*Table
        of Contents*







**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM 10-K**




**x**
            
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934****For
                the fiscal year ended June 30, 2008****o**
            
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934****For
                the transition period from
                              
                to**


**Commission
      File Number 001-33073**





**MRU
      HOLDINGS, INC.**


(Exact
      name of registrant as specified in its charter)




**Delaware**
            
            **33-0954381**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer Identification No.)**590
                Madison Avenue, 13th Floor, New York, NY**
            
            **10022**(Address
                of principal executive offices)
            
            (Zip
                Code)




Registrant’s
      telephone number, including area code: **(212)
      398-1780**


Securities
      registered pursuant to Section 12(b) of the Act:




**Title
                of Each Class**
            
            **Name
                of Each Exchange**
              **on
                Which Registered**common
                stock, par value $0.001 per share
            
            The
                NASDAQ Global Market


Securities
      registered pursuant to Section 12(g) of the
      Act:  None




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities
      Act.   Yes o No x




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange
      Act.   Yes o No x




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 the filing
      requirements for at least the past 90
      days.   Yes x No o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
      be contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this
      Form 10-K or any amendment to this Form 10 ‐ K. 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):












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        of Contents*






Large
                accelerated filero
            Accelerated
                filerx
            Non-accelerated
                filero
            Smaller
                reporting companyo




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





**MARKET
      VALUE**





The
      aggregate market value of the outstanding common stock held by non-affiliates
      of
      the registrant was approximately $92,389,784 as
      of
      December 31, 2007 (the last business day of the registrant’s most recently
      completed second fiscal quarter) based on the closing sale price on The NASDAQ
      Stock Market on that date.





**OUTSTANDING
      STOCK**




As
      of
      September 12, 2008 there were 31,721,174 outstanding
      shares of the registrant’s common stock.





**DOCUMENTS
      INCORPORATED BY REFERENCE**




Part III
      incorporates information by reference from the registrant’s definitive proxy
      statement to be filed with the Securities and Exchange Commission within 120
      days after the close of the registrant’s fiscal year.





*Table
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**MRU
      HOLDINGS, INC.**





**Table
      of Contents**




**PART
                I**
            
            1Item
                1.
            Business
            1Item
                1A.
            Risk
                Factors
            19Item
                1B.
            Unresolved
                Staff Comments
            38Item
                2.
            Properties
            38Item
                3.
            Legal
                Proceedings
            38Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            38**PART
                II**
            
            39Item
                5.
            Market
                for the Registrant’s Common Equity, Related
                Stockholder Matters and Issuer Purchases of Equity
                Securities
            39Item
                6.
            Selected
                Financial Data
            40Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            41Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            57Item
                8.
            Financial
                Statements and Supplementary
                Data
            57Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            58Item
                9A.
            Controls
                and Procedures
            58Item
                9B.
            Other
                Information
            59**PART
                III**
            
            61Item
                10.
            Directors,
                Executive Officers and Corporate
                Governance
            61Item
                11.
            Executive
                Compensation
            61Item
                12.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            61Item
                13.
            Certain
                Relationships and Related Transactions, and
                Director Independence
            61Item
                14.
            Principal
                Accounting Fees and Services
            61**PART
                IV**
            
            62Item
                15.
            Exhibits,
                Financial Statement Schedules
            62Signatures
            
            68Index
                to Consolidated Financial
                Statements
            F-1







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**FORWARD
      LOOKING INFORMATION**





Our
      Annual Report on Form l0-K for the year ended June 30, 2008, our 2008
      Annual Report to Stockholders, any of our Quarterly Reports on Form 10-Q or
      Current Reports on Form 8-K, or any other oral or written statements made
      in press releases or otherwise by or on behalf of MRU Holdings, Inc., may
      contain forward looking statements within the meaning of the Section 21E of
      the Securities and Exchange Act of 1934, as amended, (the “Exchange Act”) which
      involve certain risks and uncertainties. Forward looking statements predict
      or
      describe, among other things, our future operations, business plans, business
      and investment strategies. These forward looking statements are identified
      by
      their use of such terms and phrases as “intends,” “intend,” “intended,” “goal,”
“estimate,” “estimates,” “expects,” “expect,” “expected,” “project,”
“projected,” “projections,” “plans,” “seeks,” “anticipates,” “anticipated,”
“should,” “could,” “may,” “will,” “designed to,” “foreseeable future,”
“believe,” “believes” and “scheduled” and similar expressions or the negative of
      such expressions. Our actual results or outcomes may differ materially from
      those anticipated. Some, but not all, of the factors that might cause such
      differences include the risk factors set forth below under the caption “Risk
      Factors” in Item 1A of Part I of this annual report which you should carefully
      read and consider. Readers are cautioned not to place undue reliance on these
      forward looking statements, which speak only as of the date the statement was
      made. We undertake no obligation to publicly update or revise any forward
      looking statements, whether as a result of new information, future events or
      otherwise.





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**PART
      I**





**Item
      1.****Business.**





References
      herein to “we,” “us,” “our,” “MRU” or “the Company” refer to MRU Holdings, Inc.
      and its subsidiaries unless the context specifically requires
      otherwise.





The
      following discussion describes the operation of our business before we paused
      our origination activities on September 5, 2008 and before our ability to fund
      loans through our primary warehouse facility was halted on September 8, 2008
      and
      how we expect to operate our business upon receipt of additional financing; the
      Company will not be able to originate new loans until it raises additional
      equity capital and/or obtains additional warehouse financing .
      We
      continue to provide software and services to admissions offices through our
      wholly owned subsidiary, Embark Corp., and provide students with information
      through our Embark.com website as discussed below. Please
      s ee
“Item
      7. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations - Liquidity and Capital Resources.”





***Overview***





We
      are a
      specialty consumer finance company that facilitates and provides students with
      funds for higher education. Equipped with proprietary analytical models and
      decision tools, we provide customized financial products to students in what
      we
      believe is a more competitive and customer-friendly manner. Since launching
      our
      private loan product in May 2005, we have originated over $420 million of
      private student loans and approximately $40 million of federal student
      loans.





We
      structure, market, and perform substantially all aspects of student loan
      origination, including underwriting and verification, for our student loan
      programs. All the private student loans are disbursed by Doral Bank, FSB (the
      “Bank”), a federally-chartered savings bank, pursuant to origination agreements
      with MRU. We then purchase the loans from the Bank through one of our special
      purpose funding subsidiaries or affiliates pursuant to purchase agreements
      we
      have with the Bank. These private student loans are purchased with funds
      borrowed from one of our warehouse loan facilities and with our or our
      affiliates’ equity capital. To provide for permanent financing, we have
      securitized these private student loans in the past. In the future, we plan
      to
      securitize or sell all of our student loan products. We outsource the
      servicing and collections to third parties who are experienced in servicing
      and
      collecting both federal and private student loans. We monitor the performance
      of
      our student loans to ensure proper servicing and to improve our underwriting
      criteria.





We
      take a
      highly focused approach to marketing, while maintaining one of the more diverse
      sourcing channels in the industry. Of the approximately 6,400 accredited
      institutions of higher education in the United States, we focus on a targeted
      subset of approximately 2,200 undergraduate, graduate and professional schools.
      The targeted professional graduate disciplines include law, business
      administration, engineering and medicine. We market directly to students using
      marketing channels such as Internet search, print advertising, direct mail,
      and
      our branded MyRichUncle® web site (www.myrichuncle.com). In addition, we have
      developed indirect origination sources, including referrals from third-party
      marketing companies for whom we may provide private-labeled student loan
      products.





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We
      utilize a unique and proprietary underwriting model, combining traditional
      credit scoring methods with a proprietary underwriting matrix, which considers
      factors such as the private student loan applicant’s academic data, prior work
      experience, and the educational institution they are attending. We also generate
      our own credit and repayment capability index, which we believe to be predictive
      in determining an applicant’s future repayment capabilities. Our private student
      loan underwriting approach can also offer students, who would otherwise not
      qualify under more traditional credit scoring methods, an opportunity to obtain
      funds for their education. In addition, we can price private student loans
      competitively for students who would be viewed as undifferentiated under more
      traditional methods. We believe our proprietary underwriting process adds
      another layer of analytical precision to traditional evaluation tools, helping
      us make more informed lending decisions.





We
      are an
      analytical and technology oriented company. Over the three years that we have
      operated our student loan programs, we have increasingly refined and automated
      our operating procedures. This process has allowed us to increase productivity,
      reduce headcount and significantly reduce our marginal cost to originate a
      loan.




As
      a
      specialty consumer finance company, we have traditionally utilized a high degree
      of leverage in our business. Under their original terms, our warehouse loan
      facilities allowed us to borrow in excess of our cash basis in the student
      loans
      serving as collateral for those facilities, effectively providing us with some
      working capital in addition to funding. When we sold our private student loans
      into our first securitization in June 2007, the transaction structure paid
      us a
      premium to par for our student loans, providing additional working capital
      funding.





A
      few
      months after we completed our first securitization, the credit and capital
      markets began to deteriorate on a global basis, triggered initially by credit
      problems in the United States subprime residential mortgage sector. As
      the
      year progressed, the “subprime contagion” spread to virtually every debt market,
      including the market for student loan backed securities, causing dramatic
      declines in asset prices, widespread illiquidity and massive losses at many
      financial institutions.  The auction rate market, a major source of
      funding for the student loan industry through which we had financed the majority
      of our first securitization of private student loans, ceased to function, and
      in
      February 2008 most broker-dealers ceased supporting these auctions. The failure
      of the capital markets has correspondingly severely contracted banks’ and
      hedge-funds’ ability and willingness to lend, making the procurement of
      additional short-term financing extremely difficult, and if available, more
      expensive and capital intensive.





In
      order
      to adapt our business model to the new realities of the capital markets, we
      undertook the following:





·
            We
                were able to have our warehouse loan facility (the “Merrill Facility”)
                from Merrill Lynch Bank USA (“MLBU”) extended in October 2007, December
                2007 and again in July 2008, by agreeing to pay a higher cost of
                funds and
                by lowering the advance rate (i.e. the amount that we may borrow,
                expressed as a percentage of the principal balance of a loan ). In
                September 2008, MLBU agreed to extend this facility until November
                25,
                2008.




·
            In
                October 2007, we issued $11.2 million of senior secured notes (the
“Senior
                Secured Notes”), secured by the residual from our 2007 securitization, to
                a hedge fund to raise additional working
                capital.




·
            In
                October 2007, we expanded our warehouse loan facility from DZ Bank
                AG's
                Conduit, Autobahn Funding Company, LLC (“DZ Bank”) to be able to fund our
                origination and purchase of private student loans in addition to
                PrePrimeTM
                student loans







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and
      increased the commitment amount from $100 million to $200 million. The interest
      rate and advance rate for the warehouse loan facility were at current market
      terms, but were locked in until the facility maturity date in April 2012. On
      September 8, 2008, DZ Bank notified us that we could no longer draw funds from
      this warehouse loan facility until we are in compliance with certain covenants
      of the warehouse loan facility relating to our tangible net worth and liquidity
      ratio.




·
            In
                November 2007, we raised approximately $23.5 million in net proceeds
                for
                working capital through a private sale of 5,180,000 shares of common
                stock.




·
            In
                January and April 2008, we increased prospectively the weighted average
                annual interest rate and origination fee payable by borrowers on
                new
                private student loans we originate and purchase to absorb some of our
                increased cost of funds and lower advance rate for funding our loans.
                We
                again increased the interest rates and origination fees prospectively
                on
                private student loans we originate and purchase in August 2008 based
                upon
                the advance rate and pricing of our 2008
                securitization.




·
            In
                July 2008 we paused our origination of federal student loans in order
                to
                conserve our capital and liquidity. We may begin offering these loans
                again if market conditions for federal loans
                improve.




·
            In
                June 2008, we began marketing a second securitization of our private
                student loans. The transaction sold AAA through BBB-rated securities
                and
                an unrated subordinate bond, but the advance rate was much lower
                and the
                cost of funds much higher than our 2007 securitization, reflecting
                current
                market conditions. The transaction closed on July 10,
                2008.





We
      believe that the pricing of our securitization and the repricing of our private
      student loans has opened up the possibility of obtaining additional warehouse
      financing, but as of September 15, 2008, though discussions with several lenders
      continue, we have not been able to obtain a commitment for additional warehouse
      financing.





Going
      forward, while we have reduced our cost to originate a loan, have demonstrated
      our ability, subject to the availability of financing, to scale our business,
      and have increased the interest rates and loan origination fees payable by
      private student loan borrowers, without sacrificing credit quality, to pass
      along some of our increased cost of funds, we will need substantially more
      equity capital to operate our business. Because the advance rates, which is
      the
      amount that can be borrowed as a percentage of the balance of the student loan
      borrowed against, will be lower than it has been in the past for any
      securitization we may be able to execute and potentially much lower for any
      warehouse loan facility that we may be able to obtain, we will need additional
      equity capital to fund the cash disbursement of our assets and pay for all
      of
      our working capital needs.





***Industry
      Background***




According
      to the U.S. Department of Commerce, expenditures for post-secondary education
      in
      2007 totaled over $244 billion. Over the last decade, the increasing cost of
      higher education and government support for higher education has generated
      a
      substantial gap. This, coupled with increases in higher education enrollment,
      has led to substantial growth in the overall demand for financing for higher
      education, with the gap in funding estimated at approximately $113.5 billion
      in
      2007.





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The
      two
      main drivers of the size and growth of the post-secondary education finance
      market are enrollment and cost of attendance.





*Growth
      in Post-Secondary Enrollment.* According to the U.S. Department of Education, enrollment in post-secondary
      degree granting institutions increased by 23% from 1995 to 2005 and is projected
      to increase 17% between 2005 and 2016 (median projections increase).










*Cost
      of Education Outpacing Household Income Growth* ***.*** The
      College Board estimates that between the 1997-1998 and 2007-2008 academic years,
      the average cost of attendance increased on an inflation adjusted basis by
      approximately 41% and 29% at four-year public and private institutions,
      respectively. Furthermore, between the 2006-2007 and 2007-2008 academic
      years,





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the
      average cost of attendance for both public and private four-year institutions
      increased by 3.9% and 3.8%, respectively.










*Private
      Student Loans Growing As a Source of Funding.* With
      cost of higher education far exceeding growth in household income, federal,
      state and private sources provided approximately $149 billion in financial
      aid
      in the 2006-2007 academic year. Of this amount, loans represented approximately
      52%, or $78.1 billion, while grants, education tax credits and work-study made
      up the balance. The College Board estimates that private loans at approximately
      $18.5 billion contributed 12% of total funding in the 2006-2007 academic
      year.





Through
      June 30, 2008, the loan limits for government-guaranteed Federal Family
      Education Loan Program (“FFELP”) loans are $46,000 over four years for
      undergraduates, while the average cost of attendance at private universities
      is
      more than $30,000 per year. The rising cost of education, a widening funding
      gap
      and relatively slow growth of federal loans have all contributed to a strong
      demand for private student loans. As a result, over the past decade, the volume
      of private loans has increased at a compound annual growth rate (“CAGR”) of
      approximately 23%. This growth has far outpaced the CAGR in federal loan volume
      of approximately 4.9% over the same period.





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We
      estimate private student loans will grow at a rate of 20% per annum over the
      next 6 years, based upon growth in college population and cost of education
      and
      the expectation that the amount that can be borrowed by students and parents
      under the federal loan program will not increase materially.





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*Favorable
      Demographics of College Graduates.* Only 28%
      of the U.S. adult population has a bachelor’s or graduate degree.











Four-year
      college and graduate and professional school graduates have substantial earnings
      potential.





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Bachelor’s,
      masters and professional degree holders also tend to have more stable income,
      as
      overall they tend to experience a lower rate of unemployment.











We
      believe that these statistics support our belief that over the long term
      four-year college and graduate and professional school students should have
      ample capacity to repay their student loan borrowings.




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***MRU
      Product Offerings***




*Student
      Lending Business*





Our
      student loan product offerings include:





*Private
      Student Loans* .
      Private
      student loans provide financing to qualified students beyond what they can
      obtain through federal government-guaranteed student loans. Our private student
      loans are not guaranteed by the government or by any third-party guarantor.
      We
      structure, market, and perform substantially all aspects of origination,
      including underwriting and verification, for our private student loan programs
      through our relationship with the Bank, a federally-chartered savings bank.
      All
      the private loans are then disbursed by the Bank and we subsequently purchase
      the originated loans from the Bank after a holding period through one of our
      special purpose funding subsidiaries or affiliates. The loans are purchased
      with
      funds borrowed from one of our warehouse loan facilities and/or with our or
      our
      affiliates’ equity capital. Ultimately, we intend to either sell or securitize
      these loans. Over the last fourteen months, we have completed two
      securitizations of private student loans; the first securitization of $200
      million closed in June 2007 and the second securitization of $125 million closed
      in July 2008. On September 5, 2008, we paused the origination of private student
      loans, at which time we had approximately $13 million in available warehouse
      capacity for the funding of private student loans under our warehouse loan
      facility with DZ Bank. On September 8, 2008, DZ Bank notified us that we could
      no longer draw funds from our warehouse loan facility with DZ Bank until we
      are
      in compliance with certain covenants of the warehouse loan facility relating
      to
      our tangible net worth and liquidity ratio. We are working closely with a number
      of financial institutions to try to obtain funds that would enable us to resume
      originations and
      utilize the DZ warehouse loan facility, but as of yet we do not have any
      commitments for new funding.





*PrePrimeTM
      Student Loans* .
      We
      formerly originated certain private student loans to post-secondary school
      borrowers, who otherwise would be unable to meet more traditional private
      student loan underwriting criteria through no fault of their own, e.g., thin
      or
      no credit history, insufficient earnings history, etc. We originate PrePrimeTM
student loans for our affiliate, Education Empowerment Fund I, LLC, referred
      to
      as “EEF I, LLC,” an investment fund with capital primarily from third-party
      investors. We began originating and holding PrePrimeTM student loans in June
      2006. We have paused the origination of PrePrimeTM student loans. We are
      working closely with a number of financial institutions to try to obtain funds
      that would enable us to continue to accept new customers, but as of yet we
      do
      not have any commitments for new funding.





*Federal
      Loans* .
      To
      provide a “one-stop shop” for higher education finance, we also provided FFELP
      loans until July 2008. We were one of the few lenders to offer FFELP loans
      at a
      discount to maximum rates specified by law. Our discounting strategy was meant
      to build awareness of the MyRichUncle® brand and to provide convenience to
      consumers by providing them a single point of sale for all student loan
      products. As of July 2008, we no longer offer federal student loans. We may
      begin offering these loans again, if market conditions for federal loans
      improve.





*College
      Admissions Software Business*





Through
      our wholly owned subsidiary, Embark Corp., we sell a
      hosted
      service for various offices
      of interested colleges and universities as well
      as foundations and scholarship providers, referred to as
      institutions, a suite
      of services  in
      a
“Software as a  S ervice ”
model
      (formerly known as ASP model and now known as SaaS as typified by
      Salesforce.com) that
      help them manage the ir  office process es . 
      Embark Corp. creates web-based front-en d application or
      inquiry forms and related forms for Enrollment, Financial Aid, Housing, Medical,
      Parking, Fellowship, Alumni and Research as well as Event and Interview
      scheduling for these
      various offices that
      integrate seamlessly into the institution’s web
      site ,
      and
      then Embark
      Corp. hosts
      those forms for these
      offices which they utilize to collect





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information
      including essays and other required documentations  from applicants ,
      recommenders, and/or other institutions and then
      communicate status of process and missing information to the
      applicants.  Embark
      Corp. hosts the information and documents collected in its information system
      (RDBMS) and document management system (DMS). University
      admissions offices use the Embark Corp. hosted
      a pplication m anage ment  information
      system to  receive  those applications,
      make decisions on them using Embark
      Corp. hosted decision support system ,
      and
      then interact with the applicants about
      incomplete information and then the final status of the admissions either accepted ,
      wait
      listed, or
      rejected. Interested admissions offices enter into one
      or
      more year subscription contracts for Embark
      Corp.’s hosted services. In
      addition,  Embark Corp.’s hosted CRM provides institutions the ability to
      set up a sequence of actions to automate their candidate interaction processes
      including inviting them to attend an event or schedule an interview or
      audition.  Steps can be triggered by time or results from a previous
      step.  Embark Corp. just announced an additional hosted service for
      providing a hosted content management system (CMS) for institutions to integrate
      all the institution’s web presence into a single solution including integration
      online forms created by Embark. Embark integrates with the institution’s
      information system through a configuration driven export interface to provide
      a
      seamless movement of data throughout the institution.





In
      September 2007, our wholly-owned subsidiary Embark
      Online, Inc., launched
      Embark.com, an online destination site for people
      to research
      and appl y to
      colleges and
      follow a set of steps to successfully navigate their way to college including
      links to other service providers as needed to complete those steps . 
      Embark.com utilizes a hosted
      content management system (CMS) as well as a proprietary software to allow
      students to review
      information about over 5,500 institutions of higher learning and  to
      apply online or to send an inquiry to request a paper application or additional
      information.  S tudent s and
      their parents can
      pre-fill out a set of commonly requested information into a profile which will
      be automatically pre-populated into over 650 online applications to date to
      expedite the filling out forms for the typically 5 to 7 institutions that they
      apply to. Embark.com
      offers this service free of charge, but many applicants opt-in to receive
      information about financial services and other products and
      services . In
      addition, Embark Online also launched a Facebook ® application that allows Facebook ® users
      interested in the same institutions with additional services through
      Embark.com.





In
      the
      future, we intend to leverage our Embark subsidiary’s access to college-bound
      students and their parents who utilize Embark’s internet admissions portals to
      apply to colleges online. As of September 10, 2008, Embark has generated over
      4 5 0,000
      opted-in customers who are interested in receiving information about a variety
      of products and
      services relevant
      to college bound students, ranging from discounted student travel, marketing
      from schools who wish to attract students with their particular characteristics
      and financing for attending college. After
      just the first year of operation, Embark.com’s
      opted-in customer base to date represents approximately 7.5 %
      of the
      total number of students applying to college each year.


***Business
        Segments***
  Operating
        segments are components of an enterprise about which separate financial
        information is available that is regularly reviewed by the chief operating
        decision maker about how to allocate resources and in assessing performance.
        The
        Company has two reportable operating segments: MRU and Embark. The MRU reporting
        segment consists of the following products: Private Student Loans, PrePrimeTM Student
        Loans
        (through the Company’s affiliate, EEF I, LLC), and Federal Loans. The MRU
        reporting segment also includes the Company’s parent company operations. The
        Embark reporting segment includes Embark Corp. and Embark Online, Inc. For
        financial information regarding our business segments, please see Note 17
        to our
        financial statements.


***Company
      Operations***





We
      manage
      the marketing, origination (including underwriting and verification), and
      financing of our private student loan programs. All the private student loans
      are disbursed by the Bank, a federally chartered savings bank, pursuant to
      origination agreements with MRU. We then purchase the disbursed





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loans
      from the Bank through one of our special purpose funding subsidiaries or
      affiliates pursuant to purchase agreements we have with Doral. On September
      5,
      2008, we paused the origination of private student loans, at which time we
      had
      approximately $13 million in available warehouse capacity for the funding of
      private student loans under our loan facility with DZ Bank. On September 8,
      2008, DZ Bank notified us that we could no longer draw funds from our warehouse
      loan facility with DZ Bank until we are in compliance with certain covenants
      of
      the warehouse loan facility relating to our tangible net worth and liquidity
      ratio. We are working closely with a number of financial institutions to
      try to obtain funds that would enable us resume originations, but as of yet
      we
      do not have any commitments for new funding.





All
      of
      our federal loans have been disbursed by a bank serving as eligible lender
      trustee. After origination, the loans were acquired by one of MRU’s special
      purpose subsidiaries or affiliates and pledged to a warehouse loan facility
      for
      short-term financing prior to sale or securitization. MRU outsources the
      servicing and collection of the loans to experienced third-parties. As of July
      2008, we no longer offer federal student loans. We may begin offering these
      loans again, if market conditions for federal loans improve.




*Marketing*





We
      market
      private student loans under both our internally managed MyRichUncle ® brand
      and through at least one of our marketing partners’ private label brands.
      Approximately 80% of our loan volume comes from the MyRichUncle ® brand
      and 20% through private label partners’ brands. Direct marketing is accomplished
      through direct mail, Internet search, and print, radio, and on-campus
      advertising. Additional methods may be deployed in the future. Our private
      label
      partners are mostly Internet-based marketers who own attractive domain names
      for
      education finance. Borrowers come to the private label partners’ websites and
      are directed to a private label version of our loan application website,
      entering the same real-time origination cue as customers coming directly to www.myrichuncle.com .
      We
      handle all aspects of underwriting, origination, and verification for customers
      coming through private label sites; private label marketing partners only serve
      to direct volume to us. The private label partners are paid referral
      fees.





We
      have
      also developed two significant co-branded marketing partnerships. The first
      is
      with STA Travel, one of the world’s largest student and youth travel companies.
      STA Travel has more than 300 branches in 90 countries, including 70 in the
      United States, through which they service 2.5 million students each year. We
      also have a five year exclusive marketing agreement with The Princeton Review
      (“TPR”), a leading provider of standardized test preparation and educational
      services. We entered into this agreement with TPR in February 2007. TPR assists
      more than two million future undergraduate and graduate students each year.




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*Private
      Loan Origination*




The
      private student loan origination process has four phases: application in-take,
      credit underwriting, verification, and disbursement. Interested applicants
      apply
      through the Internet. Once all required application information, including
      a credit report, has been received, applicants meeting our underwriting criteria
      are notified of their conditional approval by email, through the Internet,
      by
      phone or by mail. An adverse action notification is sent to applicants not
      meeting the underwriting criteria; sole applicants who do not pass credit
      underwriting may be counteroffered to reapply with a co-borrower.
      Approved applicants are issued a loan agreement called the master promissory
      note, and instructions on how to proceed, detailing the necessary supporting
      documentation that must be submitted for verification along with the signed
      loan
      agreement. We also verify the enrollment of the applicant, the income and the
      identity of the applicant and, if applicable, the co-applicant. Once
      verification is successfully completed, the requested loan is set for
      disbursement pending no changes in the borrowers’ data and
      the
      delivery of all required disclosures. Disbursement is made directly to the
      borrower, with the exception that certain loans are disbursed to schools if
      requested by the borrower or the school. All disbursements are accompanied
      by
      Truth-in-Lending disclosures and instructions regarding the servicing of the
      loan.





*Eligibility
      Requirements*





In
      order
      to qualify, applicants must meet the following initial
      requirements:





·
            The
                student must be a student enrolled at least half time in good standing
                at
                an undergraduate or graduate program at a school listed on our approved
                school list, or in the case of bar examination loans, medical or
                dental
                board examination loans, or medical or dental residency loans, have
                been
                enrolled in a school on the approved school list within the past
                year.




·
            The
                program in which the student is enrolled must be a degree or certificate
                granting program at an accredited institution of higher education
                in the
                United States or Canada or abroad.




·
            The
                student must be of a minimum age required to enter into a legally
                enforceable contract or have a co-borrower of legal
                age.




·
            The
                student borrower must be a U.S. citizen or have a valid social security
                number or have a co-borrower who is a U.S. citizen or permanent
                resident.







*Credit
      Analysis*





To
      underwrite an application for a private student loan, a detailed credit report
      for the student borrower and, if applicable, the co-borrower will be obtained
      from a credit bureau. Based upon the credit report(s), either the student
      borrower or, if applicable, the co-borrower must pass certain credit
      requirements including (for example and without limitation): minimum credit
      score, minimum length of credit history excluding prior student loans, maximum
      delinquency experience in the past two years, no charge-offs or write-offs
      with
      the exception of *de*  *minimis* amounts
      in the past five years, and no foreclosures, repossession, bankruptcy or uncured
      default on an education loan in the past seven years. In addition to these
      credit criteria, either the student borrower or, if applicable, the co-borrower
      must meet minimum employment and income requirements. If a student borrower
      applying as a sole borrower does not pass the underwriting criteria, the
      applicant may be invited to re-apply with a co-borrower. The amount that a
      student borrower can borrow is limited to the lesser of the total cost of
      attendance (net of other funds available to the student borrower to meet the
      costs of attendance), and





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the
      amount allowable under a debt-to-income test. For students applying as sole
      borrowers, income may be based upon projected post-graduation income based
      upon
      the student’s field of study. If an applicant meets all of the underwriting
      criteria, but the loan amount requested exceeds the debt-to-income threshold,
      the application will be declined as requested and a counteroffer in the amount
      that meets the debt-to-income criteria will be made to the
      applicant.




*Verification*





After
      passing credit underwriting, a loan will be conditionally approved subject
      to
      verification of enrollment, identity, employment and income. Once the requested
      documentation is received, it is processed by the verification department.
      Final
      approval for all loans will require specific enrollment documentation verifying
      at least half-time enrollment in good standing at a school on our approved
      school list. Additionally, the student borrower and, if applicable, the
      co-borrower will be required to provide copies of acceptable government issued
      identification to verify identity. To verify income and employment, the student
      borrower and, if applicable, the co-borrower must provide copies of acceptable
      documentation including (for example), pay stubs, employment letters, or income
      tax filings. Income qualification for graduate student borrowers is based on
      their expected future income, which is determined by verification of the
      student’s program of study.





*Disbursement*





An
      approved loan that passes verification is scheduled for disbursement subject
      to
      no adverse change and the delivery of required disclosure documents.
      Disbursement is made directly to the borrower, with the exception that certain
      loans are disbursed to schools if requested by the borrower or by the school.
      All disbursements are accompanied by Truth-in-Lending disclosures and
      instructions regarding the servicing of the loan.





*PrePrime* *TM* *Loan
      Origination*





All
      borrowers who do not meet the criteria for our private student loans are
      evaluated for eligibility for a PrePrime TM student
      loan. The underwriting and verification process for PrePrime TM student
      loans is the same as for private student loans, with the exception that the
      school eligibility criteria is more stringent for PrePrime TM student
      loans and academic criteria are substituted for certain credit criteria in
      the
      underwriting process.





*Federal
      Loan Origination*





Applicants
      for any federal student loans offered by us apply through the MyRichUncle®
website. The application is sent directly to a third-party originating-servicer
      who follows the federal guidelines for FFELP lending, as outlined in the Higher
      Education Act (the “HEA”) and implementing regulations. The originating-servicer
      coordinates with the school to secure eligibility information for the loan,
      known as “school certification.” Once the loan is certified by the school, it is
      scheduled for disbursement with the school. All proceeds of federal student
      loans are disbursed directly to the school. As of July 2008, we no longer offer
      federal student loans. We may begin offering these loans again, if market
      conditions for federal student loans improve.




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*Servicing
      and Collections*




We
      employ
      third-party servicers to perform all aspects of loan servicing, including
      maintenance of the financial record of the loan, payment application and
      allocation, billing, and collections. Our private student loans are serviced
      either by the Pennsylvania Higher Education Assistance Agency (“PHEAA”), a
      public corporation and a governmental instrumentality of the Commonwealth of
      Pennsylvania, or by University Accounting Services (“UAS”), a subsidiary of NCO
      Group, the leading servicer of Perkins Loans. All of our PrePrimeTM student loans
      are serviced by UAS. Our federal loans are serviced by either PHEAA or
      Affiliated Computer Services, Inc. (“ACS”), a provider of services to student
      loan lenders, schools and other clients.





When
      private student loan borrowers who are in repayment become delinquent, the
      servicers initiate collection efforts to try to bring the borrowers current.
      For
      private student loan borrowers who become 60 to 90 days delinquent, the
      collections effort is transferred to The CCS Companies (“CCS”), a provider of
      student loan collection and other services, to perform late stage collections
      (including, e.g., delinquency cures) for all loans between 60 and 180 days
      of
      delinquency and default collections for all loans greater than 180 days
      delinquent. If the borrower does become more than 180 days delinquent, CCS
      will
      seek to recover amounts due either through a lump-sum settlement which may
      be
      less than the outstanding balance or through a payment plan. Throughout the
      collection process, we monitor servicer and collection agency performance and
      provide information to help assist in the collection process.





For
      our
      federal student loans, the HEA includes implementing regulations that cover
      every aspect of the servicing of a federally guaranteed student loan, including
      required communications with borrowers, loan guarantors, and default aversion
      and mitigation efforts. Failure to service a federal student loan properly
      could
      jeopardize the guarantee on federal student loans; our third-party servicers
      indemnify us for the loss of the guarantee due to any servicing errors.
      This guarantee generally covers 98 (95 percent after 2012) of the student loan’s
      principal and accrued interest for loans disbursed after July 1, 2006. In the
      case of death, disability or bankruptcy of the borrower, the guarantee covers
      100 percent of the student loan’s principal and accrued interest.





FFELP
      student loans are guaranteed by state agencies or non-profit companies called
      guarantors, with the U.S. Department of Education providing reinsurance to
      the
      guarantor. Guarantors are responsible for performing certain functions necessary
      to ensure the program’s soundness and accountability. These functions include
      reviewing loan application data to detect and prevent fraud and abuse and to
      assist lenders in preventing default by providing counseling to borrowers.
      Generally, the holder of a federal student loan and the guarantor are
      responsible for ensuring that federal student loans are being serviced in
      compliance with the requirements of the HEA. When a borrower defaults on a
      FFELP
      loan, the servicer submits a claim to the guarantor who reimburses us for the
      product of principal and accrued interest and the loan’s guarantee
      percentage.





*Embark*





Our
      wholly owned subsidiaries Embark Corp. and Embark Online, Inc. (together,
“Embark”), located in San Francisco, CA, have been a leading provider of online
      services of
      solutions for students
      and college/graduate admissions offices since 1995.  We acquired the assets
      of Embark in February 2007.  Embark has processed over 8 million application forms
      for
      its clients.  Embark’s clients
      include
      over 2 00
      admissions offices around the world, including the University of Michigan,
      Cornell, New York University, Syracuse University, The Juilliard School, Harvard
      University, London School of Economics, IESE Business School, and the Fulbright
      Scholar Program.  Embark markets its hosted
      services directly
      to colleges and universities as well
      as foundations and scholarship providers through





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its
      sales
      force.  Customers enter into one or more year subscription contracts. 
      Embark employs a team of in-house developers to support its proprietary software as
      a
      service .




Embark just released
      the latest version of its software suite with client-requested features and
      an
      attractive, user-friendly design to allow
      Embark to sell its service to a significantly broader market and to increase
      average deal size significantly.





Embark.com
      was re-launched in July of 2007 to provide an online space for students to
      research the
      characteristics of schools ,
      apply
      to schools, and how
      to finance college online. 
      Students can create an Embark.com profile to enter their basic application
      information, such as contact information, academic coursework, standardized
      test
      scores, extracurricular activities, and family information. This
      information can be ported into over 6 5 0
      distinct school online applications.  Embark also created a College Planner
      application on the Facebook® platform to allow students a network to chat about
      colleges in an atmosphere that encourages research and discussion.  All of
      Embark.com’s research and application features are available to Facebook®
College Planner users.  Over 450,000 students have registered with Embark
      as of September 10, 2008 within
      the first year .





***Competition***





*Student
      Lending Business*





We
      operate an online loan origination platform. The primary competitive factors
      for
      our origination platform model are:





·
            Brand
                awareness: to be competitive, we must have the ability to attract
                consumer
                demand in high volumes. We will need to make significant investments
                to
                build and maintain a compelling brand that will compete against other
                student loan originators and lenders;





·
            High
                quality product offering: we must provide our consumers with ease
                of use
                and convenience by providing competitive product offerings based
                on
                pricing, and high quality customer
                service; and


·
              The
                  development and application of underwriting criteria, which over
                  time
                  results in a portfolio of borrowers with strong credit and repayment
characteristics.


Our
      success depends upon capturing and maintaining a significant share of students
      who obtain loans and ultimately repay them. In order to do this, we must grow
      brand awareness among customers.





Although
      a number of competitors and potential competitors exited the private student
      loan industry as a result of market disruptions during 2007 and 2008, the
      industry remains competitive with dozens of active participants. We believe
      that
      our primary competitors are traditional lending institutions. The student loan
      market has a large number of competitors and is dominated by a number of large
      institutions including JP Morgan Chase, Citibank, Wells Fargo, First Marblehead
      Corp. (through its facilitation services for leading originators of private
      loans), Nelnet and Sallie Mae.





Lenders
      in the education loan market historically have primarily 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 those loans.
      As a result of the College Cost Reduction and Access Act of 2007, which reduced
      the loan interest rates available in connection with certain federal
      undergraduate student loans, some lenders may place additional emphasis on
      the
      private student loan market and offer the student loan products we provide,
      which could result in a decline for demand of our student loan offerings. We
      believe the most significant competitive factors in terms of developing private
      student loan programs are technical and legal competence with respect to
      consumer lending laws and





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regulations,
      cost, knowledge of the performance of student loans, capital markets experience,
      and reliability, quality and speed of service.





Many
      of
      our current and potential competitors have longer operating histories and
      significantly greater financial, marketing, technical or other competitive
      resources, as well as greater name recognition, than we do. As a result, our
      competitors may be able to adapt more quickly to new or emerging technologies
      and changes in customer requirements or may be able to devote greater resources
      to the promotion and sale of their services. In addition, competitors may be
      able to adopt more aggressive pricing policies in order to attract potential
      clients. We cannot assure you that we will be able to compete successfully
      with
      new or existing competitors. To remain competitive, we will need to continue
      to
      invest in information technology, sales and marketing, legal and compliance,
      and
      product development resources.





*College
      Admissions Software Business*





Embark’s
      competitors include Datatel, Intelliworks, Jenzabar, Oracle Higher
      Education,  and SunGuard Data Systems Corporation/Banner, all of which are
      diversified software and information technology companies that offer competing
      software platforms for the institution as a whole but is installed at the
      customer site.  Admissions office customers select solutions based upon
      functionality, ease of use, deployment time frames, also ease of integration
      with other university wide software platforms, and price.  Because
      subscription contracts are usually from one to five-years in length, customer
      turnover tends to be limited prior to contract maturity, but likewise pricing
      adjustments for additional value may be restrained.  As with all
      software-based business,  competition
      is intense and barriers to entry are low.




***Government
      Regulation***




Our
      business operations and product offerings are subject to a variety of
      governmental regulations. If we or our business partners do not comply with
      applicable governmental regulations, our business may suffer.




***Privacy
      Policy***





We
      believe that issues relating to privacy and use of personal information of
      Internet users are becoming increasingly important as the Internet and its
      commercial use grow. As a result, we have adopted a detailed privacy policy
      that
      outlines how we use consumer information and the extent to which lenders and
      other third parties may access this information. This policy is prominently
      noted on our website.





***Intellectual
      Property***





We
      regard
      our intellectual property as important to our success. We rely on a combination
      of patent, trademark, copyright law, and trade secret protection to protect
      our
      proprietary rights. We have applied for a U.S. patent for a business method
      relating to providing customized financial products to consumers. We are also
      pursuing the protection of our intellectual property through trademark and
      copyright registrations. We have registered MyRichUncle® as a trademark in the
      United States. We





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consider
      the protection of our trademarks to be important for maintenance of our brand
      identity and reputation. However, we cannot assure you that any of these
      registrations or applications will not be successfully challenged by others
      or
      invalidated through administrative process or litigation. Further, if our
      trademark applications are not approved or granted due to the prior issuance
      of
      trademarks to third parties or for other reasons, there can be no assurance
      that
      we would be able to enter into arrangements with such third parties on
      commercially reasonable terms allowing us to continue to use such trademarks.
      It
      is possible that our patent application and future patent applications will
      be
      denied or granted in a very limited manner such that they offer little or no
      basis for us to deter competitors from employing similar technology or processes
      or allow us to defend ourselves against third-party claims of patent
      infringement. In addition, we seek to protect our proprietary rights through
      the
      use of confidentiality agreements and other contractual arrangements with our
      employees, affiliates, clients, licensees, and others.




***Seasonality***




For
      a
      description of the seasonality of loan originations, see “Item 7. Management’s
      Discussion and Analysis of Financial Condition and Results of Operations -
      Seasonality of Originations” below.




***Employees***




As
      of
      September 12, 2008, we had 28 full time employees and our wholly-owned
      subsidiary, Embark Corp. had 50 full time employees. Our chief executive officer
      and co-presidents are employed under employment contracts. None of our employees
      are covered by a collective bargaining agreement and management considers the
      relationship with our employees to be good.




***Codes
      of Conduct and Corporate Governance Documents***




We
      have
      adopted a code of business conduct and ethics that applies to all of our
      directors, officers and employees. In addition, we have also adopted a code
      of
      ethics that applies to our chief executive officer, our chief financial officer
      and other of our senior financial officers. The codes are designed to comply
      with applicable SEC regulations and NASDAQ listing standards and both codes
      are
      posted on our corporate website at http://www .mruholdings.com.
      In addition, charters for our audit, compensation and nominating and corporate
      governance committees of our board of directors are also posted on our corporate
      website. A copy of either code and our committee charters are also available
      free of charge, upon request directed to Investor Relations, MRU Holdings,
      Inc.,
      590 Madison Avenue, 13th Floor, New York, New York 10022.




***Website
      Access to Reports***




We
      maintain a corporate website at http://www .mruholdings.com.
      Through our website, we make available, free of charge, our annual proxy
      statement, annual reports on Form 10-K and Form 10-KSB, quarterly reports
      on Form 10-Q and Form 10-QSB, current reports on Form 8-K and
      amendments to those reports filed or furnished pursuant to
      Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably
      practicable after we electronically file such material with, or furnish them
      to,
      the SEC. The SEC maintains a website that contains these reports at http://www .sec.gov.




***Corporate
      Information***




We
      were
      incorporated under the laws of the state of Delaware in March 2000. In July
      2004, we completed a share exchange (“Share Exchange”) with the stockholders of
      Iempower, Inc., a Delaware corporation doing business as MyRichUncle® pursuant
      to which we acquired 100% of the outstanding





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capital
      stock of Iempower in exchange for 6,863,433 shares of our common stock, par
      value $.001 per share (the “Common Stock”) and 2,136,567 Common Stock purchase
      warrants issued to Iempower’s warrant holders (each warrant is exercisable to
      purchase one share of Common Stock with a weighed average exercise price of
      $0.45 per share) (the “Share Exchange”). In conjunction with the Share Exchange,
      we changed our name to MRU Holdings, Inc.




In
      May
      2005, we launched our MyRichUncle® private loan platform. In May 2006, we began
      our student advocacy campaign. In May/June 2006, we launched our PreprimeTM and
      federal student loan products. In October 2006, we listed our Common Stock
      on
      the NASDAQ under the symbol “UNCL.” In February 2007, we acquired our Embark
      software business from The Princeton Review. In September 2007, we launched
      our
      Embark.com website, which is a leading online admissions portal.





Our
      principal executive offices are located at 590 Madison Avenue, New York, New
      York. The telephone number of our principal executive offices is (212)
      398-1780.





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**Item
      1A.****Risk
      Factors.**





**RISKS
      RELATING TO OUR LIQUIDITY AND CAPITAL RESOURCES**





***Our
      independent registered public accounting firm has issued a going concern opinion
      and, if we cannot obtain additional financing in the near term, we may have
      to
      curtail or cease operations and may ultimately cease to
      exist.***





We
      require additional equity capital in the near term to maintain our current
      operations. Our independent registered public accounting firm has issued a
      going
      concern opinion indicating that there is substantial doubt that we can continue
      as a going concern. We are currently seeking additional equity or convertible
      debt financing that would allow us to continue to operate as a going concern.
      In
      addition, any issuance of additional equity or convertible debt must be approved
      by the holders of our series B and series B-2 preferred stock, as well as
      certain of our creditors. **** There
      is
      no assurance that such equity capital or convertible debt will be available
      and,
      to the extent it is available, it is very likely that our currently outstanding
      common and preferred stock will be severely diluted in connection with an equity
      financing. To the extent adequate equity, convertible debt or other financing
      is
      not available, we would have to curtail or cease completely our operations
      and
      may ultimately cease to exist.





***If
      we cannot raise additional equity capital in the near term, we will have to
      file
      for bankruptcy protection; holders of our common and preferred stock may be
      severely diluted or their equity eliminated entirely in connection with a
      bankruptcy filing.***





As
      of
      September 12, 2008, we estimate that we had current payables of approximately
      $10.3 million and we only had approximately $6.9 million of unrestricted cash
      available. In addition, as of June 30, 2008 we had negative stockholders’ equity
      of $5.5 million. We have negotiated informal payment plans with nearly all
      of
      our major vendors with respect to existing payables in order to allow us more
      time to raise the equity capital that we need. If we are unable to obtain
      sufficient additional equity financing, however, we will likely have to file
      for
      bankruptcy protection. Additionally, despite the payment plans we have arranged
      with vendors, it is possible that our creditors could choose to initiate
      involuntary bankruptcy proceedings against us or against one or more of our
      subsidiaries, which would force us to make defensive voluntary filing(s) of
      our
      own. In addition, if we restructure our debt or file for bankruptcy protection,
      it is very likely that holders of our common and/or preferred stock will be
      severely diluted if not eliminated entirely.





***We
      were not in compliance with certain originally negotiated covenants under our
      Senior Secured Notes in relation to our outstanding payables balance. We have
      received a waiver of these events of default from the holders of the Senior
      Secured Notes that will expire on October 17, 2008. Barring an additional
      waiver, if we cannot raise additional capital, an event of default will occur
      and the holders of the Senior Secured Notes will be able to accelerate the
      debt.***





On
      September 12, 2008, the Company and the holders of the Senior Secured Notes
      entered into an amendment to waive until October 17, 2008 the covenants with
      respect to indebtedness as it relates to payables, of which we would have been
      in violation absent such waiver.  The covenant has been amended to require
      payables not to exceed $11 million on or prior to October 17, 2008 and $5
      million after October 17, 2008.  A new covenant has also been
      added which will require us to maintain a minimum unrestricted cash balance
      of $4.35 million.  Additionally, we agreed to repay the Senior Secured
      Notes in full upon the event that we receive $30 million or more in
      gross





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proceeds
      from the sale of equity or debt securities.  In consideration for the
      waiver and amendment, we paid the holders of the Senior Secured Notes an
      amendment fee of $1.5 million and prepaid $0.36 million of interest on the
      Senior Secured Notes and the $0.26 million facility fee that would have been
      due
      on October 20.  Unless we are able to raise additional equity capital, it
      will not be possible to be in compliance with the amended covenants after
      October 17, 2008, as the amount of cash needed to reduce payables if paid out
      would cause us to violate the minimum unrestricted cash covenant.  In this
      event, unless we were able to secure an additional waiver and amendment from
      the
      holders of the Senior Secured Notes, an event of default will occur with respect
      to the Senior Secured Notes, and if the holders of the Senior Secured Notes
      chose to accelerate their debt we would need to file for bankruptcy. In
      addition, acceleration of amounts due under the Senior Secured Notes would
      result in cross defaults under approximately $18.4 million aggregate principal
      amount of bridge notes as of September 8, 2008, together with accrued and unpaid
      interest thereon, and such amount would be due and payable by us, unless we
      obtained waivers from the holders of the bridge notes.





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***We
      are not in compliance with certain originally negotiated covenants under the
      DZ
      Bank loan facility in relation to our tangible net worth and our liquidity
      ratio. We have informally agreed to a waiver of these events of default from
      the
      lender that will expire on October 31, 2008. Barring an additional waiver,
      if we
      cannot raise additional equity capital prior to the expiry of the waiver, we
      will be required to pay an increased interest rate on this debt, and the lender
      may accelerate all amounts due under this loan, which would trigger cross
      defaults under certain of our other indebtedness.***




As
      of
      September 8, 2008, approximately $98 million of MRU’s private student loans are
      financed through a loan facility under which its affiliate, Education
      Empowerment SPV, LLC is the borrower. As of September 8, 2008, there was
      approximately $95 million in principal, interest and fees owed under the
      loan facility with respect to the private student loans financed. Under the
      terms of the loan facility, an event of default occurs if MRU does not: (i)
      maintain a Tangible Net Worth (as defined in the loan facility) of at least
      $5,000,000 or (ii) maintain a Liquidity Ratio (as defined in the loan facility)
      of at least 1.50. As of June 30, 2008, the MRU had Tangible Net Worth of $(13.4)
      million and a liquidity ratio of 1.24.




On
      September 15, 2008, we informally agreed to enter into an amendment of this
      facility and a waiver of the covenants above until October 31, 2008. If after
      the expiry of the waiver additional equity capital has not been raised to cure
      noncompliance and an event of default results, the lender may, among other
      things, accelerate all amounts due under the loan facility, and we would be
      required to pay an increased interest rate equal to the arithmetic average
      of
      the rates of interest publicly announced by JPMorgan Chase Bank and Citibank,
      N.A. plus 3%. As of September 5, 2008, the default rate was 8%. In addition,
      if
      the lender accelerates the amounts due under the loan facility and such amounts
      are not immediately paid, the lender is entitled to sell the assets pledged
      to
      the lender under the loan facility in an effort to obtain amounts owed to it.
      Because the facility is non-recourse to MRU, if the lender foreclosed and sold
      the assets, we would not be required to pay any increased costs associated
      with
      a default rate of interest or any potential deficiency balance associated with
      a
      sale of the assets in the event that the cash flow of the financed private
      student loans was not sufficient to satisfy the obligation in full, but we
      would
      no longer have access to this source of funding. If
      the
      lender accelerates the amounts due under the loan facility, MRU would also
      experience cross defaults under approximately $18.4 million aggregate principal
      amount of bridge notes as of September 15, 2008, together with accrued and
      unpaid interest thereon, and such amount would become due and payable by MRU,
      unless we obtain waivers from the holders of the bridge notes.




***If
      we do not obtain equity or convertible debt financing, we may not be able to
      pay
      off our loan facility with Merrill Lynch Bank USA when it comes due on November
      25, 2008, which would require us to pay an increased interest rate on this
      debt,
      and would allow the lender to accelerate all amounts due under this loan, which
      would trigger cross defaults under certain of our other
      indebtedness.***




As
      of
      September 15, 2008 approximately $35.0 million of MRU’s federal student loans
      are financed through a loan facility with Merrill Lynch Bank USA (the “Merrill
      Facility”), **** under
      which our wholly owned subsidiary, MRU SPV Funding, Inc. is the borrower. On
      September 15, 2008, the maturity date of the Merrill Facility was extended
      from
      September 26, 2008 to November 25, 2008 and certain other amendments were made
      to the Merrill Facility. Upon maturity, all principal and accrued interest
      and
      fees are immediately due and payable by the borrower. Because the borrower
      does
      not have the funds available to repay such amounts, an event of default will
      occur resulting in the rate of interest to be increased by 2% to one-month
      LIBOR
      plus 3% and the lender having the right to sell the assets pledged under the
      facility. Because the facility is non-recourse to MRU, if the lender foreclosed
      and sold the pledged assets, we would not be required to pay any increased
      costs
      associated with a default







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rate
      of
      interest or any potential deficiency balance associated with a sale of the
      assets in the event that the cash flow of the financed private and federal
      student loans was not sufficient to satisfy the obligation in full. **** If
      the
      lender accelerates the amounts due under our loan facility with MLBU, the
      primary impact upon MRU would be that approximately $18.4 million aggregate
      principal amount of bridge notes as of September 8, 2008, together with accrued
      and unpaid interest thereon, would become due and payable by MRU pursuant to
      cross-default provisions, unless we obtain waivers from the holders of the
      bridge notes.




***If
      we cannot obtain additional credit facilities from new lenders, we may not
      be
      able to resume the origination of new loans.***




On
      September 5, 2008, we paused the origination of private student loans, at
      which
      time we had approximately $13 million in available warehouse capacity for the
      funding of private student loans under our loan facility with DZ Bank. On
      September 8, 2008, DZ Bank notified us that we could no longer draw funds from
      our loan facility with DZ Bank. On
      September 15, DZ Bank informally agreed to give us a waiver of certain events
      of
      default pursuant to the terms of which we will not be able to use their facility
      until we raise additional equity capital. Our Merrill Facility matures on
      November 25, 2008. We have been working with several banks and hedge funds
      to
      obtain additional warehouse capacity, and while these discussions are ongoing,
      so far we have not been successful in obtaining financing commitments from
      prospective lenders.





Due
      to
      continuing disruptions in the credit markets precipitated by the subprime
      mortgage crisis and the credit and liquidity problems of other student loan
      finance companies, banks have grown significantly more conservative in their
      lending practices. Given the dramatic change in the overall credit environment
      and economy, we are not able to predict the terms, if any, under which we would
      be able to obtain new credit facilities. We are having ongoing discussions
      with
      a number of banks, private equity and hedge funds to obtain warehouse financing.
      However, no assurance can be given that our efforts to secure additional credit
      facilities will prove successful.





If
      we are
      able to obtain terms for a new warehouse loan facility, we anticipate that
      the
      facility will have a significantly lower advance rate and a significantly higher
      cost of funds than our current facilities. Additionally, we anticipate that
      any
      warehouse lender will request an equity kicker in the form of warrants to
      acquire a significant number of shares of our common stock. We also expect
      that
      the successful closing of an equity or convertible debt capital raise will
      be a
      precondition to any such facility.





If
      we are
      successful in raising additional equity capital but unsuccessful in obtaining
      a
      new warehouse loan facility, we would only be able to originate private student
      loans by investing our equity capital in originations on an unlevered basis.
      If
      we are not able to efficiently recycle invested equity capital through the
      execution of securitizations, whole loan sales, or other financing transactions,
      our return on equity would be decreased and we would be required to raise
      additional capital more frequently.





***Due
      to continued uncertainty and volatility of the credit markets, we may not be
      able to successfully securitize or sell our student loans in the future; or
      if
      we can securitize or sell, the terms of the transaction and the economic benefit
      to the company may not be favorable.***





Securitization
      refers to the technique of pooling loans and selling them to a special purpose,
      bankruptcy remote entity, typically a trust, which issues securities backed
      by
      those loans. The uncertainty and volatility of the credit markets may have
      a
      significant impact on the revenues derived





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from
      our
      securitization transactions, or, despite our completion of a securitization
      of
      our private student loans in July 2008, may prevent us from accessing the
      securitization market at all. The securitization of our loan portfolios rely
      heavily on key assumptions, such as credit spreads and expected defaults. If
      credit spreads continue to widen and the defaults of borrowers under our
      existing loan portfolios increase, the revenues generated by our loan portfolios
      may be significantly reduced, and accordingly, we may be unable to continue
      to
      recover the same level of residual interest from our securitization trusts
      which
      we achieved in the past under more favorable market conditions. If we are unable
      to securitize, we will not be able to recognize a gain-on-sale on the loans
      we
      have originated, and consequently our net income will be lower. If the cost
      of
      funds on a securitization increases faster than we can increase the interest
      rates we charge student loan borrowers or we are unable for marketing,
      competitive or regulatory reasons to be able to fully pass along the increased
      cost of funds to the consumer, then we may incur a loss-on-sale on a
      securitization, reducing our net income. These same factors could likewise
      impact the economics of a whole loan sale of our student loans, which is one
      potential financing alternative to securitization.





***Our
      expected intention not to sell additional loans to our 2008 securitization
      could
      negatively impact our relationship with our existing asset-backed investors
      and
      our reputation as an issuer of asset-backed securities, potentially impacting
      future demand for our securitization offerings.***




We
      structured our 2008 securitization to allow us to sell up to an additional
      $29
      million of our private student loans to the trust prior to September 30, 2008.
      The transaction structure provides that if additional loans are not sold into
      the securitization the cash reserved to purchase those loans will be returned
      to
      investors as a prepayment of principal, proportionate with each noteholder’s
      capital invested in the transaction. In the offering memorandum for the
      securitization, we disclosed to investors the potential risk that we would
      not
      be able to deliver additional loans and that such a prepayment of principal
      would occur in such event. Failure to deliver additional loans to the
      transaction does not constitute an event of default. Given our current liquidity
      and financial resources, we will not be able to transfer any additional loans
      to
      the trust prior to September 30, 2008. We believe that our failure to transfer
      additional loans to the securitization is in the best interest of our
      stockholders and may be in the best interest of our asset backed investors,
      as
      well, but we cannot predict how asset-backed investors will perceive the
      development and how it will impact future appetite in the market for our
      securitizations.




***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 student loan programs. While we were able to close
      our 2008 securitization in July, the credit markets have continued to worsen
      since that time. There can be no assurance that despite our prior success that
      we will be able to access the securitization market in the future. In addition,
      we have been unsuccessful thus far in obtaining alternatives to securitization
      to finance our loans. Other sources of funding have not been available to us
      on
      acceptable terms. 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.







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**RISKS
      RELATING TO OUR FINANCIAL REPORTING**




***In
      connection with both our recognition of revenue from securitization transactions
      and our appraisal of the fair market value of the student loans on our balance
      sheet, 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.***




In
      our
      2007 securitization, we have the right to receive any excess cash flow generated
      by the trust that is not needed to pay the trust’s liabilities. This right to
      future cash flow is referred to as a “residual” interest. We have recorded the
      residual as a receivable on our balance sheet at our estimate of its fair value.
      Because there are no quoted market prices for our residual receivable,
      accounting rules require that we use discounted cash flow modeling techniques
      and certain assumptions to estimate fair value. We have estimated the fair
      value
      initially and will estimate the fair value in each subsequent quarter and
      reflect the change in our estimate of fair value in the other comprehensive
      income component of stockholders’ equity for that period. Our key assumptions to
      estimate the fair value include prepayment and discount rates, interest rates
      and the expected defaults from the underlying securitized loan portfolio and
      the
      recoveries thereon. If the actual performance of the securitization trust varies
      from the key assumptions we use, the actual residuals that we receive from
      the
      trust could be significantly less than reflected in our current financial
      statements, and we may incur a material negative adjustment to our earnings
      in
      the period in which our assumptions change. In addition, our securitization
      yields, or our 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
      the
      securitization trust varies from the key assumptions we have 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.
      Our
      residual in our securitization is subordinate to securities issued to investors
      by the trust and may fail to generate any cash flow for us if the securitized
      assets only generate enough cash flow to pay the debt holders.





Our
      2008
      securitization was structured as on-balance sheet, so the private student loans
      that were legally sold to the trust and the asset-backed debt issued by the
      trust are consolidated on our balance sheet. The private student loans are
      recorded on our balance sheet at the lower of cost or market, or “LOCOM”, and
      the asset-backed debt is recorded at the outstanding principal balance of the
      notes. As in the 2007 securitization, in the 2008 securitization we retain
      the
      right to receive any excess cash flow not required to pay the expenses and
      meet
      the debt service requirements of the securitization, but the present value
      of
      this expected future cash flow is not recorded as an asset on our balance
      sheet.





We
      record
      all of the student loans we hold on our books, both private and federal, whether
      they are in the 2008 securitization or financed by one of our credit facilities,
      at the LOCOM. Each quarter we are required to calculate the fair market value
      of
      the loans. Because prices for such whole loan assets are not readily available,
      we use a cash flow valuation technique similar to the valuation of our residual
      in our 2007 securitization. We estimate the potential securitization capital
      structure for assets and then apply collateral performance assumptions, estimate
      the cost of funds, and the potential discount rate for any residual cash flows.
      The sum of the estimated net bond proceeds plus the estimated residual value
      is
      considered to be the fair market value of the assets. The determination of
      this
      fair market value is subject to the same risks as described above with respect
      to the determination of the value of the residual from the 2007 securitization.
      As of June 30, 2008, we estimated that the fair market value of the private
      student loans on our books was $116 million. Since these loans previously had
      a
      carrying value of $130 million (determined by subtracting the deferred
      origination fees and valuation reserve





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from
      the
      balance of the loans), we have recognized a $(14) million LOCOM adjustment
      which
      reduces our income.





***Our
      assumptions regarding the future cost of funding of auction rate notes are
      highly uncertain and greatly affect the valuation of our residual interest
      in
      our securitization.***




Our
      2007
      securitization trust issued auction rate notes to finance, in part, the purchase
      of student loans; our 2008 securitization trust did not issue any auction rate
      securities. Interest rates for the auction rate notes are determined from time
      to time at auctions. We use a spread over LIBOR to project the future cost
      of
      funding of the auction rate notes issued by the trust in determining the value
      of our service receivables. Historically, the spread over LIBOR that we used
      to
      estimate the future cost of funding was based on historical trends, then current
      auction rates for each trust and assumptions for future auction rates. During
      the second quarter of fiscal 2008, material deterioration of the debt capital
      markets resulted in actual auction rates that trended significantly higher
      than
      the rates we had assumed in the past. We believe that the higher actual auction
      rates will 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 lowest of three rates: a floating interest rate
      (generally one month LIBOR plus a margin), a fixed interest rate and the maximum
      legally permissible rate. The margin applicable to the floating interest rate
      is
      dependent upon the then current ratings of the notes subject to an auction.
      If
      the notes are downgraded, the applicable margin, and the maximum floating rate,
      would increase. If the interest rate determined pursuant to the auction
      procedures would exceed the maximum rate, the interest rate for the applicable
      interest period would be set at the maximum rate, but the amount of the “excess”
interest would accrue as “carryover interest.” A noteholder’s right to receive
      carryover interest is superior to our residual interest in the securitization
      trust. As a result, our projected cash releases from the securitization trust
      that have issued auction rate notes, including the timing of receipt, could
      be
      materially adversely affected by increased costs of funding of auction rate
      notes, including the extent to which the trust accrues carryover
      interest.





Since
      February 2008, the auctions of our single-A rated auction rate notes have
      consistently failed. These auctions may continue to fail and there can be no
      assurance that the auctions of our triple-A rated auction rate notes will not
      fail in the future, given that triple-A auction rate securities of other student
      loan issuers have been experiencing auction failures since February 2008. When
      the auctions of our single-A rated auction rate notes failed, their interest
      rate was set at the maximum rate for their rating category, which is one-month
      LIBOR plus 2.50%. While our triple-A rated auction rate notes have not
      experienced a failed auction, they have been pricing at very nearly the maximum
      rate for their rating category, which is one-month LIBOR plus 1.50%. During
      the
      fourth quarter of fiscal 2008, we revised our assumption with regard to the
      future cost of funding of auction rate notes. We assumed at June 30, 2008 that
      all outstanding auction rate notes will continue to bear interest at the current
      spreads over one-month LIBOR for 24 months in the case of AAA/Aaa-rated
      securities and 36 months in the case of A2/A-rated securities and thereafter
      decline over 18 and 24 months, respectively, to spreads that are lower but
      higher than historical levels for auction rates. As a result, during
      the fourth quarter of fiscal 2008, we decreased the estimated fair value of
      our securitization receivable by $5.5 million. See Note 16- Securitization
      to
      the consolidated financial statements.





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On
      August
      18, 2008, Moody’s announced that they were placing the auction rate tranches of
      our 2007 securitization on watch for potential downgrade, due to the continued
      higher than expected cost of funds. In the event Moody’s does downgrade the
“Aaa” rated notes, the maximum rate with respect to those securities will
      increase from LIBOR plus 1.50% to LIBOR plus 2.50%. In the event that Moody’s
      does downgrade the “A2” rated notes below “A3”, the maximum rate with respect to
      those securities will increase from LIBOR plus 2.50% to LIBOR plus 3.50%. In
      such event, we believe that it is likely that the auction rate securities would
      trade at or near their new maximum rate. See Note 20- Subsequent Events to
      the
      consolidated financial statements.





In
      late
      August 2008 through early September, most of the major investment banks that
      serve as broker dealers with respect to the auction rate securities entered
      into
      settlement agreements with the Attorney General of the State of New York whereby
      they agreed to repurchase the auction rate securities they had sold to
      investors. Because these broker dealers have been forced to repurchase
      securities they had sold to investors, they do not have the incentive to provide
      support for a market for these securities. Given this turn of events, we have
      now come to the view that it is highly unlikely that the auction rate market
      will ever recover. It is highly likely that our auction rate securities will
      trade at the maximum rate until maturity. See Note 20 - Subsequent Events to
      the
      consolidated financial statements.





Given
      the
      potential for an increased maximum rate in the event of a ratings downgrade
      and
      likely permanent lack of support for the auction rate market, we anticipate
      valuing the residual at less than $1 million as of September 30, 2008, down
      from
      $4.1 million at June 30, 2008. If our auction rate securities were to be
      downgraded and the maximum rate therefore increased, our residual would not
      be
      expected to receive any cash flow and would have a value of zero.





**RISKS
      RELATING TO OUR BUSINESS AND OPERATIONS**




***We
      have a history of losses and, because we expect our operating expenses to
      increase in the future, we may not be profitable in the near term, if
      ever.***




We
      have
      accumulated net operating loss deficits of $152.7 million through June 30,
      2008.
      The fourth quarter of the 2007 fiscal year, in which we had net income of $0.8
      million, was our first and, thus far, only profitable quarter due to our June
      2007 securitization. There can be no assurance that we will generate net income
      for our stockholders on a consistent basis, or at all.




***We
      expect to generate a significant portion of our income from gains on the sale
      of
      our student loans to securitizations; our financial results and future growth
      would be adversely affected if we are unable to securitize or if as was the
      case
      with our 2008 securitization that due to investor demand we were not able to
      structure the transaction to meet the criteria for sale treatment.***




We
      completed our first securitization in June 2007, in which we recognized a gain
      of $16.2 million from the sale of $137.8 million of private student loans to
      a
      trust established by us; in September 2007, we sold $32.4 million of additional
      private student loans to the trust and recorded a gain of $4.1 million; in
      November 2007, we sold $380,000 million of additional private student loans
      to
      the trust without gain.





We
      completed our second securitization in July 2008. Unlike our first
      securitization, which was accounted for as a sale of assets to an off-balance
      sheet trust resulting in a gain-on-sale for income purposes, our second
      securitization was not able to meet the criteria for sale treatment due to
      the
      need to provide flexibility in hedging certain tranches of fixed rate
      asset-backed notes, which were issued to





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meet
      investor demand and was instead accounted for as a financing whereby the loans
      remained on our balance sheet and the asset-backed notes were booked as
      liabilities. No gain or loss was recorded in connection with the transaction.
      We
      anticipate that future transactions will be treated as sales for accounting,
      so
      long as the transaction structure can meet the criteria for sale treatment.





To
      the
      extent that the securitization market is open for us, we intend to continue
      to
      securitize our student loans from time to time as sufficient volumes of loans
      are originated to efficiently execute such transactions. The amount of gain
      or
      loss **** we
      will
      recognize from these securitizations will be affected by the timing, size and
      structure of the securitization transactions, as well as the composition of
      the
      loan pools to be securitized, the return expectations of investors and
      assumptions we make regarding loan portfolio performance, including defaults,
      recoveries, prepayments, the cost of funds and cost of servicing. Because we
      expect the gain on sale of student loans to securitizations to comprise a
      significant portion of future income, the size and timing of such transactions
      will greatly affect our quarterly results. Until such time as we originate
      sufficient volume to efficiently securitize loans every quarter, our income
      will
      vary significantly from one quarter to the next depending upon whether a
      securitization is executed in a given quarter or not.





A
      number
      of factors could make securitization more difficult, more expensive or
      unavailable, including, but not limited to, financial results and losses,
      changes within our organization, specific events that have an adverse impact
      on
      our reputation, changes in the activities of our business partners, disruptions
      in the capital markets, specific events that have an adverse impact on the
      financial services industry, counter-party availability, changes affecting
      our
      assets, our corporate and regulatory structure, interest rate fluctuations,
      ratings agencies’ actions, general economic conditions and the legal,
      regulatory, accounting and tax environments governing our funding
      transactions.





We
      have
      historically been dependent on the securitization markets for the long-term
      financing of our student loans. If this market continues to experience
      difficulties or if our asset quality were to deteriorate, we may be unable
      to
      securitize our student loans or to do so on favorable terms, including pricing.
      If we were unable to securitize our student loans on favorable terms, we would
      seek alternative funding sources to fund increases in student loans and meet
      our
      other liquidity needs. These may include selling the loans to other financial
      institutions or holding the loans on warehouse lines to term. If we were unable
      to find cost-effective and stable funding alternatives, our funding capabilities
      and liquidity would be negatively impacted and our cost of funds could increase,
      adversely affecting our results of operations, and our ability to grow would
      be
      limited.





***Because
      fundings under our warehouse facility were suspended pending our raising
      additional equity capital, we had to cancel some of the loans that were in
      our
      funding pipeline and could be subject to negative publicity and claims as a
      result.***




On
      September 8, 2008, we were informed that we could no longer draw funds under
      our
      loan facility with DZ Bank.  As a result of this event, we were unable to
      fund approximately $2.7 million in loans that we had informed applicants that
      we
      had planned to fund.  We are currently working with affected borrowers to
      help them find alternative means of meeting their funding needs.  We may be
      subject to negative publicity which may harm our reputation with schools and
      customers and the affected customers may attempt to seek damages claims due
      to
      our failure to fund them.





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***Our
      pause in the origination of private student loans may be damaging to our brand
      and may make it more difficult for us to reestablish
      originations.***




On
      September 5, 2008, we paused the origination of private student loans to better
      manage existing liquidity and capital resources. If we are able to raise
      additional equity capital and/or obtain additional warehouse capacity, we plan
      on relaunching our private student loan product. The potential negative
      perception created by not being able to provide financing for customers that
      have sought financing at our www.myrichuncle.com website
      may lead to reduced response rates in the future and increase the cost of
      customer acquisition. While we believe that we will be able to reestablish
      confidence in our brand, in the short-term, this could result in lower growth
      rates or require more money to be spent on marketing to achieve targeted volume,
      overall making our business less efficient than it had been.




***Proposed
      changes to GAAP Accounting by the Financial Accounting Standards Board, if
      passed in the future, could make it more difficult to account for a
      securitization transaction as a sale of assets, which could prevent the Company
      from recognizing a gain from such transactions.***




The
      Company has securitized student loans through a qualified special purpose,
      bankruptcy remote trust. For our 2007 securitization, we do not consolidate
      the
      financial results of the trust with our own financial results. Our 2008
      securitization also uses a qualified special purpose, bankruptcy remote trust
      but, due to our retaining certain rights of control, did not qualify for sale
      treatment under Financial Accounting Standards Board, or FASB, Statement No.
      140, Accounting for Transfers and Servicing of Financial Assets and
      Extinguishment of Liabilities, or FAS 140, as currently constructed, and
      consequently, we consolidate the assets and liabilities of the trust. See Note
      2
“Summary of Significant Accounting Policies - Securitization Accounting” for a
      discussion of our determination to not consolidate the securitization
      trust.





On
      April
      2, 2008, the FASB held a board meeting to discuss the FASB staff recommendation
      to amend the criteria under which securitizations of financial assets can be
      treated as sales off-balance sheet and thus allow for the recognition of a
      gain-
      or loss-on-sale, as governed by FAS 140. A majority of the board agreed with
      FASB staff recommendations to increase the standard that must be met for sale
      treatment of securitized financial assets. The process of amending financial
      accounting standards can be lengthy and generally involves input from companies
      that could be affected by the proposed changes. When or if such proposed
      amendment is made, or the exact implications of the final version cannot be
      predicted. While such an amendment, if it were to come about, would not prevent
      us from securitizing our assets, it could potentially, depending upon the final
      version, require us to account for the securitization transaction as a financing
      rather than a sale, which would prevent the recording of a gain. Such a change,
      if it were to come to pass, could have a significant impact on our planned
      recognition of revenue, causing us to recognize income on the loans it had
      originated over the life of the assets rather than having a significant gain
      recorded at the time of securitization and trailing residual income
      thereafter.





***We
      had a material weakness in internal control over financial reporting and cannot
      assure you that additional material weaknesses will not be identified in the
      future. If we fail to maintain an effective system of internal controls or
      discover material weaknesses in our internal control over financial reporting,
      we may not be able to report our financial results accurately or timely or
      detect fraud, which could have a material adverse effect on our
      business.***




Section
      404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness
      of our internal control over financial reporting as of the end of each year,
      and
      to include a management report assessing the effectiveness of our internal
      control over financial reporting in each Annual Report on





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Form
      10-K. Section 404 also requires our independent registered public accounting
      firm to attest to, and report on, the effectiveness of our internal control
      over
      financial reporting.





As
      disclosed in Part I, Item 9A of this annual report, during the fourth quarter
      of
      our 2008 fiscal year, management identified a material weakness in our internal
      control over financial reporting relating to our control over our cash assets.
      Although management implemented controls and has remediated the material
      weakness as of June 30, 2008, we cannot assure you that additional material
      weaknesses will not be identified in the future.





Our
      internal control over financial reporting may not prevent all errors and all
      fraud. A control system, no matter how well designed and operated, can provide
      only reasonable, not absolute, assurance that the control system's objectives
      will be met. Further, the design of a control system must reflect the fact
      that
      there are resource constraints, and the benefits of controls must be considered
      relative to their costs.  Controls can be circumvented by the individual
      acts of some persons, by collusion of two or more people, or by management
      override of the controls. Over time, controls may become inadequate because
      changes in conditions or deterioration in the degree of compliance with policies
      or procedures may occur. Because of the inherent limitations in a cost-effective
      control system, misstatements due to error or fraud may occur and not be
      detected.




Any
      failure to maintain or implement required new or improved controls, or any
      difficulties we encounter in their implementation, could result in significant
      deficiencies or material weaknesses, cause us to fail to timely meet our
      periodic reporting obligations, or result in material misstatements in our
      financial statements. Any such failure could also adversely affect the results
      of periodic management evaluations and annual auditor attestation reports
      regarding the effectiveness of our internal control over financial reporting
      required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules
      promulgated thereunder. If our internal control over financial reporting or
      disclosure controls and procedures are not effective, there may be errors in
      our
      financial statements that could require a restatement or our filings may not
      be
      timely and investors may lose confidence in our reported financial information,
      which could lead to a decline in our stock price.





***If
      our private student loan origination and purchase
      agreements with the Bank were to terminate, our business could be disrupted
      and we could be subject to increased regulation.***




Because
      of our loan origination and loan purchase relationship with the
      Bank, the private student loans we facilitate and purchase from
      the Bank are not subject to many state lending and consumer protection
      laws, including limitations on certain interest rates, fees and other charges.
      If our loan origination and loan purchase agreements with
      the Bank were to terminate, our business could be disrupted until we were able
      to enter into similar agreements with another lender similarly exempt
      from such state lending and consumer protection laws. If we were unable to
      obtain such agreements with another lender, our operations would be subject
      to many state lending and consumer protection laws to which the private
      student loans we currently facilitate and purchase are
      not subject, and this could adversely affect our operations and financial
      results.





***We
      may not be able to effectively manage our growth.***




Our
      strategy requires growing our business. If we fail to effectively manage our
      growth, our financial results could be adversely affected. Growth may place
      a
      strain on our management systems and resources. We must continue to refine
      and
      expand our business development capabilities, our systems and processes and
      our
      access to financing sources. As we grow, we must continue to hire,
      train,







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




We
      have
      reduced our headcount in order to better manage our cash flow expenditure and
      extend the period of time available to us to raise additional equity. While
      we
      plan to make increasing use of lower-cost outsourcing alternatives and to
      develop internal computer systems to enhance existing employee efficiency,
      if we
      are successful in raising additional equity, we expect that additional hires
      will be required.




***Demand
      for our products may decrease.***




Demand
      for higher education financing may decrease. This may be as a result of a
      decrease in demand for higher education or increased affordability for higher
      education. This increased affordability may be the result of universities
      reducing costs, families having more funds available to pay for higher
      education, increases in the amount of availability of free financing such as
      scholarships or grants, or other factors unknown to us. Additionally, further
      government support of higher education through increased funding for students
      and tax or other incentives related to higher education may reduce the costs,
      increase the affordability and decrease the demand for our private student
      loan
      products and increase prepayment.




Additionally,
      over the last six months we have been increasing the interest rates and
      origination fees charged on newly originated private student loans to become
      profitable given the current cost of funds and generate adequate return on
      equity given the increased capital that will be required to operate our business
      and the lower expected advance rates on new warehouse facilities and
      securitizations. We believe that our competitors will be forced by the same
      market dynamics to adopt similar pricing, but if that is not the case the demand
      for our private student loans could decrease.




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




More
      than
      90% of our loan volume has come from private student loans originated to finance
      post-secondary education; we have discontinued federal lending in July 2008
      for
      the time being, so now 100% of our volume comes from private student loans.
      The
      availability and terms of federal student loans that the federal
      government originates, guarantees, subsidizes or is willing to purchase 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 education loans that any student can
      receive and determines the criteria for federal student loan eligibility. These
      guidelines are generally adjusted in connection with periodic funding
      authorizations from the United States Congress for programs under the Higher
      Education Act. The Higher Education Reconciliation Act of 2005 (part of the
      Deficit Reduction Act of 2005, Public Law 109-171) increased the annual amounts
      that first and second year college students and graduate or professional
      students may borrow and made Parent Loans for Undergraduate Students, or PLUS,
      loans available to graduate and professional students. The loan limit increases
      took effect July 1, 2007 while most other provisions took effect July 1, 2006.
      In addition, the College Cost Reduction and Access Act of 2007 
(Public Law 110-84) increased the availability of certain federal education
      grants, reduced the loan interest rates available in connection with certain
      federal undergraduate education loans, and made other revisions to the Higher
      Education Act, generally effective October 1, 2007. Public Law 110-227, the
      "Ensuring Continued Access to Student Loans Act of 2008," increased the
      annual and aggregate limitations on the amount of unsubsidized Stafford
      education loans undergraduate students may receive, made other changes to the
      Higher





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Education
      Act, and gave the Department of Education (the “Department”) authority to
      purchase (and enter into forward commitments to purchase) certain subsidized
      and
      unsubsidized Stafford loans and PLUS loans under certain conditions, in
      order to increase the availability of loan capital to meet the demand for
      such loans. The Department's authority to purchase such loans is presently
      scheduled to expire on July 1, 2009 unless this authority is renewed by
      Congress. Public Law 110-315, the Higher Education Opportunity Act of 2008,
      was
      signed by President Bush on August 14, 2008, and further amended and
      extended the Higher Education Act. These and other recent federal
      legislation could weaken the demand for private student loans. In addition,
      legislation such as the College Cost Reduction and Access Act of 2007 has
      reduced the loan interest rates available in connection with certain federal
      undergraduate student loans, which could result in increased competition in
      the
      market for private student loans, which could adversely affect the volume of
      private loans and securitization transactions and, as a result, the growth
      of
      our business.





***Other
      sources of higher education financing may be preferred by
      borrowers.***




We
      compete with other options that students and families may have available to
      them
      to finance the costs of post-secondary education. Families and students may
      simply prefer other options. These options include, among others: home equity
      loans, prepaid tuition plans, 529 plans, education IRAs, and credit cards.
      There
      is no assurance that we will be able to compete successfully against other
      providers of funds, including but not limited to traditional and established
      student loan providers, credit card or mortgage lenders or any new forms of
      competition. If we are unable to compete effectively with these sources of
      funding, our business, financial condition, and results of operations will
      suffer and may require us to revise or abandon our business plan or seek to
      sell, curtail, or discontinue our business.




***We
      must be able to compete effectively with other providers of higher education
      financing products and services to succeed.***




The
      market for higher education finance is highly competitive, and if we are not
      able to compete effectively, our revenue and results of operations may be
      adversely affected. The student loan origination market has a large number
      of
      competitors and is dominated by a number of large institutions, including JP
      Morgan Chase, Citibank, Wells Fargo, First Marblehead Corp. (through its
      facilitation services for leading originators of private loans), Nelnet and
      Sallie Mae. Most of our competitors have, among other competitive advantages,
      greater financial, technical and marketing resources, larger customer bases,
      greater name recognition and more established relationships than we have. 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 or eliminate profitability altogether.




***Our
      credit underwriting system may have defects or turn out to be ineffective,
      which
      could materially and adversely affect our prospects, business, and results
      of
      operations.***




The
      proprietary system we use to score our students in determining their eligibility
      for and/or cost of financing and to control risk is based on our existing
      knowledge and available actuarial data and may be incomplete and/or inaccurate.
      If this system turns out to be ineffective, our prospects, business, financial
      condition, and results of operations could be materially and adversely
      affected.





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***Our
      business could be adversely affected if our student loan servicers fail to
      provide adequate or timely services or if our relationship with a servicer
      terminates.***




All
      of
      our student loans are serviced by third-parties. This arrangement allows us
      to
      increase the volume of loans without incurring the overhead investment in
      servicing operations. Our reliance on external service providers for loan
      servicing subjects us to risks associated with inadequate or untimely services,
      such as inadequate notice of developments in prepayments, delinquencies and
      defaults. A substantial increase in these rates could adversely affect our
      ability to access profitably the securitization market and the value of our
      residual receivables. Because securitization involves the creation of a new
      legal entity to become the owner of the loans, our servicers must execute a
      new
      servicing contract with the new legal entity. Generally, we would expect that
      these new contracts would mirror the terms of the existing servicing contracts,
      but it is possible that the servicer could demand alternative terms that could
      make it more difficult to securitize our loans. In such a circumstance, we
      might
      conclude that we should transfer servicing to another servicer in order to
      maximize the liquidity of our assets. In addition, if our relationship with
      any
      third-party servicer terminates, we would need to transfer servicing to another
      third-party servicer of student loans, which could be time consuming and costly.
      In such event, our business could be adversely affected.





***If
      we do not comply with applicable governmental regulations, our business may
      suffer.***




Our
      business operations and product offerings are subject to various governmental
      regulations. If we or our business partners do not comply with applicable
      governmental regulations, our business may suffer. If we become subject to
      additional government regulation, our compliance costs could increase
      significantly. Regulatory compliance activities could also divert our human
      and
      other resources from revenue-generating activities.




***Changes
      in the regulatory regime could impair our business.***




We
      operate in a heavily regulated industry and new laws and changes in existing
      laws could affect our business. The federal government and state governments
      regulate extensively the financial institutions and other entities that offer
      consumer finance products. The applicable laws and regulations are subject
      to
      change and generally are intended to benefit and protect borrowers rather than
      our stockholders or us. Failure to comply with government regulations could
      subject us to civil and criminal penalties and affect the value of our assets.
      We could also be required to indemnify our employees in connection with any
      expenses or liabilities that they may incur individually in connection with
      regulatory action against them. As a result, there could be a material adverse
      effect on our prospects, business, financial condition and our results of
      operations.




***Litigation
      and state legislation during the last several years has sought to
      re−characterize certain loan marketers and other originators and agents of
      lenders as de facto lenders for purposes of various state lending and consumer
      protections laws; if such legislation and/or litigation on similar theories
      were
      successful against us or any third party marketer, the loans that we purchase
      and securitize would be subject to individual state lending and consumer
      protection laws.***





All
      of
      our private student loans are originated on behalf and in the name of the Bank.
      After the Bank originates a loan that we or one of our partners
      have facilitated, the loan is purchased by one of our special purpose
      subsidiaries or affiliates and pledged to a warehouse facility for short-term
      financing prior to securitization or other permanent financing. As a
      federally-chartered savings bank, the Bank is not subject to many state lending
      and consumer protection laws, including limitations on certain interest rates,
      fees and other charges. The promissory notes signed by private student loan
      borrowers under our private student loan program are payable to the order of
      the
      Bank, and also





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expressly
      provide that the promissory notes and the loan advances made under the
      promissory notes are governed by federal law and the law of the State of New
      York without regard to conflict of law rules. In providing our private student
      loan services to the Bank, we do not act as a lender, guarantor or loan
      servicer, and the terms of the loans that we purchase from the Bank and
      subsequently sell or securitize are regulated in accordance with the laws and
      regulations applicable to the Bank, a federally-chartered savings bank that
      is
      headquartered in New York State.





Litigation
      during the last several years has asserted that certain types of finance
      companies use out of state bank lenders to evade the usury and interest rate
      caps, and other consumer protection laws, imposed by the states where the
      marketers 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 recently in the context of gift cards issued in the name of national
      banks and marketed by unaffiliated third parties (such as the owners or
      operators of retail shopping centers), and income tax refund anticipation loans
      originated in the name of national banks and marketed by unaffiliated third
      parties (such as providers of income tax preparation services). We believe
      that
      our activities, and the activities of third parties whose marketing on behalf
      of
      the lender is coordinated by us, are distinguishable from the activities
      involved in these cases. However, states are enacting new legislation regulating
      the conduct of third party marketers of refund anticipation loans and gift
      cards, and state legislatures and regulators are also attempting to regulate
      the
      conduct of third party marketers of private student loans.





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 of the loans
      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 state 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, any such actions
      could have a material adverse effect on our business.





***If
      we violate applicable privacy laws our business could be materially adversely
      affected.***




The
      federal government and state governments have enacted fraud and abuse laws
      and
      laws to protect borrowers' and applicants’ privacy. Violations of these laws or
      regulations governing our operations or our third party business partners and
      our and their clients could result in the imposition of civil or criminal
      penalties, the cancellation of our contracts to provide services or exclusion
      from participating in education finance programs. These penalties or exclusions,
      were they to occur, would negatively impair our ability to operate our business.
      In some cases, such violations may also render the loan assets unenforceable
      or
      uncollectible due to, for example, successful borrower claims or counterclaims
      for damages and penalties under such laws or regulations. We could also have
      liability to consumers if we do not maintain their privacy, or if we do not
      abide by our own privacy policy and any such violations could damage our
      reputation and the value and goodwill of our brand name. Violations of these
      regulations could have a material adverse effect on our financial condition,
      business and results of operations.







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***We
      rely heavily on our technology and our technology could become ineffective
      or
      obsolete.***




We
      rely
      on technology to interact with consumers to originate our products and to
      perform some servicing functions pertaining to our financing products. It is
      possible that our technology may not be effective, or that consumers will not
      perceive it to be effective. We will be required to continually enhance and
      update our technology to maintain its efficacy and to avoid obsolescence. The
      costs of doing so may be substantial, and may be higher than the costs that
      we
      anticipate for technology maintenance and development. If we are unable to
      maintain the efficacy of our technology, we may lose market share. Further,
      even
      if we are able to maintain technical effectiveness, our technology may not
      be
      the most efficient means of reaching our objectives, in which case we may incur
      higher operating costs than we would were our technology more efficient. The
      impact of technical shortcomings could have a material adverse effect on our
      business, financial condition and results of operation.




***Our
      business may suffer if we experience technical
      problems.***




If
      our
      technology does not function properly, is breached or interrupted, or contains
      errors that we have not corrected, we may not achieve the performance we expect.
      Any interruption in or breach of our information systems may result in lost
      business. For instance, our technology may contain "bugs" or become infected
      by
      computer viruses or worms that may interfere with the functionality of our
      technology or negatively impact our proprietary databases. We may not
      immediately detect and fix these problems, which may increase damage to our
      business. These problems may result in, among other consequences, our
      over-estimating cash flows from borrowers or underestimating default rates.
      Third parties who have relied on our financial models or projections may have
      recourse against us in the event of inaccuracies caused by technical or other
      problems. Individually or cumulatively, these types of problems may have a
      material adverse effect on our business, financial condition and results of
      operations. If these types of technical problems were to lead to errors in
      our
      reporting of our collateral, it could negatively impact our collateral or our
      compliance under current or future lending facilities.




***If
      our systems are unable to accommodate a high volume of traffic on our web site,
      it could cause us to lose business.***




If
      existing or future customers’ use of our web site infrastructure increases
      beyond our capacity, customers may experience delays and interruptions in
      service. As a result, they may seek the products of our competitors and our
      revenue growth could be limited or reduced. Because we seek to generate a high
      volume of traffic and accommodate a large number of customers on our web site,
      the satisfactory performance, reliability, and availability of our web site,
      processing systems, and network infrastructure are critical to our reputation
      and our ability to serve customers. If use of our web site continues to
      increase, we will need to expand and upgrade our technology, processing systems,
      and network infrastructure. Our online services may in the future experience
      slower response times due to increased traffic if this risk is not effectively
      addressed, which could cause us to lose business.




***Our
      reliance on technology, including the Internet, as a means of offering and
      servicing our products and services may result in
      damages.***




We
      offer
      and sell our products and services to borrowers using technology. Although
      the
      use of the Internet has become commonplace, people may approach the entering
      of
      private information, as well as conducting transactions through the Internet,
      hesitantly. We have implemented security measures within our systems, but
      skilled computer-users could potentially circumvent some of these
      precautions.







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While
      we
      are dedicated to maintaining a high level of security, it is impossible to
      guarantee total and absolute security. Any security breach could cause us to
      be
      in violation of regulations regarding information privacy and as such cause
      us
      to pay fines or to lose our ability to provide our products. Consumers may
      also
      be hesitant or unwilling to use our products if they are or become aware of
      a
      security problem or potential security problem. We could also be liable to
      consumers or other third parties if we do not maintain the confidentiality
      of
      our data and the personal information of our consumers.




Monitoring
      unauthorized use of the systems and processes that we developed is difficult,
      and we cannot be certain that the steps that we have taken will prevent
      unauthorized use of our technology. Furthermore, others may independently
      develop substantially equivalent proprietary information and techniques or
      otherwise gain access to our proprietary information. If we are unable to
      protect the confidentiality of our proprietary information and know-how, the
      value of our technology and services will be adversely affected. This may have
      a
      material adverse effect on our financial condition and results of
      operation.




***Legal
      protection we seek for our intellectual property assets may not prove to be
      available or effective.***




We
      have
      filed a patent application for protecting certain intellectual property assets
      and intend to continue to apply for new innovations. These patent applications,
      we expect, could provide an important competitive advantage to us, and our
      prospects, business, financial condition and results of operations may be
      materially adversely affected if such patent applications are not granted or
      upheld. In addition to seeking patent protection, we rely on copyright,
      trademark and trade secret protection for our intellectual property. These
      methods may not be adequate to deter third parties from misappropriating our
      intellectual property or to prevent the disclosure of confidential information
      or breaches of non-competition agreements between us and our employees or
      consultants, and may not provide us with adequate remedies for misappropriation.
      Our technology could also be designed around, replicated or reverse-engineered
      by competitors, and we may not have the ability to pursue legal remedies against
      them. For example, competitors could replicate data or acquire data comparable
      to that which we have assembled in our proprietary databases, which could erode
      our competitive advantage. We also may fail to detect infringement of our
      intellectual property rights and may thereby lose those rights. In addition,
      obtaining, monitoring and enforcing our intellectual property rights will likely
      be costly, and may distract our management and employees from pursuing their
      other objectives, which could impair our performance. If we are unable to
      protect our intellectual property, our business may be materially adversely
      affected.




***We
      may be subject to litigation for infringing the intellectual property rights
      of
      others.***




Should
      we
      infringe, or be accused of infringing, an existing patent, copyright, trademark,
      trade secret or other proprietary rights of third parties, we may be subject
      to
      litigation. Such litigation will be costly. If we settle or are found culpable
      in such litigation, we may be required to pay damages, including punitive
      damages (such as treble damages) if we are found to have willfully infringed,
      and we may also be required to pay license fees or cease to use that
      intellectual property which is found to have been infringed by us. The amount
      of
      damages we are required to pay may be substantial, and may require us to obtain
      additional sources of revenue or additional capital to continue operating.
      We
      also may be precluded from offering products or services that rely on
      intellectual property that is found to have been infringed by us. Further,
      we
      may also be required to cease offering the affected products or services while
      a
      determination as to infringement is considered by a court. If we are not able
      to
      offer







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products
      or services, our business, financial condition and results from operations
      may
      be materially adversely affected.




***Senior
      management may be difficult to replace if they leave.***




The
      loss
      of the services of one or more members of our senior management team or the
      inability to attract, retain and maintain additional senior management personnel
      could harm our business, financial condition, results of operations and future
      prospects. Our operations and prospects depend in large part on the performance
      of our senior management team. Our Chief Executive Officer and Co-Presidents
      have employment agreements which expire on October 31, 2009 and April 1, 2009
      respectively. Our Chief Financial Officer, Chief Marketing Officer, General
      Counsel and Controller do not have employment agreements and are considered
      to
      be “at will” employees. We do not maintain key man insurance policies on any of
      our officers or key employees. We may not be able to find qualified replacements
      for any of these individuals if their services are no longer
      available.




***We
      may be unable to attract and retain key employees.***




Failure
      to attract and retain necessary technical personnel and skilled management
      could
      adversely affect our business. Our success depends to a significant degree
      upon
      our ability to attract, retain and motivate highly skilled and qualified
      personnel. If we fail to attract, train and retain sufficient numbers of these
      highly qualified people, our business, financial condition and results of
      operations will be materially and adversely affected. We may issue stock options
      or other equity-based compensation to attract and retain employees. The issuance
      of these securities could be dilutive to the holders of our other equity
      securities.




**RISKS
      RELATING TO OWNERSHIP OF OUR COMMON STOCK**




***The
      price of our common stock has been and may continue to be
      volatile.***




The
      trading price of our common stock has and may continue to fluctuate
      substantially, depending on many factors, some of which are beyond our control
      and may not be related to our operating performance. During the twelve months
      ended September 12, 2008, the closing sale price of our common stock on the
      NASDAQ Global Market ranged from $0.60 to $5.91. These fluctuations could cause
      you to lose part or all of your investment in our shares of common stock.
      Factors that could cause fluctuations in the price of our common stock include,
      but are not limited to those listed in this risk factors section and the
      following:




·
            our
                default under the Senior Secured Notes or a warehouse facility, all
                of
                which we currently have waivers of default under which will expire
                in the
                next one to two months;




·
            our
                filing for bankruptcy protection or an involuntary bankruptcy proceeding
                instituted against us;




·
            actual
                or anticipated changes in our earnings or fluctuations in our operating
                results or in the expectations of securities analysts;




·
            announcement
                by us, our competitors or our potential competitors of acquisitions,
                new
                products or services, significant contracts, commercial relationships
                or
                capital commitments;




·
            price
                and volume fluctuations in the overall stock market from time to
                time;




·
            significant
                volatility in the market price and trading volume of financial services
                companies;







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·
            general
                economic conditions and trends;




·
            negative
                publicity about the student loan market generally or us specifically;




·
            major
                catastrophic events;




·
            loss
                of a significant client or clients;
                or




·
            purchases
                or sales of large blocks of our stock.





***Our
      business is subject to seasonal fluctuations, which may cause volatility in
      our
      quarterly operating results.***




We
      experience, and expect to continue to experience, seasonal fluctuations in
      our
      revenue because the markets in which we operate are subject to seasonal
      fluctuations based on the typical school year. We typically originate the
      largest proportion of our student loan receivables volume in our fiscal first
      quarter ending September 30, 2008. These fluctuations could result in volatility
      or adversely affect our stock price.




***The
      rights of our Series B and Series B-2 preferred stockholders may adversely
      affect the holders of our common stock.***




Our
      charter documents provide our board of directors with the authority to issue
      series of preferred stock without a vote or action by our stockholders. Our
      board of directors also has the authority to determine the terms of our
      preferred stock, including designations, powers, preferences and voting rights.
      The rights granted to the holders of our outstanding Series B and Series B-2
      preferred stock may adversely affect the rights of holders of our common stock.
      For example, the Series B and Series B-2 preferred stock are entitled to receive
      a liquidation preference over all other equity securities that are junior to
      them. In addition, subject to certain conditions, our charter documents provide
      protective provisions to the holders of our Series B and Series B-2 preferred
      stock requiring us to first obtain the written consent of the majority of the
      holders of each of our Series B and Series B-2 preferred stock prior to
      undertaking certain actions, including, without limitation, the sale of
      substantially all of our assets or our liquidation and winding up, amending
      our
      charter documents in a manner adverse to the Series B or the Series B-2
      preferred stockholders, as applicable, the issuance of additional shares of
      our
      stock or any options or convertible securities, and paying dividends to our
      stockholders. Furthermore, our charter documents provide that, subject to
      certain conditions, the Series B preferred stockholders have a right of first
      offer to purchase any new securities offered by us which are junior to the
      Series B preferred stock. As a result, the rights granted to the holders of
      our
      Series B and Series B-2 preferred stock may significantly impair our ability
      to
      raise equity capital if the majority of the holders of our Series B or Series
      B-2 preferred stock do not consent to the offer, sale and issuance of the new
      securities or we are unable to obtain a waiver of each of our Series B preferred
      stockholder’s right of first offer. In addition, under the terms of the Series B
      preferred stock, the price at which the Series B preferred will convert into
      our
      common will be adjusted on a weighted average basis if we issue common stock
      or
      common stock equivalent securities at a price less than $3.80 per
      share




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




As
      of
      September 12, 2008, our directors and executive officers beneficially owned
      approximately 24.6 %
      of the
      outstanding voting shares and our two largest institutional stockholders owned
      an additional 36.27 %
      of our
      outstanding voting shares. As a result, these stockholders, if acting
      together,







-37-
 *Table
            of Contents*





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.




**Item
      1B.****Unresolved
      Staff Comments.**





None.




**Item
      2.****Properties.**





Our
      principal executive offices are located at 590 Madison Avenue, New York, New
      York. On April 20, 2007, we entered into a sublease agreement with International
      Business Machines Corporation for the entire 13th Floor of 590 Madison. The
      sublease expires on August 30, 2014. The base rent due under the agreement
      is
      $142,375 per month for the first three years of the agreement and is $150,750
      per month for the remainder of the agreement. On April 15, 2008, we terminated
      our sub-lease for offices we previously occupied at 1114 Avenue of the Americas,
      New York, New York.




**Item
      3.****Legal
      Proceedings.**





From
      time
      to time, we may be involved in litigation relating to claims arising out of
      our
      operations in the normal course of business. We currently are not a party to
      any
      material litigation or legal proceedings, which, in our opinion, individually
      or
      in the aggregate, would have a material adverse effect on our results of
      operations or financial position.




**Item
      4.****Submission
      of Matters to a Vote of Security Holders.**





We
      did
      not submit any matters to a vote of security holders during the fourth quarter
      of fiscal year 2008.







-38-
 *Table
            of Contents*




**PART
      II**




**Item
      5.****Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
      of Equity Securities.**




Our
      common stock has been quoted on The NASDAQ Stock Market under the symbol “UNCL”
since October 12, 2006. Prior to that time, our common stock was quoted on
      the
      OTC Bulletin Board under the symbol “MHOI.OB” from July 21, 2004. Prior to that,
      our common stock was not actively traded in the public market and was quoted
      on
      the OTC Bulletin Board under the symbol “PCFT.OB,” representing our former name,
      Pacific Technology, Inc. The following table sets forth, for the periods
      indicated, the high and low sales price information for our common stock as
      reported on the NASDAQ Stock Market and the high and low bid price information
      on the OTC Bulletin Board, for the related periods. With respect to prices
      reported on the OTC Bulletin Board, the quotations reflect inter-dealer prices,
      without retail mark-up, mark-down or commission, and may not represent actual
      transactions.




**High**
            
            **Low****Fiscal
                year 2008**Quarter
                ended June 30, 2008
            
            $
            3.05
            
            $
            1.23Quarter
                ended March 31, 2008
            
            $
            3.82
            
            $
            1.86Quarter
                ended December 31, 2007
            
            $
            6.15
            
            $
            2.86Quarter
                ended September 30, 2007
            
            $
            6.27
            
            $
            3.82**Fiscal
                year 2007**Quarter
                ended June 30, 2007
            
            $
            7.28
            
            $
            6.12Quarter
                ended March 31, 2007
            
            $
            7.75
            
            $
            5.79Quarter
                ended December 31, 2006
            
            $
            7.00
            
            $
            4.75Quarter
                ended September 30, 2006
            
            $
            5.90
            
            $
            4.60





American
      Stock Transfer & Trust Company is the transfer agent and registrar for our
      common stock. The last reported price of our common stock quoted on The NASDAQ
      Stock Market on September 12, 2008 was $0.70. As of September 14, 2008,
      there were approximately 56 holders
      of record of our common stock. This number does not include stockholders for
      whom shares are held in “street” or nominee name.





It
      is our
      present policy not to pay cash dividends and to retain future earnings to
      support our growth. We do not anticipate paying any cash dividends in the
      foreseeable future.




-39-
 *Table
            of Contents*




**Item
      6.****Selected
      Financial Data.**





The
      following selected consolidated financial data should be read in conjunction
      with our consolidated financial statements and related notes and "Management's
      Discussion and Analysis of Financial Condition and Results of Operations"
      appearing elsewhere in this filing. We have derived the data from
      consolidated financial statements, which were audited by Bagell, Josephs, Levine
      & Company, L.L.C., independent registered public accounting firm. The
      historical results presented here
      are
      not necessarily indicative of future results.




Fiscal Year Ended June 30,2008
              
              2007
              
              2006
              
              2005
              
              2004(in
                  thousands, except per share data)Total
                interest income
              
              $
              10,857
              
              $
              8,495
              
              $
              1,644
              
              $
              84
              
              $
              1Total
                interest expense
              
              
              7,890
              
              
              6,121
              
              
              1,102
              
              
              78
              
              
              0Net
                interest income
              
              
              2,967
              
              
              2,374
              
              
              543
              
              
              6
              
              
              1Total
                non interest income
              
              
              (10,649
              )
              
              18,514
              
              
              59
              
              
              258
              
              
              1Total
                non interest expense
              
              
              56,591
              
              
              44,495
              
              
              26,803
              
              
              5,179
              
              
              201Net
                Loss
              
              
              (68,932
              )
              
              (26,529
              )
              
              (27,015
              )
              
              (4,916
              )
              
              (201
              )Preferred
                Stock Dividends
              
              
              (2,175
              )
              
              (2,894
              )
              
              (11,607
              )
              
              (6,296
              )
              
              0Net
                loss applicable to common shares
              
              
              (71,107
              )
              
              (29,423
              )
              
              (38,622
              )
              
              (11,212
              )
              
              (201
              )Net
                loss per basic and diluted shares
              
              $
              (2.40
              )
              $
              (1.42
              )
              $
              (2.56
              )
              $
              0.82
              
              $
              (0.01
              )
  June
                  30,2008
              
              2007
              
              2006
              
              2005
              
              2004(in
                  thousands)Cash
                and cash equivalents
              
              $
              10,216
              
              $
              11,606
              
              $
              17,900
              
              $
              6,895
              
              $
              3Private
                student loans receivable, held for sale,lower
                  of cost or market, net (1)
              
              
              115,996
              
              
              5,441
              
              
              38,749
              
              
              158
              
              
              0Federally
                insured student loans receivable, held for sale,lower
                  of cost or market
              
              
              35,374
              
              
              7,395
              
              
              0
              
              
              0
              
              
              0Accounts
                receivable from securitizations
              
              
              4,093
              
              
              11,192
              
              
              0
              
              
              0
              
              
              0Total
                Assets
              
              
              195,317
              
              
              54,192
              
              
              65,943
              
              
              13,536
              
              
              8Total
                Liabilities
              
              
              200,857
              
              
              21,459
              
              
              41,172
              
              
              981
              
              
              127Total
                Stockholders' Equity
              
              $
              (5,540
              )
              $
              32,733
              
              $
              24,771
              
              $
              12,555
              
              $
              (119
              )
  Note
        that
        the June 30, 2004 financial information represents the period January 1 -
        June
        30, 2004 as the Company changed its fiscal year end from December to June
        in
        2005.
  (1) Net of $3,780 valuation reserve, $6,132 deferred
        origination fees and $13,713 lower of cost or market adjustment.


-40-
 *Table
            of Contents*




**Item
      7.****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 "Selected Financial Data" and
      consolidated financial statements and accompanying notes attached as an appendix
      to this annual report. In addition to the historical information, the discussion
      contains certain forward−looking statements that involve risks and
      uncertainties. Our actual results could differ materially from those expressed
      or implied by the forward−looking statements due to applications of our critical
      accounting policies and factors including, but not limited to, those set forth
      under the caption "Risk Factors" in Item 1A of Part I of this annual
      report.*




On
      September 5, 2008, we paused the origination of private student loans and on
      September 8, 2008, DZ Bank notified us that we could no longer draw funds from
      our loan facility until we are in compliance with certain covenants of the
      warehouse loan facility relating to our tangible net worth and liquidity ratio.
      We are working closely with a number of financial institutions to try to obtain
      funds that would enable us to resume originations and
      utilize the DZ warehouse loan facility. Any
      new
      warehouse facility would have an additional equity capital raise as a condition
      precedent. The Company will not be able to originate new loans until it raises
      additional equity capital. See “—Liquidity and Capital Resources” below. The
      following discussion describes the operation of our business before we paused
      our origination activities and how we expect to operate our business upon
      receipt of additional financing. We continue to provide software and services
      to
      admissions offices through our wholly owned subsidiary, Embark Corp., and
      provide students with information through our Embark.com website as discussed
      below.




**OVERVIEW**





We
      are a
      specialty consumer finance company that facilitates and provides students with
      funds for higher education. Equipped with proprietary analytical models and
      decision tools, we are able to identify and provide customized financial
      products to students in a more competitive and customer friendly manner. We
      entered the student lending market as an originator and holder of private
      student loans and have expanded our lending products to include PrePrimeTM
student loans and federal student loans. We structure, market, and perform
      all
      or substantially all aspects of student loan origination, including underwriting
      and verification, for our student loan programs.  All the private student
      loans are then disbursed by the Bank, a federally-chartered savings bank,
      pursuant to origination agreements with MRU.  We then purchase the loans
      from the Bank through one of our special purpose funding subsidiaries or
      affiliates pursuant to purchase agreements we have with the Bank.  These
      private student loans are purchased with funds borrowed from one of our
      warehouse loan facilities and with our or our affiliates’ equity capital. 
To provide for permanent financing, we have securitized these private student
      loans in the past.  In the future, we plan to securitize or sell all of our
      student loan products.  At the time of loan purchase or origination, we
      outsource the servicing and collections to third parties who are experienced
      in
      servicing and collecting both federal and private student loans.  We
      monitor the performance of our student loan assets to ensure proper servicing
      and to improve our underwriting criteria.





As
      a
      specialty consumer finance company, our profitability is driven by the
      combination of our ability to minimize the cost of originating a student loan
      and the amount and cost of leverage that we are able to procure from lenders
      and
      the capital markets. During the three years that we have been lending, we have
      continuously made improvements to our marketing and origination processes,
      which
      has helped us reduce our marginal cost to originate a loan. As our loan
      origination volumes have grown, we have benefited from economies of scale with
      regard to our fixed expenses. At the same time that our operations have become
      increasingly efficient, the credit and capital markets have experienced
      unprecedented disruption and dislocation due to the subprime mortgage market
      collapse and subsequent contagion. The increased cost of funds hindered our
      profitability and the decreased advance rates have eroded our capital. Since
      the
      crisis began, we have taken steps to reprice our loan products and
      further improve operational efficiencies to attempt to compensate, but the
      market has deteriorated faster than we have been able to pass along the
      increased costs to the borrowers.





***Operational
      Efficiencies***


*($’s
      in Millions; Numbers in Units)*


Fiscal
                Year 2008
            
            Fiscal
                Year 2007
            
            Fiscal
                Year 2006Application
                Received (Dollar Amount Requested)
            
            $
            2,524.7
            
            $
            1,414.2
            
            $
            952.9Number
                of Completed Applications Processed
            
            
            205,048
            
            
            113,622
            
            
            74,116Growth
                in Applications Received by Dollars
            
            
            79
            %
            
            48
            %Private
                Student Loans Disbursed
            
            $
            164.3
            
            $
            102.8
            
            $
            38.8






-41-
 *Table
            of Contents*








Preprime
                Student Loans Disbursed
            
            
            71.7
            
            
            43.3
            
            
            0.0Total
                Private Loan Originations
            
            $
            236.0
            
            $
            146.1
            
            $
            38.8Federal
                Student Loans Originated
            
            
            33.6
            
            
            8.3
            
            
            0.0Total
                Student Loans Originated
            
            $
            269.6
            
            $
            154.4
            
            $
            38.8Growth
                in Private Loan Originations
            
            
            62
            %
            
            277
            %Growth
                in Student Loan Originations
            
            
            75
            %
            
            298
            %Sales
                and marketing expenses
            
            $
            14.5
            
            $
            13.3
            
            $
            7.4Referral
                Marketing Costs
            
            
            2.0
            
            
            1.0
            
            
            0.4Total
                Cost of Acquisition - private loans
            
            $
            16.5
            
            $
            14.3
            
            $
            7.8as
                a % of Private Loans Originated
            
            
            7.0%
                (1
            )
            
            9.8
            %
            
            20.2
            %Growth
                in Cost of Acquisition
            
            
            15
            %
            
            83
            %Reduction
                in Marginal Cost of Acquisition
            
            
            -29
            %
            
            -51
            %Operations
                expenses
            
            $
            6.1
            
            $
            5.1
            
            $
            2.5Technology
                development
            
            
            0.9
            
            
            0.9
            
            
            1.5Total
                Cost of Origination
            
            $
            7.0
            
            $
            6.0
            
            $
            4.0as
                a % of Private Loans Originated
            
            
            3.0
            %
            
            4.1
            %
            
            10.3
            %Growth
                in Cost of Origination
            
            
            17
            %
            
            50
            %Growth
                in Marginal Cost of Origination
            
            
            -28
            %
            
            -60
            %





(1)
            Changes
                to our underwriting criteria that took place in our fourth fiscal
                quarter
                reduced fundable loan volume thereby increasing the cost of acquisition
                as
                a percentage of private loans originated. For the first three quarters
                of
                the fiscal year, prior to these changes, the cost of acquisition
                as a
                percentage of private loans originated was
                4.6%.





The
      volume of completed applications grew from $952 million to $1.4 billion to
      $2.5
      billion in fiscal years 2006, 2007 and 2008, a gain of 48% and 79% from fiscal
      year 2006 to fiscal year 2007 and from fiscal year 2007 to fiscal year 2008,
      respectively, the growing rate of growth reflecting the increased reach and
      recognition of the MyRichUncle® brand. From fiscal year 2006 to fiscal year 2007, private loan originations
      grew 277% while the cost of acquisition grew 83% and the cost of origination
      grew 50%. From fiscal year 2007 to fiscal year 2008, private loan originations
      grew 62% while the cost of acquisition grew 15% and the cost of origination
      grew
      17%. The greater percentage increase in the volume of production as compared
      to
      the cost of production illustrates the growing economies of scale.





This
      same
      improvement in efficiency of operations is indicated when costs are viewed
      from
      a marginal perspective. From fiscal year 2006 to fiscal year 2007, the cost
      of
      acquisition as a percentage of private loans originated declined from 20.2%
      to
      9.8%, a 51% decline, and the cost of origination as a percentage of private
      loans originated declined from 10.3% to 4.1%, a 60% decline. From fiscal year
      2007 to fiscal year 2008, the cost of acquisition as a percentage of private
      loans originated declined from 9.8% to 7.0%, a 15% decline, and the cost of
      origination as a percentage of private loans originated declined from 4.1%
      to
      3.01%, a 17% decline.





Improvements
      in the cost of acquisition are attributable the development of more targeted
      marketing approaches, increased use of co-branded marketing, the greater
      recognizability of the MyRichUncle® brand,
      and organic growth from return borrowers. Improvements in the cost of
      originations are attributable mainly to increased automation of the underwriting
      process and the maturity of the originations platform which has reduced
      technology development expense.




***Portfolio
      Funding***




Comparing
      our 2007 securitization to our 2008 securitization illustrates the significant
      changes that have taken place in the capital markets.





MRU
                Student Loan Trust 2007-A
            
            MRU
                Student Loan Trust 2008-AClosing
                Date
            
            June
                28, 2007
            
            July
                10, 2008Loan
                Balance (1)
            
            $
            170,443,350
            
            
            
            
            $
            125,500,000Liquidity
                Reserves
            
            $
            27,000,000
            
            
            
            
            $
            20,144,750Asset
                Balance
            
            $
            197,443,350
            
            
            
            
            $
            145,644,750Advance
                Rate (2)
            
            
            
            
            
            Advance
                Rate (2)“AAA”
                Asset Backed Securities
            
            $
            165,500,000
            
            
            81.3
            %
            $
            100,322,000
            
            
            63.9
            %“AA”
                Asset Backed Securities
            
            
            
            
            
            
            
            $
            7,477,000
            
            
            69.8
            %





-42-
 *Table
            of Contents*








“A”
                Asset Backed Securities
            
            $
            21,500,000
            
            
            93.9
            %
            $
            9,036,000
            
            
            77.0
            %“BBB”
                Asset Backed Securities
            
            
            
            
            
            
            
            $
            7,789,000
            
            
            83.3
            %“BB”/Unrated
                Asset Backed Securities
            
            $
            13,000,000
            
            
            101.5
            %
            $
            4,256,976
            (4)
            
            86.6
            %Weighted
                Average Loan Yield
            
            3-month
                LIBOR + 3.70%
            3-month
                LIBOR + 4.90%Weighted
                Average Bond Yield (3)
            
            3-month
                LIBOR + 0.40%
            3-month
                LIBOR + 4.83%






(1)
            Loan
                balance after acquisition of additional collateral during the prefunding
                period. For 2008 securitization, additional collateral has not and
                probably will not be delivered, but that fact does not detract from
                the
                relevance of the comparison.


(2)
            Advance
                rate for a given ratings level is the percentage derived by dividing
                (a)
                the sum of the principal balance of all bonds at that ratings level
                or of
                a higher rating minus the amount of liquidity reserves, by (b) the
                loan
                balance.


(3)
            At
                time of origination. (4)
            Proceeds.





In
      one
      year’s time, deterioration in the capital markets has lead the cost of funding
      to increase by nearly 4.5%. This increase in cost of funds occurred more quickly
      than we were able to raise interest rates on our private student loans to
      compensate, so the portfolio we securitized in July 2008 has less excess spread,
      the difference between the yield on the loans and cost of funds of the bonds,
      than our prior securitization. Because excess spread provides coverage for
      losses over time, lower amounts of excess spread can result in lower advance
      rates, as overcollateralization, the excess of the principal balance of the
      loans over the principal balance of the bonds, is then needed to substitute
      for
      credit enhancement, in order to pass the rating agency loss coverage
      requirements. Lower advance rates have meant that the Company must invest more
      of its capital in order to support a securitization financing. Between the
      2007
      securitization and the 2008 securitization, advance rates decreased by 15%
      of
      the balance of the loans.





The
      deterioration of the capital markets has also impacted the cost of funds of
      our
      2007 securitization, which has lead us to writedown our investment in that
      transactions residual interest, effectively reversing portions of the
      gain-on-sale that we have taken previously. The senior asset backed securities
      issued by the 2007 securitization, representing 93% of the debt issued, are
      auction rate securities. Auction rate securities have a variable rate of
      interest that is reset through an auction process on a periodic basis, subject
      to a cap rate established at the time of issuance. The deterioration of the
      capital markets has caused the auction rate market to fail to function properly
      and our auction rate securities, like those of all other student loan issuers,
      have been pricing at the maximum interest rate since February 2007. This
      increase in cost of funds has reduced our expectation about how much cash flow
      we will receive over time from our 2007 securitization and correspondingly
      we
      have reduced the value of our residual interest. The increased yield that
      investors are demanding has also caused us to increase the discount rate we
      use
      to discount the cash flow we project to receive. We have also made adjustments
      to our default assumption, but the changes in cost of funds and discount rates
      have clearly had the greatest impact. The timing difference in gain and loss
      recognition is illustrated below.




Fiscal
                Year 2007
            
            Fiscal
                Year 2008Gain-on-sale
            
            $
            16.2
                million
            
            $
            4.1
                millionResidual
                write-downs
            
            
            0.0
            
            
            (7.7
            )Securitization
                Income, Net
            
            
            16.2
            
            
            (3.7
            )Interest
                Income - Residual Interest
            
            
            0.0
            
            
            1.4Total
                Impact on Net Income (Loss)
            
            $
            16.2
                million
            
            $
            (2.3)
                millionOther
                Comprehensive Income
            
            
            2.7
            
            
            (2.7
            )Total
                Impact on Equity
            
            $
            18.9
                million
            
            $
            (5.0)
                millionBeginning
                Accounts Receivable from Securitization
            
            $
            0.0
                million
            
            $
            11.2
                millionAdditions
                from new sales to securitization
            
            
            11.2
            
            
            2.0Interest
                Income - Residual Interest
            
            
            0.0
            
            
            1.4Other
                Comprehensive Income
            
            
            0.0
            
            
            (2.7
            )Residual
                write-downs
            
            
            0.0
            
            
            (7.7
            )Ending
                Accounts Receivable from Securitization
            
            $
            11.2
                million
            
            $
            4.1
                million





***Changes
      in Originations***




In
      order
      to offset the increased cost of funds and increase the potential advance rate,
      we have increased the interest rate margin and the origination fees we charge
      for private loans. We have been able to pass along this increase without
      deterioration in credit quality. The chart below demonstrates the inelasticity
      of demand on the part of private student loan





-43-
 *Table
            of Contents*





borrowers.
      As we have increased interest rates and origination fees throughout the year,
      there has been no deterioration in credit quality.





Disbursement
                Quarter
            
            Wtd.
                Avg. Margin over 3-Month LIBOR in Repayment
            
            Wtd.
                Avg. Origination Fees as a % of Loan Balance
            
            Wtd.
                Avg. Qualifying FICO ScoreQ1
            
            
            4.66%
            
            
            4.1%
            
            
            715%Q2
            
            
            4.76%
            
            
            4.2%
            
            
            714%Q3
            
            
            5.44%
            
            
            5.1%
            
            
            712%Q4
            
            
            6.59%
            
            
            5.1%
            
            
            719%





Since
      the
      pricing of our 2008 securitization, we have further increased our pricing in
      order to ensure that we have 4-6% spread between the student loan interest
      rate
      and the expected cost of funds. As such, in August 2008 we raised our weighted
      average margin to LIBOR + 11.5% and increased the origination fees charged
      to
      7.5% for new private student loans. This should allow us to increase the advance
      rate on our securitizations, reducing the amount of capital needed to support
      the financings, and increasing the return on that capital. Based upon market
      intelligence, we believe that other student lenders are pricing their assets
      similarly.




**BUSINESS
      TRENDS, UNCERTAINTIES AND OUTLOOK**




*Portfolio
      Funding*





The
      conditions of the debt capital markets generally, and the asset-backed
      securities, or ABS, market specifically, rapidly deteriorated beginning in
      the second quarter of fiscal year 2008. That deterioration accelerated during
      the third quarter of fiscal year 2008 and persists as of September 15, 2008.
      While we were able to complete our second securitization of private student
      loans in July 2008, there can be no assurance that we will have access to the
      securitization markets in the future. In fact, market conditions have worsened
      since we closed the 2008 securitization.





To
      date,
      student loan asset-backed securitizations have been the only source of permanent
      financing for our private student loans programs. As our loans available for
      securitization volume has grown, we have pursued alternative means to finance
      our student loans. 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 has adversely affected the
      pricing, terms and conditions of alternative funding mechanisms we have pursued.
      While we continue to have discussions with several warehouse lenders, we have
      not yet been able to obtain a commitment for a lender for additional warehouse
      financing.





*Collateral
      Performance*





Our
      collateral continues to perform well due to our more selective school list,
      tighter underwriting and stringent verification standards. Similar to the
      performance of other companies’ private student loan securitizations that we
      have observed from publicly available data, the most recent graduation vintage
      is performing worse than previous graduating classes that have entered into
      repayment. We believe that this performance is attributable to the worsening
      economy which can have a disproportionate impact on recent college graduates
      attempting to enter the workforce for the first time. Seventy-four percent
      of
      our managed portfolio is not yet in repayment, and as such has the opportunity
      to commence repayment in a better economic environment.




-44-
 *Table
          of Contents*




**Managed
      Private Loan Portfolio**


**6/30/2006**
              
              **6/30/2007**
              
              **6/30/2008****Loan
                  Status**
              
              *#
                  of Loans*
              
              *Loan
                  Balance*
              
              *#
                  of Loans*
              
              *Loan
                  Balance*
              
              *#
                  of Loans*
              
              *Loan
                  Balance*In
                  School
              
              
              1,779
              
              $
              23,613,625
              
              
              6,030
              
              $
              90,137,915
              
              
              12,390
              
              $
              188,846,969In
                  Grace
              
              
              305
              
              $
              3,849,527
              
              
              1,345
              
              $
              18,901,169
              
              
              2,795
              
              $
              41,146,288Deferred
              
              
              4
              
              $
              64,709
              
              
              40
              
              $
              755,153
              
              
              170
              
              $
              3,057,617RepaymentCurrent
              
              
              664
              
              $
              7,742,007
              
              
              2,200
              
              $
              26,815,512
              
              
              5,203
              
              $
              67,288,22730
                  - 60
              
              
              6
              
              $
              39,626
              
              
              39
              
              $
              418,996
              
              
              68
              
              $
              1,016,19461
                  - 90
              
              
              6
              
              $
              98,002
              
              
              22
              
              $
              285,290
              
              
              95
              
              $
              1,330,35991
                  - 120
              
              
              3
              
              $
              18,951
              
              
              19
              
              $
              221,325
              
              
              48
              
              $
              844,973121
                  - 150
              
              
              1
              
              $
              10,152
              
              
              10
              
              $
              136,255
              
              
              23
              
              $
              293,765151
                  - 180
              
              
              
              
              
              
              
              
              5
              
              $
              94,701
              
              
              17
              
              $
              288,195Forbearance
              
              
              4
              
              $
              73,729
              
              
              42
              
              $
              789,722
              
              
              286
              
              $
              5,534,685**Repayment
                  Eligible**
              
              
              **684**
              
              
              **7,982,467**
              
              
              **2,337**
              
              
              **28,761,802**
              
              
              **5,740**
              
              
              **76,596,398****All
                  Loans**
              
              
              **2,772**
              
              **$**
              **35,510,329**
              
              
              **9,752**
              
              **$**
              **138,556,040**
              
              
              **21,095**
              
              **$**
              **309,647,273**Delinquencies
              
              
              16
              
              
              166,731
              
              
              90
              
              
              1,061,866
              
              
              234
              
              
              3,485,291As
                  a % of Repayment Eligible Loans
              
              
              2.34%
              
              
              2.09%
              
              
              3.85%
              
              
              3.69%
              
              
              4.08%
              
              
              4.55%Forbearance
              
              
              4
              
              
              73,729
              
              
              42
              
              
              789,722
              
              
              286
              
              
              5,534,685As
                  a % of Repayment Eligible Loans
              
              
              0.58%
              
              
              0.92%
              
              
              1.80%
              
              
              2.75%
              
              
              4.98%
              
              
              7.23%




Note:
      Deferment and forbearance are repayment status under which the borrower is
      not
      required to make payments on the private student loan. The private students
      loans continue to accrue interest, and accrued interest is capitalized at the
      end of every calendar quarter and also upon entry into repayment. Deferment
      may
      be granted by the servicer in the event that, among other reasons, the borrower
      returns to school, enters active duty military service, is performing certain
      types of public service (e.g., the Peace Corps), or is participating in a
      medical or dental residency. Forbearance is for borrowers who do not qualify
      for
      a deferment but are unable to make current payments.




Off
                    BalanceSheet
                  Portfolio
                
                Balance
                    Sheet
                  Portfolio
                
                Total
                    Managed
                  PortfolioNumber
                    of Loans
                
                
                11,190
                
                
                9,905
                
                
                21,095Aggregate
                    Loan Balance
                
                $
                169.9
                    million
                
                $
                139.6
                    million
                
                $
                309.6
                    millionWeighted
                    Average qualifying FICO
                
                
                718
                
                
                713
                
                
                716Percentage
                    of loans with co-borrowers
                
                
                64
                %
                
                70
                %
                
                67
                %Percentage
                    of loans with borrower who is attending a graduate or professional
                    school
                
                
                37
                %
                
                34
                %
                
                36
                %Weighted
                    average federal cohort default rate for the schools attended
                    by
                    borrowers
                
                
                2.1
                %
                
                2.2
                %
                
                2.2
                %


In
      response to increased delinquencies, we have increased our efforts to supplement
      the efforts of our servicers and collection agencies, by assisting in enrollment
      verification and skip tracing. Our recent efforts in this regard have helped
      our
      servicers and collection agencies increase the cure rate with respect to
      delinquent borrowers. Our assumptions with regard to future collateral
      performance factor in this improvement, as we intend, if we are able to raise
      additional capital to sustain our operations, to continue to focus on these
      areas.





**Securitization
      Static Pool Performance**


In
      its
      first year of performance, the 2007-A securtization has had 0.95% of the pool
      default, net of cures. Loans are considered to be defaulted when they become
      more than 180 days past due or upon the event of bankruptcy. Because student
      loans are generally non-dischargeable in bankruptcy many of the loans to
      borrowers in bankruptcy can be expected to return to repayment once the
      bankruptcy has been resolved. Approximately 28% of the defaults are defaults
      due
      to bankruptcy. Of these defaults, 43% of them have cured, i.e., returned to
      non-defaulted status. If only defaults due to delinquency are considered, pool
      defaults, net of cures would be 0.75%.





As
      discussed above, we believe that the 2007-A securitization has been negatively
      impacted by the worse than expected performance of the 2008 graduation vintage.
      We believe that if the economy is better as future graduation classes enter
      repayment and if we continue our focus on improved servicing oversight that
      future graduation vintages will exhibit better performance. With these factors
      in mind, we have increased our estimate of cumulative defaults for the 2007-A
      securitization from 4.5% to 6.0%.





-45-
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            of Contents*




*Outlook*





We
      continue to believe that private student loans are an important source of
      college funding. College attendance is growing, the overall cost of college
      continues to rise and government guaranteed 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
      federal aid. Moreover, the College Cost Reduction and Access Act of 2007 has
      reduced the loan interest rates available in connection with certain federal
      undergraduate student loans, and we believe that we will continue to see
      competitors exit the student loan industry. We have continued to receive strong
      demand for our student loans, both throughout fiscal 2008 and the beginning
      of
      fiscal 2009, which is the peak season for loan production.





At
      present, our liquidity and capital resources are limited. Our continuing
      operations will be wholly dependent upon being able to raise additional capital
      in order to recommence our student lending program. See “Liquidity and Capital
      Resources”below.





***Revenues
      and Expenses***


We
      generate operating revenues from: interest accrued and origination fees on
      our
      student loan portfolio, origination and management fees paid to us by
      the EEF I, LLC for the generation and management of Preprime TM loans,
      and subscription and service revenues from our online college application
      business. Gains from the sale or securitizations of portfolios of our student
      loans are recorded in Non-Interest Income.





Our
      earnings and growth in earnings are directly affected by the size of our
      portfolio of student loans, the interest rate characteristics of our student
      loan portfolios, and the costs associated with originating, financing, and
      managing our student loan portfolios. Our income has historically been primarily
      generated by securitization income and interest income, or net interest earned
      on our student loan portfolios. Our quarterly revenue, operating results and
      profitability vary and may continue to vary on a quarterly basis, primarily
      because of the timing and volume of the loans we originate and because of the
      timing, size and structure of any securitizations we may execute.





In
      June
      2007, we completed our first securitization of private student loans.
      Securitization refers to the technique of pooling loans and selling them to
      a
      special purpose, bankruptcy remote entity, typically a trust, which issues
      securities to investors backed by those loans. The debt instruments that the
      trust issues to finance the purchase of these student loans are obligations
      of
      the trust, and not obligations of the Company. On a going forward basis, we
      plan
      to either sell or securitize student loan portfolios, which will generate a
      gain
      on sale for us for this asset. The timing of such an event is dependent on
      several factors, including but not limited to the following: the size of our
      student loan portfolios, our financial ability to hold this asset, the
      conditions in the credit and ABS markets at the time of the transaction for
      this
      asset class, and our ability to support the requirements for a sale or
      securitization transaction.





The
      gain
      that the Company books when it securitizes is driven by the ability of the
      Company to book the expected future residual cash flow, the excess of the
      securitized portfolios collections and releases from transaction reserve funds
      over the amount required to service the securitization debt, as an asset on
      its
      balance sheet post the sale of loans to the securitization trust. Because there
      are no readily available prices for such residual assets, GAAP accounting allows
      the Company to compute the fair value by discounting projected residual cash
      flows, which are determined based upon assumptions regarding collateral
      performance and discount rates that the Company believes are reasonable. If
      actual performance were to deviate negatively from these assumptions, the
      Company would be required to write-down its residual interest to its new fair
      value assumption resulting in a loss. The Company is required to re-evaluate
      its
      valuation of the residual interest in its securitization on a quarterly basis.
      In this regard, during the quarter ended June 30, 2008, the Company had to
      decrease the value of its residual interest by $5.5 million.




Interest
      income is primarily impacted by the size of the portfolio and the Company’s
      management of its portfolio for defaults and delinquencies. Since the Company’s
      private student loan portfolio floats with LIBOR either monthly or quarterly,
      the Company feels it has very limited interest rate exposure on this asset.
      Post-origination, the private student loan portfolio is most affected by rates
      of default, delinquencies, recoveries, and prepayments. The Company originated
      its first private student loan in June 2005, so its portfolio is not highly
      seasoned.





In
      determining the adequacy of the allowance for the loan losses on our private
      student loan portfolio, the Company considers several factors, including loans
      in repayment vs. those in deferred status, delinquency or default status, and
      recoveries.





-46-
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            of Contents*




The
      expenses we incur in operating our business include: bank fees charged for
      the
      origination of our student loans, referral marketing fees paid to our private
      label origination partners, interest and fee expense on the lines of credit
      with
      which we finance our student loans, servicing and custodial costs for our
      student loan portfolio, cost associated with hosting and developing our online
      college application business, the cost of marketing to our customers through
      direct-to-consumer channels such as direct mail, print and radio, and general
      corporate and administrative expenses, such as salaries and facilities expense.
      Operating expenses also include the depreciation of capital assets and
      amortization of intangible assets.





***Seasonality
      of Originations***


The
      student loan business is seasonal in nature and activity generally corresponds
      with the timing of tuition payments and other student-related borrowing needs
      throughout the school year. Our first fiscal quarter, the three months ending
      September 30, when students are starting or returning to school, is the busiest
      time of the year for us in originating loans. We typically receive the largest
      amount of loan applications during this quarter and correspondingly underwrite
      the most loans. There is a second surge in applications and originations as
      students prepare to meet their financial obligations for the semester that
      begins in January. This activity typically benefits our second fiscal quarter,
      the three months ending December 31, and our third fiscal quarter, the three
      months ending March 31.




**Student
      Loan Originations**


*($’s
      in Millions)*




Fiscal
                Year 2008Q4
            
            Q3
            
            Q2
            
            Q1Private
                Student Loans
            
            $
            31.8
            
            $
            27.0
            
            $
            33.1
            
            $
            72.4PreprimeTM
                Student Loans
            
            
            3.7
            
            
            14.0
            
            
            20.0
            
            
            34.0Federal
                Student Loans
            
            
            3.9
            
            
            1.8
            
            
            5.4
            
            
            22.5Total
                Student Loan Originations
            
            $
            39.4
            
            $
            42.8
            
            $
            58.4
            
            $
            129.0




Fiscal
                Year 2007Q4
            
            Q3
            
            Q2
            
            Q1Private
                Student Loans
            
            $
            24.8
            
            $
            24.1
            
            $
            22.1
            
            $
            31.8PreprimeTM
                Student Loans
            
            
            9.2
            
            
            9.7
            
            
            10.6
            
            
            13.8Federal
                Student Loans
            
            
            0.6
            
            
            3.5
            
            
            2.4
            
            
            1.8Total
                Student Loan Originations
            
            $
            34.6
            
            $
            37.3
            
            $
            35.1
            
            $
            47.4




Fiscal
                Year 2006Q4
            
            Q3
            
            Q2
            
            Q1Private
                Student Loans
            
            $
            15.4
            
            $
            7.8
            
            $
            7.8
            
            $
            7.8PreprimeTM
                Student Loans
            
            
            0.0
            
            
            0.0
            
            
            0.0
            
            
            0.0Federal
                Student Loans
            
            
            0.0
            
            
            0.0
            
            
            0.0
            
            
            0.0Total
                Student Loan Originations
            
            $
            15.4
            
            $
            7.8
            
            $
            7.8
            
            $
            7.8




Note:
      Totals may not sum due to rounding.





We
      tightened our underwriting criteria in April 2008, which has reduced the volume
      of loans approved and funded.




**CRITICAL
      ACCOUNTING POLICY AND ESTIMATES**




This
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations section discusses our consolidated financial statements, which
      have been prepared in accordance with accounting principles generally accepted
      in the United States of America. The preparation of these financial statements
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reported period. On
      an
      ongoing basis, management evaluates its estimates and judgments, including
      but
      not limited to those related to revenue recognition, accrued expenses, financing
      operations, contingencies, and litigation. Management bases its estimates and
      judgments on historical experience and on various other factors that are
      believed to be reasonable under the circumstances, the results of which form
      the
      basis for making judgments about the carrying value of assets and liabilities
      that are not readily apparent from other sources. Such estimates may be the
      most
      significant accounting estimates inherent in the preparation of our financial
      statements. Actual results may differ from these estimates under different
      assumptions or conditions. These accounting policies are described





-47-
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            of Contents*





and
      disclosed in relevant sections in this discussion and analysis and in the notes
      to the consolidated financial statements included in this annual report on
      Form
      10-K.





*Carrying
      Value of Private Student Loans*


The
      company records its private student loans on its balance sheet at the lower
      of
      its amortized cost or the fair market value of the private student loans,
      referred to as “lower of cost or market” or “LOCOM”. The carrying basis of the
      loans is represented by the outstanding principal balance plus accrued interest
      less the unamortized deferred origination fees and the valuation reserve. If
      the
      fair market value of the private student loans is less than the carrying basis,
      then a lower of cost or market adjustment is established on the balance sheet
      to
      reduce the net carrying value to fair market value.





There
      are
      different ways of estimating fair market value, but the Company believes that
      securitization valuation is the most accurate valuation technique, given
      available information. A loan portfolio’s securitization valuation is equal to
      the proceeds raised by securitization, net of transaction expenses and fees,
      plus the fair market value of the residual retained. Given that 69% of the
      Company’s owned private student loan portfolio as of June 30, 2008 was
      subsequently included in the 2008 securitization, we assumed that the portfolio
      as a whole would have a comparable securitization bond structure in terms of
      advance rates and ratings class sizes and that the securities would have the
      same pricing as the bonds in the 2008 securitization (which priced three days
      after the end of the fiscal year). To value the residual, we used the same
      collateral performance assumption we used in valuing the residual in our 2007
      securitization; see “Residual Valuation” below for a summary of how these
      assumptions were determined. Based upon these assumptions, the fair market
      value
      of our private student loans was $116.0 million as of June 30, 2008. The
      following table illustrates how the lower of cost or market reserve was
      calculated.





Private
                student loans
            
            $
            139.6
                millionValuation
                Reserve
            
            $
            (3.8)
                millionDeferred
                Origination Fees
            
            $
            (6.1)
                millionCarrying
                basis
            
            $
            129.7
                millionFair
                market value
            
            $
            116.0
                millionLower
                of cost or market adjustment
            
            $
            13.7
                million





*Residual
      Valuation*


Because
      there are no quoted market prices for our securitization residual receivable,
      we
      use discounted cash flow modeling techniques and the following key assumptions
      to estimate their values:





*•*
            the
                discount rate, which we use to calculate the fair value of our
                residuals;


*•*
            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;


*•*
            expected
                annual rate and timing of loan
                defaults;


*•*
            expected
                recoveries of defaulted loans; and


*•*
            fees
                and expenses of the securitization
                trusts.





We
      began
      originating student loans in June 2005, so our performance history is limited
      with respect to prepayments, defaults and recoveries. We base
      these estimates on what historical data we have, publicly available third party
      data and our industry experience, adjusting for specific program and borrower
      characteristics such as loan type, borrower creditworthiness and federal cohort
      default rate for the borrower’s school. We 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.





The
      following table shows the approximate weighted average assumptions for loan
      performance at June 30, 2008 and 2007; we had no residuals outstanding at June
      30, 2006 as we had not yet completed our first securitization.





Cumulative
              Defaults
            
            Recovery
              Percentage
            
            Annual
              Prepayments
            
            Auction
                Rate as a Spread Over LIBOR
            
            Discount
              Rate2008
            
            
            6.0
            %
            
            20
            %
            
            7
            %
            
            0.82
            %
            
            20
            %2007
            
            
            4.5
            %
            
            20
            %
            
            7
            %
            
            0.04
            %
            
            12
            %








-48-
 *Table
            of Contents*





Cumulative
      Defaults .
      We
      increased our cumulative default assumption to 6.0% to adjust for charge-off
      experience of our 2007 securitization pool, which has had 0.95% charge-offs,
      net
      of cures, in the first year of performance. Charge-offs have come in above
      initial expectation due to the performance of 2008 graduates who have been
      impacted by the worsening economy; we have observed similar trends in other
      student loan originators publicly available data. We note that 28% of
      charge-offs in the 2007 securitization have been charge-offs due to bankruptcy,
      which generally return to repayment after the bankruptcy has been resolved
      (43%
      have already cured), due to the fact that private student loans are generally
      non-dischargeable in a bankruptcy.





Recovery
      Percentage .
      Because
      the number of charge-offs we have had is very limited, our recovery experience
      is even more limited. We base our recovery assumption primarily based upon
      a our
      assessment of publicly available industry data.





Annual
      Prepayments .
      We
      apply a prepayment curve that starts low and increases over time as the loan
      seasons, averaging 7% annual prepayments over the life of the loan. Given our
      limited performance history, we derived our prepayment curve from publicly
      available static pool performance data. During its first year, our 2007
      securitization has experienced prepayment rates consistent with our projected
      curve.





Auction
      Rate as a Spread Over LIBOR .
      All of
      the senior securities issued by our 2007 securitization were auction rate
      securities. The interest rate on an auction rate security is reset every 28
      days
      at auction. Due to the deterioration of the auction rate market, the interest
      rates have increased dramatically since issuance. For the six months prior
      to
      June 30, 2008, the interest rates have been at or less than a basis point below
      the maximum rates, which are one-month LIBOR plus 1.50% for Aaa/AAA-rated
      securities and one-month LIBOR plus 2.50% for A2/A-rated securities. Our
      residual valuation is based upon the projection that the auction rate securities
      will continue to price at the maximum rate for 2 and 3 more years for the
      Aaa/AAA and A2/A-rated securities, respectively, after which time the rates
      will
      decline to rates which are lower but above historical levels.





It
      is possible, in the event of certain ratings agency actions, that these maximum
      rates 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, 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, as applicable, its maximum auction rate would be calculated
      as one-month LIBOR plus 3.50%.





Discount
      Rates .
      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. We changed our discount rate
      assumption based upon investor demand for our 2008 securitization, which priced
      three days after the end of fiscal 2008.





The
      following table summarizes the changes in our estimate of the fair value of
      the
      Residual Interest for the fiscal year ended June 30, 2008.




*($’s
                in thousands)*
            
            
            
            **Fiscal
                Year ended**
              **June
                30, 2008**Fair
                value at beginning of period
            
            
            
            
            $
            11,192Additions
                from new sales to securitization
            
            $
            1,993Accretion
                of interest income
            
            
            1,385Reversal
                of unrealized gain in other comprehensive income
            
            
            (2,757
            )Impairment
                recorded in Securitizaton Income/(Loss), net
            
            
            (7,720
            )Net
                change
            
            
            
            
            
            (7,099
            )Fair
                value at end of period
            
            
            
            
            $
            4,093




Sensitivities


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, would have a negative effect on the value of our residual
      interest. Student loan prepayments include either full or partial payments
      by a
      borrower in advance of the maturity schedule specified in the promissory note,
      including payments as a result of loan consolidation activity. 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





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trusts'
      student loan assets earn interest based on LIBOR and some trusts have
      outstanding securities that pay interest based on the results of auction rates,
      changes in the spread between LIBOR and the auction rate can affect the
      performance of the trusts which have issued auction rate notes.





The
      following table shows our loan performance assumptions and service receivables
      balances at June 30, 2008 and estimated changes that would result from
      changes in our loan performance assumptions. The effect on the fair value of
      the
      residual receivables are based on variations of 10% or 20%. We also discuss
      below the effect on the fair value of the residual 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.





*($’s
                in Thousands)*
            
            Percentage
                Change
              in
                Assumptions
            
            Residual
              Balance
            
            Percentage
                Change
              in
                AssumptionsDown
                20%
            
            Down
                10%
            
            
            
            Up
                10%
            
            Up
                20%Annual
                Prepayment RateResidual Balance
            
            $
            4,282
            
            $
            4,186
            
            $
            4,093
            
            $
            4,002
            
            $
            3,912% Change
            
            
            4.62
            %
            
            2.27
            %
            
            
            
            
            (2.22
            )%
            
            (4.42
            )%Cumulative
                Default RateResidual Balance
            
            $
            4,657
            
            $
            4,370
            
            $
            4,093
            
            $
            3,819
            
            $
            3,550% Change
            
            
            13.78
            %
            
            6.77
            %
            
            
            
            
            (6.69
            )%
            
            (13.27
            )%Default
                Recovery RateResidual Balance
            
            $
            3,983
            
            $
            4,038
            
            $
            4,093
            
            $
            4,148
            
            $
            4,203% Change
            
            
            (2.69
            )%
            
            (1.39
            )%
            
            
            
            
            1.34
            %
            
            2.69
            %Discount
                RateResidual Balance
            
            $
            5,387
            
            $
            4,690
            
            $
            4,093
            
            $
            3,580
            
            $
            3,139% Change
            
            
            31.61
            %
            
            14.59
            %
            
            
            
            
            (12.53
            )%
            
            (23.31
            )%




*($’s
                in Thousands)*
            
            Percentage
                Change
              in
                Assumptions
            
            Residual
                Balance
            
            Percentage
                Change
              in
                AssumptionsTighten
                25 basis points
            
            Tighten
                10 basis points
            
            
            
            Widen
                10 basis points
            
            Widen
                25 basis pointsSpread
                between LIBOR and Auction Rate IndicesResidual Balance
            
            $
            5,575
            
            $
            4,686
            
            $
            4,093
            
            $
            3,577
            
            $
            2,792% Change
            
            
            36.21
            %
            
            14.49
            %
            
            
            
            
            (12.61
            )%
            
            (31.79)%
            )%





Since
      the
      end of the 2008 fiscal year, two events have occurred that have changed our
      view
      regarding the valuation of the residual. First, the New York State Attorney
      General’s settlement with many of the major auction rate broker/dealers caused
      them to repurchase auction rate securities they had sold to their customers.
      We
      believe that the impact of this course of action will be to discourage
      broker/dealers from reviving the auction rate market in the future because
      of
      the precedent created. For this reason, we now believe that the appropriate
      assumption for the auction rate is that it will stay at the maximum rate until
      maturity. Under this assumption, the value of the residual would be less than
      $1
      million. Second, on August 18, 2008, Moody’s placed the auction rate securities
      from the 2007 securitization on watch for potential downgrade due to the higher
      than expected cost of funds. If the securities are downgraded, the maximum
      rate
      will increase by at least 1%, and we believe that it is likely that the
      securities will trade at the maximum rate until maturity. If this occurs, we
      would not expect to receive any cash from the residual, and its value would
      be
      zero.





*Goodwill
      & Intangibles*


When
      we
      acquired Embark in February 2007, we recorded goodwill and intangibles in
      connection with the transaction. Goodwill represents the value we paid in excess
      of the value of the assets acquired. The intangibles are the value of certain
      licenses and intellectual property acquired. On an annual basis we are required
      to evaluate the value of the goodwill and intangibles. If we cannot justify
      the
      value of the goodwill and intangibles, then we may be required to write them
      down to the fair market value and take a charge to earnings in the amount of
      the
      write-down. As of June 30, 2008, prior to testing, we valued the goodwill at
      $5.8 million and the intangibles, net of amortization, at $2.1 million.





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During
      fiscal year 2008, Embark had revenue of $5.9 million and a net loss of $(5.4)
      million. During the fiscal year, we invested heavily in the development of
      new
      technology, the launch of our Embark.com website in September 2007 and the
      development of a new software platform for the admissions management business.
      While our Embark subsidiary had a net loss, we believe that goodwill and
      intangible valuation is justified based upon projected cashflows to be generated
      by the business over the next four years. We believe that in future fiscal
      years
      we will be able to capitalize upon the users that opt-in to receive information
      about financial services and other products either by selling the leads to
      other
      financial services companies or by being able to market student loans to them
      on
      a profitable basis.




*Consolidation*


Our
      consolidated financial statements include the accounts of MRU Holdings, Inc.
      and
      its subsidiaries, after eliminating inter-company accounts and transactions.
      We
      have not consolidated the financial results of the MRU Student Loan Trust 2007-A
      purchasing loans that we have sponsored, because the transaction met the
      deconsolidation requirements described below. We have been required to
      consolidate MRU Student Loan Trust 2008-A, which closed on July 10, 2008,
      because the transaction did not meet all of the deconsolidation requirements
      described below.





To
      meet
      the sale criteria of FAS 140, the Company’s June 2007 securitization used a
      two-step structure with a Qualified Special Purpose Entity (“QSPE”) that legally
      isolates the transferred assets from the Company, even in the event of
      bankruptcy. The transactions are also structured, in order to meet sale
      treatment, to ensure that the holders of the beneficial interests issued by
      the
      QSPE are not constrained from pledging or exchanging their interests, and that
      the Company does not maintain effective control over the transferred
      assets.





The
      Company assessed the financial structure of the securitization to determine
      whether the trust or other securitization vehicle meets the sale criteria as
      defined in FAS 140 and accounts for the transaction accordingly. To be a QSPE,
      the trust must meet all of the following conditions:




·
            It
                is demonstrably distinct from the Company and cannot be unilaterally
                dissolved by the Company and at least ten percent of the fair value
                of its
                interests is held by independent third parties.·
            The
                permitted activities in which the trust can participate are significantly
                limited. These activities are entirely specified up-front in the
                legal
                documents creating the QSPE.·
            There
                are limits to the assets the QSPE can hold; specifically, it can
                hold only
                financial assets transferred to it that are passive in nature, passive
                derivative instruments pertaining to the beneficial interests held
                by
                independent third parties, servicing rights, temporary investments
                pending
                distribution to security holders and cash.·
            It
                can only dispose of its assets in automatic response to the occurrence
                of
                an event specified in the applicable legal documents and must be
                outside
                the control of the Company.




The
      FASB
      has embarked upon a project to amend FAS 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 FASB Interpretation 46I, *Consolidation
      of Variable Interest Entities (revised December 2003) - an interpretation of
      ARB
      No. 51 (“FIN 46R”)* .
      The
      FASB is expected to issue an exposure draft on this topic and the ultimate
      impact, if any, of these deliberations on our accounting practices is uncertain
      at this time.





We
      also
      have not consolidated our affiliate, EEF I, LLC. The Company has not
      consolidated this affiliate within its financial statements per FIN 46R, which
      requires consolidation by business entities of variable interest entities,
      which
      have one or more of the following characteristics (the Company’s application of
      the facts of the agreement to FIN 46 requirements are noted after
      each):




1.
            The
                equity investment at risk is not sufficient to permit the entity
                to
                finance its activities without additional subordinated financial
                support
                provided by any parties, including the equity holders. (The agreement
                anticipated the need for more than the initial funding for each member
                up
                to a limit of $26 million. The Company is limited to $1 million in
                potential equity investment in this agreement. This agreement was
                amended
                to a funding limit of $40 million, with the Company limit amended
                to $1.5
                million.)




2.
              The
                  equity investors lack one or more of the following essential
                  characteristics of a controlling financial
                  interest:




a.
              The
                  direct or indirect ability to make decisions about the entity’s activities
                  through voting rights or similar rights. (EEF I, LLC is controlled
                  by a
                  board of managers with voting rights held by the equity
                  investors.)
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   b.
              The
                obligation to absorb the expected losses of the entity. (Gains and
                losses
                are allocated to members based on their respective
                investments.)
  c.
              The
                right to receive the expected residual return of the entity. (Residual
                interests are returned to the members in a pro rata distribution
                based on
                their respective percentage
                interests.)




3.
              The
                  equity investors have voting rights that are not proportionate
                  to their
                  economic interests, and the activities of the entity involved are
                  conducted on behalf of an investor with a disproportionately small
                  voting
                  interest. (Voting Rights: The agreement requires the unanimous
                  vote of the members; under Delaware law, managers who are also
                  members have the same rights and powers of other members unless
                  the
                  operating agreement provides otherwise. Entity Activities: EEF
                  I, LLC
                  provides student loans to unrelated third parties and
                  thereby generates profits which are allocated to the
                  members in proportion to their respective percentage
                  interests.)




**RESULTS
      OF OPERATIONS**




***Years
      ended June 30, 2008, June 30, 2007 and June 30, 2006***





**INTEREST
      INCOME** The
      Company’s interest income is mostly comprised of interest income on the private
      and federal loan portfolios and the accrual of interest income on the residual
      interest from the Company’s 2007 securitization. Total interest income increased
      to $10.9 million for the year ended June 30, 2008 (“fiscal 2008”) from $8.5
      million for the year ended June 30, 2007 (“fiscal 2007”) and $1.6 million for
      the year ended June 30, 2006 (“fiscal 2006”). The increase from fiscal 2006 to
      2007 is primarily attributable to the growth of our private student loan
      portfolio, as loan portfolio interest income on private student loans increased
      from $1.2 million to $7.8 million. Loan portfolio interest income on private
      student loans decreased to $7.1 million in fiscal 2008 due to the fact that
      we
      securitized most of our private student loans in our 2007 securitization at
      the
      end of fiscal 2007 and due to decreases in the London Interbank Offered Rate
      (“LIBOR”), upon which the interest rates on our loans are set. Despite the
      slight decline of loan portfolio interest income on private student loans,
      total
      interest income increased from fiscal 2007 to 2008 due to the addition of $1.4
      million residual interest income from our 2007 securitization and $1.3 million
      of loan portfolio interest income on federal student loans which increased
      from
      $0.1 million in fiscal 2007 due to the significant origination volume and
      portfolio growth during fiscal 2008.





**INTEREST
      EXPENSE** The
      total interest expense increased to $7.9 million for fiscal 2008 from $6.1
      million for fiscal 2007 and $1.1 million for fiscal 2006. The increase from
      fiscal 2006 to 2007 is primarily attributable to the growth of warehouse
      facility borrowings to fund the growth of our private student loan portfolio,
      as
      facility interest and origination bank costs increased from $1.1 million to
      $6.1
      million. Facility interest and origination bank costs increased in fiscal 2008
      to $6.7 million due to increases in interest rates for our warehouse facilities.
      Additionally, the increase in total interest expense in fiscal 2008 was due
      to
      the increase from in other interest expense of $1.1 million which is comprised
      of interest costs related to the Senior Secured Notes detailed in Note 12 of
      the
      Notes to the consolidated financial statements.





**NON-INTEREST
      INCOME** The
      Company’s non-interest income is primarily comprised of fair value adjustments
      to the Company’s private student loan portfolio, income relating to the 2007
      securitization as well as the subscription and service revenue fees from the
      Company’s Embark subsidiary. Non-interest income decreased to $(10.6) million in
      fiscal 2008 from $18.5 million in fiscal 2007; there was no material
      non-interest income in fiscal 2006. In fiscal 2008, the Company recorded a
      fair
      value adjustment relating to its private student loan portfolio of $(13.7)
      million, due to the fact that at June 30, 2008, the Company estimated that
      the
      fair market value of its private student loan portfolio was less than its
      carrying value. Securitization income (net) decreased to $(3.7) million in
      fiscal 2008, reflecting the gain-on-sale during the first and second quarter
      of
      fiscal 2008 of the second and third pools of loans to the 2007 securitization,
      and reduced by impairment write-downs of the Company’s Residual Interest in the
      2007 securitization that were recorded in the third and fourth quarters of
      fiscal 2008, from $16.2 million in fiscal 2007, reflecting the gain on the
      initial sale of loans to the 2007 securitization. Subscription and service
      revenue, primarily from Embark increased to $5.9 million for fiscal 2008 from
      $1.7 million for fiscal 2007, in part due to the fact that income from Embark
      was only recorded for less than five months, from the acquisition date in
      February through the end of the fiscal year on June 30. Origination processing
      fees generated by the Company’s origination of PrePrimeTM loans for
      EEF I, LLC increased 56% to $0.72 million for fiscal 2008 from $0.46 million
      for
      fiscal 2007, proportionate with the growth in origination volume.





**NON-INTEREST
      EXPENSE** In
      connection with the Company’s student lending business, non-interest expense
      increased to $45.2 million in fiscal 2008 from $42.1 million in fiscal 2007
      and
      $26.8 million in fiscal 2006. The rate of increase of non-interest expense
      was
      7% from fiscal 2007 to fiscal 2008 and 57% from fiscal 2006 to fiscal 2007.
      This
      compares favorably to the 75% increase in loan originations from fiscal 2007
      to
      fiscal 2008 and 298% from fiscal 2006 to fiscal 2007, demonstrating the scale
      that the Company’s business model is achieving.





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Corporate
      general and administrative expenses increased to $13.0 million for fiscal 2008
      from $11.7 million in fiscal 2007 and $9.6 million in fiscal 2006. In May 2007,
      the Company also moved to a larger corporate office, so rent and other
      facilities expense in fiscal 2008 is $1.1 million higher than in fiscal
      2007.





Sales
      and
      marketing expense increased to $14.5 million for fiscal 2008 from $13.3 million
      for fiscal 2007 and $7.4 million for fiscal 2006. Referral marketing costs
      increased to $2.0 million for fiscal 2008 from $1.0 million for fiscal 2007
      and
      $0.4 million for fiscal 2006. These two categories combined represent the
      Company’s aggregate marketing expenditure and are $16.5 million, $14.3 million,
      $8.4 million for fiscal 2008, 2007 and 2006, respectively. The rate of increase
      of aggregate marketing expenditure was 15% from fiscal 2007 to fiscal 2008,
      during which time period originations grew 75%, and 70% from fiscal 2006 to
      fiscal 2007, during which time originations grew 298%, further demonstrating
      the
      scalability of the Company’s brand and marketing activities.





Operations
      expense increased to $6.1 million in fiscal 2008 from $5.1 million in fiscal
      2007 and $2.5 million in fiscal 2006. The rate of increase in operations expense
      was 20% from fiscal 2007 to fiscal 2008 and 104% from fiscal 2006 to fiscal
      2007. Compared to loan volume growth during the same period, these much lower
      growth rates indicate that our customer service and origination processing
      functions are evidencing increased efficiency.





Technology
      development decreased to $0.9 million in fiscal 2008 from $2.7 million in fiscal
      2007 and $1.5 million in fiscal 2006. The Company’s expenditure on technology
      development allowed it to build and improve its proprietary loan origination
      platform. As the core technology was successfully established, the need for
      additional development expense has declined.





Within
      non-interest expense, stock compensation expense, which is a non-cash expense,
      was $3.4 million, $5.6 million and $7.8 million in fiscal 2008, 2007 and 2006,
      respectively.





Legal
      expenses increased to $2.2 million in fiscal 2008 from $1.0 million in fiscal
      2007 and $0.6 million in fiscal 2006. The significant increase in legal
      expenditures in 2008 was due to the increased number of financing transactions
      that the Company pursued in order to increase its capital and
      liquidity.





Depreciation
      and amortization expense decreased to $3.9 million in fiscal 2008 from $5.9
      million in fiscal 2007 and $4.0 million in fiscal 2006. The decrease is
      primarily due to the deferred financing fees related to the MLBU and Nomura
      credit facilities, which were fully amortized as of June 30, 2007.





In
      connection with the Company’s college admissions software business, non-interest
      expense increased to $11.3 million in fiscal 2008 from $2.3 million in fiscal
      2007. In making a comparison between fiscal year 2008 and fiscal year 2007
      performance for Embark, it is important to recognize that because the Company
      acquired Embark through a transaction structured as an asset purchase, the
      fiscal 2007 statement of operations only includes performance from the
      acquisition date in February 2007 through the end of the fiscal year on June
      30,
      a little over a third of year. Even adjusting for the differences in measurement
      periods, expenditure at Embark has increased in order to launch Embark.com,
      develop the next generation of Embark’s admissions management software towards
      whole institution management, and expand its sales force.





**NET
      LOSS** Net loss
      applicable to common shares increased to $(71.1) million for fiscal 2008 from
      $(29.4) million in fiscal 2007 and $(38.6) million in fiscal 2006. Significant
      contributors to the fiscal 2008 net loss included:





·
            the
                $(13.7) million fair value adjustment to the Company’s private student
                loan portfolio which was due to increased cost of funds and reduced
                advance rates for asset backed
                securities,


·
            the
                $(5.4) million net loss from Embark caused by investment in and expansion
                of products and services, and


·
            the
                $(3.7) million net adjustment to securitization income associated
                with
                write-downs of the Company’s residual interest from the 2007
                securitization mainly due to increased cost of funds in the auction
                rate
                market.





Fiscal
      year 2007 benefited from $16.2 million of securitization income generated by
      the
      gain-on-sale from the 2007 securitization, which helped offset operating
      expenses. Net loss per basic and diluted shares was $(2.40), $(1.42), and
      $(2.56) for fiscal years 2008, 2007 and 2006, respectively, based upon weighted
      average number of shares outstanding of 29.6 million, 20.7 million, 15.1
      million, respectively.




**LIQUIDITY
      AND CAPITAL RESOURCES** As
      of June 30, 2008, the Company had a $200 million warehouse line through its
      affiliate, EE SPV, with DZ Bank to fund private student loans and PrePrimeTM
student loans and a $125 million





-53-
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            of Contents*





warehouse
      line from MLBU to fund private student loans and federal student loans. At
      June
      30, 2008, the DZ Bank line had $72 million of open capacity and the MLBU line
      had $3 million of open capacity. The MLBU facility had a maturity date of July
      15, 2008. The Company’s DZ Bank facility is a five-year facility that does not
      come up for renewal until April 2012.





On
      July
      10, 2008, the Company closed a securitization of its private student loans
      that
      had been financed on the MLBU warehouse line. All of the eligible private
      student loans on the MLBU warehouse line were transferred to the securitization.
      At the same time, the Merrill Facility was extended until September 26,
      2008. In connection with the extension, the federal student loan funding
      capacity was restricted to $36 million (outstanding federal borrowings totaled
      approximately $35 million) and only subsequent disbursements of already funded
      loans were allowed to be pledged to the line for new borrowing. The interest
      rate charged to fund federal loans was increased. The private student loan
      funding capacity was reduced to $15 million, and the advance rate was decreased
      and the interest rate increased.





On
      September 15, 2008, MRUF and MLBU amended the existing facility agreements
      to
      extend the maturity date from September 26, 2008 to November 25, 2008.
      Additionally, MLBU waived the tangible net worth covenant with respect to the
      Company, of which the Company would have been in violation absent such waiver,
      until the earlier of the new maturity date or the date upon which the Company
      raises at least $10 million of equity. The amendment to the facility also
      provided MLBU with the ability to sell the federal loan portfolio financed
      by
      the facility at its sole discretion. If the federal student loan portfolio
      is
      sold for proceeds in excess of the amounts due pursuant to the facility, then
      any excess proceeds shall go to MRUF. In the event that the federal student
      loans are sold for less than the principal and interest due on the facility,
      neither MRUF nor the company would be obligated to pay any deficiency balance
      with respect to the facility, such amount to be forgiven by MLBU. In such an
      event, the Company would expect to incur a loss of approximately $0.5 million,
      representing the excess of the amount at which the federal student loans are
      recorded on its balance sheet and the amount of outstanding indebtedness under
      the MLBU facility.




On
      September 15, 2008, the Company’s affiliate
      Education Empowerment SPV, LLC and DZ Bank informally agreed to an
      amendment of the existing facility agreements to waive until October 31, 2008
      the tangible net worth and liquidity ratio covenants with respect to the
      Company, of which the Company would have been in violation absent such waiver.
      The amendment to the facility will also provide that there will be no more
      borrowings supported by private student loans until the Company is in compliance
      with the tangible net worth and liquidity ratio covenants and the outstanding
      borrowings supported by the private student loans pledged to the facility are
      paid down to a 89% advance rate, which will be the new advance rate for
      borrowings supported by private student loans. The Company estimates that given
      the current balance of private student loans pledged to the line that the
      requirement to reduce the advance rate from 96.5% to 89% will require the
      Company to pay approximately $7 million to reduce the outstanding balance of
      the
      debt. The amendment also provides for increases in the minimum FICO score and
      interest margin for future private student loans funded. There will be no
      further fundings of PrePrimeTM loans under the facility, but the
      financing terms of existing PrePrimeTM loans pledged to the line
      remain the same. The parties have agreed in principal to the terms above and
      are
      currently drafting an amendment which is expected to be signed in the next
      few
      days.





On
      September 5, the Company paused origination of new private loans due to limited
      warehouse capacity and capital. On September 8, DZ Bank halted all additional
      fundings until the Company was able to raise additional equity
      capital.





On
      September 8, 2008, the Company disclosed that it planned to raise up to $250
      million in a private offering of equity or convertible debt securities. There
      can be no assurances that the Company will be able to raise any capital through
      an offering of equity or convertible debt. The proceeds raised would be used
      to
      fund working capital needs, meet the capital requirements of potential future
      warehouse lines and to directly finance student loans. The Company believes
      that
      it would be feasible to fund loans using equity in lieu of a warehouse line
      and
      then sell those loans into a term securitization or on a whole loan basis in
      order to permanently finance them, recycling the capital used to fund new loans.
      However, there can be no assurance that such permanent financing will be
      available on terms acceptable to the Company, or at all.





As
      of
      September 15, 2008, the Company’s liquidity and capital resources are extremely
      limited. The Company has $13 million of borrowing capacity on the DZ Bank line
      but will not be able to access it until additional equity capital is raised.
      The
      Company continues to have discussions with several potential lenders regarding
      obtaining new warehouse facilities but as of yet does not have a commitment.
      Any
      new warehouse facility would have an additional equity capital raise as a
      condition precedent. The Company will not be able to originate new loans until
      it raises additional equity capital.





The
      Company’s payables and accruals are approximately $3.4 million in excess of
      available cash; the Company has instituted informal payment plans with the
      majority of its vendors.





The
      Company requires additional equity capital in the near term to maintain its
      current operations. The Company’s independent registered public accounting firm
      has issued a going concern opinion indicating that there is substantial
      doubt





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that
      the
      Company can continue as a going concern. The Company is currently seeking
      additional equity or convertible debt financing that would allow it to continue
      to operate as a going concern. To the extent adequate equity, convertible debt
      or other financing is not available, the Company would have to curtail or cease
      completely its operations and may ultimately cease to exist.





**CASH
      AND CASH EQUIVALENTS AND ACCOUNTS RECEIVABLE** As of
      June 30, 2008, the Company had unrestricted cash and cash equivalents of $10.2
      million, restricted cash of $2.4 million, and accounts receivable of $2.0
      million compared to unrestricted cash of $11.6 million, restricted cash of
      $3.2
      million, and accounts receivable of $2.0 million as of June 30, 2007. $2.4
      million of the June 30, 2008 balance of restricted cash was security for the
      Company’s subsidiaries’ loan purchase and sale agreements with the Bank
      which fluctuates with the volume of the loans originated. Accounts receivable
      are related to business activity generated by our Embark
      subsidiary.





The
      Company maintains cash and cash equivalent balances at financial institutions
      that are insured by the Federal Deposit Insurance Corporation up to $100,000.
      The Company’s uninsured cash balances were $10,470,000 and $13,507,000,
      respectively; for the fiscal years ended June 30, 2008 and 2007.





**STUDENT
      LOAN RECEIVABLES** As of
      June 30, 2008; the Company had a balance of private student loans receivables
      (net of reserves) of $135.8 million compared to $5.4 million as of June 30,
      2007. The amount on the Company’s balance sheet increased as a result of the
      increased loan volume during the fiscal year, reduced by the sale of
      approximately $32.8 million of loans into the Company’s 2007 securitization
      transaction.





At
      June
      30, 2008, the Company had a balance of $35.4 million of federal student loan
      receivables compared to $7.4 million at June 30, 2007. The Company launched
      its
      federal student loan program in fiscal 2007.





**FIXED
      ASSETS** At June
      30, 2008 the Company had $2.7 million of net fixed assets compared to $1.6
      million at June 30, 2007. The increase is mainly due to additional
      technology spending at the Company’s Embark subsidiary and the purchase of a
      business software system.





**OTHER
      ASSETS** At June
      30, 2008, the Company had $15.3 million in other assets compared to $11.9
      million at June 30, 2007. Other assets primarily include security deposits,
      intangibles, goodwill, deferred financing fees and prepaid expenses and other
      assets. Security deposits were $1.0 million at June 30, 2008 associated with
      the
      Company’s leases for office space and loan servicing contracts. The intangible
      assets and goodwill total $7.9 million at June 30, 2008 and are mainly related
      to the TPR transaction (described in Note 5 - Intangible Assets to the
      consolidated financial statements). The deferred financing fees (net of
      amortization) total $1.1 million at June 30, 2008. Prepaid
      expenses and other assets total $4.2 million at June 30, 2008.




**LIABILITIES** Total
      liabilities were $200.9 million at June 30, 2008 compared to $21.5 at June
      30,
      2007. The increase is primarily due to additional borrowing on the Merrill
      Facility and our credit facility with DZ Bank for funding of loan originations;
      when the Company closed its 2007 securitization on June 28, 2007, the
      outstanding balance on the MLBU line was substantially reduced. Client deposits
      and deferred contract revenues were $4.7 million related to prepaid annual
      school contracts and application fees collected on behalf of client schools
      generated by our Embark subsidiary. As of June 30, 2008, the Company had $6.8
      million in accounts payable and $2.8 million in accrued expenses, compared
      to
      $3.8 million and $0.5 million, respectively as of June 30, 2007.




**CONTRACTUAL
      OBLIGATIONS AND COMMERCIAL COMMITMENTS**


**Contractual
      Obligations**




Total
            
            Less
                than 1 year
            
            1-3
                years
            
            3-5
                years
            
            More
                than 5 yearsLong
                Term Debt Obligations
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Capital
                Lease Obligations
            
            $
            0.5
                million
            
            $
            0.3
                million
            
            $
            0.1
                million
            
            $
            0.1
                million
            
            $
            0Operating
                Lease Obligations
            
            $
            12.3
                million
            
            $
            2.1
                million
            
            $
            4.2
                million
            
            $
            4.2
                million
            
            $
            1.8
                millionUnconditional
                Purchase Obligations
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Other
                Long-Term Obligations
            
            $
            11.2
                million
            
            $
            0
            
            $
            11.2
                million
            
            $
            0
            
            $
            0Total
                Contractual Cash Obligations
            
            $
            24.1
                million
            
            $
            2.4
                million
            
            $
            15.5
                million
            
            $
            4.3
                million
            
            $
            1.8
                million





The
      Company leases office equipment and corporate space under leases with terms
      between one and seven years. The capital lease obligations are related to
      Embark's leasing of fixed assets. Monthly payments under the current operating
      leases range from $200 to $142,375; the monthly rent on the Company’s
      headquarters increases to $150,750 after the first





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three
      years. The Company is required to pay its pro rata share of costs related to
      certain of the leased facilities. The Other Long-Term Obligations includes
      the
      Senior Secured Notes detailed in Note 12 - Senior Secured Notes, which has
      a
      three-year term.




**Commercial
      Commitments**




Total
            
            Less
                than 1 year
            
            1-3
                years
            
            3-5
                years
            
            More
                than 5 yearsLines
                of Credit
            
            $
            325.0
                million
            
            $
            125.0
                million
            
            $
            0
            
            $
            200.0
                million
            
            $
            0Standby
                Letters of Credit
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Guarantees
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Standby
                Repurchase Obligations
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Other
                Commercial Commitments
            
            $
            5.5
                million
            
            $
            5.5
                million
            
            $
            0
            
            $
            0
            
            $
            0Total
                Commercial Commitments
            
            $
            330.5
                million
            
            $
            130.5
                million
            
            $
            0
            
            $
            200.0
                million
            
            $
            0





As
      of
      June 30, 2008, the Company had a $125 million credit facility with MLBU, terms
      of which are described in the Notes to the Consolidated Financial Statements
      included in this annual report on Form 10-K. The Company had an outstanding
      balance of $121.9 million on its credit facility with MLBU at June 30, 2008
      and
      $11.7 million at June 30, 2007. The Company has a $200 million credit facility
      with DZ Bank, terms of which are described in the Notes to the Consolidated
      Financial Statements included in this annual report on Form 10-K. The
      Company had an outstanding balance of $38.8 million with DZ Bank at June 30,
      2008.  During fiscal 2007, the Company paid off the Nomura credit facility.
      The Company’s subsidiaries have loan purchase and sale agreements with the Bank
      and at June 30, 2008, the Company had total commitments to the Bank of $5.5
      million compared to $1.4 million at June 30, 2007.




**OFF-BALANCE
      SHEET ARRANGEMENTS/TRANSACTIONS**




In
      2007,
      we securitized student loans through a bankruptcy remote, qualified special
      purpose trust. The transaction structure met the requirements for
      deconsolidation as outlined by FAS 140. See “Note 2 - Summary of
      Significant Accounting Policies - Securitization Accounting” in the consolidated
      financial statements for a discussion of our determination to not
      consolidate the securitization trust.




**INFLATION**





The
      Company does not believe inflation has a significant effect on its
      operations.




**RECENT
      ACCOUNTING PRONOUNCEMENTS**


See
“Note
      2 - Summary of Significant Accounting Policies - Recent Accounting
      Pronouncements” in the consolidated financial statements.




**RECENT
      DEVELOPMENTS**


See
      “Note 20 - Subsequent Events” in the consolidated financial
      statements.





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**Item
      7A.****Quantitative
      and Qualitative Disclosures about Market Risk.**





*Risks
      Related to Cash and Cash Equivalents*




We
      have
      market risk exposure related to changes in interest rates applicable to our
      cash
      and cash equivalents. We manage our market risk through a conservative
      investment policy, the primary objective of which is preservation of capital.
      As
      of June 30, 2008, cash and cash equivalents consisted primarily of highest-rated
      money market funds investing in government and implicitly government backed
      securities, bank demand deposits which are immediately available and
      certificates of deposit of up to 7-days maturity. As a result, we do not believe
      a change in interest rates would have a material impact on the fair value of
      cash and cash equivalents.





*Risks
      Related to Student Loans held for Sale*




We
      also
      have market risk exposure to our student loans held for sale. Our loans held
      for
      sale at June 30, 2008, consisted of $139.6 million of private student loans
      and
      $35.3 million of federal student loans. Our loans held for sale are recorded
      at
      lower of cost or market. Since all of our student loans are floating rate and
      are financed using floating rate liabilities, we do not believe that a change
      in
      interest rates would materially impact the value of the loans. The value of
      the
      loans is primarily sensitive to credit spreads associated with the cost of
      financing such loans, whether on a short term basis or long term through
      securitization. For an analysis of the determination of the fair market value
      of
      student loans held for sale at June 30, 2008 based on changes in these
      securitization valuation assumptions, see Note 2 in the Notes to the
      consolidated financial statements contained in this annual report on Form
      10-K.





*Risks
      Related to Residual Interests in Securitization*




Because
      there are no quoted market prices for our Residual Interests, we use discounted
      cash flow modeling techniques and various assumptions to estimate their values.
      We base these estimates on the individual terms of the loans, borrower and
      co-borrower credit characteristics, the federal cohort default rate as reported
      by the U.S. Department of Education for the institution attended, the borrower’s
      programs of study, industry data regarding the performance of other private
      student loans, the terms of the 2007 securitization and the expected cost of
      funds. Increases in our estimates of defaults, prepayments and discount rates,
      increases in the spread between LIBOR indices and auctions rates, as well as
      decreases in default recovery rates, would have a negative effect on the value
      of our residuals. For an analysis of the estimated change in residual
      receivables balance at June 30, 2008 based on changes in these loan performance
      assumptions, see Note 16 in the Notes to the consolidated financial statements
      contained in this annual report on Form 10-K.




**Item
      8.****Financial
      Statements and Supplementary Data.**





The
      financial statements required by this item and the reports of the independent
      accountants thereon required by Item 14(a)(2) appear on pages F-2 to
      F-46 .
      See
      accompanying Index to the Consolidated Financial Statements on page F-1.
      The supplementary financial data required by Item 302 of Regulation S-K appears
      in Note 18 to
      the
      consolidated financial statements.





-57-
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            of Contents*




**Item
      9.****Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.**




None.




**Item
      9A.****Controls
      and Procedures.**




***Evaluation
      of Disclosure Controls and Procedures***




An
      evaluation of the effectiveness of the design and operation of our “disclosure
      controls and procedures” (as defined in Rule 13a-15(e)) under the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the
      period covered by this annual report on Form 10-K was made under the supervision
      and with the participation of our management, including our Chief Executive
      Officer and Chief Financial Officer. Based upon this evaluation, our Chief
      Executive Officer and Chief Financial Officer have concluded that our disclosure
      controls and procedures (a) are effective to ensure that information required
      to
      be disclosed by us in reports filed or submitted under the Exchange Act is
      timely recorded, processed, summarized and reported and (b) include, without
      limitation, controls and procedures designed to ensure that information required
      to be disclosed by us in reports filed or submitted under the Exchange Act
      is
      accumulated and communicated to our management, including our Chief Executive
      Officer and Chief Financial Officer, as appropriate to allow timely decisions
      regarding required disclosure.





***Management’s
      Report on Internal Control over Financial Reporting***




Management’s
      Report on Internal Control over Financial Reporting, which appears on
      page F-3, is incorporated herein by reference.




***Attestation
      Report of Registered Public Accounting Firm***




The
      effectiveness of our internal control over financial reporting as of June 30,
      2008 has been audited by Bagell, Josephs, Levine & Company, L.L.C. an
      independent registered public accounting firm, as stated in their report which
      appears on page F-2, and is incorporated herein by reference.




***Changes
      in Internal Controls***




Other
      than the changes described below related to the Company’s remediated material
      weakness, there were no significant changes in our “internal control over
      financial reporting” (as defined in Rules 13a-15(f) and 15d-15(f) under the
      Exchange Act) that occurred during the quarter ended June 30, 2008 that have
      materially affected, or are reasonably likely to materially affect, our internal
      control over financial reporting.





During
      the fourth quarter of our 2008 fiscal year, our management identified, and
      disclosed to the Company’s audit committee, a material weakness in our internal
      control over financial reporting which related to our control over our cash
      assets. A “material weakness” is defined as “a deficiency, or a combination of
      deficiencies, in internal control over financial reporting, such that there
      is a
      reasonable possibility that a material misstatement of the company's annual
      or
      interim





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financial
      statements will not be prevented or detected on a timely basis.” Prior to June
      30, 2008, we remediated the problem by implementing systems, procedures and
      additional controls to prevent recurrence. Management has tested the
      effectiveness of the newly implemented controls and found them to be operating
      effectively. As a result, management has concluded that, as of June 30, 2008,
      the material weakness that was identified in the fourth quarter of the 2008
      fiscal year had been remediated as of June 30, 2008.




**Item
      9B.****Other
      Information.**




Because
        this Annual Report on Form 10-K is being filed within four business days
        after
        the applicable triggering events, the information below is being disclosed
        under
        this Item 9B instead of under Item 1.01 (Entry into a Material Definitive
        Agreement) of Form 8-K.
 
 **Waiver
        of Certain Events of Default with Respect to Senior Secured
        Notes**
 
 On
        September 12, 2008, we entered into a Waiver and First Amendment agreement
        (the
“Senior Secured Notes Amendment”) with respect to our 12% senior secured notes
        (the “Senior Secured Notes”). The Senior Secured Notes Amendment was made by and
        among the Company; Embark Corp., a Delaware corporation (“Embark”), Embark
        Online, Inc, a Delaware corporation (“Embark Online”), Goto College Holdings
        Inc., a Delaware corporation (“Goto College”), iempower, inc., a Delaware
        corporation (“iempower”), MRU Originations, Inc., a Delaware corporation (“MRU
        Originations”), and MRU Universal Guaranty Agency, Inc., a Delaware corporation
        (“MRU Universal”; Embark, Embark Online, Goto College, iempower, MRU
        Originations and MRU Universal, collectively, the “Subsidiaries”), each of which
        is a Subsidiary of the Company; Longview Marquis Master Fund, L.P., a British
        Virgin Islands limited partnership (including as successor to The Longview
        Fund,
        L.P., a California limited partnership, under the Purchase Agreement (as
        defined
        below), “Buyer”); and Viking Asset Management, LLC, a California limited
        liability company, in its capacity as collateral agent for the benefit of
        Buyer
        (together with its successors and assigns in such capacity, the “Collateral
        Agent”). The Senior Secured Notes Amendment amends and temporarily waives
        certain provisions of the Securities Purchase Agreement, dated October 19,
        2007,
        between the Company and Buyer (the “Purchase Agreement”).
 
 The
        Senior Secured Notes Amendment waives until October 17, 2008 the covenant
        with
        respect to the amount of our indebtedness as it relates to payables, as the
        Company would have payables in excess of the amount permitted under the Purchase
        Agreement absent such waiver. The covenant has been amended to require payables
        not to exceed $11 million on or prior to October 17, 2008 and $5 million
        after
        October 17, 2008. The Senior Secured Notes Amendment also provides a new
        covenant that requires the Company to maintain a minimum unrestricted cash
        balance of $4.35 million. Additionally, the Company agreed to repay the Senior
        Secured Notes in full upon the event that the Company receives $30 million
        or
        more in gross proceeds from the sale of equity or debt securities and/or
        any
        sale or disposition of assets outside the ordinary course of business. In
        consideration for the Senior Secured Notes Amendment, the Company paid the
        holders of the Senior Secured Notes an amendment fee of $1.5 million and
        prepaid
        $0.36 million of interest on the Senior Secured Notes and the $0.26 million
        facility fee that would have been due on October 20, 2008. Unless the Company
        is
        able to raise additional equity capital, it will not be possible to be in
        compliance with the amended covenants after October 17, 2008, as the amount
        of
        cash needed to reduce payables if paid out would cause the Company to violate
        the minimum unrestricted cash covenant. In this event, unless the Company
        were
        able to secure an additional waiver and amendment from the holders of the
        Senior
        Secured Notes, an event of default would occur with respect to the Senior
        Secured Notes, and, if the holders of the Senior Secured Notes chose to
        accelerate their debt, the Company would likely need to file for
        bankruptcy.
  -59-
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  **Extension
          of the Merrill Facility and Waiver to Certain Events of
          Default**


On
        September 15, 2008, MRU Funding SPV, Inc., the Company’s private student lending
        subsidiary (“MRUF”), and MLBU amended the Merrill Facility to extend its
        maturity date from September 26, 2008 to November 25, 2008 (the “New Maturity
        Date”). The amendment also waives the tangible net worth covenant with respect
        to the Company until the earlier of the New Maturity Date or the date upon
        which
        the Company raises at least $10 million of equity, as the Company would have
        been in violation absent such waiver. In addition, the amendment provides
        MLBU
        with the ability to sell the federal loan portfolio financed by the facility
        at
        its sole discretion. If the federal student loan portfolio is sold for proceeds
        in excess of the amounts due pursuant to the facility, then any excess proceeds
        shall go to MRUF. In the event that the federal student loans are sold for
        less
        than the principal and interest due on the facility, neither MRUF nor the
        company would be obligated to pay any deficiency balance with respect to
        the
        facility, and such would be forgiven by MLBU. In such an event, the Company
        would expect to incur a loss of approximately $0.5 million, representing
        the
        excess of the amount at which the federal student loans are recorded on its
        balance sheet and the amount of outstanding indebtedness under the Merrill
        Facility.
 
 **Waiver
        of Certain Events of Default with and Certain Amendments With Respect to
        Credit
        Line with DZ Bank**
 
 The
        Company’s affiliate, Education Empowerment SPV, LLC (“EE SPV”), is a party to
        the Second Amendment and Restatement, dated May 14, 2008, of Receivables
        Loan
        and Security Agreement, dated as of April 11, 2007, among Education Empowerment
        SPV, LLC, Autobahn Funding Company LLC, as the lender, DZ Bank AG Deutsche
        Zentral-Genossenschaftsbank, Frankfurt am Main, as agent for the lender,
        and
        Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services), as the
        backup servicer, pursuant to which DZ Bank provides the Company with a warehouse
        loan facility (the “DZ Facility”).
 
 On
        September 15, 2008, EEF SPV and DZ Bank informally agreed to an amendment
        of the
        DZ Facility that will:
 
 ·
              waive
                  until October 31, 2008 the tangible net worth and liquidity ratio
                  covenants with respect to the Company, as the Company would have
                  been in
                  violation of these covenants absent such
                  waiver;
 ·
              provide
                  that there will be no more borrowings supported by private student
                  loans
                  until the Company is in compliance with the tangible net worth
                  and
                  liquidity ratio covenants and the outstanding borrowings supported
                  by the
                  private student loans pledged to the facility are paid down to
                  a 89%
                  advance rate, which will be the new advance rate for borrowings
                  supported
                  by private student loans (the Company estimates that, given the
                  current
                  balance of private student loans pledged to the DZ Facility, the
                  requirement to reduce the advance rate from 96.5% to 89% will require
                  the
                  Company to pay approximately $7 million to reduce the outstanding
                  balance
                  of the debt);
 ·
              require
                  an increased minimum FICO score and interest margin for future
                  private
                  student loans funded; and
 ·
              provide
                  that there will be no further fundings of PrePrimeTM loans under the DZ
                  Facility, but the financing terms of existing PrePrimeTM loans pledged to
                  the line remain the same.
 
 The
        parties have agreed in principal to the terms above and are currently drafting
        an amendment, which is expected to be signed in the next few
        days.







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**PART
      III**





**Item
      10.****Directors,
      Executive Officers and Corporate Governance.**





The
      information required by Items 401, 405, 406 and 407I(3), (d)(4) and
      (d)(5) of Regulation S-K is incorporated herein by reference to the
      Company’s definitive proxy statement to be filed not later than 120 days after
      the end of the Company’s fiscal year ended June 30, 2008 with the Securities and
      Exchange Commission pursuant to Regulation 14A under the Exchange
      Act.




**Item
      11.****Executive
      Compensation.**





The
      information required by Item 402 and paragraph (e)(4) and (e)(5) of
      Item 407 of Regulation S-K is incorporated herein by reference to the Company’s
      definitive proxy statement to be filed not later than 120 days after the end
      of
      the Company’s fiscal year ended June 30, 2008with the Securities and Exchange
      Commission pursuant to Regulation 14A under the Exchange Act.





**Item
      12.****Security
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters.**




The
      information required by Items 201(d) and 403 of Regulation S-K is
      incorporated herein by reference to the Company’s definitive proxy statement to
      be filed not later than 120 days after the end of the Company’s fiscal year
      ended June 30, 2008 with the Securities and Exchange Commission pursuant to
      Regulation 14A under the Exchange Act.





**Item
      13.****Certain
      Relationships and Related Transactions, and Director
      Independence.**





The
      information required by Items 404 and 407(a) of Regulation S-K is
      incorporated herein by reference to the Company’s definitive proxy statement to
      be filed not later than 120 days after the end of the Company’s fiscal year
      ended June 30, 2008 with the Securities and Exchange Commission pursuant to
      Regulation 14A under the Exchange Act.





**Item
      14.****Principal
      Accounting Fees and Services.**





The
      information required by Item 9(e) of Schedule 14A is incorporated
      herein by reference to the Company’s definitive proxy statement to be filed not
      later than 120 days after the end of the Company’s fiscal year ended June 30,
      2008 with the Securities and Exchange Commission pursuant to Regulation 14A
      under the Exchange Act.








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**PART
      IV**





**Item
      15.****Exhibits,
      Financial Statement Schedules**





(a)(1)
            Financial
                Statements




See
      the
      accompanying Index to Financial Statement Schedule on page F-1





(a)(2)
            Consolidated
                Financial Statement Schedules





See
      the
      accompanying Index to Financial Statement Schedule on page F-1





(a)(3)
            Exhibits








-62-
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            of Contents*




**EXHIBIT
      INDEX**




**Exhibit
                Number**
            **Description**3.1.a
            Amended
                and Restated Certificate of Incorporation of MRU Holdings, Inc. (filed
                as
                Exhibit 3.1 to the Company’s Annual Report on Form 10-K (File No.
                001-33073) filed on September 28, 2007 and incorporated herein by
                reference).3.1.b
            Certificate
                of Designation of Series B-2 Preferred Stock, par value $0.001 per
                share
                (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File
                No. 001-33073) filed on July 7, 2008 and incorporated herein by
                reference).3.2
            Amended
                and Restated Bylaws of MRU Holdings, Inc. (filed as Exhibit 3.1 to
                the
                Company’s Current Report on Form 8-K (File No. 001-33073) filed on
                September 28, 2007 and incorporated herein by
                reference).4.1
            Warrant
                to purchase 646,741 shares of common stock issued to Battery Ventures
                VII,
                L.P. (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K
                (File No. 001-33073) filed on July 7, 2008 and incorporated herein
                by
                reference).4.2
            Warrant
                to purchase 12,391 shares of common stock issued to Battery Investment
                Partners VII, LLC (filed as Exhibit 4.3 to the Company’s Current Report on
                Form 8-K (File No. 001-33073) filed on July 7, 2008 and incorporated
                herein by reference).4.3
            Subordination
                Agreement, dated June 30, 2008, by and among the Company, Battery
                Ventures
                VII, L.P., Battery Investment Partners VII, LLC, Viking Asset Management
                L.L.C. and the buyers of certain secured senior notes issued by the
                Company dated as of October 19, 2007 (filed as Exhibit 4.4 to the
                Company’s Current Report on Form 8-K (File No. 001-33073) filed on July 7,
                2008 and incorporated herein by reference).4.4
            Convertible
                Promissory Note dated July 10, 2008, issued to Merrill Lynch Mortgage
                Capital Inc. (filed as Exhibit 4.1 to the Company’s Current Report on Form
                8-K (File No. 001-33073) filed on July 16, 2008 and incorporated
                herein by
                reference).4.5
            Subordination
                Agreement, dated July 10, 2008, among the Company, Merrill Lynch
                Mortgage
                Capital Inc., Viking Asset Management L.L.C. and the buyers of certain
                secured senior notes issued by the Company dated as of October 19,
                2007
                (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K (File
                No. 001-33073) filed on July 16, 2008 and incorporated herein by
                reference).4.6
            Promissory
                Note, dated July 10, 2008, issued to Battery Ventures VII, L.P. (filed
                as
                Exhibit 4.3 to the Company’s Current Report on Form 8-K (File No.
                001-33073) filed on July 16, 2008 and incorporated herein by
                reference).4.7
            Promissory
                Note, dated July 10, 2008, issued to Battery Investment Partners
                VII, LLC
                (filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K (File
                No. 001-33073) filed on July 16, 2008 and incorporated herein by
                reference).4.8
            Promissory
                Note, dated July 10, 2008, issued to Printworks Series E LLC (filed
                as
                Exhibit 4.5 to the Company’s Current Report on Form 8-K (File No.
                001-33073) filed on July 16, 2008 and incorporated herein by
                reference).4.9
            Warrant
                to Purchase shares of Common Stock issued to Battery Ventures VII,
                L.P.
                (filed as Exhibit 4.6 to the Company’s Current Report on Form 8-K (File
                No. 001-33073) filed on July 16, 2008 and incorporated herein by
                reference).





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4.10
            Warrant
                to purchase shares of Common Stock issued to Battery Investment Partners
                VII, LLC (filed as Exhibit 4.7 to the Company’s Current Report on Form 8-K
                (File No. 001-33073) filed on July 16, 2008 and incorporated herein
                by
                reference).4.11
            Warrant
                to purchase shares of Common Stock issued to Printworks Series E
                LLC
                (filed as Exhibit 4.8 to the Company’s Current Report on Form 8-K (File
                No. 001-33073) filed on July 16, 2008 and incorporated herein by
                reference).4.12
            Subordination
                Agreement, dated July 10, 2008, among the Company, Battery Ventures
                VII,
                L.P., Battery Investment Partners VII, LLC, Printworks Series E LLC,
                Viking Asset Management L.L.C. and the buyers of certain secured
                senior
                notes issued by the Company dated as of October 19, 2007 (filed as
                Exhibit
                4.9 to the Company’s Current Report on Form 8-K (File No. 001-33073) filed
                on July 16, 2008 and incorporated herein by reference).4.13
            Promissory
                Note, dated July 15, 2008, issued to Professional Investments of
                America,
                LLC (filed as Exhibit 4.10 to the Company’s Current Report on Form 8-K
                (File No. 001-33073) filed on July 16, 2008 and incorporated herein
                by
                reference).4.14
            Warrant
                to Purchase shares of Common Stock issued to Professional Investments
                of
                America, LLC (filed as Exhibit 4.11 to the Company’s Current Report on
                Form 8-K (File No. 001-33073) filed on July 16, 2008 and incorporated
                herein by reference).4.15
            Subordination
                Agreement, dated July 15, 2008, among the Company, Professional
                Investments of America, LLC, Viking Asset Management L.L.C. and the
                buyers
                of certain secured senior notes issued by the Company dated as of
                October
                19, 2007 (filed as Exhibit 4.12 to the Company’s Current Report on Form
                8-K (File No. 001-33073) filed on July 16, 2008 and incorporated
                herein by
                reference).4.16
            Form
                of Promissory Note dated July 31, 2008 (filed as Exhibit 4.1 to the
                Company’s Current Report on Form 8-K (File No. 001-33073) filed on August
                6, 2008 and incorporated herein by reference).4.17
            Form
                of Subordination Agreement, dated July 31, 2008, by and among the
                Company,
                the Subordinated Creditor, Viking Asset Management L.L.C. and the
                Buyers
                of certain secured senior notes issued by the Company on October
                19, 2007
                (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K (File
                No. 001-33073) filed on August 6, 2008 and incorporated herein by
                reference).4.18
            Form
                of Warrant to purchase shares of common stock dated July 31, 2008
                (filed
                as Exhibit 4.3 to the Company’s Current Report on Form 8-K (File No.
                001-33073) filed on August 6, 2008 and incorporated herein by
                reference).10.1
            MRU
                Holdings, Inc. 2004 Incentive Plan (filed as Appendix C to the Company’s
                Definitive Proxy Statement on Form 14A (File No. 000-33487) filed
                on
                September 7, 2005 and incorporated herein by
                reference).10.2
            MRU
                Holdings, Inc. 2005 Consultant Incentive Plan (filed as Appendix
                B to the
                Company’s Definitive Proxy Statement on Form 14A (File No. 000-33487)
                filed on September 7, 2005 and incorporated herein by
                reference).10.3
            Form
                of Incentive Stock Option Award Agreement (filed as Exhibit 10.13
                to the
                Company’s Quarterly Report on Form 10-Q (File No. 001-33073) filed on
                February 14, 2008 and incorporated herein by
                reference).







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+
            10.4
            Form
                of Non-Incentive Stock Option Award Agreement (filed as Exhibit 10.14
                to
                the Company’s Quarterly Report on Form 10-Q (File No. 001-33073) filed on
                February 14, 2008 and incorporated herein by
                reference).+
            10.5
            Form
                of Restricted Stock Award Agreement (filed as Exhibit 10.15 to the
                Company’s Quarterly Report on Form 10-Q (File No. 001-33073) filed on
                February 14, 2008 and incorporated herein by
                reference).+
            10.6
            Form
                of Restricted Stock Unit Award Agreement (filed as Exhibit 10.16
                to the
                Company’s Quarterly Report on Form 10-Q (File No. 001-33073) filed on
                February 14, 2008 and incorporated herein by
                reference).+
            10.7
            Amended
                Employment Agreement dated as of September 27, 2007, by and between
                the
                Company and Edwin J. McGuinn, Jr. (filed as Exhibit 10.1 to the Company’s
                Current Report on Form 8-K (File No. 001-33073) filed on September
                28,
                2007 and incorporated herein by reference).+
            10.8
            Employment
                Agreement of Raza Khan (filed as Exhibit 10.8 to the Company’s Annual
                Report on Form 10-K (File No. 001-33073) filed on September 28, 2007
                and
                incorporated herein by reference).+
            10.9
            Employment
                Agreement of Vishal Garg ((filed as Exhibit 10.9 to the Company’s Annual
                Report on Form 10-K (File No. 001-33073) filed on September 28, 2007
                and
                incorporated herein by reference).10.10
            Office
                Lease for 590 Madison Avenue (filed as Exhibit 10.10 to the Company’s
                Annual Report on Form 10-K (File No. 001-33073) filed on September
                28,
                2007 and incorporated herein by reference).10.11
            Securities
                Purchase Agreement by and among the Company and the purchasers of
                Series B
                Convertible Preferred Stock (filed as Exhibit 10.1 to the Company’s
                Current Report on Form 8-K (File No. 000-33487 ) filed on January
                6, 2006
                and incorporated herein by reference).10.12
            Loan
                Program Agreement, dated July 25, 2005, by and between MRU Lending,
                Inc.
                and Doral Bank NY FSB (filed as Exhibit 10.1 to the Company’s Current
                Report on Form 8-K (File No. 000-33487) filed on July 29, 2005 and
                incorporated herein by reference).10.13
            Loan
                Sale Agreement, dated July 25, 2005, by and between MRU Lending,
                Inc. and
                Doral Bank NY FSB (filed as Exhibit 10.2 to the Company’s Current Report
                on Form 8-K (File No. 000-33487) filed on July 29, 2005 and incorporated
                herein by reference).10.14
            Loan
                Program Agreement, dated as of February 28, 2006, by and between
                Doral
                Bank FSB and MRU Originations, Inc. (filed as Exhibit 10.11 to the
                Company’s Quarterly Report on Form 10-Q (File No. 001-33073) filed on
                February 14, 2008 and incorporated herein by
                reference).10.15
            Loan
                Sale Agreement, dated as of February 28, 2006, by and between Doral
                Bank
                FSB and Achiever Fund I LLC (filed as Exhibit 10.12 to the Company’s
                Quarterly Report on Form 10-Q (File No. 001-33073) filed on February
                14,
                2008 and incorporated herein by reference).10.16
            Securities
                Purchase Agreement, dated as of October 19, 2007, by and among the
                Company
                and certain investors named therein (filed as Exhibit 10.1 to the
                Company’s Current Report on Form 8-K (File No. 001-33073) filed on October
                22, 2007 and incorporated herein by reference).





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10.17
            Form
                of Note (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K
                (File No. 001-33073) filed on October 22, 2007 and incorporated herein
                by
                reference).10.18
            Form
                of Guaranty (filed as Exhibit 10.3 to the Company’s Current Report on Form
                8-K (File No. 001-33073) filed on October 22, 2007 and incorporated
                herein
                by reference).10.19
            Assignment
                Agreement, dated as October 19, 2007, by and among MRU ABS LLC and
                the
                parties named therein (filed as Exhibit 10.4 to the Company’s Current
                Report on Form 8-K (File No. 001-33073) filed on October 22, 2007
                and
                incorporated herein by reference).10.20
            Account
                Control Agreement, dated as of October 19, 2007, by and among the
                Company,
                the Collateral Agent and the Bank of New York Trust Company, N.A.
                (filed
                as Exhibit 10.5 to the Company’s Current Report on Form 8-K (File No.
                001-33073) filed on October 22, 2007 and incorporated herein by
                reference).10.21
            Pledge
                and Security Agreement, dated as of October 19, 2007, by and among
                the
                Company and the parties named therein (filed as Exhibit 10.6 to the
                Company’s Current Report on Form 8-K (File No. 001-33073) filed on October
                22, 2007 and incorporated herein by reference).10.22
            Registration
                Rights Agreement, dated as of November 2, 2007, by and among the
                Company
                and the parties named therein (filed as Exhibit 10.1 to the Company’s
                Current Report on Form 8-K (File No. 001-33073) filed on November
                6, 2007
                and incorporated herein by reference).10.23
            Amended
                and Restated Master Loan Agreement, dated as of February 1, 2007,
                by and
                between Merrill Lynch Bank USA and MRU Funding SPV Inc. (filed as
                Exhibit
                10.8 to the Company’s Quarterly Report on Form 10-Q (File No. 001-33073 )
                filed on February 14, 2008 and incorporated herein by
                reference).10.24
            Amendment
                No. 5 to Master Loan Agreement, dated as of September 28, 2007, by
                and
                between Merrill Lynch Bank USA and MRU Funding SPV Inc. (filed as
                Exhibit
                10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 001-33073 )
                filed on November 14, 2007 and incorporated herein by
                reference).10.25
            Amendment
                No. 6 to Master Loan Agreement, dated as of December 21, 2007, by
                and
                between Merrill Lynch Bank USA and MRU Funding SPV Inc. (filed as
                Exhibit
                10.9 to the Company’s Quarterly Report on Form 10-Q (File No. 001-33073 )
                filed on February 14, 2008 and incorporated herein by
                reference).*
            10.26
            Amendment
                No. 7 to Master Loan Agreement, dated as of July 10, 2008, by and
                between
                Merrill Lynch Bank USA and MRU Funding SPV Inc.10.27
            Amended
                and Restated Receivables Loan and Security Agreement, dated as of
                November
                9, 2007, by and among Education Empowerment SPV, LLC, Autobahn Funding
                Company LLC, DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt
                AM
                Main and Lyon Financial Services, Inc. (filed as Exhibit 10.10 to
                the
                Company’s Quarterly Report on Form 10-Q (File No. 001-33073) filed on
                February 14, 2008 and incorporated herein by
                reference).*
            10.28
            Second
                Amended and Restated Receivables Loan and Security Agreement, dated
                as of
                May 14, 2008, by and among Education Empowerment SPV, LLC, Autobahn
                Funding Company LLC, DZ Bank AG Deutsche Zentral-Genossenschaftsbank,
                Frankfurt AM Main and Lyon Financial Services,
                Inc.





-66-
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            of Contents*








*
            10.29
            Note
                Purchase Agreement, dated as of July 2, 2008, by and among the Company,
                MRU ABS II LLC and the Initial Purchasers.*
            10.30
            Administration
                Agreement, dated as of July 1, 2008, by and among the Company, MRU
                ABS II
                LLC, The Bank of New York Trust Company, N.A., Wilmington Trust Company
                and MRU Student Loan Trust 2008-A*
            10.31
            Transfer
                & Contribution Agreement, dated as of July 10, 2008, by and between
                the Company and MRU ABS II LLC*
            10.32
            Loan
                Sale Agreement, dated as of January 10, 2006, by and between Doral
                Bank
                FSB and MRU Funding SPV Inc.*
            14.1
            MRU
                Holdings, Inc. Code of Business Conduct and Ethics*
            14.2
            MRU
                Holdings, Inc. Code of Ethics for the CEO and Senior Financial
                Officers*
            21.1
            Subsidiaries
                of MRU Holdings, Inc.*
            23.1
            Consent
                of Bagell, Josephs, Levine & Company, LLC*
            31.1
            Certification
                of Edwin J. McGuinn, Jr., Chief Executive Officer, as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002.*
            31.2
            Certification
                of Jonathan Coblentz, Chief Financial Officer, as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002.*
            32.1
            Certification
                of Edwin J. McGuinn, Jr., Chief Executive Officer, pursuant to 18
                U.S.C.
                Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 2002.*
            32.2
            Certification
                of Jonathan Coblentz, Chief Financial Officer, pursuant to 18 U.S.C.
                Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 2002.





*
            Filed
                herewith.


+
            Represents
                a management contract or compensatory plan or
                arrangement.





-67-
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            of Contents*




**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) 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.





September
      15, 2008


Date




/s/
      Edwin
      J. McGuinn, Jr.


Edwin
      J.
      McGuinn, Jr.


Chief
      Executive Officer




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed by the following person on behalf of the registrant and in the capacities
      and on the dates indicated.





September
                15, 2008
            
            /s/
                Edwin J. McGuinn, Jr.Date
            
            Edwin
                J. McGuinn, Jr.Chief
                Executive Officer and Chairman of the Board of Directors(Principal
                Executive Officer)September
                15, 2008
            
            /s/
                Jonathan CoblentzDate
            
            Jonathan
                CoblentzChief
                Financial Officer and Treasurer(Principal
                Financial and Accounting Officer)September
                15, 2008
            
            /s/
                Raza KhanDate
            
            Raza
                KhanCo-President
                and DirectorSeptember
                15, 2008
            
            /s/
                Vishal GargDate
            
            Vishal
                GargCo-President
                and DirectorSeptember
                15, 2008
            
            /s/
                Richmond T. FisherDate
            
            Richmond
                T. FisherDirectorSeptember
                15, 2008
            
            /s/
                C. David BushleyDate
            
            C.
                David BushleyDirectorSeptember
                15, 2008
            
            /s/
                Michael M. BrownDate
            
            Michael
                M. BrownDirectorSeptember
                15, 2008
            
            /s/
                Sunil DhaliwalDate
            
            Sunil
                DhaliwalDirectorSeptember
                15, 2008
            
            /s/
                Andrew MathiesonDate
            
            Andrew
                MathiesonDirectorSeptember
                15, 2008
            
            /s/
                Gregory N. ElinskyDate
            
            Gregory
                N. ElinskyDirector





-68-
 *Table
            of Contents*




**Index
      to Consolidated Financial Statements**




Report
                of Independent Registered Public Accounting
                Firm
            F-2Management’s
                Report of Internal Control over Financial
                Reporting
            F-3Report
                of Independent Registered Public Accounting
                Firm
            F-4Audited
                Financial StatementsConsolidated
                Balance Sheets as of June 30, 2008 and
                2007
            F-5Consolidated
                Statements of Income for the years ended June 30,
                2008, 2007 and 2006
            F-6Consolidated
                Statements of Stockholders’ Equity for the years
                ended June 30, 2008, 2007 and 2006
            F-7Consolidated
                Statements of Cash Flows for the years ended June
                30, 2008, 2007 and 2006
            F-8Notes
                to Consolidated Financial
                Statements
            F-9








F-1
 *Table
            of Contents*


**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  Board
        of
        Directors and Stockholders
 MRU
        Holdings, Inc.
 590
        Madison Avenue, 13 th Floor
 New
        York,
        NY 10022
  We
        have
        audited MRU Holdings, Inc.’s internal control over financial reporting as of
        June 30, 2008, based on criteria established in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        MRU Holdings, Inc.’s management is responsible for maintaining effective
        internal control over financial reporting and for its assessment of the
        effectiveness of internal control over financial reporting included in the
        accompanying Management’s Report On Internal Control Over Financial Reporting.
        Our responsibility is to express an opinion on the company’s internal control
        over financial reporting based on our audit.
  We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit of internal control over financial reporting included
        obtaining an understanding of internal control over financial reporting,
        assessing the risk that a material weakness exists, and testing and evaluating
        the design and operating effectiveness of internal control based on the assessed
        risk. Our audit also included performing such other procedures as we considered
        necessary in the circumstances. We believe that our audit provides a reasonable
        basis for our opinion.
  A
        company’s internal control over financial reporting is a process designed to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles. A company’s internal control over
        financial reporting includes those policies and procedures that (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company’s
        assets that could have a material effect on the financial
        statements.
  Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements. Also, projections of any evaluation of
        effectiveness to future periods are subject to the risk that controls may
        become
        inadequate because of changes in conditions, or that the degree of compliance
        with the policies or procedures may deteriorate.
  In
        our
        opinion, MRU Holdings, Inc. maintained, in all material respects, effective
        internal control over financial reporting as of June 30, 2008, based on criteria
        established in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission
        (COSO).
  We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated balance sheets and the
        related
        consolidated statements of operations, stockholders’ equity and accumulated
        other comprehensive income, and cash flows of MRU Holdings, Inc., and our
        report
        dated June 30, 2008 expressed an unqualified opinion.
  
 ***/s/
        BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.***
 Bagell,
        Josephs, Levine & Company, L.L.C.
 Marlton,
        NJ 08053
 
 September
        15, 2008


F-2
 *Table
            of Contents*





**MANAGEMENT’S
      REPORT ON INTERNAL CONTROL OVER**


**FINANCIAL
      REPORTING**




Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting, and for performing an assessment of the effectiveness
      of
      internal control over financial reporting as of June 30, 2008. Internal control
      over financial reporting is a process designed to provide reasonable assurance
      regarding the reliability of financial reporting and the preparation of
      financial statements for external purposes in accordance with generally accepted
      accounting principles. The Company’s system of internal control over financial
      reporting includes those policies and procedures that (i) pertain to the
      maintenance of records that, in reasonable detail, accurately and fairly reflect
      the transactions and dispositions of the assets of the Company;
      (ii) provide reasonable assurance that transactions are recorded as
      necessary to permit preparation of financial statements in accordance with
      generally accepted accounting principles, and that receipts and expenditures
      of
      the company are being made only in accordance with authorizations of management
      and directors of the company; and (iii) provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use,
      or
      disposition of the company’s assets that could have a material effect on the
      financial statements.




All
      internal control systems, no matter how well designed, have inherent
      limitations. Therefore, even those systems determined to be effective can
      provide only reasonable assurance with respect to financial statement
      preparation and presentation.




Management
      performed an assessment of the effectiveness of the Company’s internal control
      over financial reporting as of June 30, 2008 based upon criteria in Internal
      Control—Integrated Framework issued by the Committee of Sponsoring Organizations
      of the Treadway Commission (‘‘COSO’’). Based on our assessment, management
      determined that the Company’s internal control over financial reporting was
      effective as of June 30, 2008 based on the criteria in Internal
      Control-Integrated Framework issued by COSO.




The
      effectiveness of the Company’s internal control over financial reporting as of
      June 30, 2008 has been audited by Bagell, Josephs, Levine & Company, LLC, an
      independent registered public accounting firm, as stated in their report which
      appears herein.




Dated:  September
      15, 2008




Edwin
                J. McGuinn, Jr.
            Jonathan
                CoblentzChief
                Executive Officer
            Chief
                Financial Officer





F-3
 *Table
            of Contents*


**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  Board
        of
        Directors and Stockholders
 MRU
        Holdings, Inc.
 590
        Madison Avenue, 13 th Floor
 New
        York,
        NY 10022
  We
        have
        audited the accompanying consolidated balance sheets of MRU Holdings, Inc.
        as of
        June 30, 2008 and 2007, and the related consolidated statements of operations,
        stockholders’ equity and accumulated other comprehensive income, and cash flows
        for each of the years in the three-year period ended June 30, 2008. MRU
        Holdings, Inc.’s management is responsible for these financial statements. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of MRU Holdings, Inc. as
        of
        June 30, 2008 and 2007, and the results of its operations and its cash flows
        for
        each of the years in the three-year period ended June 30, 2008 in conformity
        with accounting principles generally accepted in the United States of
        America.
  The
        accompanying financial statements have been prepared assuming the Company
        will
        continue as a going concern. As discussed in Note 19 to the financial
        statements, the Company has sustained operating losses and unless the Company
        is
        successful in generating new sources of revenue, or obtaining debt or equity
        financing, the Company is likely to deplete its working capital during 2008.
        These matters raise substantial doubt about the Company’s ability to continue as
        a going concern. Management’s plan in regard to these matters is also described
        in Note 19. The financial statements do not include any adjustments that
        might
        result from the outcome of this uncertainty.
  We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), MRU Holdings, Inc.’s internal control over
        financial reporting as of June 30, 2008, based on criteria established in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
        and our report dated September 15, 2008 expressed an unqualified
        opinion.
  
 ***/s/
        BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.***
 Bagell,
        Josephs, Levine & Company, L.L.C.
 Marlton,
        NJ 08053
 
 September
        15, 2008


F-4
 *Table
          of Contents*




**MRU
      HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
        BALANCE SHEETS**
 JUNE
        30, 2008 AND JUNE 30,
        2007
 (Dollars
        in Thousands)


**ASSETS****June
                30,**
            
            **June
                30,****2008**
            
            **2007****ASSETS:**Cash
                and cash equivalents
            
            $
            10,216
            
            $
            11,606Restricted
                cash
            
            
            2,398
            
            
            3,154Accounts
                receivable
            
            
            1,990
            
            
            1,979Private
                student loans receivable, held for sale, lower of cost or
                market
            
            
            139,621
            
            
            6,256Valuation
                Reserve for private student loans receivable
            
            
            (3,780
            )
            
            (815
            )Lower
                of cost or market adjustment - Private student loans
                receivable
            
            
            (13,713
            )
            
            —Federally
                insured student loans receivable, held for sale, lower of cost or
                market
            
            
            35,374
            
            
            7,395Accounts
                receivable from securitizations
            
            
            4,093
            
            
            11,192Original
                issue discount - Senior Secured Notes
            
            
            1,107
            
            
            —Fixed
                assets, net of depreciation
            
            
            2,685
            
            
            1,553Security
                deposits
            
            
            999
            
            
            955Intangible
                assets, net of amortization
            
            
            2,100
            
            
            2,824Goodwill
            
            
            5,803
            
            
            5,875Investment
                in Education Empowerment Fund I, LLC
            
            
            1,001
            
            
            322Due
                from affiliates
            
            
            157
            
            
            802Deferred
                financing fees, net of amortization
            
            
            1,108
            
            
            —Prepaid
                expenses and other assets
            
            
            4,158
            
            
            1,094**TOTAL
                ASSETS**
            
            **$**
            **195,317**
            
            **$**
            **54,192****LIABILITIES
                AND STOCKHOLDERS' EQUITY****LIABILITIES:**Accounts
                payable
            
            $
            6,750
            
            $
            3,835Accrued
                expenses
            
            
            2,812
            
            
            458Accrued
                payroll
            
            
            899
            
            
            592Client
                deposits
            
            
            1,121
            
            
            899Deferred
                contract revenue
            
            
            3,564
            
            
            2,276Notes
                payable - Doral Bank FSB NY
            
            
            5,523
            
            
            1,399Notes
                payable - Merrill Lynch
            
            
            121,891
            
            
            11,711Notes
                payable - Nomura Credit & Capital
            
            
            —
            
            
            —Notes
                payable - DZ
            
            
            38,760
            
            
            —Senior
                Secured Notes
            
            
            11,200
            
            
            —Deferred
                origination fee revenue
            
            
            6,132
            
            
            226Obligations
                under capital lease
            
            
            623
            
            
            —Other
                liabilities
            
            
            1,582
            
            
            63**Total
                Liabilities**
            
            
            **200,857**
            
            
            **21,459****STOCKHOLDERS'
                EQUITY**Preferred
              Stock, Series B-2, $.001 par value; 2,500,000 shares authorized2,197,109
                and 0 shares issued and outstanding as of June 30, 2008 and June
                30,
                2007
            
            
            2
            
            
            —Preferred
                Stock, Series B, $.001 par value; 12,000,000 shares
                authorized8,506,724
                and 8,237,264 shares issued and outstanding as of June 30, 2008 and
                June
                30, 2007
            
            
            9
            
            
            8Common
                Stock, $.001 par value; 200,000,000 shares authorized, 31,721,174
                and25,714,393
                issued and outstanding as of June 30, 2008 and June 30,
                2007
            
            
            32
            
            
            26Additional
                paid-in capital
            
            
            147,124
            
            
            111,544Accumulated
                other comprehensive income
            
            
            —
            
            
            2,757Accumulated
                deficit
            
            
            (152,707
            )
            
            (81,602
            )**Total
                Stockholders' Equity**
            
            
            **(5,540**
            **)**
            
            **32,733****TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            **$**
            **195,317**
            
            **$**
            **54,192**


The
      accompanying notes are an integral part of these consolidated financial
      statements




F-5
 *Table
          of Contents*






**MRU
      HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 FOR
          THE YEARS ENDED JUNE 30, 2008, 2007 AND
          2006
 (Dollars
          in Thousands - except per share
          data)


**Year
                  Ended****June
                  30,****2008**
              
              **2007**
              
              **2006****Interest
                  Income:**Loan
                  portfolio interest income - private student loans
              
              $
              7,125
              
              $
              7,790
              
              $
              1,206Loan
                  portfolio interest income - federal student loans
              
              
              1,314
              
              
              119
              
              
              —Origination
                  fee revenue - private loans
              
              
              218
              
              
              110
              
              
              10Interest
                  income - residual interest
              
              
              1,385
              
              
              —
              
              
              —Other
                  Interest income
              
              
              815
              
              
              475
              
              
              429Total
                  interest income
              
              
              10,857
              
              
              8,495
              
              
              1,644**Interest
                  Expense:**Facility
                  interest and origination bank costs
              
              
              6,728
              
              
              6,114
              
              
              1,078Other
                  Interest expense
              
              
              1,162
              
              
              7
              
              
              24Total
                  interest expense
              
              
              7,890
              
              
              6,121
              
              
              1,102Net
                  Interest Income
              
              
              2,967
              
              
              2,374
              
              
              543Valuation
                  reserve provision - private student loans
              
              
              4,659
              
              
              2,921
              
              
              815Net
                  interest income after valuation provision
              
              
              (1,692
              )
              
              (548
              )
              
              (272
              )**Non-interest
                  income**Securitization
                  income (loss), net
              
              
              (3,655
              )
              
              16,205
              
              
              —Fair
                  value adjustment - private student loans
              
              
              (13,713
              )
              
              —
              
              
              —Subscription
                  and service revenue
              
              
              5,883
              
              
              1,661
              
              
              26Origination
                  processing fees
              
              
              716
              
              
              458
              
              
              —Referral
                  Income - private student loans
              
              
              —
              
              
              —
              
              
              2Master
                  Oversight Fee
              
              
              109
              
              
              —
              
              
              —Other
                  non-interest income
              
              
              11
              
              
              190
              
              
              31Total
                  non-interest income
              
              
              (10,649
              )
              
              18,514
              
              
              59**Non-interest
                  expense:**Corporate
                  general and administrative expenses
              
              
              15,378
              
              
              12,284
              
              
              9,609Sales
                  and marketing expenses
              
              
              16,996
              
              
              13,945
              
              
              7,447Operations
                  expenses
              
              
              6,442
              
              
              5,178
              
              
              2,523Technology
                  development
              
              
              3,895
              
              
              3,296
              
              
              1,467Referral
                  marketing costs
              
              
              1,993
              
              
              991
              
              
              372Consulting
                  and hosting
              
              
              318
              
              
              153
              
              
              54Cost
                  of subscription and service revenue
              
              
              2,541
              
              
              478
              
              
              —Servicing
                  and custodial costs
              
              
              582
              
              
              338
              
              
              83Legal
                  expenses
              
              
              2,313
              
              
              974
              
              
              591Other
                  operating expenses
              
              
              1,998
              
              
              980
              
              
              661Depreciation
                  and amortization
              
              
              4,135
              
              
              5,880
              
              
              3,996Total
                  non-interest expense
              
              
              56,591
              
              
              44,495
              
              
              26,803(Loss)
                  before provision for income taxes
              
              
              (68,932
              )
              
              (26,529
              )
              
              (27,015
              )Provision
                  for income taxes
              
              
              —
              
              
              —
              
              
              —Net
                  (loss)
              
              $
              (68,932
              )
              $
              (26,529
              )
              $
              (27,015
              )Preferred
                  Stock Dividends
              
              
              (2,175
              )
              
              (2,894
              )
              
              (11,607
              )Net
                  (loss) applicable to common shares
              
              $
              (71,107
              )
              $
              (29,423
              )
              $
              (38,622
              )Net
                  (loss) per basic and diluted shares
              
              $
              (2.40
              )
              $
              (1.42
              )
              $
              (2.56
              )Weighted
                  average number of common shares outstanding
              
              
              29,586,524
              
              
              20,720,628
              
              
              15,100,652


The
        accompanying notes are an integral part of these consolidated financial
        statements
   F-6
 *Table
            of Contents*




**MRU
                    HOLDINGS, INC. AND SUBSIDIARIES****CONSOLIDATED
                    STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND ACCUMULATED
                    OTHER
                    COMPRESHENSIVE INCOME****FOR
                    THE YEARS ENDED JUNE 30, 2008, 2007, and 2006****(in
                    thousands, with the exception of # of
                    shares)**




**Accumulated****Series
                    A**
                  **Preferred
                    Stock**
                
                **Series
                    B**
                  **Preferred
                    Stock**
                
                **Series
                    B-2**
                  **Preferred
                    Stock**
                
                **Common
                    Stock**
                
                
                
                **Additional**
                  **Paid-In**
                
                **Other
                    Comprehensive**
                
                **Accumulated****Shares**
                
                **Amount**
                
                **Shares**
                
                **Amount**
                
                **Shares**
                
                **Amount**
                
                **Shares**
                
                **Amount**
                
                **Capital**
                
                **Income**
                
                **(Deficit)**
                
                **Total****Balance,
                    June 30, 2005**
                
                
                3,250,006
                
                $
                3
                
                
                0
                
                $
                -
                
                
                0
                
                $
                -
                
                
                13,664,502
                
                $
                14
                
                $
                26,063
                
                $
                -
                
                $
                (13,525
                )
                $
                12,555Exercise
                    of warrants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                339,790
                
                
                0
                
                
                406
                
                
                
                
                
                
                
                
                406Exercise
                    of options
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                141,250
                
                
                0
                
                
                350
                
                
                
                
                
                
                
                
                350Issuance
                    of Series A preferred stock dividend
                
                
                198,017
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                297
                
                
                
                
                
                (191
                )
                
                106Conversion
                    of Series A preferred stock
                
                
                (3,448,023
                )
                
                (3
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,448,023
                
                
                3
                
                
                
                
                
                
                
                
                
                
                
                0Issuance
                    of Series B preferred stock, net of expenses
                
                
                
                
                
                
                
                
                7,631,580
                
                
                8
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                38,676
                
                
                
                
                
                (10,516
                )
                
                28,167Accrue
                    Series B preferred stock dividend
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                331
                
                
                
                
                
                (931
                )
                
                (600
                )Accrue
                    value of warrants issued to Merrill Lynch
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,987
                
                
                
                
                
                
                
                
                2,987Accrue
                    FAS123R stock option expense
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,815
                
                
                
                
                
                
                
                
                7,815Net
                    (loss) for the year ended June 30, 2006
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (27,015
                )
                
                (27,015
                )**Balance,
                    June 30, 2006**
                
                
                0
                
                $
                0
                
                
                7,631,580
                
                $
                8
                
                
                0
                
                $
                -
                
                
                17,593,565
                
                $
                18
                
                $
                76,925
                
                $
                -
                
                $
                (52,179
                )
                $
                24,772Exercise
                    of warrants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,953,248
                
                
                8
                
                
                25,623
                
                
                
                
                
                
                
                
                25,631Exercise
                    of options
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                167,580
                
                
                -
                
                
                451
                
                
                
                
                
                
                
                
                451Accrue
                    Series B preferred stock dividend
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,115
                
                
                
                
                
                (2,894
                )
                
                (1,779
                )Issuance
                    of Series B preferred stock dividend
                
                
                
                
                
                
                
                
                605,684
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,300
                
                
                
                
                
                
                
                
                2,301Revaluation
                    of warrants issued to Merrill Lynch
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (495
                )
                
                
                
                
                
                
                
                (495
                )Accrue
                    FAS123R stock option expense
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,625
                
                
                
                
                
                
                
                
                5,625Revaluation
                    of residual securitization interest
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,757
                
                
                
                
                
                2,757Net
                    (loss) for the year ended June 30, 2007
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (26,529
                )
                
                (26,529
                )**Balance,
                    June 30, 2007**
                
                
                0
                
                $
                -
                
                
                8,237,264
                
                $
                8
                
                
                0
                
                $
                -
                
                
                25,714,393
                
                $
                26
                
                $
                111,544
                
                $
                2,757
                
                $
                (81,602
                )
                $
                32,733Exercise
                    of warrants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                518,763
                
                
                1
                
                
                137
                
                
                
                
                
                
                
                
                138Exercise
                    of options and restricted stock issuance
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                308,018
                
                
                -
                
                
                741
                
                
                
                
                
                
                
                
                741Accrue
                    Series B preferred stock dividend
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                256
                
                
                
                
                
                (2,175
                )
                
                (1,919
                )Issuance
                    of Series B preferred stock dividend
                
                
                
                
                
                
                
                
                269,460
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,023
                
                
                
                
                
                
                
                
                1,024Issuance
                    of common stock in private placement, net of expenses
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,000
                
                
                5
                
                
                22,850
                
                
                
                
                
                
                
                
                22,855Accrue
                    value of vested warrants issued to Merrill Lynch
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,225
                
                
                
                
                
                
                
                
                2,225Accrue
                    FAS123R stock option expense
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,441
                
                
                
                
                
                
                
                
                3,441Revaluation
                    of residual securitization interest
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,757
                )
                
                
                
                
                (2,757
                )Issuance
                    of Series B-2 convertible preferred stock, net of expenses
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,197,109
                
                
                2
                
                
                
                
                
                
                
                
                4,907
                
                
                
                
                
                
                
                
                4,909Net
                    (loss) for the year ended June 30, 2008
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (68,930
                )
                
                (68,930
                )**Balance,
                    June 30, 2008**
                
                
                0
                
                $
                -
                
                
                8,506,724
                
                $
                9
                
                
                2,197,109
                
                $
                2
                
                
                26,546,174
                
                $
                32
                
                $
                147,124
                
                $
                -
                
                $
                (152,707
                )
                $
                (5,540
                )


The
        accompanying notes are an integral part of these consolidated financial
        statements


F-7
 *Table
            of Contents*




**MRU
                    HOLDINGS, INC. AND SUBSIDIARIES****CONSOLIDATED
                    STATEMENTS OF CASH
                    FLOWS****FOR
                    THE YEARS ENDED JUNE 30, 2008, 2007, and
                    2006**
  **2008**
                
                **2007**
                
                **2006****CASH
                    FLOWS FROM OPERATING ACTIVITIES**Net
                    (loss)
                
                $
                (68,933
                )
                $
                (26,529
                )
                $
                (27,015
                )**Adjustments
                    to reconcile net loss to net cash****used
                    in operating activities:**Depreciation
                    and amortization
                
                
                4,135
                
                
                5,880
                
                
                3,996Increase
                    in stock options outstanding - options expense
                
                
                3,441
                
                
                5,625
                
                
                7,815(Decrease)
                    in stock options outstanding - options exercise
                
                
                (285
                )
                
                (105
                )
                
                (297
                )(Increase)
                    in tax provision valuation stock options outstanding
                
                
                (1,170
                )
                
                (1,913
                )
                
                (2,657
                )Accretion
                    of interest income on A/R from securitization
                
                
                (1,385
                )
                
                —
                
                
                —Impairment
                    loss - A/R from securitization
                
                
                7,721
                
                
                —
                
                
                —Lower
                    cost or market adjustment, private student loans
                
                
                13,713
                
                
                —
                
                
                —Increase
                    in valuation reserve - private student loans
                
                
                4,660
                
                
                313
                
                
                815(Decrease)
                    in valuation reserve - private student loans sold in
                    securitization
                
                
                (821
                )
                
                —
                
                
                —(Decrease)
                    in valuation reserve - private student loans charged-off
                
                
                (873
                )
                
                (313
                )
                
                —**Changes
                    in assets and liabilities**Decrease/(Increase)
                    in accounts receivable
                
                
                (11
                )
                
                (1,975
                )
                
                16Decrease/(Increase)
                    in restricted cash
                
                
                756
                
                
                (178
                )
                
                (2,975
                )Decrease
                    in collateral deposit - student loans
                
                
                —
                
                
                —
                
                
                250(Increase)
                    in prepaid expenses and other current assets
                
                
                (2,282
                )
                
                (735
                )
                
                (255
                )Decrease/(Increase)
                    in due from affiliates
                
                
                725
                
                
                (715
                )
                
                —Decrease
                    in goodwill
                
                
                72
                
                
                —
                
                
                —(Increase)
                    in security deposits
                
                
                (44
                )
                
                (925
                )
                
                363(Increase)
                    in private student loans receivable, held for sale
                
                
                (166,217
                )
                
                (104,429
                )
                
                (39,406
                )(Increase)
                    in federal student loans receivable, held for sale
                
                
                (27,548
                )
                
                (7,395
                )
                
                —Sale
                    of private student loans receivable into securitization
                
                
                32,852
                
                
                137,737
                
                
                —(Decrease)/Increase
                    in accounts payable and accrued expenses, and other
                    liabilities
                
                
                3,719
                
                
                2,455
                
                
                1,040Increase/(Decrease)
                    in accrued payroll
                
                
                370
                
                
                431
                
                
                (64
                )Increase
                    in deferred contract revenue
                
                
                1,288
                
                
                38
                
                
                —Increase
                    in client deposits
                
                
                222
                
                
                899
                
                
                —Increase/(Decrease)
                    in deferred origination fee revenue
                
                
                5,475
                
                
                (1,101
                )
                
                1,320Total
                    adjustments
                
                
                (121,489
                )
                
                33,596
                
                
                (30,040
                )**Net
                    cash (used in) provided by operating activities**
                
                
                **(190,422**
                **)**
                
                **7,067**
                
                
                **(57,055**
                **)****CASH
                    FLOWS FROM INVESTING ACTIVITIES**Acquisition
                    of fixed assets
                
                
                (1,183
                )
                
                (1,404
                )
                
                (574
                )Acquisition
                    of intangible assets
                
                
                —
                
                
                (6,320
                )
                
                —(Increase)
                    in receivables from securitizations
                
                
                (1,993
                )
                
                (8,435
                )
                
                —(Increase)
                    in Education Empowerment Fund I, LLC
                
                
                (679
                )
                
                (202
                )
                
                (120
                )**Net
                    cash (used in) investing activities**
                
                
                **(3,856**
                **)**
                
                **(16,361**
                **)**
                
                **(694**
                **)****CASH
                    FLOWS FROM FINANCING ACTIVITES**Increase
                    in advances - originating loan program agreements
                
                
                169,962
                
                
                102,885
                
                
                37,624(Decrease)
                    due to repayments - originating loan program agreements
                
                
                (165,837
                )
                
                (102,292
                )
                
                (36,818
                )Increase
                    in advances - Nomura Credit and Capital credit facility
                
                
                —
                
                
                731
                
                
                19,287(Decrease)
                    due to repayments - Nomura Credit and Capital credit
                    facility
                
                
                —
                
                
                (19,463
                )
                
                (554
                )Increase
                    in advances - Merrill Lynch credit facility
                
                
                158,662
                
                
                128,476
                
                
                17,920(Decrease)
                    due to repayments - Merrill Lynch credit facility
                
                
                (48,482
                )
                
                (134,628
                )
                
                (57
                )Increase
                    in advances - DZ credit facility
                
                
                38,760
                
                
                —
                
                
                —Proceeds
                    from issuance of common stock
                
                
                22,855
                
                
                —
                
                
                —Proceeds
                    from issuance of Series B convertible preferred stock
                
                
                —
                
                
                —
                
                
                28,167Proceeds
                    from issuance of senior secured notes
                
                
                9,983
                
                
                —
                
                
                —Proceeds
                    from issuance of convertible promissory notes
                
                
                5,000
                
                
                —
                
                
                —Proceeds
                    from conversion of warrants and options
                
                
                1,160
                
                
                26,183
                
                
                1,053Increase
                    in deferred tax due to stock options outstanding
                
                
                1,170
                
                
                1,913
                
                
                2,657Increase
                    in obligation under capital lease agreement
                
                
                623
                
                
                —
                
                
                —Cash
                    used in other financing activities
                
                
                (113
                )
                
                —
                
                
                —(Increase)
                    in deferred financing fees
                
                
                (854
                )
                
                (804
                )
                
                (525
                )**Net
                    cash provided by financing activities**
                
                
                **192,889**
                
                
                **3,000**
                
                
                **68,754****NET
                    INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS**
                
                
                **(1,390**
                **)**
                
                **(6,294**
                **)**
                
                **11,005****CASH
                    AND CASH EQUIVALENTS - BEGINNING OF PERIOD**
                
                
                **11,606**
                
                
                **17,900**
                
                
                **6,895****CASH
                    AND CASH EQUIVALENTS - END OF PERIOD**
                
                **$**
                **10,216**
                
                **$**
                **11,606**
                
                **$**
                **17,900****SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOW INFORMATION:****CASH
                    PAID DURING THE YEAR FOR:**Interest
                    expense
                
                $
                7,890
                
                $
                6,203
                
                $
                1,102Income
                    taxes
                
                $
                —
                
                $
                —
                
                $
                —**SUPPLEMENTAL
                    DISCLOSURE OF NON-CASH ACTIVITIES:**Issuance
                    of preferred stock in conversion of dividends payable
                
                $
                1,024
                
                $
                2,302
                
                $
                522Accrued
                    Series B stock dividends
                
                $
                1,151
                
                $
                77
                
                $
                600Preferred
                    stock converted into common shares
                
                $
                —
                
                
                —
                
                $
                3Cashless
                    exercise of warrants
                
                $
                500
                
                $
                500
                
                $
                —Vesting
                    of warrants issued in connection with financings
                
                $
                2,225
                
                $
                —
                
                $
                2,987Issuance
                    of Series B-2 Convertible Preferred Stock in cancellation of
                    convertible
                    promissory notes
                
                $
                5,026
                
                $
                —
                
                $
                —The
                    Company purchased certain assets assumed certain liabilities
                    per the
                    AssetPurchase
                    Agreement with The Princeton Review as follows:Fair
                    Value of Intangible Assets Acquired
                
                $
                —
                
                $
                3,000
                
                $
                —Goodwill
                
                $
                —
                
                $
                5,875
                
                $
                —Cash
                    paid
                
                $
                —
                
                $
                (6,320
                )
                $
                —Liabilites
                    Assumed
                
                $
                —
                
                $
                2,555
                
                $
                —


The
      accompanying notes are an integral part of these consolidated financial
      statements




F-8
 *Table
          of Contents*




**MRU
      HOLDINGS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008, JUNE 30, 2007, AND JUNE 2006**




**NOTE
                1 -**
              ****ORGANIZATION
                  AND BASIS OF
                  PRESENTATION****


MRU
      Holdings, Inc. (the “Company”) was incorporated in Delaware on March 2, 2000. On
      July 6, 2004 the Company changed its name to MRU Holdings, Inc. On May 20,
      2005,
      the Company’s board of directors approved a change in the Company’s year end
      from December 31 to June 30.




The
      Company is a specialty consumer finance company that facilitates and provides
      students with funds for higher education. Equipped with proprietary analytical
      models and decision tools, we are able to identify and provide customized
      financial products to students in a more competitive and customer friendly
      manner. We entered the student lending market as an originator and holder of
      private student loans and have expanded our lending products to include
      PreprimeTM student loans and federal student loans.  We design our loan
      programs, market, underwrite and originate loans, and acquire the loans from
      our
      bank origination partner through one of our funding subsidiaries or
      affiliates.  We outsource servicing and collection to expert third-parties
      and monitor and provide information to assist in the collection process. 
Initially, we fund the student loans through warehouse facilities with one
      of
      our funding subsidiaries or affiliates.  We have provided for the permanent
      funding of our private student loans through securitization in the past and
      may
      securitize or sell our loans in the future.




**NOTE
                2 -**
              ****SUMMARY
                  OF SIGNIFICANT ACCOUNTING
                  POLICIES****


**Principles
      of Consolidation**





The consolidated
      financial statements include the accounts of the Company and all its wholly
      owned subsidiaries. All intercompany accounts and transactions were eliminated
      in consolidation.





**Use
      of Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosures of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.





**Revenue
      and Expense Recognition**





The
      Company records its revenue on an accrual basis, whereby revenue is recognized
      when earned and expenses recognized when incurred.





**Interest
      Income**





Interest
      income on student loans receivable is recognized in accordance with SFAS 91, *Accounting
      for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
      and Initial Direct Costs of Leases* .





F-9
 *Table
            of Contents*





The
      Company follows SFAS 91 for the revenue recognition of origination fee revenue,
      whereby loan origination fees are deferred and recognized over the life of
      the
      loan as an adjustment of yield (interest income).





For
      the
      fiscal year ended June 30, 2008, the Company accrued $7,125.,000 in loan
      portfolio interest income on its private student loans, $218,000 in origination
      fee revenue on its private student loans, $1,314,000 in loan portfolio interest
      income on its federal student loans, $1,385,000 in interest income on the
      residual interest from its June 2007 securitization, and $815,000 of other
      interest income.




For
      the
      fiscal year ended June 30, 2007, the Company accrued $7,790,000 in loan
      portfolio interest income on its private student loans, $110,000 in origination
      fee revenue on its private student loans, $119,000 in loan portfolio interest
      income on its federal student loans, and $475,000 of other interest
      income.





For
      the
      fiscal year ended June 30, 2006, the Company accrued $1,206,000 in loan
      portfolio interest income on its private student loans, $10,000 in origination
      fee revenue on its private student loans, and $429,000 of other interest
      income.





**Interest
      Expense**





For
      the
      fiscal year ended June 30, 2008, the Company incurred $6,728,000 in credit
      facility interest and originating bank costs related to its student loan
      receivables portfolios and $1,162,000 in other interest expense.





For
      the
      fiscal year ended June 30, 2007, the Company incurred $6,114,000 in credit
      facility interest and originating bank costs related to its student loan
      receivables portfolios and $7,000 in other interest expense.





For
      the
      fiscal year ended June 30, 2006, the Company incurred $1,078,000 in credit
      facility interest and originating bank costs related to its student loan
      receivables portfolios and $24,000 in other interest expense.





**Valuation
      Reserve - Student Loan Receivables**





The
      Company’s private and federally insured student loans receivable portfolios are
      both held for sale and valued at the lower of cost or market. The valuation
      reserve represents management’s estimate of expected losses on these student
      loans receivable portfolios. This evaluation process is subject to numerous
      estimates and judgments. The Company evaluates the adequacy of the valuation
      reserve on its federally insured loans receivable portfolio separately from
      its
      private student loans receivable portfolio.





In
      determining the adequacy of the valuation reserve for the private student loans
      receivable portfolio, the Company considers several factors including: United
      States Department of Education’s cohort default rates for Title IV
      post-secondary educational institutions (adjusted for particular characteristics
      of individual borrowers including the university attended, program of study,
      academic progress in the current or prior program of study, and current or
      prior
      employment history), portfolio loan performance of those loans in repayment
      versus those in nonpayment status, and portfolio delinquency and default
      performance. Should any of these factors change, the estimates made by
      management would also change, which in turn would impact the level of the
      Company’s future valuation reserve.





The
      valuation reserve is maintained at a level management believes is adequate
      to
      provide for estimated possible credit losses inherent in the student loan
      receivable portfolio. This evaluation is inherently subjective because it
      requires estimates that may be susceptible to significant changes.





F-10
 *Table
            of Contents*




As
      of
      June 30, 2008, the Company maintained $3,780,481 as a valuation reserve for
      its
      private student loans receivable, representing an additional provision of
      $4,659,579 and reductions of $873,016 due to charge-offs compared to June 30,
      2007.




The
      Company places a private student loan receivable on nonaccrual status and
      charges off the loan when the collection of principal and/or interest is 180
      days past due or if the Company learns of an event or circumstance which in
      the
      Company’s judgment causes the loan to have a high probability of nonpayment,
      even before the collection of principal and/or interest is 180 days past due.
      The Company’s third party servicers work with borrowers who have temporarily
      ceased making full payments due to hardship or other factors, according to
      a
      schedule approved by the Company and accepted by the third party servicers
      that
      is consistent with established loan program servicing procedures and policies.
      Loans granted deferment or forbearance will likely cease principal and/or
      interest repayment, although these loans will continue to accrue interest.
      The
      Company works with the servicer in identifying borrowers who may be delinquent
      on their loans due to misinformation (students frequently change addresses)
      or
      availing the student borrower deferment or forbearance. The Company actively
      manages its servicing and collection process to optimize the performance of
      its
      student loans receivable portfolios. For the fiscal year ended June 30, 2008,
      the Company recorded charge-offs and placed on non-accrual loans totaling
      $873,016.




An
      analysis of the Company’s valuation reserve is presented in the following table
      for the fiscal years ended June 30, 2008 and 2007:





Fiscal
                Year Ended
              June
                30, 2008
            
            Fiscal
                Year Ended
              June
                30, 2007Balance
                at beginning of period
            
            $
            814,918
            
            $
            814,631Valuation
                reserve increase/(decrease)Federally insured loans
            
            
            0
            
            
            0Private student loans
            
            
            4,659,579
            
            
            2,783,045Total
                valuation reserve change
            
            
            4,659,579
            
            
            2,783,045Charge-offs
                net of recoveriesFederally insured loans
            
            
            0
            
            
            0Private student loans
            
            
            (873,016
            )
            
            (312,906
            )Net
                Charge-offs
            
            
            (873,016
            )
            
            (312,906
            )Loans
                sold into securitization
            
            
            (821,000
            )
            
            (2,469,853
            )Balance
                at end of period
            
            $
            3,780,481
            
            $
            814,918Private
                student loan valuation reserve as a percentageof the private student loans receivable portfolio
            
            
            2.7
            %
            
            13.0
            %




For
      the
      fiscal year ended June 30, 2008, the Company originated approximately $31.8
      million in loans under the U.S. Department of Education’s Federal Family
      Education Loan Program (FFELP) provisions. The amount of valuation reserve
      for
      this portfolio is zero as the risk of loss is deminimis.





**Non-Interest
      Income**





The
      Company recognizes revenues from license/subscription fees for web-based
      services over the life of the contract, which is typically one to three years.
      The Company recognizes revenue from





F-11
 *Table
            of Contents*





transaction
      processing fees, such as web-based school admissions applications, as the
      transactions are completed.





For
      the
      fiscal year ended June 30, 2008, the Company recognized $(3,655,000) in
      securitization income (net of impairment write-downs of $7,720,000 to the
      Company’s residual interest in its securitization trust) from the sale of loans
      into its securitization trust, $(13,713,000) in fair value adjustment on the
      private student loans, $5,883,000 from subscription and service revenue,
      $716,000 from origination processing fees for originating PreprimeTM loans on
      behalf of EEF I, LLC, $109,000 in master oversight fees for managing the
      PreprimeTM portfolio on behalf of EEF I, LLC, and $11,000 in other non-interest
      income.





For
      the
      fiscal year ended June 30, 2007, the Company recognized $16,205,000 in
      securitization income from the sale of loans into its securitization trust,
      $1,661,000 from subscription and service revenue, $458,000 from origination
      processing fees for originating PreprimeTM loans on behalf of Education
      Empowerment Fund I, LLC (f/k/a Achiever Fund I, LLC) (“EEF I, LLC”)
      and $190,000 in other non-interest income.





For
      the
      fiscal year ended June 30, 2006, the Company recognized $26,000 from
      subscription and service revenue, $2,000 from referral income from referring
      consolidation and private student loan requests to other lenders (all referral
      agreements were terminated as of June 30, 2007), and $31,000 in other
      non-interest income.





**Non-Interest
      Expense**





The
      Company includes as costs of revenues all direct costs related to the production
      of the various revenue streams of the Company’s business.





For
      the
      fiscal year ended June 30, 2008, the Company incurred $15,378,000 in corporate,
      general and administrative expenses, $16,996,000 in sales and marketing expense,
      $6,442,000 in operations expense, $3,895,000 in technology development,
      $1,993,000 in referral marketing costs related to the generation of the
      Company’s private student loans and admission application service
      business, $318,000 in consulting and hosting costs for the scholarship
      search and college application products, $2,541,000 in cost of subscription
      and
      service revenue related to college application products, $582,000 in student
      loan servicing and custodial costs, $2,313,000 in legal expenses, and $1,998,000
      in other operating expenses.





For
      the
      fiscal year ended June 30, 2007, the Company incurred $12,284,000 in corporate,
      general and administrative expenses, $13,945,000 in sales and marketing expense,
      $5,178,000 in operations expense, $3,296,000 in technology development, $991,000
      in referral marketing costs related to the generation of the Company’s private
      student loans and admission application service business, $153,000 in
      consulting and hosting costs for the scholarship search and college application
      products, $478,000 in cost of subscription and service revenue related to
      college application products, $338,000 in student loan servicing and custodial
      costs, $974,000 in legal expenses, and $980,000 in other operating
      expenses.





For
      the
      fiscal year ended June 30, 2006, the Company incurred $9,609,000 in corporate,
      general and administrative expenses, $7,447,000 in sales and marketing expense,
      $2,523,000 in operations expense, $1,467,000 in technology development, $372,000
      in referral marketing costs related to the generation of the Company’s private
      student loans and admission application service business, $54,000 in
      consulting and hosting costs for the scholarship search and college application
      products, $83,000 in student loan servicing and custodial costs, $591,000 in
      legal expenses, and $661,000 in other operating expenses.




F-12
 *Table
          of Contents*




**Cash
      and Cash Equivalents/Restricted Cash**




The
      Company considers all highly liquid debt instruments and other short-term
      investments with an initial maturity of three months or less to be cash
      equivalents. The Company maintains cash and cash equivalent balances at
      financial institutions that are insured by the Federal Deposit Insurance
      Corporation up to $100,000. At June 30, 2008 and 2007, the Company’s uninsured
      cash balances total $10,470,000 and $13,507,000, respectively.





Included
      in cash and cash equivalents are restricted cash deposits that are not readily
      available to the Company for working capital purposes. At June 30, 2008 and
      2007, the Company’s restricted cash balances were $2,398,000 and $3,154,000,
      respectively.




**Security
      Deposits**





As
      of
      June 30, 2008 and June 30, 2007, the Company had $999,000 and $955,000,
      respectively, in security deposits held and controlled by other parties to
      secure lease agreements the Company has for office space and facilities, on
      deposit with the SEC for future filings, and on deposit related to
      servicing agreements.




**Fixed
      Assets**





Fixed
      assets are stated at cost. Depreciation is computed primarily using the
      straight-line method over the estimated useful life of the assets.





Computer
                network equipment
            3
                YearsLeasehold
                improvements
            3
                YearsFurniture
                and fixtures
            3
                Years




**Investment
      in Education Empowerment Fund I, LLC (f/k/a Achiever Fund I, LLC) (“EEF I,
      LLC”)**





On
      April
      18, 2006, the Company entered into a definitive agreement with a consortium
      of
      European financial institutions with significant experience in consumer lending
      and specialty financial products to support the launch and origination of
      PreprimeTM student loans. These private student loans address the market
      of high academic achievement post-secondary school borrowers who are
      currently unable to meet traditional private student loan underwriting criteria, *e.g.* thin or
      no credit history, insufficient earnings history, *etc.* The
      Company is both the managing member (through its EEF I, LLC affiliate) and
      a
      minority investor in EEF I, LLC. As of June 30, 2008, the Company’s investment
      percentage in EEF I, LLC was less than five (5%) percent.





On
      April
      27, 2007, Education Empowerment SPV, LLC, a wholly-owned, special purpose
      subsidiary of EEF I, LLC, entered into a $100 million revolving credit facility
      for the origination and funding of PreprimeTM student loans with an asset backed
      commercial paper conduit managed by DZ Bank AG. The facility has a five year
      term. The proceeds from the initial draw down on the facility were used to
      return a significant portion of invested capital to EEF I, LLC’s members. The
      line of credit expands the capacity of the fund to acquire PreprimeTM student
      loans originated by the Company. The line of credit is solely an obligation
      of
      EEF I, LLC. There is no recourse to the Company.




The
      Company has not consolidated EEF I, LLC within its financial statements per
      FASB
      Interpretation 46(R), *Consolidation
      of Variable Interest Entities (revised December 2003) — an interpretation of ARB
      No. 51* (“FIN
      46R”), which requires consolidation by business entities of variable interest
      entities, which have one or more of the following characteristics (the Company’s
      application of the facts of the operating agreement to FIN 46 requirements
      are
      noted after each):







F-13
 *Table
            of Contents*




1.
                The
                    equity investment at risk is not sufficient to permit the entity
                    to
                    finance its activities without additional subordinated financial
                    support
                    provided by any parties, including the equity holders. (The agreement
                    anticipated the need for more than the initial funding for each
                    member up
                    to a limit of $26 million. The Company is limited to $1 million
                    in
                    potential equity investment in this agreement. This agreement
                    was amended
                    to a funding limit of $40 million, with the Company limit amended
                    to $1.5
                    million.)  2.
                  The
                      equity investors lack one or more of the following essential
                      characteristics of a controlling financial
                      interest:
 a.
                    The
                        direct or indirect ability to make decisions about the entity’s activities
                        through voting rights or similar rights. (EEF I, LLC is controlled
                        by a
                        board of managers with voting rights held by the equity
                        investors.)
 b.
                    The
                        obligation to absorb the expected losses of the entity. (Gains
                        and losses
                        are allocated to members based on their respective
                        investments.)
 c.
                    The
                        right to receive the expected residual return of the entity.
                        (Residual
                        interests are returned to the members in a pro rata distribution
                        based on
                        their respective percentage
                        interests.)


3.
              The
                  equity investors have voting rights that are not proportionate
                  to their
                  economic interests, and the activities of the entity involved are
                  conducted on behalf of an investor with a disproportionately small
                  voting
                  interest. (Voting Rights: The agreement requires the unanimous
                  vote of the members; under Delaware law, managers who are also
                  members have the same rights and powers of other members unless
                  the
                  operating agreement provides otherwise. Entity Activities: EEF
                  I, LLC
                  provides student loans to unrelated third parties and
                  thereby generates profits which are allocated to the
                  members in proportion to their respective percentage
                  interests.)


On
      September 27, 2007, the limited liability company agreement of EEF I, LLC was
      amended and restated to allow the Company to finance its private student loans
      through EEF I, LLC. As part of the amendment and restatement, separate
      series of limited liability company interests, as contemplated by Section 18-215
      of the Delaware Act, were established and designated as Series A and Series
      B.
      PreprimeTM loans acquired or to be acquired by EEF I, LLC, and the associated
      assets and liabilities and cash flow of EEF I, LLC are allocated to Series
      A,
      and the private student loans and the associated assets and liabilities and
      cash
      flow of EEF I, LLC, are allocated to Series B, of which the Company’s wholly
      owned subsidiary is the sole member and 100% owner.





As
      the
      governing documents of EEF I, LLC have been changed in a manner that changes
      the
      characteristics of the Company’s equity investment, the Company has undertaken a
      review to reconsider the initial FIN46R determination described above and has
      concluded that consolidation of EEF I, LLC and affiliates is not required per
      FIN46R as the entity is not a variable interest entity. The Company has
      consolidated the assets, liabilities and related cash flows of the separate
      Series B, as the Company is the sole member and 100% owner of such separate
      series.





On
      November 9, 2007, the revolving credit facility with an asset backed commercial
      paper conduit managed by DZ Bank AG was amended and restated, increasing the
      facility from $100 million to $200 million. As it relates to the PreprimeTM
lending business conducted in separate Series A, the amendment and
      restatement established a maximum borrowing limit of $150
      million.





F-14
 *Table
            of Contents*





The
      Company accounts for the investment in the separate Series A of EEF I, LLC
      at
      the lower of cost or fair value, which is the Company’s investment basis (cost)
      per EITF 03-16, *Accounting
      for Investments in Limited Liability Companies* .





**Securitization
      Accounting**





To
      meet
      the sale criteria of SFAS No. 140, the Company’s June 2007 securitization used a
      two-step structure with a Qualified Special Purpose Entity (“QSPE”) that legally
      isolates the transferred assets from the Company, even in the event of
      bankruptcy. The transactions are also structured, in order to meet sale
      treatment, to ensure that the holders of the beneficial interests issued by
      the
      QSPE are not constrained from pledging or exchanging their interests, and that
      the Company does not maintain effective control over the transferred
      assets.





The
      Company assessed the financial structure of the securitization to determine
      whether the trust or other securitization vehicle meets the sale criteria as
      defined in SFAS No. 140 and accounts for the transaction accordingly. To be
      a
      QSPE, the trust must meet all of the following conditions:




·
            It
                is demonstrably distinct from the Company and cannot be unilaterally
                dissolved by the Company and at least ten percent of the fair value
                of its
                interests is held by independent third
                parties.




·
              The
                  permitted activities in which the trust can participate are significantly
                  limited. These activities are entirely specified up-front in the
                  legal
                  documents creating the
                  QSPE.




·
              There
                  are limits to the assets the QSPE can hold; specifically, it can
                  hold only
                  financial assets transferred to it that are passive in nature,
                  passive
                  derivative instruments pertaining to the beneficial interests held
                  by
                  independent third parties, servicing rights, temporary investments
                  pending
                  distribution to security holders and
                  cash.




·
              It
                  can only dispose of its assets in automatic response to the occurrence
                  of
                  an event specified in the applicable legal documents and must be
                  outside
                  the control of the
                  Company.




**Retained
      Interests in Securitizations**





The
      Company securitizes its student loan assets and for transactions qualifying
      as
      sales, the Company retains residual interests, all of which are referred to
      as the Company’s accounts receivable from securitizations. The residual interest
      is the right to receive cash flows from the student loans and reserve accounts
      in excess of the amounts needed to pay servicing, derivative costs (if any),
      other fees, and the principal and interest on the bonds backed by the student
      loans. The investors of the securitization trusts have no recourse to the
      Company’s other assets should there be a failure of the student loans to pay
      when due.





The
      Company recognizes the resulting gain or loss on student loan securitizations
      in
      the consolidated statements of operations. This gain is based upon the
      difference between the allocated cost basis of the assets sold and the relative
      fair value of the assets received. The component in determining the fair value
      of the assets received that involves the most judgment is the residual interest.
      The Company estimates the fair value of the residual interest, both initially
      and each subsequent quarter, based on the present value of future expected
      cash
      flows using management’s best estimates of the following key assumptions —
defaults, recoveries, prepayment speeds, interest rates on the asset backed
      bonds, and discount rates commensurate with the risks involved. Quoted market
      prices are not available for the residual interest. The Company accounts for
      its
      residual interests as available-for-sale securities. Accordingly, residual
      interests are reflected at market value with temporary changes in market value
      reflected as a component of accumulated other comprehensive income in
      stockholders’ equity.




The
      Company records interest income and periodically evaluates its residual
      interests for other than temporary impairment in accordance with the Emerging
      Issues Task Force (“EITF”) Issue





F-15
 *Table
            of Contents*





No.
      99-20, *Recognition
      of Interest Income and*  *Impairment
      on Purchased and Retained Beneficial Interests in Securitized Financial
      Assets* .
      Under
      this guidance, each quarter, the Company estimates the cash flows to be received
      from its residual interests which are used prospectively to calculate a yield
      for income recognition. In cases where the Company’s estimate of future cash
      flows results in a decrease in the yield used to recognize interest income
      compared to the prior quarter, the residual interest is written down to fair
      value, first to the extent of any unrealized gain in accumulated other
      comprehensive income, then through earnings as an other than temporary
      impairment.





For
      the
      fiscal year ended June 30, 2008, the Company reversed $2,757,000 in unrealized
      gain in other comprehensive income, and recorded $7,720,000 in impairment
      losses. Interest income accreted on the residual interest for the fiscal year
      ended June 30, 2008 was $1,385,000.




**Income
      Taxes**





The
      income tax benefit is computed on the pretax income (loss) based on the current
      tax law. Deferred income taxes are recognized for the tax consequences in future
      years of differences between the tax basis of assets and liabilities and their
      financial reporting amounts at each year-end based on enacted tax laws and
      statutory tax rates.





**Sales
      and Marketing**





The
      Company expenses the costs associated with sales and marketing as incurred.
      Sales and marketing expenses for both the Company's student loan and admission
      application lines of business, included in the statements of operations for
      the fiscal years ended June 30, 2008, 2007 and 2006 were $16,996,000,
      $13,945,000 and $7,447,000, respectively.





**(Loss)
      Per Share of Common Stock**





Historical
      net (loss) per common share is computed using the weighted average number of
      common shares outstanding. Diluted earnings per share (“EPS”) includes
      additional dilution from common stock equivalents, such as stock issuable
      pursuant to the exercise of stock options and warrants.





The
      following is a reconciliation of the computation for basic and diluted EPS
      for
      the fiscal years ended June 30, 2008, 2007 and 2006:




June
                30, 2008
            
            June
                30, 2007
            
            June
                30, 2006Net
                (loss) applicable to common shares
            
            $
            (71,107,000
            )
            $
            (29,423,000
            )
            
            (38,622,000
            )Weighted-average
                common stockOutstanding (Basic)
            
            
            29,586,524
            
            
            20,720,628
            
            
            15,100,652Weighted-average
                common stockequivalents:Stock options
            
            
            —
            
            
            —
            
            
            —Warrants
            
            
            —
            
            
            —
            
            
            —Weighted-average
                common stockoutstanding (Diluted)
            
            
            29,586,524
            
            
            20,720,628
            
            
            15,100,652Net
                (Loss) per basic and diluted shares
            
            $
            (2.40
            )
            $
            (1.42
            )
            $
            (2.56
            )







F-16
 *Table
            of Contents*




For
      June
      30, 2008, 2007 and 2006, warrants (7,476,469 7,294,108 and 15,604,968,
      respectively) were not included in the computation of diluted EPS because
      inclusion would have been antidilutive. For June 30, 2008, 2007 and 2006,
      options (6,665,039, 5,737,807 and 4,320,485, respectively) were not included
      in
      the computation of diluted EPS because inclusion would have been
      antidilutive.




**Financial
      Instruments Disclosures of Fair Value**





Statement
      of Financial Accounting Standard 107, *Disclosures
      about Fair Value of Financial Instruments* (“FAS
      107”) requires entities to disclose the fair value of all (recognized and
      unrecognized) financial instruments that is practicable to estimate, including
      liabilities. The estimates of fair value of financial instruments are summarized
      as follows:




*Carrying
      amounts approximate fair value*




June
                30, 2008
            
            June
                30, 2007Cash
            
            $
            10,216,000
            
            $
            11,606,000Restricted
                Cash
            
            
            2,398,000
            
            
            3,154,000Accounts
                Receivable
            
            
            1,990,000
            
            
            1,979,000Private
                student loans receivable, held for sale, lower of cost or market
                (1)
            
            
            115,996,000
            
            
            —Federal
                student loans, held for sale
            
            
            34,374,000
            
            
            7,395,000Investment
                in EEF I, LLC
            
            
            1,001,000
            
            
            —Accounts
                Payable
            
            
            6,750,000
            
            
            3,835,000Notes
                Payable - Doral Bank
            
            
            5,523,000
            
            
            1,399,000Notes
                Payable - Merrill Lynch
            
            
            121,891,000
            
            
            11,711,000Note
                Payable - DZ Bank
            
            
            38,760,000
            
            
            0Senior
                Secured Notes
            
            
            11,200,000
            
            
            0Accounts
                Receivable from Securitizations
            
            
            4,093,000
            
            
            11,192,000




(1)
              Net
                  of $3,780,000 valuation reserve, $6,132,000 deferred origination
                  fees and
                  $13,713,000 lower of cost or market
                  adjustment


The
      fair
      value of the accounts receivable from securitizations is internally calculated
      by discounting the projected cash flows to be received over the life of the
      trust. In projecting the cash flows to be received, the primary assumptions
      the
      Company makes relate to prepayment speeds, default and recovery rates, and
      cost
      of funds. These assumptions are developed internally. See Note 16 -
      Securitization, for further discussions regarding these assumptions. Carrying
      values approximate fair value for the other listed assets and liabilities
      because of their short time to realization.




*Assets
      with fair values exceeding carrying amounts*


June 30, 2007Carrying
              Value
            
            Fair
              ValuePrivate
                student loan receivable, held for sale, net of valuation
                reserve
            
            $
            5,441,000
            
            $
            6,023,000Investment
                in EEF I, LLC
            
            $
            322,000
            
            $
            342,000




The
      Company determined the fair value of its student loans receivable through a
      net
      present value analysis on an individual loan basis. This analysis considered
      the
      United States Department of Education’s cohort default rates for Title IV
      post-secondary educational institutions, the borrower’s program of study, the
      borrower and co-borrower’s credit quality, the individual terms of the loan, and
      estimated prepayment and recovery rates. As of June 30, 2007, the
      approximate





F-17
 *Table
            of Contents*





9.7%
      increase in fair value over the carrying value, which is the Company’s cost,
      results from this net present value modeling of future cash flows from the
      borrowers servicing these loans tempered by all of the above
      factors.




The
      fair
      value of the investment in EEF I, LLC was determined from the June 2008 and
      June
      2007, net asset value reports provided to the investors in this
      entity.




**Stock
      Based Compensation**





At
      June
      30, 2008, the Company had two stock-based compensation plans, the 2004
      Incentive Plan and the 2005 Consultant Incentive Plan. The Company accounts
      for
      stock based compensation in accordance with Financial Accounting Standards
      Board
      (“FASB”) Statement 123(R), *Share-Based
      Payments* (“FAS
      123R”). FAS 123R requires compensation expense, measured as the fair value at
      the grant date, related to share-based payment transactions to employees to
      be
      recognized in the financial statements over the period that an employee provides
      service in exchange for the award.





The
      Company recognized $3,440,830 in stock based compensation expense for the fiscal
      year ended June 30, 2008.





The
      Company recognized $5,625,117 in stock based compensation expense for the fiscal
      year ended June 30, 2007.





The
      Company recognized $7,814,692 in stock based compensation expense for the fiscal
      year ended June 30, 2006.




**Recent
      Accounting Pronouncements**




In
      February 2006, the FASB issued SFAS 155, *Accounting
      for Certain Hybrid Financial Instruments* , an
      amendment of FASB Statement 133 *Accounting
      for Derivative Instruments and Hedging Activities* and FASB
      Statement 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* (“SFAS
      155”). SFAS 155 was effective for the Company beginning in the first quarter of
      fiscal 2007. SFAS 155 permits interests in hybrid financial instruments that
      contain an embedded derivative, which would otherwise require bifurcation,
      to be
      accounted for as a single financial instrument at fair value, with changes
      in
      fair value to be recognized in earnings. This election is permitted on an
      instrument-by-instrument basis for all hybrid financial instruments held,
      obtained, or issued as of the adoption date. The adoption of SFAS 155 did not
      have any material impact on the Company’s consolidated financial condition
      or results of operations.





In
      March
      2006, the FASB issued SFAS 156, *Accounting
      for the Servicing of Financial Assets* , an
      amendment of FASB Statement 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* (“SFAS
      156”). SFAS 140 required that all separately recognized servicing assets and
      liabilities be initially measured at fair value, if practicable, and required
      entities to elect either fair value measurement with changes in fair value
      reflected in earnings or the amortization and impairment requirements of SFAS
      140 for subsequent measurement. SFAS 156 was effective for the Company beginning
      in the first quarter of fiscal 2007. The adoption of SFAS 156 did not have
      any
      material impact on the Company’s consolidated financial condition or
      results of operations.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, *Fair
      Value Measurement* (“SFAS
      157”). This standard provides guidance for using fair value to measure assets
      and liabilities. SFAS 157 applies whenever other standards require (or permit)
      assets or liabilities to be measured at fair value but does not expand the
      use
      of fair value in any new circumstances. Prior to SFAS 157, the methods for
      measuring fair value were diverse and inconsistent, especially for items that
      are not actively traded. The standard clarifies that for items





F-18
 *Table
            of Contents*





that
      are
      not actively traded, such as certain kinds of derivatives, fair value should
      reflect the price in a transaction with a market participant, including an
      adjustment for risk, not just the Company’s mark-to-model value. SFAS 157 also
      requires expanded disclosure of the effect on earnings for items measured using
      unobservable data. SFAS 157 is effective for financial statements issued for
      fiscal years beginning after November 15, 2007, and interim periods within
      those
      fiscal years. The Company is currently evaluating the impact of this statement
      on its financial statements.





In
      February 2007, FASB issued Statement of Financial Accounting Standard No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      amendment of FASB Statement No. 115* (“SFAS
      159”). SFAS 159 permits entities to elect to measure many financial instruments
      and certain other items at fair value. Unrealized gains and losses on items
      for
      which the fair value option has been elected will be recognized in earnings
      at
      each subsequent reporting date. SFAS 159 is effective for fiscal years beginning
      after November 15, 2007. The Company is currently assessing the impact of SFAS
      159 on its consolidated financial statements.





In
      June
      2007, the FASB ratified EITF Issue No. 06-11 *Accounting
      for Income Tax Benefits of Dividends on Share-Based Payment
      Awards* (“EITF
      06-11”), which requires entities to record tax benefits on dividends or dividend
      equivalents that are charged to retained earnings for certain share-based awards
      to additional paid-in capital. In a share-based payment arrangement, employees
      may receive dividends or dividend equivalents on awards of nonvested equity
      shares, nonvested equity share units during the vesting period and share options
      until the exercise date. Generally, the payment of such dividends can be
      treated as deductible compensation for tax purposes. The amount of tax benefits
      recognized in additional paid-in-capital should be included in the pool of
      excess tax benefits available to absorb tax deficiencies on share-based payment
      awards. EITF 06-11 is effective for fiscal years beginning after December 15,
      2007 and interim periods within those years. The Company is currently assessing
      the impact of EITF 06-11 on its consolidated financial
      statements.




In
      December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
      in Consolidated Financial Statements—an amendment of ARB No. 51. 
 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.  SFAS No. 160 is
      effective for fiscal years, and interim periods within those fiscal years,
      beginning on or after December 15, 2008.  The Company is currently
      evaluating the impact of this statement on its financial
      statements.





In
      February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective
      Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP
      No. 157-2 defers the effective date of SFAS No. 157 to fiscal years
      beginning after December 15, 2008, and interim periods within those fiscal
      years, for all nonfinancial assets and liabilities, except those that are
      recognized or disclosed at fair value in the financial statements on a recurring
      basis (at least annually). Examples of items within the scope of FSP
      No. 157-2 are nonfinancial assets and nonfinancial liabilities initially
      measured at fair value in a business combination (but not measured at fair
      value
      in subsequent periods), and long-lived assets, such as property, plant and
      equipment and intangible assets measured at fair value for an impairment
      assessment under SFAS No. 144.





In
      March
      2008, the FASB issued SFAS No. 161, Disclosures about Derivative
      Instruments and Hedging Activities—an amendment of FASB Statement
      No. 133.  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
      Statement No.133, and how derivative instruments and related hedged items affect
      a company’s financial position, financial performance, and cash flows. SFAS
      No. 161 is effective for financial statements issued for fiscal years and
      interim periods beginning after November 15, 2008.  The Company is
      currently evaluating the impact of this statement on its financial
      statements.







F-19
 *Table
            of Contents*





In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles” (SFAS No. 162). SFAS No. 162 identifies the sources of
      accounting principles and the framework for selecting principles used in the
      preparation of financial statements.  SFAS No. 162 is effective 60
      days following the SEC’s approval of the Public Company Accounting Oversight
      Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity
      with Generally Accepted Accounting Principles”. The implementation of this
      standard will not have a material impact on consolidated financial
      statements.





**Reclassification**





Certain
      amounts in the June 30, 2007 and June 30, 2006 financial statements have been
      reclassified to conform to the June 30, 2008 presentation. There was no effect
      on net loss for the periods.






**NOTE
              3 -**
            ****STUDENT
                LOAN RECEIVABLES, HELD FOR
                SALE****




Student
      loan receivables are private student loans made to post-secondary and/or
      graduate students pursuing degree programs from selective colleges and
      universities in the United States and abroad.  Private student loans are
      not guaranteed by any governmental entity and are unsecured consumer debt. 
Interest accrues on these loans from date of advance, with the interest rate
      dependent on the loan’s pricing tier as determined during underwriting and the
      student borrower’s choice of repayment option (deferred, interest payment only,
      and principal and interest payment).  Once these loans begin to service,
      borrower payments are applied to interest and principal consistent with the
      effective interest rate method per SFAS 91, *Accounting
      for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
      and Initial Direct Costs of Leases* .
      Origination fee revenue is recognized, if applicable, over the principal
      servicing life of the loan, also per SFAS 91.




The
      Company values its student loan receivables at the lower of cost or market
      on an
      individual loan basis. The Company determines the fair market value of its
      student loans receivable through a net present value analysis of its student
      loan portfolios. This process is described in Note 2, Financial Instruments
      Disclosures of Fair Value for private student loans receivable. The Company
      completed its first sale of student loans to a securitization transaction in
      June 2007 and plans to continue to securitize its student loan receivables
      in
      the future, subject to market conditions.




The
      Company structures, markets, and performs all or substantially all aspects
      of
      student loan origination, including underwriting and verification, for its
      student loan programs.  All the private student loans are then disbursed by
      Doral Bank, FSB (the “Bank”), a federally-chartered savings bank, pursuant to
      origination agreements with the Company’s wholly owned subsidiaries.  The
      Company then purchases the loans from Doral through one of its special purpose
      funding subsidiaries or affiliates pursuant to purchase agreements that exist
      with Doral as described below.  These private student loans are purchased
      with funds borrowed from one of the Company’s warehouse loan facilities and with
      its or its affiliates’ equity capital.




MRU
      Lending, Inc. (“MRUL”) and MRU Funding SPV, Inc. (“MRUF”) and MRU
      Originations, Inc. ("MRUO”) have loan purchase agreements with Doral Bank
      NY, FSB, a federally-chartered savings bank (the “Bank”). Through November 30,
      2005, MRUL had a loan purchase agreement with Webbank, a Utah state chartered
      financial institution and a wholly owned subsidiary of WebFinancial
      Corporation.




The
      Bank
      loan program is secured by $3 million invested in seven-day certificates of
      deposit held at the Bank, with assignment rights to the Bank.  The Bank
      also has the right to offset amounts due under the loan program against
      origination fees payable to MRUL and MRUF.





F-20
 *Table
            of Contents*








Through
      June 30, 2008, the Company purchased the following private student loan volumes
      through its various subsidiary loan programs. All loans purchased through these
      loans programs are purchased at par, i.e. no discount, and without recourse
      or
      redemption features available to the Bank.




·
              The
                  Bank-MRUL loan program purchased approximately $18.5 million in
                  private
                  student loans.




·
              The
                  Bank-MRUF loan program purchased approximately $246.5 million in
                  private
                  student loans.




·
              The
                  Bank-MRUO loan program purchased approximately $42.4 million in
                  private
                  student loans.
  ·
                The
                    Webbank-MRUL loan program purchased approximately $1.5 million
                    in private
                    student loans.


The
      Company has retained servicing rights on the loans purchased under its various
      subsidiary loan programs and has outsourced the servicing function to a third
      party, who remits funds collected to us along with monthly activity
      reports.





As
      of
      June 30, 2008 aggregate private loan receivables of $138,033,192 were pledged
      as
      collateral.




**NOTE
                4 -**
              **FIXED******ASSETS****




Fixed
      assets consist of the following at June 30, 2008 and June 30, 2007:





June
                30, 2008
            
            June
                30, 2007Computer
                network equipment
            
            $
            3,823,744
            
            $
            2,081,701Furniture
                and fixtures
            
            
            92,332
            
            
            71,033Leasehold
                improvements
            
            
            317,065
            
            
            6,9064,233,141
            
            
            2,159,640Less:
                accumulated depreciation
            
            
            (1,547,590
            )
            
            (606,754
            )Total
                fixed assets
            
            $
            2,685,551
            
            $
            1,552,886




Depreciation
      expense for the fiscal year ended June 30, 2008 and 2007 was $940,836 and
      $388,217, respectively.




**NOTE
                5 -**
              **INTANGIBLE
                  ASSETS**


The
      Company acquired a scholarship resource database in July 2005. After
      identification of tangible assets in this asset purchase, the Company paid
      and
      assigned a valuation of $148,440 to this intangible asset. The Company is
      amortizing this asset over a three year useful life.




The
      Company obtained a group of customer contracts, trademarks and technology,
      and a
      non-compete agreement related to a February 2007 transaction with The Princeton
      Review (“TPR”). The transaction valued the group of customer contracts at
      $1,500,000, the trademarks and technology at $1,000,000 and a non-compete with
      TPR at $500,000. The group of customer





F-21
 *Table
            of Contents*





contracts
      is amortized over a four year useful life. The trademarks and technology are
      amortized over a five year useful life. The non-compete is amortized over the
      provision’s five year term.





As
      of
      June 30, 2008, the book value and accumulated amortization of the Company’s
      intangible assets follows:




Gross
                Carrying
            
            
            AccumulatedIntangible
              Asset
            
            
            Amount
            
            
            AmortizationCustomer
                Contracts
            
            $
            1,500,000
            
            $
            500,000Trademarks
                & Technology
            
            
            1,000,000
            
            
            266,667Non-compete
                Agreement
            
            
            500,000
            
            
            133,333Scholarship
                Resource data
            
            
            148,440
            
            
            148,440TOTAL
            
            $
            3,148,440
            
            $
            1,048,440





Amortization
      expense for the fiscal year ended June 30, 2008 was $724,480.





As
      of
      June 30, 2007, the book value and accumulated amortization of the Company’s
      intangible assets follows:




Gross
                Carrying
            
            
            AccumulatedIntangible
                Asset
            
            
            Amount
            
            
            AmortizationCustomer
                Contracts
            
            $
            1,500,000
            
            $
            125,000Trademarks
                & Technology
            
            
            1,000,000
            
            
            66,667Non-compete
                Agreement
            
            
            500,000
            
            
            33,333Scholarship
                Resource data
            
            
            148,440
            
            
            98,960TOTAL
            
            $
            3,148,440
            
            $
            323,960




Amortization
      expense for the fiscal year ended June 30, 2007 was $274,480.




The
      following table summarizes the estimated amortization expense relating to the
      Company’s intangible assets for the next five fiscal years:





2009
            
            $
            675,0002010
            
            $
            675,0002011
            
            $
            550,0002012
            
            $
            200,0002013
            
            $
            0




A
      non-cash adjustment of $72,000 was made to the purchase price of the TPR
      transaction during the three months ended September 30, 2007, reducing the
      purchase price and the related goodwill.




**NOTE
                6 -**
              **PROVISION
                  FOR INCOME
                  TAXES**




Income
      taxes are provided for the tax effects of transactions reported in the financial
      statements and consist of taxes currently due. Deferred taxes related to
      differences between the basis of assets and liabilities for financial and income
      tax reporting will either be taxable or deductible when the assets or
      liabilities are recovered or settled. The difference between the basis of assets
      and liabilities for financial and income tax reporting are not material,
      therefore the provision for income taxes from operations consist of income
      taxes
      currently payable.





F-22
 *Table
            of Contents*








The
      nature of the timing difference generating the deferred tax asset is the
      accumulated net operating loss carry forwards that can be applied towards
      mitigating future tax liabilities of the Company. The Company has established
      a
      valuation account at the full value of the tax deferred asset.





There
      were no provisions for income taxes for the fiscal years ended June 30, 2008
      and
      2007.





Deferred
      income taxes are determined using the liability method for the temporary
      differences between the financial reporting basis and income tax basis of the
      Company’s assets and liabilities. Deferred income taxes will be measured based
      on the tax rates expected to be in effect when the temporary differences are
      included in the Company’s consolidated tax return. Deferred tax assets and
      liabilities are recognized based on anticipated future tax consequences
      attributable to differences between financial statements carrying amounts of
      assets and liabilities and their respective tax bases.




The
      Company’s deferred tax asset, which the Company has set aside a valuation
      allowance at an equal amount, is due primarily to the expected tax benefit
      of
      the Company’s net operating losses. To date, the Company’s operations have not
      generated any federal, state, or local taxes beyond the minimum filing
      requirements, which can not and have not been mitigated by operating loss carry
      forwards. The Company does not have an effective tax rate due to the Company’s
      lack of taxable profits to-date.




June
                30, 2008
            
            June 30, 2007Deferred
                tax assets
            
            
            42,828,000
            
            $
            20,265,000Less:
                valuation allowance
            
            
            (42,828,000
            )
            
            (20,265,000
            )Totals
            
            $
            —
            
            $
            —




At
      June
      30, 2008 and June 30, 2007, the Company had accumulated net operating loss
      deficits of approximately $122.4 million and
      $57.9 million, respectively, available to offset future taxable income through
      2027. The Company established valuation allowances equal to the full amount
      of
      the deferred tax assets due to the uncertainty of the operating losses in future
      periods. Note that the Company’s beneficial conversion features for the Series B
      Convertible Preferred Stock increases the Company’s accumulated deficit but does
      not contribute to net operating losses that can be used to offset future taxable
      income.




**NOTE
              7 -**
            ****STOCKHOLDERS’
                EQUITY****




**Common
      Stock**





There
      were 200,000,000 shares of common stock authorized, with 31,721,174 and
      25,714,393 shares issued and outstanding at June 30, 2008 and 2007,
      respectively. The par value for the common stock is $.001 per
      share.







F-23
 *Table
            of Contents*






On
      November 5, 2007, the Company closed a private placement sale of 5,180,000
      shares of its common stock, resulting in gross proceeds of $24,367,500.
 $1,502,847 in commissions and other expenses related to the sale were
      recorded as a reduction to additional paid-in capital.




**Series
      B Convertible Preferred Stock**





There
      were 12,000,000 shares of Series B convertible preferred stock authorized,
      with
      8,506,724 and 8,237,264 shares issued and outstanding as of June 30, 2008 and
      June 30, 2007. The par value for this preferred issuance is $0.001 per
      share.





As
      further described in the Company’s charter, at the option of the majority
      holders of the Series B Convertible Preferred Stock, at any time on or
      after December 31, 2010, the Company shall mandatorily redeem, in two
      annual installments commencing 90 days after the Company receives written notice
      from the majority holders requesting redemption, all shares of Series B
      Convertible Preferred Stock outstanding at a price per share equal to
      the greater of (i) $3.80 per share, plus the value of all declared but unpaid
      dividends; or (ii) the fair market value of a share of Series B Convertible
      Preferred Stock on the date on which notice is delivered.  Fair market
      value will be determined by an expert selected by the mutual consent of the
      Company’s board of directors and the holders of a majority of the Series B
      Convertible Preferred Stock (or if the parties cannot agree on a single expert,
      a committee of three experts), based upon all factors such expert or experts
      deem relevant.




If
      the
      Company does not have sufficient funds to redeem on any redemption date all
      shares of the Series B Convertible Preferred Stock outstanding immediately
      prior
      to such redemption date, the Company will redeem a pro rata portion of each
      Series B holder's redeemable shares of such stock out of available funds, and
      as
      soon as practicable after the Company has funds available, it will redeem the
      remaining shares to have been redeemed, at a price per share equal to the
      original redemption price plus interest at the rate of 15% per annum, payable
      quarterly, from such redemption date to the date when redemption actually
      occurs.




The
      Series B Convertible Preferred Stockholders shall be entitled to receive
      cumulative dividends on the Series B Preferred at a rate equal to six (6%)
      percent of the Series B Original Issue Price annually, payable in arrears in
      additional shares of Series B Preferred. The Series B Preferred shares paid
      pursuant to the foregoing dividend will be valued at the Series B Original
      Issue
      Price. Dividends on the Series B Preferred shall cease to accrue, and all
      accrued but unpaid dividends shall be paid in kind, by the Third Trading Day
      after the first day on which the Market Price (the volume weighted average
      price
      for such date on the Principal Market, as reported by Bloomberg Financial,
      LP)
      of a share of the Company’s Common Stock listed on a Principal Market (the New
      York Stock Exchange or the NASDAQ National Market) is at least three (3) times
      the Original Series B Purchase Price for at least five (5) consecutive Trading
      Days.




During
      the fiscal years ended June 30, 2008 and June 30, 2007, the Company paid
      dividends to holders of Series B Convertible Preferred Stock through the
      issuance of 269,460 and 605,684 shares, respectively.




As
      of
      June 30, 2008 and 2007, the balances for the additional paid-in capital account
      for the beneficial conversion feature for the Series B Convertible Preferred
      Stock were $15,544,000 and $14,264,000, respectively. The Company will continue
      to record the beneficial conversion feature for the Series B Convertible
      Preferred stock for any new issuances or dividends accrued on this
      instrument.





**Series
      B-2 Convertible Preferred Stock**




There
      were 2,500,000 shares of Series B-2 Convertible Preferred Stock (Series B-2
      Preferred) authorized with 2,197,109 shares issued and outstanding as of June
      30, 2008.  There were no shares issued and outstanding as of June 30,
      2007.





F-24
 *Table
            of Contents*





On
      June
      30, 2008, the Board adopted a resolution creating a series of the Corporation’s
      preferred stock, par value $0.001 per share, designated as the “Series B-2
      Convertible Preferred Stock” (the Series B-2 Preferred”) and authorized the
      issuance of 2,500,000 shares were authorized for issuance.  The power,
      preferences, and rights of the Series B-2 Preferred set forth in the Certificate
      of Designation of Series B-2 Convertible Preferred Stock of MRU Holdings, Inc.
      (the “Certificate of Designation”) include dividends, rank, liquidation
      preference, conversion, optional exchange, voting rights, protective provisions
      and redemption.





The
      Series B-2 Preferred is senior to the Company’s outstanding Series B Convertible
      Preferred Stock, and its common stock with respect to the payment of dividends
      and payment upon a liquidation event.





The
      Series B-2 Preferred stockholders are entitled to receive when, as and if
      declared by the Company’s Board, dividends on the Series B-2 Preferred at a
      simple annual rate equal to nine percent (9%) of the Series B-2 Original Issue
      price, up to but not including September 30, 2008 (the “Alternate Interest Rate
      Date”) and at a simple annual interest rate of eighteen percent (18%) of the
      Series B-2 Original Issue Price from and after the Alternate Interest Rate
      Date
      until the Series B-2 Preferred is converted, exchanged or redeemed; provided,
      however, dividends shall not be declared unless permitted under the
      subordination agreement between the Company, the holders of the Series B-2
      Preferred, the purchasers of the Company’s 12% senior secured notes (the “Senior
      Lenders”) and the collateral agent for the Senior Lenders (the “Collateral
      Agent”) (the “Series B-2 Subordination Agreement”).  Subject to the
      foregoing, dividends may be paid by the Company in cash or shares of Common
      Stock.  To the extent declared, dividends are to be paid on June 30th of
      each year.





Upon
      the
      consummation by the Company of the issuance of equity securities (the “Equity
      Securities”) in connection with an equity financing in which the Company
      receives in excess of a minimum threshold amount of gross proceeds mutually
      agreed to by the Company and the investors in the Series B-2 Preferred, the
      Series B-2 Preferred will automatically convert into Equity Securities based
      on
      the terms and conditions of automatic conversion contained in the Certificate
      of
      Designation.  In the event that the Series B-2 Preferred is not
      automatically converted in connection with an equity financing before the
      Alternate Interest Rate Date, on and after the Alternate Interest Rate Date,
      each share of Series B-2 Preferred shall be convertible, at the option of a
      Series B-2 Holder, into a share or shares of Common Stock based on the terms
      and
      conditions of optional conversion contained in the Certificate of
      Designation.





If
      the
      Company issues Automatically Converting Debt Securities (as defined in the
      Certificate of Designation), each Series B-2 holder shall have the right, but
      not the obligation, to exchange all, but not less than all, of the Series B-2
      Preferred held by such Series B-2 holder for Automatically Converting Debt
      Securities on the same terms and conditions applicable to the purchasers of
      the
      Automatically Converting Debt Securities, subject to certain
      limitations.





Subject
      the provisions of the Series B-2 Subordination Agreement, at any time on or
      after December 31, 2008, the holders of a majority of the Series B-2 Preferred
      may require the Company to redeem all the outstanding shares of Series B-2
      Preferred and pay the Series B-2 holders  for each share of Series B-2
      Preferred then held by such holders (i) any and all accrued and unpaid dividends
      (whether or not declared) on such share of Series B-2 Preferred through the
      redemption date, and (ii) an amount per share equal to the $2.25 per share
      of
      Series B-2 Preferred.




On
      June
      30, 2008, Battery Ventures VII, L.P. and Battery Investment Partners VII, L.P.
      (the “Battery
      Investors”) purchased
      2,155,804 shares and 41,305 shares, respectively, of Series B-2 Convertible
      Preferred Stock at a price of $2.25 per share. In connection with the issuance
      of the Series B-2 Preferred, the Company and the Battery Investors agreed to
      amend the convertible promissory notes in the original aggregate principal
      amount of $5,000,000 (collectively, the “Cancelled
      Notes”)
      issued to the
      Battery Investors on June 9, 2008 to allow for their prepayment, and prepaid
      the
      principal amount of the Cancelled Notes, paid the accumulated interest on the
      Cancelled Notes, and the Cancelled Notes and the related warrants that were
      issued in connection with the bridge financing were cancelled.




F-25
 *Table
          of Contents*




**Stock-Based
      Compensation**




Under
      the
      2004 Incentive Plan, as amended (the “Plan”), the Company may grant either
      incentive stock options (“ISOs”) pursuant to Section 422 of the Internal Revenue
      Code, non-qualified stock options (“NQOs”), restricted stock, restricted stock
      units (“RSU”’s), performance grants, unrestricted common stock, or stock
      appreciation rights to its officers, directors, and employees.





The
      compensation committee of the Company's board of directors administers the
      Plan. The compensation committee has the complete authority and discretion
      to
      determine the terms of the Plan grants.





ISOs
      and
      NQOs are granted at an exercise price not less than their fair value at the
      date
      of the grant. Options granted have a maximum term of ten years. Option,
      restricted stock and RSU-vesting periods range from immediate vesting to three
      years.




The
      key
      assumptions for the Black-Scholes valuation method include the expected term
      of
      the option, stock price volatility, risk-free interest rate, dividend yield,
      forfeiture rate, and exercise price. Many of these assumptions are judgmental
      and highly sensitive. Following is a table of the key weighted average
      assumptions used in the valuation calculations for the options granted in the
      fiscal years ended June 30, 2008, 2007 and 2006, and a discussion of our
      methodology for developing each of the assumption used in the valuation
      model.




June
                2008
            
            June
                2007
            
            June
                2006Expected
                term
            
            
            6.5
                yrs
            
            
            6.5
                yrs
            
            
            6.5
                yrsExpected
                volatility
            
            
            58
            %
            
            57
            %
            
            26
            %Risk-free
                interest rate
            
            
            3.30
            %
            
            4.64
            %
            
            4.70
            %Dividend
                yield
            
            
            0
            %
            
            0
            %
            
            0
            %




At
      June
      30, 2008, there were 639,012 shares available for future grants under the
      Plan and 1,389,000 shares available for future grants under the 2005 Consultant
      Incentive Plan.




Expected
      Term This is the period of time over which the options granted are expected to remain
      outstanding. Options granted have a maximum term of ten years.  The Company
      lacks sufficient historical exercise data that it may rely on to determine
      expected term for the grants issued through June 30, 2008.  Therefore, the
      Company relied on the simplified method for expected term as defined by the
      SEC
      Staff Accounting Bulletin 107 (SAB 107), where expected term equals the sum
      of
      the vesting term and the original contractual term, which is then divided by
      two.  SAB 107 originally prescribed that the simplified method for
      estimating expected term would only be available for option grants through
      December 31, 2007.  In SEC Staff Accounting Bulletin 110 (SAB 110), the SEC
      staff acknowledged that such detailed information about employee behavior may
      not be widely available by December 31, 2007, and accordingly, the staff will
      continue to accept, under certain circumstances, the use of the simplified
      method beyond December 31, 2007.  Due to the limited period of time the
      Company’s shares have been publically traded through the Nasdaq Global Market,
      and the lack of related historical exercise date, the Company considers the
      continued use of the simplified method to be appropriate and consistent with
      SAB
      110.





Expected
      Volatility Actual
      changes in the market value of our stock are used to calculate the volatility
      assumption. The Company calculated daily market value changes during the period
      that the grant was issued to determine volatility, which was then annualized.
      An
      increase in the expected volatility will increase share-based compensation
      expense.





Risk-Free
      Interest Rate This
      is
      the ten-year US Treasury zero coupon bond interest rate posted at the date
      of
      grant having a term equal to the expected term of the option. An increase in
      the
      risk-free interest rate will increase share-based compensation
      expense.





F-26
 *Table
            of Contents*





Dividend
      Yield This
      is
      the annual rate of dividends per share over the exercise price of the option.
      The Company has no history of paying a dividend, so this has been 0%. An
      increase in the dividend yield will increase share-based compensation
      expense.





Forfeiture
      Rate This
      is
      the estimated percentage of options granted that are expected to be forfeited
      before becoming fully vested, *i.e.* service-based awards where the full award does not vest due to non-completion
      of
      the service by the employee, director, or consultant. This percentage is derived
      from historical experience. An increase in the forfeiture rate will decrease
      compensation expense.





As
      of
      June 30, there was $2,772,772 million
      of unrecognized compensation cost related to stock options, which is expected
      to
      be recognized over a weighted average period of 2.3 years.




The
      following table summarizes the stock option activity for the Plan for the year
      ended June 30, 2008:




Number
                of Options
            
            Weighted
                Average Exercise Price
              per
                Share
            
            Weighted
                Average Remaining Contractual Term
            
            Aggregate
              Intrinsic
                ValueOutstanding
                at June 30, 2007
            
            
            5,326,911
            
            $
            4.05Granted
            
            
            1,957,127
            
            $
            2.87Exercised
            
            
            (137,505
            )
            $
            3.33Canceled
            
            
            (548,160
            )
            $
            6.10Outstanding
                at June 30, 2008
            
            
            6,598,373
            
            $
            3.54
            
            
            8.08
            
            $
            1,167,500Exercisable
                at June 30, 2008
            
            
            4,653,208
            
            $
            3.77
            
            
            7.49
            
            $
            1,068,417




The
      weighted-average fair value of Plan option grants, calculated using the
      Black-Scholes valuation method under the assumptions indicated above, was $1.75
      in 2008, $2.39 in 2007, and $2.34 in 2006.




The
      following table summarizes the stock option activity for the 2005 Consultant
      Incentive Plan for the year ended June 30, 2008:




Number
                of Options
            
            Weighted
                Average Exercise Price
              per
                Share
            
            Weighted
                Average Remaining Contractual Term
            
            Aggregate
              Intrinsic
                ValueOutstanding
                at June 30, 2007
            
            
            128,654
            
            $
            3.43Granted
            
            
            —
            
            $
            —Exercised
            
            
            —
            
            $
            —Canceled
            
            
            (61,987
            )
            $
            3.51Outstanding
                at June 30, 2008
            
            
            66,666
            
            $
            3.35
            
            
            7.34
            
            $
            4,167Exercisable
                at June 30, 2008
            
            
            66,666
            
            $
            3.35
            
            
            7.34
            
            $
            4,167







F-27
 *Table
            of Contents*





The
      following table summarizes the restricted stock and RSU activity for the year
      ended June 30, 2008:




Number
                of Shares
            
            Weighted
                Average Grant Date Fair ValueNonvested
                at June 30, 2007
            
            
            153,356
            
            $
            6.72Granted
            
            
            142,692
            
            $
            5.08Vested
            
            
            (59,899
            )
            $
            6.75Canceled
            
            
            (25,070
            )
            $
            6.73Nonvested
                at June 30, 2008
            
            
            211,079
            
            $
            5.60


As
      of
      June 30, 2008 there was $988,455 of
      unrecognized compensation cost related to restricted stock and RSUs, which
      is
      expected to be recognized over a weighted average period of 2.1 years.




**Warrants**





There
      were a total number of 657,731 warrants exercised for the year ended June
      30, 2008 at a weighted average price of $1.28.





There
      were a total number of 8,050,593 warrants exercised for the year ended June
      30,
      2007 at a weighted average price of $3.25.




There
      were a total number of 339,800 warrants
      exercised for the year ended June 30, 2006 at a weighted average price of
      $1.20.





The
      Company had the following warrants outstanding for the purchase of its common
      stock at June 30, 2008 and 2007:





Exercise
            
            Expiration
            
            June
                30,
            
            June
                30,Price
            
            Date
            
            2008
            
            2007$0.99
            
            
            December
                2007
            
            
            0
            
            
            505,336$0.99
            
            
            December
                2008
            
            
            530,607
            
            
            530,607$0.99
            
            
            April
                2009
            
            
            22,740
            
            
            22,740$1.60
            
            
            July
                2007
            
            
            0
            
            
            100,000$1.60
            
            
            July
                2009
            
            
            330,350
            
            
            330,350$2.00
            
            
            July
                2007
            
            
            0
            
            
            90,119$3.40
            
            
            February
                2011
            
            
            2,138,158
            
            
            0$3.45
            
            
            February
                2011
            
            
            342,106
            
            
            0$3.50
            
            
            February
                2010
            
            
            127,500
            
            
            207,500$3.50
            
            
            February
                2015
            
            
            750,000
            
            
            750,000$3.50
            
            
            February
                2016
            
            
            1,482,751
            
            
            1,482,751$3.50
            
            
            March
                2017
            
            
            180,004
            
            
            180,004$3.80
            
            
            December
                2010
            
            
            152,000
            
            
            152,000$3.80
            
            
            February
                2011
            
            
            98,684
            
            
            2,480,264$3.80
            
            
            December
                2016
            
            
            412,437
            
            
            412,437$4.00
            
            
            April
                2010
            
            
            50,000
            
            
            50,000$4.65
            
            
            December
                2015
            
            
            200,000
            
            
            0TOTAL
            
            
            
            
            
            7,476,469
            
            
            7,294,108Exercisable
                warrants
            
            7,276,469
            
            
            6,881,671Weighted
                average exercise price
            $
            3.11
            
            $
            2.89








F-28
 *Table
            of Contents*








**NOTE
                8 -**
              ****CREDIT
                  LINE WITH NOMURA CREDIT & CAPITAL, INC. 
                  (“NOMURA”)****




On
      February 4, 2005, MRUL, a wholly-owned subsidiary of the Company, entered into
      a
      credit agreement (the “Credit Agreement”), by and among Nomura, as Agent, a
      subsidiary of Nomura Holdings, Inc., and the institutions from time to time
      party thereto as lenders, pursuant to which the lenders agreed to provide MRUL
      with a $165 million secured revolving credit facility for the origination and
      warehousing of private student loans. The loans under the Credit Agreement
      were
      secured by, among other things, a lien on all of the student loans financed
      under the Credit Agreement and any other student loans owned by MRUL and not
      otherwise released, together with a pledge of 100% of the capital stock of
      MRUL.
      The Credit Agreement contained terms and provisions (including representations,
      covenants and conditions) customary for transactions of this type. The Company
      paid $206,500 in deferred financing fees in association with the Credit
      Agreement.




The
      Credit Agreement also provided for customary events of default, including
      failure to pay principal, interest or fees when due, failure to comply with
      covenants, breaches of certain representations and warranties, the bankruptcy
      of
      MRUL or MRU Lending Holdco, LLC (MRUL’s direct parent and wholly-owned
      subsidiary of the Company), failure to maintain certain net worth ratios, a
      material adverse change in MRUL’s ability to originate student loans, and
      failure of the Company to indirectly own 100% of the outstanding capital stock
      of MRUL. The facility had a three year term. Related to this transaction, Nomura
      was granted a warrant, subject to certain terms and conditions, to purchase
      common stock of the Company equal to an approximately 27.5% ownership interest
      in the Company on a diluted basis. The Company valued the warrants granted
      at
      $6,079,581 and recorded a deferred financing fee in an equivalent
      amount.




On
      June
      14, 2007, MRUL entered into an agreement with Nomura to terminate its credit
      line seven business days after the close of the Company’s June 2007
      securitization of private student loans. In connection with the early
      termination of the Credit Agreement, Nomura agreed to waive its rights to be
      paid all amounts that would otherwise become due and payable to Nomura upon
      the
      early termination of the Credit Agreement with respect to collateral securing
      the loans under the Credit Agreement as well as waiving all past, present and
      future fees due (or that may become due) and payable under the Credit Agreement.
      Pursuant to this early termination agreement, the Credit Agreement was
      terminated on July 5, 2007.




The
      financing fees were fully amortized as of June 30, 2007.





As
      of
      June 30, 2008, there were no amounts outstanding on the Nomura line of credit,
      as the line was terminated on July 5, 2007.




**NOTE
                9 -**
              **CREDIT
                  LINE WITH MERRILL LYNCH BANK USA
                  (“MLBU”)**


On
      January 23, 2006, the Company’s private student lending subsidiary, MRUF entered
      into a definitive agreement with MLBU pursuant to which MLBU will provide MRUF
      with a $175 million revolving credit facility for the origination and
      warehousing of private student loans. The facility has a one-year term, with
      periodic renewals at the option of both parties. As a result of this
      transaction, MLBU was granted a warrant, subject to certain terms and
      conditions, to purchase up to 4.9% of the Company’s then outstanding common
      stock.




On
      September 28, 2007, the MRUF and MLBU amended the MRUF warehouse line, effective
      October 15, 2007, to increase the cost of the warehouse line to market rates
      and
      to change the renewal amount to $145 million.







F-29
 *Table
            of Contents*





On
      December 21, 2007, MRUF and MLBU amended the MRUF warehouse line, effective
      December 24, 2007, extending the term of the facility until July 15, 2008,
      and
      established the commitment amount available under the facility as $100 million
      from the effective date through, but not including January 2, 2008, and $125
      million on and after January 2, 2008.




Amounts
      drawn on the line for private loan fundings bear an interest rate of Libor
      + 200
      basis points per annum.  Amounts drawn on the line for federal loan
      fundings bear an interest rate of Libor + 60 basis points per annum.  A fee
      of 25 basis points per annum is charged on the amount of unused
      facility.




In
      connection with the December 21, 2007 amendment, the Company issued MLBU a
      warrant to purchase 200,000 shares of the Company’s common stock at a purchase
      price of $4.65 per share.  The warrant will vest on July 14, 2008, if and
      only if the facility is extended on or before the vesting date, for a minimum
      of
      one full year without any reduction in the commitment amount under the
      facility.




On
      December 21, 2007, the Company recorded deferred financing fees of $2,224,941
      relating to the vesting of warrants previously issued to MLBU in connection
      with
      the facility.




The
      Company recognized amortization expense associated with all deferred MLBU
      financing fees of $1,788,122 and $2,130,260 for the fiscal years ended June
      30,
      2008 and 2007, respectively.




As
      of
      June 30, 2008, the MRUF obtained approximately $121.5 million in financing
      through the MLBU line of credit by collateralization of loans originated through
      the Bank MRUF loan program. As of June 30, 2008, aggregate private student
      loans
      receivable of $98.2 million were pledged as collateral against this credit
      facility. As of June 30, 2008, aggregate federal student loans receivable of
      $35.8 million were pledged as collateral against this credit
      facility.




The
      facility provides for events of default typical for an asset backed warehouse
      line, including, among others: tangible net worth test with respect to the
      Company, collateral performance triggers, insolvency of the Company or MRUF,
      cross-default resulting in acceleration of the debt with respect to other
      warehouse lines or student loan financing transactions, default by the servicer
      with respect to its obligation to service the loans, material adverse change
      occurs with respect to MRUF, material misstatement with respect to
      representations and warranties regarding the terms of the student loans being
      financed, failure by MRUF to adhere to certain legal covenants, and failure
      to
      pay interest or principal when due.  Upon the occurrence of an event of
      default MLBU may accelerate the debt and, in its sole discretion, can choose
      to
      sell the student loans financed in order to repay the amounts due.  The
      facility is solely an obligation of MRUF, and there is no recourse to the
      Company even upon the occurrence of an event of default.





On
      September 15, 2008, MLBU waived the tangible net worth covenant with respect
      to
      the Company, of which the Company would have been in violation absent such
      waiver (see Note 20 - Subsequent Events).




**NOTE
                10 -**
              **CREDIT
                  LINE WITH DZ BANK AG’s
                  CONDUIT**


On
      November 9, 2007, the Company obtained additional financing for its private
      student loan business by amending a loan facility (the “Amended Loan Facility”)
      under which its affiliate, Education Empowerment SPV, LLC (“EE SPV”) is the
      borrower. The student loans to be financed under the Amended Loan Facility
      are
      originated by the Bank pursuant to a Loan Program Agreement between MRUO and
      the
      Bank. The student loans arel then purchased from the Bank by EEF I, LLC
      pursuant to a Loan Sale Agreement and then contributed by EEF I, LLC to EEF
      SPV.
      The Loan Program Agreement and Loan Sale Agreement are existing agreements
      which





F-30
 *Table
            of Contents*





have
      been
      effectively supplemented by the Amended Loan Facility in order to provide EE
      SPV
      with access to student loans for financing under the Amended Loan Facility.
      The
      Amended Loan Facility described above is set forth in the Amended and Restated
      Receivables Loan and Security Agreement, dated as of November 9, 2007, among
      Education Empowerment SPV, LLC, a Delaware limited liability company, Autobahn
      Funding Company LLC, as the lender, DZ Bank AG Deutsche
      Zentral-Genossenschaftsbank, Frankfurt am Main, as agent for the lender, and
      Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services), as the
      backup servicer. This agreement was originally entered into by the same parties
      on April 11, 2007 and initially provided funding only for PreprimeTM student
      loans in which the Company retained less than a 5% equity economic interest
      due
      to the participation of third-party investors in EEF I, LLC (see Note 2 -
      Investment in Education Empowerment Fund I, LLC).




Following
      the amendment and restatement of the Amended Loan Facility on November 9, 2007,
      the Amended Loan Facility has been increased to $200 million in total
      commitment, of which up to $200 million was available to finance private student
      loans and up to $150 million is available to finance PreprimeTM student loans.
      The economic interest in the private student loans is retained 100% by the
      Company through its sole membership and 100% ownership of the separate Series
      B
      of EEF I, LLC. The assets, liabilities and cash flows of separate Series B
      are
      consolidated in the Company’s financial statements.





The
      Amended Loan Facility terminates on April 11, 2012, unless terminated earlier
      at
      EEF SPV’s option or as a result of an event of default or similar occurrence.
      The amount of the total commitment that can be drawn down and remain outstanding
      at any time depends on a borrowing base calculation, which measures the
      outstanding balance of the student loans pledged to the lender, less
      non-performing loans or loans that exceed certain concentration limits. Each
      student loan that is pledged to the lender is required to meet certain
      eligibility criteria at the time of pledge.





Amounts
      drawn on the line for private student loan fundings bear an interest rate of
      Commercial Paper + 125 basis points per annum.  A fee of 40 basis points
      per annum is charged against the amount of unused facility.





As
      of
      June 30, 2008, the Company through its 100% ownership of Series B of EEF I,
      LLC
      obtained approximately $38.8 million in financing through this line of credit.
      As of June 30, 2008 aggregate private loan receivables of $39,840,219 were
      pledged as collateral against this credit facility. On September 8, 2008, DZ
      Bank notified the Company that it could no longer draw funds from this facility
      (see Note 18 - Subsequent Events).





The
      facility provides for events of default typical for an asset backed warehouse
      line, including, among others: tangible net worth and liquidity ratio tests
      with
      respect to the Company, tangible net worth test with respect to EEF, collateral
      performance triggers, insolvency of EEF or EE SPV, default by the servicer
      with
      respect to its obligation to service the loans, material adverse change occurs
      with respect to EEF or EE SPV, material misstatement with respect to
      representations and warranties regarding the terms of the student loans being
      financed, failure by EEF or EE SPV to adhere to certain legal covenants, and
      failure to pay interest or principal when due.  Upon the occurrence of an
      event of default DZ Bank AG’s conduit may accelerate the debt and, in its sole
      discretion, can choose to sell the student loans financed in order to repay
      the
      amounts due.  The facility is solely an obligation of EE SPV, and there is
      no recourse to the Company or EEF even upon the occurrence of an event of
      default.





On
      September 12, 2008, EE SPV and DZ Bank informally agreed to an amendment of
      the
      existing facility agreements to waive until October 31, 2008 the tangible net
      worth and liquidity ratio covenants with respect to the Company, of which the
      Company would have been in violation absent such waiver (see Note 20 -
      Subsequent Events).





F-31
 *Table
            of Contents*







**NOTE
                11 -**
              **LOAN
                  PROGRAM AGREEMENTS**




On
      July
      25, 2005, MRUL, a wholly-owned subsidiary of the Company, entered into a
      definitive agreement with the Bank. The agreements provide for the Bank’s
      disbursement of private student loans to qualified applicants participating
      in
      MRUL’s private student loan program, the marketing of such program and
      solicitation and qualification of such applicants by MRUL or its affiliates
      and
      the sale by the Bank and purchase by MRUL of such student loans at par, *i.e.* no
      discount, and without recourse. The business purpose of the loan program and
      loan sale agreements between MRUL and the Bank is to allow MRUL to purchase
      student loans originated by a federal savings bank. There are legal and
      regulatory advantages to MRUL for purchasing loans originated by a federal
      savings bank that are not otherwise available to MRUL. The agreement between
      MRUL and the Bank is evidenced by a loan program agreement and a loan sale
      agreement both dated July 25, 2005. The agreements have a thirty-six (36) month
      term and are automatically renewable for up to two (2) successive terms of
      twelve (12) months. The agreement, however, may be terminated by either party
      on
      90 days’ prior notice.





There
      were no balances due to the Bank for origination of MRUL private student loans
      as of June 30, 2008 and June 30, 2007.





On
      January 10, 2006, MRUO and MRUF, wholly-owned subsidiaries of the Company
      entered into definitive agreements with the Bank. The agreement provides for
      the
      Bank’s origination of private student loans to qualified applicants
      participating in MRUO’s private student loan program, the marketing of such
      program and solicitation and qualification of such applicants by MRUO and the
      sale by the Bank and purchase by MRUF of such student loans at par, *i.e.* no
      discount, and without recourse. The business purpose of the loan program and
      loan sale agreements between, MRUO, MRUF, and the Bank is to allow MRUF and
      MRUO
      to purchase student loans originated by a federal savings bank. There are legal
      and regulatory advantages to MRUF and MRUO for purchasing loans originated
      by a
      federal savings bank that are not otherwise available to MRUF or MRUO. The
      agreements between MRUO, MRUF and the Bank is evidenced by loan program
      agreements dated January 10, 2006. The agreements have a thirty-six (36) month
      term and are automatically renewable for up to two (2) successive terms of
      twelve (12) months. The agreements, however, may be terminated by either party
      on 90 days’ prior notice.




The
      balances due to the Bank for origination of MRUO and MRUF private student loans
      were $5,523,000 and $1,399,000 as of June 30, 2008 and June 30,
      2007.




**NOTE
                12 -**
              **SENIOR
                  SECURED NOTES**




On
      October 19, 2007, the Company issued, in a private placement transaction, 12%
      senior secured notes (the “Notes”) in an original aggregate principal of
      $11,200,000.  The Notes were issued with original issue discount in an
      aggregate amount equal to $1,217,000 and have a three year term.  The Notes
      are guaranteed by the Company’s direct and indirect subsidiaries other than
      those subsidiaries established as special purpose entities for the purpose
      of
      structured financing transactions.




In
      connection with this transaction, the Company delivered to the investors an
      Assignment Agreement, dated as of October 19, 2007, made by MRU ABS LLC, a
      wholly owned subsidiary of the Company (“MRU ABS”), whereby MRU ABS, transferred
      and conveyed to the Company, all of MRU ABS’ rights, title and interest in and
      to the right to receive any residual payments from the MRU Student Loan Trust
      2007-A.  The Company also entered into a pledge and security agreement with
      such investors, dated as of October 19, 2007, pursuant to which the Company
      has
      provided such investors with a first lien on and first perfected security
      interest in (i) all of the equity interest in MRU ABS (“Pledged Interests”);
      (ii) all other property in substitution for or in





F-32
 *Table
            of Contents*




addition
      to the Pledged Interests; (iii) any dividends or distribution from MRU ABS;
      and
      (iv) the proceeds of any of the collateral described in clauses (i)-(iii)
      inclusive.





The
      original issue discount is amortized utilizing the effective interest
      method.  The Company recorded amortization expense of $226,916 related to
      deferred fees, net of note issuance costs in the fiscal year ended June 30,
      2008.





The
      Notes
      provide for events of default typical for senior secured indebtedness,
      including, among others: violation of affirmative covenants, including, among
      others, covenants to maintain the security of the notes, violation of negative
      covenants, including, among others, restrictions on incurring additional
      indebtedness or liabilities, restrictions on the payment of dividends, interest
      or prepayment of subordinate indebtedness, restrictions on selling the
      collateral for the notes, failure by the Company or its subsidiaries to
      materially pay debts when they become due, commencement of bankruptcy
      proceedings with respect to the Company or its subsidiaries, and failure to
      pay
      interest or principal when due.  Upon the occurrence of an event of default
      the senior secured noteholders may accelerate the debt, requiring immediate
      payment of all outstanding principal and accrued interest.





On
      September 12, 2008, the Company and the holders of the Senior Secured Notes
      entered into an amendment to waive until October 17, 2008 the covenants with
      respect to Indebtedness as it relates to payables, of which the Company would
      have been in violation absent such waiver (see Note 20 - Subsequent
      Events).





**NOTE
              13 -**
            **PATENTS**




The
      Company has a patent pending for a business method. This business method enables
      the Company to provide customized financial products to consumers.




**NOTE
                14 -**
              **COMMITMENTS
                  AND
                  CONTINGENCIES**




**Earn
      Out Feature of Acquisition**





Related
      to the Company’s transaction with TPR, the Company could be obligated to pay an
      earn-out of up to $1.25 million in cash before December 31, 2008 based upon
      certain performance targets of the assets purchased in this transaction. In
      no
      event, will TPR owe the Company any amounts based on the performance of the
      assets the Company acquired from TPR.




**Employment
      Agreements**





The
      Company has three employment agreements with the following key management
      personnel:





NAME
            
            TITLE
            
            EXPIRATION
                DATEEdwin
                J. McGuinn, Jr.
            
            CEO
            
            October
                31, 2009Raza
                Khan
            
            Co-President
            
            April
                1, 2009Vishal
                Garg
            
            Co-President
            
            April
                1, 2009





**Legal
      Matters**




None




**Operating
      Leases**




The
      Company leases office equipment and corporate space under leases with terms
      between one and seven years. Monthly payments under the current leases range
      between $200 and $142,375. The
      Company is required to pay its pro-rata share of costs relating to certain
      of
      the leased facilities.





F-33
 *Table
            of Contents*




The
      following is a schedule by fiscal years of future minimum rental payments
      required under the operating leases which have an initial or remaining
      non-cancelable lease term in excess of one year as of June 30,
      2008:




2009
            
            $
            2,109,1172010
            
            $
            2,125,8672011
            
            $
            2,067,9842012
            
            $
            2,252,7812013
            
            $
            2,022,381


**NOTE
                15 -**
              **RELATED
                  PARTY TRANSACTIONS**




The
      obligations of the Company under the ISID Finance of America, Inc. sub-lease
      are
      guaranteed by Edwin J. McGuinn, Jr., the Company’s Chief Executive Officer, in
      accordance with a Guaranty dated April 26, 2005 executed by Mr. McGuinn in
      favor
      of the Sub-landlord. The lease was terminated in April 2008.




**NOTE
              16 -**
            ****SECURITIZATION****




On
      June
      28, 2007, the Company closed its first securitization of its private student
      loan assets. The transaction was accounted for as a sale of the $137.8 million
      of private student loans securitized. In connection with the sale, the Company
      booked a gain of $16.2 million based upon the excess of the proceeds and value
      of the Residual Interest received over the carrying value of the assets sold.
      On
      September 25, 2007, the Company sold an additional $32.4 million of private
      loans to the trust and booked a gain of $4.1 million. On November 29, 2007,
      the
      Company sold an additional $0.38 million of private loans to the trust. The
      Company values the retained Residual Interest at $4.1 million, all of which
      are
      referred to as the Company’s Accounts Receivable from the Securitization. The
      Residual Interest is the right to receive cash flows from the student loans
      and
      reserve accounts in excess of the amounts needed to pay servicing, other fees,
      and the principal and interest on the bonds backed by the student loans. The
      residual cash flows are expected to be received by the Company over
      approximately 28 years. The investors in the securitization trust have no
      recourse to the Company’s other assets should there be a failure of the student
      loans to pay when due.





The
      following table summarizes the Company’s securitization activity for the fiscal
      year ended June 30, 2008 and the fiscal year ended June 30, 2007.




*($’s
                in Thousands)*
            
            Fiscal
                Year Ended June 30, 2008
            
            Fiscal
                Year Ended June 30, 2007#
                of
              Sales
            
            Amount of Loans
              Sold
                to
              Securitizations
            
            Pre-Tax
              Gain
            
            Gain
                %
            
            #
                of
              Sales
            
            Amount of Loans
              Sold
                to
              Securitizations
            
            Pre-Tax
              Gain
            
            Gain
                %Private
                Student Loans
            
            
            2
            
            
            
            
            $
            32,851
            
            $
            4,066
            
            
            12.4
            %
            
            1
            
            
            
            
            $
            137,792
            
            $
            16,205
            
            
            11.8
            %Federal
                Student Loans
            
            
            0
            
            
            
            
            
            0
            
            
            0
            
            
            0.0
            %
            
            0
            
            
            
            
            
            0
            
            
            0
            
            
            0.0
            %Total
                Sales to Securitization
            
            
            2
            
            
            
            
            $
            32,851
            
            $
            4,066
            
            
            12.4
            %
            
            1
            
            
            
            
            $
            137,792
            
            $
            16,205
            
            
            11.8
            %









F-34
 *Table
            of Contents*





Key
      economic assumptions used in estimating the fair value of the Residual Interest
      at the date of securitization were as follows.




Fiscal
                Year Ended
              June
                30, 2008
            
            Fiscal
                Year
              Ended
                June 30, 2007Private
              Student
                Loans
            
            Federal
              Student
                Loans
            
            Private
              Student
                Loans
            
            Federal
              Student
                LoansAnnual
                Prepayment Rate (1)
            
            
            7
            %
            
            N/A
            
            
            7
            %
            
            N/ACumulative
                Default Rate (2)
            
            
            4.5
            %
            
            N/A
            
            
            4.5
            %
            
            N/ADefault
                Recovery Rate (3)
            
            
            20
            %
            
            N/A
            
            
            20
            %
            
            N/AWeighted
                Average Life
            
            
            9.0 yrs.
            
            
            N/A
            
            
            9.6
                yrs.
            
            
            N/ASpread
                between LIBOR and Auction Rate Indices (4)
            
            
            0.48
            %
            
            N/A
            
            
            0.01
            %
            
            N/ADiscount
                Rate (5)
            
            
            12
            %
            
            N/A
            
            
            12
            %
            
            N/A




(1)
            Annual
                Prepayment Rate is expressed on a lifetime basis, is applied after
                loans
                enter repayment, and is in addition to impact of defaults on collateral
                average life.




(2)
              Cumulative
                  Default Rate is the loan balance of defaulted student loans as
                  a
                  percentage of the aggregate principal balance of student loans
                  upon entry
                  into repayment.






(3)
            Default Recovery Rate is the
                percentage of
                the defaulted loan balance that is recovered over
                time.




(4)
            The
                senior tranches of the Company’s securitization are auction rate notes.
                The interest rate on auction rate notes is reset through an auction
                process periodically (currently every 28 days). Based upon market
                conditions at the time of each auction, the spread to LIBOR of the
                interest rate required by investors could be more or less than the
                initial
                spread to LIBOR at which the transaction was priced. Since November
                2007,
                the interest rate on the Company’s student loan auction rate notes has
                widened to approximately 1.65% over LIBOR. In booking the gain on
                the
                loans sold in September 2007 and November 2007 and in valuing the
                Residual
                Interest, the Company has assumed that these higher spreads will
                continue
                through the June 2008 and then return over the next twelve months
                to
                approximately 0.275% over LIBOR for the remaining life of the transaction.
                The spread indicated above is the weighted average over the life
                of the
                transaction.


(5)
              Discount
                  Rate is the rate of return used to discount the residual cash flows
                  projected given the collateral assumptions and the securitization
                  structure.




The
      following table summarizes cash flows received from or paid to the
      securitizations trust during the fiscal year ended June 30, 2008 and the fiscal
      year ended June 30, 2007.




*($’s
              in Thousands)*
            
            
            Fiscal Year
                Ended
            
            
            Fiscal
                Year EndedJune
                30, 2008
            
            
            June 30, 2007Net
                proceeds from sales of loans to securitizations
            
            $
            32,923
            
            $
            138,095Repurchases
                of securitized loans due to delinquency
            
            
            0
            
            
            0Cash
                distributions from trusts related to Residual Interests
            
            
            0
            
            
            0




*Residual
      Interest in Securitized Receivables*




The
      following table summarizes the fair value of the Company’s Residual Interests
      (and the assumptions used to value such Residual Interests), along with the
      underlying off-balance sheet student loans that relate to those Securitizations
      as of June 30, 2008 and June 30, 2007.





F-35
 *Table
            of Contents*








*($’s
                in Thousands)*
            
            As
                of June 30, 2008
            
            As
                of June 30, 2007Private
              Student
                Loans
            
            Federal
              Student
                Loans
            
            Private
              Student
                Loans
            
            Federal
              Student
                LoansFair
                value of Residual Interests
            
            $
            4,093
            
            
            N/A
            
            $
            11,192
            
            
            N/AUnderlying
                securitized loan balance
            
            $
            169,947
            
            
            N/A
            
            $
            137,828
            
            
            N/AWeighted
                average life
            
            
            8.3
                yrs.
            
            
            N/A
            
            
            9.6
                yrs.
            
            
            N/AAnnual
                Prepayment Rate
            
            
            7
            %
            
            N/A
            
            
            7
            %
            
            N/ACumulative
                Default Rate
            
            
            6.0
            %
            
            N/A
            
            
            4.5
            %
            
            N/ADefault
                Recovery Rate
            
            
            20
            %
            
            N/A
            
            
            20
            %
            
            N/ASpread
                between LIBOR and Auction Rate Indices (1)
            
            
            0.82
            %
            
            N/A
            
            
            0.01
            %
            
            N/ADiscount
                Rate
            
            
            20
            %
            
            N/A
            
            
            12
            %
            
            N/A


(1)
              Spread
                  between LIBOR and Auction Rate Indices is the weighted average
                  spread over
                  the life of the transaction. As of June 30, 2008, the Company assumes
                  that
                  its auction rate notes will continue to price at or near the maximum
                  rate
                  (LIBOR + 1.50% for AAA-rated securities and LIBOR + 2.50% for A-rated
                  securities) for another 24 and 36 months for the AAA-rated and
                  A-rated
                  securities, respectively, and then gradually decline to a spread
                  over
                  LIBOR that is lower than the maximum rate but higher than historical
                  auction rate pricing.




The
      following table summarizes the changes in our estimate of the fair value of
      the
      Residual Interest for the fiscal year ended June 30, 2008.




*($’s
                in thousands)*
            
            
            
            **Fiscal
                Year ended**
              **June
                30, 2008**Fair
                value at beginning of period
            
            
            
            
            $
            11,192Additions
                from new sales to securitization
            
            
            1,993Accretion
                of interest income
            
            
            1,385Reversal
                of unrealized gain in other comprehensive income
            
            
            (2,757
            )Impairment
                recorded in Securitizaton Income/(Loss), net
            
            
            (7,720
            )Net
                change
            
            
            
            
            
            (7,099
            )Fair
                value at end of period
            
            
            
            
            $
            4,093




The
      following table summarizes the sensitivity of the value of the Residual Interest
      to variations in the key economic assumptions described above as of June 30,
      2008.




*($’s
                in Thousands)*
            
            Percentage
                Change
              in
                Assumptions
            
            Residual
              Balance
            
            Percentage
                Change
              in
                AssumptionsDown
                20%
            
            Down
                10%
            
            
            
            Up
                10%
            
            Up
                20%Annual
                Prepayment RateResidual Balance
            
            $
            4,282
            
            $
            4,186
            
            $
            4,093
            
            $
            4,002
            
            $
            3,912% Change
            
            
            4.62
            %
            
            2.27
            %
            
            
            
            
            (2.22
            )%
            
            (4.42
            )%Cumulative
                Default RateResidual Balance
            
            $
            4,657
            
            $
            4,370
            
            $
            4,093
            
            $
            3,819
            
            $
            3,550% Change
            
            
            13.78
            %
            
            6.77
            %
            
            
            
            
            (6.69
            %)
            
            (13.27
            %)Default
                Recovery RateResidual Balance
            
            $
            3,983
            
            $
            4,038
            
            $
            4,093
            
            $
            4,148
            
            $
            4,203% Change
            
            
            (2.69
            %)
            
            (1.39
            %)
            
            
            
            
            1.34
            %
            
            2.69
            %





F-36
 *Table
            of Contents*










Discount
                RateResidual Balance
            
            $
            5,387
            
            $
            4,690
            
            $
            4,093
            
            $
            3,580
            
            $
            3,139% Change
            
            
            31.61
            %
            
            14.59
            %
            
            
            
            
            (12.53
            %)
            
            (23.31
            %)




*($’s
                in Thousands)*
            
            Percentage
                Change
              in
                Assumptions
            
            Residual
              Balance
            
            Percentage
                Change
              in
                AssumptionsTighten
                25 basis points
            
            Tighten
                10 basis points
            
            
            
            Widen
                10 basis points
            
            Widen
                25 basis pointsSpread
                between LIBOR and Auction Rate IndicesResidual Balance
            
            $
            5,575
            
            $
            4,686
            
            $
            4,093
            
            $
            3,577
            
            $
            2,792% Change
            
            
            36.21
            %
            
            14.49
            %
            
            
            
            
            (12.61
            )%
            
            (31.79
            )%




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





The
      table
      below shows the Company’s off-balance sheet private student loan delinquency
      trends as of June 30, 2008 and June 30, 2007.




*($’s
                in Thousands)*
            
            As
                of June 30, 2008
            
            As
                of June 30, 2007Loans
                in-school /grace/deferment (1)
            
            $
            114,310
            
            
            
            
            $
            109,778Loans
                in forbearance (2)
            
            
            5,291
            
            
            9.5
            %
            
            789
            
            
            2.8
            %Loans
                in repaymentCurrent
            
            
            47,347
            
            
            85.1
            %
            
            26,763
            
            
            95.4
            %Delinquent
                31-60 Days (3)
            
            
            717
            
            
            1.3
            %
            
            409
            
            
            1.5
            %Delinquent
                61-90 Days
            
            
            1,176
            
            
            2.1
            %
            
            87
            
            
            0.3
            %Delinquent
                91 Days or More
            
            
            1,106
            
            
            2.0
            %
            
            0
            
            
            0.0
            %Total
                Loans in repayment and forbearance
            
            $
            55,637
            
            
            100.0
            %
            $
            28,048
            
            
            100.0
            %Total
                off-balance sheet private student loans
            
            $
            169,947
            
            
            
            
            $
            137,828


(1)
              Loans
                  for borrowers who are not required to make payments because they
                  are still
                  in or have returned to school, have recently graduated, or are
                  in other
                  valid non-repayment statuses (*e.g.*,
                  military service, medical /dental residency,*etc.*).




(2)
              Loans
                  for borrowers who have entered repayment but have requested a moratorium
                  on making payments due to economic hardship or other factors, in
                  keeping
                  with established program
                  guidelines.




(3)
            Delinquency
                is the number of days that scheduled payments are contractually past
                due.




**NOTE
                  17 -**
                ****BUSINESS
                    SEGMENTS****


Operating
        segments are components of an enterprise about which separate financial
        information is available that is regularly reviewed by the chief operating
        decision maker about how to allocate resources and in assessing performance.
        The
        Company has two reportable operating segments: MRU and Embark. The MRU reporting
        segment consists of the following products: Private Student Loans, PrePrime
        Student Loans (through the Company’s affiliate, Education Empowerment Fund I,
        LLC), and Federal Loans. The MRU reporting segment also includes the Company’s
        parent company operations. The Embark reporting segment includes Embark
        Corporation and Embark Online. Embark was acquired by the Company on February
        16, 2007 (see Note 5 - Intangible Assets).
  The
        accounting policies of the segments are the same as those of the Company.
        The
        presentation and allocation of assets, liabilities and results of operations
        may
        not reflect the actual economic costs of the segments as stand-alone businesses.
        If a different basis of allocation were utilized, the relative contributions
        of
        the segments might differ, but management believes that the relative trends
        in
        segments would likely not be impacted.
  F-37
 *Table
            of Contents*




The
      following tables’ present segment information for the years ended June 30, 2008
      and 2007:




**Year
                    Ended June 30, 2008****MRU**
                
                
                **Embark**
                
                
                **Eliminations**
                
                
                **Consolidated**Net
                    interest income after valuation provision
                
                $
                (1,727
                )
                $
                34
                
                
                
                
                $
                (1,693
                )Non-interest
                    income
                
                
                (16,532
                )
                
                5,883
                
                
                
                
                
                (10,649
                )Cost
                    of goods sold
                
                
                —
                
                
                2,541
                
                
                
                
                
                2,541Other
                    operating expenses
                
                
                41,355
                
                
                8,560
                
                
                
                
                
                49,915Depreciation
                    and amortization
                
                
                3,891
                
                
                244
                
                
                
                
                
                4,135Provision
                    for income taxes
                
                
                —
                
                
                —
                
                
                
                
                
                —Net
                    (loss)
                
                $
                (63,505
                )
                $
                (5,428
                )
                
                —
                
                $
                (68,933
                )Segment
                    Assets
                
                $
                194,811
                
                $
                5,783
                
                $
                (5,277
                )
                $
                195,317
   **Year
                    Ended June 30, 2007****MRU**
                
                **Embark**
                
                **Eliminations**
                
                **Consolidated**Net
                    interest income after valuation provision
                
                $
                (556
                )
                $
                8
                
                
                
                
                $
                (548
                )Non-interest
                    income
                
                
                16,865
                
                
                1,649
                
                
                
                
                
                18,514Cost
                    of goods sold
                
                
                —
                
                
                478
                
                
                
                
                
                478Other
                    operating expenses
                
                
                36,239
                
                
                1,898
                
                
                
                
                
                38,137Depreciation
                    and amortization
                
                
                5,865
                
                
                15
                
                
                
                
                
                5,880Provision
                    for income taxes
                
                
                —
                
                
                —
                
                
                
                
                
                —Net
                    (loss)
                
                $
                (25,795
                )
                $
                (734
                )
                
                
                
                $
                (26,529
                )Segment
                    Assets
                
                $
                50,755
                
                $
                4,798
                
                $
                (1,361
                )
                $
                54,192
 **NOTE
                  18 -**
                **QUARTERLY
                    RESULTS (Unaudited)**
  First
                    Quarter
                
                
                Second Quarter
                
                
                Third
                    Quarter
                
                
                Fourth
                    Quarter**Fiscal
                  2008**Net
                    interest income after valuation provision
                
                $
                (1,725
                )
                $
                (106
                )
                $
                378
                
                $
                (240
                )Non-interest
                    income
                
                
                5,834
                
                
                1,596
                
                
                (601
                )
                
                (17,478
                )Non-interest
                    expense
                
                
                14,181
                
                
                12,156
                
                
                12,475
                
                
                17,779Net
                    (loss)
                
                
                (10,072
                )
                
                (10,666
                )
                
                (12,698
                )
                
                (35,497
                )(Loss)
                    per common share (1)
                
                
                (0.42
                )
                
                (0.38
                )
                
                (0.42
                )
                
                —


F-38
 *Table
          of Contents*




First
                  Quarter
              
              
              Second Quarter
              
              
              Third
                  Quarter
              
              
              Fourth
                  Quarter**Fiscal
                  2007**Net
                  interest income after valuation provision
              
              $
              (1,268
              )
              $
              2
              
              $
              352
              
              
              285Non-interest
                  income
              
              
              147
              
              
              108
              
              
              830
              
              
              17,429Non-interest
                  expense
              
              
              9,997
              
              
              7,561
              
              
              10,014
              
              
              16,842Net
                  income (loss)
              
              
              (11,118
              )
              
              (7,451
              )
              
              (8,832
              )
              
              872Earnings
                  (loss) per common share (1)
              
              
              (0.67
              )
              
              (0.45
              )
              
              (0.47
              )
              
              —**Fiscal
                  2006**Net
                  interest income after valuation provision
              
              $
              0
              
              $
              83
              
              $
              110
              
              
              (465
              )Non-interest
                  income
              
              
              10
              
              
              6
              
              
              17
              
              
              27Non-interest
                  expense
              
              
              3,207
              
              
              8,547
              
              
              3,993
              
              
              11,056Net
                  income (loss)
              
              
              (3,197
              )
              
              (8,458
              )
              
              (3,866
              )
              
              (11,494
              )(Loss)
                  per common share (1)
              
              
              (0.25
              )
              
              (0.63
              )
              
              (0.26
              )
              
              —
  (1)
                  Earnings
                      per common share is computed independently for each of the
                      quarters
                      presented; accordingly, in the sum of the quarterly earnings
                      per common
                      share may not equal the total computed for the
                      year.


**NOTE
                19 -**
              **GOING
                  CONCERN**


As
      shown
      in the accompanying financial statements, the Company has
      sustained operating losses for the years ended June 30, 2008, 2007 and
      2006.  There is no guarantee whether the Company will be able to raise
      sufficient financing to recommence the origination of private student loans
      and
      sustain operations. This raises substantial doubt about the Company’s ability to
      continue as a going concern.




Management
      is seeking additional equity or convertible debt financing, subject to market
      and other conditions.  Management has implemented aggressive expense
      reduction efforts and will continue to actively manage cash outflows. The
      Company’s future success is dependent upon its ability to secure additional
      financing.  There is no guarantee that the Company will be able to raise
      enough capital to sustain its operations.




The
      consolidated financial statements do not include any adjustments relating to
      the
      recoverability or classification of recorded assets and liabilities that might
      result should the Company be unable to continue as a going concern.




**NOTE
              20 -**
            **SUBSEQUENT
                EVENTS**




*Pause
      in Origination of Private Student Loans*




On
      September 5, 2008, we paused the origination of private student loans, at which
      time we had approximately $13 million in available warehouse capacity for the
      funding of private student loans under our loan facility with DZ Bank. We are
      working closely with a number of financial institutions to try to obtain funds
      that would enable us to continue to resume originations.




*Warehouse
      Lines*


On
      September 8, 2008, DZ Bank notified us that we could no longer draw funds from
      our loan facility with DZ Bank.




On
      July
      10, 2008, MRU Funding SPV, Inc., a subsidiary of the Company, entered into
      an
      amendment (the “ML Amendment”) to its Amended and Restated Master Loan Agreement
      (the “Loan Agreement”) with Merrill Lynch Bank USA. The purpose of the Loan
      Agreement, when originally signed, was to finance the origination of
      federally-guaranteed and private student loans in contemplation of the
      refinancing of these student loans by means of a sale or a securitization
      transaction. As described below, on July 10, 2008, the Company completed a
      securitization of its private student loans, as a result of which the
      outstanding loans under the Loan Agreement that financed private student loans
      have been fully repaid. In addition, pursuant to the ML Amendment, the maturity
      date of the Loan Agreement (in respect of private student loans) has been
      extended to September 26, 2008 with a new commitment amount of $15.0 million.
      Pursuant to the ML Amendment, the commitment with respect to
      federally-guaranteed loans has also been extended to September 26, 2008 (unless
      terminated or further extended prior to such time) at the maximum commitment
      amount of $36.0 million, which is approximately the amount currently outstanding
      under the Loan Agreement in respect of federally-guaranteed loans.






F-39
 *Table
          of Contents*






*Extension
      of MLBU Lending Facility and Waiver to Certain Events of
      Default*




On
      September 15, 2008, MRUF and MLBU amended the existing facility agreements
      to
      extend the maturity date from September 26, 2008 to November 25, 2008. 
Additionally, MLBU waived the tangible net worth covenant with respect to the
      Company, of which the Company would have been in violation absent such waiver,
      until the earlier of the new maturity date or the date upon which the Company
      raises at least $10 million of equity.  The amendment to the facility also
      provided MLBU with the ability to sell the federal loan portfolio financed
      by
      the facility at its sole discretion.    If the federal student
      loan portfolio is sold for proceeds in excess of the amounts due pursuant to
      the
      facility then any excess proceeds shall go to MRUF.  In the event that the
      federal student loans are sold for less than the principal and interest due
      on
      the facility, neither MRUF nor the company would be obligated to pay any
      deficiency balance with respect to the facility, such amount to be forgiven
      by
      MLBU. In such an event, the Company would expect to incur a loss of
      approximately $0.5 million, representing the excess of the amount at which
      the
      federal student loans are recorded on its balance sheet and the amount of
      outstanding indebtedness under the MLBU facility.




*Waiver
      to Certain Events of Default with Respect to Credit Line with DZ Bank AG’s
      Conduit*




On
      September 12, 2008, EE SPV and DZ Bank informally agreed to an amendment of
      the
      existing facility agreements to waive until October 31, 2008 the tangible net
      worth and liquidity ratio covenants with respect to the Company, of which the
      Company would have been in violation absent such waiver.  The amendment to
      the facility will also provide that there will be no more borrowings supported
      by private student loans until the Company is in compliance with the tangible
      net worth and liquidity ratio covenants and the outstanding borrowings supported
      by the private student loans pledged to the facility are paid down to a 89%
      advance rate, which will be the new advance rate for borrowings supported by
      private student loans.  The Company estimates that given the current
      balance of private student loans pledged to the line that the requirement to
      reduce the advance rate from 96.5% to 89% will require the Company to pay
      approximately $7 million to reduce the outstanding balance of the debt. 
The amendment also provides for increases in the minimum FICO score and interest
      margin for future private student loans funded.  There will be no further
      fundings of PreprimeTM loans under the facility, but the financing terms of
      existing PreprimeTM loans pledged to the line remain the same.




*Waiver
      of Certain Events of Default with Respect to Senior Secured
      Notes*




On
      September 12, 2008, the Company and the holders of the Notes entered into an
      amendment to waive until October 17, 2008 the covenants with respect to
      Indebtedness as it relates to payables, of which the Company would have been
      in
      violation absent such waiver.  The covenant has been amended to require
      payables not to exceed $11 million on or prior to October 17, 2008 and $5
      million after October 17, 2008.  A new covenant has also been
      added which will require the Company to maintain a minimum unrestricted
      cash balance of $4.35 million.  Additionally, the Company agreed to repay
      the Notes in full upon the event that the Company receives $30 million or more
      in gross proceeds from the sale of equity or debt securities.  In
      consideration for the waiver and amendment, the Company paid the holders of
      the
      Notes an amendment fee of $1.5 million and prepaid $0.36 million of interest
      on
      the Notes and the $0.26 million facility fee that would have been due on October
      20.  Unless the Company is able to raise additional equity capital, it will
      not be possible to be in compliance with the amended covenants after October
      17,
      2008, as the amount of cash needed to reduce payables if paid out would cause
      the Company to violate the minimum unrestricted cash covenant.  In this
      event, unless the Company were able to secure an additional waiver and amendment
      from the holders of the Notes, an event of default will occur with respect
      to
      the Notes, and if the holders of the Notes chose to accelerate their debt the
      Company would need to file for bankruptcy.




F-40
 *Table
          of Contents*




*Securitization
      Transaction*




On
      July
      10, 2008, the Company completed an offering of $140,894,000 of notes (the
“Notes”) issued by the MRU Student Loan Trust 2008-A (the “Trust”) pursuant to
      an Indenture (the “Indenture”), dated as of July 1, 2008, between the Trust, as
      issuer, and The Bank of New York Mellon Trust Company, National Association,
      as
      indenture trustee. The Notes are backed by a portfolio of direct-to-consumer
      private student loans acquired by the Trust from the Company. The obligations
      to
      pay principal and interest on the Notes are solely the obligations of the Trust.
      For financial accounting purposes, the Notes will be reflected as long-term
      indebtedness of the Company on a consolidated basis. The proceeds of the Notes
      were used to fund the acquisition of private student loans from the Company’s
      existing loan portfolio and may be used to make additional acquisitions of
      private student loans subsequent to closing but prior to September 30, 2008,
      which is known as the “acquisition period”.




In
      connection with the offering, on July 10, 2008, the Company entered into an
      Administration Agreement (the “Administration Agreement”) and a Transfer &
Contribution Agreement (the “T&C Agreement”). In addition, the Company
      agreed to indemnify certain service providers involved in the transaction for
      potential costs and claims which they may incur as a result of providing
      services in connection with the transaction. Under the Administration Agreement,
      the Company acts as administrator for the student loans owned by the Trust.
      The
      Company, acting as the administrator, will be responsible for administering
      the
      Trust's accounting and financial reporting activities, and performing certain
      responsibilities of the Trust under the transaction documents to which the
      Trust
      is party.




The
      student loans acquired by the Trust were acquired by the Trust from MRU ABS
      II
      LLC (the “LLC”), a limited liability company of which the Company is the sole
      member. Pursuant to the T&C Agreement, the Company transferred the student
      loans to the LLC, and the same student loans were then transferred by the LLC
      to
      the Trust. The Company provided the LLC and the Trust with certain
      representations and warranties with respect to the student loans under the
      T&C Agreement. In the event of a breach by the Company of those
      representations and warranties, the Company may be required to reacquire the
      affected loan or loans from the Trust and indemnify the Trust for other related
      losses. The Trust has issued an owner trust certificate representing 100% of
      the
      residual interest in the Trust to the LLC. The Company owns 100% of the equity
      interests in the LLC.




*July
      10* *th* *Bridge Financing*




On
      July
      10, 2008, the Company, in exchange for a payment of $7,750,000 in cash, issued,
      in a private placement transaction, a convertible promissory note (the “ML
      Note”) in the original aggregate principal amount of $7,750,000 to Merrill Lynch
      Mortgage Capital Inc. (“ML”). The ML Note will accrue interest on the unpaid
      principal amount at a simple annual interest rate of nine percent (9%) per
      annum
      up to, but not including, September 27, 2008 (the “Alternate Interest Rate
      Date”) and at a simple annual interest rate of twelve percent (12%) per annum
      from and after the Alternative Interest Rate Date until paid in full; *provided,
      however* that no
      interest shall be due prior to the Maturity Date (as defined below) unless
      the
      Senior Indebtedness (as defined in the ML Subordination Agreement defined below)
      has been paid in full at which point interest on the ML Note will be payable
      on
      the 15 th day of
      January, April, July and October. Unless earlier converted as described below,
      the ML Note is due on October 31, 2010 (the “Maturity Date”). Repayment of the
      ML Note is subject to the limitations contained in the ML Subordination
      Agreement (defined below), the terms of which are summarized below.






F-41
 *Table
          of Contents*




If
      the
      Company sells Equity Securities in the future pursuant to an equity financing
      (including the issuance of Equity Securities upon the conversion or exchange
      of
      debt securities (the “Automatically Converting Debt Securities”) issued in
      connection with an equity financing) in which the Company receives in excess
      of
      a minimum threshold amount of gross proceeds agreed to by the Company and ML
      and
      the Investors (as defined below) (the “Equity Financing”), then the outstanding
      principal amount of the ML Note together with the accrued but unpaid interest
      will be mandatorily prepaid subject to certain conditions contained in the
      ML
      Subordination Agreement and the ML Note. Subject to the Subordination Agreement,
      the ML Note may be prepaid without premium or penalty at the Company’s option on
      ten days prior notice to ML.




If
      the ML
      Note is not repaid in connection with an Equity Financing as described above
      or
      otherwise repaid by the Alternate Interest Rate Date, then ML will have the
      option to convert the outstanding principal of and accrued and unpaid interest
      on the ML Note into shares of the Company’s common stock (the “Common Stock”) at
      a conversion price of $2.25 per share; *provided* , *however* ,
      that ML
      will not have the right to convert the principal of or accrued and unpaid
      interest on the ML Note in excess of that portion of the principal and accrued
      interest that, upon giving effect to such conversion, would cause the aggregate
      number of shares of Common Stock beneficially owned by ML and its affiliates
      to
      exceed 19.99% of the voting power of the Company following such conversion
      or
      issuance of shares (the “Issuance Limitation”), *unless* the
      Company’s stockholders approve any “change of control” (as defined under NASDAQ
      Marketplace Rule 4350(i)(1)(B)) that would result from such conversion, in
      which
      case the Issuance Limitation would not apply. The ML Note also contains
      customary events of default, which include, among other things, the occurrence
      of a default on payment of principal when due, a default on the payment of
      interest for 30 days, bankruptcy or the default on $500,000 or more in other
      indebtedness.




On
      July
      10, 2008, in connection with the issuance of the ML Note, the Company became
      a
      party to a subordination agreement with ML, a Senior Lender and the Collateral
      Agent (the “ML Subordination Agreement”). Pursuant to the ML Subordination
      Agreement, among other things, (i) ML agreed that the payment of any
      indebtedness under the Note would be subordinated to the payment in full of
      the
      Senior Indebtedness (as defined in the ML Subordination Agreement) and (ii)
      the
      Company agreed not to take any action that would frustrate the purposes of
      the
      subordination of the Note to the Senior Indebtedness. Notwithstanding the
      foregoing, the issuance of Common Stock of the Company to ML upon the optional
      conversion of the ML Note as described above will not be deemed a violation
      of
      the ML Subordination Agreement or the documents evidencing the Senior
      Indebtedness.




On
      July
      10, 2008, the Company also entered into a note and warrant purchase agreement
      (the “July 10 th Purchase
      Agreement”), by and among the Company, Battery Ventures VII, L.P., Battery
      Investment Partners VII, LLC and a non-affiliated investor listed on the
      Investor Schedule attached thereto (each, a “July 10 th Investor” and collectively, the “July 10 th Investors”) pursuant to which, in exchange for a payment of $4,000,000 in cash,
      the Company issued, in a private placement transaction: (i) promissory notes
      in
      the original aggregate principal amount of $5,000,000 (the “Original Principal
      Amount”) (collectively, the “Non-ML Notes”) and (ii) warrants to purchase in the
      aggregate 2,222,222 shares of Common Stock at an exercise price of $2.25 per
      share (the “July 10 th Warrants”). The Non-ML Notes and the July 10th Warrants are described in greater
      detail below. The July 10 th Purchase
      Agreement contains standard representations, and warranties and affirmative
      and
      negative covenants.




F-42
 *Table
          of Contents*




The
      Non-ML Notes will accrue interest on the unpaid principal amount at a simple
      annual interest rate of eighteen percent (18%) per annum *provided,
      however* ,
      the
      Original Principal Amount of the Non-ML Notes shall increase by twenty percent
      (20%) sixty days after the date of issuance of the Non-ML Notes (the “First
      Principal Reset Date”) unless the Company issues the Automatically Converting
      Debt Securities or the Equity Securities prior to the First Principal Reset
      Date; *provided,
      further* ,
      that
      the Original Principal Amount of the Non-ML Notes shall increase by an
      additional twenty percent (20%) one hundred and twenty days after the date
      of
      the issuance of the Non-ML Notes (the “Second Principal Reset Date”) unless the
      Company issues the Automatically Converting Debt Securities or the Equity
      Securities prior to the Second Principal Reset Date. No interest under the
      Non-ML Notes shall be due prior to the Maturity Date. The Non- ML
      Notes
      are due on the Maturity Date. Repayment of the Non-ML Notes is subject to the
      limitations contained in the July 10 th Subordination Agreement (defined below), the terms of which are summarized
      below.




In
      addition, if the Company undertakes an Equity Financing, then the outstanding
      principal amount of the Non-ML Notes together with the accrued but unpaid
      interest will be mandatorily prepaid subject to certain conditions contained
      in
      the July 10th Subordination Agreement and the Non-ML Notes. Subject to the
      July
      10th Subordination Agreement, the Non-ML Notes may be prepaid without premium
      or
      penalty at the Company’s option on ten days prior notice to the July
      10 th Investors.




The
      Non-ML Notes also contain customary events of default, which include, among
      other things, the occurrence of a default on payment of principal when due,
      a
      default on the payment of interest for 30 days, bankruptcy or the default on
      $500,000 or more in other indebtedness. In addition, the Non-ML Notes also
      contain certain debt restrictions pursuant to which the Company is prohibited
      from incurring additional pari passu or senior indebtedness while the Non-ML
      Notes are outstanding other than the Automatically Converting Debt Securities
      and an aggregate of $20,000,000 of pari passu indebtedness on similar terms
      to
      the Non-ML Notes. Pursuant to the Non-ML Notes, the July 10 th Investors are collectively entitled to approve one member of the board of
      directors of the Company for so long as the July 10 th Investors hold all the Non-ML Notes.




The
      July
      10 th Warrants
      are exercisable for an aggregate of 2,222,222 shares of Common Stock at an
      exercise price of $2.25 per share prior to July 9, 2013; *provided* , *however* ,
      that in
      no event will the July 10 th Investors be entitled to exercise the July 10 th Warrants
      for a number of shares of Common Stock in excess of the Issuance Limitation, *unless* the
      Company’s stockholders approve any “change of control” (as defined under NASDAQ
      Marketplace Rule 4350(i)(1)(B)) that would result from such exercise, in which
      case the Issuance Limitation would not apply. The July 10 th Warrants
      may be exercised by the July 10 th Investors by making payment in full of the exercise price either in cash or
      by
      written instruction directing the Company to cancel or surrender a portion
      of
      the July 10 th Warrants
      to satisfy payment of the exercise price.




On
      July
      10, 2008, in connection with the issuance of the Non-ML Notes, the Company
      became a party to a subordination agreement with the July 10 th Investors, the Senior Lenders and the Collateral Agent (the “July 10th
      Subordination Agreement”). Pursuant to the July 10th Subordination Agreement,
      among other things, (i) the July 10 th Investors agreed that the payment of any indebtedness under the Non-ML Notes
      would be subordinated to the payment in full of the Senior Indebtedness (as
      defined in the July 10th Subordination Agreement) and (ii) the Company agreed
      not to take any action that would frustrate the purposes of the subordination
      of
      the Non-ML Notes to the Senior Indebtedness. Notwithstanding the foregoing,
      the
      issuance of Common Stock of the Company to the July 10 th Investors upon exercise of the July 10 th Warrants
      will not be deemed a violation of the July 10th Subordination Agreement or
      the
      documents evidencing the Senior Indebtedness.




F-43
 *Table
          of Contents*




*July
      15* *th* *Bridge Financing*




On
      July
      15, 2008, the Company entered into a note and warrant purchase agreement (the
      “July 15 th Purchase
      Agreement”), by and between the Company and a non-affiliated investor listed on
      the Investor Schedule attached thereto (the “July 15 th Investor”) pursuant to which, in exchange for a payment of $500,000 in cash, the
      Company issued, in a private placement transaction: (i) a promissory note in
      the
      original aggregate principal amount of $600,000 (the “July 15 th Original
      Principal Amount”) (the “July 15 th Note”)
      and (ii) warrants to purchase in the aggregate 327,868 shares of Common Stock
      at
      an exercise price of $1.83 per share (the “July 15 th Warrants”). The July 15 th Note and
      the July 15 th Warrants
      are described in greater detail below. The July 15 th Purchase
      Agreement contains standard representations, and warranties and affirmative
      and
      negative covenants.




The
      July
      15 th Note
      will accrue interest on the unpaid principal amount at a simple annual interest
      rate of eighteen percent (18%) per annum *provided,
      however* ,
      the
      July 15 th Original
      Principal Amount of the July
      15 th Note shall
      increase by twenty percent (20%) sixty days after the date of issuance of the July
      15 th Note (the
      “July 15 th Note
      First Principal Reset Date”) unless the Company issues the Automatically
      Converting Debt Securities or the Equity Securities prior to the July
      15 th Note
      First Principal Reset Date; *provided,
      further* ,
      that
      the July 15 th Original
      Principal Amount of the July
      15 th Note shall
      increase by an additional twenty percent (20%) one hundred and twenty days
      after
      the date of the issuance of the July
      15 th Note (the
      “July 15 th Note
      Second Principal Reset Date”) unless the Company issues the Automatically
      Converting Debt Securities or the Equity Securities prior to the July
      15 th Note
      Second Principal Reset Date. No interest under the July
      15 th Note shall
      be
      due prior to the Maturity Date. The July
      15 th Note is
      due on the Maturity Date. Repayment of the July 15 th Note is
      subject to the limitations contained in the July 15th Subordination Agreement
      (defined below), the terms of which are summarized below.




In
      addition, if the Company undertakes an Equity Financing, then the outstanding
      principal amount of the July 15 th Note
      together with the accrued but unpaid interest will be mandatorily prepaid
      subject to certain conditions contained in the July 15th Subordination Agreement
      and the July 15 th Note.
      Subject to the July 15th Subordination Agreement, the July 15 th Note may
      be prepaid without premium or penalty at the Company’s option on ten days prior
      notice to the July 15 th Investor.




The
      July
      15 th Note
      also contains customary events of default, which include, among other things,
      the occurrence of a default on payment of principal when due, a default on
      the
      payment of interest for 30 days, bankruptcy or the default on $500,000 or more
      in other indebtedness. In addition, the July 15 th Note
      also contain certain debt restrictions pursuant to which the Company is
      prohibited from incurring additional pari passu or senior indebtedness while
      the
      July 15 th Note is
      outstanding other than the Automatically Converting Debt Securities and an
      aggregate of $20,000,000 of pari passu indebtedness on similar terms to the
      July
      15 th Note.




The
      July
      15 th Warrants
      are exercisable for an aggregate of 327,868 shares of Common Stock at an
      exercise price of $1.83 per share prior to July 14, 2013; *provided* , *however* ,
      that in
      no event will the July 15 th Investor
      be entitled to exercise the July 15th Warrants for a number of shares of Common
      Stock in excess of the Issuance Limitation, *unless* the
      Company’s stockholders approve any “change of control” (as defined under NASDAQ
      Marketplace Rule 4350(i)(1)(B)) that would result from such exercise, in which
      case the Issuance Limitation would not apply. The July 15 th Warrants
      may be exercised by the Investor by making payment in full of the exercise
      price
      either in cash or by written instruction directing the Company to cancel or
      surrender a portion of the July 15 th Warrant
      to satisfy payment of the exercise price.




On
      July
      15, 2008, in connection with the issuance of the July 15 th Note,
      the Company became a party to a subordination agreement with the July
      15 th Investor, the Senior Lenders and the Collateral Agent to the Senior Lenders
      (the
“July 15 th Subordination Agreement”. Pursuant to the July 15th Subordination Agreement,
      among other things, (i) the July 15 th Investor
      agreed that the payment of any indebtedness under the July 15 th Note
      would be subordinated to the payment in full of the Senior Indebtedness (as
      defined in the July 15 th Subordination Agreement) and (ii) the Company agreed not to take any action
      that
      would frustrate the purposes of the subordination of the July 15 th Note to
      the Senior Indebtedness. Notwithstanding the foregoing, the issuance of Common
      Stock of the Company to the July 15 th Investor
      upon exercise of the July 15 th Warrants
      will not be deemed a violation of the July 15 th Subordination Agreement or the documents evidencing the Senior
      Indebtedness.




F-44
 *Table
          of Contents*




*July
      31st Bridge Financing*




On
      July
      31, 2008, the Company entered into six note and warrant purchase agreements
      (the
“July 31 st Purchase
      Agreements”) with six non-affiliated investors (each, a “July 31 st Investor” and collectively, the “July 31 st Investors”) pursuant to which, in exchange for an aggregate payment of
      $3,000,000 in cash, the Company issued, in a private placement transaction:
      (i)
      promissory notes in the original aggregate principal amount of $3,750,000 (the
      “July 31 st Notes
      Original Principal Amount”) (the “July 31 st Notes”)
      and (ii) warrants to purchase in the aggregate 2,678,571 shares of Common Stock
      at an exercise price of $1.40 per share (the “July 31 st Warrants”). The July 31 st Notes
      and the July 31 st Warrants
      are described in greater detail below. The July 31 st Purchase
      Agreements contain standard representations, and warranties and affirmative
      and
      negative covenants.




The
      July
      31 st Notes
      will accrue interest on the unpaid principal amount at a simple annual interest
      rate of eighteen percent (18%) per annum *provided,
      however* ,
      the July
      31 st Original
      Principal Amount of the July
      31 st Notes shall
      increase by twenty percent (20%) sixty days after the date of issuance of the Notes (the
      “ July
      31 st Note
      First Principal Reset Date”) unless the Company issues the Automatically
      Converting Debt Securities or the Equity Securities prior to the July
      31 st Notes
      First Principal Reset Date; *provided,
      further* ,
      that
      the July
      31 st Original
      Principal Amount of the July
      31 st Notes  shall
      increase by an additional twenty percent (20%) one hundred and twenty days
      after
      the date of the issuance of the Notes (the
      “ July
      31 st Notes
      Second Principal Reset Date”) unless the Company issues the Automatically
      Converting Debt Securities or the Equity Securities prior to the July
      31 st Notes
      Second Principal Reset Date. No interest under the July
      31 st Notes shall
      be
      due prior to the Maturity Date. The July
      31 st Notes
      are due on the Maturity Date. Repayment of the July 31 st Notes is
      subject to the limitations contained in the July 31 st Subordination Agreements (defined below), the terms of which are summarized
      below.




In
      addition, if the Company undertakes an Equity Financing, then the outstanding
      principal amount of the July 31 st Notes
      together with the accrued but unpaid interest will be mandatorily prepaid
      subject to certain conditions contained in the July 31 st Subordination Agreements and the July 31 st Notes.
      Subject to the July 31 st Subordination Agreement, the July 31 st Notes
      may be prepaid without premium or penalty at the Company’s option on ten days
      prior notice to the July 31 st Investors.




The
      July
      31 st Notes
      also contain customary events of default, which include, among other things,
      the
      occurrence of a default on payment of principal when due, a default on the
      payment of interest for 30 days, bankruptcy or the default on $500,000 or more
      in other indebtedness. In addition, the July 31 st Notes
      also contain certain debt restrictions pursuant to which the Company is
      prohibited from incurring additional pari passu or senior indebtedness while
      the
      July 31 st Notes
      are outstanding other than the Automatically Converting Debt Securities and
      an
      aggregate of $20,000,000 of pari passu indebtedness on similar terms to the
      July
      31 st Notes.




The
      July
      31 st Warrants
      are exercisable for an aggregate of 2,678,571 shares of Common Stock at an
      exercise price of $1.40 per share prior to July 30, 2013; *provided,
      however* ,
      that in
      no event will any July 31 st Investor
      be entitled to exercise the July 31 st Warrants
      for a number of shares of Common Stock in excess of the Issuance Limitation, *unless* the
      Company’s stockholders approve any “change of control” (as defined under NASDAQ
      Marketplace Rule 4350(i)(1)(B)) that would result from such exercise, in which
      case the Issuance Limitation would not apply. The July 31 st Warrants
      may be exercised by the July 31 st Investors by making payment in full of the exercise price either in cash or
      by
      written instruction directing the Company to cancel or surrender a portion
      of
      the July 31 st Warrants
      to satisfy payment of the exercise price. On July 31, 2008, in connection with
      the issuance of the July 31 st Notes,
      the Company entered into a subordination agreement with each of the July
      31 st Investors, the Senior Lenders and the Collateral Agent (collectively, the “July
      31 st Subordination Agreements”). Pursuant to the July 31 st Subordination Agreements, among other things, (i) the July 31 st Investors agreed that the payment of any indebtedness under the July
      31 st Notes
      would be subordinated to the payment in full of the Senior Indebtedness (as
      defined in the July 31 st Subordination Agreements) and (ii) the Company agreed not to take any action
      that would frustrate the purposes of the subordination of the July
      31 st Notes to
      the Senior Indebtedness. Notwithstanding the foregoing, the issuance of Common
      Stock to the July 31 st Investors upon exercise of the July 31 st Warrants
      will not be deemed a violation of the July 31 st Subordination Agreements or the documents evidencing the Senior
      Indebtedness.




F-45
 *Table
          of Contents*




*Moody’s
      Places MRU Student Loan Trust 2007-A Auction Rate Notes on Watch for Potential
      Credit Ratings Downgrade*




On
      August
      18, 2008, Moody’s announced that it was placing the auction rate tranches of our
      2007 securitization on watch for potential downgrade, due to the continued
      higher than expected cost of funds due to continuing disruptions in the auction
      rate securities market. In the event Moody’s does downgrade the “Aaa” rated
      notes, the maximum rate with respect to those securities will increase from
      LIBOR plus 1.50% to LIBOR plus 2.50%. In the event that Moody’s does downgrade
      the “A2” rated notes below “A3”, the maximum rate with respect to those
      securities will increase from LIBOR plus 2.50% to LIBOR plus 3.50%. In such
      event, we believe that it is likely that the auction rate securities would
      price
      at or near their new maximum rate.




*Auction
      Rate Broker-Dealer Settlement with New York State Attorney General and
      Repurchase of Auction Rate Securities by Broker-Dealers*




In
      late
      August 2008 through early September, most of the major investment banks that
      serve as broker dealers with respect to the auction rate securities entered
      into
      settlement agreements with the Attorney General of the State of New York whereby
      they agreed to repurchase the auction rate securities they had sold to
      investors. Because these broker dealers have been forced to repurchase
      securities they had sold to investors, they do not have the incentive to provide
      support for a market for these securities. Given this turn of events, we have
      now come to the view that it is highly unlikely that the auction rate market
      will ever recover. It is highly likely that our auction rate securities will
      trade at the maximum rate until maturity.






F-46