 and ASU 2009-17. At March 31, 2011, residual receivables and the related trust updates related to consolidated securitization trusts have
been eliminated and are no longer reflected in our consolidated balance sheet or consolidated statement of operations. The residual receivables eliminated related to the three consolidated GATE Trusts. We continue to reflect residual receivables due
from other off-balance sheet VIEs of $6.6 million at March 31, 2011. We recorded trust update income of $161 thousand in the third quarter of fiscal 2011, primarily related to accretion for the passage of time. We recorded trust update losses
of $1.0 million for the first nine months of fiscal 2011, primarily related to overall performance of off-balance sheet VIEs for the first nine months of the year, partially offset by accretion for the passage of time. The loss for the third quarter
of fiscal 2010 reflected the change in the recovery rate, but for the nine months ended March 31, 2010, this loss was more than offset by the gains for a decrease in the discount rate and accretion for the passage of time.

See Education Loan Performance Assumption Overview below for a description of the significant observable and unobservable inputs used
in to develop the estimated fair values of our additional structural advisory fee and residual receivables.

(c) Education Loan
Performance Assumption Overview

Recovery, Default and Prepayment Rate Assumptions

Risk Segments. The majority of additional structural advisory fee receivables recorded by our Education Financing segment are due from the NCSLT
Trusts, and all of our asset servicing fees are due from the third-party owner of the Trust Certificate and are dependent upon the performance of the Trusts. During the third quarter of fiscal 2010, we retroactively scored education loans held by
the Trusts using our proprietary risk score modeling, origination data and additional credit bureau data made available following origination. We then divided education loans into three risk segments, with loans in Segment 1 expected to perform
better than loans in Segment 2, and loans in Segment 2 expected to perform better than loans in Segment 3. We initially used this segmentation to undertake a detailed analysis of default and prepayment rates, as described more fully below.
Recoveries on defaulted education loans, by their nature, emerge at the end of the loan life cycle and extend over a period lasting as long as seven years. The majority of defaults on education loans held by the Trusts have emerged since 2008, and
until recently, meaningful data on recoveries for the most recent economic cycle was not available. Approximately 50% of the total recoveries received by the Trusts have been received in the last 15 months. Using data observed over the last 15
months, we began to use a segmented approach in our determination of appropriate recovery rate assumptions as of March 31, 2011.

Recovery
Rates. At March 31, 2011, we have reassessed our recovery rates, particularly in light of segmentation analyses and emerging recovery data on these loans. Although we continue to believe that an assumed net recovery rate of 40.0% remains
appropriate for loan portfolios securitized prior to 2004, subsequent loan portfolios included a greater proportion of Segment 3 education loans, and most of the defaults since 2008 were generated by Segment 3 education loans. During the third
quarter of fiscal 2011, we analyzed recoveries on a segmented basis using a conditional rate approach based on volumes by credit tier under different economic conditions, rather than by year of default. In addition, we believe that our improved
pre-default efforts may have the effect of reducing the recovery rates on education loans that ultimately default because defaults will relate to only the worst credit exposures. In light of these observations, we will apply a segmented approach to
our determination of appropriate recovery rates. While maintaining our assumed recovery expenses of 20.0%, we decreased the net recovery rate assumption from 40.0% to 36.3% for Segment 1 education loans, 32.1% for Segment 2 education loans and 22.1%
for Segment 3 education loans.

Primarily as a result of the changes in projected recovery rates, we recorded a fee update loss related to
asset servicing fees of $5.0 million during the third quarter of fiscal 2011. Trust update losses for additional structural advisory fees of $21.0 million primarily related to the recovery rate changes were eliminated from revenue in consolidation,
but remain in revenue for our Education Financing segment for segment reporting purposes. Although these losses are not reflected in revenue on a consolidated basis, they reflect a decrease in our estimates of the cash that we may ultimately receive
from these trusts over the life of the trusts. Such amounts are an important measure of cash flows that will be available to our stockholders. The recovery rate changes had no impact to the residual receivables recorded in our consolidated balance
sheet because these receivables relate only to trusts created prior to fiscal 2005.

No changes were made to recovery rate assumptions during
the three and nine months ended March 31, 2010.



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Default and Prepayment Rates. No significant changes were made to the projected timing and end-point
default rates during the third quarter of fiscal 2011. Higher default rate assumptions compared to periods a year earlier reflect changes to the macroeconomic indicators used to develop our default rate assumptions.

During the third quarter of fiscal 2010, in addition to analyzing default and prepayment rates by segment, we enhanced our financial models to
incorporate certain prospective macroeconomic factors in default and prepayment assumptions for education loans securitized in the Trusts. These enhancements had a significant impact on our end-point default rate assumptions and prepayment rates
assumptions in fiscal 2010. As a result, we decreased the carrying value of additional structural advisory fees by $39.1 million for higher projected defaults, and increased the carrying value by $25.3 million for lower and slower projected
prepayments.

The table below identifies net recovery, gross and net default and prepayment rate assumptions for each segment, as well as the
percentage of the Trust portfolios in each segment, including the NCSLT Trusts and those Trusts that have not been consolidated.



|                                                  |  |                |      |   |                   |  |      |               |  |  |                |   |  |          |      |   |          |  |      |          |  |  |          |   |  |          |      |   |          |  |      |          |  |  |          |   |  |  |      |   |  |  |      |   |  |  |      |  
|------------------------------------------------- |  | -------------- | ---- | - | ----------------- |  | ---- | ------------- |  |  | -------------- | - |  | -------- | ---- | - | -------- |  | ---- | -------- |  |  | -------- | - |  | -------- | ---- | - | -------- |  | ---- | -------- |  |  | -------- | - |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                                                  |  | March 31, 2011 |      |   | December 31, 2010 |  |      | June 30, 2010 |  |  | March 31, 2010 |  
|Trust Portfolio:                                  |  | Segment1       |      |   | Segment2          |  |      | Segment3      |  |  | Segment1       |   |  | Segment2 |      |   | Segment3 |  |      | Segment1 |  |  | Segment2 |   |  | Segment3 |      |   | Segment1 |  |      | Segment2 |  |  | Segment3 |  
|Distribution by original loan amount              |  |                | 25.5 | % |                   |  | 27.0 | %             |  |  | 47.5           | % |  |          | 25.5 | % |          |  | 27.0 | %        |  |  | 47.5     | % |  |          | 25.5 | % |          |  | 27.0 | %        |  |  | 47.5     | % |  |  | 25.5 | % |  |  | 27.0 | % |  |  | 47.5 | %
|Distribution by total outstanding loan
amount(1): |  |                |      |   |                   |  |      |               |  |  |                |   |  |          |      |   |          |  |      |          |  |  |          |   |  |          |      |   |          |  |      |          |  |  |          |   |  |  |      |   |  |  |      |   |  |  |      |  
|Not in repayment(2)                               |  |                | 2.9  |   |                   |  | 4.8  |               |  |  | 12.8           |   |  |          | 3.3  |   |          |  | 5.3  |          |  |  | 13.9     |   |  |          | 4.3  |   |          |  | 6.7  |          |  |  | 16.9     |   |  |  | 5.0  |   |  |  | 7.7  |   |  |  | 19.3 |  
|In repayment                                      |  |                | 20.2 |   |                   |  | 22.8 |               |  |  | 36.4           |   |  |          | 19.7 |   |          |  | 22.2 |          |  |  | 35.6     |   |  |          | 18.5 |   |          |  | 20.5 |          |  |  | 33.1     |   |  |  | 17.7 |   |  |  | 19.3 |   |  |  | 31.0 |  
|                                                  |  |                |      |   |                   |  |      |               |  |  |                |   |  |          |      |   |          |  |      |          |  |  |          |   |  |          |      |   |          |  |      |          |  |  |          |   |  |  |      |   |  |  |      |   |  |  |      |  
|Total by segment                                  |  |                | 23.1 |   |                   |  | 27.6 |               |  |  | 49.2           |   |  |          | 23.0 |   |          |  | 27.5 |          |  |  | 49.5     |   |  |          | 22.8 |   |          |  | 27.2 |          |  |  | 50.0     |   |  |  | 22.7 |   |  |  | 27.0 |   |  |  | 50.3 |  
|Gross default rate(3)                             |  |                | 10.4 |   |                   |  | 21.3 |               |  |  | 52.2           |   |  |          | 10.4 |   |          |  | 20.8 |          |  |  | 51.5     |   |  |          | 9.7  |   |          |  | 19.6 |          |  |  | 48.8     |   |  |  | 10.7 |   |  |  | 19.7 |   |  |  | 48.3 |  
|Recovery rate(4)                                  |  |                | 36.3 |   |                   |  | 32.1 |               |  |  | 22.1           |   |  |          | 40.0 |   |          |  | 40.0 |          |  |  | 40.0     |   |  |          | 40.0 |   |          |  | 40.0 |          |  |  | 40.0     |   |  |  | 40.0 |   |  |  | 40.0 |   |  |  | 40.0 |  
|Net default rate(5)                               |  |                | 6.6  |   |                   |  | 14.5 |               |  |  | 40.7           |   |  |          | 6.3  |   |          |  | 12.5 |          |  |  | 30.9     |   |  |          | 5.8  |   |          |  | 11.8 |          |  |  | 29.3     |   |  |  | 6.4  |   |  |  | 11.8 |   |  |  | 29.0 |  
|Prepayment rate(6)                                |  |                | 6.6  |   |                   |  | 4.7  |               |  |  | 2.9            |   |  |          | 6.6  |   |          |  | 4.7  |          |  |  | 2.8      |   |  |          | 6.9  |   |          |  | 4.9  |          |  |  | 3.1      |   |  |  | 6.7  |   |  |  | 4.8  |   |  |  | 3.1  |  



|(1) | Outstanding aggregate principal and capitalized interest balance as of the dates indicated.
|--- | -------------------------------------------------------------------------------------------

|(2) | Loans not in repayment include loans in deferment or basic forbearance status as of the dates indicated. We classify loans subject to alternative payment
plans as in repayment.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Historical and projected defaults over the lives of the trusts as a percentage of original outstanding aggregate principal.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(4) | Historical and projected recoveries, net of historical and projected collections costs, as a percentage of historical and projected cumulative gross defaults.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Historical and projected defaults over the lives of the trusts less historical and projected recoveries, net of collection costs, as a percentage of original
outstanding aggregate principal.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Amount presented is the weighted-average conditional prepayment rate (CPR) over the lives of the trusts. The CPR is an estimate of the likelihood that a loan will be
prepaid during a period given that it has not previously defaulted or been repaid in full.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Discount Rate Assumptions

The following table identifies our discount rate assumptions and changes in the assumptions:



|                                                              |  |             |      |   |                                  |  |     |             |  |  |      |   
|------------------------------------------------------------- |  | ----------- | ---- | - | -------------------------------- |  | --- | ----------- |  |  | ---- | --
|                                                              |  |             |      |   | Change in assumptions during the | 
|                                                              |  | Assumptions |      |   | Quarter                          |  |     | Nine months | 
|March 31, 2011:                                               |  |             |      |   |                                  |  |     |             |  |  |      |   
|Asset servicing fee receivables                               |  |             | 16.0 | % |                                  |  |    | %           |  |  |     | % 
|Additional structural advisory fee receivables:               |  |             |      |   |                                  |  |     |             |  |  |      |   
|GATE Trusts and the Trusts with projected residual cash flows |  |             | 14.0 |   |                                  |  |    |             |  |  |     |   
|The Trusts with no projected residual cash flows              |  |             | 16.0 |   |                                  |  |    |             |  |  |     |   
|All other off-balance sheet VIEs                              |  |             | 10.0 |   |                                  |  |    |             |  |  | (4.0 | ) 
|Residual receivables                                          |  |             | 10.0 |   |                                  |  |    |             |  |  | (6.0 | ) 
|March 31, 2010:                                               |  |             |      |   |                                  |  |     |             |  |  |      |   
|Asset servicing fee receivables                               |  |             | 16.0 | % |                                  |  |    | %           |  |  | (1.0 | )%
|Additional structural advisory fee receivables (all)          |  |             | 14.0 |   |                                  |  | 2.2 |             |  |  | 1.5  |   
|Residual receivables                                          |  |             | 16.0 |   |                                  |  |    |             |  |  | (1.0 | ) 



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Discount RateAsset Servicing Fees. In determining an appropriate discount rate, we consider a
number of factors, including market data made available to us on spreads on federally guaranteed education loans and private education loans, rates used in the much broader ABS market, and yield curves for corporate subordinated debt with maturities
similar to the weighted-average life of our residuals. Since September 30, 2009, we have used a discount rate of 16.0% for purposes of estimating the fair value of asset servicing fees, which are contingent upon residual distributions to the
third-party owner of the Trust Certificate.

Discount RateAdditional Structural Advisory Fees. At March 31, 2011, we used a
discount rate of 14.0% to measure estimated fair value of additional structural advisory fees due from the Trusts, both consolidated and not consolidated, for which there were supporting residual cash flows. For those Trusts for which no residual
cash flows were projected, we used a discount rate of 16.0% because in those situations, the additional structural advisory fees were in a first-loss position. Due to the changes in our recovery rate assumptions at March 31, 2011, the number of
Trusts we project to have no residual cash flows increased. As a result, we used a discount rate of 16.0% for a greater number of trusts in the third quarter of fiscal 2011 compared to prior periods. For all other off-balance sheet VIEs, we used a
discount rate of 10.0%, unchanged from the prior period. Discount rates used for additional structural advisory fees reflect market data made available to us on ABS market spreads on federally guaranteed education loans and private education loans,
as well as rates used in the much broader ABS market. We believe that for the GATE Trusts and the Trusts, a 2.0% differential is appropriate between receivables in a first-loss position, such as asset servicing fees, residuals and additional
structural advisory fees with no supporting residual cash flows, when compared to additional structural advisory fees with supporting residual cash flows. For other off-balance sheet VIEs for which we are entitled to additional structural advisory
fees, we maintained the discount rate at 10.0%, reflecting performance characteristics and our most recent estimates of the shorter weighted-average lives of those fees.

At March 31, 2010, we used a discount rate of 14.0%, up 2.2% from the prior quarter, and 1.5% from the beginning of fiscal 2010. Prior to the methodology enhancements we put in place in the third
quarter of fiscal 2010, our projections indicated a shorter life for our additional structural advisory fees, and our discount rate was based on the 10-year U.S. Treasury Bond rate plus a risk premium (9.0% at June 30, 2009 and 8.0% at
December 31, 2009). In determining the risk premium, we considered factors such as yields on B-rated instruments and the level of available cash flows from residual interests that support the additional structural advisory fees. The change from
an index-based discount rate to a rate of 14.0% reflected the change in other cash flow assumptions that had the effect of lengthening the weighted-average life of the additional structural advisory fee receivables. Under the new assumptions,
projected residual interest cash flows available to support additional structural advisory fees were reduced and the timing of cash received for additional structural advisory fees was delayed. The combination of these factors led us to conclude
that the additional structural advisory fee receivables were more analogous to longer term financial instruments than 10-year debt issuances, and, therefore, a higher discount rate was appropriate.

Discount RateResiduals. In determining an appropriate discount rate, we consider a number of factors, including market data made available
to us on ABS market spreads on federally guaranteed education loans and private education loans, rates used in the much broader ABS market, and yield curves for corporate subordinated debt with maturities similar to the weighted-average life of our
residuals. At March 31, 2011, the only remaining residuals on our consolidated balance sheet are due from trusts dating from 2000 to 2004. Due to the seasoning of the trusts, applicable credit enhancements and the characteristics of the
collateral held by these trusts, the weighted-average lives of fees due from these trusts are much shorter than that of our asset servicing fees, and as such, we reduced the discount rate for these trusts to 10.0% in the first quarter of fiscal 2011
and kept the rate unchanged during the second and third quarters of fiscal 2011.

At March 31, 2010, we used a discount rate of 16.0% for
purposes of estimating the fair value of residuals receivables, which, as of that date, included residuals due from the three GATE Trusts that are now eliminated in consolidation. This discount rate was unchanged from the prior quarter but decreased
1.0% from the prior year end due to observed tightening of credit spreads during the period, and resulted in an increase in the estimated fair value of residuals during the nine months ended March 31, 2010.



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Other Assumptions

Forward LIBOR Curve. Fluctuations in interest rates, specifically the London Interbank Offered Rate (LIBOR), which is the underlying rate for most of the securitization trusts assets and
liabilities, can have a significant impact on the cash flows generated by each securitization trust. The forward LIBOR curve is a market observable input obtained from an independent third party. Changes in the forward LIBOR curve can have a
significant impact on the principal balances of the education loans (especially early in a loans life when interest is capitalizing on loans in deferment), which affects the overall net interest margin the securitization trust can generate.
Changes in the forward LIBOR curve can also impact our additional structural advisory fee receivables, as the majority of accrued but unpaid fees bear interest at LIBOR plus 1.5%. In addition, certain securitization trusts have issued a tranche of
ABS that bears a fixed interest rate. A decrease in the forward LIBOR curve may result in a reduced spread on the fixed interest-rate tranche, which, in turn, decreases the estimated fair value of our service receivables.

During the third quarter of fiscal 2011, the forward LIBOR curve was relatively unchanged from the prior quarter, and had no material effect on the
estimated fair value of service revenue receivables. For the nine months ended March 31, 2011, the forward LIBOR curve experienced an upward shift of approximately 50 to 65 basis points from June 30, 2010. Although the upward shift had no
effect on the fair value of additional structural advisory fees due from off-balance sheet VIEs, it increased the projected cash flows due to us from consolidated VIEs for additional structural advisory fees. As a result, less cash flows were
projected to be available to support the residuals held by the third-party owner of the Trust Certificate, which, in turn, resulted in a decrease in the estimated fair value of our asset serving fee receivables due to us.

During the third quarter of fiscal 2010, the forward LIBOR curve experienced an upward shift of approximately 75 to 100 basis points, resulting in an
increase in the estimated fair value of our structural advisory fee receivables. This shift more than offset the tightening of the forward LIBOR curve, by approximately 20 to 50 basis points, experienced during the second quarter of fiscal 2010 and
resulted in a net increase of $1.7 million in the estimated fair value of our structural advisory fee receivables for the first nine months of fiscal 2010.

Auction Rate Note Interest Rates. As a result of failed auctions and deterioration in the credit ratings of securitization trusts that issued auction rate notes, outstanding auction rate notes
currently bear interest at a maximum spread over one-month LIBOR as specified in the applicable indentures. During fiscal 2010 and the first nine months of fiscal 2011, we have assumed that the notes would continue to bear interest at the
contractual maximum spread.

(10) Long-term Borrowings

Through the securitization process, the consolidated securitization trusts issued debt instruments to finance the purchase of education loans obtained from originating lenders or their assignees. The debt
securities issued are obligations of the trusts. Holders of these debt securities generally have recourse only to the assets of the particular trust that issued the debt, and not to any other securitization trusts, FMD, its operating subsidiaries,
or the originating lenders or their assignees.

The following table provides additional information on long-term borrowings:



|                                                                                                 |  |                        |           |  |                                                                           |  |               |                       |  |  |           | 
|------------------------------------------------------------------------------------------------ |  | ---------------------- | --------- |  | ------------------------------------------------------------------------- |  | ------------- | --------------------- |  |  | --------- | 
|                                                                                                 |  | March 31, 2011         |          
|                                                                                                 |  | Carrying value         |           |  | Range of spreads overindex or range of fixedinterest 
rates (annualbasis) |  |               | Distributionfrequency | 
|                                                                                                 |  | (dollars in thousands) |          
|Principal outstanding on variable-rate ABS, indexed to one-month LIBOR(1)unless otherwise noted: |  |                        |           |  |                                                                           |  |               |                       |  |  |           | 
|Senior notes and certificates                                                                    |  | $                      | 6,536,411 |  |                                                                           |  | +0.03 to 0.48 | %                     |  |  | Monthly   | 
|Senior notes indexed to three-month LIBOR(1)                                                     |  |                        | 250,000   |  |                                                                           |  | +0.48         | %                     |  |  | Quarterly | 
|Subordinated notes                                                                               |  |                        | 1,446,118 |  |                                                                           |  | +0.32 to 1.35 |                       |  |  | Monthly   | 
|Senior and subordinated auction rate notes                                                       |  |                        | 114,550   |  |                                                                           |  | +3.50         | (2)                   |  |  | Quarterly | 
|Unamortized proceeds of senior fixed-rate interest-only securities(3)                            |  |                        | 63,732    |  |                                                                           |  | 4.80 to 9.75  |                       |  |  | Monthly   | 
|                                                                                                 |  |                        |           |  |                                                                           |  |               |                       |  |  |           | 
|Total long-term debt                                                                             |  | $                      | 8,410,811 |  |                                                                           |  |               |                       |  |  |           | 
|                                                                                                 |  |                        |           |  |                                                                           |  |               |                       |  |  |           | 



|(1) | The averages of one-month LIBOR for the three and nine months ended March 31, 2011 were 0.26% and 0.27%, respectively. The averages of three-month LIBOR for the
three and nine months ended March 31, 2011 were 0.29% and 0.34%, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Failed auctions occurred and have persisted with respect to a consolidated securitization trust that issued auction rate notes. When failed auctions occur, the notes
bear interest at a spread over one-month LIBOR as specified in the applicable indenture, based on the ratings assigned to the notes by independent rating agencies. Deterioration in securitization trust performance has resulted in downgrades to the
ratings assigned to these notes, and, as a result, these notes bear interest at the maximum allowable spread over one-month LIBOR.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Interest-only securities had a combined notional value of $1.50 billion at March 31, 2011 and have varying maturity dates from April 2011 to
October 2012.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

Interest payments and principal paydowns on the debt are made from collections on the purchased loans, or
from the release of trust cash reserves, on a monthly or quarterly basis, as indicated in the table above. Within any given securitization trust, there may exist multiple classes of notes, certificates or interest-only securities. Typically, notes
within a given class are sequentially ordered based upon their original scheduled maturities. Interest payments and principal paydowns are made each distribution period based on cash available to the trust in accordance with the subordination
priorities established in the trust indentures. Payments on interest-only strips are made based on notional values and have scheduled maturity dates. Principal payments are not based on scheduled maturity dates. Each securitization trust is a
standalone, bankruptcy remote entity, meaning that collateral performance, cash flow, credit enhancement and subordination for a given trust is independent from any other trust.

(11) Fair Value of Financial Instruments

(a) Financial Instruments
Recorded at Fair Value in our Balance Sheet

For financial instruments recorded at fair value in our balance sheet, we base that
financial instruments categorization within the valuation hierarchy 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 financial instruments
recorded at fair value in our balance sheet:



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



| |  |  | Investments available for sale are federal agency mortgage-backed securities that are marked to market using pricing from an independent third party
and are classified as Level 2 in the hierarchy.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Participation account deposits and service revenue receivables do not have available market prices. As such, we estimate fair value using the net
present value of expected future cash flows. At March 31, 2011, the fair value of deposits for participation accounts was not materially different from the cash balance of the underlying interest-bearing deposits. See Note 9, Service
Revenue Receivables and Related Income, for a description of significant observable and unobservable inputs used to develop the estimated fair values of service revenue receivables. At June 30, 2010, market prices were not available for
education loans held for sale, and we estimated fair value using the net present value of expected future cash flows. These assets are classified within Level 3 of the valuation hierarchy.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table presents financial instruments carried at fair value in our consolidated balance sheet, in accordance with the valuation hierarchy
described above, on a recurring and nonrecurring basis:



|                                             |  |                        |         |  |               |   |       |         |  |   |                    |  |  |         |         |  |         |   |         |         |  |   |                    |  |  |   |         |  |  |   |         | 
|-------------------------------------------- |  | ---------------------- | ------- |  | ------------- | - | ----- | ------- |  | - | ------------------ |  |  | ------- | ------- |  | ------- | - | ------- | ------- |  | - | ------------------ |  |  | - | ------- |  |  | - | ------- | 
|                                             |  | March 31, 2011         |         |  | June 30, 2010 |  
|                                             |  | Level 1                |         |  | Level 2       |   |       | Level 3 |  |   | Totalcarryingvalue |  |  | Level 1 |         |  | Level 2 |   |         | Level 3 |  |   | Totalcarryingvalue | 
|                                             |  | (dollars in thousands) |        
|Assets:                                      |  |                        |         |  |               |   |       |         |  |   |                    |  |  |         |         |  |         |   |         |         |  |   |                    |  |  |   |         |  |  |   |         | 
|Recurring:                                   |  |                        |         |  |               |   |       |         |  |   |                    |  |  |         |         |  |         |   |         |         |  |   |                    |  |  |   |         |  |  |   |         | 
|Cash equivalents                             |  | $                      | 176,299 |  |               | $ |      |         |  | $ |                   |  |  | $       | 176,299 |  |         | $ | 216,050 |         |  | $ |                   |  |  | $ |        |  |  | $ | 216,050 | 
|Investments available for sale               |  |                        |        |  |               |   | 3,559 |         |  |   |                   |  |  |         | 3,559   |  |         |   |        |         |  |   | 4,471              |  |  |   |        |  |  |   | 4,471   | 
|Deposits for participation interest accounts |  |                        |        |  |               |   |      |         |  |   | 8,505              |  |  |         | 8,505   |  |         |   |        |         |  |   |                   |  |  |   |        |  |  |   |        | 
|Service revenue receivables                  |  |                        |        |  |               |   |      |         |  |   | 9,789              |  |  |         | 9,789   |  |         |   |        |         |  |   |                   |  |  |   | 53,279  |  |  |   | 53,279  | 
|Non-recurring:                               |  |                        |         |  |               |   |       |         |  |   |                    |  |  |         |         |  |         |   |         |        
|Education loans held for sale(1)             |  |                        |        |  |               |   |      |         |  |   |                   |  |  |         |        |  |         |   |        |         |  |   |                   |  |  |   | 105,082 |  |  |   | 105,082 | 
|                                             |  |                        |         |  |               |   |       |         |  |   |                    |  |  |         |         |  |         |   |         |         |  |   |                    |  |  |   |         |  |  |   |         | 
|Total assets                                 |  | $                      | 176,299 |  |               | $ | 3,559 |         |  | $ | 18,294             |  |  | $       | 198,152 |  |         | $ | 216,050 |         |  | $ | 4,471              |  |  | $ | 158,361 |  |  | $ | 378,882 | 
|                                             |  |                        |         |  |               |   |       |         |  |   |                    |  |  |         |         |  |         |   |         |         |  |   |                    |  |  |   |         |  |  |   |         | 



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|(1) | Education loans held for sale were held by UFSB-SPV, which was deconsolidated on July 1, 2010 in connection with our adoption of ASU 2009-16 and ASU 2009-17.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table presents activity related to our financial assets categorized as Level 3 of the valuation hierarchy,
valued on a recurring basis, for the three and nine months ended March 31, 2011 and 2010. All realized and unrealized gains and losses recorded during the periods presented relate to assets still held at our balance sheet date. There have been
no transfers in or out of Level 3 of the hierarchy, nor between Levels 1 and 2, for the periods presented.



|                                             |  |                              |        |  |                                                                      |   |        |                       |  |   |                          |   |  |                          |        |  |                                                             |   |        |             |  |   |                          |   |  |   |      |   |  |   |        | 
|-------------------------------------------- |  | ---------------------------- | ------ |  | -------------------------------------------------------------------- | - | ------ | --------------------- |  | - | ------------------------ | - |  | ------------------------ | ------ |  | ----------------------------------------------------------- | - | ------ | ----------- |  | - | ------------------------ | - |  | - | ---- | - |  | - | ------ | 
|                                             |  | Three months ended March 31, |       
|                                             |  | 2011                         |        |  | 2010                                                                 |  
|                                             |  | Fairvalue,January 1,2011     |        |  | Realized andunrealizedgains(losses),recorded 
innon-interestrevenues |   |        | Fundingandsettlements |  |   | Fair value,March 31,2011 |   |  | Fairvalue,January 1,2010 |        |  | Realized andunrealizedgains,recorded innon-interestrevenues |   |        | Settlements |  |   | Fair value,March 31,2010 |  
|                                             |  | (dollars in thousands)       |       
|Assets:                                      |  |                              |        |  |                                                                      |   |        |                       |  |   |                          |   |  |                          |        |  |                                                             |   |        |             |  |   |                          |   |  |   |      |   |  |   |        | 
|Deposits for participation interest accounts |  | $                            | 8,492  |  |                                                                      | $ | 13     |                       |  | $ |                         |   |  | $                        | 8,505  |  |                                                             | $ |       |             |  | $ |                         |   |  | $ |     |   |  | $ |       | 
|Service revenue receivables                  |  |                              | 14,547 |  |                                                                      |   | (4,726 | )                     |  |   | (32                      | ) |  |                          | 9,789  |  |                                                             |   | 74,588 |             |  |   | (22,033                  | ) |  |   | (382 | ) |  |   | 52,173 | 
|                                             |  |                              |        |  |                                                                      |   |        |                       |  |   |                          |   |  |                          |        |  |                                                             |   |        |             |  |   |                          |   |  |   |      |   |  |   |        | 
|Total assets                                 |  | $                            | 23,039 |  |                                                                      | $ | (4,713 | )                     |  | $ | (32                      | ) |  | $                        | 18,294 |  |                                                             | $ | 74,588 |             |  | $ | (22,033                  | ) |  | $ | (382 | ) |  | $ | 52,173 | 
|                                             |  |                              |        |  |                                                                      |   |        |                       |  |   |                          |   |  |                          |        |  |                                                             |   |        |             |  |   |                          |   |  |   |      |   |  |   |        | 



|                                             |  |                             |        |  |                              |   |         |                                                             |  |   |                       |   |  |                          |       |   |                       |   |        |                                                             |  |   |             |  |  |                          |         |   |  |   |      |   |  |   |        | 
|-------------------------------------------- |  | --------------------------- | ------ |  | ---------------------------- | - | ------- | ----------------------------------------------------------- |  | - | --------------------- | - |  | ------------------------ | ----- | - | --------------------- | - | ------ | ----------------------------------------------------------- |  | - | ----------- |  |  | ------------------------ | ------- | - |  | - | ---- | - |  | - | ------ | 
|                                             |  | Nine months ended March 31, |       
|                                             |  | 2011                        |        |  | 2010                         |  
|                                             |  | Fairvalue,July 1,2010       |        |  | Change inaccountingprinciple |   |         | Realized andunrealizedgains,recorded innon-interestrevenues |  |   | Fundingandsettlements |   |  | Fair value,March 31,2011 |       |   | Fairvalue,July 1,2009 |   |        | Realized andunrealizedgains,recorded innon-interestrevenues |  |   | Settlements |  |  | Fair value,March 31,2010 |        
|                                             |  | (dollars in thousands)      |       
|Assets:                                      |  |                             |        |  |                              |   |         |                                                             |  |   |                       |   |  |                          |       |   |                       |   |        |                                                             |  |   |             | 
|Deposits for participation interest accounts |  | $                           |       |  |                              | $ |        |                                                             |  | $ | 28                    |   |  | $                        | 8,477 |   |                       | $ | 8,505  |                                                             |  | $ |            |  |  | $                        |        |   |  | $ |     |   |  | $ |       | 
|Service revenue receivables                  |  |                             | 53,279 |  |                              |   | (38,692 | )                                                           |  |   | (4,338                | ) |  |                          | (460  | ) |                       |   | 9,789  |                                                             |  |   | 67,475      |  |  |                          | (14,873 | ) |  |   | (429 | ) |  |   | 52,173 | 
|                                             |  |                             |        |  |                              |   |         |                                                             |  |   |                       |   |  |                          |       |   |                       |   |        |                                                             |  |   |             |  |  |                          |         |   |  |   |      |   |  |   |        | 
|Total assets                                 |  | $                           | 53,279 |  |                              | $ | (38,692 | )                                                           |  | $ | (4,310                | ) |  | $                        | 8,017 |   |                       | $ | 18,294 |                                                             |  | $ | 67,475      |  |  | $                        | (14,873 | ) |  | $ | (429 | ) |  | $ | 52,173 | 
|                                             |  |                             |        |  |                              |   |         |                                                             |  |   |                       |   |  |                          |       |   |                       |   |        |                                                             |  |   |             |  |  |                          |         |   |  |   |      |   |  |   |        | 

(b) Fair Values of Other Financial Instruments

Fair value estimates for financial instruments not carried at fair value in our consolidated balance sheet are generally subjective in nature, and are made as of a specific point in time based on the
characteristics of the financial instruments and relevant market information. We have elected not to apply the fair value provisions available under ASC 820, Fair Value Measurements and Disclosures, to these assets and liabilities. Disclosure
of fair value estimates is not required for certain items, such as premises and equipment, intangible assets and income tax assets and liabilities.

The short duration of many of our assets and liabilities result in a significant number of financial instruments for which fair value equals or closely approximates the value reported in our consolidated
balance sheet. We believe that the carrying values of short-term investments, federal funds sold, restricted cash and guaranteed investment contracts, deposits and restricted funds due to clients approximate fair value due to their short duration,
and that the fair value of mortgage loans held to maturity is not materially different from its carrying value.

The estimated fair values of
education loans held to maturity and long-term borrowings presented in the table below were based on the net present value of cash flows, using the same observable and unobservable performance assumptions that we used to estimate the fair value of
our service revenue receivables, applying discount rates commensurate with the duration, yield and credit ratings of the assets or liabilities, as applicable. We estimated the fair value of UFSB-SPVs liability under the education loan
warehouse facility based upon the fair values of eligible assets used as collateral.

The following table discloses the carrying values and
estimated fair values of certain financial instruments not recorded at fair value in our balance sheet:



|                                                                   |  |                        |           |  |               |   |           |                |  |   |            |  |  |   |         | 
|------------------------------------------------------------------ |  | ---------------------- | --------- |  | ------------- | - | --------- | -------------- |  | - | ---------- |  |  | - | ------- | 
|                                                                   |  | March 31, 2011         |           |  | June 30, 2010 |  
|                                                                   |  | Carrying value         |           |  | Fair value    |   |           | Carrying value |  |   | Fair value | 
|                                                                   |  | (dollars in thousands) |          
|Education loans held to maturity, net of allowance for loan losses |  | $                      | 7,134,944 |  |               | $ | 5,239,023 |                |  | $ | 391        |  |  | $ | 391     | 
|Long-term borrowings                                               |  |                        | 8,410,811 |  |               |   | 5,771,687 |                |  |   |           |  |  |   |        | 
|Education loan warehouse facility                                  |  |                        |          |  |               |   |          |                |  |   | 218,059    |  |  |   | 108,447 | 



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(12) Commitments and Contingencies

(a) Income Tax Matters

Massachusetts Appellate Tax Board
Matters.We are involved in several matters before the Massachusetts Appellate Tax Board (ATB) relating to the Massachusetts tax treatment of GATE Holdings, Inc. (GATE), a former subsidiary of FMD. We have taken the position in
these proceedings that GATE is properly taxable as a financial institution and is entitled to apportion its income under applicable provisions of Massachusetts tax law. The Massachusetts Commissioner of Revenue (Commissioner) has taken
alternative positions with FMD: that GATE is properly taxable as a business corporation, or that GATE is taxable as a financial institution, but is not entitled to apportionment or is subject to 100% Massachusetts apportionment. In
September 2007, we filed a petition with the ATB seeking a refund of state taxes paid for our taxable year ended June 30, 2004, all of which taxes had previously been paid as if GATE were a business corporation. In December 2009,
the Commissioner made additional assessments of tax, along with accrued interest, of approximately $11.9 million for GATEs taxable years ended June 30, 2004, 2005 and 2006, and approximately $8.1 million for our taxable years ended
June 30, 2005 and 2006. In March 2010, we filed petitions with the ATB contesting the additional assessments against GATE and us. The assessments against GATE are in the alternative to the assessments against us, and if the
assessments against GATE for the taxable year ended June 30, 2004 are valid, then we would be entitled to an income tax refund of approximately $1.1 million for the same fiscal year. In April 2011, the ATB held an evidentiary hearing on
the foregoing. We cannot predict the timing or outcome of these matters, but an adverse outcome may have a material impact on our state tax liability not only for the taxable years at issue, but also for the taxable years 2007 through 2009. We
believe we have recorded adequate reserves for these proceedings in our balance sheet for all of the potentially affected taxable years.

Internal Revenue Service Audit. As a result of the sale of the Trust Certificate, which was effective March 31, 2009, as well as our
operating losses incurred in fiscal 2009, we recorded an income tax receivable for federal income taxes paid on taxable income in prior taxable years. In fiscal 2010, we received a total of $189.3 million in federal and state income tax refunds
related to our income tax receivables. In April 2010, the Internal Revenue Service (IRS) commenced an audit of our tax returns for taxable years 2007, 2008 and 2009. Such audits are consistent with the practice of the Joint Committee of
Taxation, which requires the IRS to audit a taxpayer who claims and receives a tax refund of a specified magnitude. In connection with this audit, the IRS is reviewing, among other things, the tax treatment of the sale of the Trust Certificate,
including the related income tax refund previously received by us. The IRS has also expanded its audit to include our fiscal 2010 tax return in light of the $45.1 million tax refund that we received in October 2010. We cannot predict the timing
or outcome of the IRS audit. As of March 31, 2011, the IRS has not proposed any adjustments in connection with its audit.

(b) Performance Guaranty

In
connection with the sale by Union Federal of an education loan portfolio in October 2009, FMD delivered a performance guaranty (Performance Guaranty) pursuant to which FMD guarantees the performance by Union Federal of its obligations and
agreements under the loan purchase and sale agreement relating to the transaction. The Performance Guaranty provides that FMD will be released from its obligations, without any action of the purchaser, upon (1) any merger or consolidation of
Union Federal into another entity as a result of which a majority of the capital stock of Union Federal is converted into or exchanged for the right to receive cash, securities or other property or (2) a sale of all or substantially all of the
assets of Union Federal, in either case after which transaction Union Federal is no longer a subsidiary of FMD. We are not aware of any contingencies existing at our balance sheet date that are both probable and estimable for which we would record a
reserve, nor can we estimate a range of possible losses at this time.

(c) Assumption of Potential Contingent Liabilities of Union
Federal

In April 2010, FMD and certain of its subsidiaries entered into agreements relating to the restructuring of the education
loan warehouse facility (Facility) of UFSB-SPV. In connection with the restructuring, the third-party conduit lender released any and all potential claims against Union Federal and UFSB-SPV pursuant to the indenture relating to the Facility based
upon events arising prior to April 16, 2010, to the extent such claims would exceed $20.0 million in the aggregate (Liability Cap). Neither Union Federal nor UFSB-SPV would have any liability until the conduit lenders aggregate
losses exceeded $3.5 million (Deductible), at which point Union Federal and UFSB-SPV would only be liable for amounts above the Deductible up to the Liability Cap. Neither the Liability Cap nor the Deductible would apply, however, in cases of
fraud, willful misconduct, gross negligence or third-party claims by or on behalf of borrowers against the conduit lender based on loan origination errors. In addition, the release is not deemed a waiver of rights previously reserved but not
exercised by the conduit lender, except as specifically released pursuant to a settlement agreement.



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FMD assumed any remaining contingent liability of Union Federal and its affiliates, other than UFSB-SPV,
under the Facility arising prior to April 16, 2010, subject to the Liability Cap discussed above. In addition, FMD assumed any contingent liability of Union Federal under the Facility arising prior to April 16, 2010 based on fraud, willful
misconduct, gross negligence, third-party claims by or on behalf of borrowers against the conduit lender based on loan origination errors or rights not otherwise released by the conduit lender. We are not aware of any contingencies existing at our
balance sheet date that are both probable and estimable for which we would record a reserve, nor can we estimate a range of possible losses at this time.



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(13) Segment Reporting

Operating results by segment were as follows:



|                                                                |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|--------------------------------------------------------------- |  | ----------------------------------------------------------- | ------- | - | -------------------- | - | ------- | ------------ |  | - | ------ | - |  | ------------------ | ------- | - | ------------------------------- | - | ------- | ----- |  | - | ------ | - |  | - | ------- | -
|                                                                |  | Three months ended March 31,                                |        
|                                                                |  | 2011                                                        |         |   | 2010                 |  
|                                                                |  | EducationFinancing                                          |         |   | SecuritizationTrusts |   |         | Eliminations |  |   | Total  |   |  | EducationFinancing |         |   | Deconsolidationand Eliminations |   |         | Total | 
|                                                                |  | (dollars and shares in thousands, except per share amounts) |        
|Revenues:                                                       |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |  
|Net interest income:                                            |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |  
|Interest income                                                 |  | $                                                           | 557     |   |                      | $ | 79,323  |              |  | $ | 9      |   |  | $                  | 79,889  |   |                                 | $ | 605     |       |  | $ | 3,777  |   |  | $ | 4,382   |  
|Interest expense                                                |  |                                                             | (206    | ) |                      |   | (14,881 | )            |  |   |       |   |  |                    | (15,087 | ) |                                 |   | (615    | )     |  |   | (3,111 | ) |  |   | (3,726  | )
|                                                                |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|Net interest income                                             |  |                                                             | 351     |   |                      |   | 64,442  |              |  |   | 9      |   |  |                    | 64,802  |   |                                 |   | (10     | )     |  |   | 666    |   |  |   | 656     |  
|Provision for loan losses                                       |  |                                                             | (10     | ) |                      |   | (73,745 | )            |  |   |       |   |  |                    | (73,755 | ) |                                 |   | (152    | )     |  |   |       |   |  |   | (152    | )
|                                                                |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|Net interest income (loss) after provision for loan losses      |  |                                                             | 341     |   |                      |   | (9,303  | )            |  |   | 9      |   |  |                    | (8,953  | ) |                                 |   | (162    | )     |  |   | 666    |   |  |   | 504     |  
|Non-interest revenues:                                          |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|Asset servicing fees:                                           |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|Fee income                                                      |  |                                                             | 170     |   |                      |   |        |              |  |   |       |   |  |                    | 170     |   |                                 |   | 2,133   |       |  |   |       |   |  |   | 2,133   |  
|Fee updates                                                     |  |                                                             | (5,129  | ) |                      |   |        |              |  |   |       |   |  |                    | (5,129  | ) |                                 |   | (2,635  | )     |  |   |       |   |  |   | (2,635  | )
|                                                                |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|Total asset servicing fees                                      |  |                                                             | (4,959  | ) |                      |   |        |              |  |   |       |   |  |                    | (4,959  | ) |                                 |   | (502    | )     |  |   |       |   |  |   | (502    | )
|Additional structural advisory fees and residualstrust updates |  |                                                             | (21,413 | ) |                      |   |        |              |  |   | 21,646 |   |  |                    | 233     |   |                                 |   | (21,531 | )     |  |   |       |   |  |   | (21,531 | )
|Administrative and other fees                                   |  |                                                             | 11,414  |   |                      |   | 1,818   |              |  |   | (2,368 | ) |  |                    | 10,864  |   |                                 |   | 4,725   |       |  |   | (164   | ) |  |   | 4,561   |  
|                                                                |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|Total non-interest revenues                                     |  |                                                             | (14,958 | ) |                      |   | 1,818   |              |  |   | 19,278 |   |  |                    | 6,138   |   |                                 |   | (17,308 | )     |  |   | (164   | ) |  |   | (17,472 | )
|                                                                |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|Total revenues                                                  |  |                                                             | (14,617 | ) |                      |   | (7,485  | )            |  |   | 19,287 |   |  |                    | (2,815  | ) |                                 |   | (17,470 | )     |  |   | 502    |   |  |   | (16,968 | )
|Non-interest expenses:                                          |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |  
|Compensation and benefits                                       |  |                                                             | 11,615  |   |                      |   |        |              |  |   |       |   |  |                    | 11,615  |   |                                 |   | 8,594   |       |  |   |       |   |  |   | 8,594   |  
|General and administrative expenses                             |  |                                                             | 15,563  |   |                      |   | (9,724  | )            |  |   | 19,157 |   |  |                    | 24,996  |   |                                 |   | 15,528  |       |  |   | (442   | ) |  |   | 15,086  |  
|Losses on education loans held for sale                         |  |                                                             |        |   |                      |   |        |              |  |   |       |   |  |                    |        |   |                                 |   |        |       |  |   | 4,180  |   |  |   | 4,180   |  
|                                                                |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|Total non-interest expenses                                     |  |                                                             | 27,178  |   |                      |   | (9,724  | )            |  |   | 19,157 |   |  |                    | 36,611  |   |                                 |   | 24,122  |       |  |   | 3,738  |   |  |   | 27,860  |  
|                                                                |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|Income (loss) before other income and income taxes              |  |                                                             | (41,795 | ) |                      |   | 2,239   |              |  |   | 130    |   |  |                    | (39,426 | ) |                                 |   | (41,592 | )     |  |   | (3,236 | ) |  |   | (44,828 | )
|Other income  gain from TERI settlement                        |  |                                                             |        |   |                      |   | 18      |              |  |   |       |   |  |                    | 18      |   |                                 |   |        |       |  |   |       |   |  |   |        |  
|                                                                |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|Income (loss) before income taxes                               |  |                                                             | (41,795 | ) |                      |   | 2,257   |              |  |   | 130    |   |  |                    | (39,408 | ) |                                 |   | (41,592 | )     |  |   | (3,236 | ) |  |   | (44,828 | )
|Income tax expense (benefit)                                    |  |                                                             | (82     | ) |                      |   |        |              |  |   |       |   |  |                    | (82     | ) |                                 |   | (4,647  | )     |  |   | 302    |   |  |   | (4,345  | )
|                                                                |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|Net income (loss)                                               |  | $                                                           | (41,713 | ) |                      | $ | 2,257   |              |  | $ | 130    |   |  | $                  | (39,326 | ) |                                 | $ | (36,945 | )     |  | $ | (3,538 | ) |  | $ | (40,483 | )
|                                                                |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    |         |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|Net loss per basic and diluted share                            |  | $                                                           | (0.41   | ) |                      | $ | 0.02    |              |  | $ |       |   |  | $                  | (0.39   | ) |                                 | $ | (0.37   | )     |  | $ | (0.04  | ) |  | $ | (0.41   | )
|Basic and diluted weighted-average shares outstanding           |  |                                                             |         |   |                      |   |         |              |  |   |        |   |  |                    | 100,834 |   |                                 |   |         |       |  |   |        |   |  |   | 99,248  |  



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|                                                                |  |                                                             |         |   |                      |   |          |              |  |   |        |   |  |                    |          |   |                                 |   |          |       |  |   |         |   |  |   |          |  
|--------------------------------------------------------------- |  | ----------------------------------------------------------- | ------- | - | -------------------- | - | -------- | ------------ |  | - | ------ | - |  | ------------------ | -------- | - | ------------------------------- | - | -------- | ----- |  | - | ------- | - |  | - | -------- | -
|                                                                |  | Nine months ended March 31,                                 |        
|                                                                |  | 2011                                                        |         |   | 2010                 |  
|                                                                |  | EducationFinancing                                          |         |   | SecuritizationTrusts |   |          | Eliminations |  |   | Total  |   |  | EducationFinancing |          |   | Deconsolidationand Eliminations |   |          | Total | 
|                                                                |  | (dollars and shares in thousands, except per share amounts) |        
|Revenues:                                                       |  |                                                             |         |  
|Net interest income:                                            |  |                                                             |         |  
|Interest income                                                 |  | $                                                           | 1,478   |   |                      | $ | 251,346  |              |  | $ | 29     |   |  | $                  | 252,853  |   |                                 | $ | 6,505    |       |  | $ | 11,813  |   |  | $ | 18,318   |  
|Interest expense                                                |  |                                                             | (823    | ) |                      |   | (48,974  | )            |  |   |       |   |  |                    | (49,797  | ) |                                 |   | (2,219   | )     |  |   | (9,502  | ) |  |   | (11,721  | )
|                                                                |  |                                                             |         |   |                      |   |          |              |  |   |        |   |  |                    |          |   |                                 |   |          |       |  |   |         |   |  |   |          |  
|Net interest income                                             |  |                                                             | 655     |   |                      |   | 202,372  |              |  |   | 29     |   |  |                    | 203,056  |   |                                 |   | 4,286    |       |  |   | 2,311   |   |  |   | 6,597    |  
|Provision for loan losses                                       |  |                                                             | (277    | ) |                      |   | (305,679 | )            |  |   |       |   |  |                    | (305,956 | ) |                                 |   | (105     | )     |  |   |        |   |  |   | (105     | )
|                                                                |  |                                                             |         |   |                      |   |          |              |  |   |        |   |  |                    |          |   |                                 |   |          |       |  |   |         |   |  |   |          |  
|Net interest income (loss) after provision for loan losses      |  |                                                             | 378     |   |                      |   | (103,307 | )            |  |   | 29     |   |  |                    | (102,900 | ) |                                 |   | 4,181    |       |  |   | 2,311   |   |  |   | 6,492    |  
|Non-interest revenues:                                          |  |                                                             |         |  
|Asset servicing fees:                                           |  |                                                             |         |  
|Fee income                                                      |  |                                                             | 1,929   |   |                      |   |         |              |  |   |       |   |  |                    | 1,929    |   |                                 |   | 6,012    |       |  |   |        |   |  |   | 6,012    |  
|Fee updates                                                     |  |                                                             | (6,165  | ) |                      |   |         |              |  |   |       |   |  |                    | (6,165   | ) |                                 |   | (2,272   | )     |  |   |        |   |  |   | (2,272   | )
|                                                                |  |                                                             |         |   |                      |   |          |              |  |   |        |   |  |                    |          |   |                                 |   |          |       |  |   |         |   |  |   |          |  
|Total asset servicing fees                                      |  |                                                             | (4,236  | ) |                      |   |         |              |  |   |       |   |  |                    | (4,236   | ) |                                 |   | 3,740    |       |  |   |        |   |  |   | 3,740    |  
|Additional structural advisory fees and residualstrust updates |  |                                                             | (16,654 | ) |                      |   |         |              |  |   | 16,552 |   |  |                    | (102     | ) |                                 |   | (18,613  | )     |  |   |        |   |  |   | (18,613  | )
|Administrative and other fees                                   |  |                                                             | 20,199  |   |                      |   | 2,393    |              |  |   | (7,478 | ) |  |                    | 15,114   |   |                                 |   | 15,588   |       |  |   | (498    | ) |  |   | 15,090   |  
|                                                                |  |                                                             |         |   |                      |   |          |              |  |   |        |   |  |                    |          |   |                                 |   |          |       |  |   |         |   |  |   |          |  
|Total non-interest revenues                                     |  |                                                             | (691    | ) |                      |   | 2,393    |              |  |   | 9,074  |   |  |                    | 10,776   |   |                                 |   | 715      |       |  |   | (498    | ) |  |   | 217      |  
|                                                                |  |                                                             |         |   |                      |   |          |              |  |   |        |   |  |                    |          |   |                                 |   |          |       |  |   |         |   |  |   |          |  
|Total revenues                                                  |  |                                                             | (313    | ) |                      |   | (100,914 | )            |  |   | 9,103  |   |  |                    | (92,124  | ) |                                 |   | 4,896    |       |  |   | 1,813   |   |  |   | 6,709    |  
|Non-interest expenses:                                          |  |                                                             |         |  
|Compensation and benefits                                       |  |                                                             | 27,640  |   |                      |   |         |              |  |   |       |   |  |                    | 27,640   |   |                                 |   | 24,937   |       |  |   |        |   |  |   | 24,937   |  
|General and administrative expenses                             |  |                                                             | 40,088  |   |                      |   | 17,083   |              |  |   | 9,538  |   |  |                    | 66,709   |   |                                 |   | 45,516   |       |  |   | 111     |   |  |   | 45,627   |  
|Losses on education loans held for sale                         |  |                                                             |        |   |                      |   |         |              |  |   |       |   |  |                    |         |   |                                 |   | 63,573   |       |  |   | 75,221  |   |  |   | 138,794  |  
|                                                                |  |                                                             |         |   |                      |   |          |              |  |   |        |   |  |                    |          |   |                                 |   |          |       |  |   |         |   |  |   |          |  
|Total non-interest expenses                                     |  |                                                             | 67,728  |   |                      |   | 17,083   |              |  |   | 9,538  |   |  |                    | 94,349   |   |                                 |   | 134,026  |       |  |   | 75,332  |   |  |   | 209,358  |  
|                                                                |  |                                                             |         |   |                      |   |          |              |  |   |        |   |  |                    |          |   |                                 |   |          |       |  |   |         |   |  |   |          |  
|Loss before other income and income taxes                       |  |                                                             | (68,041 | ) |                      |   | (117,997 | )            |  |   | (435   | ) |  |                    | (186,473 | ) |                                 |   | (129,130 | )     |  |   | (73,519 | ) |  |   | (202,649 | )
|Other income  gain from TERI settlement                        |  |                                                             | 8,112   |   |                      |   | 42,587   |              |  |   |       |   |  |                    | 50,699   |   |                                 |   |         |       |  |   |        |   |  |   |         |  
|                                                                |  |                                                             |         |   |                      |   |          |              |  |   |        |   |  |                    |          |   |                                 |   |          |       |  |   |         |   |  |   |          |  
|Loss before income taxes                                        |  |                                                             | (59,929 | ) |                      |   | (75,410  | )            |  |   | (435   | ) |  |                    | (135,774 | ) |                                 |   | (129,130 | )     |  |   | (73,519 | ) |  |   | (202,649 | )
|Income tax expense (benefit)                                    |  |                                                             | 1,957   |   |                      |   |         |              |  |   |       |   |  |                    | 1,957    |   |                                 |   | (27,666  | )     |  |   | 299     |   |  |   | (27,367  | )
|                                                                |  |                                                             |         |   |                      |   |          |              |  |   |        |   |  |                    |          |   |                                 |   |          |       |  |   |         |   |  |   |          |  
|Net loss                                                        |  | $                                                           | (61,886 | ) |                      | $ | (75,410  | )            |  | $ | (435   | ) |  | $                  | (137,731 | ) |                                 | $ | (101,464 | )     |  | $ | (73,818 | ) |  | $ | (175,282 | )
|                                                                |  |                                                             |         |   |                      |   |          |              |  |   |        |   |  |                    |          |   |                                 |   |          |       |  |   |         |   |  |   |          |  
|Net loss per basic and diluted share                            |  | $                                                           | (0.61   | ) |                      | $ | (0.75    | )            |  | $ | (0.01  | ) |  | $                  | (1.37    | ) |                                 | $ | (1.02    | )     |  | $ | (0.75   | ) |  | $ | (1.77    | )
|Basic and diluted weighted-average shares outstanding           |  |                                                             |         |   |                      |   |          |              |  |   |        |   |  |                    | 100,809  |   |                                 |   |          |       |  |   |         |   |  |   | 99,232   |  



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|                                                  |  |                        |         |  |                      |   |            |              |  |   |         |   |  |   |           |  
|------------------------------------------------- |  | ---------------------- | ------- |  | -------------------- | - | ---------- | ------------ |  | - | ------- | - |  | - | --------- | -
|                                                  |  | March 31, 2011         |        
|                                                  |  | EducationFinancing     |         |  | SecuritizationTrusts |   |            | Eliminations |  |   | Total   |  
|                                                  |  | (dollars in thousands) |        
|Assets:                                           |  |                        |         |  |                      |   |            |              |  |   |         |   |  |   |           |  
|Cash, cash equivalents and short-term investments |  | $                      | 278,709 |  |                      | $ |           |              |  | $ |        |   |  | $ | 278,709   |  
|Restricted cash and investments                   |  |                        | 97,436  |  |                      |   | 129,576    |              |  |   |        |   |  |   | 227,012   |  
|Education loans                                   |  |                        |        |  |                      |   | 7,135,334  |              |  |   | (390    | ) |  |   | 7,134,944 |  
|Service revenue receivables                       |  |                        | 31,929  |  |                      |   |           |              |  |   | (22,140 | ) |  |   | 9,789     |  
|All other assets                                  |  |                        | 83,296  |  |                      |   | 108,931    |              |  |   | (3,499  | ) |  |   | 188,728   |  
|                                                  |  |                        |         |  |                      |   |            |              |  |   |         |   |  |   |           |  
|Total assets                                      |  | $                      | 491,370 |  |                      | $ | 7,373,841  |              |  | $ | (26,029 | ) |  | $ | 7,839,182 |  
|                                                  |  |                        |         |  |                      |   |            |              |  |   |         |   |  |   |           |  
|Liabilities:                                      |  |                        |         |  |                      |   |            |              |  |   |         |   |  |   |           |  
|Long-term borrowings                              |  | $                      |        |  |                      | $ | 8,410,811  |              |  | $ |        |   |  | $ | 8,410,811 |  
|Other liabilities                                 |  |                        | 217,334 |  |                      |   | 28,716     |              |  |   | (19,957 | ) |  |   | 226,093   |  
|                                                  |  |                        |         |  |                      |   |            |              |  |   |         |   |  |   |           |  
|Total liabilities                                 |  | $                      | 217,334 |  |                      | $ | 8,439,527  |              |  | $ | (19,957 | ) |  | $ | 8,636,904 |  
|                                                  |  |                        |         |  |                      |   |            |              |  |   |         |   |  |   |           |  
|Total stockholders equity (deficit)              |  | $                      | 274,036 |  |                      | $ | (1,065,686 | )            |  | $ | (6,072  | ) |  | $ | (797,722  | )
|                                                  |  |                        |         |  |                      |   |            |              |  |   |         |   |  |   |           |  

Our Education Financing segment includes all of our services to owners of education loans for program design, program
support, loan origination, portfolio management, trust administration and asset servicing, including services provided to our Securitization Trusts segment, as well as the operations of our bank subsidiary, Union Federal. In addition, TMS is
included in our Education Financing segment as of and for the three months ended March 31, 2011. The financial results of our Securitization Trusts segment relate to the 14 securitization trusts consolidated as a result of a change in
accounting principle effective July 1, 2010, prospectively. The net deficit of entities included in our Securitization Trusts segment does not represent economic exposure to our stockholders. The trusts have been structured to provide creditors
or beneficial interest holders of a securitization trust recourse only to the assets of that particular securitization trust, and not to the assets of FMD, its operating subsidiaries or any other securitization trust. Any deficit generated by a
consolidated trust will reverse out of our accumulated deficit or retained earnings, and be recorded as a non-cash gain, when the trusts liabilities are extinguished or the trust is deconsolidated by us. The amounts presented in
Eliminations for the three and nine months ended March 31, 2011 relate to income recognized by our Education Financing segment and the related expenses incurred by our Securitizations Trusts segment for services provided by our
Education Financing segment, as well as the elimination of the residual interests held by our Education Financing segment in the GATE Trusts. The amounts presented in Deconsolidation and Eliminations for the three and nine months ended
March 31, 2010 relate to the operating results of UFSB-SPV, deconsolidated effective July 1, 2010, and the related tax adjustments and intercompany eliminations recorded as a result of consolidating UFSB-SPV in prior periods. Such amounts
are presented separately from our Education Financing segment to allow for comparability between periods. See Note 1, Nature of Business, for a more detailed description of our reporting segments.

(14) Net Interest Income

The following
table reflects the components of net interest income:



|                                                    |  |                             |        |  |                            |   |       |      |  |   |         |  |  |   |        | 
|--------------------------------------------------- |  | --------------------------- | ------ |  | -------------------------- | - | ----- | ---- |  | - | ------- |  |  | - | ------ | 
|                                                    |  | Three months endedMarch 31, |        |  | Nine months endedMarch 31, |  
|                                                    |  | 2011                        |        |  | 2010                       |   |       | 2011 |  |   | 2010    | 
|                                                    |  | (dollars in thousands)      |       
|Interest income:                                    |  |                             |        | 
|Cash and cash equivalents                           |  | $                           | 115    |  |                            | $ | 148   |      |  | $ | 452     |  |  | $ | 437    | 
|Short-term investments and federal funds sold       |  |                             | 63     |  |                            |   | 74    |      |  |   | 212     |  |  |   | 127    | 
|Restricted cash and guaranteed investment contracts |  |                             | 171    |  |                            |   |      |      |  |   | 341     |  |  |   |       | 
|Investments available for sale                      |  |                             | 43     |  |                            |   | 74    |      |  |   | 141     |  |  |   | 268    | 
|Education loans held for sale                       |  |                             |       |  |                            |   | 3,778 |      |  |   |        |  |  |   | 16,754 | 
|Education loans held to maturity                    |  |                             | 79,398 |  |                            |   | 194   |      |  |   | 251,437 |  |  |   | 313    | 
|Mortgage loans held to maturity                     |  |                             | 99     |  |                            |   | 114   |      |  |   | 270     |  |  |   | 419    | 
|                                                    |  |                             |        |  |                            |   |       |      |  |   |         |  |  |   |        | 
|Total interest income                               |  |                             | 79,889 |  |                            |   | 4,382 |      |  |   | 252,853 |  |  |   | 18,318 | 
|Interest expense:                                   |  |                             |        | 
|Time and savings account deposits                   |  |                             | 81     |  |                            |   | 313   |      |  |   | 381     |  |  |   | 1,169  | 
|Money market account deposits                       |  |                             | 39     |  |                            |   | 123   |      |  |   | 100     |  |  |   | 550    | 
|Education loan warehouse facility                   |  |                             |       |  |                            |   | 3,110 |      |  |   |        |  |  |   | 9,501  | 
|Other interest-bearing liabilities                  |  |                             | 86     |  |                            |   | 180   |      |  |   | 342     |  |  |   | 501    | 
|Long-term borrowings                                |  |                             | 14,881 |  |                            |   |      |      |  |   | 48,974  |  |  |   |       | 
|                                                    |  |                             |        |  |                            |   |       |      |  |   |         |  |  |   |        | 
|Total interest expense                              |  |                             | 15,087 |  |                            |   | 3,726 |      |  |   | 49,797  |  |  |   | 11,721 | 
|                                                    |  |                             |        |  |                            |   |       |      |  |   |         |  |  |   |        | 
|Net interest income                                 |  | $                           | 64,802 |  |                            | $ | 656   |      |  | $ | 203,056 |  |  | $ | 6,597  | 
|                                                    |  |                             |        |  |                            |   |       |      |  |   |         |  |  |   |        | 



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(15) General and Administrative Expenses

The following table reflects components of general and administrative expenses:



|                                                |  |                             |        |  |                            |   |        |      |  |   |        |  |  |   |        | 
|----------------------------------------------- |  | --------------------------- | ------ |  | -------------------------- | - | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                                |  | Three months endedMarch 31, |        |  | Nine months endedMarch 31, |  
|                                                |  | 2011                        |        |  | 2010                       |   |        | 2011 |  |   | 2010   | 
|                                                |  | (dollars in thousands)      |       
|General and administrative expenses:            |  |                             |        | 
|Third-party services                            |  | $                           | 6,377  |  |                            | $ | 5,445  |      |  | $ | 17,779 |  |  | $ | 15,279 | 
|Depreciation and amortization                   |  |                             | 2,126  |  |                            |   | 3,355  |      |  |   | 6,573  |  |  |   | 10,648 | 
|Occupancy and equipment                         |  |                             | 3,241  |  |                            |   | 4,919  |      |  |   | 8,249  |  |  |   | 14,606 | 
|Servicer fees                                   |  |                             | 6,312  |  |                            |   | 199    |      |  |   | 18,745 |  |  |   | 729    | 
|Trust collection costs and other trust expenses |  |                             | 3,286  |  |                            |   |       |      |  |   | 8,370  |  |  |   |       | 
|Other                                           |  |                             | 3,654  |  |                            |   | 1,168  |      |  |   | 6,993  |  |  |   | 4,365  | 
|                                                |  |                             |        |  |                            |   |        |      |  |   |        |  |  |   |        | 
|Total                                           |  | $                           | 24,996 |  |                            | $ | 15,086 |      |  | $ | 66,709 |  |  | $ | 45,627 | 
|                                                |  |                             |        |  |                            |   |        |      |  |   |        |  |  |   |        | 

(16) Other Income  Gain from TERI Settlement

TERI is a private, not-for-profit Massachusetts organization. In its role as guarantor in the education lending market, TERI previously agreed to reimburse many of the securitization trusts we facilitated
for unpaid principal and interest on defaulted education loans. As a result of the TERI Reorganization, the securitization trusts facilitated by us, including those consolidated in our financial results, have not been able to fully realize
TERIs guarantee obligations. Under the Modified Plan of Reorganization, which became effective in November 2010, general unsecured creditors of TERI, including us, are entitled to receive a pro rata share of cash and future recoveries or other
proceeds in respect of a portfolio of defaulted education loans held by a liquidating trust. In addition, FMD and certain subsidiaries entered into the Stipulation with TERI and the Creditors Committee that became effective in October 2010 that
resolved all claims and controversies among the parties to the agreement, with the exception of a dispute relating to certain obligations and restrictions that we allege continue to apply to TERI with respect to a loan database that we provided to
TERI in 2008.

In connection with the Stipulation and the Modified Plan of Reorganization, our Education Financing segment and our
Securitization Trusts segment each recorded gains during the second and third quarters of fiscal 2011. These gains represented the forgiveness of notes payable and other liabilities, cash distributions from the liquidating trustee, and the transfer
of assets to us in excess of our recorded receivables.



|                                                |  |                             |    |  |                            |   |       |                       |  |   |        |  |  |   |        | 
|----------------------------------------------- |  | --------------------------- | -- |  | -------------------------- | - | ----- | --------------------- |  | - | ------ |  |  | - | ------ | 
|                                                |  | Three months endedMarch 31, |    |  | Nine months endedMarch 31, |  
|                                                |  | Securitization Trusts/Total |    |  | EducationFinancing         |   |       | Securitization Trusts |  |   | Total  | 
|                                                |  | (dollars in thousands)      |   
|Cash received in excess of recorded receivables |  | $                           | 5  |  |                            | $ | 3,091 |                       |  | $ | 30,834 |  |  | $ | 33,925 | 
|Reversal of recorded liabilities                |  |                             | 13 |  |                            |   | 5,021 |                       |  |   | 11,753 |  |  |   | 16,774 | 
|                                                |  |                             |    |  |                            |   |       |                       |  |   |        |  |  |   |        | 
|Total other income  gain from TERI settlement  |  | $                           | 18 |  |                            | $ | 8,112 |                       |  | $ | 42,587 |  |  | $ | 50,699 | 
|                                                |  |                             |    |  |                            |   |       |                       |  |   |        |  |  |   |        | 

Additional distributions to general unsecured creditors are expected to occur from time to time, based on the level of
recoveries or other proceeds in respect of the loan portfolio held by the liquidating trust. Recoveries on defaulted education loans may be collected over many years, and amounts ultimately received by general unsecured creditors may depend in part
on the experience and skill of the party or parties managing collections with respect to such loans.

(17) Income Taxes

Income tax benefit for the third quarter of fiscal 2011 was $82 thousand, and total expense for the first nine months of fiscal 2011 was $2.0 million. The
income tax benefit was $4.3 million for the third quarter of fiscal 2010 and $27.4 million for the first nine months of fiscal 2010. Due to enactment of the Worker, Homeownership and Business Assistance Act of 2009 (WHBAA) described below, we
recorded an income tax benefit for certain losses in fiscal 2010, as the legislation permitted the carryback of these losses to offset taxable income in earlier periods. Beginning in fiscal 2011, we no longer have any carrybacks to offset taxable
income in prior periods. As a result, we recorded a net operating loss carryforward asset as of March 31, 2011, for which we recorded a full valuation allowance. The net effect is that we had no tax expense or benefit from our operating losses for
the three and nine months ended March 31, 2011, and we recorded expense accruals related to unrecognized tax benefits.

Under current law, we
do not have remaining taxes paid within available net operating loss carryback periods, and it is more likely than not that our deferred tax assets will not be realized through future reversals of existing temporary differences or available tax
planning strategies. Accordingly, we have determined that a valuation allowance is necessary for all of our deferred tax assets not scheduled to reverse against existing deferred tax liabilities as of March 31, 2011. We will continue to review the
recognition of deferred tax assets on a quarterly basis.



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Net unrecognized tax benefits were $30.9 million at March 31, 2011 and June 30, 2010. At
March 31, 2011, we had $7.7 million accrued for interest and no amounts accrued for the payment of penalties. At June 30, 2010, we had $5.8 million accrued for interest and no amounts accrued for the payment of penalties.

In November 2009, the WHBAA was signed into law. Under the WHBAA, we were permitted to carry back the taxable losses from either fiscal
2009 or 2010 for five years instead of two years. We filed our fiscal 2010 tax return and elected to carry that taxable loss back for five years. As a result of the WHBAA and pre-existing net operating loss carryback rules, we recorded an income tax
receivable at September 30, 2010 of $45.1 million, which was received on October 1, 2010. The tax refund included $21.2 million that was attributable to Union Federal, which we distributed to Union Federal pursuant to our tax
sharing agreement.

(18) Net Loss per Share

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



|                                       |  |                                                             |         |   |                             |   |         |      |  |   |          |   |  |   |          |  
|-------------------------------------- |  | ----------------------------------------------------------- | ------- | - | --------------------------- | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                       |  | Three months ended March 31,                                |         |   | Nine months ended March 31, |  
|                                       |  | 2011                                                        |         |   | 2010                        |   |         | 2011 |  |   | 2010     |  
|                                       |  | (dollars and shares in thousands, except per share amounts) |        
|Net loss                               |  | $                                                           | (39,326 | ) |                             | $ | (40,483 | )    |  | $ | (137,731 | ) |  | $ | (175,282 | )
|Net loss per common share:             |  |                                                             |         |  
|Basic                                  |  | $                                                           | (0.39   | ) |                             | $ | (0.41   | )    |  | $ | (1.37    | ) |  | $ | (1.77    | )
|Diluted                                |  |                                                             | (0.39   | ) |                             |   | (0.41   | )    |  |   | (1.37    | ) |  |   | (1.77    | )
|Weighted-average shares outstanding:   |  |                                                             |         |   |                             |   |         |      |  |   |          |   |  |   |          |  
|Basic                                  |  |                                                             | 100,834 |   |                             |   | 99,248  |      |  |   | 100,809  |   |  |   | 99,232   |  
|Diluted                                |  |                                                             | 100,834 |   |                             |   | 99,248  |      |  |   | 100,809  |   |  |   | 99,232   |  
|                                       |  |                                                             |         |  
|Anti-dilutive common stock equivalents |  |                                                             | 9,141   |   |                             |   | 8,879   |      |  |   | 9,017    |   |  |   | 8,878    |  

As a result of the net losses for the
periods presented, common stock equivalents are considered anti-dilutive, and, therefore, are excluded from diluted weighted-average shares outstanding. Common stock equivalents include restricted stock units, series B non-voting convertible
preferred stock and stock options. For the majority of stock options outstanding, the conversion or exercise price exceeds fair market value at the report date.

(19) Union Federal Regulatory Matters

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 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 classifications, however, are also subject to qualitative judgments by the regulators about components, risk weightings and
other factors. Union Federals equity capital was $12.5 million at March 31, 2011.

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



|                          |  |                       |     |   |                 |  |      |               |  |  |              |   |  |  |       |  
|------------------------- |  | --------------------- | --- | - | --------------- |  | ---- | ------------- |  |  | ------------ | - |  |  | ----- | -
|                          |  | Regulatory Guidelines |     |   |                 |  |      |               | 
|                          |  | Minimum               |     |   | Wellcapitalized |  |      | March 31,2011 |  |  | June 30,2010 |  
|Capital ratios:           |  |                       |     |   |                 |  |      |               |  |  |              |   |  |  |       |  
|Tier 1 risk-based capital |  |                       | 4.0 | % |                 |  | 6.0  | %             |  |  | 104.6        | % |  |  | 124.8 | %
|Total risk-based capital  |  |                       | 8.0 |   |                 |  | 10.0 |               |  |  | 105.9        |   |  |  | 125.5 |  
|Tier 1 (core) capital     |  |                       | 4.0 |   |                 |  | 5.0  |               |  |  | 17.2         |   |  |  | 27.9  |  

As of March 31, 2011 and
June 30, 2010, Union Federal was well capitalized under the regulatory framework for prompt corrective action.



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The OTS regulates all capital distributions by Union Federal directly or indirectly to us, including
dividend payments. Union Federal is required to file a notice with the OTS at least 30 days before the proposed declaration of a dividend or approval of a proposed capital distribution by Union Federals board of directors. Union
Federal must file an application to receive the approval of the OTS for a proposed capital distribution when, among other circumstances, the total amount of all capital distributions (including the proposed capital distribution) for the applicable
calendar year exceeds net income for that year to date plus the retained net income for the preceding two years.

A notice or application to
make a capital distribution by Union Federal may be disapproved or denied by the OTS if it determines that, after making the capital distribution, Union Federal would fail to meet minimum required capital levels or if the capital distribution raises
safety or soundness concerns or is otherwise restricted by statute, regulation or agreement between Union Federal and the OTS or the Federal Deposit Insurance Corporation (FDIC), or a condition imposed by an OTS agreement. Under the Federal Deposit
Insurance Act (FDIA), an FDIC-insured depository institution such as Union Federal is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become
undercapitalized (as such term is used in the FDIA).

In October 2010, the OTS approved a cash dividend from Union Federal to FMD
of up to $29.0 million. Union Federal paid a dividend of $29.0 million to FMD in November 2010. The dividend included the $21.2 million that we distributed to Union Federal in October 2010 pursuant to our tax sharing agreement.

In March 2010, our Board of Directors adopted resolutions required by the OTS undertaking to support the implementation by Union Federal of its
business plan, so long as Union Federal is owned or controlled by FMD, and to notify the OTS in advance of any distributions to our stockholders in excess of $1.0 million per fiscal quarter and any incurrence or guarantee of debt in excess of
$5.0 million.

FMD is subject to extensive regulation, supervision and examination by the OTS as a savings and loan holding company and
Union Federal is subject to extensive regulation, supervision and examination by the OTS and FDIC.

FORM 10-Q PART I CROSS-REFERENCE INDEX

The information required by the items presented below is incorporated herein by reference from the Financial Information section of this quarterly report.



|        |  |                                                                                                               |  |      |    | 
|------- |  | ------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|        |  |                                                                                                               |  | Page |   
|PART I. |  | FINANCIAL INFORMATION                                                                                         |  |      |    | 
|Item 1. |  | Financial Statements                                                                                          |  |      | 34 | 
|        |  | Consolidated Statements of Operations for the three and nine months ended March 31, 2011 and
2010             |  |      | 34 | 
|        |  | Consolidated Balance Sheets as of March 31, 2011 and June 30, 2010                                            |  |      | 35 | 
|        |  | Consolidated Statements of Changes in Stockholders Equity for the nine months ended March 31, 2011 and
 2010 |  |      | 36 | 
|        |  | Consolidated Statements of Cash Flows for the nine months ended March 31, 2011 and
2010                       |  |      | 37 | 
|        |  | Notes to Unaudited Consolidated Financial Statements                                                          |  |      | 38 | 
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                         |  |      | 1  | 
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                    |  |      | 29 | 
|Item 4. |  | Controls and Procedures                                                                                       |  |      | 32 | 





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Part II. Other Information



|Item 1. | Legal Proceedings.
|------- | ------------------

Massachusetts
Appellate Tax Board Matters.We are involved in several matters before the ATB relating to the Massachusetts tax treatment of GATE, a former subsidiary of FMD, including The First Marblehead Corp. v. Commissioner of Revenue, ATB Docket
No. C293487, which was instituted on September 5, 2007; GATE Holdings, Inc. v. Commissioner of Revenue, ATB Docket No. C305217, which was instituted on March 16, 2010; The First Marblehead Corp. v. Commissioner of Revenue,
ATB Docket No. C305241, which was instituted on March 22, 2010; and GATE Holdings, Inc. v. Commissioner of Revenue, ATB Docket No. C305240, which was instituted on March 22, 2010. We have taken the position in these
proceedings that GATE is properly taxable as a financial institution and is entitled to apportion its income under applicable provisions of Massachusetts tax law. The Commissioner has taken alternative positions with FMD: that GATE is properly
taxable as a business corporation, or that GATE is taxable as a financial institution, but is not entitled to apportionment or is subject to 100% Massachusetts apportionment. In September 2007, we filed a petition with the ATB seeking a
refund of state taxes paid for our taxable year ended June 30, 2004, all of which taxes had previously been paid as if GATE were a business corporation. In December 2009, the Commissioner made additional assessments of tax, along with
accrued interest, of approximately $11.9 million for GATEs taxable years ended June 30, 2004, 2005 and 2006, and approximately $8.1 million for our taxable years ended June 30, 2005 and 2006. In March 2010, we filed
petitions with the ATB contesting the additional assessments against GATE and us. The assessments against GATE are in the alternative to the assessments against us, and if the assessments against GATE for the taxable year ended June 30, 2004
are valid, then we would be entitled to an income tax refund of approximately $1.1 million for the same fiscal year. In April 2011, the ATB held an evidentiary hearing on the foregoing. We cannot predict the timing or outcome of these
matters, but an adverse outcome may have a material impact on our state tax liability not only for the taxable years at issue, but also for the taxable years 2007 through 2009.

Internal Revenue Service Audit. As a result of the sale of the Trust Certificate, which was effective March 31, 2009, as well as our operating losses incurred in fiscal 2009, we recorded
an income tax receivable for federal income taxes paid on taxable income in prior taxable years. In fiscal 2010, we received a total of $189.3 million in federal and state income tax refunds related to our income tax receivables. In
April 2010, the IRS commenced an audit of our tax returns for taxable years 2007, 2008 and 2009. Such audits are consistent with the practice of the Joint Committee of Taxation, which requires the IRS to audit a taxpayer who claims and receives
a tax refund of a specified magnitude. In connection with this audit, the IRS is reviewing, among other things, the tax treatment of the sale of the Trust Certificate, including the related income tax refund previously received by us. The IRS has
also expanded its audit to include our fiscal 2010 tax return in light of the $45.1 million tax refund that we received in October 2010. We cannot predict the timing or outcome of the IRS audit.

TERI Database Dispute. FMD is engaged in a contract interpretation dispute with TERI, which we refer to as the Database Dispute. The Database
Dispute, which arose in the context of the TERI Reorganization, relates to certain obligations and restrictions that we allege apply to TERI with respect to a database of historical education loan data. The Database Dispute was the subject of
an order, or the Database Order, entered by the Bankruptcy Court on December 14, 2010. The Database Order stated that an earlier order issued by the Bankruptcy Court in June 2008 was not intended to extend restrictions applicable to TERI
beyond two years following the termination of the parties database sale and supplementation agreement. TERI rejected that agreement effective as of May 31, 2008. On December 23, 2010, FMD filed in Bankruptcy Court a notice
of appeal of the Database Order and an election to have the appeal heard in the U.S. District Court for the District of Massachusetts. A hearing on the matter (Civil Action No. 11-10241 (DPW)), which FMD briefed in March 2011, has been
scheduled for June 1, 2011.

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



|Item 1A. | Risk Factors.
|-------- | -------------

Investing in our common
stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below in addition to the other information included in this quarterly report. If any of the following risks actually occurs, our business,
financial condition or results of operations could be adversely affected, which, in turn, could have a negative impact on the price of our common stock. 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 the risk factors described in this Item 1A to reflect financial and operational information for the most recently completed fiscal quarter. In addition, we have made material changes
to the following risk factors as compared to the version disclosed in our Annual Report for the fiscal year ended June 30, 2010:



| |  |  | Challenges exist in implementing revisions to our business model.
| | - |  | -----------------------------------------------------------------



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| |  |  | We have provided credit enhancement in connection with two loan programs and may enter into similar arrangements in connection with future loan
programs based on our Monogram platform. As a result, we have capital at risk in connection with lenders loan programs. We may lose the capital we have provided as credit enhancement, and our financial results could be adversely affected.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will need to facilitate substantial loan volume in order to return to profitability.
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Continuation of the current economic conditions could adversely affect the education loan industry.
| | - |  | ---------------------------------------------------------------------------------------------------



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



| |  |  | If we are unable to protect the confidentiality of our historical loan database and proprietary information systems and processes, the value of our
services and technology could be adversely affected.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An interruption in or breach of our information systems, or those of third parties on which we rely, may result in lost business.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | We were required to consolidate certain securitization trusts in our financial results as of July 1, 2010, which has resulted in significant
changes to the presentation of our financial statements and may result in increased volatility in our reported financial condition and results of operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our liquidity could be adversely affected if the sale of the Trust Certificate does not result in the tax consequences that we expect or if we are
unable to successfully resolve the state tax matters pending before the Massachusetts Appellate Tax Board.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in interest rates could affect the value of our additional structural advisory fee, asset servicing fee and residual receivables, as well as
demand for education loans and our services.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | TERIs rejection of its guaranty agreements in the context of the Modified Plan of Reorganization could result in litigation against us by former
clients for breach of contractual obligations, which could adversely affect our business, reputation and financial results. (Note: this risk factor was originally titled The TERI Reorganization could adversely affect our cash flows from the
securitization trusts.)
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our potential recovery from TERIs bankruptcy estate on our general unsecured claim is uncertain. (Note: this risk factor was originally titled
Our claims against TERI will not be settled by the Modified Plan of Reorganization, and our potential recovery from TERIs bankruptcy estate on our general unsecured claim has been eroded by the costs and pace of the reorganization
proceeding.)
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may become subject to additional state registration or licensing requirements. If we determine that we are subject to additional state registration
or licensing requirements, our compliance costs could increase significantly and other adverse consequences may result.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, we added risk factors entitled:



| |  |  | We may be unable to integrate our operations successfully and realize all of the anticipated benefits of our acquisition of TMS.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



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| |  |  | A significant portion of our acquisition of TMS includes goodwill and intangible assets that are subject to periodic impairment evaluations. An
impairment loss could have a material adverse impact on our financial condition and results of operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our financial and operational results are subject to seasonality.
| | - |  | -----------------------------------------------------------------

Finally, we have deleted the risk factor entitled The Creditors Committee has challenged 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. Pursuant to the terms of the Modified Plan of Reorganization, the Creditors Committees challenge has been dismissed with prejudice. We also deleted
the risk factor entitled We may acquire other businesses, and we may have difficulty integrating those businesses or generating an acceptable return from acquisitions, which was included in our quarterly report on Form 10-Q for the
quarterly period ended September 30, 2010.

Risks Related to Our Industry, Business and Operations

Challenges exist in implementing revisions to our business model.

Since the beginning of fiscal 2009, we have taken several measures to adjust our business in response to economic conditions. Most significantly, we refined our service offerings and added fee-for-service
offerings such as portfolio management and asset servicing. In August 2009, we completed the development of our Monogram platform, which incorporates refinements to our origination process, including an enhanced application interface, an
expanded credit decisioning model and additional reporting capabilities. Starting January 1, 2011, we began offering outsourced tuition planning, tuition billing and payment technology services for educational institutions through TMS.

We have limited experience with our Monogram platform, which is based on a new, proprietary origination risk score model and does not
contemplate a third-party guaranty. We are uncertain of the extent to which the market will accept our Monogram platform, particularly in the current economic environment where there has been reluctance by many lenders to focus on education lending
opportunities. We have signed two loan program agreements and fully deployed the product to two clients. We are uncertain of the volume of education loans to be generated by our two clients, or any additional clients, in the future. Successful sales
of our services, including our Monogram platform and TMS services, will be critical to growing and diversifying our revenues and client base in the future.

Our Monogram platform may include capital commitments on our part for credit enhancement. We have provided capital commitments in connection with our two initial Monogram-based loan programs. Should
additional lenders require credit enhancement from us as a condition to entering into a loan program agreement, our growth may be constrained by the level of capital available to us.

Commercial banks have historically served as the initial funding sources for education loans we facilitate and have been our principal clients. Since the first quarter of fiscal 2008, we have not
facilitated take-out securitization transactions to support the long-term funding of education loans, and commercial banks are facing liquidity and credit challenges from other sources, in particular mortgage, auto loan and credit card lending
losses. In addition, the synergies that previously existed between federal education loan marketing and education loan marketing have been eliminated by legislation that eliminated the Federal Family Education Loan Program, or FFELP. As a result,
many lenders have re-evaluated their business strategies related to education lending. In light of general economic conditions, capital markets disruptions and the declining credit performance of consumer-related loans, the education loan business
may generally be less attractive to commercial banks than in the past.

Some of our former clients have exited the education loan market
completely. To the extent that commercial banks exit the education loan market, the number of our prospective clients diminishes. One of our primary challenges is to convince national and regional lenders that they can address the market opportunity
in a manner that meets their desired risk control and return objectives. A related challenge is to finance successfully loans generated through our Monogram platform through capital market transactions. We cannot assure you that we will be
successful in either the short term or the long term in meeting these challenges.

We have provided credit enhancement in connection
with two loan programs and may enter into similar arrangements in connection with future loan programs based on our Monogram platform. As a result, we have capital at risk in connection with lenders loan programs. We may lose the capital we
have provided as credit enhancement, and our financial results could be adversely affected.



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Historically, the loan programs that we facilitated included a third-party guaranty, pursuant to which the
guarantor agreed to reimburse lenders for unpaid principal and interest on defaulted loans. Our Monogram platform does not include a third-party guaranty. In connection with the initial two loan programs based on our Monogram platform, we have
provided credit enhancement by funding a participation account for each lender up to a specified dollar limit, which we refer to as the participation cap, to serve as a first-loss reserve for defaulted program loans. We provided an initial deposit
into the participation accounts and agreed to provide supplementary deposits into such accounts on a quarterly basis during the term of the loan program agreements based on disbursed program loan volume and adjustments to default projections for
program loans. Although we will not be required to provide any credit enhancement in excess of the participation cap, we have or will have capital at risk in connection with lenders loan programs and the amount of such capital at risk will
increase quarterly. We have funded capital commitments in the amount of $8.5 million in support of existing Monogram-based loan programs. We could lose some or all of the amounts that we have deposited, or will deposit in the future, in the
participation accounts depending on the performance of the portfolio of program loans. Any such loss would erode our liquidity position and damage business prospects for our Monogram platform.

Our Monogram platform is based on proprietary scoring models and risk mitigation and pricing strategies that we have only recently developed. We have
limited experience with the actual performance of loan portfolios generated by lenders based on our Monogram platform, and we may need to adjust pricing strategies from time to time based on the distribution of loan volume among credit tiers or
competitive considerations. We must closely monitor the characteristics and performance of each lenders loan portfolio in order to suggest adjustments to the lenders programs and tailor our default prevention and recovery strategies. We
have limited experience with the infrastructure that we have built for such monitoring, which requires extensive operational and data integration among the loan servicer, multiple default prevention and recovery agencies, and us. To the extent that
our infrastructure is inadequate or we are otherwise unsuccessful in identifying portfolio performance characteristics and trends, or to the extent that lenders are unwilling to adjust their loan programs, our risk of losing amounts deposited in the
participation accounts may increase.

We may offer additional prospective clients similar credit enhancement arrangements. We expect that the
amount of any such credit enhancement offered to a particular lender would be determined based on the particular terms of the lenders loan program, including the underwriting guidelines with respect to such program, and the terms of our
business relationship with the lender. We have limited amounts of cash available to offer to prospective clients, and there is a risk that lenders will not enter into loan program agreements with us unless we offer credit enhancement.

We will need to facilitate substantial loan volume in order to return to profitability.

We designed our Monogram platform, in part, to reduce our dependence on the securitization market in order to generate revenue. Although we expect to
generate ongoing monthly revenue through the maturity of the program loans, we will need to facilitate substantial loan volumes beyond what we have originated to date in order to return to profitability. In addition, because the revenues that we
expect to generate for Monogram-based loan programs will depend in part on the size, credit mix and actual performance of our lender clients loan portfolios, it is difficult for us to forecast the level or timing of our revenues or income with
respect to our Monogram platform generally or a specific lenders Monogram-based loan program. In addition, education loan programs are subject to seasonal trends. The volume of education loan applications typically increases with the approach
of tuition payment dates, and we have historically processed the greatest application volume during the summer months. This seasonality of education loan originations will likely impact the timing and size of fees that we earn in the remainder of
fiscal 2011.

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

Based on the range of services that we offer, we believe that SLM
Corporation, also known as Sallie Mae, is our principal competitor. Sallie Mae has announced that it intends to concentrate on growth of its education loan volumes, particularly following the elimination of FFELP. Our business could be adversely
affected if Sallie Maes program to market education loans continues to grow, or if Sallie Mae or Nelnet, Inc. seeks to market more aggressively to third parties the full range of services that we offer. Other education loan competitors include
JPMorgan Chase Bank, N.A., Wells Fargo & Company and Discover Financial Services. In addition, Sallie Mae, Nelnet, Inc. and Higher One Payments, Inc. compete directly with TMS.



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We may face competition from loan originators, including our clients or former clients, if they choose to
develop an internal capability to provide any of the services that we currently offer. For example, a loan originator that has, or decides to develop, a portfolio management or capital markets function may not choose to engage us for our services.
Historically, lenders in the education loan market have focused their lending activities on federal loans because of the relative size of the federal loan market and because the federal government guarantees repayment of these loans, thereby
significantly limiting the lenders credit risk. The demand for our services could decline if lenders exit educational lending altogether or place additional emphasis on the education loan market and offer the services we provide in response to
the elimination of FFELP.

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

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

We focus our business on the market for education loans, and the majority of our business is concentrated in products for post-secondary education. The availability and terms of loans that the government
originates or guarantees affects the demand for education loans because students and their families often rely on 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 of 1965. Recent federal legislation expands federal grant and loan assistance, which could weaken the demand for education
loans. In addition, the elimination of FFELP could result in increased competition in the market for education loans, which could adversely affect the volume of education loans and future capital markets transactions, if any, that we facilitate and
impede the growth of our business.

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



| |  |  | Permits a parent borrower under the federal Parent Loan for Undergraduate Students, or PLUS, loan program to defer repayment of a PLUS loan until six
months after the student ceases to carry at least one-half the normal full-time academic workload;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Extends eligibility for a PLUS loan to an applicant who, during the period beginning January 1, 2007 and ending December 31, 2008, has not
been delinquent for more than 180 days on mortgage loan payments or medical bill payments nor more than 89 days delinquent on the repayment of any other debt, in any case, during such period; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increases the loan limits for unsubsidized Stafford loans for undergraduate students.
| | - |  | -------------------------------------------------------------------------------------

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



| |  |  | Significant restrictions to the marketing of federal and private education loans; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Significant compliance burdens to education loan lenders by adding new Truth in Lending Act, or TILA, disclosures, procedures and rescission rights, as
well as accompanying civil penalties.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

The demand for 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:



| |  |  | Home equity loans or other borrowings available to families to finance their education costs;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Pre-paid tuition plans, which allow students to pay tuition at todays rates to cover tuition costs in the future;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | 529 plans, which include both prepaid tuition plans and college savings plans that allow a family to save funds on a tax-advantaged basis;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Education IRAs, now known as Coverdell Education Savings Accounts, under which a holder can make annual contributions for education savings;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Government education loan programs, generally; and
| | - |  | --------------------------------------------------



| |  |  | Direct loans from colleges and universities.
| | - |  | --------------------------------------------

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

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

As a result of capital market dislocations that began during the second quarter of fiscal 2008, continued through fiscal 2009 and fiscal 2010 and, to a
lesser extent, persisted in fiscal 2011, as well as the TERI Reorganization, we have not completed a securitization transaction since September 2007. In addition, high unemployment rates and the unsteady financial sector have adversely affected
many consumers and borrowers throughout the country. Current borrowers may experience more trouble in repaying credit obligations, which could increase loan delinquencies, defaults and forbearance, or otherwise negatively affect loan portfolio
performance and the estimated value of our service revenue receivables. Forbearance programs may have the effect of delaying default emergence, and alternative payment plans may reduce the utilization of basic forbearance. In addition, some
consumers may find that higher education is an unnecessary investment during turbulent economic times and defer enrollment in educational institutions until the economy improves or turn to less costly forms of secondary education, thus decreasing
education loan application and funding volumes. Finally, many lending institutions have been reluctant to lend and have significantly tightened their underwriting standards, and several clients and potential clients have exited the education loan
business and may or may not seek our services as the economy improves. If the adverse economic environment continues, our financial condition may deteriorate for any one of the foregoing reasons.

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

We have in the past relied on, and will continue to rely in part, on our clients to market and fund education loans to borrowers. If our clients do not
devote sufficient time and resources to their marketing efforts or are not successful in these efforts, then we may not reach the full potential of our capacity for facilitated loan volume and our business will be adversely affected.

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

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

During fiscal 2008 and fiscal 2009, we significantly reduced headcount, including departures of members of our senior management. Our
cost reduction initiatives have placed and will continue to place a strain on our management, systems and resources at a critical point in our business and industry. We must continue to 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, and our ability to retain our employees may become more difficult as we face an
increasingly competitive landscape with respect to talented employees as the economy begins to re-emerge from the financial crisis.

Based on
facilitated loan volumes, we may outsource some borrower services functions in an effort to reduce costs, take advantage of technologies and effectively manage the seasonality associated with education loan volume. We rely on our vendors to provide
high levels of service and support. Our reliance on external vendors subjects us to risks associated with inadequate or untimely service and could result in problems with service or support that we would not experience if we performed the service
functions in-house.

We cannot assure you that we will be able to:



| |  |  | Expand our systems effectively;
| | - |  | -------------------------------



| |  |  | Successfully develop new products or services;
| | - |  | ----------------------------------------------



| |  |  | Allocate our human resources optimally;
| | - |  | ---------------------------------------



| |  |  | Identify, hire and retain qualified employees or vendors; or
| | - |  | ------------------------------------------------------------



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| |  |  | Incorporate effectively the components of any business that we may acquire in our effort to achieve growth.
| | - |  | -----------------------------------------------------------------------------------------------------------

We are dependent upon the retention and motivation of certain key employees and the loss of any such employees could adversely affect our business. In
addition, our future performance will also depend upon our ability to attract skilled, new employees. If we are unable to manage our cost reductions, or if we lose key employees or are unable to attract new employees, 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 database of historical information on education
loan performance that we use to help us enhance our proprietary origination risk score model, determine the terms of portfolio funding transactions and establish the changes in fair value of the additional structural advisory fee, asset servicing
fee and residual receivables that we recognize as revenue. We also have developed a proprietary loan information processing system to enhance our application processing and loan origination capabilities. We believe that 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, and TERI possesses certain historical information related to loans
formerly guaranteed by TERI. 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. Our competitors and potential competitors
may have originated or serviced a greater volume of education loans than we have over the past two fiscal years, which may have provided them with comparatively greater borrower or loan data, particularly during the most recent economic cycle. 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.

On November 2, 2010, TERI filed with the Bankruptcy Court a Motion for Interpretation of Order, effectively requesting the Bankruptcy Court to rule
that certain contractual restrictions on TERIs rights have lapsed with respect to a loan database that we provided in 2008. In general, the contractual restrictions limited TERI to using or disclosing the loan database in connection with
education loan guaranty programs offered and guaranteed by TERI. On December 14, 2010, following the confirmation and effectiveness of the Modified Plan of Reorganization, the Bankruptcy Court issued the Database Order in response to
TERIs motion. The Database Order stated that an earlier order issued by the Bankruptcy Court in June 2008 was not intended to extend the contractual restrictions applicable to TERI beyond two years following the termination by TERI of our
2001 database sale and supplementation agreement. TERI rejected that agreement effective as of May 31, 2008. We do not agree with the Database Order and are contesting it. We continue to believe that the Bankruptcy Court did not have
jurisdiction to issue the Database Order and that TERI does not have rights to sell, license or transfer the database that we provided in 2008. In December 2010, we filed an appeal to the Database Order in federal district court, which we
briefed in March 2011. The hearing has been scheduled on the matter on June 1, 2011. If our appeal is unsuccessful or if we are not otherwise successful in preventing TERI from selling, licensing or transferring the database, the competitive
advantage of our loan database could diminish.

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

We rely on trade
secret laws and restrictions on disclosure to protect our historical loan database and proprietary information systems and processes. We have entered into confidentiality agreements with third parties and with some of our employees to maintain the
confidentiality of our trade secrets and proprietary information. These methods may neither effectively prevent use or disclosure of our confidential or proprietary information nor provide meaningful protection for our confidential or proprietary
information if there is unauthorized use or disclosure. Although we sought in the context of the TERI Reorganization to limit TERIs rights with respect to a historical loan database that we provided in 2008, the Bankruptcy Court issued the
Database Order in December 2010. If our pending appeal of the Database Order in federal district court is unsuccessful, or if we are not otherwise successful in preventing TERI from selling, licensing or transferring the database, the
competitive advantage of our loan database could diminish.

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



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Our future success depends, in part, on our ability to process loan applications in an automated, error-free
manner. The volume of loan originations that we are able to process is based, in large part, on the systems and processes we have implemented and developed. The loan origination process is becoming increasingly dependent upon technological
advancement, such as the ability to process loans over the Internet, accept electronic signatures and provide initial decisions instantly. Our future success also depends, in part, on our ability to develop and implement technology solutions that
anticipate and keep pace with continuing changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely basis. If competitors introduce products, services,
systems and processes that are better than ours or that gain greater market acceptance, those that we offer or use may become obsolete or noncompetitive. In addition, if we fail to execute our clients origination requirements or properly
administer our clients credit agreement templates or required disclosures, we could be subject to breach of contract claims and related damages. Any one of these circumstances could have a material adverse effect on our business reputation and
ability to obtain and retain clients.

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

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

As of March 31, 2011, the Pennsylvania Higher Education Assistance Agency, or PHEAA, serviced a substantial majority of
education loans held by the securitization trusts that we administer and served as the sole loan servicer for loan programs based on our Monogram platform. Our arrangements with PHEAA allow us to avoid the overhead investment in servicing
operations, but require us to rely on PHEAA to adequately service the education loans, including collecting payments, responding to borrower inquiries, effectively implementing servicing guidelines applicable to loans and communicating with
borrowers whose loans have become delinquent. We periodically review the costs associated with establishing servicing operations to service loans. We continue to believe that ownership of a loan servicer could complement our overall strategy and
reduce our reliance on an external service provider for loan servicing, which subjects us to risks associated with inadequate or untimely services, including notice of developments in prepayments, delinquencies and defaults, and usage rates for
forbearance programs, including alternative payment plans. 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 fee, asset servicing fee and residual receivables. If our relationship with PHEAA terminates, we would either need to expand our operations 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, or those of
third parties on which we rely, may result in lost business.

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

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

If we experience a data security
breach and confidential customer information is disclosed, we may be subject to penalties imposed by regulators, civil actions for damages and negative publicity, which could affect our customer relationships and have a material adverse effect on
our business. In addition, 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.



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Data security breaches suffered by well-known companies and institutions have attracted a substantial amount
of media attention, prompting state and federal legislation, legislative proposals and regulatory rule-making to address data privacy and security. Consequently, we may be subject to rapidly changing and increasingly extensive requirements intended
to protect the applicant and borrower information that we process in connection with education loans. Implementation of systems and procedures to address these requirements has increased our compliance costs, and these costs may increase further as
new requirements emerge. If we were to experience a data security breach, or if we or the securitization trusts that we administer were to otherwise improperly disclose confidential customer or consumer 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, such pending legislative proposals and regulations, 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.

We may be unable to integrate our operations
successfully and realize all of the anticipated benefits of our acquisition of TMS.

Our acquisition of TMS is a significant
transaction for us. The acquisition price was $47.0 million in cash. We have made several assumptions regarding cost and revenue synergies in connection with the acquisition, many of which are dependent upon how successful we are in integrating
operations of TMS. The difficulties of integrating TMS operations include, among other things:



| |  |  | Retaining customers;
| | - |  | --------------------



| |  |  | Consolidating corporate and administrative functions;
| | - |  | -----------------------------------------------------



| |  |  | Coordinating sales and marketing functions;
| | - |  | -------------------------------------------



| |  |  | Persuading employees that the First Marblehead and TMS business cultures are compatible, maintaining morale and retaining key employees, in particular
TMS senior management team;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Training our respective sales forces with regard to each others product offerings; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Integrating TMS accounting, financial reporting, management, information, human resource and other administrative systems to permit effective
management, and the lack of control if such integration is delayed or not implemented.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The process of integrating
operations could cause an interruption of, or loss of momentum in, the activities of each companys business and the loss of key personnel. The diversion of managements attention and any delays or difficulties encountered in connection
with the acquisition and the integration of TMS operations could harm our business, results of operations, financial condition or prospects.

Risks Related to Our Financial Reporting and Liquidity

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

As compensation for our past securitization activities, we are entitled to receive additional structural advisory fees over time from securitization trusts that we facilitated, based on the amount of
education loans outstanding in the trust over the life of the trust, as well as residual interests in certain trusts. As required under GAAP, we recognized the estimated fair value of additional structural advisory fees and residual receivables as
revenue when the securitization trusts purchased the education loans because receipt of our fees is not contingent on any further service requirement by us. Quarterly, we update our estimate of the fair value of our receivables, and changes to the
fair value, less cash distributions, if any, are recorded as revenue (trust updates) in the period in which the change is made. We are entitled to asset servicing fees for additional services that we are contractually obligated to perform relating
to the Trust Certificate. We recognize the net present value of asset servicing fees as our services are performed. The receipt of the fees is contingent, however, on distributions from the Trusts available to the third-party owner of the Trust
Certificate. Quarterly, we update our assumptions with respect to the amount and timing of receipt of these fees, and record the changes in our estimates as revenue (fee updates) in the period in which the change is made. In addition, in relation to
our Monogram platform, we also record changes in the fair value of deposits for participation accounts recorded in non-interest revenues.

We
have no further financial obligation with respect to our additional structural advisory fees or residuals in the securitization trusts we facilitated. However, our fees are subordinate to securities issued to investors in such securitizations, and
the trusts may fail to



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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 revenue receivables from certain securitization trusts are expected to be eliminated entirely, and our projected cash flows from other securitization trusts could be delayed, impaired or eliminated, if actual performance differs
from our assumptions at March 31, 2011. As of March 31, 2011, we expected to receive additional structural advisory fees and residuals beginning five to 22 years after the date of a particular securitization transaction, consistent
with our expectations at June 30, 2010.

Because there are no quoted market prices for our service revenue receivables and deposits for
participation accounts, we use discounted cash flow modeling techniques and certain assumptions to estimate fair value. Our key assumptions to estimate fair value include, as applicable: discount rates, which we use to calculate the present fair
value of our future cash flows; 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, which is a projection of future LIBOR rates over time, and
expected auction rates, if applicable; the expected annual rate and timing of education loan defaults, including the effects of various risk mitigation strategies, such as forbearance programs and alternative payment plans, the expected amount and
timing of recoveries of defaulted education loans; and the fees and expenses of the securitization trusts. Because our estimates rely on quantitative and qualitative factors, including macroeconomic indicators and our historical experience to
predict default, recovery and prepayment rates, managements ability to determine which factors should be more heavily weighted in our estimates, and to accurately incorporate those factors into our loan performance assumptions, are subjective
and can have a material effect on valuations.

If the actual performance of the education loan portfolios held by us, some or all of the
securitization trusts, or our clients who hold Monogram-based loans were to vary appreciably from the adjusted assumptions we use, we may need to adjust our key assumptions further. Such an adjustment could materially affect our earnings in the
period in which our assumptions change, and our service revenue receivables or releases of deposits from participation accounts could be significantly less than that reflected in our current financial statements. In particular, economic, regulatory,
competitive and other factors affecting default and recovery rates on loan portfolios could cause or contribute to differences between actual performance of the portfolios and our key assumptions.

We were required to consolidate certain securitization trusts in our financial results as of July 1, 2010, which has resulted in significant
changes to the presentation of our financial statements and may result in increased volatility in our reported financial condition and results of operations.

The presentation of our consolidated financial statements beginning with the first quarter of fiscal 2011 differs significantly from the presentations included in prior periodic reports. Historically,
each of the securitization trusts created after January 31, 2003 met the criteria to be a QSPE as defined by ASC 860-40. Accordingly, we did not consolidate these existing securitization trusts in our financial statements. In addition, the
securitization trusts created prior to January 31, 2003 in which we hold a variable interest that could have resulted in us being considered the primary beneficiary of such trust, were amended in order for them to be considered QSPEs. Effective
July 1, 2010 we adopted ASU 2009-16 and ASU 2009-17, which eliminated the exemption from consolidation afforded to QSPEs and changed the criteria for determining the party considered to be a primary beneficiary.

Effective July 1, 2010, we consolidated 14 securitization trusts that we previously facilitated, and we deconsolidated UFSB-SPV. As a result, on the
date of adoption, we recorded a net increase in total assets and total liabilities of approximately $7.90 billion and $8.78 billion, respectively, and a net decrease in total stockholders equity of approximately $880.1 million.
We adjusted our opening retained earnings by $990.3 million for the net deficit of the consolidated securitization trusts, which was partially offset by an adjustment of $110.2 million to remove the deficit of UFSB-SPV and reverse certain
deferred tax asset valuation allowances. In addition, beginning with the first quarter of fiscal 2011, our results of operations no longer reflect securitization-related trust updates or administrative fees received from the 14 consolidated
securitization trusts. Instead, we recognize interest income associated with securitized assets, including private education loans, in the same line item as interest income from non-securitized assets, as well as a provision for loan losses, and we
recognize interest expense associated with debt issued by the securitization trusts to third-party investors on the same line item as other interest-bearing liabilities of FMD. We continue to recognize trust updates from additional structural
advisory fees and residual receivables, and administrative and other fees from other off-balance sheet VIEs that were not consolidated. See Managements Discussion and Analysis of Financial Condition and Results of
OperationsApplication of Critical Accounting Policies and EstimatesConsolidation, included in Part I of this quarterly report for additional details regarding our adoption of ASU 2009-16 and ASU 2009-17.

ASU 2009-17 requires us to make additional judgments that are subject to change based on new facts and circumstances, and evolving interpretations and
practices. Under ASU 2009-17, the determination of whether to consolidate a VIE is based on whether the company is considered to be the primary beneficiary. Such determination is based on both the power to direct the activities of the entity that
most significantly impact the entitys economic performance, and the obligation to absorb losses or the right to receive benefits that could be significant to the entity. The nature of these determinations, made on an entity-by-entity basis,
requires a high level of subjectivity and judgment. Moreover, we are required to continuously reassess whether consolidation or deconsolidation of a



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VIE is appropriate, as opposed to the trigger-based assessment allowed under previous guidance. As a result, determinations that we make from time to time will be susceptible to change. We
continue to monitor our involvement with additional unconsolidated VIEs for which we perform services related to default prevention and portfolio management. We have determined that we are not the primary beneficiary due to the sole, unilateral
rights of other parties to terminate us in our role as service provider or due to a lack of obligation on our part to absorb benefits or losses of the VIE that would be significant to that VIE. Significant changes to the pertinent rights of other
parties or significant changes to the ranges of possible financial performance outcomes used in our assessment of the variability of cash flows due to us could cause us to change our determination of whether or not a VIE should be consolidated in
future periods. Given the size of our VIEs, any decision to consolidate or deconsolidate VIEs could result in significant changes to our reported assets and liabilities and results of operations during the quarter in which the change occurs. Changes
in our determinations to consolidate or deconsolidate VIEs may also lead to increased volatility in our financial results and make comparisons of results between time periods challenging. See Note 4, ConsolidationReassessment of
Consolidation of VIEs, in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

The accounting for these matters is new and complex, particularly in light of our sale of the Trust Certificate to an unrelated third party. We have determined that it was necessary to correct the
financial statement presentation in our quarterly reports for the quarters ended September 30, 2010 and December 31, 2010 with respect to non-controlling interest accounting. We may be required to adjust our financial statement presentation in the
future as a result of new accounting standards or changes to current accounting standards.

In addition, our financial results beginning with
the first quarter of fiscal 2011 reflect our adoption of new accounting policies, including policies for the determination of an allowance for loan losses and the related provision for loan losses, the recognition of interest income on delinquent
and defaulted loans and amortization of loan acquisition costs and origination fees. We have also adjusted, and may need to further adjust, elements of our information technology infrastructure in order to support our financial reporting following
adoption of ASU 2009-17. We have limited experience with our new estimates and infrastructure, and we may need to adjust them in the future based on our actual experience, new facts and circumstances, or evolving interpretations and practices.

Our liquidity could be adversely affected if the sale of the Trust Certificate does not result in the tax consequences that we expect
or if we are unable to successfully resolve the state tax matters pending before the Massachusetts Appellate Tax Board.

Effective
March 31, 2009, we completed the sale of our Trust Certificate in a transaction intended to improve our financial condition and liquidity. The sale of the Trust Certificate generated a cash refund for income taxes previously paid of $189.3
million. The U.S. federal and state income tax consequences of the sale of the Trust Certificate, however, are complex and uncertain. The IRS has begun an audit of our tax returns for fiscal years 2007, 2008, 2009 and 2010, including a review of the
tax treatment of the sale of the Trust Certificate, as well as the $45.1 million refund that we received in October 2010. The IRS or a state taxing authority could challenge our tax positions in connection with the transactions, notwithstanding our
receipt of any tax refund. If such a challenge were successful, in whole or in part, we may not keep all or a portion of any refund for taxes previously paid, or we may not eliminate our tax obligations relating to the residuals. In either case, our
near-term and long-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 IRS, could
result in substantial costs.

In addition, in September 2007, we filed a petition with the ATB seeking a refund of state tax for our tax year
ended June 30, 2004, all of which tax had previously been paid as if GATE were a business corporation. In December 2009, the Commissioner made additional assessments of tax, along with accrued interest, of approximately $11.9 million for
GATEs tax years ended June 30, 2004, 2005 and 2006 and approximately $8.1 million for our tax years ended June 30, 2005 and 2006. In March 2010, we filed petitions with the ATB contesting the additional assessments against GATE
and us. The assessments against GATE are in the alternative to the assessments against us, and if the assessments against GATE for the year ended June 30, 2004 are valid, then we would be entitled to a refund of approximately $1.1 million in
tax for the same fiscal year. In April 2011, there was an evidentiary hearing for these matters before the ATB. We cannot predict the timing or outcome of these matters at this time, and an adverse outcome may have a material impact on our
state tax liability not only for the tax years at issue, but also for fiscal years 2007 through 2009, which could materially adversely affect our liquidity. For more information, see Note 17, Income Taxes, in the notes to our unaudited
consolidated financial statements included in Part I of this quarterly report.



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We have guaranteed the performance of Union Federals obligations under a loan purchase and sale
agreement and assumed potential contingent liabilities of Union Federal under an indenture. We may incur substantial costs if we have to perform or assume obligations of Union Federal, which could have a material adverse effect on our liquidity or
financial condition.

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

In April 2010, we entered into agreements relating to the restructuring of the education loan warehouse facility of UFSB-SPV. In connection with the
restructuring, the third-party conduit lender released potential claims against Union Federal and UFSB-SPV pursuant to the indenture relating to the facility based upon events arising prior to April 16, 2010, to the extent such claims exceed
$20.0 million in the aggregate. Neither Union Federal nor UFSB-SPV would have any liability until the conduit lenders aggregate losses exceed $3.5 million, at which point Union Federal and UFSB-SPV would only be liable for amounts
above such amount up to the $20.0 million liability cap. Neither the liability cap nor the $3.5 million deductible would apply, however, in cases of fraud, willful misconduct, gross negligence or third-party claims by or on behalf of
borrowers against the conduit lender based on loan origination errors. In addition, the release is not deemed a waiver of rights previously reserved but not exercised by the conduit lender, except as specifically released pursuant to a settlement
agreement.

We assumed any remaining contingent liability of Union Federal and its affiliates, other than UFSB-SPV, under the facility arising
prior to April 16, 2010, subject to the liability cap discussed above. In addition, we assumed any contingent liability of Union Federal under the facility arising prior to April 16, 2010 based on fraud, willful misconduct, gross
negligence, third-party claims by or on behalf of borrowers against the conduit lender based on loan origination errors or rights not otherwise released by the conduit lender. As a result, we may incur substantial costs in the event of a claim for
damages related to the facility, which could have a material adverse affect on our liquidity or financial condition.

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

Education loans held by us and the securitization trusts facilitated by us 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 delinquency and default rates for outstanding education loans, as well as increased use of basic forbearance or alternative payment plans. Forbearance programs may have the
effect of delaying default emergence, and alternative payment plans may reduce the utilization of basic forbearance. Other factors, such as challenging economic times, including high unemployment rates, can also lead to an increase in delinquency
and default rates or such use. In addition, higher interest rates, or the perception that interest rates could increase in the future, could cause an increase in full or partial prepayments. If the prepayment or default rates increase for the
education loans held by us, the securitization trusts that we facilitated or our Monogram platform clients, we may experience a decline in the value of service revenue receivables and releases of deposits from participation accounts, as well as a
decline in fees related to Monogram-based loan programs in the future, which could cause a decline in the price of our common stock and could cause future portfolio funding transactions to be less profitable for us. In addition, an increase in
interest rates could reduce borrowing for education generally, which, in turn, could cause the overall demand for our services to decline.

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

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

We
may require additional funds for our products, operating expenses, including expenditures relating to TMS, credit enhancement for Monogram-based loan programs, 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, although more accessible than during the height of the financial crisis, continues to be
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acceptable to us. We have also satisfied our funding needs through equity financings. We cannot be certain that additional public or private financing would be available in amounts or on terms
acceptable to us, if at all. Although we believe that our capital resources as of March 31, 2011, which include proceeds of tax refunds under audit, are sufficient to satisfy our operating needs for the succeeding twelve months, we cannot
assure you that they will be sufficient to provide amounts that we may determine to be necessary or appropriate to contribute to prospective clients related to new programs. Insufficient funds could require us to delay, scale back or eliminate
certain of our products, curtail or delay plans for TMS, or further scale back our expenses. In addition, our short-term financing needs are subject to regulatory capital requirements related to Union Federal. See Note 19, Union Federal
Regulatory Matters, in the notes to our unaudited consolidated financial statements included in Part I of this quarterly report for additional information.

A significant portion of our acquisition of TMS includes goodwill and intangible assets that are subject to periodic impairment evaluations. An impairment loss could have a material adverse impact
on our financial condition and results of operations.

We acquired $27.6 million of intangible assets and $22.2 million of goodwill
related to our acquisition of TMS. As required by current accounting standards, we review intangible assets for impairment either annually or whenever changes in circumstances indicate that the carrying value may not be recoverable.

The risk of impairment to goodwill is higher during the early years following an acquisition. This is because the fair values of these assets align very
closely with what we paid to acquire the reporting units to which these assets are assigned. As a result, the difference between the carrying value of the reporting unit and its fair value (typically referred to as headroom) is smaller
at the time of acquisition. Until this headroom grows over time, due to business growth or lower carrying value of the reporting unit, a relatively small decrease in reporting unit fair value can trigger impairment charges. When impairment charges
are triggered, they tend to be material due to the size of the assets involved.

Our financial and operational results are subject to
seasonality.

The financial and operational results of our Education Financing segment are subject to seasonal trends. For example,
the volume of education loan applications typically increases with the approach of tuition payment dates. Historically, we have 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. This seasonality of education loan originations has historically impacted the timing and size of securitization transactions, the amount of processing fees that we earned
in a particular quarter and the level of expenses incurred to process the higher origination activity. In addition, we expect seasonality with regard to TMS financial and operational results, with expenses generally increasing from March to
July as we hire temporary staff to meet higher demand for enrollment in tuition payment plans for the succeeding school year.

Risks Related to Asset-Backed Securitizations and Other Funding Sources

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

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

Although our Monogram platform offering has been designed to generate recurring revenue with less dependence on the securitization
market and third-party credit enhancement, we have limited experience with it and have fully deployed it to two lender clients. In addition, our future financial results and growth may continue to be affected by our inability to structure
securitizations or alternative financing transactions involving education loans on terms acceptable to us. In particular, such transactions may enable us to access and recycle capital previously deployed as credit enhancement for interim financing
facilities. If we are able to facilitate securitizations in the near-term, we expect the structure and economics of the transactions to be substantially different than our past transactions, including lower revenues and additional cash requirements
on our part.

If our inability to access the ABS market on acceptable terms continues, our revenues may continue to be adversely impacted, and
we may continue to generate net losses, which would further erode our liquidity position.

Our business, financial condition, results of
operations and cash flows will be adversely affected if we do not achieve widespread market acceptance of loan programs based on our Monogram platform offering.



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Since the beginning of fiscal 2009, we have significantly refined our service offerings and added
fee-for-service offerings, such as portfolio management and asset servicing. During fiscal 2010, we completed the development of our Monogram platform and entered into loan program agreements with two lender clients pursuant to which we expect to
generate ongoing monthly revenue through the maturity of the Monogram-based program loans. Deployment of this platform has been limited, however, and we will need to gain widespread market acceptance of our Monogram platform among both lenders and
borrowers in order to improve our long-term financial condition, results of operations and cash flows.

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

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



| |  |  | Persistent and prolonged disruption or volatility in the capital markets generally or in the education loan ABS sector specifically, which could
continue to restrict or delay our access to the capital markets;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our inability to structure and gain market acceptance for new products or services to meet new demands of ABS investors or credit facility providers;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continuing degradation of the credit quality or performance of the loan portfolios of the trusts we facilitated, which could reduce or eliminate
investor demand for future securitizations that we facilitate, particularly for subordinate classes of ABS, or result in material, adverse modifications in rating agency assumptions, ratings or conclusions with respect to the securitization trusts;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Rating agency actions, including downgrades, of ABS that we facilitated in the past or any occurrence of an event of default with respect to such
securities, which could reduce demand for additional securitizations that we structure;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Material breach of our obligations to clients, including securitization trusts and former or current lender clients;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | The timing and size of education loan asset-backed securitizations that other parties facilitate, or the adverse performance of, or other problems
with, such securitizations, including continued disruptions of the auction rate note market, which could impact pricing or demand for our future securitizations, if any;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Challenges to the enforceability of education loans based on violations of federal or state consumer protection or licensing laws and related
regulations, or imposition of penalties or liabilities on assignees of education loans for violation of such laws and regulations; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes to bankruptcy laws that change the current non-dischargeable status of education-related loans, which could materially adversely affect
recovery rates on defaulted loans.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

New or continuing dislocations in the capital
markets, reductions in the valuations of our service revenue receivables 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
expect the structure and pricing terms in near-term future transactions, if any, to be less favorable than in the past.

Recent
legislation will affect the terms of future securitization transactions.

The SEC has proposed new rules governing ABS issuance that,
due to the requirements for risk retention, may affect the desirability of issuing ABS as a funding strategy. In addition, the Dodd-Frank Act, signed into law on July 21, 2010, grants federal banking regulators substantial discretion in
developing specific risk retention requirements for all types of consumer credit products and requires the SEC to establish new data requirements for all issuers, including standards for data format, asset-level or loan-level data, the nature and
extent of the compensation of the broker or originator, and the amount of risk retention required by loan securitizers.



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The Dodd-Frank Act and its implementing regulations, once adopted, will affect the terms of future
securitization transactions, if any, that we facilitate and may result in greater risk retention and less flexibility for us in structuring such transactions.

In structuring and facilitating securitizations of our clients loans, administering securitization trusts or as holders of rights to receive residual cash flows in non-NCSLT Trusts, we may
incur liabilities to transaction parties.

We facilitated and structured a number of different special purpose trusts that have been
used in securitizations to finance education loans that our clients originated, including trusts that have issued auction rate notes. Under applicable state and federal securities laws, if investors incur losses as a result of purchasing ABS that
those trusts have issued, we could be deemed responsible and could be liable to those investors for damages. If we failed to cause the trusts or other transaction parties to disclose adequately all material information regarding an investment in the
ABS, if the trust made statements that were misleading in any material respect in information delivered to investors or if we breach any duties as the structuring advisor or administrator of the securitization trusts, it is possible that we could be
sued and ultimately held liable to noteholders or other transaction parties. The Modified Plan of Reorganization provides exculpation for certain of our actions as administrator of the trusts in connection with the TERI Reorganization, but the
exculpation may not cover all of our actions as administrator of the trusts during the TERI Reorganization. Recent investigations by state Attorneys General, as well as private litigation, have focused on auction rate securities, including the
marketing and trading of such securities. It is possible that we could become involved in such matters in the future. In addition, under various agreements entered into with underwriters or financial guaranty insurers of those ABS, as well as
certain lenders, we are contractually bound to indemnify those persons if investors are successful in seeking to recover losses from those parties and the trusts are found to have made materially misleading statements or to have omitted material
information.

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

Risks Related to the TERI Reorganization

TERIs rejection of its guaranty agreements in the context of the Modified Plan of Reorganization could result in litigation against us by former clients for breach of contractual obligations,
which could adversely affect our business, reputation and financial results.

Prior to the TERI Reorganization, TERI had historically
been the exclusive provider of borrower default guarantees for our clients education loans. Under the terms of our past purchase agreements with lender clients, we generally have an obligation to use our best efforts to facilitate the purchase
of a clients TERI-guaranteed loans during a specified loan purchase period. Under the Modified Plan of Reorganization, which became effective during the second quarter of fiscal 2011, TERI rejected the guaranty agreements. In general, the
termination of the TERI guaranty agreements terminated our purchase obligations under the purchase agreements. We may be subject to claims, however, that we breached our contractual obligations under our past purchase agreements, which could
adversely affect our business reputation. In addition, our financial results would be adversely affected if we were required to defend or pay damages in connection with any such claim.

Our potential recovery from TERIs bankruptcy estate on our general unsecured claim is uncertain.

Notwithstanding the allowance of our unsecured claim in the aggregate amount of $28.1 million pursuant to the Stipulation, the amount of our ultimate recovery from TERIs bankruptcy estate in
respect of our claims is difficult to estimate. The compensation and other operating expenses of TERI, together with the expenses of its professional advisors and those of the Creditors Committee, during the course of the reorganization proceeding
consumed a significant portion of TERIs unrestricted cash. As a result, general unsecured creditors of TERI received only a small portion of their claims in cash shortly following the effective date of the Modified Plan of Reorganization. The
larger portion of their respective distributions under the plan will only be received by creditors based on the level of recoveries on defaulted loans transferred to the liquidating trust. Those recoveries are expected to be collected over many
years, and the recovery rate will depend on the experience and skill of the party or parties managing collections with respect to such loans. Under the Modified Plan of Reorganization, reorganized TERI manages collections with respect to the portion
of such loans for which TERI was managing collections prior to the effective date. As of the effective date of the Modified Plan of Reorganization, we were managing collections on behalf of the liquidating trust with regard to the remainder of such
loans. We have been asked by the liquidating trustee to continue providing such services until May 31, 2011.

Risks
Related to Regulatory Matters

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



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Regulators have increased diligence and enforcement efforts and new laws and regulations have been passed or
are under consideration in Congress as a result of turbulence in the financial services industry. On July 21, 2010, the President signed into law the Dodd-Frank Act. The Dodd-Frank Act requires various federal agencies to adopt a broad range of
new implementing rules and regulations, and the federal agencies are given significant discretion in drafting the implementing rules and regulations. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for
many months or years.

The Dodd-Frank Act also restructures the regulation of depository institutions. Under the Dodd-Frank Act, the OTS,
which is currently the primary federal regulator for FMD and Union Federal, will cease to exist on July 21, 2011 unless the Secretary of the Treasury opts to delay such date for up to an additional six months. The Office of the Comptroller of
the Currency, or OCC, which is currently the primary federal regulator for national banks, will become the primary federal regulator for federal thrifts, including Union Federal. The Federal Reserve will supervise and regulate all savings and loan
holding companies that were formerly regulated by the OTS, including FMD. Although the OCC and Federal Reserve are directed to implement existing OTS regulations, orders, resolutions, determinations and agreements for thrifts and their holding
companies under the Home Owners Loan Act, the transition of supervisory functions from the OTS to the OCC (with respect to Union Federal) and the Federal Reserve (with respect to FMD) could alter the supervisory approach for Union Federal and
FMD. This could, in turn, affect the operations of FMD and Union Federal. The Dodd-Frank Act also will impose consolidated capital requirements on savings and loan holding companies, but they are not effective for five years.

The Dodd-Frank Act establishes the Bureau of Consumer Financial Protection, or CFPB, as an independent agency within the Federal Reserve to regulate
consumer financial products, including education loans, and services offered primarily for personal, family or household purposes, with rule-making and enforcement authority over unfair, deceptive or abusive practices. The CFPB will come into
existence on July 21, 2011. These laws may directly impact our business operations. The potential reach of the CFPBs broad new rulemaking powers and enforcement authority on the operations of financial institutions offering consumer
financial products or services, including FMD, is currently unknown. In addition, the Dodd-Frank Act establishes an education loan ombudsman within the CFPB, which would, among other things, receive, review and attempt to resolve informally
complaints from education loan borrowers. Finally, the Dodd-Frank Act requires the CFPB and the Secretary of Education, in consultation with Federal Trade Commission, or FTC, commissioners and the U.S. Attorney General, to submit a report, within
two years of enactment of the Dodd-Frank Act, on a variety of matters relating to the education lending market, including education loan lenders.

The Dodd-Frank Act also includes several provisions that could affect our future portfolio funding transactions, if any, including skin in the game risk retention requirements applicable to
any entity that organizes and initiates an ABS transaction, new disclosure and reporting requirements for each tranche of ABS, including new loan-level data requirements, and new disclosure requirements relating to the representations, warranties
and enforcement mechanisms available to ABS investors. The Dodd-Frank Act may have a material impact on our operations, including through increased operating and compliance costs.

In addition, regulators and enforcement officials are taking increasingly expansive positions with respect to whether certain products or product terms may run afoul of state and federal unfair or
deceptive acts and practices laws. Furthermore, the Dodd-Frank Act has potentially expanded the ambit of such laws by prohibiting abusive lender actions. These and other regulatory changes could result in, among other things, increased
compliance costs, more limited lending markets and alterations to our business practices, any of which could have a material adverse effect on our business operations and financial results.

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

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



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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 material adverse effect on our operations and financial statements. We have in the past been required to make capital infusions to Union Federal, and regulatory authorities could require additional capital infusions or
take other corrective measures in the future.

There is a risk that we could incur additional costs in complying with regulations applicable
to savings and loan holding companies and savings banks, or significant penalties if we fail to comply. Our ability to comply with all applicable laws and rules depends largely on our establishment and maintenance of a system to ensure such
compliance, as well as our ability to attract and retain qualified compliance personnel. Further reductions in staffing levels could make it difficult to retain experienced personnel to maintain adequate internal controls related to regulatory
matters. If severe failures in internal controls occur, regulatory authorities could impose sanctions on Union Federal or us. We 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.

The Dodd-Frank Act
eliminates the OTS and replaces it with the OCC as the regulator of federal savings banks, such as Union Federal, and with the Federal Reserve as the regulator of savings and loan holding companies, such as FMD. There is a risk that we could incur
additional costs in complying with differing interpretations of these new regulators for savings and loan holding companies and savings banks, or significant penalties if we fail to comply.

We may become subject to additional state registration or licensing requirements. If we determine that we are subject to additional state registration or licensing requirements, 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, credit services organizations and loan arrangers. Some of these statutes are drafted or interpreted to cover a broad scope of activities. Our subsidiary FMER has been approved for licenses in
Massachusetts, New Jersey, Pennsylvania and Texas and our subsidiary TMS has submitted license applications or registrations and/or received licenses or registrations as a credit services organization and/or collection agency in approximately 15
states. As the integration of TMS continues, we may determine that we need to submit additional license applications in other states. Although we believe that our prior consultations with regulatory counsel and, in some cases state regulators, have
identified all material licensing, registration and other regulatory requirements that could be applicable to us based on current laws and the manner in which we currently conduct business, we may be subject to additional state licensing,
registration and other regulatory requirements in the future. In particular, certain state licenses or registrations may be required if we change our operations, if regulators reconsider their prior guidance or if federal or state laws or
regulations are changed. In particular, the Dodd-Frank Act weakens federal pre-emption of state regulations currently enjoyed by federal savings associations and their operating subsidiaries, such as Union Federal and its operating subsidiary, FM
Loan Origination Services, LLC, or FMLOS. 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 to borrowers located in the state by mail,
telephone, the Internet or other remote means.

Absent a change in federal law, either by judicial interpretation or legislation, including as
discussed above, to the extent that our services are conducted through Union Federal, we believe it is less likely that state regulatory requirements affecting loan brokers, small lenders, credit services organizations or loan arrangers will be
asserted. However, the Dodd-Frank Act weakens federal pre-emption of state regulations currently enjoyed by federal savings and loan holding companies and their operating subsidiaries, such as Union Federal and FMLOS. Specifically, the Dodd-Frank
Act eliminates for operating subsidiaries of federal banks the pre-emption of state licensing requirements. In addition, we may now be subject to state consumer protection laws in each state where we do business and those laws may be interpreted and
enforced differently in different states. We will continue to review state registration and licensing requirements, and we intend to pursue registration or licensing in applicable jurisdictions where we are not currently registered or licensed if we
elect to operate through an entity that does not enjoy federal pre-emption. We cannot assure you that we will be successful in obtaining additional state licenses or registrations in a timely manner, or at all. If we determine that additional state
registrations or licenses are necessary, we may be required to delay or restructure our activities in a manner that will not subject us to such licensing or registration requirements.



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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:



| |  |  | Curtailment of our ability to continue to conduct business in the relevant jurisdiction, pending a return to compliance or processing of registration
or a license application;
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| |  |  | Administrative enforcement actions;
| | - |  | -----------------------------------



| |  |  | Class action lawsuits;
| | - |  | ----------------------



| |  |  | The assertion of legal defenses delaying or otherwise affecting the enforcement of loans; and
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| |  |  | Criminal as well as civil liability.
| | - |  | ------------------------------------

Any of the foregoing could have a material adverse effect on our business.

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

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

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, constrain the marketing of education loans, 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 state and federal
investigations into education loan marketing practices, particularly the payment of marketing fees directly to schools in exchange for loan referrals. State and federal regulatory authorities have sought information from some of our former clients
and us regarding the loan programs we coordinated, and it is possible that some marketing or underwriting practices associated with the programs we coordinated and assets we securitized will be challenged as a result of such investigations. In
August 2007, we announced that, as part of the New York Attorney Generals ongoing investigation of several lending, educational and nonprofit institutions, we had received a subpoena for information regarding our role in the education loan
industry. During fiscal 2008, we worked with the New York Attorney Generals office regarding the investigation, and we have not received any further requests for information since May 2008.

The regulatory actions described above have also prompted state and federal legislation that will affect our operations. In August 2009, the Federal
Reserve issued regulations to implement provisions of the Higher Education Opportunity Act. The regulations revised the number, timing, and content of disclosures required for education loans by TILA and the Federal Reserves implementing
regulation for TILA, Regulation Z. Under the regulations, education loan creditors are now required to provide disclosures about loan



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terms and features on or with the loan application and are also required to disclose information about federal education loan programs that may offer less costly alternatives to education loans.
Additional disclosures must be provided when the loan is approved and after loan acceptance but prior to loan disbursement. Compliance with the new regulations became mandatory in February 2010. In addition, in December 2009, the Federal Reserve and
the FTC announced final rules to implement the risk-based pricing provisions of the Fair and Accurate Credit Transactions Act of 2003. The final rules generally require that lenders provide disclosures to all consumers or alternatively to certain
consumers if credit is offered to them on less favorable terms than those offered by the lender to other consumers. Compliance with the disclosure requirements became mandatory as of January 1, 2011.

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 business reputation and 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, additional
structural advisory fees or asset servicing fees could also be adversely impacted. In some cases, such violations may render the loan assets unenforceable.

A recent Supreme Court decision, and recent legislative proposals, could affect the non-dischargeability of education loans in bankruptcy. If the legislative proposals are enacted, it could
adversely affect the performance of the securitization trusts, the key assumptions we use to estimate the fair value of our service revenue receivables, and/or the competiveness of our Monogram platform.

Under current law, education loans can be discharged in bankruptcy only upon a court finding of undue hardship if the borrower were required
to continue to make loan payments. The bankruptcy court must hear evidence and make a finding of undue hardship in order to discharge the debtors education loans. In March 2010, the United States Supreme Court upheld a bankruptcy
confirmation order which discharged a debtors education loans without a finding of undue hardship by the bankruptcy court. Specifically, the debtors proposed plan, which the bankruptcy court ultimately approved, included a
discharge of the debtors education loans; however, the bankruptcy court never heard evidence or made a finding of undue hardship. As a result of the Supreme Courts decision, it may be advisable for us, in performing
collections management for the securitization trusts and our clients, to review certain bankruptcy filings that we do not currently review to determine if plans include a discharge of education loans without the necessary adversary proceeding and a
finding of undue hardship. Such additional review could increase our costs and the complexity of our operations.

In April 2010,
legislation was introduced in both the U.S. Senate and the U.S. House of Representatives that would generally end the bankruptcy exemption from dischargeability for all education loans. If enacted as initially proposed, both bills would apply
retroactively to education loans already made, and would not require the borrower to make any payments before seeking discharge in bankruptcy. Although these bills were not enacted in the last Congress, if similar bills are introduced and enacted
this Congress, such legislation could adversely affect the performance of the securitization trusts and the key assumptions we used, including recovery assumptions, to estimate the fair value of our service revenue receivables. In addition, these
bills, if enacted, may restrict the availability of capital to fund education loans and may increase loan pricing to borrowers to compensate for the additional risk of bankruptcy discharge, which could adversely affect the competitiveness of our
Monogram platform and our ability to engage lenders to fund loans based on our Monogram platform.

In the last Congress, legislation was
introduced in both the U.S. Senate and the U.S. House of Representatives that would have allowed education loan borrowers to swap their education loan debt for federal unsubsidized Stafford or graduate/professional PLUS debt to the
extent that previous Stafford or PLUS loans, as applicable, to such borrowers had not exceeded the aggregate limits established by federal law for such loans. Education loans made between July 1, 1994 and July 1, 2010 would be eligible for
such a swap. Borrowers could not be more than 90 days delinquent on their education loans in order to qualify. Although these bills were not enacted in the last Congress, if similar bills are introduced and enacted in this Congress, borrowers
with loans in the securitization trusts could exchange their education loans for federal Stafford, PLUS, and/or Direct Consolidation loans. Accordingly, the bill could adversely affect the performance of the securitization trusts and the key
assumptions that we have used to estimate the fair value of our service revenue receivables.

Recent litigation has sought to
re-characterize certain loan marketers and other originators as lenders; if litigation on similar theories were successful against us or any third-party marketer we have worked with in the past, the education loans that we facilitate 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, in most cases, are able to charge the interest rates, fees and other charges available to the most favored lender in their home state. In addition, our lender clients or prospective lender clients may be chartered by the
federal government and enjoy pre-emption from enforcement of state consumer protection laws. In providing our education loan services to our lender clients, we do not act as a lender, guarantor or loan servicer, and the terms of the education loans
that we facilitate are regulated in accordance with the laws and regulations applicable to the lenders.



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The association between marketers of high-interest payday loans, tax-return anticipation loans,
or subprime credit cards, and online payment services, on the one hand, and banks, on the other hand, has come under recent scrutiny. Recent litigation asserts that loan marketers use lenders with a bank charter that authorizes the lender to charge
the most favored interest rate available in the lenders home state in order to evade usury and interest rate caps, and other consumer protection laws imposed by the states where they do business. Such litigation has sought, successfully in
some instances, to re-characterize the loan marketer as the lender for purposes of state consumer protection law restrictions. Similar civil actions have been brought in the context of gift cards. Moreover, federal banking regulators and the FTC
have undertaken enforcement actions challenging the activities of certain loan marketers and their bank partners, particularly in the context of subprime credit cards. We believe that our activities, and the activities of third parties whose
marketing on behalf of lenders has been coordinated by us, are distinguishable from the activities involved in these cases.

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

Risks Related 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 your shares of our common stock. Those factors that could cause fluctuations include, but are not limited to, the following:



| |  |  | The success of our Monogram platform, our fee-for-service offerings and our tuition payment plan offerings;
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| |  |  | Announcement by us, our competitors or our potential competitors of acquisitions, new products or services, significant contracts, commercial
relationships or capital markets activities;
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| |  |  | Actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of securities analysts, including as a
result of the timing, size or structure of any portfolio funding transactions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Difficulties we may encounter in structuring securitizations or alternative financings, including continued disruptions in the education loan ABS
market or demand for securities offered by trusts that we facilitate, or the loss of opportunities to structure securitization transactions;
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| |  |  | Any variance between the actual performance of the securitization trusts and the key assumptions that we have used to estimate the fair value of our
service revenue receivables, including among others, discount, net default and prepayment rates;
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| |  |  | General economic conditions and trends, including unemployment rates and economic pressure on consumer asset classes such as education loans;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Legislative initiatives affecting federal or private education loans, including initiatives relating to bankruptcy dischargeability and the federal
budget and regulations implementing the Dodd-Frank Act;
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| |  |  | Changes in demand for our product and service offerings or in the education finance marketplace generally;
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| |  |  | Negative publicity about the education loan market generally or us specifically;
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| |  |  | Regulatory developments or sanctions directed at Union Federal or us;
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| |  |  | Unfavorable outcomes in litigation or proceedings in which we are involved;
| | - |  | ---------------------------------------------------------------------------



| |  |  | Adverse rating agency actions with respect to the securitization trusts that we facilitated;
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| |  |  | Our adoption of ASU 2009-16 and ASU 2009-17 and their effects on our reported financial condition and results of operations, including future
determinations to consolidate or deconsolidate VIEs;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Price and volume fluctuations in the overall stock market and volatility in the ABS market, from time to time;
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| |  |  | Significant volatility in the market price and trading volume of financial services and process outsourcing companies;
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| |  |  | Major catastrophic events;
| | - |  | --------------------------



| |  |  | Purchases or sales of large blocks of our common stock or other strategic investments involving us; or
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Departures or long-term unavailability of key personnel, including our Chief Executive Officer, who we believe has unique insights and experience at
this point of change in our business and the education loan industry.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the past, following periods of volatility in the
market price of a companys securities, securities class action litigation has often been brought against that company. We have in the past been the target of securities litigation. Any future litigation could result in substantial costs and
divert managements attention and resources from our business.

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

Our directors and executive officers, and
entities affiliated with them, owned approximately 22% of the outstanding shares of our common stock as of March 31, 2011, excluding shares issuable upon vesting of outstanding restricted stock units, shares issuable upon exercise of
outstanding vested and unvested stock options and shares of preferred stock held by affiliates of GS Capital Partners, or GSCP, convertible into 8,846,733 additional shares of our common stock. Affiliates of GSCP have agreed not to convert shares of
preferred stock if, after giving effect to any such conversion, they and their affiliates would own more than 9.9% of our outstanding shares of common stock. Approximately 5,136,367 additional shares of common stock could be issued to affiliates of
GSCP upon conversion of shares of preferred stock before they and their affiliates would own more than 9.9% of our outstanding shares of common stock. These stockholders, if acting together, could substantially influence matters requiring approval
by our stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to
your interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to 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:



| |  |  | Only our Board of Directors, our Chairman of the Board or our President may call special meetings of our stockholders;
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| |  |  | Our stockholders may take action only at a meeting of our stockholders and not by written consent;
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| |  |  | We have authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;
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| |  |  | Our directors may be removed only for cause by the affirmative vote of a majority of the directors present at a meeting duly held at which a quorum is
present, or by the holders of 75% of the votes that all stockholders would be entitled to cast in the election of directors; and
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| |  |  | We impose advance notice requirements for stockholder proposals.
| | - |  | ----------------------------------------------------------------

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.



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|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

(c) Issuer Purchases of Equity Securities

The following table provides information
as of and for the quarter ended March 31, 2011 regarding shares of our common stock that were repurchased under a repurchase plan authorized by our Board of Directors in April 2007, or the 2007 Stock Repurchase Plan, and our 2003 stock
incentive plan, or the 2003 Plan.



|                                     |  |                                 |    |  |                             |   |      |                                                                                 |  |  |                                                                              |  |  |  |       | 
|------------------------------------ |  | ------------------------------- | -- |  | --------------------------- | - | ---- | ------------------------------------------------------------------------------- |  |  | ---------------------------------------------------------------------------- |  |  |  | ----- | 
|                                     |  | Total number ofshares purchased |    |  | Average pricepaid per share |   |      | Total number of shares purchasedas part of publicly 
announced plansor programs |  |  | Maximum number of
sharesthat may yet be purchasedunder the plans or programs | 
|                                     |  |                                 |    |  |                             |   |      | (shares in thousands)                                                           |  |  |                                                                              | 
|2007 Stock Repurchase Plan(1):       |  |                                 |    |  |                             |   |      |                                                                                 |  |  |                                                                              |  |  |  |       | 
|Balance, beginning of period:        |  |                                 |    |  |                             |   |      |                                                                                 |  |  |                                                                              |  |  |  | 8,831 | 
|January 1 - 31, 2011                 |  |                                 |   |  |                             |   |     |                                                                                 |  |  |                                                                             |  |  |  | 8,831 | 
|February 1 - 28, 2011                |  |                                 |   |  |                             |   |     |                                                                                 |  |  |                                                                             |  |  |  | 8,831 | 
|March 1 - 31, 2011                   |  |                                 |   |  |                             |   |     |                                                                                 |  |  |                                                                             |  |  |  | 8,831 | 
|                                     |  |                                 |    |  |                             |   |      |                                                                                 |  |  |                                                                              |  |  |  |       | 
|Total 2007 Stock Repurchase Plan     |  |                                 |   |  |                             |   |     |                                                                                 |  |  |                                                                             |  |  |  | 8,831 | 
|Other(2)
:                           |  |                                 |    |  |                             |   |      |                                                                                 |  |  |                                                                              |  |  |  |       | 
|Balance, beginning of period:        |  |                                 | 14 |  |                             | $ | 2.32 |                                                                                 |  |  |                                                                              |  |  |  | N/A   | 
|January 1 - 31, 2011                 |  |                                 |   |  |                             |   |     |                                                                                 |  |  |                                                                             |  |  |  | N/A   | 
|February 1 - 28, 2011                |  |                                 |   |  |                             |   |     |                                                                                 |  |  |                                                                             |  |  |  | N/A   | 
|March 1 - 31, 2011                   |  |                                 | 2  |  |                             |   | 2.15 |                                                                                 |  |  |                                                                             |  |  |  | N/A   | 
|                                     |  |                                 |    |  |                             |   |      |                                                                                 |  |  |                                                                              |  |  |  |       | 
|Total Other                          |  |                                 | 16 |  |                             |   | 2.29 |                                                                                 |  |  |                                                                             |  |  |  | N/A   | 
|                                     |  |                                 |    |  |                             |   |      |                                                                                 |  |  |                                                                              |  |  |  |       | 
|Total Purchases of Equity Securities |  |                                 | 16 |  |                             |   | 2.29 |                                                                                 |  |  |                                                                             |  |  |  |       | 
|                                     |  |                                 |    |  |                             |   |      |                                                                                 |  |  |                                                                              |  |  |  |       | 



|(1) | Our Board of Directors authorized the repurchase of up to 10,000,000 shares of our common stock under the 2007 Stock Repurchase Plan. The 10,000,000 shares authorized
for repurchase included 3,393,300 shares that remained available for repurchase under a previously authorized repurchase program. Future repurchases pursuant to the 2007 Stock Repurchase Plan may require regulatory approval. The 2007 Stock
Repurchase Plan was approved by our Board of Directors on April 24, 2007 and has no expiration date.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Pursuant to our 2003 Plan, we withhold shares of common stock in connection with tax withholding obligations upon vesting of restricted stock units. Our 2003 Plan was
approved by stockholders on November 16, 2009 and has an expiration date of September 14, 2013.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 6. | Exhibits.
|------- | ---------

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



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SIGNATURES

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



|                   |  |  |  |                                  |  |                                                                                                                        
|------------------ |  |  |  | -------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------
|                   |  |  |  | THE FIRST MARBLEHEAD CORPORATION
|                   |  |  | 
|Date: May 16, 2011 |  |  |  | By:                              |  | /s/ KENNETH KLIPPER                                                                                                    
|                   |  |  |  |                                  |  | Kenneth Klipper Managing Director and Chief Financial Officer (Duly Authorized Officer
and Principal Financial Officer)



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                         
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                             
|31.1          |  | Chief Executive OfficerCertification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002                           
|              | 
|31.2          |  | Chief Financial OfficerCertification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002                           
|              | 
|32.1          |  | Chief Executive OfficerCertification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|              | 
|32.2          |  | Chief Financial OfficerCertification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|              | 
|99.11         |  | Static pool data as of March 31, 2011                                                                                                                                                                   
|              | 
|99.21         |  | Supplemental presentation dated March 31, 2011                                                                                                                                                          



|(1) | Incorporated by reference to exhibits to the registrants current report on Form 8-K filed with the SEC on May 10, 2011
|--- | -----------------------------------------------------------------------------------------------------------------------



94