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



FORM 10-Q



(MARK ONE)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For The Quarterly Period Ended September 30, 2008ORo

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


Commission File Number 001-31825



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



Delaware(State or Other Jurisdiction of
Incorporation or Organization)

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

02199-8157(Zip Code)


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



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

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

Large accelerated filer ý

Accelerated filer o

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

Smaller reporting company o


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

As of November 7, 2008, the registrant had 99,085,300 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 InformationItem 1



Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2008 and June 30, 2008

1Condensed Consolidated Statements of Operations for the three months ended September 30, 2008 and 2007

2Condensed Consolidated Statement of Changes in Stockholders' Equity for the three months ended September 30, 2008

3Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2008 and 2007

4Notes to Unaudited Condensed Consolidated Financial Statements

5Item 2



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

28Item 3



Quantitative and Qualitative Disclosures About Market Risk

63Item 4



Controls and Procedures

64Part II. Other InformationItem 1



Legal Proceedings

64Item 1A



Risk Factors

65Item 2



Unregistered Sales of Equity Securities and Use of Proceeds

88Item 6



Exhibits

88SIGNATURES

89EXHIBIT INDEX

90


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Part I. Financial Information

Item 1Financial Statements

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

September 30,
2008

June 30,
2008ASSETSCash and cash equivalents

$
152,384

$
70,280Federal funds sold


83,192


80,215Investments


69,483


70,629Loans held for sale


482,715


497,324Service receivables:Structural advisory fees


94,475


113,842Residuals


213,099


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


791


4,086Total service receivables


308,365


411,183Property and equipment


87,975


92,273Less accumulated depreciation and amortization


(56,262
)

(54,592
)Property and equipment, net


31,713


37,681Goodwill


1,701


1,701Intangible assets, net


1,758


1,956Other prepaid expenses


13,915


15,377Mortgage loans held to maturity, net


10,166


10,754Net deferred income tax asset


48,088


Other assets


6,091


3,798Total assets

$
1,209,571

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

$
246,367

$
244,113Education loan warehouse facility


244,239


242,899Accounts payable and accrued expenses


23,245


20,543Income taxes payable


12,939


31,275Net deferred income tax liability





10,385Other liabilities


12,205


14,071Total liabilities


538,995


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





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





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


1


Common stock, par value $0.01 per share; 250,000 shares authorized at September 30, 2008 and June 30, 2008; 106,755 and 106,456 shares issued at
September 30, 2008 and June 30, 2008, respectively; 99,113 and 98,886 shares outstanding at September 30, 2008 and June 30, 2008, respectively


1,068


1,065Additional paid-in capital


426,544


300,498Retained earnings


427,036


519,933Treasury stock, 7,642 and 7,570 shares held at September 30, 2008 and June 30, 2008, respectively, at cost


(184,246
)

(183,993
)Accumulated other comprehensive income


173


109Total stockholders' equity


670,576


637,612Total liabilities and stockholders' equity

$
1,209,571

$
1,200,898


See accompanying notes to unaudited condensed consolidated financial statements.

1

---





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

Three months ended September 30,2008

2007Service revenues:Up-front structural advisory fees

$


$
177,542Additional structural advisory fees:From new securitizations





24,304Trust updates


(17,890
)

2,859Total additional structural advisory fees


(17,890
)

27,163Residuals:From new securitizations





116,972Trust updates


(80,156
)

(14,108
)Total residuals


(80,156
)

102,864Processing fees from TERI


2,385


46,249Administrative and other fees


3,619


21,761Total service revenues


(92,042
)

375,579Net interest income


7,137


4,383Total revenues


(84,905
)

379,962Non-interest expenses:Compensation and benefits


15,257


32,003General and administrative expenses


24,447


65,498Unrealized losses on loans held for sale


21,226


Total non-interest expenses


60,930


97,501Income (loss) before income taxes


(145,835
)

282,461Income tax expense (benefit)


(52,938
)

113,641Net income (loss)

$
(92,897
)
$
168,820Net income (loss) per share, basic

$
(0.94
)
$
1.81Net income (loss) per share, diluted


(0.94
)

1.80Cash dividends declared per share





0.275Weighted average shares outstanding, basic


98,964


93,437Weighted average shares outstanding, diluted


98,964


93,796


See
accompanying notes to unaudited condensed consolidated financial statements.

2

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(unaudited)

(in thousands, except per share amounts)

Series B
non-voting
convertible
preferred stock

Common stockIssued

Issued

In treasury





Accumulated
other
comprehensive
incomeAdditional
Paid-in
capital

Retained
earnings

Total
stockholders'
equityShares

Amount

Shares

Amount

Shares

AmountBalances at June 30, 2008








106,456

$
1,065


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

$
519,933

$
109

$
637,612Comprehensive income (loss)Net loss























(92,897
)




(92,897
)Accumulated other comprehensive income, net


























64


64Total comprehensive loss























(92,897
)

64


(92,833
)Issuance of preferred stock


133


1














125,857








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








299


3


(72
)

(253
)

(3
)







(253
)Stock-based compensation




















2,555








2,555Tax expense from stock-based compensation




















(2,363
)







(2,363
)Balances at September 30, 2008


133

$
1


106,755

$
1,068


(7,642
)
$
(184,246
)
$
426,544

$
427,036

$
173

$
670,576


See accompanying notes to unaudited condensed consolidated financial statements.

3

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

Three months ended
September 30,2008

2007Cash flows from operating activities:Net income (loss)

$
(92,897
)
$
168,820Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


5,055


4,422Deferred income tax (benefit) expense


(58,473
)

41,598Stock-based compensation


2,555


2,378Unrealized loss on loans held for sale


21,226


Loss on disposal of property and equipment


1,394


Distribution of additional structural advisory fees


1,477


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


(6,617
)

(164,106
)(Increase) decrease in structural advisory fees


17,890


(27,163
)(Increase) decrease in residuals


80,156


(102,864
)(Increase) decrease in processing fees TERI


3,295


(3,395
)Decrease in prepaid income taxes





107,512Decrease in other prepaid expenses


1,462


1,363(Increase) in other assets


(2,292
)

(7,366
)(Decrease) in accounts payable and accrued expenses, income taxes payable and other liabilities


(16,546
)

(9,135
)Net cash provided by (used in) operating activities


(42,315
)

12,064Cash flows from investing activities:Net changes in federal funds sold


(2,977
)

Dispositions of investments


12,610


429Purchases of investments


(11,400
)

(25,000
)Purchases of property and equipment


(283
)

(4,246
)Net change in loans held to maturity


588


Payments to TERI for loan database updates





(62
)Net cash provided by (used in) investing activities


(1,462
)

(28,879
)Cash flows from financing activities:Increase in deposits


2,254


70,246Increase in education loan warehouse facility


1,340


94,000Repayment of capital lease obligations


(955
)

(1,023
)Repayment of notes payable to TERI





(208
)Tax benefit (expense) from stock-based compensation


(2,363
)

569Issuances of common stock, net


(253
)

506Issuance of series B non-voting convertible preferred stock, net


125,858


Repurchases of common stock





(755
)Cash dividends on common stock





(25,719
)Net cash provided by financing activities


125,881


137,616Net increase in cash and cash equivalents


82,104


120,801Cash and cash equivalents, beginning of period


70,280


106,271Cash and cash equivalents, end of period

$
152,384

$
227,072Supplemental disclosures of cash flow information:Interest paid

$
4,933

$
2,471Income taxes paid

$
26,234

$
712Supplemental disclosure of non-cash activities:Acquisition of property and equipment through capital leases

$


$
200


See accompanying notes to unaudited condensed consolidated financial statements.

4

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Nature of Business

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

The
Company focuses primarily on private student loan programs for undergraduate, graduate and professional education, and, to a lesser degree, on continuing education programs, the
primary and secondary school market, career training and study abroad programs.

Business Trends, Uncertainties and Outlook

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

Student
loan asset-backed securitizations have historically been the Company's sole source of permanent financing for its clients' private student loan programs. The conditions of the
debt capital markets generally, and the asset-backed securities (ABS) market specifically, rapidly deteriorated during the second quarter of fiscal 2008. This deterioration accelerated during the
third quarter of fiscal 2008 and persisted as of September 30, 2008. The Company's business has been and continues to be materially adversely impacted by the current market dynamics, including
an inability to access the securitization market and interim financing facilities. The Company did not complete a securitization transaction during its second, third, or fourth quarters of fiscal 2008
or the first quarter of fiscal 2009. The Company's securitization volumes materially decreased in fiscal 2008 compared to fiscal 2007. The Company does not expect to complete a securitization in the
near-term and may not
complete any securitizations during fiscal 2009. In addition, it expects pricing terms in future securitizations, if any, to be substantially less favorable than in the past. In the
near-term, it also expects investors to have limited or no demand for subordinate tranches of ABS in securitization transactions, if any, that it is able to facilitate.

On
April 7, 2008, TERI filed a voluntary petition for relief (TERI Reorganization) under Chapter 11 of the United States Bankruptcy Code (Bankruptcy Code) in the United
States Bankruptcy Court for the District of Massachusetts (Bankruptcy Court). As of November 10, 2008, TERI continued

5

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

to
operate its business as "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and
orders of the Bankruptcy Court.

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

The
Company has recently developed alternatives to the loan guaranty and loan origination services that TERI has historically provided to the Company's clients. The Company has developed
a private label loan program that would not require a guaranty from a third party, and the Company has begun to offer outsourced loan origination services and portfolio management services on a
fee-for-service, stand-alone basis. The success of these initiatives is critical to growing and diversifying the Company's revenues and client base in the future. Compared to
past TERI-guaranteed loan programs, the new private label loan program has been designed to have more selective underwriting criteria, higher borrower pricing and a greater proportion of
immediate-repayment loans, or loans for which payment of principal and interest begins shortly after final disbursement, and interest-only loans, or loans for which payment of interest
begins shortly after disbursement but payment of principal is deferred during enrollment. The Company's near-term financial performance and future growth depend, however, in large part on
its ability to structure securitizations. The Company is uncertain whether former, current or prospective clients will purchase these services from the Company. Union Federal is not, as of the date of
this report, able to fund loan originations in the private label loan program due to its current lack of funding capacity. See "Management's Discussion and Analysis of Financial Condition and Results
of OperationsExecutive Summary."

Basis of Presentation

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

6

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

financial
statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended June 30, 2008 included in the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission (SEC) on August 28, 2008.

Student Loan Market Seasonality and Revenue Related to Securitization Transactions

Origination of student loans is generally subject to seasonal trends, with the volume of loan applications increasing with the approach
of tuition payment dates. Historically, the Company has processed the greatest application volume during the summer months, as students and their families seek to borrow money in order to pay tuition
costs for the fall semester or the entire school year. The Company has also tended to process an increased volume of loan applications during November, December and January, as students and their
families seek to borrow money to pay tuition costs for the spring semester. Historically, this seasonality of loan originations has impacted the timing and size of securitization transactions, the
amount of processing fees from TERI that the Company earned in a particular quarter, and the level of expenses incurred to market and process the higher origination activity.

The
Company expects to facilitate a significantly lower volume of loan applications during fiscal 2009 compared to past fiscal years as a result of, among other factors, the TERI
Reorganization. The Company processed a significantly lower application volume during the summer months of 2008 compared to 2007, as the Company's clients instructed TERI to stop accepting
applications or
suspended their marketing of TERI-guaranteed loans and certain clients terminated their agreements with the Company. During the first quarter of fiscal 2008, the Company facilitated loans
with an aggregate principal balance of $2,401,541 and received $46,249 in processing fees from TERI. During the first quarter of fiscal 2009, the Company facilitated loans with an aggregate principal
balance of $128,089 and received $2,385 in processing fees from TERI. Processing fees from TERI have historically consisted of reimbursement of expenses incurred by the Company relating to services
performed on behalf of TERI under the terms of the master servicing agreement between the Company and TERI (Master Servicing Agreement). In June 2008, the Bankruptcy Court entered an order approving a
motion by TERI to reject the Master Servicing Agreement effective May 31, 2008, and to enter into a transition services agreement (Transition Services Agreement), which terminated on
September 29, 2008.

The
Company completed two securitization transactions during the first quarter of fiscal 2008, but did not complete a securitization transaction during its second, third or fourth
quarters of fiscal 2008, or the first quarter of fiscal 2009. The Company does not expect to complete a securitization in the near-term and may not complete any securitizations during
fiscal 2009. In addition, it expects pricing terms in future securitizations, if any, to be substantially less favorable than in the past. In the near-term, the Company also expects
investors to have limited or no demand for subordinate tranches of ABS in securitization transactions, if any, that it is able to facilitate. If the Company is able to facilitate the securitization of
TERI-guaranteed loans in the future, its up-front structural advisory fee yields would likely decline and market conditions would likely dictate that the Company obtain
additional credit enhancement for such securitizations, the cost of which would result in lower revenues and additional cash requirements. Variations in the size, timing and type of financing
transactions the

7

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Company
facilitates has in the past, and may in the future, contribute to variability in quarterly operating results.

At
September 30, 2008, the principal balance of loans facilitated and available to FMC for securitization was $2,359,110. Under the terms of its purchase agreements with lender
clients, FMC generally has an obligation to use its best efforts to facilitate the purchase of the client's private student loans during a specified loan purchase period. The length of the loan
purchase period varies by client and generally ranges from 195 days to 555 days following final loan disbursement. If FMC fails to facilitate a purchase in breach of its obligations,
FMC's liability would be limited under the terms of certain of its purchase agreements to liquidated damages of one percent of the total principal amount of the loans as to which the loan purchase
period had expired. Those purchase agreements that limit FMC's liability to liquidated damages generally provide that FMC's obligation to close a securitization is subject to the condition that no
"market disruption event" has occurred. The TERI Reorganization constitutes a "market disruption event" under certain of these purchase agreements, suspending FMC's contractual obligation to close a
securitization. Any liquidated damages would be due at expiration of the relevant loan purchase period, which would not occur until the market disruption event ceases. FMC's purchase agreements
applicable to approximately $1,162,262 of FMC's facilitated loan volume available for securitization as of September 30, 2008 do not include a liquidated damages provision in the event FMC
fails to facilitate a securitization in breach of its obligations, and the amount of the Company's potential liability with respect to such loans is not determinable at this time. The purchase
agreements
generally require the Company to use its best efforts to facilitate a securitization of loans available for securitization within 555 days after final disbursement.

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

Concentrations

TERI

TERI is a private, not-for-profit Massachusetts organization as described under section 501(c)(3) of the
Internal Revenue Code. Incorporated in 1985, TERI is the oldest and largest guarantor of alternative, or private, education loans. In its role as guarantor in the private education lending market,
TERI agreed to reimburse lenders and securitization trusts for unpaid principal and interest on defaulted loans. Historically, TERI was the exclusive third party provider of borrower default
guarantees for the Company's clients' private education loans. As of September 30, 2008, TERI had a Ca counterparty rating from Moody's Investor Services and did not receive a rating from Fitch
Ratings.

Historical Relationship.In 2001, the Company acquired TERI's historical database and loan processing operations, but not its investment assets or guaranty
liabilities. In connection with the transaction, the Company entered into a series of agreements with respect to loan processing services, database updates and the securitization of
TERI-guaranteed loans. These included the Master Servicing Agreement, a database sale and supplementation agreement (Database Agreement) and a master loan guaranty agreement (Master Loan
Guaranty Agreement). Pursuant to the Master Servicing Agreement, TERI engaged the Company to provide loan origination, default prevention, claims and default

8

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

management
services. Under TERI's agreements with lenders, lenders delegated their loan origination functions to TERI, and TERI had the right to subcontract these functions. Pursuant to the Database
Agreement, TERI provided updated information to the Company about the performance of the student
loans it had guaranteed, so that the Company could continue to supplement and enhance the Company's database.

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

The
Company entered into supplements to the Master Loan Guaranty Agreement that enabled TERI to elect to adjust the amount of its administrative fee, and adjust the amount deposited into
the Pledged Accounts, within specified parameters. For each securitization for which TERI elected to adjust the administrative fee, the Company made a corresponding adjustment to the relative
ownership percentages of the residual interests in the applicable securitization trust. To the extent TERI elected to increase the amount of its administrative fee above 150 basis points, such an
adjustment resulted in an increase in the Company's ownership percentage, and a decrease in the ownership interest of TERI, by a percentage that resulted in an equivalent dollar reduction in the fair
value of TERI's residual ownership interest at the time of the securitization.

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

In
April 2008, the Company received notice that Bank of America elected to terminate its agreements with the Company due to the TERI Reorganization. Loans funded by Bank of America
represented approximately 29% of the Company's total loans available for securitization as of September 30, 2008. The Company has the right to facilitate the securitization of Bank of America
loans originated prior to the termination, subject to the terms and conditions of the note purchase agreements between the Company and Bank of America.

The
Company also received notice in April 2008 that RBS elected to terminate certain agreements with the Company and its clients. The Company provided services to RBS in connection with
various private student loan programs (RBS Programs), including RBS Programs marketed by third parties that

9

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

are
not themselves lenders (Program Marketers) and RBS Programs marketed under RBS' private label brands. Subject to the terms and conditions of note purchase agreements between RBS and the Company,
the Company had the right to facilitate securitization of RBS Program loans. The Company had also entered into agreements among RBS, Program Marketers and the Company pursuant to which the Company
coordinated the marketing of certain RBS Programs. As a result of the terminations, neither RBS nor the Company has any further obligations to sell or purchase certain RBS Program loans, and the
affected Program Marketers were required to cease all marketing activities with regard to their RBS Programs. Loans funded by RBS represented approximately 30% of the Company's total loans available
for securitization as of September 30, 2008.

In
July 2008, the Bankruptcy Court entered an order (Order) granting a motion by TERI to terminate the loan origination agreement and guaranty agreement between TERI and JPMorgan Chase.
TERI and JPMorgan Chase entered into a stipulation in connection with the motion, providing for certain agreements among the parties with regard to the terminations. Pursuant to the stipulation, TERI
agreed to return to JPMorgan Chase a portion of the guaranty fees previously paid by JPMorgan Chase to TERI with regard to private education loans funded and currently owned by JPMorgan Chase (Program
Loans), and JPMorgan Chase waived and relinquished any further guaranty claims against TERI with regard to the Program Loans. The Company had the right to facilitate securitization of the Program
Loans, subject to the terms and conditions of the note purchase agreement between the Company and JPMorgan Chase (NPA). As a result of the termination of the guaranty agreement, the NPA also
terminated. As a result, JPMorgan Chase no longer has any further obligations to sell and the Company no longer has any obligation to purchase Program Loans pursuant to the NPA. Consequently, the
Company will not be purchasing from JPMorgan Chase, pursuant to the NPA, Program Loans totaling approximately $700,000 funded by JPMorgan Chase prior to the termination of the NPA.

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

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

10

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

Ongoing Matters.The committee of unsecured creditors of TERI (Creditors Committee) continues to have a right to challenge the validity, perfection, priority or
enforceability of the securitization trusts' security interests in funds to be transferred to the Pledged Accounts after the filing of TERI's petition for reorganization (Post-Petition
Transfers), as well as any other collateral securing TERI's guaranty obligations other than Post-Petition Transfers and the funds in the Pledged Accounts as of April 7, 2008. TERI
may also continue to have a similar right to challenge the trusts' security interests, but such right is being challenged by the Creditors Committee as of November 10, 2008. The Company expects
TERI or the Creditors Committee to raise potential objections with regard to the validity or perfection of the trusts' security interests in certain collateral, in particular, the trusts' security
interests in cash recoveries on defaulted loans and proceeds expected by the Company to be deposited in the Pledged Accounts from sales by TERI of rehabilitated loans back to the trusts.

If
the Creditors Committee or any other party were successful in challenging the trusts' security interests in the Post-Petition Transfers or other collateral, including
recoveries, the amount of pledged collateral available exclusively to a particular securitization trust to satisfy TERI's guaranty obligations to that trust would decrease materially. As a result, the
trust's unsecured claims against TERI would increase proportionately. For example, recoveries from defaulted student loans, which have historically been used to replenish a particular trust's Pledged
Account, would instead become an asset of TERI's bankruptcy estate and available to satisfy administrative claims of TERI's bankruptcy estate and other holders of claims in accordance with the
priorities established by the Bankruptcy Code. In addition, TERI may seek to reject its guaranty obligations entirely in the context
of the TERI Reorganization. Any of these developments would decrease materially the Company's service receivables and could further harm its ability to structure securitizations in the future.

Beginning
in June 2008, TERI resumed paying its obligations under the guaranty agreements with respect to defaulted loans from the trusts, but only using cash in the Pledged Account
established for the benefit of the specific trust that owned the defaulted loan. As of November 10, 2008, TERI is not permitted to satisfy its guaranty obligations using funds from TERI's
general reserves. Funds in the Pledged Accounts of certain trusts have been exhausted, or are expected to be exhausted in the near term, at which point such trust will have a general unsecured claim
against TERI. As of November 10, 2008, TERI had not resumed paying guaranty obligations with respect to defaulted loans of lenders holding TERI-guaranteed loans that have not been
securitized.

FM Loan Origination Services, LLC

In May 2008, Union Federal formed a new, wholly owned operating subsidiary, FM Loan Origination Services, LLC, or FMLOS. Through
FMLOS, the Company plans to provide outsourced student loan origination services on a fee-for-service basis. As a subsidiary of a federal financial institution, FMLOS provides
the Company with greater regulatory flexibility than it had previously.

11

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Union
Federal received regulatory approvals from the OTS and the Federal Deposit Insurance Corporation, or FDIC, relating to the formation and operation of FMLOS in July 2008.

PHEAA

As of September 30, 2008, there were eight loan servicers servicing loans for which the Company facilitated origination.
Servicers provide administrative services relating to loans, including processing deferment and forbearance requests, sending out account statements and accrual notices, responding to borrower
inquiries, and collecting and crediting payments received from borrowers. As of September 30, 2008, Pennsylvania Higher Education Assistance Agency (PHEAA) serviced a significant majority of
the loans for which the Company facilitated origination. PHEAA also operates under the name American Education Services, or AES. If the Company's relationship with PHEAA terminates, the Company would
either need to expand or develop a relationship with another loan servicer, which could be time-consuming and costly.

Revenue Concentration

The Company did not facilitate any securitizations in the first quarter of fiscal 2009. Securitization-related fees from the trusts
used to securitize student loans in the first quarter of fiscal 2008 represented approximately 84% of total revenue in that quarter. The securitization trusts facilitated during the first quarter of
fiscal 2008 purchased private student loans from several lenders, including JPMorgan Chase, Bank of America, RBS and Union Federal. The Company did not recognize more than 10% of total revenue from
any other client in the first quarter of fiscal 2008.

Significant Accounting Policies and Estimates

The preparation of the Company's consolidated financial statements requires the Company to make estimates, assumptions and judgments
that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. The Company bases its estimates and judgments on historical
experience and on various other factors, and actual results may differ from these estimates under varying assumptions or conditions. On an ongoing basis, the Company evaluates its estimates and
judgments, particularly as they relate to accounting policies that the Company believes are most important to the portrayal of the Company's financial condition and results of operations, such as its
accounting policies involving the recognition and valuation of the Company's securitization-related service revenues, and with respect to the determination of whether or not to consolidate the
securitization trusts that it facilitates. For a discussion of the Company's critical accounting policies, see "Management's Discussion and Analysis of Financial Condition and Results of
OperationsExecutive SummaryApplication of Critical Accounting Policies and Estimates." For a discussion of changes made during the first quarter of fiscal 2009 to the
assumptions used to determine the fair value of the Company's residual and additional structural advisory fees receivables, see Note 2.

Cash and Cash Equivalents

Cash and cash equivalents at September 30, 2008 included $149,810 held in money market funds and $2,574 in
non-interest bearing deposit accounts. Included in cash and cash equivalents are

12

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

compensating
balances held in money market funds supporting various financing arrangements of $3,173 and $7,550 at September 30, 2008 and June 30, 2008, respectively.

Investments

The Company classifies all of its short-term investments as either held-to-maturity or
available-for-sale investments. Held-to-maturity investments are carried at amortized cost. Available-for-sale investments are
carried at fair value. The Company reports unrealized gains and losses within comprehensive income. Investments at September 30, 2008 and June 30, 2008 primarily consisted of variable
rate demand notes. Variable rate demand notes may be redeemed as interest rates reset, which occurs at least weekly in the case of all securities held by the Company at September 30, 2008 and
June 30, 2008. The carrying value of available-for-sale securities was $69,483 and $70,629, including a fair value adjustment of $173 and $109 as of September 30,
2008 and June 30, 2008 respectively.

Loans Held for Sale

Loans held for sale at September 30, 2008 included outstanding principal balance of approximately $501,727 of
variable-rate education loans, of which loans with a principal and interest receivable balance of $254,699 were pledged as collateral under the education loan warehouse facility of UFSB
Private Loan SPV, LLC (UFSB-SPV), a subsidiary of Union Federal. Interest income is recognized on the interest method. Loans held for sale are carried at the lower of cost or fair
market value. The carrying value as of September 30, 2008 included a fair value adjustment of $28,598 and interest receivable of $9,586. A reduction in the carrying value of loans held for sale
of $21,226 was recorded during the three-month period ended September 30, 2008. As of September 30, 2008, $3,780 of the loans held for sale were greater than 90 days past due.

The
estimated fair value of loans held for sale are evaluated on a periodic basis and in the absence of readily determined market values, based on the present value of expected future
cash flows, using management's estimates. These estimates are based on historical and third party data and the Company's industry experience with assumptions for defaults, recovery rates on defaulted
loans, prepayment rates and discount rates commensurate with the risks involved. If readily determined market values became available or if actual performance were to vary appreciably from assumptions
used, the evaluation of the loans may need to be adjusted, which could result in material differences from the recorded carrying amounts.

13

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

Three months ended
September 30,2008

2007Fair value at beginning of period

$
497,324

$
37,052New loans issued





391,017Securitized loans





(214,063
)Accrued interest


10,485


4,257Cash receipts and cancellations


(3,868
)

(17,352
)Fair value adjustment


(21,226
)

Fair value at end of period

$
482,715

$
200,911


The
carrying value at September 30, 2007 included $11,905 of mortgage loans and $34 of consumer loans which have transferred to as held to maturity beginning in the third quarter
of fiscal 2008.

Mortgage Loans Held to Maturity

Mortgage loans held to maturity at September 30, 2008 totaled approximately $10,133, $6,863 of which have a variable interest
rate. Mortgage loans held to maturity at September 30, 2008 were carried at cost net of an allowance for loan losses of $388 and net deferred fees of $10. Loan origination fees, net of certain
direct organization costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. If a mortgage loan is delinquent by greater than 90 days, the
interest income on that loan is discontinued until the loan is brought current or paid. Past due status is based on the contractual terms. An allowance for loan losses is established through a charge
to operations. When management believes that the collection of a loan's
principal balance is unlikely, the principal amount is charged to the allowance. Recoveries are credited to the allowance as amounts are received.

Income Taxes

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

The
Company has determined that no valuation allowance is necessary for the deferred tax assets because it is more likely than not that these assets will be realized through future
reversals of existing

14

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

temporary
differences, and through future taxable income. The Company will continue to review the recognition of deferred tax assets on a regular basis.

Included
in the tax liability balance at September 30, 2008, were $6,531 of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate.
The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense. The Company recognizes penalties, if any, in income tax expense. During the three months ended
September 30, 2008, the Company reversed prior accrued interest of approximately $320. At September 30, 2008, the Company had approximately $1,535 accrued for interest and no amount
accrued for the payment of penalties.

The
Company is subject to U.S. federal income tax, as well as income tax in multiple U.S. state and local jurisdictions. The Internal Revenue Service (IRS) completed an examination of
the Company's U.S. income tax return for the year ended June 30, 2004. All significant state and local income tax matters have been concluded through June 30, 2003. The Company's state
income tax returns for the year ended June 30, 2004, and state and federal income tax returns for the years ended June 30, 2005, 2006, 2007 and 2008 remain subject to examination.

(2) Service Receivables

Additional structural advisory fees and residuals receivables represent the estimated fair value of additional structural advisory fees and residuals expected to be collected over the
life of the various separate securitization trusts that have purchased student loans facilitated by the Company. The fees are expected to be paid from the various securitization trusts to the Company.
Processing fees receivable from TERI represents amounts due from TERI for expenses incurred by the Company on TERI's behalf.

On
a quarterly basis, the Company updates its estimates of the fair value of its structural advisory fees and residuals receivables to reflect the passage of time, any change in discount
rates used to estimate their fair value, any changes in the estimated operational expenses for the separate securitization trusts and any changes to the trust performance assumptions that the Company
considers in its fair value estimates, such as the expected annual rate and timing of loan defaults and TERI's ability to pay default claims, expected recoveries on defaulted loans, including use of
recoveries to replenish trusts' Pledged Accounts, the annual rate and timing of student loan prepayment, the trend of interest rates over the life of the loan pool, including the forward London
Interbank Offered Rate (LIBOR), and the cost of funding outstanding auction rate notes.

The
following table shows the approximate weighted average assumptions for loan performance at September 30, 2008 and June 30, 2008 for the Company's private label loan
trusts:

Percentage rate

Percentage discount rateDefault

Recovery

Prepayments

Structural
advisory fees

ResidualsSeptember 30, 2008


15.96
%

48
%

8.40
%

11.07
%

16.35
%June 30, 2008


14.83
%

48
%

8.40
%

9.72
%

14.88
%


15

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(2) Service Receivables (Continued)

During
the first quarter of fiscal 2009, the Company adjusted its performance assumptions with respect to gross default rates and discount rates applicable to both its residuals
receivables and its additional structural advisory fees.

Default Rates.In response to an acceleration in default activity coupled with deterioration in overall consumer credit quality, the Company increased the weighted
average gross default rate assumptions used to estimate the fair value of its residuals and additional structural advisory fees receivables from 14.83% to 15.96%. The Company also increased its
assumed weighted average net default rate from 7.68% to 8.30%. The increases in the default rate assumptions during the first quarter of fiscal 2009 resulted in a decrease in the estimated fair value
of the Company's residuals receivable of $40,728 and a decrease in the estimated fair value of its additional structural advisory fees receivable of $3,133.

Discount RateResiduals.In determining an appropriate discount rate for valuing its residuals, the Company historically has reviewed the rates used by
student loan securitizers as well as rates used in the much broader ABS market. At September 30, 2008, due to the continued dislocation in the capital markets and the private student loan
securities sector, the Company increased the discount rate by 150 basis points. The Company applied a discount rate of 16.0% for purposes of estimating the fair value of residuals from securitization
trusts that had not issued Triple B-rated securities and a discount rate of 17.0% for purposes of estimating the fair value of residuals from securitization trusts that had issued Triple
B-rated securities, which resulted in a decrease of $43,643 in the estimated fair value of the Company's residuals during the first quarter of fiscal 2009.

Discount RateAdditional Structural Advisory Fees.The Company has historically based the discount rate that it uses to estimate the fair value of its
additional structural advisory fees on a spread over the 10-year U.S. Treasury Note rate. At September 30, 2008, due to the continued dislocation in the capital markets and the
private student loan securities sector, the Company increased the discount rate by 150 basis points. The Company applied a discount rate of 11.07% for purposes of estimating the fair value of the
additional structural advisory fees, which resulted in a decrease of $15,641 in the estimated fair value of the Company's additional structural advisory fees during the first quarter of fiscal 2009.

16

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(2) Service Receivables (Continued)

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

Three months ended
September 30,2008

2007Fair value at beginning of period

$
113,842

$
133,644Additions from new securitizations





24,304Cash received from trust distribution


(1,477
)

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


2,789


2,410Assumption changes:Increase in discount rate assumption


(15,641
)

Increase in timing and average default rate


(3,133
)

Other factors


(1,905
)

449Net change from trust updates


(17,890
)

2,859Fair value at end of period

$
94,475

$
160,807


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

Three months ended
September 30,2008

2007Fair value at beginning of period

$
293,255

$
665,115Additions from new securitizations





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


10,931


19,903Assumption changes:Increase in discount rate assumption


(43,643
)

(25,182
)Increase in timing and average default rate


(40,728
)

Other factors


(6,716
)

(8,829
)Net change from trust updates


(80,156
)

(14,108
)Fair value at end of period

$
213,099

$
767,979


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

TERI
may seek to reject its guaranty obligations entirely in the context of the TERI Reorganization. As of November 10, 2008, TERI had not rejected or otherwise indicated how it
will

17

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(2) Service Receivables (Continued)

treat
its guaranty obligations to the trusts or lenders, including Union Federal. As a consequence, it is uncertain how collateral securing such obligations will be treated or applied to satisfy
TERI's obligations. For purposes of estimating the fair value of the Company's service receivables, the
Company assumed at September 30, 2008 that the application of collateral will continue in the ordinary course in accordance with existing agreements.

(3) Fair Value Measurement

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

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



At September 30, 2008, the Company applied fair value to all assets based on quoted market prices, where available. For
financial instruments for which quotes from recent exchange transactions are not available, the Company determines fair value based on discounted cash flow analysis and comparison to similar
instruments. Discounted cash flow analysis is dependent upon
estimated future cash flows and the level of interest rates. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.

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

18

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(3) Fair Value Measurement (Continued)



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

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

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

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



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

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

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

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

19

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(3) Fair Value Measurement (Continued)

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

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

The
following table presents the financial instruments carried at fair value as of September 30, 2008, by caption on the consolidated balance sheet and by SFAS No. 157
valuation hierarchy described above.

Assets measured at fair value on a
recurring and nonrecurring basis
at September 30, 2008:

Level 1

Level 2

Level 3

Total
carrying
valueRecurring:Cash equivalents

$
140,986

$


$


$
140,986Investments


69,483








69,483Structural advisory fees








94,475


94,475Residuals








213,099


213,099Nonrecurring:Loans held for sale








482,715


482,715Total assets at fair value

$
210,469

$


$
790,289

$
1,000,758


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

20

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(4) Net Interest Income

The following table reflects the components of net interest income for the three months ended September 30, 2008, and 2007.

Three Months Ended
September 30,2008

2007Interest IncomeCash and cash equivalentstaxable

$
415

$
950Cash and cash equivalentstax exempt


49


140Federal funds sold


421


383Investmentstaxable


126


158Investmentstax exempt


452


1,179Student loans


10,485


4,228Mortgage loans


151


197Total interest-earning assets


12,099


7,235Interest ExpenseSavings accounts

$
525

$
573Money market accounts


375


Brokered deposits


1,165


792Warehouse line of credit


2,696


1,275Other interest-bearing liabilities


201


212Total interest-bearing liabilities


4,962


2,852Net Interest Income

$
7,137

$
4,383


(5) Related Party Transaction

At September 30, 2008, the Company had invested approximately $130,220 of cash equivalents in a money market fund. The investment adviser for this fund is Milestone Capital
Management, LLC (MCM), an institutional money management firm. In addition, approximately $70,816 of investments and cash equivalents were invested by MCM on behalf of the Company under an
investment management agreement. MCM receives a fee for services it performs under this agreement. MCM is a wholly owned subsidiary of Milestone Group Partners. Members of the immediate family of one
of the Company's directors owned approximately 65% of Milestone Group Partners as of September 30, 2008.

21

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(6) Deposits

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

September 30,
2008

June 30,
2008Savings accounts

$
14,911

$
14,887Money market and demand deposit accounts


64,937


31,447Time deposits


166,519


197,779$
246,367

$
244,113


The
aggregate amount of time deposits in denominations greater than $100 or more is $134,612 and $165,393 as of September 30, 2008 and June 30, 2008, respectively. Included
in time deposits above are brokered deposits totaling $121,000 and $150,194 at September 30, 2008 and June 30, 2008, respectively. Included in money market accounts is $31,562 TERI
segregated reserve account deposit related to USFB education loans.

A
summary of time deposits, by maturity, is as follows:

September 30,
2008

June 30,
2008Amount

Weighted
average
rate

Amount

Weighted
average
rateWithin one year

$
166,383


2.88
%
$
197,579


3.13
%Over one year


136


4.00
%

200


3.58
%$
166,519




$
197,779


(7) Education Loan Warehouse Facility

In July 2007, UFSB-SPV, entered into a $300,000 education loan warehouse facility to fund the purchase of education loans from Union Federal. At September 30,
2008, $244,239 was outstanding under the facility. UFSB-SPV has pledged the purchased education loans as collateral for the advances it received from the conduit lender.

The
TERI Reorganization, and subsequent TERI ratings downgrades, resulted in events of termination under the indenture relating to the facility. As a result, the facility termination
date was declared, UFSB-SPV is not eligible for further borrowings under the facility and the conduit lender may elect to accelerate repayment of notes outstanding under the facility. In
April 2008, UFSB-SPV entered into a letter agreement pursuant to which it agreed to pay higher rates of fees to the conduit lender in consideration for an acknowledgement by the
conduit lender that interest on the notes issued under the facility would not be payable based on an alternative rate set forth in the indenture (Default Rate) unless and until the conduit lender
delivered further notice to UFSB-SPV. The conduit lender may elect for interest on outstanding notes to become payable at the Default Rate for periods following delivery of notice of such
election, in which case UFSB-SPV would pay fees at the lower rates in effect prior to the letter agreement. The facility termination date had been scheduled to occur

22

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(7) Education Loan Warehouse Facility (Continued)

on
July 16, 2008. Under the indenture, the facility termination date commences a liquidation period that ends on the date immediately following the later of July 14, 2010 and the date on
which the principal and interest on all outstanding notes, and all amounts otherwise payable by UFSB-SPV in connection with the facility, are paid in full. In May 2008, an
additional event of termination occurred under the indenture relating to the one- and three-month default ratios on the underlying portfolio. The conduit lender's recourse under the
indenture is limited to student loans pledged as collateral.

(8) Stockholders' Equity

Investment Agreement

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

The
total investment by the Purchasers, including their initial investment of $59,800, was capped by the terms of the Investment Agreement at an amount not to exceed 25% of the Company's
total stockholders' equity, consistent with regulations of the OTS. As a result of a decrease in the Company's stockholders' equity since the time of the initial investment by the Purchasers, and
based on the Company's stockholder's equity as of June 30, 2008, the subsequent equity investment by the Purchasers, which closed on August 18, 2008, was limited to $132,700. The Company
received aggregate gross proceeds of approximately $192,500 from the sale of the Series A Preferred Stock and the Series B Preferred Stock pursuant to the Investment Agreement. In
January 2008, the Purchasers elected to convert their Series A Preferred Stock into an aggregate of 5,320 shares of Common Stock.

Series B Non-Voting Convertible Preferred Stock

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

23

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THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(8) Stockholders' Equity (Continued)

2003 Stock Incentive Plan

In September 2003, the Board of Directors and stockholders approved the 2003 Stock Incentive Plan. A total of 4,050 shares of
Common Stock are authorized for issuance pursuant to awards under this plan. During the first quarter of fiscal 2009, the Company granted 21 restricted stock units, each such restricted stock unit
representing the right to receive one share of Common Stock upon vesting. As of September 30, 2008, there were 329 restricted stock units outstanding and 3,228 shares available for future grant
under this plan.

2003 Employee Stock Purchase Plan

In October 2003, the Board of Directors and stockholders approved the 2003 Employee Stock Purchase Plan (Stock Purchase Plan). A
total of 600 shares of Common Stock were authorized for issuance under this plan. The Stock Purchase Plan permitted eligible employees to purchase shares of Common Stock at the lower of 85% of the
fair market value of the Common Stock at the beginning or at the end of each offering period. Participation is voluntary. Under the Stock Purchase Plan, 30 and 15 shares of Common Stock were issued in
January 2008 and July 2007, respectively. At March 31, 2008, 406 shares were available for future purchase under the Stock Purchase Plan. On April 22, 2008, the Board of
Directors, which administers the Stock Purchase Plan, terminated the offering period that began on January 1, 2008 and indefinitely suspended the Stock Purchase Plan.

2008 Meyers' Option Plan

The Board of Directors elected Daniel Meyers as President and Chief Executive Officer and as a member of the Board of Directors,
effective September 1, 2008, subject to any required regulatory approvals. In connection with the election, the Board of Directors and a subcommittee of the Compensation Committee of the Board
of Directors approved the grant on August 18, 2008 of stock options to Mr. Meyers to purchase (a) 2,000 shares of Common Stock, at an exercise price of $6.00 per share, that will
vest and become exercisable as to 25% of the shares underlying the stock option on each of the first, second, third and fourth anniversaries of the Grant
Date ($6.00 Stock Options); (b) 2,000 shares of Common Stock, at an exercise price of $12.00 per share, that will vest and become exercisable in full 90 days after the Grant Date; and
(c) 2,000 shares of Common Stock, at an exercise price of $16.00 per share, that will vest and become exercisable in full 90 days after the Grant Date. Each of the stock options will
vest and become exercisable in full (a) if the closing sale price of the Common Stock is at least 150% of the exercise price of the applicable option for a period of five consecutive trading
days (assuming the trading on each day is not less than 90% of the average daily trading volume for the prior three months prior to such five day period), (b) in the event of
Mr. Meyers's death or disability, as defined in his employment agreement, or (c) in the event that Mr. Meyers's employment is terminated by the Company without Cause, as defined
in his employment agreement, or by Mr. Meyers with Good Reason, as defined in his employment agreement. In addition, subject to certain conditions set forth in his employment agreement, the
$6.00 Stock Options may be exercised beginning 90 days after the Grant Date prior to vesting, provided that the unvested shares issued will be held in escrow by the Company and will be subject
to a repurchase option by the Company. Each of the stock options will expire ten (10) years from the Grant Date. The stock options were not granted under any of the Company's existing
stockholder-approved incentive plans.

24

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(8) Stockholders' Equity (Continued)

Share Repurchase Program

In April 2007, the Board of Directors authorized the repurchase of up to 10,000 shares of Common Stock from time to time on the
open market or in privately negotiated transactions. The 10,000 shares authorized for repurchase included 3,393 remaining shares available for repurchase as of April 24, 2007 under a previously
authorized repurchase program. The repurchase program approved on April 24, 2007 does not have a fixed expiration date. Through September 30, 2008, the Company had repurchased an
aggregate of 1,169 shares of Common Stock under this program. The Company did not repurchase any shares of its Common Stock under this program during the first quarter of fiscal 2009.

Cash Dividend

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

(9) Union Federal Regulatory Capital Requirements

Union Federal is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Company's financial condition. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Union Federal must meet specific capital guidelines that involve quantitative measures of Union Federal's assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weighting and other factors. Additionally, Union Federal may not pay dividends to FMC or originate private student loans in the future without prior approval of the regulatory
authorities. UFSB's equity capital was $108,051 at September 30, 2008.

Quantitative
measures established by regulation to ensure capital adequacy require Union Federal to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined) and of Tier 1 capital to average assets (as defined). As of September 30, 2008 and June 30 2008, Union Federal
met all quantitative capital adequacy requirements to which it was subject and had total risk-based ratios of 20.93% and 22.14%, Tier 1 risk-based ratios of 20.92% and
22.08%, and Tier 1 leverage ratios of 17.41% and 18.43%, respectively. As of September 30, 2008 and June 30, 2008, Union Federal was well capitalized under the regulatory
framework for prompt corrective action.

25

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(10) Net Income (Loss) per Share

The following table sets forth the computation of basic and diluted net income (loss) per share of Common Stock for the first quarters of fiscal 2009 and fiscal 2008:

Three months ended
September 30,2008

2007Net income (loss)

$
(92,897
)
$
168,820Shares used in computing net income (loss) per common sharebasic


98,964


93,437Effect of dilutive securities:Stock options





123Restricted stock units





236Dilutive potential common shares





359Shares used in computing net income (loss) per common sharediluted


98,964


93,796Net income (loss) per common share:Basic

$
(0.94
)
$
1.81Diluted

$
(0.94
)
$
1.80


The
Company did not include 5 dilutive shares underlying stock options, 1,028 dilutive shares underlying restricted stock units and 1,327 shares of Series B Preferred Stock in the
computation of diluted net loss per share for the quarter ended September 30, 2008 as the effect would have been antidilutive.

(11) Commitments and Contingencies

In April and May 2008, seven purported class action lawsuits were filed against the Company and certain of its current and former officers and directors in the United States
District Court for the District of Massachusetts. The plaintiffs allege, among other things, that the defendants made false and misleading statements and failed to disclose material information in
various SEC filings, press releases and other public statements. The complaints allege various claims under the Securities Exchange Act of 1934, as amended (Exchange Act) and
Rule 10b-5 promulgated thereunder. The complaints seek, among other relief, class certification, unspecified damages, fees and such other relief as the court may deem just and
proper. In August 2008, the court consolidated these cases and appointed lead plaintiffs and a lead counsel. A consolidated amended complaint is due to be filed on November 28, 2008. A class
had not been certified in the actions as of November 10, 2008.

In
addition, in May and June 2008, three federal derivative lawsuits were filed against certain of the Company's current and former officers and directors and nominally against it
in the United States District Court for the District of Massachusetts. The complaints are purportedly brought on behalf of the Company to remedy alleged violations of federal and state law, including
violations of the Exchange Act, breaches of fiduciary duties, waste of corporate assets and unjust enrichment, which allegedly occurred between August 2006 and June 2008. The complaints
seek a monetary judgment, injunctive

26

---



THE FIRST MARBLEHEAD CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(11) Commitments and Contingencies (Continued)

relief,
restitution, disgorgement and a variety of purported corporate governance reforms. In August, 2008, the court consolidated the federal derivative cases and stayed them pending resolution of
the purported class actions described above. A state derivative action was also filed in Massachusetts Superior Court in June 2008. The complaint is purportedly brought on behalf of the Company
to remedy alleged violations of federal and state law, including breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment, which allegedly
occurred between August 2006 and June 2008. The complaint seeks a monetary judgment, injunctive relief, restitution, disgorgement, and costs and disbursements of the action. In
October 2008, the court stayed the case until January 5, 2009.

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

(12) New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R,Business Combinations.SFAS No. 141R will be effective for the
Company beginning in the second quarter of fiscal 2009. The statement requires all business combinations to be accounted for by applying the acquisition method. The adoption of SFAS No. 141R is
not expected to have a material impact on the Company's consolidated financial condition or results of operations.

In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51.SFAS No. 160 will be effective for the Company beginning in the second quarter of fiscal 2009. The statement requires non-controlling
interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. The adoption of SFAS
No. 160 is not expected to have a material impact on the Company's consolidated financial condition or results of operations.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB
Statement No. 133.SFAS No. 161 will be effective for the Company beginning in the second quarter of fiscal 2009. The statement requires companies with derivative
instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, and how
derivative instruments and related hedged items affect a company's financial position, financial performance, and cash flows. The adoption of SFAS No. 161 is not expected to have a material
impact on the Company's consolidated financial condition or results of operations.

27

---





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

You should read the following discussion and analysis of our financial condition and results of operations
together with our unaudited condensed consolidated financial statements and accompanying notes included in this quarterly report.

Factors That May Affect Future Results

In addition to historical information, this quarterly report includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Section 27A of the Securities Act of 1933, as amended, or the Securities Act. For this purpose,
any statements contained herein regarding our strategy, future operations, financial position, future revenues and funding transactions, projected costs, prospects, plans and objectives of management,
other than statements of historical facts, are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "observe," "plans," "projects," "will,"
"would," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually
will achieve the plans, intentions or expectations expressed or implied in our forward-looking statements, which involve risks, assumptions and uncertainties. There are a number of important factors
that could cause actual results, levels of activity, performance or events to differ materially from those expressed or implied in the forward-looking statements we make. These important factors
include our "critical accounting estimates" set forth below under
"Application of Critical Accounting Policies and Estimates" and factors including, but not limited to, those set forth below under the caption "Risk Factors" in Item 1A of
Part II of this quarterly report. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and
readers should not rely on those forward-looking statements as representing our views as of any date subsequent to November 10, 2008.

Executive Summary

Recent Developments

Our inability to access the securitization markets as a result of market disruptions continued during the first quarter of fiscal 2009.
That inability, together with the reorganization in bankruptcy of The Education Resources Institute, Inc., or TERI, has strained our client relationships, resulted in the termination of several
material client agreements, reduced our facilitated loan volume and created uncertainty about our business prospects. We have made significant changes in our senior leadership, and have made
significant expense reductions in the attempt to overcome the challenges currently facing us. We have summarized below recent developments affecting our business:



28

---





29

---





Overview

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

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



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

We
have not taken a direct ownership interest in the student loans our clients have generated, nor have we served as a guarantor with respect to any student loan programs that we have
facilitated. We have generally assisted the lenders in our loan programs in selecting their underwriting criteria used in deciding whether a student loan will be made to an applicant. However, each
lender has had ultimate control over the selection of these criteria, and in providing our services we have been obligated by contract to comply with them. Union Federal has funded a portion of our
proprietary loan programs in the past, although it is not doing so as of November 10, 2008. Union Federal held approximately $482.7 million of private student loans as of
September 30, 2008, of which loans with a principal and interest receivable balance of $254.7 million were pledged as collateral under a warehouse facility

30

---



provided
by a conduit lender. Our proprietary loan programs are Astrive Student Loans, Monticello Student Loans and Laurel Collegiate Loans.

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

In
the past, we offered our clients a fully integrated suite of outsourcing services, but we did not charge separate fees for many of those services. Moreover, although we received fees
for providing loan processing services to TERI in connection with TERI-guaranteed loans, and fees from certain of our clients for marketing coordination services, those fees represented
reimbursement of the direct expenses we incurred. Accordingly, we did not earn a profit on those fees in the past. Although we provided those various services without charging a separate fee, or at
"cost" in the case of processing services for TERI-guaranteed loans and marketing coordination services, we generally entered into agreements with the lender clients giving us the
exclusive right to securitize the student loans that they did not intend to hold. We received structural advisory fees and residuals for facilitating securitizations of those loans.

We
have been unable to access the securitization market since September 2007 as a result of market disruptions that began in the second quarter of fiscal 2008 and persist as of
November 10, 2008. That
inability, together with the TERI Reorganization, has impacted our client relationships, resulted in the termination of certain material client agreements, reduced our facilitated loan volume and
challenged our business prospects. During the first quarter of fiscal 2008, we facilitated loans with an aggregate principal balance of $2.4 billion and received $46.2 million in
processing fees from TERI. During the first quarter of fiscal 2009, we facilitated loans with an aggregate principal balance of $128.1 million and received $2.4 million in processing
fees from TERI.

We
have refined our products and services, and significantly reduced our operating expenses, in an attempt to overcome the challenges currently facing us. We have worked over the past
several months to develop all facets of a new private label loan program that would not require a guaranty from a third party, as well as outsourced loan origination services and portfolio management
services on a stand alone basis. As a result, we are able to offer both a fully integrated suite of services for private student loan programs, as well as certain services on a
fee-for-service basis. We expect in the future to enter into arrangements with private label lenders under which we provide fee-based outsourcing services, but may
not have the exclusive right to securitize the student loans that they fund. As in the past, however, we expect our level of profitability to continue to depend in the future on our ability to earn
structural advisory fees and residuals for facilitating securitizations. We also generate fees as the administrator of the trusts that have purchased the private label loans, and in this capacity
monitor the performance of the loan servicers.

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



31

---





Business Trends, Uncertainties and Outlook

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

In
addition, we expect pricing terms in future securitizations, if any, to be substantially less favorable than in the past and investors to have limited or no demand for subordinate
tranches of ABS in securitization transactions, if any, that we are able to facilitate. If we are able to facilitate the securitization of TERI-guaranteed loans in the future, our
up-front structural advisory fee yields would likely decline and market conditions would likely dictate that we obtain additional credit enhancement for such securitizations, the cost of
which would result in lower revenues and additional cash requirements.

Student
loan asset-backed securitizations have historically been our sole source of permanent financing for our clients' private student loan programs. We have pursued alternative means
to finance our clients' loans, but other sources of funding have not been available on acceptable terms, if available at all. Recent conditions in the capital markets have generally resulted in a
substantial widening of credit spreads and significantly more restrictive covenants, which have adversely affected the pricing, terms and conditions of alternative funding mechanisms we have pursued.
In addition, the TERI Reorganization and subsequent ratings downgrades resulted in events of termination under the indenture relating to an education loan warehouse facility to fund the purchase of
education loans from Union Federal. As a result, the facility is no longer available to finance student loans originated by Union Federal on an interim basis. The facility terminated in
July 2008.

TERI Reorganization.In June 2008, in the context of the TERI Reorganization, our "master" agreements with TERI were terminated, effective as of
May 31, 2008. We entered into a transition services agreement with TERI pursuant to which we provided a reduced level of services, and received

32

---



a
reduced level of fees. The term of the transition services agreement expired on September 29, 2008. In October 2008, we entered into a letter agreement with TERI, subject to subsequent
approval by the Bankruptcy Court, to provide limited additional services to TERI, including continued occupancy through December 15, 2008 of certain office space subleased by TERI from us. TERI
paid $0.2 million of rent in advance in consideration for the continued occupancy, and the sublease relating to the office space will terminate as of December 15, 2008.

The
official committee of TERI's unsecured creditors, which we refer to as the creditors committee, continues to have a right to challenge the validity, perfection, priority or
enforceability of the securitization trusts' security interests in funds to be transferred after the filing of TERI's petition for reorganization, which we refer to as post-petition
transfers, to the segregated reserve accounts pledged by TERI to such trusts, which we refer to as pledged accounts. The creditors committee may also challenge the trusts' security interests in any
other collateral securing TERI's guaranty obligations, other than funds in the pledged accounts as of April 7, 2008. TERI may also continue to have a similar right to challenge the trusts'
security interests, but such right is being challenged by the creditors committee as of November 10, 2008. We expect TERI or the creditors committee to raise potential objections with regard to
the validity or perfection of the trusts' security interests in certain collateral, in particular, the trusts' security interests in cash recoveries on defaulted loans and proceeds expected by us to
be deposited in the pledged accounts from sales by TERI of rehabilitated loans back to the trusts.

If
the creditors committee or any other party were successful in challenging the trusts' security interests in the post-petition transfers to the pledged accounts or other
collateral, including recoveries, the amount of pledged collateral available exclusively to a particular securitization trust to satisfy TERI's guaranty obligations to that trust would decrease
materially. As a result, the trust's unsecured claims against TERI would increase proportionately. For example, recoveries from defaulted student loans, which have historically been used to replenish
a particular trust's pledged account, would instead become an asset of TERI's bankruptcy estate and available to satisfy administrative claims of TERI's bankruptcy estate and other holders of claims
in accordance with the priorities established by the Bankruptcy Code. In addition, TERI may seek to reject its guaranty obligations entirely in the context of the TERI Reorganization. Any of these
developments would decrease materially our service receivables and could further harm our ability to structure securitizations in the future.

Beginning
in June 2008, TERI resumed paying its obligations under the guaranty agreements with respect to defaulted loans from the trusts, but only using cash in the pledged
account established for the benefit of the specific trust that owned the defaulted loan. As of November 10, 2008, TERI is not
permitted to satisfy its guaranty obligations using funds from TERI's general reserves. Funds in the pledged accounts of certain trusts have been exhausted, or are expected to be exhausted in the near
term, at which point such trust will have a general unsecured claim against TERI. TERI has not resumed paying guaranty obligations with respect to defaulted loans of lenders holding
TERI-guaranteed loans that have not been securitized.

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

33

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Prepayment and Default Trends.Although it can be difficult to discern trends in the overall portfolio, we observed that prepayment rates generally continued to
decline during the first quarter of fiscal 2009. Prepayment rates generally rose for the first three quarters of fiscal 2008 and generally fell during the last quarter of fiscal 2008 and the first
quarter of fiscal 2009. We estimate that prepayment rates decreased by more than 30% since the fourth fiscal quarter of fiscal 2008, primarily due, we believe, to an increase in the spread between
LIBOR and prevailing mortgage rates, a slow down in loan consolidation activities and current economic conditions. There is a lag between certain indicators and their effect on prepayment rates.
During the first quarter of fiscal 2009, defaults generally increased in our securitized loan portfolio, causing us to adjust upward our assumed gross default assumptions, from 14.83% to 15.96%, and
our net default assumptions, from 7.71% to 8.30%. We believe that defaults trended higher during the first quarter of fiscal 2009 compared to fiscal 2008 primarily as a result of the generally adverse
consumer credit trends and a material increase in the number of loans in early repayment status. Defaults continued to trend higher in October 2008. Student loans tend to experience higher
rates of delinquencies and defaults in the early years of repayment compared to later years. Over the past eight months, we have implemented several collections initiatives, including "early
awareness" campaigns and increased focus on early stage delinquencies, which we expect to reduce delinquencies and, ultimately, defaults over the long term. However, in the short term we remain
uncertain of their effect, and we have concluded that despite apparently positive initial results, it would be premature to assume positive long-term trends as of September 30,
2008.

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



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

Liquidity and Capital Resources.In August 2008, we received $132.7 million in gross proceeds from the sale of shares of series B preferred
stock to affiliates of GSCP. The proceeds provided us with liquidity and capital resources that will be critical to our short-term funding requirements. Our short-term needs,
however, remain subject to uncertainties regarding regulatory capital requirements of Union Federal. Union Federal's regulatory authorities have from time to time requested that we provide additional
capital to Union Federal. If the OTS or FDIC were to require us to make additional infusions of regulatory capital into Union Federal, our short-term liquidity needs would be adversely
affected.

During
the last two quarters of fiscal 2008, we announced a reduction in our overall cost structure, including the reduction of headcount by over 600 employees. In September 2008
and November 2008, we further reduced headcount by approximately 100 employees. Following these reductions, we had 241 full-time employees, compared to 1,031 full-time
employees as of September 30, 2007. As of November 10, 2008, we estimate that our net cash operating outflows for fiscal 2009 will be approximately $60 million.

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Product and Management Changes.We have recently developed alternatives to the loan guaranty and loan origination services that TERI has historically provided to
our clients. We have developed a private label loan program that would not require a guaranty from a third party, and we have begun to
offer outsourced loan origination services and portfolio management services on a fee-for-service, stand alone basis. The success of these initiatives is critical to growing
and diversifying our revenues and client base in the future. Compared to past TERI-guaranteed loan programs, the new private label loan program has been designed to have more selective
underwriting criteria, higher borrower pricing and a greater portion of immediate repayment loans, or loans for which payment of principal and interest begins shortly after final disbursement, and
interest-only loans, or loans for which payment of interest begins shortly after disbursement but payment of principal is deferred during enrollment. We are uncertain of the level of
interest from former, current or prospective clients with regard to the new program or the offered services. Union Federal is not, as of the date of this report, able to fund loan origination in the
private label loan program due to its current lack of funding capacity.

We
experienced significant changes in senior management during the first quarter of fiscal 2009. On August 18, 2008, we announced that Daniel Meyers would return to the company as
Chief Executive Officer and President, and as a director, effective September 1, 2008. Mr. Meyers co-founded the company and served as our Chief Executive Officer and
Chairman of the Board from our incorporation in 1994 to September 2005 and as our President from November 2004 to September 2005. In addition to the departure of
Mr. Kopnisky, whom Mr. Meyers succeeded as Chief Executive Officer and President, four Executive Vice Presidents, including our Senior Executive Vice President, Chief Financial Officer
and Group Head of Capital Markets, have left the company in an organizational realignment. We have reconstituted our senior management team, and the loss of any such key employees could adversely
affect our business. If we are unable to manage our cost reductions, or if we lose key employees as a result, our operations and our financial results could be adversely affected. These challenges are
further discussed below under Item 1A, "Risk FactorsRisks Related to Our Industry, Business and Operations."

We
continue to believe that private student loans are an important source of college funding. College attendance is high, the overall cost of college continues to rise and government
supported loans are limited. Added pressure for funding education may also result from declining home values and the unavailability of home equity loans that have been a source of funding for
education in the past. We believe that borrowers will need responsible private student loan solutions after exhausting all available scholarships, grants and government aid. Moreover, the College Cost
Reduction and Access Act of 2007 has significantly reduced the profit margins of traditional non-governmental providers of federal loans, and we believe that we will continue to see
competitors and potential competitors exit the student loan industry.

Although
significant uncertainty exists regarding the success or market acceptance of our new products and services and our ability to access the securitization markets, we believe that
the strategic realignment and management changes that we have undertaken should position the company to lead the next product cycle and compete in a re-emerging private student loan
marketplace.

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

Securitizations and Related Revenue

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

35

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or
those of originating lenders or their assignees. We refer to the trusts utilized in the securitization of TERI-guaranteed private label loans as private label loan trusts.

At
September 30, 2008, the principal balance of loans facilitated and available to us for securitization was approximately $2.4 billion of which $83.2 million was
facilitated in the first quarter of 2009. Under the terms of our purchase agreements with lender clients, we generally have an obligation to use our best efforts to facilitate the purchase of the
client's loans during a specified loan purchase period. The length of the loan purchase period varies by client and generally ranges from 195 days to 555 days following final loan
disbursement. If we fail to facilitate a purchase in breach of our obligations, our damages would be limited under the terms of certain of our purchase agreements to liquidated damages of one percent
of the total principal amount of the loans as to which the loan purchase period had expired. Certain other purchase agreements, however, do not include a liquidated damages provision.

Those
purchase agreements that limit our liability to liquidated damages generally provide that our obligation to close a securitization is subject to the condition that no "market
disruption event" has occurred. The TERI Reorganization constitutes a "market disruption event" under certain of these purchase agreements, suspending our contractual obligation to close a
securitization with respect to approximately $701.7 million of our facilitated loan volume available for securitization as of September 30, 2008, excluding approximately
$482.7 million of loan volume originated by Union Federal. Any liquidated damages would be due at the expiration of the relevant loan purchase period, which would not occur until the market
disruption event ceases. Our purchase agreements applicable to approximately $1.2 billion of the facilitated loan volume available for securitization as of September 30, 2008 do not
include a liquidated damages provision in the event that we fail to facilitate a securitization in breach of our obligations, and the amount of our potential liability with respect to such loans is
not determinable at this time. The purchase agreements generally require us to use our best efforts to facilitate a securitization of loans available for securitization within 555 days after
final disbursement.

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



36

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Processing Fees from TERI

Historically, we provided outsourcing services for TERI, including loan origination, customer service, default processing, default
prevention and administrative services under a master servicing agreement between TERI and us. We recognized as revenue the monthly reimbursement that TERI provided us for the expenses we incurred in
providing these services. During fiscal 2008, we received $126.5 million in processing fees from TERI pursuant to the master servicing agreement. In June 2008, in the context of the TERI
Reorganization, the Bankruptcy Court entered an order approving a motion by TERI to reject the master servicing agreement effective as of May 31, 2008. As a result of the termination, we will
not receive processing fees from TERI pursuant to the master servicing agreement for any period after May 31, 2008. In addition, we have a general unsecured claim with regard to
$16.0 million of processing fees from TERI that were due, but unpaid, prior to the filing of TERI's bankruptcy petition. The order, however, approved a motion by TERI to enter into a transition
services agreement with us with a term through September 29, 2008. Processing fees from TERI during the first

37

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quarter
of fiscal 2009 represented fees from TERI pursuant to the transition services agreement. We do not expect to receive a material amount of processing fees from TERI in the future.

Recognition and Valuation of Service Revenue

We recognize up-front structural advisory fees as revenue at the time the securitization trust purchases the loans. In
order for the securitization trust to purchase the loans, all of the applicable services must be performed, rating agencies must deliver their ratings letters, transaction counsel must deliver the
required legal opinions and the underwriters must receive the debt securities issued by the securitization trust. These events indicate that the securitization transaction has been properly structured
and loans have been properly sold to the securitization trust.

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

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

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

Quarterly Fluctuations

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

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

Fiscal 2009First
Quarter(in thousands)Principal amount of student loans facilitated

$
128,089Principal amount of student loans facilitated that were also available to us for securitization

$
83,215Principal and accrued interest balance of student loans securitized

$
Total revenues

$
(84,905
)Net (loss)

$
(92,897
)




Fiscal 2008First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total(in thousands)Principal amount of student loans facilitated

$
2,401,541

$
1,081,324

$
1,249,201

$
271,934

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

$
2,227,380

$
982,052

$
1,042,671

$
267,931

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

$
2,027,079










$
2,027,079Total revenues

$
379,962

$
(122,810
)
$
(251,788
)
$
(33,773
)
$
(28,409
)Net income (loss)

$
168,820

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


Application of Critical Accounting Policies and Estimates

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

Our
significant accounting policies are more fully described in Note 2 of the notes to the audited consolidated financial statements for the fiscal year ended June 30,
2008, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on August 28, 2008. On an ongoing basis, we evaluate our
estimates and judgments, particularly as they relate to accounting policies that we believe are most important to the portrayal of our financial condition and results of operations. We regard an
accounting estimate or assumption underlying our financial statements to be a "critical accounting estimate" where:



We
have discussed our accounting policies with the audit committee of our board of directors, and we believe that our estimates relating to the recognition and valuation of our
securitization-related revenue and receivables, as described below, fit the definition of critical accounting estimates. We also

39

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consider
our policy with respect to the determination of whether or not to consolidate the financial results of the securitization trusts that we facilitate to be a critical accounting policy.



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

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

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



We
base these estimates on our proprietary historical data, publicly available third party data and our industry experience, adjusting for specific program and borrower characteristics
such as loan type and borrower creditworthiness. We also monitor trends in loan performance over time and make adjustments we believe are necessary to value properly our receivables balances at each
balance sheet
date. Because our estimates rely on quantitative and qualitative factors, including macroeconomic indicators to predict prepayment, default and recovery rates, management's ability to determine which
factors are more heavily weighted in our estimates, and our ability to accurately incorporate those factors into our estimates, can have a material effect on our valuations.

We
have posted to our website, and filed as exhibit 99.1 to this quarterly report, static pool data as of September 30, 2008, including actual borrower payment status,
delinquency, cumulative loss and prepayment data as of September 30, 2008 for certain securitization trusts that we have facilitated. We have also posted to our website, and filed as
exhibit 99.2 to this quarterly report, a supplemental presentation of certain historical trust performance data, including channel-specific loans available for securitization by fiscal quarter,
parity ratios by trust, net recovery rates by trust, FICO score ranges by year of origination and by channel, FICO score distributions for loans disbursed since January 1, 2008, payment status
by trust and six-month rolling prepayment rates by trust.

The
following table shows the approximate weighted average assumptions for loan performance at September 30, 2008 and June 30, 2008 for our private label loan trusts:

Percentage rate

Percentage discount rateDefault

Recovery

Prepayments

Residuals

Structural
advisory feesSeptember 30, 2008


15.96
%

48
%

8.40
%

16.35
%

11.07
%June 30, 2008


14.83
%

48
%

8.40
%

14.88
%

9.72
%


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In
selecting loan performance assumptions, we consider the underlying creditworthiness of the student loan borrowers as well as the type of loans being securitized. We analyze
creditworthiness in several tiers, and select what we believe to be appropriate loan performance assumptions based on those tiers. Past TERI-guaranteed private label loan programs, under
which approximately 77% of the borrowers had a creditworthy cosigner, typically a family member, had an extensive credit underwriting process.

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



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

During
the fourth quarter of fiscal 2008, we increased our weighted average gross default rate from 14.77% to 14.83%. We have historically derived endpoint default rates taking into
account the underwriting criteria and marketing channel of the loan. Beginning in the fourth quarter of fiscal 2008, we further enhanced our model to take into account the current pipeline of
delinquencies, through delinquency flow assumptions that we believe will better predict defaults expected over the subsequent six months. In addition, we further enhanced our model to include a
"multiplier" that could enable us to model the shape of the default timing curve based on economic and other factors subsequent to the delinquency timeframes. As a result, we believe our default
timing curve more closely tracks actual results. We intend to continue to enhance our model in order to improve its predictive value. For the fourth quarter of fiscal 2008, the increase in our
weighted average gross default rate resulted in a decrease of approximately $7.7 million in the estimated fair value of our residuals receivable and a decrease of approximately $62,000 in the
estimated fair value of our additional structural advisory fees receivable. For all of fiscal 2008, the increase in our weighted average gross default rate and changes to our timing curve resulted in
a decrease of approximately $49.9 million in the estimated fair value of our residuals receivable and a decrease of approximately $3.0 million in the estimated fair value of our
additional structural advisory fees receivable.

In
response to an acceleration in default activity coupled with deterioration in overall consumer credit quality, we increased the weighted average gross default rate assumptions used to
estimate the fair value of our residuals and additional structural advisory fees receivables from 14.83% to 15.96%. We also increased its assumed weighted average net default rate from 7.68% to 8.30%.
The increases in the default rate assumptions during the first quarter of fiscal 2009 resulted in a decrease in the estimated fair value of our residuals receivable of $40.7 million and a
decrease in the estimated fair value of our additional structural advisory fees receivable of $3.1 million.

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

TERI
may seek to reject its guaranty obligations entirely in the context of the TERI Reorganization. As of November 10, 2008, TERI had not rejected or otherwise indicated how it
will treat its guaranty obligations to the trusts or lenders, including Union Federal. As a consequence, it is uncertain how collateral securing such obligations will be treated or applied to satisfy
TERI's obligations. For purposes of estimating the fair value of our service receivables, we assumed at September 30, 2008 that the application of collateral will continue in the ordinary
course in accordance with existing agreements.

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

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

During
the fourth quarter of fiscal 2008, we developed multiple prepayment curves based on credit tiers through the first seven years of the life of the loan, rather than utilizing a
single average prepayment curve, to assess our prepayment rate assumption. The model generally demonstrated that loans in higher credit tiers have a higher rate of prepayment than loans in lower
credit tiers. Although this change did not result in an adjustment to the average prepayment rate assumption of 8.4% during the fourth quarter of fiscal 2008, the average interest rate on securitized
loans is projected to increase as a result of retirement of loans with lower interest rates more quickly than loans with higher interest

42

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rates.
Use of the enhanced model resulted in an increase of approximately $11.8 million in the estimated fair value of our residuals receivable.

During
the first quarter of fiscal 2009, we did not alter our assumptions with regard to prepayment rates. We continue to see reductions in prepayment levels for loans in both deferment
and repayment status. We continue to monitor actual prepayment rates against our expectations and will make such future adjustments to our assumptions as we believe are necessary at each balance sheet
date.

Discount RateResiduals.In determining an appropriate discount rate for valuing our residuals, we historically have reviewed the rates used by student
loan securitizers as well as rates used in the much broader ABS market. During the fourth quarter of fiscal 2008, due to the continued dislocation in the capital markets and the private student loan
securities sector, we increased the discount rate used for valuing our residuals by 100 basis points. As of June 30, 2008, we applied a discount rate of 14.5% for purposes of estimating the
fair value of residuals from securitization trusts that had not issued Triple B-rated securities and a discount rate of 15.5% for purposes of estimating the fair value of residuals from
securitization trusts that had issued Triple B-rated securities, which resulted in a decrease of $36.9 million in the estimated fair value of our residuals during the fourth quarter
of fiscal 2008.

At
September 30, 2008, due to the continued dislocation in the capital markets environment and the private student loan securities sector, we increased the discount rate by an
additional 150 basis points. We applied a discount rate of 16.0% for purposes of estimating the fair value of residuals from securitization trusts that had not issued Triple B-rated
securities and a discount rate of 17.0% for purposes of estimating the fair value of residuals from securitization trusts that had issued Triple B-rated securities, which resulted
in a decrease of $43.6 million in the estimated fair value of our residuals during the first quarter of fiscal 2009.

Discount RateAdditional Structural Advisory Fees.Historically, we have based the
discount rate that we use to estimate the fair value of our additional structural advisory fees on a spread over the 10-year U.S. Treasury Note rate based on the priority payment status of
additional structural advisory fees in the flow of funds out of the securitization trusts and comparable spreads on structured and corporate debt securities. A decrease in the 10-year U.S.
Treasury Note rate has the effect of increasing the estimated fair value of our structural advisory fees receivable, while an increase in the rate has the opposite effect on our estimate of fair
value.

As
a result of the continued dislocation in the capital markets environment and the private student loan ABS sector, during the fourth quarter of fiscal 2008, we increased the spread
over the 10-year U.S. Treasury Note rate from 400 basis points to 575 basis points to estimate the fair value of our additional structural advisory fees. As a result, we applied a discount
rate at June 30, 2008 of 9.72%, compared to a discount rate at March 31, 2008 of 7.41%. The increase in the discount rate resulted in a decrease in the estimated fair value of our
additional structural advisory fees receivable of approximately $29.7 million during the fourth quarter of fiscal 2008.

At
September 30, 2008, due to the continued dislocation in the capital markets environment and the private student loan securities sector, we increased the discount rate by an
additional 150 basis points. In addition, between June 30, 2008 and September 30, 2008, the 10-year U.S. Treasury Note rate decreased by 15 basis points. As a result we
applied a discount rate of 11.07% for purposes of estimating the fair value of the additional structural advisory fees, which resulted in a decrease of $15.6 million in the estimated fair value
of our additional structural advisory fees during the first quarter of fiscal 2009.

Auction Rate Note Interest Rates.Five private label loan trusts have issued auction rate notes to finance the purchase of student loans. Interest rates for the
auction rate notes are determined from time to time at auction. We use a spread over LIBOR to project the future cost of funding of the

43

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auction
rate notes issued by each such trust. Historically, the spread over LIBOR used to estimate the future cost of funding was based on historical trends, then current auction rates for each trust
and assumptions for future auction rates.

During
the third quarter of fiscal 2008, failed auctions occurred with respect to auction rate notes issued by each of the five securitization trusts that have issued auction rate notes.
As a result of the failed auctions, the auction rate notes bear interest at a maximum rate, which was calculated as of September 30, 2008 as one-month LIBOR plus 1.50%, in the case
of auction rate notes that were rated at least Aa3 by Moody's and AA- by Standard & Poor's, or S&P, as of September 30, 2008, or one-month LIBOR plus 2.50%, in
the case of auction rate notes that were rated at least A3 by Moody's and A- by S&P as of September 30, 2008. Auction rate notes issued by two securitization trusts are also rated
by Fitch and bear interest at a maximum rate, which was calculated as of September 30, 2008 as one-month LIBOR plus 1.50%, in the
case of auction rate notes that were rated at least AA- by Fitch as of September 30, 2008, or one-month LIBOR plus 2.50%, in the case of auction rate notes that were rated at least
A- by Fitch as of September 30, 2008. During the third quarter of fiscal 2008, we revised our assumption with regard to the future cost of funding of auction rate notes. We assumed
at March 31, 2008 that all outstanding auction rate notes would continue to bear interest at the then-current maximum spreads over one-month LIBOR until their expected maturity
dates. As a result, during the third quarter of fiscal 2008, we decreased the estimated fair value of our residuals receivable by $59.5 million and the estimated fair value of our additional
structural advisory fees receivable by $54,000 as a result of our change in the auction rate notes assumption. We maintained these assumptions as of September 30, 2008.

It
is possible, in the event of certain ratings agency actions, that these maximum spreads can increase further. If any auction rate note were to be rated below Aa3 but at least A3 by
Moody's, and below AA- but at least A- by S&P and Fitch, as applicable, it would bear an interest rate of one-month LIBOR plus 2.50%. Furthermore, if any auction
rate note were to be rated below A3 by Moody's and below A- by S&P and Fitch, as applicable, its maximum auction rate would be calculated as one-month LIBOR plus 3.50%.

On
October 30, 2008, Moody's downgraded the ratings assigned to certain subordinated auction rate notes to below A3. As a result, the interest rate spread on these notes increased
from one-month LIBOR plus 1.50% to one-month LIBOR plus 2.50%. We expect the impact of the downgrades on the future cost of funding auction rate notes to decrease the estimated
value of our service receivables by approximately $3.2 million. On November 5, 2008, Moody's downgraded the insurance financial strength rating of Ambac to Baa1 from Aa3. Ambac has
provided credit enhancement for certain ABS issued in securitizations that we have facilitated, including certain auction rate notes. The downgrading of Ambac's ratings increases the likelihood that
the ratings assigned to certain auction rate notes may be further downgraded, possibly to ratings below A3 by Moody's and below A- by S&P and Fitch. We provide a sensitivity analysis with
respect to auction rate notes below, under the caption "Sensitivity Analysis."

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

44

---



Fees and Expenses.Beginning in the fourth quarter of fiscal 2008, we took into account default prevention and other collections related costs into our estimates
of the fair value of our additional structural advisory fees and residuals receivable. Previously, these costs were reimbursed by TERI pursuant to our master loan guaranty agreement and were excluded
from our valuation model. Due to the termination of the master loan guaranty agreement effective as of May 31, 2008, however, we no longer receive reimbursement for such expenses. At
June 30, 2008, we estimated the aggregate costs necessary to achieve our gross default rate assumption, which resulted in a decrease in the estimated fair value of our residual receivable of
$15.9 million and a decrease in the estimated fair value of our additional structural advisory fee receivable of $0.2 million during the fourth quarter of fiscal 2008. We did not change
these estimates during the first quarter of fiscal 2009.



Increases in our estimates of defaults, prepayments and discount rates, increases in the spread between LIBOR indices and auction
rates, as well as decreases in default recovery rates and the multi-year forward estimates of LIBOR, would have a negative effect on the value of our additional structural advisory fees
and residuals. Student loan prepayments include either full or partial payments by a borrower in advance of the maturity schedule specified in the credit agreement. If amounts in the pledged accounts
were unavailable to pay the trusts' default claims or if recoveries on defaulted loans were not used to replenish such pledged accounts, or if net defaults increase beyond the level of expected third
party reimbursement assumptions, then these changes will have an additional negative effect on the value of our additional structural advisory fees and residuals. LIBOR is the reference rate for a
substantial majority of the loan assets and, we believe, a reasonable index for borrowings of the trusts. Because the trusts' student loan assets earn interest based on LIBOR and some trusts have
outstanding securities that pay interest based on the results of auction rates, changes in the spread between LIBOR and the auction rate can affect the performance of the trusts which have issued
auction rate notes.

45

---



The
following table shows our loan performance assumptions and service receivables balances at September 30, 2008 and estimated changes that would result from changes in our loan
performance assumptions. The effect on the fair value of the structural advisory fees and residuals receivables are based on variations of 10% or 20%, except for the forward LIBOR rates, which are
based on variations of 1% and 2% from the forward LIBOR rates at September 30, 2008. We also discuss below the effect on the fair value of the structural advisory fees and residuals receivables
of changes in the assumed spread between 1-month LIBOR rates and auction rates.

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

Management
assumption
and
receivables
balance at
September 30,
2008Percentage change in
assumptions

Percentage change in
assumptionsStructural advisory fees

Down 20%

Down 10%

Up 10%

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


13.84
%

14.91
%

15.96
%

17.00
%

18.03
%Total structural advisory fees

$
100,842

$
97,161

$
94,475

$
91,220

$
89,038Change in receivables balance


6.74
%

2.84
%




(3.45
)%

(5.75
)%Default recovery rate:Management assumption


38.40
%

43.20
%

48.00
%

52.80
%

57.60
%Total structural advisory fees

$
92,580

$
93,404

$
94,475

$
96,294

$
97,490Change in receivables balance


(2.01
)%

(1.13
)%




1.93
%

3.19
%Annual prepayment rate:Management assumption


6.72
%

7.56
%

8.40
%

9.24
%

10.08
%Total structural advisory fees

$
97,065

$
95,756

$
94,475

$
93,238

$
92,027Change in receivables balance


2.74
%

1.36
%




(1.31
)%

(2.59
)%Discount rate:Management assumption


8.86
%

9.97
%

11.07
%

12.18
%

13.29
%Total structural advisory fees

$
118,488

$
105,678

$
94,475

$
84,663

$
76,057Change in receivables balance


25.42
%

11.86
%




(10.39
)%

(19.50
)%




Change in assumption



Change in assumptionDown 200
basis points

Down 100
basis points

Receivables
balance

Up 100
basis points

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

$
81,122

$
87,165

$
94,475

$
102,374

$
111,222Change in receivables balance


(14.13
)%

(7.74
)%




8.36
%

17.73
%


---

46

---



Management
assumption
and
receivables
balance at
September 30,
2008Percentage change in
assumptions

Percentage change in
assumptionsResiduals

Down 20%

Down 10%

Up 10%

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


13.84
%

14.91
%

15.96
%

17.00
%

18.03
%Total residual fees

$
276,304

$
242,228

$
213,099

$
195,465

$
176,882Change in receivables balance


29.66
%

13.67
%




(8.27
)%

(16.99
)%Default recovery rate:Management assumption


38.40
%

43.20
%

48.00
%

52.80
%

57.60
%Total residual fees

$
192,260

$
203,720

$
213,099

$
227,506

$
239,751Change in receivables balance


(9.78
)%

(4.40
)%




6.76
%

12.51
%Annual prepayment rate:Management assumption


6.72
%

7.56
%

8.40
%

9.24
%

10.08
%Total residual fees

$
229,862

$
221,323

$
213,099

$
204,636

$
196,873Change in receivables balance


7.87
%

3.86
%




(3.97
)%

(7.61
)%Discount rate:Management assumptionnon-Triple-B trusts


12.80
%

14.40
%

16.00
%

17.60
%

19.20
%Management assumptionTriple-B trusts


13.60
%

15.30
%

17.00
%

18.70
%

20.40
%Total residual fees

$
321,003

$
260,839

$
213,099

$
175,067

$
144,647Change in receivables balance


50.64
%

22.40
%




(17.85
)%

(32.12
)%




Change in assumption



Change in assumptionDown 200
basis points

Down 100
basis points

Receivables
balance

Up 100
basis points

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

$
197,938

$
204,400

$
213,099

$
220,347

$
225,360Change in receivables balance


(7.11
)%

(4.08
)%




3.40
%

5.75
%


---

If
all outstanding auction rate notes that bore interest at one-month LIBOR plus 1.50% as of September 30, 2008 were to continue to bear interest at one-month LIBOR plus 1.50%,
but all outstanding auction rate notes that bore interest at one-month LIBOR plus 2.50% as of September 30, 2008 were instead to bear interest at one-month LIBOR plus 3.50%, the estimated fair
value of our residuals would decrease by $2.7 million, or 1.3%, and the estimated fair value of our additional structural advisory fees would decrease by $0.5 million, or 0.5% from their
current valuations.

If
all outstanding auction rate notes that bore interest at one-month LIBOR plus 1.50% as of September 30, 2008 were to instead to bear interest at one-month LIBOR plus 2.50%, and
all
outstanding auction rate notes that bore interest at one-month LIBOR plus 2.50% as of September 30, 2008 were instead to bear interest at one-month LIBOR plus 3.50%, the estimated fair value of
our residuals would decrease by $29.2 million, or 13.7%, and the estimated fair value of our additional structural advisory fees would decrease by $3.1 million, or 3.3% from their
current valuations. See "Risk Factors" under Item 1A of Part II of this quarterly report for additional information regarding our trusts' auction rate notes.

47

---



On October 30, 2008, Moody's downgraded the ratings assigned to certain subordinated auction rate notes to below A3. As a result, the interest rate spread on these notes increased
from one-month LIBOR plus 1.50% to one-month LIBOR plus 2.50%. We expect the impact of the downgrades on the future cost of funding auction rate notes to decrease the estimated
value of our service receivables by approximately $3.2 million. On November 5, 2008, Moody's downgraded the insurance financial strength rating of Ambac to Baa1 from Aa3. Ambac has
provided credit enhancement for certain ABS issued in securitizations that we have facilitated, including certain auction rate notes. The downgrading of Ambac's ratings increases the likelihood that
the ratings assigned to certain auction rate notes may be further downgraded, possibly to ratings below A3 by Moody's and below A- by S&P and Fitch. If such a downgrade were to occur, we
would expect the impact on the future cost of funding auction rate notes to decrease estimated value of our service receivables by approximately $56.8 million.

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



Our consolidated financial statements include the accounts of The First Marblehead Corporation and its subsidiaries, after eliminating
inter-company accounts and transactions. We have not consolidated the financial results of the securitization trusts purchasing loans that we have
facilitated. Prior to July 1, 2003, this accounting treatment was in accordance with various Emerging Issues Task Force issues and related interpretations. We considered, among other things,
the following factors in assessing consolidation of the securitization trusts:



Beginning
July 1, 2003, and for securitization trusts created after January 31, 2003, we applied Financial Accounting Standards Board, or FASB, Interpretation
No. 46,Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, or FIN No. 46, in assessing consolidation.
FIN No. 46 provided a new framework for identifying variable interest entities and determining when a company should include the assets, liabilities, non-controlling interests and
results of activities of a variable interest entity in its consolidated financial statements.

On
December 24, 2003, the FASB issued FIN No. 46 (revised December 2003),Consolidation of Variable Interest Entities, or
FIN No. 46R, which addressed how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should
consolidate the entity. FIN No. 46R has replaced FIN No. 46. At September 30, 2008, each

48

---



securitization
trust created after January 31, 2003 has met the criteria to be a qualified special-purpose entity, or QSPE, as defined in paragraph 35 of FASB Statement No. 140, Accounting for the Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, or FASB Statement No. 140. Accordingly, we did
not consolidate these existing securitization trusts in our financial statements. In addition, the securitization trusts created prior to January 31, 2003 in which we hold a variable interest
that could result in us being considered the primary beneficiary of such trust, have been amended in order for them to be considered QSPEs. The adoption of FIN No. 46R, which we began to apply
in December 2003, did not have a material impact on our consolidated financial condition, results of operations, earnings per share or cash flows.

The
FASB has embarked upon a project to amend FASB Statement No. 140 that would potentially remove the concept of the QSPE from such statement effective for fiscal years beginning
after November 15, 2009 and thereby eliminate gain on sale accounting as currently utilized. As a result of this, the FASB would then also remove the QSPE exception from FIN No. 46. The
FASB has issued an exposure draft on this topic with comments due by November 14, 2008. The ultimate impact, if any, of these deliberations on our accounting practices is uncertain at this
time.

Results of Operations

Three months ended September 30, 2008 and 2007

Revenue Related to Securitization Transactions

We primarily offer services in connection with private label education loan products offered through two marketing channels:
(a) direct to consumer, which generally refers to programs that lenders market directly to prospective borrowers and their families, and (b) school channel, which refers to programs that
lenders market indirectly to student borrowers and their families through educational institutions. In either case, lenders may engage third parties that are not themselves lenders but which market
loans on behalf of lenders that fund the loans. We refer to these third parties as loan marketers, and we refer to the lenders that fund these loans as program lenders.

We
did not facilitate any securitization transactions during the first quarter of fiscal 2009 but did facilitate two securitization transactions during the first quarter of fiscal 2008.
Our estimates of the allocation by marketing channel of our securitization revenues for the first quarter of fiscal 2008, expressed as a percentage of the total principal and accrued interest of
private label loans securitized in each channel at the date of securitization, are as follows:

Percentage yieldMonth and year of private label
securitization

Marketing
channel

Volume of
loans
securitized(1)



Up-front
structural
advisory fees

Additional
structural
advisory fees

Residuals

Total(3)(dollars in millions)Fiscal 2008September 2007

Direct to consumer

$
1,640


81
%

9.6
%

1.2
%

6.6
%

17.3
%School channel


387


19


5.1


1.2


2.5


8.8Total

$
2,027Blended yield(2)








8.7


1.2


5.8


15.7


---

49

---



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

Market
demand for private student loan ABS has been volatile, and we believe does not exist for TERI-guaranteed loans as of November 10, 2008. This volatility, and
absence of demand for private student loan ABS, has negatively affected, and will likely continue to negatively affect, the cost and availability of certain financing structures previously utilized in
the securitization transactions that we have facilitated, including the issuance of subordinate classes of ABS. In addition, we are uncertain as of November 10, 2008 whether the fee structure
that we have historically used in facilitating securitization transactions will be used in any future securitizations. In particular, market conditions may dictate that we reduce or forgo our
up-front structural advisory fee in connection with securitizations, if any, that we are able to facilitate in the near-term.



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



The additional component of structural advisory fees decreased to $(17.9) million during the first quarter of fiscal 2009 from
$27.2 million during the first quarter of fiscal 2008. The decrease in additional structural advisory fees between the periods was primarily due to the changes in assumptions we use to estimate
the fair value of our additional structural advisory fees and decreased securitization volume between the fiscal 2009 and fiscal 2008 periods.

50

---



The
following table summarizes the changes in our estimate of the fair value of the structural advisory fees receivable for the first quarters of fiscal 2009 and fiscal 2008:

Three months ended
September 30,2008

2007(in thousands)Fair value at beginning of period

$
113,842

$
133,644Additions from new securitizations





24,304Cash received from trust distribution


(1,477
)Trust updates:Passage of time (present value accretion)


2,789


2,410Assumption changes:Increase in discount rate assumption


(15,641
)

Increase in timing and average default rate


(3,133
)

Other factors


(1,905
)

449Net change from trust updates


(17,890
)

2,859Fair value at end of period

$
94,475

$
160,807


On
a quarterly basis, we update our estimate of the fair value of our additional structural advisory fees, which we expect, as of November 10, 2008, to begin to receive
approximately six to seventeen years after the date of a particular securitization transaction. In doing so, we give effect to the passage of time, which results in the accretion of the discounting
inherent in the fair value estimates, and we also adjust for any change in the discount rate and other assumptions that we use in estimating the fair value of these receivables. We monitor the
performance of trust assets, including default, recovery, prepayment and interest rate trend experience, which we also consider in our estimates. We also make assumptions about the pledged accounts,
including periodic replenishments thereof, the cumulative loan default rate of each securitization trust and the ability of TERI to pay guaranty claims out of its general reserves. We estimate the
trend of interest rates over the life of the loan pool using an implied forward LIBOR curve, and an assumed spread between LIBOR and auction rates, to estimate trust cash flows. For a discussion of
the assumptions we make in estimating our additional structural advisory fees, see "Executive SummaryApplication of Critical Accounting Policies and
EstimatesService Revenue and Receivables."

During
the first quarter of fiscal 2009, our estimates of the fair value of our additional structural advisory fees resulted in a decrease in their carrying value of approximately
$17.9 million. During the first quarter of fiscal 2008, our estimates of the fair value of our additional structural advisory fees resulted in an increase in their carrying value of
approximately $2.9 million. The decrease during the first quarter of fiscal 2009 was primarily due to the impact of changes we made to the assumptions we use to estimate the fair value of our
additional structural advisory fees receivable, particularly an increase in our discount rate assumption, which more than offset the accretion of discounting inherent in the fair value estimates. The
increase during the first quarter of fiscal 2008 was primarily due to the accretion of the discounting inherent in the fair value estimates. For a discussion of changes we made during the first
quarter of fiscal 2009 to certain assumptions we use to estimate the fair value of our additional structural advisory fees receivable, see "Executive SummaryApplication of
Critical Accounting Policies and EstimatesService Revenue and Receivables."



Service revenues from residuals decreased by $183.0 million, to $(80.2) million for the first quarter of fiscal 2009, from
$102.9 million for the first quarter of fiscal 2008. The decrease in service revenues from residuals in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 was

51

---



primarily
a result of changes we made to certain assumptions we use to estimate the value of our residuals receivable in the first quarter of fiscal 2009 and a decrease in securitization volume. We
did not conduct a securitization transaction in the first quarter of fiscal 2009. As a result, we did not recognize any residuals from new securitizations in the quarter.

The
following table summarizes the changes in our estimate of the fair value of the residuals receivable for the first quarters of fiscal 2009 and fiscal 2008:

Three months ended
September 30,2008

2007(in thousands)Fair value at beginning of period

$
293,255

$
665,115Additions from new securitizations





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


10,931


19,903Assumption changes:Increase in discount rate assumption


(43,643
)

(25,182
)Increase in timing and average default rate


(40,728
)

Other factors


(6,716
)

(8,829
)Net change from trust updates


(80,156
)

(14,108
)Fair value at end of period

$
213,099

$
767,979


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

Our
estimates of the fair value of our residuals receivable resulted in a decrease in the aggregate carrying value of approximately $80.2 million during the first quarter of
fiscal 2009 and a decrease of $14.1 million during the first quarter of fiscal 2008. The decrease during the first quarter of fiscal 2009 was due primarily to the impact of changes we made to
the assumptions we use to estimate the fair value of our residuals receivable, particularly, an increase in discount rates and an increase in our
weighted average gross default rates. The negative impact of these changes to our assumptions, together with a decrease in securitization volumes between periods, more than offset the positive impact
of the passage of time. For a discussion of our decision during the first quarter of fiscal 2009 to change the assumptions we use to estimate the value of our residuals receivable see
"Executive SummaryApplication of Critical Accounting Policies and EstimatesService Revenue and Receivables." During the first quarter of fiscal 2008, the
positive impact of the passage of time was more than offset by an increase in our discount rate assumption for the same period.

52

---





Processing fees from TERI decreased to $2.4 million for the first quarter of fiscal 2009 from $46.2 million for the first
quarter of fiscal 2008. The decrease during the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 was primarily due to the impact of the TERI Reorganization on our facilitated
loan volume, including the termination of the master servicing agreement effective May 31, 2008. Effective June 1, 2008, we began receiving a decreased level of fees from TERI pursuant
to a transition services agreement, which terminated on September 29, 2008. We received on average $865,000 per month pursuant to the transition services agreement during its term. We do not
expect to receive a material amount of processing fees from TERI in the future.



Administrative and other fees decreased to $3.6 million for the first quarter of fiscal 2009 from $21.8 million for the
first quarter of fiscal 2008. The decrease during the first quarter of fiscal 2009 was primarily due to a reduction in marketing fees earned by us and decreased reimbursable expenses that we generated
between periods from marketing coordination services provided to some of our clients. These reductions offset increasing student loan balances in the securitization trusts during the fiscal 2009
period compared to the fiscal 2008 period. We generated approximately $1.4 million in marketing fees during the first quarter of fiscal 2009, compared to approximately $20.0 million in
marketing fees and reimbursable expenses from marketing coordination services during the first quarter of fiscal 2008. We earned administrative fees for the daily management of the securitization
trusts of approximately $1.8 million during the first quarter of fiscal 2009 and $1.7 million during the first quarter of fiscal 2008.

Net Interest Income

Net interest income increased to $7.1 million for the first quarter of fiscal 2009 from $4.4 million for the first
quarter of fiscal 2008. The increase in the current year period was primarily due to higher average education loan balances outstanding at our subsidiary, Union Federal, during the first quarter of
fiscal 2009 compared to the first quarter of fiscal 2008. Net interest income earned by Union Federal of $6.4 million during the first quarter of fiscal 2009 and $2.3 million during the
first quarter of fiscal 2008 was primarily derived from education loans held for sale during each period.

53

---



The
following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities for the three months ended September 30, 2008 and 2007.

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

Three months ended September 30,2008

2007Average
Daily
Balance

Interest

Rate

Average
Daily
Balance

Interest

RateAssetsCash and cash equivalentstaxable

$
94,465

$
415


1.74
%
$
78,952

$
950


4.78
%Cash and cash equivalentstax exempt


9,211


49


3.28


14,331


140


5.98Federal funds sold


89,703


421


1.86


30,734


383


4.95Investmentstaxable


9,297


126


5.37


11,505


158


5.45Investmentstax exempt


72,265


452


3.82


121,663


1,179


5.93Student loans


502,900


10,485


8.27


155,384


4,228


10.83Mortgage loans


10,883


151


5.52


12,442


197


6.31Total interest-earning assets


788,724


12,099


6.32
%

425,011


7,235


7.63
%Cash and cash equivalents


609








526Service receivables


379,200








847,846Other assets


65,535








123,688Total assets

$
1,234,068







$
1,397,071LiabilitiesSavings accounts

$
61,941

$
525


3.36
%
$
45,142

$
573


5.05
%Money market accounts


43,636


375


3.41








Brokered deposits


143,264


1,165


3.23


59,529


792


5.29Warehouse line of credit


243,723


2,696


4.39


91,521


1,275


5.54Other interest-bearing liabilities


14,105


201


5.66


9,119


212


9.23Total interest-bearing liabilities


506,669


4,962


3.89
%

205,311


2,852


5.53
%Noninterest-bearing deposits


9








100All other liabilities


54,274








315,779Total liabilities


560,952








521,190Stockholders' equity


673,116








875,881Total liabilities and stockholders' equity

$
1,234,068







$
1,397,071Net interest margin


788,724


7,137


3.59
%

425,011


4,383


4.10
%


54

---



Analysis of Changes in Net Interest Income
For the three months ended September 30, 2007 and
the three months ended September 30, 2008
(in thousands)

Due to Change inVolume

Rate

Net ChangeCash and cash equivalentstaxable

$
190

$
(725
)
$
(535
)Cash and cash equivalentstax exempt


(50
)

(41
)

(91
)Federal funds sold


737


(699
)

38Investmentstaxable


(30
)

(2
)

(32
)Investmentstax exempt


(477
)

(250
)

(727
)Student loans


9,494


(3,237
)

6,257Mortgage loans


(24
)

(22
)

(46
)Total interest income








4,864Savings accounts

$
215

$
(263
)
$
(48
)Money market accounts


375





375Brokered deposits


1,119


(746
)

373Warehouse line of credit


2,130


(709
)

1,421Other interest-bearing liabilities


117


(128
)

(11
)Total interest expense








2,110Net increase in net interest income







$
2,754


Non-interest Expenses

Total non-interest expenses decreased to $60.9 million for the first quarter of fiscal 2009 from
$97.5 million for the first quarter of fiscal 2008. Compensation and benefits decreased to $15.3 million for the first quarter of fiscal 2009 from $32.0 million for the first
quarter of fiscal 2008. General and administrative expenses decreased to $24.4 million for the first quarter of fiscal 2009 from $65.5 million for the first quarter of fiscal 2008.

The
decrease in compensation and benefits expense during the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008 was primarily the result of a decrease in
personnel and a decrease in incentive compensation accruals. During the last two quarters of fiscal 2008, we announced a reduction in our overall cost structure, including the reduction of headcount
by over 600 employees. In September 2008 and November 2008, we further reduced headcount by approximately 100 employees. Following these reductions, we had 241 full-time employees, compared to 1,031
employees as of September 30, 2007.

General
and administrative expenses decreased during the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008 as a result of decreases in several categories of
expenses. Marketing coordination expenses decreased to $3.4 million for the first quarter of fiscal 2009 from $26.8 million for the first quarter of fiscal 2008. The decrease in
marketing coordination expense was primarily due to the termination by some clients of their marketing coordination agreements. Equipment expenses decreased to $2.2 million for the first
quarter of fiscal 2009 from $3.9 million for the first quarter of fiscal 2008. Depreciation and amortization expense increased to $5.1 million for the first quarter of fiscal 2009 from
$4.4 million for the first quarter of fiscal 2008. The increase in equipment, depreciation and amortization expense was due to the amortization of capitalized software development costs.
Professional fees decreased to $3.1 million for the first quarter of fiscal 2009 from $4.5 million for the first quarter of fiscal 2008 primarily due to a decrease in legal costs.
Temporary employment

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services
costs decreased to $0.1 million for the first quarter of fiscal 2009 from $3.2 million for the first quarter of fiscal 2008. External call center costs decreased to
$0.6 million for the first quarter of fiscal 2009 from $10.6 million in the first quarter of fiscal 2008. The decreases in temporary employment services expense and external call center
costs were primarily due to decreases in personnel necessary to process the decreasing volume of loans facilitated between periods. Occupancy expenses decreased to $2.7 million for the first
quarter of fiscal 2009 from $3.7 million in the first quarter of fiscal 2008 is a result of lower communications costs, utilities and office maintenance costs.

Unrealized Losses on Loans Held for Sale

Our loans held for sale at September 30, 2008 consisted of $482.7 million in education loans originated by Union Federal.
Under GAAP, we are required to reduce the carrying value of our education loans if their fair value decreases below our cost. In such an event, we are required to write-down the carrying
value of our education loans and may be required to provide additional regulatory capital to Union Federal. We recorded a reduction in the carrying value of loans held for sale of $21.2 million
during the first quarter of fiscal 2009. We did not adjust the carrying value of loans held for sale during the first quarter of fiscal 2008. As of September 30, 2008, $3.8 million of
the loans held for sale were greater than 90 days past due.

Income Tax Expense (Benefit)

Income tax benefit increased to $52.9 million for the first quarter of fiscal 2009 from income tax expense of
$113.6 million for the first quarter of fiscal 2008. The increase in income tax benefit was primarily the result of a decrease in the amount of income before income tax expense between periods
due to the decrease in securitization volume between periods. During the first quarter of fiscal 2009, our effective tax rate, or the income tax expense (benefit) as a percentage of
income loss before income tax expense (benefit), decreased to 36.3% from an effective tax rate of 40.2% for the first quarter of fiscal 2008. The decrease in our effective tax rate was primarily due
to unutilized losses in certain of our subsidiaries for state tax purposes during the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008. Our effective tax rate applicable to
up-front structural advisory fees is greater than our effective tax rate applicable to residual revenues.

Financial Condition, Liquidity and Capital Resources

Our liquidity requirements have historically consisted of capital expenditures, working capital, business development expenses, costs
associated with alternative financing transactions, general corporate expenses, repurchases of our common stock, quarterly cash dividends and infusions of regulatory capital into Union Federal. In
order to preserve capital and maximize liquidity in challenging market conditions, our board of directors has eliminated regular quarterly cash dividends for the foreseeable future. In addition, we do
not expect to repurchase shares of common stock for the foreseeable future. In fiscal 2009, we expect our overall cash spend to decrease on an annualized basis by approximately 70% compared to fiscal
2008, including reduction of marketing coordination and operational expenses.

Short-term Funding Requirements

We expect to fund our short-term liquidity requirements through revenues from operations, cash and cash equivalents, and,
subject to disposition of its current portfolio of student loans, various sources of funding that may be available to Union Federal to finance education loans. In August 2008, we received aggregate
gross proceeds of approximately $132.7 million from the sale of preferred stock to affiliates of GSCP. The proceeds from the sale of preferred stock significantly improved our ability to meet
our short-term liquidity requirements, although we remain uncertain about future regulatory capital requirements relating to Union Federal. We believe, based on our operating plan as of
November 10, 2008 and the proceeds of the sale of preferred stock, that our cash, cash equivalents, investments and revenues from operations will be sufficient to fund our operations into
fiscal 2010.

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Our business has been and continues to be adversely impacted by the current ABS market dynamics, including an inability to access the securitization market and interim financing
facilities. We did not complete a securitization transaction during our first quarter of fiscal 2009, and we do not expect to complete a securitization in the near-term. We expect pricing
terms in future securitizations to be substantially less favorable than in the past. Our inability to generate up-front structural advisory fees has eroded our short-term
liquidity position.

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

In
July 2007, UFSB-SPV entered into a $300.0 million education loan warehouse facility with a conduit lender to fund the purchase of education loans from Union
Federal. At September 30, 2008, $244.2 million was outstanding. Under the facility, UFSB-SPV pledged the purchased education loans as collateral for the advances it received
from the conduit lender. The TERI Reorganization, and subsequent TERI ratings downgrades, resulted in events of termination under the indenture relating to the facility. As a result, the facility
termination date was declared, UFSB-SPV is not eligible for further borrowings under the facility and the conduit lender may elect to accelerate payment of such notes. In April 2008,
UFSB-SPV entered into a letter agreement pursuant to which it agreed to pay higher rates of fees to the conduit lender in consideration for an acknowledgement by the conduit lender that
interest on the notes issued under the facility would not be payable based on an alternative rate set forth in the indenture, or the Default Rate, unless and until the conduit lender delivered further
notice to UFSB-SPV. The conduit lender may elect for interest on outstanding notes to become payable at the Default Rate for periods following delivery of notice of such election, in which
case UFSB-SPV would pay fees at the lower rates in effect prior to the letter agreement. The facility termination date had been scheduled to occur on July 16, 2008. Under the
indenture, the facility termination date commences a liquidation period that ends on the date immediately following the later of July 14, 2010 and the date
on which the principal and interest on all outstanding notes, and all amounts otherwise payable by UFSB-SPV in connection with the facility, are paid in full. In May 2008, an additional
event of termination occurred under the indenture relating to the one- and three-month default ratios on the underlying loan portfolio. The conduit lender's recourse under the indenture is
limited to student loans pledged as collateral.

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

Union
Federal's equity capital was $108.1 million at September 30, 2008. Quantitative measures established by regulation to ensure capital adequacy require Union Federal to
maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital to average assets
(as defined). Union Federal met all quantitative capital adequacy requirements to which it was subject as of September 30, 2008, and had a total risk-based ratio of 20.93%, a
Tier 1 risk-based ratio of 20.92%, and a Tier 1 leverage ratio of 17.41%.

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Union
Federal's regulatory authorities have from time to time requested that we provide additional capital to Union Federal. The OTS or the FDIC could in the future require us to make
additional infusions of regulatory capital into Union Federal, which could adversely affect our short-term liquidity.

Long-term Funding Requirements

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

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



Treasury Stock

We had treasury stock of $184.2 million at September 30, 2008 and $184.0 million at June 30, 2008. Our
treasury stock balance was primarily derived from the repurchases of our common stock in open market transactions. Treasury stock also includes shares of our stock withheld from employees to satisfy
statutory minimum withholding obligations as equity compensation awards vest. As of September 30, 2008, we had repurchased an aggregate of 7,525,800 shares at an average price, excluding
commissions, of $24.27 per share, under various repurchase programs approved by our board of directors.

On
April 24, 2007, our board of directors approved the repurchase of up to 10 million shares of our common stock. The 10 million shares authorized for repurchase
included 3.4 million shares available for repurchase as of April 24, 2007 under a previously authorized repurchase program. As of September 30, 2008, we had repurchased an
aggregate of 1.2 million shares at an average price, excluding commissions, of $36.17 per share, under various repurchase programs approved by our board of directors. At September 30,
2008, a maximum of 8.8 million shares may be repurchased under the

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repurchase
program approved by the board of directors on April 24, 2007. We did not repurchase any shares of common stock pursuant to this program during the first quarter of fiscal 2009.

Cash, Cash Equivalents, Federal Funds Sold and Investments

At September 30, 2008 and June 30, 2008, we had $305.1 million and $221.1 million, respectively, in cash,
cash equivalents, federal funds sold and investments. The increase in cash, cash equivalents, federal funds sold and investments is primarily due to cash received from the issuance of series B
preferred stock to affiliates of GSCP, offset by cash used to fund operations.

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

Loans Held for Sale

Our loans held for sale decreased to $482.7 million at September 30, 2008 from $497.3 million at June 30,
2008. The decrease in loans held for sale is due to the fair value writedown of $21.2 million during the quarter partially offset by principal payments received. Our loans held for sale at
September 30, 2008 and June 30, 2008 were comprised of education loans.

Service Receivables

Our service receivables decreased to $308.4 million at September 30, 2008 from $411.2 million at June 30,
2008, primarily as a result of changes we made to assumptions we use to estimate the value of our residual and additional structural advisory fee receivables. See "Executive
SummaryApplication of Critical Accounting Policies and EstimatesService Revenues and Receivables."

The
following chart illustrates the pre-tax amount and timing of cash flows expected to be released to us from additional structural advisory fees and residuals. The
information presented reflects our trust performance assumptions and undiscounted cash flow estimates from outstanding securitization trusts as of September 30, 2008. See
"Executive SummaryApplication of Critical Accounting Policies and EstimatesService Revenue and Receivables" for a discussion of our key assumptions, as well as a
sensitivity analysis of hypothetical changes to those assumptions. You are cautioned that the valuation assumptions require our subjective judgment and are susceptible to change. We have made in the
past, and will likely need to make in the future, adjustments to our valuation assumptions. The actual cash releases from additional structural advisory fees and residuals that we receive from the
trusts, and the actual timing of receipt, could be materially different than reflected in the chart below as a result of variances between the actual performance of the securitization trusts and the
assumptions as of September 30, 2008, including assumptions relating to the sufficiency of pledged accounts, and the

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periodic
replenishment thereof, and cumulative default rates of the securitization trusts and TERI's claims paying ability.

GRAPHIC

The
information above is intended to supplement the financial information prepared and presented in accordance with GAAP appearing elsewhere in this quarterly report. We have provided
the cash flow projections in order to assist investors in assessing our liquidity needs and to provide additional information related to our existing additional structural advisory fees and residuals
receivables. See "Risk Factors" under Item 1A of Part II of this quarterly report for additional factors you should consider in evaluating the cash flow projections.

Property and Equipment, net

During the first quarter of fiscal 2009, our property and equipment, net decreased by $6.0 million, primarily as a result of a
$1.4 million write-off of fixed assets that were taken out of service during the quarter, as well as $5.1 million of depreciation expense recorded during the period. During
the first quarter of fiscal 2009, we had $0.3 million in acquisitions of equipment.

Other Prepaid Expenses

Our other prepaid expenses decreased to $13.9 million at September 30, 2008 from $15.4 million at June 30,
2008. The decrease in other prepaid expenses was primarily due to a decrease in prepaid insurance of $0.4 million and other various prepaid items.

Other Assets

Other assets increased to $6.1 million at September 30, 2008 from $3.8 million at June 30, 2008 primarily
due to a receivable of $1.4 million for marketing and processing services performed on behalf of a third party lender.

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Deposits

Deposits increased to $246.4 million at September 30, 2008 from $244.1 million at June 30, 2008. Brokered
deposits decreased by $29.2 million which was offset by an increase of $31.4 million in money market, savings accounts and time deposits.

Education Loan Warehouse Facility

We had $244.2 million in borrowings outstanding at September 30, 2008 under the education loan warehouse facility between
Union Federal and a conduit lender. We had $242.9 million in borrowings outstanding under the facility at June 30, 2008. The facility provided interim financing which we used to fund the
disbursement of education loans by Union Federal. The TERI
Reorganization, and subsequent TERI ratings downgrades, resulted in events of termination under the indenture relating to the facility. As a result, the facility termination date was declared,
UFSB-SPV is not eligible for further borrowings under the facility and the conduit lender may elect to accelerate payment of such notes. In April 2008, UFSB-SPV entered into a
letter agreement pursuant to which it agreed to pay higher rates of fees to the conduit lender in consideration for an acknowledgement by the conduit lender that interest on the notes issued under the
facility would not be payable based on an alternative rate set forth in the indenture, the Default Rate, unless and until the conduit lender delivered further notice to UFSB-SPV. The
conduit lender may elect for interest on outstanding notes to become payable at the Default Rate for periods following delivery of notice of such election, in which case UFSB-SPV would pay
fees at the lower rates in effect prior to the letter agreement. The facility termination date had been scheduled to occur on July 16, 2008. Under the indenture, the facility termination date
commences a liquidation period that ends on the date immediately following the later of July 14, 2010 and the date on which the principal and interest on all outstanding notes, and all amounts
otherwise payable by UFSB-SPV in connection with the facility, are paid in full. In May 2008, an additional event of termination occurred under the indenture relating to the
one- and three-month default ratios on the underlying loan portfolio. The conduit lender's recourse under the indenture is limited to student loans pledged as collateral.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses increased to $23.2 million at September 30, 2008 from $20.5 million at
June 30, 2008. Our accounts payable were $1.9 million higher at September 30, 2008 as compared to June 30, 2008 primarily due to the timing of the receipt and processing of
invoices.

Income Taxes Payable

We had income taxes payable of $12.9 million at September 30, 2008. We had income taxes payable of $31.3 million
at June 30, 2008. The decrease in our income taxes payable is primarily due to tax payments made during the quarter as well as lower taxable income earned during the first quarter of fiscal
2009.

Net Deferred Income Tax Liability/Asset

Our net deferred income tax liability changed to a deferred income tax asset of $48.1 million at September 30, 2008 from
a liability of $10.4 million at June 30, 2008. We have a net deferred income tax asset primarily because, under GAAP, we recognize additional structural advisory fees and residuals in
our financial statements earlier than they are recognized for income tax purposes. Our net deferred income tax liability changed to an asset primarily as a result of the decrease in additional
structural advisory fees and residuals receivables at September 30, 2008.

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Other Liabilities

Other liabilities decreased to $12.2 million at September 30, 2008 from $14.1 million at June 30, 2008.
Other liabilities primarily include our note payable to TERI, capital lease obligations and deferred rent related to several operating leases for office space. The decrease in other liabilities is
primarily due to a decrease in lease obligations and deferred rent.

Contractual Obligations

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

Cash Flows

Our net cash used in operating activities increased to $42.3 million for the first quarter of fiscal 2009, compared to cash
provided by operating activities of $12.1 million for the first quarter of fiscal 2008. The increase in cash used in operations resulted primarily from the change in prepaid income taxes in
fiscal 2008.

Our
cash used in investing activities was $1.5 million for the first quarter of fiscal 2009, compared to $28.9 million for the first quarter of fiscal 2008. Net cash used
by investing activities during the first quarter of fiscal 2008 was primarily a result of purchases of investments and property and equipment.

Net
cash provided by financing activities decreased to $125.9 million during the first quarter of fiscal 2009, compared to net cash provided by financing activities of
$137.6 million during the first quarter of fiscal 2008. Net cash provided by financing activities decreased during the first quarter of fiscal 2009 primarily as a result of a lower growth in
deposits and less use of the education loan warehouse facility.

We
expect that our capital expenditure requirements for the final three quarters of fiscal 2009 will be approximately $0.8 million. We expect to use these funds primarily for
reconfiguration of systems for a new product set that we are developing.

Off-Balance Sheet Transactions

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

The
principal uses of these trusts have been to generate sources of liquidity for our clients' and Union Federal's assets sold into such trusts and make available more funds to students
and colleges. See "Executive SummaryApplication of Critical Accounting Policies and EstimatesConsolidation" for a discussion of our determination to not
consolidate these securitization trusts.

Inflation

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

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Item 3Quantitative and Qualitative Disclosures about Market Risk

Risks Related to Cash, Cash Equivalents, Federal Funds Sold and Investments

We have market risk exposure related to changes in interest rates applicable to our cash, cash equivalents and investments. We manage
our market risk through a conservative investment policy, the primary objective of which is preservation of capital. At September 30, 2008, cash, cash equivalents, investments and federal funds
sold consisted primarily of investments in variable rate demand notes, Federal Home Loan Bank bonds, funds deposited in taxable or tax-exempt money market funds and federal funds sold by
Union Federal, all of which were due on demand or within one year. As a result, we do not believe a change in interest rates would have a material impact on the fair value of cash, cash equivalents,
federal funds sold or investments.

Risks Related to Loans Held for Sale and Deposits

We also have market risk exposure related to our loans held for sale and deposits. Our loans held for sale at September 30, 2008
consisted of $482.7 million in education loans
originated by Union Federal. Our loans held for sale are recorded at lower of cost or fair value and as a result of their variable interest rates, are not subject to interest rate sensitivity. Under
GAAP, we would be required to reduce the carrying value of our education loans if their fair value decreases below our cost. In such an event, we would be required to write-down the
carrying value of our education loans and may be required to provide additional regulatory capital to Union Federal. At September 30, 2008, our student loans had an average interest rate of
approximately 8.28%. All of our education loans and approximately 65% of our mortgage loans have variable interest rates.

We
held deposits of $246.4 million at September 30, 2008. Our deposits are recorded at the amount owed. Our deposit balances are subject to changes in economic value based
on varying market conditions, primarily changes in the levels of interest rates. At September 30, 2008, our deposits had an average interest rate of approximately 3.30%. Less than 1% of our
deposits have fixed interest rates in excess of 12 months. Approximately 90% of our deposits have fixed interest rates of 6 months or less.

We
do not believe a change in interest rates would have a material impact on the fair value of our loans held for sale or deposits since the majority of these assets and liabilities
carry interest rates that are variable and any loss we may incur would not be material relative to our consolidated financial statements.

Risk Related to Structural Advisory Fees and Residuals

Because there are no quoted market prices for our additional structural advisory fees and residuals receivables, we use discounted cash
flow modeling techniques and various assumptions to estimate their values. We base these estimates on our proprietary historical data, third party data and our industry experience, adjusting for
specific program and borrower characteristics such as loan type and borrower creditworthiness. We also monitor trends in loan performance over time and make adjustments we believe are necessary to
value properly our receivables balances at each balance sheet date. Because our estimates rely on quantitative and qualitative factors, including macroeconomic indicators to predict prepayment,
default and recovery rates, management's ability to determine which factors are relevant to our estimates, and our ability to accurately incorporate those factors into our estimates, can have a
material effect on our valuations.

Our
assumptions regarding TERI's ability to pay claims on defaulted loans affects the expected timing of cash payments to us in respect of additional structural advisory fees and
residuals, which in turn affects our estimates of their fair value. If we were to determine that recoveries with respect to a trust's defaulted student loans would be unavailable to replenish the
trust's pledged account, the estimated value of our additional structural advisory fees and residuals would be reduced. In addition,

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increases
in our estimates of defaults, prepayments and discount rates, increases in the spread between LIBOR indices and auction rates, as well as decreases in default recovery rates and the
multi-year forward estimates of the LIBOR rate, which is the reference rate for the loan assets and borrowings of the securitization trusts, would have a negative effect on the value of
our additional structural advisory fees and residuals. For an analysis of the estimated change in our structural advisory fees and residuals receivables balance at September 30, 2008 based on
changes in our loan performance assumptions, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsExecutive SummaryApplication of
Critical Accounting Policies and EstimatesSensitivity Analysis." For a chart illustrating the amount and timing of cash flows expected to be released to us from additional structural
advisory fees and residuals, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital
ResourcesService Receivables."

Item 4Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our
disclosure controls and procedures as of September 30, 2008. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's
management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2008, our chief executive
officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No
change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, occurred during the fiscal
quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1.    Legal Proceedings

In April and May 2008, seven purported class action lawsuits were filed against us and certain of our current and former officers and
certain of our directors in the United States District Court for the District of Massachusetts. The plaintiffs allege, among other things, that the defendants made false and misleading statements and
failed to disclose material information in various SEC filings, press releases and other public statements. The complaints allege various claims under the Exchange Act and
Rule 10b-5 promulgated thereunder. The complaints seek, among other relief, class certification, unspecified damages, fees and such other relief as the court may deem just and
proper. In August 2008, the court consolidated these cases and appointed lead plaintiffs and a lead counsel. A consolidated amended complaint is due to be filed on November 28, 2008. A class
had not been certified in the actions as of November 10, 2008. In addition, three federal derivative lawsuits, and one state derivative lawsuit, have been filed against certain of our current
and former officers and directors

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and
nominally against us in the United States District Court for the District of Massachusetts and Massachusetts Superior Court, respectively. The derivative complaints allege various violations of
federal and state law, including violations of the Exchange Act, breaches of fiduciary duties, waste of corporate assets and unjust enrichment. The derivative complaints seek a monetary judgment,
injunctive relief, restitution, disgorgement and a variety of purported corporate governance reforms. In August 2008, the federal court consolidated the federal derivative cases and stayed them
pending resolution of the purported class actions described above. In October 2008, the state court stayed the state derivative action until January 5, 2009.

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

Item 1A.    Risk Factors

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

We
have updated certain of the following risk factors to reflect financial and operational information for the most recently completed fiscal quarter. We have made material changes to
the following risk factors as compared to the version disclosed in our annual report on Form 10-K for the fiscal year ended June 30, 2008:



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Risks Related to Asset-Backed Securitizations and Other Funding Sources

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

Securitization refers to the technique of pooling loans and selling them to a special purpose, bankruptcy remote entity, typically a
trust, which issues to investors securities backed by those loans. As of the date of this report, we have provided structural advisory and other services for 38 loan securitizations since our
formation in 1991. In connection with past securitizations, we have received compensation in the form of structural advisory fees, residuals and administrative fees for management of the trusts. The
amount and timing of the fees and residuals we recognize are affected, in part, by the timing, size and structure of the securitization transactions, as well as the composition of loan pools to be
securitized, the return expectations of investors and assumptions we make regarding loan portfolio performance, including defaults, recoveries, prepayments and the cost of funding. We derived
approximately $320.4 million in revenue from new securitizations in fiscal 2008.

We
did not complete a securitization during the second, third or fourth quarters of fiscal 2008 or first quarter of fiscal 2009, which contributed to our net losses for each
quarter. Our securitization volumes materially decreased in fiscal 2008 compared to fiscal 2007. We do not expect to complete a securitization in the near term and may not complete any securitizations
during fiscal 2009. In addition, we expect pricing terms in future securitizations, if any, to be substantially less favorable than in the past. We also expect investors to have limited or no
demand for subordinate tranches of ABS in
securitization transactions, if any, that we may be able to facilitate in the foreseeable future. The inability to access the securitization market, together with the TERI Reorganization, has impacted
our client relationships, reduced our facilitated loan volume and challenged our business prospects. If we continue to be unable to access the ABS market, our revenues may continue to decline and we
may continue to generate net losses, which would further erode our liquidity position. We will need to continue to adapt and gain market acceptance for our products and services in order to overcome
the challenges we are facing.

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

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



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

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

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

Our quarterly revenue, operating results and profitability have varied on a quarterly basis in the past primarily as a result of the
timing, size and structure of any capital markets transactions that we have facilitated and, to a lesser extent, the seasonality of student loan originations, which in the past has affected the amount
of processing fees from TERI that we earned in a particular quarter. In fiscal 2008, we facilitated two securitizations in the first quarter and no securitizations in the second, third, or
fourth quarters. Recent disruptions and volatility in the ABS market have adversely affected our ability to structure securitizations and will affect the timing, size, structure and profitability of
future capital markets transactions. We did not facilitate any securitization transactions in the first quarter of fiscal 2009. We do not expect to complete a securitization in the
near-term and may not complete any securitizations during fiscal 2009. In addition, we expect pricing terms in future securitizations, if any, to be substantially less favorable than in
the past. We also expect limited or no investor demand for subordinate tranches of ABS in securitization transactions, if any, that we may be able to facilitate in the foreseeable future. As a result,
the variability of our quarterly revenue, operating results and profitability may increase. Termination of our agreements with TERI may contribute to such an increase, because we do not expect to
receive a material amount of processing fees from TERI in the future. Our loan origination or marketing fees, and the timing, size and structure of any future securitization activities, may also be
affected by the seasonality of student loan

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applications
and loan originations. Origination of student loans is generally subject to seasonal trends, with the volume of loan applications increasing with the approach of tuition payment dates.

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

Student loan asset-backed securitizations have historically been our sole source of permanent financing for our clients' private
student loan programs. We were unable to complete a securitization transaction during the first quarter of fiscal 2009, and we do not expect to complete a securitization in the near-term.
In addition, we have been unsuccessful in obtaining alternatives to securitization to finance our clients' loans. Other sources of funding have not been available to us on acceptable terms, if
available at all. Recent conditions in the capital markets have generally resulted in a substantial widening of credit spreads and significantly more restrictive covenants, which has adversely
affected the pricing and terms and conditions of alternative funding mechanisms that we have pursued. Our facilitated loan volume available for securitization has grown since the securitization
transactions we completed in the first quarter of fiscal 2008. At September 30, 2008, the principal balance of loans facilitated and available to us for securitization was approximately
$2.4 billion of which $83.2 million was facilitated in the first quarter of 2009.

Under
the terms of our purchase agreements with lender clients, we generally have an obligation to use our best efforts to facilitate the purchase of the client's loans during a
specified loan purchase period. The length of the loan purchase period varies by client and generally ranges from 195 days to 555 days following final loan disbursement. Our purchase
agreements applicable to approximately $1.2 billion of the facilitated loan volume available for securitization as of September 30, 2008 do not include a liquidated damages provision in
the event that we fail to facilitate a securitization in breach of our obligations, and the amount of our potential liability with respect to such loans is not determinable at this time. If we do not
honor our contractual obligations, our value proposition to clients and prospective clients would be compromised, our relationships with current clients could terminate and our prospective clients may
not be interested in entering into business arrangements with us. In addition, our financial results would be adversely affected if we were required to pay damages.

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

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

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

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Risks Related to Our Financial Reporting and Liquidity

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

Historically, we have received structural advisory fees for our services in connection with securitization transactions. We have
received an up-front portion of these structural advisory fees when the securitization trust purchases the loans. We are entitled to receive an additional portion of these structural
advisory fees over time, based on the amount of loans outstanding in the trust from time to time over the life of the trust. We also have the right to receive a portion of any residual interests that
the trust creates. As required under GAAP, we recognize as revenue an estimate of the fair value of the additional portion of the structural advisory fees and residuals at the time the securitization
trust purchases the loans because these revenues are deemed to be earned before they are actually paid to us.

We
record additional structural advisory fees and residuals as receivables on our balance sheet at our estimate of their fair value. Because there are no quoted market prices for our
additional structural advisory fees or residuals receivable, we use discounted cash flow modeling techniques and certain assumptions to estimate fair value. We estimate the fair value both initially
and in each subsequent quarter and reflect the change in our estimate of fair value in earnings for that period. Our key assumptions to estimate the fair value include: discount rates; the annual rate
and timing of student loan prepayments; the trend of interest rates over the life of the loan pool, including the forward LIBOR curve, and the spread between LIBOR and auction rates; the expected
annual rate and timing of loan defaults, and TERI's ability to pay default claims; expected recoveries of defaulted loans, including the use of recoveries to replenish trusts' pledged funds; the
source and amount of guaranty payments made on defaulted loans and the fees and expenses of the securitization trusts. Our estimates rely on quantitative and qualitative factors, including
macroeconomic indicators to predict prepayment,
default and recovery rates, and management's ability to determine which factors are more heavily weighted in our estimates, and to accurately incorporate those factors into our estimates, are
subjective and can have a material effect on valuations.

During
the second quarter of fiscal 2008, we changed our key accounting assumptions which resulted in a $178 million pre-tax decrease in the value of our additional
structural advisory fees and residuals receivables. During the third quarter of fiscal 2008, we changed our key accounting assumptions, including our assumptions with regard to TERI's ability to pay
guaranty claims from its general reserves, which resulted in a $315.3 million pre-tax decrease in the value of our additional structural advisory fees and residuals receivables.
During the fourth quarter of fiscal 2008, we further changed our key accounting assumptions, including our assumptions with regard to the discount rates used in determining the value of our service
receivables, which resulted in a $60.0 million pre-tax decrease in the value of those receivables. During the first quarter of fiscal 2009, we again changed our key accounting
assumptions, including our assumptions with regard to the discount rates used in determining the value of our service receivables, which resulted in a $99.5 million pre-tax decrease
in the value of those receivables. In general, our adjustments during fiscal 2008 and the first quarter of fiscal 2009 were necessary because securitization trusts had performed below our range of
expectations, including with regard to prepayments, delinquencies and defaults, dislocations in the capital markets that began in the second quarter of fiscal 2008 persisted through
September 30, 2008, TERI's claims paying ability is less certain as a result of the TERI reorganization, and the estimated cost of funding auction rate notes issued by several securitization
trusts was projected to be higher than previously estimated. For a discussion of these changes and the sensitivity of the additional structural advisory fees and residuals to variations in our
assumptions and estimates, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsExecutive SummaryApplication of Critical Accounting
Policies and Estimates."

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If
the actual performance of some or all of the securitization trusts were to vary appreciably from the adjusted assumptions we use, we may need to adjust further our key assumptions,
which could adversely affect our earnings in the period in which our assumptions change, and the actual additional structural advisory fees and residuals that we receive from the trusts could be
significantly less than reflected in our current financial statements. In addition, our securitization yields, or our structural advisory fees and residuals from a new securitization transaction
expressed as a percentage of the total principal and accrued interest securitized, realized on future securitized transactions could decrease if the actual performance of some or all of the
securitization trusts varies from the key assumptions we have historically used. In particular, economic, regulatory, competitive and other factors affecting prepayment, default and recovery rates on
the underlying securitized loan portfolio, including full or partial prepayments and prepayments as a result of loan consolidation activity, could cause or contribute to differences between the actual
performance of the securitization trusts and our key assumptions. In addition, developments in the TERI Reorganization, including challenges to the trusts' security interests in collateral securing
TERI's guaranty obligations or TERI's rejection of its guaranty agreements could cause us to adjust further our key assumptions. As of November 10, 2008, TERI had not rejected or otherwise
indicated how it will treat its guaranty obligations, and for purposes of
estimating the fair value of our service receivables, we assumed at September 30, 2008 that the application of collateral will continue in the ordinary course in accordance with existing
agreements. Finally, recent and continuing dislocations in the capital markets have resulted in increased volatility in investors' demand and yield requirements for ABS. If such conditions persist, we
may need to adjust further our key assumptions.

While
we have no further obligation to support the obligations within the bankruptcy-remote securitization trusts, our residuals and additional structural advisory fees in each
securitization we have facilitated are subordinate to securities issued to investors in such securitizations and may fail to generate any cash flow for us if the securitized assets do not generate
enough cash flow to pay debt holders in full or only generate enough cash flow to pay the debt holders. As a result of the TERI Reorganization, we expect as of September 30, 2008 to receive
additional structural advisory fees and residuals beginning six to seventeen years after the date of a particular securitization transaction. At December 31, 2007, we expected to receive such
cash flows beginning five to seven years after the date of a particular securitization.

Our
loans held for sale at September 30, 2008 consisted of $482.7 million in education loans originated by Union Federal. Our loans held for sale are recorded at lower of
cost or fair value. The estimated fair value of loans held for sale is evaluated on a periodic basis and, in the absence of readily determined market values, is based on the present value of expected
future cash flow using management's estimates. Under GAAP, we are required to reduce the carrying value of our education loans if their fair value decreases below our cost. In such an event, we would
be required to write-down the carrying value of our education loans, which would result in an increase in our general and administrative expenses, and we may be required to provide
additional regulatory capital to Union Federal. We recorded a valuation adjustment of approximately $7.3 million in fiscal 2008 and $21.2 million in the first quarter of fiscal 2009, and
we may be required to make additional adjustments in the future.

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

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

Historically,
the spread over one-month LIBOR that we used to estimate the future cost of funding was based on historical trends, then current auction rates for each trust and
assumptions for

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

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

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

During
the third quarter of fiscal 2008, the auction rate securities market systematically failed. During the third and fourth quarters of fiscal 2008, and the first quarter of fiscal
2009, failed auctions occurred with respect to auction rate notes issued by each of the five securitization trusts that have issued auction rate notes. As a result of the failed auctions, the auction
rate notes bear interest at a maximum rate, which was calculated as of September 30, 2008 as one-month LIBOR plus 1.50%, in the case of auction rate notes that were rated at
least Aa3 by Moody's and AA- by S&P as of September 30, 2008, or one-month LIBOR plus 2.50%, in the case of auction rate notes that were rated at least A3 by Moody's and
A- by S&P as of September 30, 2008. Auction rate notes issued by two securitization trusts are also rated by Fitch, and bear interest at a maximum rate, which was calculated as of
September 30, 2008 as one-month LIBOR plus 1.50%, in the case of auction rate notes that were rated at least AA- by Fitch as of September 30, 2008, or
one-month LIBOR plus 2.50%, in the case of auction rate notes that were rated at least A- by Fitch as of September 30, 2008. During the third quarter of fiscal 2008, we
revised our assumption with regard to the future cost of funding of auction rate notes. We assumed at March 31, 2008 that all outstanding auction rate notes would continue to bear interest at
the then-current spreads over one-month LIBOR until their expected maturity dates. As a result, during the third quarter of fiscal 2008, we decreased the estimated fair value of our
residuals receivable by $59.5 million and the estimated fair value of our additional structural advisory fees receivable by $54,000. See "Management's Discussion and Analysis of Financial
Condition and Results of OperationsExecutive SummaryApplication of Critical Accounting Policies and EstimatesService Revenue and Receivables", and in the
securitization trust cash flow projections

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included
under "Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital ResourcesService Receivables."

On
October 30, 2008, Moody's downgraded the ratings assigned to certain subordinated auction rate notes to below A3. As a result, the interest rate spread on these notes increased
from one-month LIBOR plus 1.50% to one-month LIBOR plus 2.50%. We expect the impact of the downgrades on the future cost of funding auction rate notes to decrease the estimated
value of our service receivables by approximately $3.2 million. On November 5, 2008, Moody's downgraded the insurance financial strength rating of Ambac to Baa1 from Aa3. Ambac has
provided credit enhancement for certain ABS issued in securitizations that we have facilitated, including certain auction rate notes. The downgrading of Ambac's ratings increases the likelihood that
the ratings assigned to certain auction rate notes may be further downgraded, possibly to ratings below A3 by Moody's and below A- by S&P and Fitch. If such a downgrade were to occur, we
would expect the impact on the future cost of funding auction rate notes to decrease the estimated value of our service receivables by approximately $56.8 million.

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

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

We provide structural advisory and other services for loan securitizations undertaken through statutory trusts. We do not consolidate
the financial results of the trusts with our own financial results. For a discussion of our decision not to consolidate, see "Management's Discussion and Analysis of Financial Condition and Results of
OperationsExecutive SummaryApplication of Critical Accounting Policies and EstimatesConsolidation" included in this quarterly report. Some of the accounting
rules relevant to this issue are in the process of being amended. In particular, the FASB has embarked upon a project to amend FASB Statement No. 140,Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,that would potentially remove the concept of the QSPE from such statement effective for fiscal
years beginning after November 15, 2009 and thereby eliminate gain on sale accounting as currently utilized by us. As a result of this, the FASB would then also remove the QSPE exception
from FIN No. 46,Consolidation of Variable Interest Entities. The FASB has issued an exposure draft on this topic with comments due by
November 14, 2008. The ultimate impact, if any, of these deliberations on our accounting practices is uncertain as of November 10, 2008. If we were required to consolidate the
financial results of one or more trusts with our own financial results as a result of amendments or changes in accounting rules, or if the SEC or other accounting authorities do not agree with our
current approach, our financial results could be adversely affected. Our near-term financial results could also be adversely affected if we were to conduct future securitization
transactions, or alternative funding transactions, as "on balance sheet" financing transactions.

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

Private student loans typically carry floating interest rates tied to prevailing short-term interest rates. Higher interest rates would
increase the cost of the loan to the borrower, which in turn, could cause an increase in default rates for outstanding student loans. In addition, higher interest rates, or the perception that
interest rates could increase in the future, could cause an increase in prepayments, including full or partial prepayments or prepayments as a result of loan consolidation activity. In particular,
prepayments may increase during periods in which long-term interest rates, such as interest

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rates
on mortgages, are lower than short-term interest rates, including rates on student loans. If the prepayment or default rates increase for the student loans held by the securitization
trusts, we may experience a decline in the value of our additional structural advisory fees and residuals receivable, which could cause a decline in the price of our common stock and could cause
future securitization transactions to be less profitable for us. In addition, an increase in interest rates could
reduce borrowing for education generally, which, in turn, could cause the overall demand for our services to decline.

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

We may require additional funds for our programs, our operating expenses, the pursuit of regulatory approvals, acquisition
opportunities and the expansion of our capabilities. Historically, we have satisfied our funding needs primarily through student loan asset-backed securitizations. The securitization market has not
been available to us and may not be available to us when needed in the future, and, if available, the terms may not be acceptable to us. We have also satisfied our funding needs through equity
financings. Pursuant to an investment agreement with affiliates of GSCP, we received aggregate gross proceeds of approximately $192.5 million, $59.8 million of which was received in
December 2007 and $132.7 million of which was received on August 18, 2008, in connection with the sale of equity securities to the purchasers. We cannot assure you that the
proceeds of the equity investment by affiliates of GSCP will be sufficient to satisfy our liquidity needs or capital funding requirements beyond fiscal 2009, particularly in the event of a prolonged
dislocation in the private student loan ABS market. Our short-term needs also remain subject to uncertainties regarding regulatory capital requirements of Union Federal. Union Federal's
regulatory authorities have from time to time requested that we provide additional capital to Union Federal. If the OTS or FDIC were to require additional infusions of regulatory capital by us into
Union Federal, our short-term liquidity needs would be adversely affected. Insufficient funds could require us to delay, scale back or eliminate certain of our programs and further scale
back our expenses.

Risks Related to the TERI Reorganization

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

We have historically structured and supported private student loan programs for commercial banks, including JPMorgan Chase, Bank of
America and RBS. Structural advisory fees and residuals from securitization of JPMorgan Chase loans represented approximately 34% of our total securitization-related fees from the trusts used to
securitize student loans during fiscal 2008 and approximately 29% of our total revenue for fiscal 2007. Structural advisory fees and residuals from securitization of Bank of America loans represented
approximately 20% of our total
securitization-related fees from the trusts used to securitize student loans during fiscal 2008 and approximately 15% of total revenue for fiscal 2007. We also historically structured and supported
private student loan programs for companies such as NextStudent Inc. that assisted lenders such as RBS in marketing their programs to customers. Structural advisory fees and residuals from
securitization of RBS loans, including loans funded by RBS but marketed by third parties on behalf of RBS, represented approximately 23% of our total securitization-related fees from the trusts used
to securitize student loans during fiscal 2008 and approximately 24% of total revenue for fiscal 2007.

Certain
of our client agreements provided for termination rights in the event of the filing by TERI of a voluntary petition under federal bankruptcy laws. In April 2008, we
received notice that Bank of America elected to terminate its agreements with us due to the TERI Reorganization and RBS elected to terminate certain agreements with our clients and us. In
July 2008, our note purchase agreement with JPMorgan Chase was terminated in the context of the TERI Reorganization. Loans originated by Bank of America and RBS represented approximately 29%
and 30%, respectively, of our total principal

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amount
of loans facilitated and available for securitization as of September 30, 2008. Loans originated by JPMorgan Chase are no longer available for securitization as a result the termination
of our note purchase agreement with JPMorgan Chase.

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

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

Our master servicing agreement, master loan guaranty agreement and database sale and supplementation agreement, with TERI terminated effective as of May 31, 2008.

TERI has historically been the exclusive third party provider of borrower default guarantees for our clients' private label loans. In
addition, we had an agreement to provide various loan origination services for TERI and an agreement to receive from TERI updated information about the performance of the student loans it had
guaranteed, to allow us to supplement our database. In June 2008, in the context of the TERI Reorganization, the Bankruptcy Court entered an order approving a motion by TERI terminating our
"master" agreements. As a result of the terminations, our business has been and could continue to be adversely affected for the following reasons:



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

The TERI Reorganization will adversely affect our ability to facilitate the securitization of TERI-guaranteed loans, and could adversely affect our residual
interests in securitization trusts.

In its role as guarantor in the private education lending market, TERI has agreed to reimburse lenders for unpaid principal and
interest on defaulted loans. TERI has historically been the exclusive

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provider
of borrower default guarantees for our clients' private label loans. We expect the TERI Reorganization to adversely affect our ability to facilitate the securitization of
TERI-guaranteed loans. In particular, we expect investors to ascribe little or no value to the TERI-guaranty beyond a trust's pledged account. As a result, in structuring
future securitizations of TERI-guaranteed loans, if any, we will likely be required to reduce or eliminate our up-front structural advisory fee in order to increase the level
of reserves available to the trust. In addition, it is likely that we would need to obtain additional credit enhancement for any future securitizations of TERI-guaranteed loans, the cost
of which would also result in lower revenues.

To
the extent the pledged account or other reserves available to a particular securitization trust were exhausted and loan defaults continued to occur, that trust would have a claim as
an unsecured creditor of TERI in the context of the TERI Reorganization. If TERI's general reserves are insufficient to satisfy the guaranty claims, loan defaults would have a further adverse affect
on the amount or timing of residual cash flows that we would otherwise expect to receive from the trust.

In
April and May 2008, the Bankruptcy Court issued interim orders prohibiting TERI from withdrawing any amounts from its segregated reserve accounts until further order by the Bankruptcy
Court. In June 2008, the Bankruptcy Court entered an order approving a motion by TERI to honor its guaranty agreement obligations using cash in pledged accounts established for the benefit of certain
securitization trusts. The order was granted subject to the following:



The
Bankruptcy Court, with the assent of all affected parties, subsequently extended until December 1, 2008 the rights to challenge the trusts' security interests in the
collateral securing TERI's guaranty obligations other than the pledged accounts, notably recoveries. Extension of the objection deadline will allow the creditors committee additional time to review
and discuss its potential objections with the affected parties.

If
the creditors committee or any other party were successful in challenging the trusts' security interests in the post-petition transfers to the pledged accounts or other
collateral, including recoveries, the amount of pledged collateral available exclusively to a particular securitization trust to satisfy TERI's guaranty obligations to that trust would decrease
materially. As a result, the trust's unsecured claims against TERI would increase proportionately. For example, recoveries from defaulted student loans, which have historically been used to replenish
a particular trust's pledged account, would instead become an asset of TERI's bankruptcy estate and available to satisfy administrative claims of TERI's bankruptcy estate and other holders of claims
in accordance with the priorities established by the Bankruptcy Code. In addition, TERI may seek to reject its guaranty obligations entirely in the context of the TERI Reorganization. Any of these
developments would decrease materially our service receivables and could further harm our ability to structure securitizations in the future.

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Risks Related to Our Industry, Business and Operations

Challenges exist in implementing revisions to our business model.

Historically, our net income has been derived almost exclusively from structuring securitizations of our clients' private student
loans. We have been unable to access the securitization market as a result of market disruptions that began in the second quarter of fiscal 2008, accelerated during the subsequent periods and
persist as of the date of this report. That inability, together with the TERI Reorganization, has impacted our client relationships, resulted in the termination of certain material client agreements,
reduced our facilitated loan volume and challenged our business prospects. We have refined our business model in order to address the challenges currently facing us. Our revised business model
includes fee-for-service sales of our capabilities, including loan origination and disbursement, program design, risk management and portfolio management. In addition, we have
developed a private label loan program that would not require a guaranty from a third party. Successful sales of these services will be critical in order to grow our revenues and client base in the
future. We have limited experience with the new private loan program and our fee-for-service business strategy, and we are uncertain of the level of interest from former,
current or prospective clients with regard to the new program or offered services.

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

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

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

We offer our clients and prospective clients, national and regional financial institutions and educational institutions, services in
structuring and supporting their private education loan programs. The outsourcing services market in which we operate includes a large number of service providers, some of which have greater
financial, technical and marketing resources, larger customer bases, greater name recognition and more established relationships with their clients than we have. Larger competitors with greater
financial resources may be better able than we are to overcome capital markets dislocations, respond to the need for technological changes, compete for skilled professionals, build upon efficiencies
based on a larger volume of loan transactions, fund internal growth and compete for market share generally. We may face competition from our clients or former clients if they choose, or acquire the
ability to provide directly the services that we provide, or formerly provided, to them. In addition, to the extent that Union Federal provides student loans directly to consumers, we would compete
directly with clients and former clients. We may face competition from third parties who decide to expand their services to include the suite of services that we provide. We are aware of four
principal competitors, Sallie Mae, Wells Fargo Company, Discover Financial Services, and Student Loan Corporation, an 80% owned subsidiary of Citibank, N.A., that offer a similar range of services to
lenders. Our business could also be adversely affected if Sallie Mae's program to market private student loans directly to consumers continues to grow, if Sallie Mae seeks to market more aggressively

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to
third parties the full range of services for private loan programs that we provide or if Sallie Mae's private loan consolidation product results in increased consolidation of private student loans
held by the securitization trusts we have facilitated. Sallie Mae has announced that it intends to focus increasingly on originating private student loans both through the school channel and the
direct to consumer channel. If we are not able to compete effectively, our revenue and results of operations may be adversely affected. In addition, if third parties choose to provide the range of
services that we provide, pricing for our services may become more competitive, which could lower our profitability.

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

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

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

We focus our business exclusively on the market for private education loans, and more than 90% of our business is concentrated in loan
programs for post-secondary education. The availability and terms of loans that the government originates or guarantees affects the demand for private student loans because students and
their families often rely on private loans to bridge a gap between available funds, including family savings, grants and federal and state loans, and the costs of post-secondary education.
The federal government currently places both annual and aggregate limitations on the amount of federal loans that any student can receive and determines the criteria for student eligibility. These
guidelines are generally adjusted in connection with funding authorizations from the United States Congress for programs under the Higher Education Act. The Deficit Reduction Act of 2005 increased
amounts that first and second year college students may borrow and made PLUS loans available to graduate and professional students. Loans to fund graduate level education represented approximately 10%
during fiscal 2008 and 11% during fiscal 2007 of our total loan facilitation volume. The loan limit increases took effect July 1, 2007 while most other provisions took effect
July 1, 2006. Recent federal legislation expands federal grant and loan assistance, which could weaken the demand for private student loans. In addition, legislation such as the College Cost
Reduction and Access Act of 2007 has significantly reduced the profit margins of traditional providers of federal loans, which could result in increased competition in the market for private student
loans, which could adversely affect the volume of private loans and the securitization transactions that we facilitate and structure and, as a result, the growth of our business. Bills recently passed
by the U.S. Senate and the House of Representatives, intended to inject liquidity into the student loan asset-backed securitization market, would enable the Department of Education
to buy only federally guaranteed student loans, not private student loans. On May 7, 2008, the President signed into law the "Ensuring Continued Access to Student Loans Act of 2008," which
contains provisions which might adversely impact the demand for private education loans and outsourcing services provided by us, availability and flow of funds for private education loans, and our
liquidity position. Among other things, the Act:



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On
August 14, 2008, President Bush signed the Higher Education Opportunity Act, which will:



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

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



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

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

We have in the past, and will continue in the future, to rely on our clients to market and originate education loans to student
borrowers. If they do not devote sufficient time and resources to their marketing efforts, or if they are otherwise not successful in these efforts, then we may experience a reduction in the volume of
loans that we process and securitize, and our business will
be adversely affected. Certain of our clients have terminated their marketing coordination agreements with us, and additional clients that have not terminated their agreements have suspended their
marketing of TERI-guaranteed loan programs as a result of the TERI Reorganization or instructed TERI to stop accepting applications for TERI-guaranteed loans.

In
addition, if the loans were marketed by our clients in a manner that is unfair or deceptive, or if the marketing, origination or servicing violated any applicable law, state unfair
and deceptive practices acts could impose liability on a securitization trust holding the loan or create defenses to the enforceability of the loan. In response to recent legislative initiatives,
lenders may increasingly focus on the direct to consumer marketing channel, increasing competition within the channel for private student loans. Investigations by the New York Attorney General, the
Attorneys General of other states, the United States Congress or others could have a negative impact on the ability of our clients, and Union Federal, to market student loans. The Higher Education
Opportunity Act of 2008 creates significant additional restrictions on the marketing of private student loans.

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

During the last two quarters of fiscal 2008, we announced a reduction in our overall cost structure, including the reduction of
headcount by over 600 employees. In September 2008 and November 2008, we further reduced headcount by approximately 100 employees, including the departures of our former Chief Executive Officer, Chief
Financial Officer, Chief Administrative Officer, Chief Information Officer and Chief Marketing Officer. Following these reductions, we had 241 full-time employees, compared to 1,031 full-time
employees as of September 30, 2007. Our cost reduction measures will place a strain on our management, systems and resources at a critical point in our business and industry. We must develop
alternatives to the loan guaranty and origination services that TERI has historically provided to our clients, and we must refine our business development capabilities, our systems and processes and
our access to financing sources. We must retain, train, supervise and manage our remaining employees during this period of change in our business.

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

We
cannot assure you that we will be able to:



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

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

We own a proprietary database of historical information on private student loan performance that we use to help us establish the
pricing provisions of new loan programs on behalf of lenders, determine the terms of securitization transactions and establish the fair value of the structural advisory fees and residuals that we
recognize as revenue. We also have developed a proprietary loan information processing system to enhance our application processing and loan origination capabilities. Our student loan database and
loan information processing system provide us with a competitive advantage in offering our services. Third parties could create or acquire databases and systems such as ours. For example, as lenders
and other organizations in the student loan market originate or service loans, they compile over time information for their own student loan performance database. If a third party creates or acquires
a student loan database or develops a loan information processing system, our competitive positioning, ability to attract new clients and business could be adversely affected. As a result of the
termination of our agreements with TERI in the context of the TERI Reorganization, we have lost access to continuing updates to the database of TERI-guaranteed loan performance data with
regard to TERI-guaranteed loans that are neither held by securitization trusts facilitated by us nor Union Federal.

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

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

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

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

Our ability to handle an increasing volume of transactions is based in large part on the systems and processes we have implemented and
developed. The loan origination process is becoming increasingly dependent upon technological advancement such as the ability to process loans over the Internet, accept electronic signatures and
provide process updates instantly. Our future success depends in part on our ability to develop and implement technology solutions that anticipate and keep pace with these and other continuing changes
in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely basis. If competitors introduce products, services,
systems and processes that are better than ours or that gain greater market acceptance, those that we offer or use may become obsolete or noncompetitive. Any one of these circumstances could have a
material adverse effect on our ability to obtain and retain key clients.

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

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

As of September 30, 2008, PHEAA serviced a substantial majority of loans held by the securitization trusts that we administer.
This arrangement allows us to avoid the overhead investment in servicing operations but requires us to rely on PHEAA to adequately service the trusts' student loans, including collecting payments,
responding to borrower inquiries and communicating with borrowers whose loans have become delinquent. Our reliance on an external service provider for loan servicing subjects us to risks associated
with inadequate or untimely services, including notice of developments in prepayments, delinquencies and defaults. A substantial increase in these rates could adversely affect our ability to access
profitably the securitization markets for our clients' loans and the value of our additional structural advisory fees and residuals receivables. In addition, if PHEAA were to fail to comply with
TERI's servicing guidelines in servicing securitized TERI-guaranteed student loans, TERI

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would
not be obligated to make guaranty payments on such loans, in which case PHEAA would be obligated to cure the noncompliance or purchase the loans. Such an event could have a negative impact on
the value of our residuals and additional structural advisory fee receivables. If our relationship with PHEAA terminates, we would either need to expand or develop a relationship with another loan
servicer, which could be time consuming and costly. In such event, our business could be adversely affected. Although we periodically review the costs associated with establishing servicing operations
to service loans, we have no plans to establish and perform servicing operations at this time.

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

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

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

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

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Risks Relating to Regulatory Matters

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

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

In
addition, Union Federal is subject to extensive regulation, supervision and examination by the OTS and the FDIC. Such regulation covers all banking business, including activities and
investments, lending practices, safeguarding deposits, capitalization, risk management policies and procedures, relationships with affiliated companies, recordkeeping and conduct and qualifications of
personnel. In particular, the failure to meet minimum capital requirements could initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have
a direct material adverse effect on our operations and financial statements. As a result of disruptions in the ABS market, we have been unable to facilitate the securitization of private student loans
originated by Union Federal since September 2007. The OTS has expressed concern over the situation and could require additional infusions of regulatory capital into Union Federal in the future, which
would erode our liquidity position. Other regulatory sanctions are available to the OTS in order to protect the safety and soundness of the institutions that it regulates. In addition, Union Federal
will not be permitted to serve as a meaningful funding lender in our new private loan program until it improves its funding capacity.

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

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

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

All
of our operations relating to education loan processing are located in Massachusetts. In 2001, we received determination letters from the Massachusetts Division of Banks confirming
that the loan origination outsourcing services provided under contract to TERI by First Marblehead Education

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

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

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



As
a federally chartered institution, Union Federal, including its operating subsidiary FM Loan Origination Services, LLC, or FMLOS, may conduct its business without regard to
such state licensing laws and requirements. We expect to provide outsourced student loan origination services through Union Federal or FMLOS on a fee-for-service basis. To the
extent that these activities are conducted through Union Federal or FMLOS, we believe state regulatory requirements affecting loan brokers, small lenders and credit services organizations will be less
likely to be asserted.

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

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

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comply
with our obligations with respect to these third parties, we could be subject to civil or criminal liability.

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

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

The
risk of noncompliance with regulatory requirements by our lender clients and their marketing partners has been highlighted by recent state and federal investigations into education
loan marketing practices, particularly the payment of marketing fees directly to schools in exchange for loan referrals. None of our contracts with lenders or marketers involves the payment of fees to
schools for loan
volume. State and federal regulatory authorities have sought information from some of our former clients and us regarding the loan programs we coordinate, and it is possible that some marketing or
underwriting practices associated with the programs we coordinate and assets we securitize will be challenged as a result of such investigations. On August 31, 2007 we announced that, as part
of the New York Attorney General's ongoing investigation of several lending, educational, and nonprofit institutions, we had received a subpoena for information regarding our role in the student loan
industry. As of the date of this report, we continue to work with the New York Attorney General's office regarding the investigation.

The
regulatory actions described above have also prompted state and federal legislation that will affect our operations. The State of New York has enacted legislation that may impede
accepted marketing practices in the school channel, such as school endorsement of loan products that the school believes are beneficial to students. In addition, the New York legislation will require
additional disclosures that will increase our costs. Similarly, the Higher Education Opportunity Act of 2008 amended the federal Truth-in-Lending Act to add new
disclosures and procedural requirements for marketing and originating private student loans.

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

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

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

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

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

Risks Relating to Ownership of Our Common Stock

The price of our common stock may be volatile.

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



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In
the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been brought against that company. Due to the
recent volatility of our stock price, we have become the target of securities litigation. In April and May 2008, seven purported class actions were filed against us and certain of our current and
former officers and certain of our directors in the United States District Court for the District of Massachusetts. The plaintiffs allege, among other things, that the defendants made false and
misleading statements and failed to disclose material information in various SEC filings, press releases and other public statements. The complaints allege various claims under the Exchange Act and
Rule 10b-5 promulgated thereunder. The complaints seek, among other relief, class certification, unspecified damages, fees and such other relief as the court may deem just and
proper. In August 2008, the court consolidated these cases and appointed lead plaintiffs and a lead counsel. A consolidated amended complaint is due to be filed on November 28, 2008. A
class had not been certified in the actions as of November 10, 2008. In addition, three federal derivative lawsuits, and one state derivative lawsuit, have been filed against certain of our
current and former officers and directors and nominally against us in the United States District Court for the District of Massachusetts and Massachusetts Superior Court, respectively. The derivative
complaints allege various violations of federal and state law, including violations of the Exchange Act, breaches of fiduciary duties, waste of corporate assets and unjust enrichment. The derivative
complaints seek a monetary judgment, injunctive relief, restitution, disgorgement and a variety of purported corporate governance reforms. In August 2008, the federal court consolidated the
federal derivative cases and stayed them pending resolution of the purported class actions described above. In October 2008, the state court stayed the state derivative action until
January 5, 2009.

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

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

Our directors and executive officers, and entities affiliated with them, beneficially owned approximately 26% of the outstanding
shares of our common stock as of November 10, 2008. During the first quarter of fiscal 2009, affiliates of GSCP were issued shares of preferred stock convertible into approximately
8.8 million shares of our common stock, and Daniel Meyers, who began serving as our President and Chief Executive Officer effective September 1, 2008, was granted stock options
potentially exercisable for 6.0 million shares of our 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:



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

(a)   Recent Sales of Unregistered Securities

We refer you to our current report on Form 8-K filed with the SEC on August 18, 2008.

(b)   Use of Proceeds from Sale of Registered Securities

In our initial public offering, or IPO, we sold 11,859,375 shares of common stock, including an over-allotment option of
1,547,625 shares, pursuant to a registration statement on Form S-1 (File No. 333-108531) that was declared effective by the SEC on
October 30, 2003. We received aggregate net proceeds of approximately $115.1 million, after deducting underwriting discounts and commissions of approximately $8.9 million and
expenses of the offering of approximately $2.5 million. From the effective date of the registration statement through September 30, 2008, we have spent approximately $90.8 million
of the net proceeds from the IPO, which have been used for general corporate purposes. None of the net proceeds of the IPO has been paid by us, directly or indirectly, to any director, officer, or
general partner of us, or any of their associates, or to any person owning ten percent or more of any class of our equities securities or any of our affiliates.

(c)   Issuer Purchases of Equity Securities

On April 24, 2007, our board of directors authorized the repurchase of up to an aggregate of 10,000,000 shares of our common stock. The
10,000,000 shares authorized for repurchase on April 24, 2007 included 3,393,300 shares available for repurchase under the previously authorized repurchase plan.
The current repurchase program does not have a fixed expiration date. We did not repurchase any shares of common stock pursuant to this program during the first quarter of fiscal 2009. Through
September 30, 2008, we had repurchased an aggregate of 1,169,100 shares under this program at an average price paid per share, excluding commissions, of $36.17. As of
September 30, 2008, 8,830,900 shares of our common stock may yet be purchased under this program.

During
the first quarter of fiscal 2009 we repurchased 72,057 shares from employees who elected to withhold such shares to satisfy statutory minimum tax withholding
obligations in connection with the vesting of restricted stock units.

Item 6Exhibits

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

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SIGNATURES

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

THE FIRST MARBLEHEAD CORPORATIONDate: November 10, 2008

By:

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


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EXHIBIT INDEX

Exhibit
Number

Description10.1(1)#

Employment Agreement, dated as of August 18, 2008, between the registrant and Daniel Meyers10.2(1)#

Indemnification Agreement, dated as of August 18, 2008, between the registrant and Daniel Meyers10.3(1)#

Form of Non-Statutory Stock Option Agreement for $6.00 Stock Options between the registrant and Daniel Meyers10.4(1)#

Form of Non-Statutory Stock Option Agreement for $12.00 and $16.00 Stock Options between the registrant and Daniel Meyers10.5(2)#

Letter agreement, entered into by and between the registrant and Jack L. Kopnisky on September 11, 200810.6(3)#

Letter agreement, entered into by and between the registrant and Anne P. Bowen on September 30, 200810.7(3)#

Letter agreement, entered into by and between the registrant and Greg D. Johnson on September 30, 200810.8(3)#

Letter agreement, entered into by and between the registrant and John A. Hupalo on October 3, 200810.9(1)

Amendment No. 2, dated August 18, 2008, to the Investment Agreement, dated December 21, 2007, among the registrant and GS Parthenon A, L.P., and GS Parthenon B,
 L.P.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 200231.2

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

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

Chief Financial OfficerCertification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200299.1(4)

Trust static pool data as of September 30, 200899.2(4)

Supplemental presentation


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