Mru Holdings Inc - Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2008

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

MRU Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)	33-0954381 (I.R.S. Employer Identification No.)

590 Madison Avenue, 13th Floor New York, New York (Address of Principal Executive Offices)	10022 (Zip Code)

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

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

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

¨ Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨ Smaller reporting company

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

The number of shares outstanding of the issuer’s common stock, $0.001 par value, as of May 9, 2008 was 31,721,174 shares.

TABLE OF CONTENTS

		Page
Part I. Financial Information

ITEM 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of March 31, 2008 (unaudited) and June 30, 2007 (audited)	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2008 and 2007 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2008 and 2007 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	33
ITEM 4.	Controls and Procedures	33

Part II. Other Information

ITEM 1.	Legal Proceedings	34
ITEM 1A.	Risk Factors	34
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
ITEM 3.	Defaults upon Senior Securities	42
ITEM 4.	Submission of Matters to a Vote of Security Holders	42
ITEM 5.	Other Information	42
ITEM 6.	Exhibits	43

SIGNATURES		44

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

MRU HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2008 AND JUNE 30, 2007

(Dollars in Thousands)

ASSETS

	March 31,			June 30,
	2008			2007
	(unaudited)			(audited)
ASSETS:
Cash and cash equivalents	$	17,223		$	11,606
Restricted cash		2,652			3,154
Accounts receivable		665			1,979
Private student loans receivable, held for sale, lower of cost or market		106,476			6,256
Valuation Reserve for private student loans receivable		(2,827	)		(815	)
Federally insured student loans receivable, held for sale, lower of cost or market		36,407			7,395
Accounts receivable from securitizations		9,263			11,192
Original issue discount - Senior Secured Notes		1,152			-
Fixed assets, net of depreciation		1,957			1,553
Security deposits		1,013			955
Intangible assets, net of amortization		2,281			2,824
Goodwill		5,803			5,875
Investment in Education Empowerment Fund I, LLC		670			322
Due from affiliates		(34	)		803
Deferred financing fees, net of amortization		2,198			-
Prepaid expenses and other assets		1,775			1,094

TOTAL ASSETS	$	186,674		$	54,192


LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Accounts payable	$	1,948		$	3,835
Accrued expenses		2,510			458
Accrued payroll		526			592
Client deposits		2,467			899
Deferred contract revenue		2,342			2,276
Notes payable - Doral Bank FSB NY		2,943			1,399
Notes payable - Merrill Lynch		112,924			11,711
Notes payable - DZ		19,702			-
Senior Secured Notes		11,200			-
Deferred origination fee revenue		4,423			226
Obligations under capital lease		609			-
Other liabilities		1,220			63

Total Liabilities		162,814			21,459

STOCKHOLDERS' EQUITY
Preferred Stock, Series B, $.001 par value; 12,000,000 shares authorized
8,237,264 shares issued and outstanding as of March 31, 2008 and June 30, 2007		8			8
Common Stock, $.001 par value; 20,000,000 shares authorized, 31,721,174 and
25,714,393 issued and outstanding as of March 31, 2008 and June 30, 2007		32			26
Additional paid-in capital		92,026			68,788
Additional paid-in capital - options		15,534			13,038
Additional paid-in capital - Series B beneficial conversion feature		14,520			14,264
Additional paid-in capital - warrants		18,464			15,454
Accumulated other comprehensive income		-			2,757
Accumulated deficit		(116,724	)		(81,602	)

Total Stockholders' Equity		23,860			32,733

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	186,674		$	54,192

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

MRU HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

(Dollars in Thousands - except per share data)

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2008			2007			2008			2007
				(Restated)						(Restated)

Interest Income:
Loan portfolio interest income - private student loans	$	2,295		$	2,242		$	4,666		$	5,124
Loan portfolio interest income - federal student loans		444			41			870			104
Origination fee revenue - private loans		178			32			218			78
Interest Income - Residual Interest		343			-			1,105			-
Other Interest income		225			78			591			375
Total interest income		3,485			2,393			7,450			5,681

Interest Expense:
Facility interest and origination bank costs		2,108			1,754			4,989			4,139
Other Interest expense		375			4			744			7
Total interest expense		2,483			1,758			5,733			4,146

Net Interest Income		1,002			635			1,717			1,535
Valuation reserve provision - private student loans		815			283			3,643			2,449
Net interest income after valuation provision		187			352			(1,926	)		(914	)

Non-interest income
Securitization income (loss), net		(2,270	)		-			1,795			-
Subscription and service revenue		1,501			709			4,275			722
Origination processing fees		140			111			680			353
Master Oversight Fee		28			-			79			-
Other non-interest income		-			10			-			11
Total non-interest income		(601	)		830			6,829			1,086

Non-interest expense:
Corporate general and administrative expenses		4,236			3,376			12,284			7,128
Sales and marketing expenses		2,299			2,582			9,541			8,023
Operations expenses		1,219			1,242			5,380			3,751
Technology development		902			691			2,817			2,151
Referral marketing costs - private student loans		382			224			1,521			725
Consulting and hosting		103			58			209			80
Cost of subscription and service revenue		336			-			1,379			-
Servicing and custodial costs		181			119			378			256
Legal expenses		610			397			1,425			860
Other operating expenses		396			366			927			564
Depreciation and amortization		1,620			959			2,476			4,035
Total non-interest expense		12,284			10,014			38,337			27,573

(Loss) before provision for income taxes		(12,698	)		(8,832	)		(33,434	)		(27,401	)
Provision for income taxes		-			-			-			-

Net (Loss)	$	(12,698	)	$	(8,832	)	$	(33,434	)	$	(27,401	)

Less Preferred Stock Dividends		(484	)		(776	)		(1,687	)		(2,093	)

Net (loss) applicable to common shares	$	(13,182	)	$	(9,608	)	$	(35,121	)	$	(29,494	)

Net (Loss) per basic and diluted shares	$	(0.42	)	$	(0.47	)	$	(1.22	)	$	(1.60	)

Weighted average number of common shares outstanding		31,669			20,658			28,880			18,401

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

MRU HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

(Dollars in Thousands)

	Nine Months Ended
	March 31,
	2008			2007
				(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)	$	(33,434	)	$	(27,401	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization		2,476			4,035
Increase in stock options outstanding - options expense		2,781			3,296
(Decrease) in stock options outstanding - options exercise		(285	)		(105	)
(Increase) in tax provision valuation stock options outstanding		(945	)		(1,121	)
Accretion of interest income on A/R from securitization		(1,105	)		-
Impairment loss - A/R from securitization		2,270			-
Increase in valuation reserve - private student loans		3,994			2,449
(Decrease) in valuation reserve - private student loans sold in securitization		(821	)		-
(Decrease) in valuation reserve - private student loans charged-off		(1,161	)		(280	)

Changes in assets and liabilities
Decrease/(Increase) in accounts receivable		1,314			(1,231	)
Decrease in restricted cash		501			22
(Increase) in prepaid expenses and other current assets		(398	)		(8	)
Decrease/(Increase) in due from affiliates		837			(679	)
Decrease in goodwill		72			-
(Increase) in security deposits		(58	)		(1	)
(Increase) in private student loans receivable, held for sale		(133,072	)		(79,444	)
(Increase) in federal student loans receivable, held for sale		(29,013	)		(7,545	)
Sale of private student loans receivable into securitization		32,852			-
(Decrease)/Increase in accounts payable and accrued expenses, and other liabilities		(854	)		2,233
(Decrease)/Increase in accrued payroll		(4	)		61
Increase/(Decrease) in deferred contract revenue		66			(548	)
Increase in client deposits		1,569			1,061
Increase in deferred origination fee revenue		4,197			2,930

Total adjustments		(114,785	)		(74,875	)

Net cash (used in) operating activities		(148,220	)		(102,276	)

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets		(1,082	)		(423	)
Acquisition of intangible assets		-			(6,320	)
(Increase) in receivables from securitizations		(1,993	)		-
(Increase) in Education Empowerment Fund I, LLC		(348	)		(1,380	)

Net cash (used in) investing activities		(3,423	)		(8,123	)

CASH FLOWS FROM FINANCING ACTIVITES
Increase in advances - originating loan program agreements		137,995			77,823
(Decrease) due to repayments - originating loan program agreements		(136,451	)		(77,971	)
Increase in advances - Nomura Credit and Capital credit facility		-			731
(Decrease) due to repayments - Nomura Credit and Capital credit facility		-			(1,909	)
Increase in advances - Merrill Lynch credit facility		148,267			83,660
(Decrease) due to repayments - Merrill Lynch credit facility		(47,054	)		(4,393	)
Increase in advances - DZ credit facility		19,702			-
Proceeds from issuance of common stock		22,865			-
Proceeds from issuance of senior secured notes		9,983			-
Proceeds from conversion of warrants and options		1,161			25,342
(Decrease) in paid-in capital for warrant conversions		-			(1,302	)
Increase in deferred tax due to stock options outstanding		945			1,121
Increase in obligation under capital lease agreement		609			-
Cash used in other financing activities		(21	)		-
(Increase) in deferred financing fees		(741	)		(804	)

Net cash provided by financing activities		157,260			102,299

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		5,617			(8,101	)

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		11,606			17,900

CASH AND CASH EQUIVALENTS - END OF PERIOD	$	17,223		$	9,799

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

CASH PAID DURING THE YEAR FOR:
Interest expense	$	5,733		$	4,146
Income taxes	$	-		$	-

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Accrued Series B stock dividends	$	1,687		$	2,093
Cashless exercise of warrants	$	500		$	-
Vesting of warrants issued in connection with financings	$	2,225		$	-

The Company purchased certain assets assumed certain liabilities per the Asset
Purchase 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 condensed consolidated financial statements.

MRU HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

On November 19, 2007, the 2007 annual meeting of stockholders was held at the New York, New York offices of Withers Bergman, LLP. At the annual meeting, the Company’s stockholders voted on, and approved by requisite stockholder vote, the election of eight directors to the Company’s board of directors.

NOTE 2 -

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed unaudited interim consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s June 30, 2007 audited consolidated financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these condensed consolidated financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.

These condensed unaudited consolidated financial statements reflect all adjustments, including normal recurring adjustment, which, in the opinion of management, are necessary to present fairly the operations and cash flows for the period presented.

Principles of Consolidation

The condensed 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 .

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 nine months ended March 31, 2008, the Company accrued $4,666,000 in loan portfolio interest income on its private student loans, $218,000 in origination fee revenue on its private student loans, $870,000 in loan portfolio interest income on its federal student loans, $1,105,000 in interest income on the residual interest from its June 2007 securitization, and $591,000 of other interest income.

For the nine months ended March 31, 2007, the Company accrued $5,124,000 in loan portfolio interest income on its private student loans, $78,000 in origination fee revenue on its private student loans, $104,000 in loan portfolio interest income on its federal student loans and $375,000 of other interest income.

Interest Expense

For the nine months ended March 31, 2008, the Company incurred $4,989,000 in credit facility interest and originating bank costs related to its student loan receivables portfolios and $744,000 in other interest expense.

For the nine months ended March 31, 2007, the Company incurred $4,139,000 in credit facility interest and originating bank costs related to its student loan receivables portfolios and $7,000 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.

As of March 31, 2008, the Company maintained $2,827,000 as a valuation reserve for its private student loans receivable, representing an additional provision of $3,643,000 and reductions of $810,000 due to charge-offs and a reversal of $821,000 due to the sale of loans into a securitization 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 nine months ended March 31, 2008, the Company recorded charge-offs and placed on non-accrual loans totaling $810,000.

An analysis of the Company’s valuation reserve is presented in the following table for the nine months ended March 31, 2008:

	Nine Months Ended March 31, 2008
Balance at beginning of period	$	815,000
Valuation reserve increase/(decrease)
Federally insured loans		0
Private student loans		3,643,000
Total valuation reserve change		3,643,000

Charge-offs net of recoveries
Federally insured loans		0
Private student loans		(810,000	)
Net Charge-offs		(810,000	)

Loans sold into securitization		(821,000	)

Balance at end of period	$	2,827,000
Private student loan valuation reserve as a percentage of the private student loans receivable portfolio		2.65	%

For the nine months ended March 31, 2008, the Company disbursed approximately $30.0 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 de minimus.

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

For the nine months ended March 31, 2008, the Company recognized $1,795,000 in securitization income (net of impairment write-downs of the Company’s residual interest in its securitization trust) from the sale of loans into its securitization trust, $4,275,000 from subscription and service revenue, $680,000 from origination processing fees for originating Preprime™ loans on behalf of Education Empowerment Fund I, LLC (f/k/a Achiever Fund I, LLC) (“EEF I, LLC”) and $79,000 in master oversight fees for managing the Preprime™ portfolio on behalf of EEF I, LLC.

For the nine months ended March 31, 2007, the Company recognized $722,000 from subscription and service revenue and $353,000 from origination processing fees for originating Preprime™ loans on behalf of EEF I, LLC.

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 nine months ended March 31, 2008, the Company incurred $12,284,000 in corporate, general and administrative expenses, $9,541,000 in sales and marketing expense, $5,380,000 in operations expense, $2,817,000 in technology development, $1,521,000 in referral marketing costs related to the generation of the Company’s private student loans and admission application service business, $209,000 in consulting and hosting costs for the scholarship search and college application products, $1,379,000 in cost of subscription and service revenue related to college application products, $378,000 in student loan servicing and custodial costs, $1,425,000 in legal expenses, and $927,000 in other operating expenses.

For the nine months ended March 31, 2007, the Company incurred $7,128,000 in corporate, general and administrative expenses, $8,023,000 in sales and marketing expense, $3,751,000 in operations expense, $2,151,000 in technology development, $725,000 in referral marketing costs related to the generation of the Company’s private student loans, $80,000 in consulting and hosting costs for the scholarship search product, $256,000 in student loan servicing and custodial costs, $860,000 in legal expenses, and $564,000 in other operating expenses.

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 March 31, 2008 and June 30, 2007, the Company’s uninsured cash balances total $17,852,000 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 March 31, 2008 and June 30, 2007, the Company’s restricted cash balances were $2,652,000 and $3,154,000, respectively.

Security Deposits

As of March 31, 2008 and June 30, 2007, the Company had $1,013,000 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 Years
Leasehold improvements	3 Years
Furniture 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 Preprime™ 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 March 31, 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 Preprime™ 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 Preprime™ student loans originated by the Company. The line of credit is solely an obligation of the fund. There is no recourse to the Company.

The Company has not consolidated these affiliates 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 agreement to FIN 46 requirements are noted after each):

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.)

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.)

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 the fund. 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. Preprime™ loans acquired or to be acquired by the 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 is 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 will consolidate 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 Preprime™ lending business conducted in separate Series A, the amendment and restatement established a maximum borrowing limit of $150 million.

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 on student loan securitizations in the condensed 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 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.

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 nine months ended March 31, 2008 and 2007 were $9,541,000 and $8,023,000, 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 nine months ended March 31, 2008 and March 31, 2007:

	March 31, 2008			March 31, 2007
				(Restated)
Net (loss) applicable to common shares	$	(35,121,000	)	$	(29,494,000	)
Weighted-average common stock
Outstanding (Basic)		28,880,000			18,401,000
Weighted-average common stock
equivalents:
Stock options		-			-
Warrants		-			-
Weighted-average common stock
outstanding (Diluted)		28,880,000			18,401,000

For March 31, 2008 and 2007, warrants (6,817,000 and 6,884,000, respectively) were not included in the computation of diluted EPS because inclusion would have been antidilutive. For March 31, 2008 and 2007, options (6,875,000 and 4,868,000, 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

	March 31, 2008 (unaudited)		June 30, 2007 (audited)
Cash	$	17,223,000	$	11,606,000
Restricted Cash		2,652,000		3,154,000
Accounts Receivable		665,000		1,979,000
Federal student loans, held for sale		36,407,000		7,395,000
Accounts Payable		1,948,000		3,835,000
Notes Payable - Doral Bank		2,943,000		1,399,000
Notes Payable - Merrill Lynch		112,924,000		11,711,000
Note Payable - DZ Bank		19,702,000		0
Senior Secured Notes		11,200,000		0
Accounts Receivable from Securitizations		9,263,000		11,192,000

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

	March 31, 2008 (unaudited)
	Carrying Value		Fair Value
Private student loans receivable, held for sale, net of valuation reserve	$	103,649,000	$	113,428,000

Investment in EEF I, LLC	$	670,000	$	1,091,000

	June 30, 2007 (audited)
	Carrying Value		Fair Value
Private student loan receivable, held for sale, net of valuation reserve	$	5,441,000	$	6,023,000

Investment 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 March 31, 2008, the approximate 9.4% 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 March 2008 net asset value report provided to the investors in this entity.

Stock Based Compensation

At March 31, 2008, the Company had two stock-based compensation plans, the 2004 Incentive Plan and the 2005 Consultant Incentive Plan. During the quarter ended December 31, 2005, the Company adopted the 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 $2,787,000 in stock based compensation expense for the nine months ended March 31, 2008.

The Company recognized $3,296,000 in stock based compensation expense for the nine months ended March 31, 2007.

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 condensed 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 condensed 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 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 condensed 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 condensed 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 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.

Reclassification

Certain amounts in the March 31, 2007 financial statements have been reclassified to conform to the March 31, 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.

MRU Lending, Inc. (“MRUL”) and MRU Funding SPV, Inc. (“MRUF”) and MRU Originations, Inc. ("MRUO”) have loan purchase agreements with Doral Bank Federal Savings Bank New York (the “Bank”), an affiliate of the Doral Financial Corporation. 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.

Through March 31, 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 originating bank.

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

The Bank-MRUF loan program purchased approximately $237.6 million in private student loans.

The Bank-MRUO loan program purchased approximately $19.9 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.

NOTE 4 -

FIXED ASSETS

Fixed assets consist of the following at March 31, 2008 and June 30, 2007:

	March 31, 2008 (unaudited)			June 30, 2007 (audited)

Computer network equipment	$	2,821,816		$	2,081,701
Furniture and fixtures		92,332			71,033
Leasehold improvements		317,065			6,906
		3,231,213			2,159,640
Less: accumulated depreciation		(1,274,000	)		(606,754	)

Total fixed assets	$	1,957,213		$	1,552,886

Depreciation expense for the nine months ended March 31, 2007 and 2006 was $667,246 and $239,838, 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 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 March 31, 2008, the unaudited book value and accumulated amortization of the Company’s intangible assets follows:

			Accumulated
Intangible Asset	Book Value		Amortization (restated)

Customer Contracts	$	1,093,750	$	406,250
Trademarks & Technology		783,333		216,667
Non-compete Agreement		391,666		108,333
Scholarship Resource data		12,370		136,070

TOTAL	$	2,281,119	$	867,320

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

			Accumulated
Intangible Asset	Book Value		Amortization

Customer Contracts	$	1,375,000	$	125,000
Trademarks & Technology		933,333		66,667
Non-compete Agreement		466,667		33,333
Scholarship Resource data		49,480		98,960

TOTAL	$	2,824,480	$	323,960

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

2008	$	724,480
2009	$	675,000
2010	$	675,000
2011	$	550,000
2012	$	200,000

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.

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 quarters ended March 31, 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.

	March 31, 2008			June 30, 2007

Deferred tax assets	$	40,845,000		$	18,760,000
Less: valuation allowance		(40,845,000	)		(18,760,000	)

Totals	$	-		$	-

At March 31, 2008 and June 30, 2007, the Company had accumulated net operating loss deficits of $116.7 million and $53.6 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 March 31, 2008 (unaudited) and June 30, 2007 (audited), respectively. The par value for the common stock is $0.001 per share.

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.

There were a total number of 659,731 warrants exercised for the nine months ended March 31, 2008 at a weighted average price of $1.40.

There were 137,505 options exercised for the nine months ended March 31, 2008 at a weighted average price of $3.33.

Series B Convertible Preferred Stock

There were 12,000,000 shares of Series B convertible preferred stock authorized, with 8,237,264 shares issued and outstanding as of March 31, 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.

As of March 31, 2008 (unaudited) and June 30, 2007 (audited), the balances for the additional paid-in capital account for the beneficial conversion feature for the Series B Convertible Preferred Stock were $14,520,000 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.

Stock Options

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, 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-vesting periods range from immediate vesting to three years, with approximately 31 % of stock option grants vesting ratably over three years. During the nine months ended March 31, 2008, 1,774,819 options, with a weighted average fair value of $1.80 were granted under the Plan. There were 1,297,377 options granted under the Plan for the nine months ended March 31, 2007.

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 nine months ended March 31, 2008 and a discussion of our methodology for developing each of the assumption used in the valuation model.

	March 2008
Expected term	6.5 yrs
Expected volatility	57.89%
Risk-free interest rate	3.357%
Dividend yield	0%

At March 31, 2008, there were 783,334 shares available for future grants under the Plan and 1,425,000 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 March 31, 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.

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 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.

Warrants

There were 200,000 warrants issued during the nine months ended March 31, 2008. There were no warrants issued during the nine months ended March 31, 2007.

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 (see Note 17 - Restatement).

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 Company recognized amortization expense associated with the financing fees of $1,571,429 for the nine months ended March 31, 2007. The financing fees were fully amortized as of June 30, 2007.

As of March 31, 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 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.,

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.

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 $1,199,731 and $2,130,260 for the nine months ended March 31, 2008 and 2007, respectively.

As of March 31, 2008, the MRUF obtained approximately $112.9 million in financing through the MLBU line of credit by collateralization of loans originated through the Doral Bank FSB New York-MRUF loan program.

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 Fund SPV, LLC (“EEF SPV”) is the borrower. The student loans to be financed under the Amended Loan Facility will be originated pursuant to a Loan Program Agreement between MRUO and the Bank. The student loans will then be 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 have been effectively supplemented. 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 Preprime™ 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 agreement on November 9, 2007, the loan facility has been increased to $200 million in total commitment, of which up to $200 million is available to finance private student loans and up to $150 million is available to finance Preprime™ 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.

As of March 31, 2008, the Company through its 100% ownership of Series B of EEF I, LLC obtained approximately $19.7 million in financing through this line of credit.

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 origination 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 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.

There were no balances due to the Bank for origination of MRUL private student loans as of March 31, 2008 (unaudited) and June 30, 2007 (audited).

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 allow MRUF to purchase student loans originated by a Federal Savings Bank. There are legal and regulatory advantages to MRUF for purchasing loans originated by a Federal Savings Bank that are not otherwise available to MRUF. The agreement between MRUO and the Bank is evidenced by a loan program agreement dated January 10, 2006. The agreement between MRUF and the Bank is evidenced by a loan program agreement 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 balances due to the Bank for origination of MRUO and MRUF private student loans were $2,943,000 and $1,399,000 as of March 31, 2008 (unaudited) and June 30, 2007 (audited).

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 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 $57,009 related to deferred fees and note issuance costs in the nine month period ended March 31, 2008.

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 DATE
Edwin J. McGuinn, Jr.	CEO	October 31, 2008
Raza Khan	President	April 1, 2009
Vishal Garg	CFO	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.

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, 2007:

2008	$	2,333,665
2009	$	2,444,180
2010	$	2,136,871
2011	$	2,220,621
2012	$	2,220,621

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.

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 $9.3 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 nine months ended March 31, 2008 and the fiscal year ended June 30, 2007.

($’s in Thousands)	Nine Months Ended March 31, 2008 (unaudited)										Fiscal Year Ended June 30, 2007 (audited)
	# 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	%

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

	Nine Months Ended March 31, 2008 (unaudited)					Fiscal Year Ended June 30, 2007 (audited)
	Private Student Loans			Federal Student Loans		Private Student Loans			Federal Student Loans
Annual Prepayment Rate (1)		7	%		N/A		7	%		N/A
Cumulative Default Rate (2)		4.5	%		N/A		4.5	%		N/A
Default Recovery Rate (3)		20	%		N/A		20	%		N/A
Weighted Average Life		9.0 yrs.			N/A		9.6 yrs.			N/A
Spread between LIBOR and Auction Rate Indices (4)		0.48	%		N/A		0.01	%		N/A
Discount 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 nine months ended March 31, 2008 and the fiscal year ended June 30, 2007.

($’s in Thousands)	Nine Months Ended March 31, 2008 (unaudited)		Fiscal Year Ended June 30, 2007 (audited)
Net proceeds from sales of loans to securitizations	$	32,923	$	138,095
Repurchases of securitized loans due to delinquency		0		0
Cash 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 March 31, 2008 and June 30, 2007.

($’s in Thousands)	As of March 31, 2008 (unaudited)					As of June 30, 2007 (audited)
	Private Student Loans			Federal Student Loans		Private Student Loans			Federal Student Loans
Fair value of Residual Interests	$	9,263			N/A	$	11,192			N/A
Underlying securitized loan balance	$	170,835			N/A	$	137,828			N/A
Weighted average life		8.7 yrs.			N/A		9.6 yrs.			N/A
Annual Prepayment Rate		7	%		N/A		7	%		N/A
Cumulative Default Rate		4.5	%		N/A		4.5	%		N/A
Default Recovery Rate		20	%		N/A		20	%		N/A
Spread between LIBOR and Auction Rate Indices (1)		0.72	%		N/A		0.01	%		N/A
Discount Rate		12	%		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 March 31, 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 18 and 24 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 nine months ended March 31, 2008.

($’s in thousands)			Nine months ended March 31, 2008

Fair value at beginning of period			$	11,192
Additions from new securitzations	1,993
Accretion of interest income	1,105
Reversal of unrealized gain in other comprehensive income	(2,757	)
Impairment recorded in Securitizaton Income/(Loss), net	(2,270	)
Net change				(1,929	)

Fair value at end of period			$	9,263

The following table summarizes the sensitivity of the value of the Residual Interest to variations in the key economic assumptions described above as of March 31, 2008.

($’s in Thousands)	Percentage Change in Assumptions						Residual Balance		Percentage Change in Assumptions
	Down 20%			Down 10%					Up 10%			Up 20%
Annual Prepayment Rate
Residual Balance	$	9,648		$	9,472		$	9,263	$	9,061		$	8,867
% Change		4.55	%		2.25	%				(2.18	%)		(4.28	%)
Cumulative Default Rate
Residual Balance	$	9,972		$	9,616		$	9,263	$	8,916		$	8,570
% Change		7.65	%		3.81	%				(3.75	%)		(7.48	%)
Default Recovery Rate
Residual Balance	$	9,124		$	9,193		$	9,263	$	9,334		$	9,403
% Change		(1.50	%)		(0.75	%)				0.76	%		1.52	%
Discount Rate
Residual Balance	$	10,934		$	10,057		$	9,263	$	8,542		$	7,887
% Change		18.04	%		8.57	%				(7.78	%)		(14.86	%)

($’s in Thousands)	Percentage Change in Assumptions						Residual Balance		Percentage Change in Assumptions
	Tighten 25 basis points			Tighten 10 basis points					Widen 10 basis points			Widen 25 basis points
Spread between LIBOR and Auction Rate Indices
Residual Balance	$	11,468		$	10,175		$	9,263	$	8,440		$	7,211
% Change		23.80	%		9.84	%				(8.89	)%		(22.16	)%

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 March 31, 2008 and June 30, 2007.

($’s in Thousands)	As of March 31, 2008				As of June 30, 2007
Loans in-school /grace/deferment (1)	$	119,814			$	109,778
Loans in forbearance (2)		3,709	7.3	%		789	2.8	%
Loans in repayment
Current		43,653	85.6	%		26,763	95.4	%
Delinquent 31-60 Days (3)		1,352	2.7	%		409	1.5	%
Delinquent 61-90 Days		791	1.6	%		87	0.3	%
Delinquent 91 Days or More		1,515	3.0	%		0	0.0	%
Total Loans in repayment and forbearance	$	51,020	100.0	%	$	28,048	100.0	%
Total off-balance sheet private student loans	$	170,835			$	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 -

RESTATEMENT

The Company is restating the condensed consolidated statements of operations and cash flows for the nine months ended March 31, 2007.

As identified in Note 8, on February 4, 2005, MRUL, a wholly-owned subsidiary of the Company entered into a Credit Agreement with Nomura under which Nomura agreed to provide MRUL with a $165 million secured revolving credit facility for the origination and warehousing of private student loans. Related to this transaction, Nomura was granted a warrant, subject to certain terms and conditions, to purchase common stock of the Company equal to, at that point in time, 27.5% ownership interest in the Company on a diluted basis.

Financial Accounting Standards No. 123R - Share Based Payments , requires, with respect to share based transactions with other than employees, that the consideration received for the issuance of equity instruments shall be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

As a result of a review by management of the data considered in deriving the value of the warrants issued to Nomura, management has determined that a restatement is required to appropriately reflect the value of the warrants.

The impact on the condensed consolidated statement of operations for the nine months ended March 31, 2007 is as follows:

·	Depreciation and amortization has been increased by $1,519,895, from $2,514,991 to $4,034,886.
·	Loss applicable to common shares has increased $1,519,895, from $(27,974,213) to $(29,494,108).
·	Net loss per basic and diluted shares has increased $0.08 from $(1.52) to $(1.60).

Net loss, and depreciation and amortization as reported in the condensed consolidated statement of cash flows for the nine months ended March 31, 2007 have been restated as described above.

NOTE 18 -

SUBSEQUENT EVENTS

Subordinate Student Loan Auction Rate Bond Auction Failures

Since March 31, 2008, the two auctions that have been held for the subordinate, single-A-rated auction rate notes in the Company’s securitization have failed ( i.e. , there was no clearing bid from investors and the broker-dealer did not otherwise provide a clearing bid). The economic impact of the failure of the subordinate, single-A-rated auction rate note auctions has been immaterial as the bonds had previously been pricing at very close to the maximum rate (LIBOR + 2.50%), where they priced upon the failure of the auction. The senior, triple-A-rated auction rate notes in the Company’s securitization have never experienced an auction failure but continue to price very near at the maximum rate (LIBOR + 1.50%).

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

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and accompanying notes included within this quarterly 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 Part II, Item 1A of this quarterly report on Form 10-Q.

OVERVIEW

We are a specialty 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 now also originate, lend, and hold FFELP loans.

In originating our private student loans, we use a unique and proprietary underwriting model which we believe provides us with a compelling competitive advantage. By combining traditional FICO™-based credit scoring methods with our proprietary underwriting matrix, which considers the loan applicant’s academic data, prior work experience, course of study, the educational institution which they are attending , and the amount being borrowed, we generate our own credit and repayment capability index which we believe is more insightful and predictive in determining an applicant’s future repayment capabilities. Our approach allows us to competitively price loans for students that would be viewed as undifferentiated under traditional methods employed by other student loan companies. We believe that no other educational finance company currently uses a similar approach to evaluating loan applicants or determining loan pricing. Our underwriting process adds another layer of analytical precision to traditional evaluation tools and helps us make more informed lending decisions.

As of March 31, 2008, the Company’s managed private student loan portfolio had the following characteristics:

	Off Balance Sheet Portfolio			Balance S heet Portfolio			Total Managed Portfolio
Number of Loans	11,700			7,563			19,263
Aggregate Loan Balance	$	170.8 million		$	104.5 million		$	275.3 million
Weighted average Qualifying FICO ™		718			711			715
Percentage of loans with co-borrowers		64	%		73	%		67	%
Percentage of Loans with a borrower who is attending a graduate or professional school		37	%		31	%		35	%
Weighted average federal cohort default rate for the schools attended by borrowers		2.1	%		2.2	%		2.2	%

We began originating student loans in June 2005, so our performance history is limited. Currently, approximately 25% of the managed private student loan portfolio has entered repayment. For the last twelve months, 30+ days delinquencies as a percentage of repayment eligible loans has averaged 5.3%, and loans in forbearance as a percentage of repayment eligible loans has averaged 3.3%. These performance statistics are substantially better than industry average for private student loans.

The increase in delinquencies and forbearance that has occurred in the last three months is typical for student loan portfolios. In general, there is an annual seasonal bump in negative performance in January due to a newly graduating class entering repayment, of which many may be late due to servicer delays in locating borrowers who have moved from school to another address post graduation. As illustrated in the chart below, delinquencies have been declining since their peak in January.

In addition to our unique underwriting methodology, we take a highly focused approach to our marketing while maintaining one of the most diverse sourcing channels in the industry. Of the approximately 6,500 accredited institutions of higher education in the United States, we focus on a targeted subset of approximately 3,000 undergraduate and professional graduate institutions. The professional graduate disciplines that we target include law, business administration, engineering and medicine. These criteria define our lending and marketing methods. We believe that this targeted approach will consistently yield the optimal mix of attractive pricing, acceptable credit risk and a sufficiently deep base of potential customers. We use a highly diverse approach to sourcing potential customers which we believe will create more sustainable distribution channels than our competitors. Our direct marketing channels include print advertising campaigns, direct mail campaigns, radio campaigns, Internet marketing campaigns and our branded MyRichUncle® web site: www.MyRichUncle.com . We also employ co-branded direct marketing, leveraging our marketing agreements with The Princeton Review™ and STA Travel™ to reach further customers. In addition, we have developed indirect origination sources including referrals from third party referral companies for whom we may provide a private labeled set of student loan products. 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 portal, Embark.com, to apply to colleges on-line. As of March 31, 2008, Embark.com has generated over 375,000 opt-ed in customers who are interested in being provided a variety of products 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. Embark.com’s opt-ed in customer base to date represents approximately 20% of the total number of students applying to college each year. Equipped with our unique credit model, our focused marketing and diverse distribution channels, we believe we are well positioned to grow in the market for higher education products and services.

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.

In the first quarter of fiscal 2008, we originated a record number of loans aggregating approximately $129.0 million in our private and federal student loan programs. For the quarter ending March 31, 2008, we originated approximately $42.8 million in our private and federal student loan programs. The current fiscal year volume (through nine months) of approximately $230.2 million represents 92% growth compared to the comparable period in the prior fiscal year, when we originated approximately $119.8 million in our private and federal student loan programs. Additionally, as we add to our product offerings, we expect that new products will be additive to our results and as we introduce them in any given quarter that particular quarter could also have variations when compared to the comparable quarter in previous years.

Student Loan Originations

($’s in Millions)

	FY 2008						FY 2007
	Q3		Q2		Q1		Q4		Q3		Q2		Q1
Private Student Loans	$	27.0	$	33.1	$	72.4	$	24.8	$	24.1	$	22.1	$	31.8
Preprime™ Student Loans		14.0		20.0		34.0		9.2		9.7		10.6		13.8
Federal Student Loans		1.8		5.4		22.5		0.6		3.5		2.4		1.8
Total Student Loan Originations	$	42.8	$	58.4	$	129.0	$	34.6	$	37.3	$	35.1	$	47.4

Note: Totals may not sum due to rounding.

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 is 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 market at the time of the transaction for this asset class, and our ability to support the requirements for a sale or securitization transaction. We are currently working on a Securitization that we plan to execute, subject to market conditions, prior to the conclusion of the current fiscal year on June 30, 2008.

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.

For the quarter ended March 31, 2008, the Company adjusted its auction rate assumptions used to value its Residual Interest in its securitization, leading to a $2.4 million reduction in the value of its residual, which resulted in a $0.1 million adjustment to other comprehensive income and a $2.3 million write-down, recorded as a negative Securitization Income. Despite the fact that the Company’s securitization’s senior, triple-A auction rate notes have not had a failed auction and the subordinate, single-A notes have only recently experienced their first failed auctions, due to the general dislocation of the student loan auction rate market in general, we have extended the period through which the auction rate securities would price at the maximum rate through the next 18 to 24 months and assumed that rates would thereafter decline over 18 to 24 months to a rate in excess of the levels that the Company’s securities priced at the inception of the transaction. We do not believe that such markets will remain dislocated forever. Logically speaking, if in the future the spreads on term asset backed securities fall below the maximum rates at which auction rate notes are pricing now, we believe that investor demand for such assets should be rekindled at such time. We believe that this process will be aided by the fact that the broker-dealers who conduct the auctions are required by the terms of their contract to continue to hold an auction every 28 days. Our valuation of our residual assumes that this normalization may begin to occur in 18 to 24 months. The table below illustrates how the valuation of our residual might change if such normalization took more or less time to occur.

Months at Maximum Rate for AAA’s	6	12	18	24	30
Months at Maximum Rate for A’s	12	18	24	30	36
Residual Valuation ($’s in Millions)	$10.9	$10.0	$9.3	$8.6	$7.9

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.

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.

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

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2008, COMPARED TO THE NINE MONTHS ENDED MARCH 31, 2007

INTEREST INCOME The Company’s interest income is 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 Securitization. Total interest income increased by $1,769,000: $7,450,000 for the nine months ended March 31, 2008 compared to $5,681,000 for the nine months ended March 31, 2007. This increase is primarily attributable to the increase in federal student loan volume and the Residual Interest income from the securitization. Federal student loan interest income increased to $870,000 for nine months ended March 31, 2008 compared to $104,000 for the nine months ended March 31, 2007. The interest income on the Residual Interest totaled $1,105,000 for the nine months ended March 31, 2008.

INTEREST EXPENSE The total interest expense increased to $5,733,000 for the nine month period ended March 31, 2008 compared to $4,146,000 for the nine month period ended March 31, 2007. Facility interest and origination bank costs increased by 21% from $4,139,000 to $4,989,000 for the nine month periods ended March 31, 2007 and 2008, respectively. The Other Interest Expense of $744,000 for the nine month period ended March 31, 2008 is comprised of interest costs related to the Senior Secured Notes detailed in Note 12 of the Notes to the Financial Statements.

NON-INTEREST INCOME The Company’s non-interest income is primarily comprised of income from the Securitization as well as the subscription and service revenue fees from the Company’s Embark subsidiary, an online college admissions application business acquired by the Company in February 2007. Securitization income (net) totaled $1,795,000 for the nine month period ended March 31, 2008 which was generated by the Company’s sale in the six months ended December 31, 2007 of the second and third pools of loans to the securitization trust established in June 2007, and reduced by impairment write-downs of the Company’s Residual Interest in its Securitization trust that were recorded for the three-months ended March 31, 2008. Subscription and service revenue, primarily from the Company’s Embark subsidiary, was $4,275,000 for the nine months ended March 31, 2008 compared to $722,000 for the nine months ended March 31, 2007. Origination processing fees generated by the Company’s origination of PrePrime ^TM loans for EEF I, LLC increased 93% to $680,000 for the nine months ended March 31, 2008 compared to $353,000 from the comparable period a year ago, proportionate with the growth in origination volume.

NON-INTEREST EXPENSE The Company’s total non-interest expense increased by 39% to $38,337,000 for the nine month period ended March 31, 2008 over the same period for 2007. Not including the expenses for the Company’s Embark subsidiary, the Company’s non-interest expense increased by 13% to $30,515,000 for the nine month period ended March 31, 2008 over the same period for 2007. This compares favorably with the 92% increase in loan originations for the same period, demonstrating the scale that the Company’s business model is achieving.

Corporate general and administrative expenses increased from $7,128,000 for the nine month period ended March 31, 2007 to $12,284,000 for the nine month period ended March 31, 2008, out of which $1,821,000 of the corporate G&A expenses are related to the Embark subsidiary. The 47% increase in non-Embark related corporate general and administrative expenses is primarily due to the increase in the size of the organization and the additional employees thus an increase in salaries and stock compensation. Stock compensation expense totaled $2,787,000 of the total corporate general and administrative expense. The Company also moved to a larger corporate office and the rent expense increased by $692,957 over the same period in 2007.

Sales and marketing expense for the nine month period ended March 31, 2008 totaled $9,541,000 compared to $8,023,000 for the same period in 2007. This increase is primarily due to sales and marketing expenses for the Embark subsidiary in the amount of $1,752,000. Not including Embark, the Company’s sales and marketing expenses was $7,789,000, approximately equal to the amount expended in the same period of 2007, which compared to a growth of 92% in loan originations, indicates increasing scalability of the Company’s brand and marketing activities.

Operations expense increased from $3,751,000 for the nine month period ended March 31, 2007 to $5,380,000 for the same period in 2008. The 43% increase in operations expenses should be compared to the 92% increase in the Company’s loan volume for the period, which indicates that our customer service and origination processing functions are evidencing increased efficiency.

The cost of subscription and service revenue of $1,379,000 is associated with costs related to the processing of admissions applications at the Company’s Embark subsidiary. The increase of $796,000 in referral marketing costs (from $725,000 for the nine month period ended March 31, 2007 compared to $1,521,000 for the same period in 2008) is proportionate with increased origination of private student loans by the Company’s private label marketing partners. Legal expenses increased by $565,000 in 2008 due to legal documentation related to the renewal and expansion of credit facilities.

Depreciation and amortization expense was $2,476,000 in the nine months ended March 31, 2008 compared to $4,035,000 in the nine months ended March 31, 2007. 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.

NET LOSS For nine months ended March 31, 2008, the Company incurred a net loss applicable to common shares of $35,121,000, or $1.22 per share compared to a net loss of $29,494,000, or $1.60 per share for the nine months ended March 31, 2007. The weighted average number of shares outstanding for nine months ended March 31, 2008 was 28,880,000 shares compared to 18,401,000 shares for the nine months ended March 31, 2007.

LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2008, the Company had $325 million of warehouse line capacity to fund its private and federal student loan originations, $125 million from Merrill Lynch Bank USA and $200 million from DZ Bank AG. The Company is currently in discussions with Merrill Lynch regarding the potential to renew the line before July 15, 2008. The Company’s DZ Bank facility is a five-year facility that does not come up for renewal until April 2012. The Company is holding discussion with other banks regarding the additional warehouse lines or whole loan sales, which would increase its loan origination capacity. Additionally, the Company is currently working on structuring a securitization which will allow it to refresh its existing warehouse line capacity.

CASH AND CASH EQUIVALENTS AND ACCOUNTS RECEIVABLE As of March 31, 2008, the Company had unrestricted cash and cash equivalents of $17,223,000, restricted cash of $2,652,000, and accounts receivable of $665,000 compared to unrestricted cash of $11,606,000, restricted cash of $3,154,000, and accounts receivable of $1,979,000 as of June 30, 2007. $2.1 million of the March 31, 2008 balance of restricted cash is 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 $17,852,000 and $13,507,000, respectively; for the nine months ended March 31, 2008 and year ended June 30, 2007.

STUDENT LOAN RECEIVABLES As of March 31, 2008; the Company had a balance of private student loans receivables (net of reserves) of $103,649,000 compared to $5,441,000 as of June 30, 2007. The amount on the Company’s balance sheet increased as a result of the increased loan volume during the months of July through March, reduced by the sale of approximately $32.8 million of loans into the Company’s securitization transaction.

At March 31, 2008, the Company had a balance of $36,407,000 of federal student loan receivables compared to $7,395,000 at June 30, 2007. The Company launched its federal student loan program in fiscal 2007.

FIXED ASSETS At March 31, 2008 the Company had $1,957,000 of net fixed assets compared to $1,553,000 at June 30, 2007. The increase is mainly due to additional technology spending at the Company’s Embark subsidiary.

OTHER ASSETS At March 31, 2008, the Company had $13,706,000 in other assets compared to $11,873,000 at June 30, 2007. Other assets primarily include security deposits, intangibles, goodwill and deferred financing fees. Security deposits were $1,013,000 at March 31, 2008 associated with the Company’s leases for office space and loan servicing contracts. The intangible assets and goodwill total $8,084,000 at March 31, 2008 and are mainly related to the TPR transaction (described in Note 5 to the Condensed Consolidated Financial Statements). The deferred financing fees (net of amortization) total $2,198,000 at March 31, 2008.

LIABILITIES Total liabilities were $162,814,000 at March 31, 2008 compared to $21,459,000 at June 30, 2007. The increase is primarily due to additional borrowing on the MLBU and DZ lines for funding of loan originations. Client deposits and deferred contract revenues were $4,809,000 related to prepaid annual school contracts and application fees collected on behalf of client schools generated by our Embark subsidiary. As of March 31, 2008, the Company had $1,948,000 in accounts payable and $2,510,000 in accrued expenses, compared to $3,835,000 and $458,000, 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 years
Long Term Debt Obligations	$	0	$	0	$	0	$	0	$	0
Capital Lease Obligations	$	0.8 million	$	0.2 million	$	0.5 million	$	0.1 million	$	0
Operating Lease Obligations	$	14.3 million	$	2.3 million	$	4.5 million	$	3.9 million	$	3.6 million
Unconditional Purchase Obligations	$	0	$	0	$	0	$	0	$	0
Other Long-Term Obligations	$	11.2 million	$	0	$	11.2 million	$	0	$	0
Total Contractual Cash Obligations	$	26.3 million	$	2.5 million	$	16.2 million	$	4.0 million	$	3.6 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 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 had a three-year term.

Commercial Commitments

	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Lines of Credit	$	325.0 million	$	125.0 million	$	0	$	200.0 million	$	0
Standby Letters of Credit	$	0	$	0	$	0	$	0	$	0
Guarantees	$	0	$	0	$	0	$	0	$	0
Standby Repurchase Obligations	$	0	$	0	$	0	$	0	$	0
Other Commercial Commitments	$	2.9 million	$	2.9 million	$	0	$	0	$	0
Total Commercial Commitments	$	327.9 million	$	127.9 million	$	0	$	200.0 million	$	0

The Company has a renewable $125 million credit facility with MLBU, terms of which are described in the Notes to the Condensed Consolidated Financial Statements included in this quarterly report on Form 10-Q. The Company had an outstanding balance of $112,924,000 on its credit facility with MLBU at March 31, 2008 and $11,711,000 at June 30, 2007. The Company has a $200 million credit facility with DZ Bank AG’s conduit, Autobahn Funding Company LLC (“DZ Bank”), terms of which are described in the Notes to the Condensed Consolidated Financial Statements included in this quarterly report on Form 10-Q. The Company had an outstanding balance of $19,702,000 with DZ Bank at March 31, 2008. During fiscal 2007, the Company paid off the Nomura credit facility. The Company’s subsidiaries have loan purchase and sale agreements with Doral Bank and at March 31, 2008, the Company had total commitments to Doral Bank of $2,943,000 compared to $1,399,000 at June 30, 2007.

OFF-BALANCE SHEET ARRANGEMENTS/TRANSACTIONS

We securitized student loans through a bankruptcy remote, qualified special purpose trust. See “Summary of Significant Accounting Policies - Securitization Accounting” for a discussion of our determination to not consolidate the securitization trust.

CRITICAL ACCOUNTING POLICY AND ESTIMATES

The Company’s Management and Discussion and Analysis of Financial Condition and Results of Operations section discusses its condensed 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 and disclosed in relevant sections in this discussion and analysis and in the notes to the condensed consolidated financial statements included in this quarterly report on Form 10-Q.

Note on Forward-Looking Statements

Except for historical information contained herein, this quarterly report on Form 10-Q contains 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 are included with respect to, among other things, our current business plan, business and investment strategy and portfolio management. 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,” “anticipates,” “anticipated,” “should,” “designed to,” “foreseeable future,” “believe,” “believes” and “scheduled” and similar expressions. Our actual results or outcomes may differ materially from those anticipated. 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 assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Important factors that we believe might cause actual results to differ from any results expressed or implied by these forward-looking statements are discussed in Item 1A of Part II of this Form 10-Q. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this quarterly report on Form 10-Q.

Item 3. 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 March 31, 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 March 31, 2008, consisted of $106.5 million of private student loans and $36.4 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.

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 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 March 31, 2008 based on changes in these loan performance assumptions, see Note 16 in the Notes to the condensed consolidated financial statements contained in this quarterly report on Form 10-Q.

Item 4. 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 quarterly report 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 recorded, processed, summarized and reported within the time periods specified by Securities and Exchange Commission rules and forms 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.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this quarterly report that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors.

Except with respect to the risk factors titled:

(i)

“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,”

(ii)

“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 us from recognizing a gain from such transaction” and

(iii)

“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”

which have been added since the filing of our annual report on Form 10-KSB for the year ended June 30, 2007, and the risk factor titled:

(i)

“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”,

which we have made material changes to as compared to the version disclosed in our annual report on Form 10-KSB for the year ended June 30, 2007, there have been no material changes to the risk factors previously disclosed in our annual report on Form 10-KSB for the year ended June 30, 2007. In addition to the other information discussed in this quarterly report on Form 10-Q, please consider the risk factors provided below which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition or operating results.

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 $116.7 million through March 31, 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 the securitization. There can be no assurance that we will generate net income for our stockholders on a consistent basis.

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.

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. 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 $0.38 million of additional private student loans to the trust without gain. 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 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 and the cost of funds. 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 are 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.

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 securitization trust issued auction rate notes to finance, in part, the purchase of student loans. Interest rates for the auction rate notes are determined from time to time at 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 also concluded that the higher actual auction rates would persist, resulting in a greater spread over LIBOR, for a longer period of time than we had previously estimated. Our assumption with regard to future auction rates, like our other key valuation assumptions, requires our subjective judgment and is susceptible to change.

The interest rate on each outstanding auction rate note is limited by a maximum rate. The maximum rate is the least of three rates: a floating interest rate (generally one month LIBOR plus a margin), a fixed interest rate and the maximum legally permissible rate. The margin applicable to the floating interest rate is dependent upon the then current ratings of the notes subject to an auction. If the notes are downgraded, the applicable margin, and the maximum floating rate, would increase. If the interest rate determined pursuant to the auction procedures would exceed the maximum rate, the interest rate for the applicable interest period would be set at the maximum rate, but the amount of the “excess” interest would accrue as “carryover interest.” A noteholder’s right to receive carryover interest is superior to our 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.

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

As of March 31, 2008, we had not had any failed auctions. However, since that time two of the auctions of our single-A rated auction rate notes have 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. Because the auctions of our single-A rated auction rate note 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 third quarter of fiscal 2008, we revised our assumption with regard to the future cost of funding of auction rate notes. We assumed at March 31, 2008 that all outstanding auction rate notes will continue to bear interest at the current spreads over one-month LIBOR for 18 months in the case of AAA/Aaa-rated securities and 24 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 third quarter of fiscal 2008, we decreased the estimated fair value of our securitization receivable by $2.4 million. See Note 16 - Securitization to the condensed consolidated financial statements

Illiquidity as a result of failed auctions in the future could result in higher interest rates determined by future auctions, derogatory rating agency action, including ratings downgrades, and impairment charges by the holders of the outstanding auction rate notes, each of which could materially adversely affect future demand for auction rate notes.

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. We do not consolidate the financial results of the trust with our own financial results. 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 Financial Accounting Standards Board (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 FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. 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 the Company securitizing its assets, it could potentially, depending upon the final version, require the Company 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 the Company’s planned recognition of revenue, causing the Company 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.

In connection with our recognition of revenue from securitization transactions, if the estimates we make, or the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may vary materially from those reflected in our financial statements.

In our 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.

We may be unable to meet our capital requirements in the future.

We may need additional capital in the future, which may not be available to us on reasonable terms or at all. The raising of additional capital may dilute your ownership in us. We may need to raise additional funds through public or private debt or equity financings in order to meet various objectives. Any additional capital raised through the sale of equity may dilute your ownership percentage in us. This could also result in a decrease in the fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of securities we issue in future capital transactions may be more favorable to our new investors, and may include preferences, security interests in specific assets, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect. Furthermore, any additional debt or equity financing we may need may not be available on terms favorable to us, or at all. If we are unable to obtain required additional capital, we may be forced to curtail our growth plans or cut back our existing business and, further, we may not be able to continue operating if we do not generate sufficient revenues from operations we need to stay in business. We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will impact our financial statements.

There are market, credit and liquidity risks associated with our business which could have a material adverse effect on us.

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 our existing lenders would renew our credit facilities. In anticipation of this outcome, we have begun discussions with a number of other banks to broaden our warehouse funding channels and to ensure competitive economic terms. However, no assurance can be given that our efforts to secure additional credit facilities on the same or more favorable terms will prove successful.

The uncertainty and volatility of the credit markets may have a significant impact on the revenues derived from our securitization transactions, or 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.

Our risk control and eligibility scoring 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.

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.

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 comes from private student loans originated to finance post-secondary education. The availability and terms of loans that the federal government originates or guarantees affects the demand for private student loans because students and their families often rely on private loans to bridge a gap between available funds, including family savings, grants and federal and state loans, and the costs of post-secondary education. The federal government currently places both annual and aggregate limitations on the amount of federal loans that any student can receive and determines the criteria for student eligibility. These guidelines are generally adjusted in connection with funding authorizations from the United States Congress for programs under the Higher Education Act. The Deficit Reduction Act of 2005 increased amounts that first and second year college students may borrow and made 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. Recent federal legislation has sought to expand federal grant and loan assistance, which could weaken the demand for private student loans. In addition, legislation such as the College Cost Reduction and Access Act of 2007 has significantly reduced the profit margins of traditional providers of federal loans, which could result in increased competition in the market for private student loans, which could adversely affect the volume of private loans and securitization transactions and, as a result, the growth of our business. Bills recently passed by the U.S. Senate and the House of Representative, intended to inject liquidity into the student loan asset-backed securitization market, would enable the Department of Education to buy only federally guaranteed student loans, not private student loans. On May 7, 2008, the President signed into law the “Ensuring Continued Access to Student Loans Act of 2008,” which contains provisions which might adversely impact the demand for private educational loans, availability and flow of funds for private educational loans, and our liquidity position. Among other things, the Act:

	•		permits a parent borrower under the federal PLUS Loan program to defer repayment of the PLUS loan until six months after the student ceases to carry at least one-half the normal full-time academic workload;

	•		extends eligibility for a parent PLUS loan to an applicant who, during the period beginning January 1, 2007 and ending December 31, 2009, has not been delinquent for more than 180 days on mortgage loan payments or medical bill payments nor more than 89 days delinquent on the repayment of any other debt, in any case, during such period; and


	•		increases the loan limits for unsubsidized Stafford loans for undergraduate students.

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.

Our direct marketing initiative may not prove to be effective.

Our primary marketing strategy is to target parents and students directly. We accomplish this principally through our website, www.MyRichUncle.com , which provides an interactive forum for parents and students to learn about our products and services and to apply for them from us. There can be no assurance that the Internet will be an effective means of reaching our prospective customers, or that we will be able to effectively utilize any alternative means that may become available, or that our marketing plans will succeed in attracting customers.

Public relations are an important part of our marketing program and our effort to build our reputation and brand identity. As our products and services become better known, they may become less newsworthy, and we may receive less media coverage, or we may have to increase our public relations efforts and expenditures to maintain or increase the amount of media coverage we receive. We cannot assure you that media coverage will be accurate and/or positive. Inaccurate and/or negative representations of us in the media may have a material adverse effect on our financial condition and results of operations.

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 in order 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 Sallie Mae, Wells Fargo, Bank of America, JP Morgan Chase and Citibank. 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. Larger competitors with greater financial resources may be better able to respond to the need for technological changes, compete for skilled professionals, build upon efficiencies based on a larger volume of transactions, procure capital at a lower cost, fund internal growth and compete for market share generally. As to our alternative financing products and services where we hope to establish a niche, third parties may enter these markets and compete against us. 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.

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

Our business operations and product offerings may be subject to various governmental regulations. We are in the process of ascertaining the applicability of various laws to us and our operations. 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.

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' 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. 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.

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.

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.

If our systems are unable to accommodate a high volume of traffic on our web site, the growth of our revenue could be reduced or limited.

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. Currently, customer response times have not had a material detrimental effect on our results of operations to date. Our online services may in the future experience slower response times due to increased traffic if this risk is not effectively addressed.

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. 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 for protecting our intellectual property assets and continue to patent new innovations. These patents provide an important competitive advantage to us, and our prospects, business, financial condition and results of operations may be materially adversely affected if these patents 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 products or services, our business, financial condition and results from operations may be materially adversely affected.

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.

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, including in particular Messrs. Raza Khan and Vishal Garg. 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.

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 May 14, 2008, our directors and executive officers beneficially owned approximately 23.8% of the outstanding voting shares and our two largest institutional stockholders owned an additional 26.4% of our outstanding voting shares. As a result, these stockholders, if acting together, could substantially influence matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

The rights of our Series B 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 preferred stock may adversely affect the rights of holders of our common stock. For example, the holders of our Series B preferred stock are entitled to receive a liquidation preference over all other equity securities that are junior to the Series B preferred stock. In addition, subject to certain conditions, our charter documents provide protective provisions to the holders of our Series B preferred stock requiring us to first obtain the written consent of the majority of the holders of our Series B 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 preferred stockholders, 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 preferred stock may significantly impair our ability to raise equity capital if the majority of the holders of our Series B 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.

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

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 first quarter. These fluctuations could result in volatility or adversely affect our stock price.

The price of our common stock may be volatile.

The trading price of our common stock may fluctuate substantially, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose part or all of your investment in our shares of common stock. Those factors that could cause fluctuations include, but are not limited to, the following: actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of securities analysts; difficulties we may encounter in securitizing our loans; any variance between the actual performance of the securitization trust and the key assumptions that we have used to estimate the fair value of our residual receivable; changes in the key assumptions we use to estimate the fair value of our residual receivables, including discount, default and prepayment rates; 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; general economic conditions and trends; negative publicity about the student loan market generally or us specifically; legislative initiatives effecting federal or private student loans; major catastrophic events; loss of a significant client or clients; purchases or sales of large blocks of our stock; or departures of key personnel.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

During the quarterly period covered by this quarterly report on Form 10-Q, we issued 3,500 shares of our common stock in connection with the exercise of previously issued warrants.

The dates of issuance and issue price of the shares is as follows:

Date of Issuance	Number of Shares Issued	Exercise or Issuance Price
January 10, 2008	3,500	$1.60

The warrant exercises generated total proceeds to us of $5,600. We used all of these proceeds for working capital and general corporate purposes. The issuance of our shares of common stock upon exercise of the warrants was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof and/or Regulation D promulgated thereunder.

In March 2008, 2,657 shares of common stock were purchased for $5,899 in exchange for the payment of witholding taxes due upon the vesting of restricted stock. The average fair value of the common stock was $2.22 per share.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Submission of Matters to a Vote of Security Holders.

None.

Item 5.

Other Information.

None.

Item 6.

Exhibits.

*	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 Vishal Garg, 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 Vishal Garg, 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

SIGNATURES

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

		MRU HOLDINGS, INC.


Date: May 15, 2008		/s/ Edwin J. McGuinn, Jr.
		Edwin J. McGuinn, Jr.
		Chief Executive Officer (Principal Executive Officer)

Date: May 15, 2008		/s/ Vishal Garg
		Vishal Garg
		Chief Financial Officer (Principal Financial and Accounting Officer)

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