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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



(Mark One)



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



For the quarterly period ended March 31, 2004.



OR



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



For the transition period from
to



Commission file number: 000-29995



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EDUCATION LENDING GROUP, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0851387                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS employer identification number)



12760 High Bluff
Drive,

Suite 210, San Diego, California 92130

(Address of principal executive offices)



(858) 617-6080

(Registrants telephone number, including area code)



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



Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).
YES  x NO ̈



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the last practicable
date: Shares of Common Stock, $0.001 par value, outstanding at March 31, 2004: 16,296,337, including treasury shares.



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TABLE OF CONTENTS



|                                                                                              |  |     
|--------------------------------------------------------------------------------------------- |  | ----
|                                                                                              |  | Page
|PART I. FINANCIAL INFORMATION                                                                 |  | 3   
|Item 1. Financial Statements                                                                  |  | 3   
|Consolidated Balance Sheets                                                                   |  | 3   
|Consolidated Statements of Operations                                                         |  | 4   
|Consolidated Statement of Changes in Stockholders Equity/(Deficit)                           |  | 5   
|Consolidated Statements of Cash Flows                                                         |  | 6   
|Notes to Consolidated Financial Statements                                                    |  | 7   
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 18  
|Item 3. Quantitative and Qualitative Discussions about Market Risk                            |  | 29  
|Item 4. Controls and Procedures                                                               |  | 30  
|PART II. OTHER INFORMATION                                                                    |  | 31  
|Item 1. Legal Proceedings                                                                     |  | 31  
|Item 2. Changes In Securities, Use of Proceeds and Issuer Purchases of Equity Securities      |  | 31  
|Item 3. Defaults Upon Senior Securities                                                       |  | 31  
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 31  
|Item 5. Other Information                                                                     |  | 31  
|Item 6. Exhibits and Reports on Form 8K                                                      |  | 31  



2



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PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------



EDUCATION LENDING GROUP, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                    |  |                |                    |   |                   |   |                    |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------------------ | - | ----------------- | - | ------------------ | -
|ASSETS                                                                                                                                                                                              |  | March 31, 2004 |                    |   | December 31, 2003 |  
|                                                                                                                                                                                                    |  | (Unaudited)    |                    |   |                   |  
|Student loans, net of loan loss reserve                                                                                                                                                             |  | $              | 900,700,102        |   |                   | $ | 540,561,502        |  
|Student loans, net of loan loss reserve (securitized)                                                                                                                                               |  |                | 2,696,655,319      |   |                   |   | 2,750,239,082      |  
|Student loans held for resale at the lower of cost or market                                                                                                                                        |  |                | 76,651,150         |   |                   |   | 75,441,990         |  
|Restricted cash and investments                                                                                                                                                                     |  |                | 149,022,431        |   |                   |   | 141,846,261        |  
|Cash and cash equivalents                                                                                                                                                                           |  |                | 27,426,833         |   |                   |   | 33,557,879         |  
|Interest & other receivables                                                                                                                                                                        |  |                | 34,451,863         |   |                   |   | 28,191,861         |  
|Property and equipment, net                                                                                                                                                                         |  |                | 1,717,417          |   |                   |   | 1,600,606          |  
|Deferred financing costs                                                                                                                                                                            |  |                | 12,038,817         |   |                   |   | 12,268,239         |  
|Other                                                                                                                                                                                               |  |                | 1,176,853          |   |                   |   | 133,448            |  
|                                                                                                                                                                                                    |  |                |                    |   |                   |   |                    |  
|Total Assets                                                                                                                                                                                        |  | $              | 3,899,840,785      |   |                   | $ | 3,583,840,868      |  
|                                                                                                                                                                                                    |  |                |                    |   |                   |   |                    |  
|LIABILITIES AND STOCKHOLDERS EQUITY/(DEFICIT)                                                                                                                                                      |  |                |                    |   |                   |   |                    |  
|Accounts payable                                                                                                                                                                                    |  | $              | 2,880,489          |   |                   | $ | 4,470,680          |  
|Government payable Accrued expenses and other liabilities                                                                                                                                           |  |                | 7,777,3576,255,650 |   |                   |   | 7,917,6898,217,111 |  
|Education Loan Backed Notes related to securitized student loans structured as collateralized borrowings                                                                                            |  |                | 2,855,535,613      |   |                   |   | 2,905,121,844      |  
|Warehouse loan facilities                                                                                                                                                                           |  |                | 1,025,333,858      |   |                   |   | 660,353,242        |  
|                                                                                                                                                                                                    |  |                |                    |   |                   |   |                    |  
|Total Liabilities                                                                                                                                                                                   |  |                | 3,897,782,967      |   |                   |   | 3,586,080,566      |  
|                                                                                                                                                                                                    |  |                |                    |   |                   |   |                    |  
|Commitments and contingencies(Note 9)                                                                                                                                                              |  |                |                   |   |                   |   |                   |  
|Preferred stock$0.001 par value, 10,000,000 shares authorizedCommon stock$0.001 par value, 40,000,000 shares authorized,    16,296,337 and 15,917,705
shares issued and outstanding, respectively |  |                | 16,296             |   |                   |   | 15,918             |  
|Additional paid in capital                                                                                                                                                                          |  |                | 42,306,611         |   |                   |   | 40,673,609         |  
|Accumulated deficit                                                                                                                                                                                 |  |                | (38,577,705        | ) |                   |   | (41,548,168        | )
|Accumulated other comprehensive loss, net of taxes of $0                                                                                                                                            |  |                | (1,687,384         | ) |                   |   | (1,381,057         | )
|                                                                                                                                                                                                    |  |                |                    |   |                   |   |                    |  
|Total Stockholders Equity/(Deficit)                                                                                                                                                                |  |                | 2,057,818          |   |                   |   | (2,239,698         | )
|                                                                                                                                                                                                    |  |                |                    |   |                   |   |                    |  
|Total Liabilities and Stockholders Equity/(Deficit)                                                                                                                                                |  | $              | 3,899,840,785      |   |                   | $ | 3,583,840,868      |  
|                                                                                                                                                                                                    |  |                |                    |   |                   |   |                    |  



See accompanying notes
to consolidated financial statements



3



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EDUCATION LENDING GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2004 and 2003

(Unaudited)



|                                                              |  |      |            |      |   |                |  
|------------------------------------------------------------- |  | ---- | ---------- | ---- | - | -------------- | -
|Interest income:                                              |  | 2004 |            | 2003 |  
|Student loans, net                                            |  | $    | 30,135,859 |      | $ | 14,712,652     |  
|Investments                                                   |  |      | 356,220    |      |   | 190,905        |  
|                                                              |  |      |            |      |   |                |  
|                                                              |  |      | 30,492,079 |      |   | 14,903,557     |  
|Cost of interest income                                       |  |      |            |      |   |                |  
|Interest related expenses                                     |  |      | 14,714,103 |      |   | 8,607,003      |  
|Valuation of interest rate swap Loan servicing and other fees |  |      | 1,863,703 |      |   | 912,702727,609 |  
|                                                              |  |      |            |      |   |                |  
|Total cost of interest income                                 |  |      | 16,577,806 |      |   | 10,247,314     |  
|Net interest income                                           |  |      | 13,914,273 |      |   | 4,656,243      |  
|                                                              |  |      |            |      |   |                |  
|Less: provision for loan losses                               |  |      | 437,523    |      |   | 554,630        |  
|                                                              |  |      |            |      |   |                |  
|Net interest income after provision for loan losses           |  |      | 13,476,750 |      |   | 4,101,613      |  
|                                                              |  |      |            |      |   |                |  
|Other income                                                  |  |      |            |      |   |                |  
|Gain on sale of student loans                                 |  |      | 2,426,546  |      |   | 7,741,418      |  
|Other                                                         |  |      | 58,011     |      |   | 7,045          |  
|                                                              |  |      |            |      |   |                |  
|Total other income                                            |  |      | 2,484,557  |      |   | 7,748,463      |  
|Operating expenses:                                           |  |      |            |      |   |                |  
|General and administrative                                    |  |      | 2,528,930  |      |   | 1,898,913      |  
|Servicing                                                     |  |      | 164,103    |      |   |               |  
|Sales and marketing                                           |  |      | 10,192,858 |      |   | 11,509,951     |  
|                                                              |  |      |            |      |   |                |  
|Total operating expenses                                      |  |      | 12,885,891 |      |   | 13,408,864     |  
|                                                              |  |      |            |      |   |                |  
|Income/(loss) before income tax provision                     |  |      | 3,075,416  |      |   | (1,558,788     | )
|Income tax provision                                          |  |      | 104,953    |      |   | 36,056         |  
|                                                              |  |      |            |      |   |                |  
|Net income/(loss)                                             |  | $    | 2,970,463  |      | $ | (1,594,844     | )
|                                                              |  |      |            |      |   |                |  
|Net income/(loss) per share:                                  |  |      |            |      |   |                |  
|Basic                                                         |  | $    | 0.19       |      | $ | (0.14          | )
|Diluted                                                       |  | $    | 0.16       |      | $ | (0.14          | )
|Weighted average common shares outstanding:                   |  |      |            |      |   |                |  
|Basic                                                         |  |      | 15,980,461 |      |   | 11,311,164     |  
|                                                              |  |      |            |      |   |                |  
|Diluted                                                       |  |      | 18,493,415 |      |   | 11,311,164     |  
|                                                              |  |      |            |      |   |                |  



See accompanying notes
to consolidated financial statements



4



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EDUCATION LENDING GROUP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY/(DEFICIT)

For the Three Months Ended March 31, 2004

(Unaudited)



|                                                  |  |                 |  |        |        |                          |   |            |                    |  |   |                                   |   |  |       |            |   |                          |   |            |   |  |   |           |  
|------------------------------------------------- |  | --------------- |  | ------ | ------ | ------------------------ | - | ---------- | ------------------ |  | - | --------------------------------- | - |  | ----- | ---------- | - | ------------------------ | - | ---------- | - |  | - | --------- | -
|                                                  |  | Common Stock    | 
|                                                  |  | Number ofShares |  | Amount |        | AdditionalPaid inCapital |   |            | AccumulatedDeficit |  |   | AccumulatedOtherComprehensiveLoss |   |  | Total |            |   | TotalComprehensiveIncome |  
|Balance, December 31, 2003                        |  | 15,917,705      |  | $      | 15,918 |                          | $ | 40,673,609 |                    |  | $ | (41,548,168                       | ) |  | $     | (1,381,057 | ) |                          | $ | (2,239,698 | ) |  |   |           |  
|Exercise of options and warrants                  |  | 378,632         |  |        | 378    |                          |   | 776,896    |                    |  |   |                                  |   |  |       |           |   |                          |   | 777,274    |   |  |   |           |  
|Performance-based option vesting                  |  |                |  |        |       |                          |   | 861,145    |                    |  |   |                                  |   |  |       |           |   |                          |   | 861,145    |   |  |   |           |  
|2003 Secondary offering-additional issuance costs |  |                |  |        |       |                          |   | (5,039     | )                  |  |   |                                  |   |  |       |           |   |                          |   | (5,039     | ) |  |   |           |  
|Other comprehensive loss                          |  |                |  |        |       |                          |   |           |                    |  |   |                                  |   |  |       | (306,327   | ) |                          |   | (306,327   | ) |  | $ | (306,327  | )
|Net income                                        |  |                |  |        |       |                          |   |           |                    |  |   | 2,970,463                         |   |  |       |           |   |                          |   | 2,970,463  |   |  |   | 2,970,463 |  
|                                                  |  |                 |  |        |        |                          |   |            |                    |  |   |                                   |   |  |       |            |   |                          |   |            |   |  |   |           |  
|Balance at March 31, 2004                         |  | 16,296,337      |  | $      | 16,296 |                          | $ | 42,306,611 |                    |  | $ | (38,577,705                       | ) |  | $     | (1,687,384 | ) |                          | $ | 2,057,818  |   |  | $ | 2,664,136 |  
|                                                  |  |                 |  |        |        |                          |   |            |                    |  |   |                                   |   |  |       |            |   |                          |   |            |   |  |   |           |  



See accompanying notes
to consolidated financial statements



5



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EDUCATION LENDING GROUP, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2004 and 2003

(Unaudited)



|                                                                                   |  |      |              |   |      |   |              |  
|---------------------------------------------------------------------------------- |  | ---- | ------------ | - | ---- | - | ------------ | -
|                                                                                   |  | 2004 |              |   | 2003 |  
|Cash Flows From Operating Activities:                                              |  |      |              |   |      |   |              |  
|Net income/(loss)                                                                  |  | $    | 2,970,463    |   |      | $ | (1,594,844   | )
|Adjustments to reconcile net loss to net cash used by operations:                  |  |      |              |   |      |   |              |  
|Depreciation, amortization and other non-cash charges                              |  |      | 1,665,275    |   |      |   | 294,230      |  
|Loan loss reserve                                                                  |  |      | 437,523      |   |      |   | 554,630      |  
|Valuation of interest rate swap                                                    |  |      |             |   |      |   | 912,702      |  
|(Increase) decrease in assets:                                                     |  |      |              |   |      |   |              |  
|Interest and other receivables                                                     |  |      | (6,260,002   | ) |      |   | (4,365,026   | )
|Other assets                                                                       |  |      | (889,999     | ) |      |   | 329,118      |  
|Increase (decrease) in liabilities:                                                |  |      |              |   |      |   |              |  
|Accounts payable                                                                   |  |      | (1,590,190   | ) |      |   | 3,379,628    |  
|Government payable                                                                 |  |      | (140,332     | ) |      |   | 1,054,661    |  
|Accrued expenses and other liabilities                                             |  |      | (2,035,439   | ) |      |   | (1,256,735   | )
|                                                                                   |  |      |              |   |      |   |              |  
|Net cash used by operating activities                                              |  |      | (5,842,701   | ) |      |   | (691,636     | )
|                                                                                   |  |      |              |   |      |   |              |  
|Cash flows from investing activities:                                              |  |      |              |   |      |   |              |  
|Purchase/origination of student loans                                              |  |      | (407,403,001 | ) |      |   | (445,194,159 | )
|Sales of student loans                                                             |  |      | 98,785,491   |   |      |   |             |  
|Acquisition of property and equipment                                              |  |      | (314,521     | ) |      |   | (176,717     | )
|Acquisition of intangible assets                                                   |  |      | (63,406      | ) |      |   |             |  
|Other investments                                                                  |  |      | (90,000      | ) |      |   |             |  
|                                                                                   |  |      |              |   |      |   |              |  
|Net cash used in investing activities                                              |  |      | (309,085,437 | ) |      |   | (445,370,876 | )
|                                                                                   |  |      |              |   |      |   |              |  
|Cash flows from financing activities:                                              |  |      |              |   |      |   |              |  
|Net proceeds from credit facility                                                  |  |      | 369,123,451  |   |      |   | 471,601,403  |  
|Net proceeds from Education Loan Backed                                            |  |      |              |   |      |   |              |  
|Notes related to securitized student loans structured as collateralized borrowings |  |      | (60,905,237  | ) |      |   | (21,525,554  | )
|Costs related to securitizations                                                   |  |      | (193,357     | ) |      |   | (582,241     | )
|Proceeds from issuance of stock                                                    |  |      | 772,235      |   |      |   | 173,816      |  
|                                                                                   |  |      |              |   |      |   |              |  
|Net cash provided by financing activities                                          |  |      | 308,797,092  |   |      |   | 449,667,424  |  
|                                                                                   |  |      |              |   |      |   |              |  
|Net increase/(decrease) in cash                                                    |  |      | (6,131,046   | ) |      |   | 3,604,912    |  
|Cash and cash equivalents at beginning of period                                   |  |      | 33,557,879   |   |      |   | 2,042,527    |  
|                                                                                   |  |      |              |   |      |   |              |  
|Cash and cash equivalents at end of period                                         |  | $    | 27,426,833   |   |      | $ | 5,647,439    |  
|                                                                                   |  |      |              |   |      |   |              |  
|Supplemental Information                                                           |  |      |              |   |      |   |              |  
|Cash paid for interest                                                             |  | $    | 11,261,949   |   |      | $ | 5,064,124    |  
|Cash paid for taxes                                                                |  | $    | 40,957       |   |      | $ | 36,056       |  



See accompanying notes
to consolidated financial statements



6



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Education Lending Group, Inc.

Notes to Consolidated Financial Statements

March 31, 2004

(Unaudited)



Note 1Summary of Organization



OrganizationEducation Lending Group, Inc., (Education Lending Group, we, our Company, our and us) was incorporated in Delaware on March 26,
1999. Our Company was formed to identify and acquire enterprises in the student loan business. Without consummating any acquisitions, in September 2001, through Education Lending Services, Inc. and Education Funding Resources, LLC, we began
operations related to marketing, originating, and purchasing student loans. Through these subsidiaries, we originate or purchase Federal Family Education Loan Program (FFELP) student loans that are eligible for guarantee from the Department of
Education (DOE), federally sponsored consolidation loans and other eligible student loans. We have in place two warehouse loan facilities with financial institutions which we use to facilitate originating and purchasing student loans. On a periodic
basis, we complete student loan securitizations to pay down the warehouse facility and finance our loans on a permanent basis.



Education Lending Services, Inc., a wholly-owned subsidiary of our Company, was incorporated in Delaware on October 3, 2000. Currently, Education Lending
Services, Inc.s business is focused on the origination of consolidation loans and Parent Loans to Undergraduate Students (PLUS).



Education Funding Resources, LLC was formed in Delaware on July 19, 2001. Education Lending Services, Inc. is the sole equity member of Education Funding
Resources, LLC. Education Funding Resources, LLC is a special purpose bankruptcy remote entity that was formed in order to facilitate the student loan origination and funding process and the secondary market acquisitions of student loans.



Student Loan Xpress, Inc., a wholly-owned subsidiary of our
Company, was incorporated in Delaware on November 1, 2000 and began operations in November, 2001. Student Loan Xpress, Inc.s business is primarily focused on development of the traditional school preferred lender-list channel for loan
originations. Currently we sell the majority of the loans we generate through this channel.



Education Funding Capital I, LLC was formed in Delaware on April 22, 2002. Education Lending Services, Inc. is the sole equity member of Education Funding Capital I, LLC. Additionally, we have formed Education Funding
Capital Trust I, Education Funding Capital Trust II, Education Funding Capital Trust III and Education Funding Capital Trust IV, all of which are Delaware statutory trusts and wholly-owned subsidiaries of Education Funding Capital I. These entities
participate in the permanent financing securitizations of our student loan assets.



Education Loan Servicing Corporation was incorporated in Delaware on October 15,2003 and is expected to begin servicing a portion of our loan portfolio during 2004.



Note 2Summary of Significant Accounting Policies



Principles of ConsolidationThe financial results included in
this report are stated in conformity with accounting principles generally accepted in the United States of America and all normal recurring adjustments that we consider necessary for a fair presentation of the results for such periods.



These consolidated financial statements include the accounts of Education
Lending Group, Inc., Student Loan Xpress, Inc. (SLX), Education Loan Servicing Corporation (ELSC) and Education Lending Services, Inc. (ELS). SLX, ELSC and ELS are our wholly-owned subsidiaries. ELS consists of Education Funding Resources, LLC (EFR)
and Education Funding Capital I, LLC (EFC I). (ELS is the sole member of EFR and EFC I). Additionally, we have formed Education Funding Capital Trust I, Education Funding Capital Trust II, Education Funding Capital Trust III and Education Funding
Capital Trust IV, all of which are Delaware statutory trusts and wholly-owned subsidiaries of EFC I. All significant intercompany accounts and transactions have been eliminated in consolidation.



Student LoansStudent loans, consisting of student loans which
are 98% guaranteed by the government and alternative supplemental loans (guaranteed by other third parties) are carried at their purchase price, including unamortized premiums and unamortized origination costs. Loan set-up fees and certain direct
loan origination costs are deferred. Net deferred loan origination costs related to securitized loans are amortized into interest expense over the contractual life of the student loan using the effective interest method. Net deferred loan
origination costs related to loans which have not been securitized are amortized into interest expense over the contractual life of the student loan using the straight-line method. The overall effect of this treatment is approximation of the
effective interest method. Deferred fees and costs associated with loans that have been repaid or sold are recorded in the income statement in the period of repayment.



7



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Student Loans Held for ResaleThe majority of the student loans originated through the
traditional school preferred lender-list channel are subsequently sold to one of two entities. According to the terms of our agreements with the entities who purchase these loans from us, loans sold to one of the entities are sold immediately upon
initial disbursement. Deferred costs related to the origination of these loans are netted against gain on sale when the loans are sold rather than capitalized and amortized as discussed above. Loans sold to the other entity are sold subsequent to
the final disbursement. Interest on these loans is earned for the period during which they are held on our balance sheet. Once the loan is sold, the gain on the sale is recorded as discussed below. Costs related to the origination of these loans are
capitalized and recognized once the loan is sold. When the loan is sold the costs are written off (netted against gain on sale). Loans held for resale are reflected on our balance sheet at the lower of cost or market.



Student Loan Income and Net Interest IncomeWe recognize student
loan income as earned, including amortization of premiums. We amortize the premiums and deferred origination fees over the estimated life of the student loan. With the guarantee on the student loans applicable to both principal and interest, we
recognize interest on student loans as earned regardless of delinquency status. If a student loan should lose its guaranteed status, interest would be recognized as received. To date, there are no student loans in our portfolio which have lost their
guaranteed status. Net interest income is derived largely from our portfolio of student loans that remain on our balance sheet and is the spread between interest earned on student loans and our cost of generating that interest income. These costs
include interest expense on the warehouse facility and permanent financings, amortization of deferred financing costs, fees paid to third-party servicers to service the loans, mark-to-market adjustments related to interest rate swaps that have not
been designated as cash flow hedges, fees paid to the DOE, and amortization of premiums paid to acquire student loans. All servicing of our student loans is currently outsourced to third-party servicers to whom we pay a fee.



Gain on Sale of Student LoansWe currently sell the majority of
the Stafford and PLUS loans we originate. Additionally, from time to time, we may elect to sell consolidation loans. We book the sale in the period the loan is sold and record the transaction on the income statement as a gain on the sale of student
loans. Sales of student loans are accounted for under Statement of Financial Accounting Standard (SFAS) 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, (SFAS 140). Student loans
are sold with the servicing rights released and without recourse. Gains or losses on sales of student loans are recognized based on the difference between the selling prices and the carrying values of the related student loans sold. Unamortized
deferred origination fees and expenses are netted against gain on sale when the loans are sold. According to the terms of our agreements with the entities who purchase these non-consolidation loans from us, loans sold to one of the entities are sold
immediately upon initial disbursement. Loans sold to the other entity are sold subsequent to the final disbursement.



Allowance for Student Loan LossesWe have established an allowance for potential losses on our existing portfolio of student loans, both
securitized and unsecuritized. These student loan assets are presented net of the respective allowances on our balance sheet. In evaluating the adequacy of the allowance for losses, we consider several factors, including trends in student loan
claims rejected for payments by guarantors, default rates on alternative supplemental student loans and the amount of FFELP loans held subject to two percent risk-sharing. The allowance is based on periodic evaluations of our loan portfolio, changes
to federal student loan programs, current economic conditions and other relevant factors. We utilize these factors to estimate a projected default rate for our student loan portfolio. This estimate, along with the applicable risk-sharing percentage,
is used to calculate the allowance for student loan losses. The allowance is maintained at a level that management believes is adequate to provide for probable credit losses. Currently, approximately 98% of our student loan portfolio is guaranteed.
The allowance for student loan losses is calculated by multiplying the principal balance of the student loans we carry on our balance sheet by 2% (the uninsured portion of the federally sponsored student loans on our balance sheet) and then
multiplying that amount by the projected default rate. This evaluation is inherently subjective as it requires estimates that may be susceptible to significant changes.



Marketing Partner FeesWe have established relationships with various third-party marketing partners to market
student loans on our behalf. These fees represent a significant cost to us. SFAS 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, (SFAS 91)
establishes the accounting for nonrefundable fees and costs associated with lending, committing to lend, or purchasing a loan or group of loans. SFAS 91 specifies that costs incurred to identify and attract potential borrowers should be expensed as
incurred. As such, fees we pay to our marketing partners are expensed during the period incurred. These fees are included in sales and marketing operating expenses in the income statement.



8



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Additionally, some of these marketing partners have been awarded performance-based stock options, which
vest in relation to certain performance criteria being met by the partner. These options are accounted for under SFAS 123, Accounting for Stock-Based Compensation, (SFAS 123), Emerging Issues Task Force (EITF) Issue 96-18,
Accounting for Equity Instruments that Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and FASB Interpretation Number (FIN) 28,Accounting for Stock Appreciation Rights
and Other Variable Stock Options or Award Plans (FIN 28). Under the guidelines established by these pronouncements, in each quarter until performance under the marketing partner agreement is completed, we must record an expense related to
the options that are vested as of the end of the quarter. This expense includes a charge equal to the fair market value of the options which vested during the quarter, and a mark-to-market adjustment for the options which vested in previous
quarters. This non-cash charge is directly related to our stock price and the performance of our marketing partners, and will fluctuate from quarter to quarter based on the performance of our stock and the number of options which vest during the
quarter. This expense is a component of marketing partner fees which are a component of the sales and marketing expense line item on our income statement.



Restricted Cash and InvestmentsWe periodically take draws against our warehouse loan facility to fund student loans and any premiums
associated with them. The restricted cash and investments shown on the balance sheet reflects draws taken against the warehouse line which have not yet been used to fund student loans. These amounts are restricted and may be used only to fund
student loans and any premiums associated with them as outlined in the indentures. Additionally, we are required to maintain certain cash levels in our securitizations. Restricted cash and investments shown on the balance sheet also include these
cash balances and are restricted to use as outlined in the indentures.



Cash, Cash Equivalents and Credit RiskWe consider all unrestricted highly liquid investments purchased with maturities of three months or less to be cash equivalents. We maintain a large balance in an investment fund that is
rated triple A by three rating agencies. These funds are invested in domestic corporate money market securities including commercial paper, repurchase agreements, variable rate instruments and bank instruments. We consider the credit risk associated
with our cash and cash investments to be minimal.



Interest
and Other ReceivablesInterest and other receivables consists of interest receivable on student loans, borrower payments received by third-party servicers not yet sent to us, DOE fees reimbursable on loans sold, and premiums due to us on
loans we have sold.



Software and Web-Site Development
CostsWe capitalize the costs of software developed for internal use in compliance with Statement of Position, (SOP), 98-1 Accounting for the Costs of Computer Software Developed or Obtained for Internal Use and EITF
Issue 00-2 Accounting for Web-Site Development Costs. Capitalization of software developed for internal use and web-site development costs begins at the application development phase of the project. Amortization of software
developed for internal use and web-site development costs begins when the software is placed in productive use, and is computed on a straight-line basis over the estimated useful life of the software, which typically ranges from one to three years.



Property and Equipment, netProperty and equipment
is stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets, which range from three to seven years.



Deferred Financing CostsDirect costs associated with obtaining financing are capitalized and amortized into interest expense over the term
of the respective Education Loan Backed Notes or warehouse loan facility. The majority of the costs are related to our Education Loan Backed Notes, and are amortized, using the effective interest method, over the term of the securitization,
typically 40 years. The costs related to the warehouse loan facility are amortized, using the straight-line method, over three years. The overall effect of this treatment is approximation of the effective interest method.



Derivatives and Hedging ActivitiesSFAS 133, Accounting
for Derivative Instruments and Hedging Activities, (SFAS 133) requires companies to recognize all derivative contracts as either assets or liabilities on the balance sheet and to measure them at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge. SFAS 133, as amended by SFAS 137, Accounting for Derivative Instruments and Hedging Activities, Deferral of the Effective Date of SFAS 133, SFAS 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities and SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, is effective for all fiscal quarters for fiscal years beginning
after June 15, 2000. During the fourth quarter of 2002, we entered into an interest rate swap that was not specifically designated as a hedge. As required by SFAS 133, the fair market value of the interest rate swap contract (mark-to-market) was
recognized during the period as an additional liability and treated as additional expense/(income) on our income statement. During the second and fourth quarters of 2003 we entered into additional interest rate swap agreements, both of which were
designated as and are effective as cash flow hedges. These swaps are also



9



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recorded in the accrued expenses and other liabilities section of our balance sheet. As these agreements qualify as cash
flow hedges and are currently effective as such, changes in the agreements fair values (mark-to-market) are recorded in the other comprehensive loss section of the balance sheet rather than as an expense on the income statement. Accrued
interest receivable or payable related to the interest rate swap agreements is recorded in interest expense.



Employee Stock OptionsEmployee stock options are accounted for under Accounting Principals Board (APB) Opinion 25, Accounting for
Stock Issued to Employees (APB 25), using the intrinsic value method. Generally, as options granted to employees are fixed in nature, and the awards are made at fair market value on the date of grant, no expense is required to be
recognized. However, in January 2003 certain employees were awarded performance-based options, which would vest over three years (with the first tranche vesting December 31, 2003, assuming the performance conditions were met). These criteria were
met on December 31, 2003. Since performance-based options require variable plan accounting under the terms of APB 25, during 2003 these options were marked-to-market quarterly, until the performance criteria had or had not been met. Accordingly, we
recorded this expense as a component of operating expenses on our income statement. As of December 31, 2003, we determined which performance criteria had been met, and correspondingly, which options would remain outstanding and continue vesting. The
final mark-to-market adjustment was made as of December 31, 2003. As required by APB 25, and in accordance with the accelerated vesting schedule described in FIN 28 we will continue to expense these options throughout 2004 and 2005, until they are
fully vested, at which time all related expense will have been recognized.



Education Loan Backed NotesOur Education Loan Backed Notes, consisting of Series 2003 (October) Notes, Series 2003 (April) Notes and Series 2002 Notes, or securitized borrowings, are accounted for under
SFAS 140. Under SFAS 140, securitizations that do not qualify for sales treatment are accounted for as secured borrowings. As we retain a call on redeeming any series of the notes under our securitized borrowings, the requirements of paragraph nine
of SFAS 140 have not been met. Therefore these transactions are accounted for as secured borrowings in accordance with the provisions of paragraph 15 of SFAS 140.



Government PayablesWe are required to pay the DOE a one-time 50 basis point origination fee on consolidation,
Stafford and PLUS loans and an annual 105 basis point consolidation loan rebate fee on all consolidation loans originated and held after October 1, 1993. Each fee is payable to the DOE. Fees due the DOE but not yet paid are shown as government
payables.



Income TaxesWe account for income taxes
in accordance with SFAS 109, Accounting for Income Taxes, using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are determined for temporary differences between the
carrying amounts of assets or liabilities for book purposes versus tax purposes, based on the enacted tax rates which are expected to be in effect when the underlying items of income and expense are expected to be realized. We file a consolidated
U.S. federal income tax return that includes our eligible subsidiaries.



Income/(Loss) Per Common ShareBasic income/(loss) per share is computed by dividing the income/(loss) available to common stockholders by the weighted average number of common shares outstanding for the period. In periods
during which we record a net profit, diluted earnings per share reflect the potential dilutive effect of additional common shares that are issuable on exercise of outstanding stock options and warrants, as determined by application of the treasury
stock method. During the periods we reported a net loss, diluted loss per share in the periods presented is equal to basic loss per share since any potential additional dilutive common shares are considered antidilutive and are therefore not
included in the computation.



The following table shows a
reconciliation of our basic earnings per share to our diluted earnings per share for the quarter ended March 31, 2004. It excludes 6,100 shares that were not included in the calculation as they would have been antidilutive. (There was no difference
between our basic and diluted loss per share in the quarter ended March 31, 2003.)



|                                            |  |                                    |            |                    |   |     
|------------------------------------------- |  | ---------------------------------- | ---------- | ------------------ | - | ----
|                                            |  | For thequarter ended March 31,2004 |            | Earnings per Share
|Net income                                  |  | $                                  | 2,970,463  |                    |   |     
|                                            |  |                                    |            |                    |   |     
|Basic weighted average shares outstanding   |  |                                    | 15,980,461 |                    | $ | 0.19
|Dilutive shares                             |  |                                    | 2,512,954  |                    |   |     
|                                            |  |                                    |            |                    |   |     
|Diluted weighted average shares outstanding |  |                                    | 18,493,415 |                    | $ | 0.16
|                                            |  |                                    |            |                    |   |     



EstimatesThe process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets,
liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.



10



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ReclassificationsCertain accounts in the prior year consolidated financial statements have
been reclassified for comparative purposes to conform to presentation in the current-year consolidated financial statements.



Disclosure of pro forma earnings in accordance with SFAS 148, Accounting for Stock-Based CompensationTransition and Disclosurean
amendment of SFAS 123In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS 148, Accounting for Stock-Based CompensationTransition and Disclosurean amendment of SFAS 123 (SFAS 148). SFAS
148 addresses transition provisions for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123. As we continue to account for our
incentive-based compensation using the intrinsic value method under APB 25, SFAS 148 does not have an impact on our consolidated financial statements. Had compensation costs for our stock options been recognized based upon the estimated fair value
on the grant date under the fair value methodology prescribed by SFAS 123 as amended by SFAS 148, our net earnings and earnings per share for the quarters ended March 31, 2004 and 2003 would have been as follows:



|                                                                                                                |  |                                      |           |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | --------- | - | ---- | - | ---------- | -
|                                                                                                                |  | For the three months ended March 31, |          
|                                                                                                                |  | 2004                                 |           |   | 2003 |  
|Net income/(loss), as reported                                                                                  |  | $                                    | 2,970,463 |   |      | $ | (1,594,844 | )
|Add/deduct, total stock-based compensation expense determined under fair value based method, net of tax effects |  |                                      | (470,980  | ) |      |   | (207,748   | )
|                                                                                                                |  |                                      |           |   |      |   |            |  
|Pro forma net income/(loss)                                                                                     |  | $                                    | 2,499,483 |   |      | $ | (1,802,592 | )
|                                                                                                                |  |                                      |           |   |      |   |            |  
|Income/(loss) per share:                                                                                        |  |                                      |           |   |      |   |            |  
|Basic as reported                                                                                               |  | $                                    | 0.19      |   |      | $ | (0.14      | )
|Basic pro forma                                                                                                 |  | $                                    | 0.16      |   |      | $ | (0.16      | )
|Diluted as reported                                                                                             |  | $                                    | 0.16      |   |      | $ | (0.14      | )
|Diluted pro forma                                                                                               |  | $                                    | 0.14      |   |      | $ | (0.16      | )



Proposed Accounting Pronouncements



SFAS 123, Accounting for Stock-Based Compensation, and APB
Opinion No. 25, Accounting for Stock Issued to Employees



The FASB is currently considering amending SFAS 123 and APB Opinion No. 25. The proposed standard will require us to record compensation expense for all share-based compensation plans. If adopted, this proposed
standard would have a negative impact on our earnings in future periods.



Note 3Student Loans



We originate
student loans on our own behalf and we purchase student loans from originating lenders. Our portfolio consists principally of loans originated under FFELP, a federally sponsored program. We also purchase alternative supplemental education loans.
There are three principal categories of FFELP loans: consolidation loans, Stafford loans and PLUS loans. The nature of the student loans held at March 31, 2004 is as follows:



|                                       |  |                                         |             |   |                           |   |               |       |  |   |               |  
|-------------------------------------- |  | --------------------------------------- | ----------- | - | ------------------------- | - | ------------- | ----- |  | - | ------------- | -
|                                       |  | As of March 31, 2004                    |            
|                                       |  | Student Loans(including heldfor resale) |             |   | Student Loans Securitized |   |               | Total | 
|FFELP Loans:                           |  |                                         |             |   |                           |   |               |       |  |   |               |  
|Consolidation                          |  | $                                       | 807,658,698 |   |                           | $ | 2,678,555,676 |       |  | $ | 3,486,214,374 |  
|Stafford                               |  |                                         | 150,781,830 |   |                           |   |              |       |  |   | 150,781,830   |  
|PLUS                                   |  |                                         | 1,486,627   |   |                           |   |              |       |  |   | 1,486,627     |  
|                                       |  |                                         |             |   |                           |   |               |       |  |   |               |  
|FFELP Subtotal                         |  |                                         | 959,927,155 |   |                           |   | 2,678,555,676 |       |  |   | 3,638,482,831 |  
|Alternative supplemental loans         |  |                                         | 11,658,506  |   |                           |   |              |       |  |   | 11,658,506    |  
|                                       |  |                                         |             |   |                           |   |               |       |  |   |               |  
|Total student loans, gross             |  |                                         | 971,585,661 |   |                           |   | 2,678,555,676 |       |  |   | 3,650,141,337 |  
|Capitalized costs, net of amortization |  |                                         | 6,824,974   |   |                           |   | 21,313,909    |       |  |   | 28,138,883    |  
|Loan loss reserve                      |  |                                         | (1,059,383  | ) |                           |   | (3,214,266    | )     |  |   | (4,273,649    | )
|                                       |  |                                         |             |   |                           |   |               |       |  |   |               |  
|Total student loans, net               |  | $                                       | 977,351,252 |   |                           | $ | 2,696,655,319 |       |  | $ | 3,674,006,571 |  
|                                       |  |                                         |             |   |                           |   |               |       |  |   |               |  



11



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The nature of the student loans held at December 31, 2003 was as follows:



|                                                |  |                                         |             |   |                            |   |               |       |  |   |               |  
|----------------------------------------------- |  | --------------------------------------- | ----------- | - | -------------------------- | - | ------------- | ----- |  | - | ------------- | -
|                                                |  | As of December 31, 2003                 |            
|                                                |  | Student Loans(including heldfor resale) |             |   | Student Loans(securitized) |   |               | Total | 
|FFELP Loans:                                    |  |                                         |             |   |                            |   |               |       |  |   |               |  
|Stafford                                        |  | $                                       | 103,226,517 |   |                            | $ |              |       |  | $ | 103,226,517   |  
|PLUS                                            |  |                                         | 33,466,328  |   |                            |   |              |       |  |   | 33,466,328    |  
|Consolidation                                   |  |                                         | 464,963,561 |   |                            |   | 2,732,653,627 |       |  |   | 3,197,617,188 |  
|                                                |  |                                         |             |   |                            |   |               |       |  |   |               |  
|FFELP sub-total                                 |  |                                         | 601,656,406 |   |                            |   | 2,732,653,627 |       |  |   | 3,334,310,033 |  
|Alternative supplemental loans                  |  |                                         | 10,132,888  |   |                            |   |              |       |  |   | 10,132,888    |  
|                                                |  |                                         |             |   |                            |   |               |       |  |   |               |  
|Total student loans, gross                      |  |                                         | 611,789,294 |   |                            |   | 2,732,653,627 |       |  |   | 3,344,442,921 |  
|Deferred origination costs, net of amortization |  |                                         | 4,845,119   |   |                            |   | 20,864,638    |       |  |   | 25,709,757    |  
|Loan loss reserve                               |  |                                         | (630,921    | ) |                            |   | (3,279,183    | )     |  |   | (3,910,104    | )
|                                                |  |                                         |             |   |                            |   |               |       |  |   |               |  
|Total student loans, net                        |  | $                                       | 616,003,492 |   |                            | $ | 2,750,239,082 |       |  | $ | 3,366,242,574 |  
|                                                |  |                                         |             |   |                            |   |               |       |  |   |               |  



The FFELP is subject
to comprehensive reauthorization every five years and to frequent statutory and regulatory changes. The Higher Education Act is scheduled to expire on September 30, 2004, and reauthorization is currently under consideration by the United States
Congress. Changes in the Higher Education Act made in the two most recent reauthorizations have included reductions in student loan yields paid to lenders, increased fees paid by lenders and a decreased level of guarantee.



Generally, Stafford and PLUS loans have repayment periods of between five and
ten years. Consolidation loans have repayment periods of twelve to thirty years. FFELP loans obligate the borrower to pay interest at a stated fixed rate or an annually reset variable rate that has a cap. The interest rates are either fixed to term
or reset annually on July first of each year depending on when the loan was originated. We earn interest at the greater of the borrowers rate or a floating rate. If the floating rate exceeds the borrower rate, the DOE makes a payment directly
to us based upon the Special Allowance Payment (SAP) formula. SAP is generally paid whenever the average of all of the applicable floating rates (91-day Treasury bill, commercial paper, 52-week Treasury bill, or the constant maturity Treasury rate)
in a calendar quarter, plus a spread of between 1.74 and 3.50 percentage points depending on the loan status and origination date, exceeds the rate of interest which the borrower is obligated to pay. If the floating rate determined by the SAP
formula is less than the rate the borrower is obligated to pay, we simply earn interest at the borrower rate. In all cases, the rate a borrower is obligated to pay sets a minimum rate for determining the yield that we earn on the loan.



We purchase alternative supplemental loans. These loans are made to
students whose loan eligibility under the FFELP program does not meet their total borrowing needs. Unlike FFELP loans, alternative supplemental loans are credit-based. Depending on the loan program, the credit requirements may be met by a
co-borrower. Interest rates are reset quarterly and may be tied to prime or to commercial paper (CP) rates. Alternative supplemental loans may be guaranteed by a third-party guarantor. At March 31, 2004, all our alternative supplemental loans were
100% guaranteed by third-party guarantors.



Our portfolio of
FFELP student loans generally earns interest at the higher of a floating rate based on the SAP formula set by the DOE and the borrower rate, which is fixed over a period of time. We generally finance our student loan portfolio with floating rate
debt over all interest rate levels. In low interest rate environments, when student loans are earning at the fixed borrower rate and the interest on our floating rate debt is continuing to decline, we earn additional spread income and refer to it as
floor income. Depending on the type of student loan and when it is originated, the borrower rate is either fixed to term (as is the case of consolidation loans) or is reset to a market rate each July 1st (as is the case for Stafford and PLUS loans).
As a result, for loans where the borrower rate is fixed to term, we may earn floor income for an extended period of time, and for those loans where the borrower interest rate is reset annually July first, we may earn floor income until the next
reset date.



We are required to pay the DOE a one-time 50 basis
point origination fee on Stafford, PLUS, and consolidation loans and an annual 105 basis point consolidation loan rebate fee on all consolidation loans originated and held after October 1, 1993. Each fee is payable to the DOE. The unamortized
portion of the origination fees are included in our balance sheet in student loans, net of loan loss reserve, student loans, net of loan loss reserve (securitized) and student loans held for resale at the lower of cost or market. Also, all loans
acquired after October 1, 1993 are subject to risk-sharing on claim payments under which the loan is guaranteed for 98% of the outstanding balance plus accrued interest.



The activity relating to the student loan balances held during the period from December 31, 2003 through March 31, 2004 is
as follows:



|                                         |  |                                         |             |   |                           |   |               |       |  |   |               |  
|---------------------------------------- |  | --------------------------------------- | ----------- | - | ------------------------- | - | ------------- | ----- |  | - | ------------- | -
|                                         |  | Student Loans(including heldfor resale) |             |   | Student Loans Securitized |   |               | Total | 
|Balance at December 31, 2003             |  | $                                       | 616,003,492 |   |                           | $ | 2,750,239,082 |       |  | $ | 3,366,242,574 |  
|Additions                                |  |                                         |             |   |                           |   |               |       |  |   |               |  
|Originations and purchases               |  |                                         | 484,494,858 |   |                           |   |              |       |  |   | 484,494,858   |  
|Capitalized interest                     |  |                                         | 395,283     |   |                           |   | 5,184,313     |       |  |   | 5,579,596     |  
|Additions to deferred origination costs  |  |                                         | 2,379,668   |   |                           |   | 1,001,892     |       |  |   | 3,381,560     |  
|Reductions in loan loss reserve          |  |                                         | 18,711      |   |                           |   | 69,214        |       |  |   | 87,925        |  
|Deductions                               |  |                                         |             |   |                           |   |               |       |  |   |               |  
|Borrower payments                        |  |                                         | (17,196,026 | ) |                           |   | (31,536,690   | )     |  |   | (48,732,716   | )
|Sales to third parties                   |  |                                         | (98,785,491 | ) |                           |   |              |       |  |   | (98,785,491   | )
|Refunds, cancellations and adjustments   |  |                                         | (10,694,942 | ) |                           |   | (26,092,914   | )     |  |   | (36,787,856   | )
|Net additions to loan loss reserve       |  |                                         | (469,034    | ) |                           |   | (56,414       | )     |  |   | (525,448      | )
|Reductions in deferred origination costs |  |                                         | (399,581    | ) |                           |   | (552,853      | )     |  |   | (952,434      | )
|Other                                    |  |                                         |             |   |                           |   |               |       |  |   |               |  
|Transfer to securitizations              |  |                                         | 1,603,788   |   |                           |   | (1,603,788    | )     |  |   |              |  
|Other                                    |  |                                         | 526         |   |                           |   | 3,477         |       |  |   | 4,003         |  
|                                         |  |                                         |             |   |                           |   |               |       |  |   |               |  
|Balance at March 31, 2004                |  | $                                       | 977,351,252 |   |                           | $ | 2,696,655,319 |       |  | $ | 3,674,006,571 |  
|                                         |  |                                         |             |   |                           |   |               |       |  |   |               |  



12



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Included in the above table is a line labeled Refunds, cancellations and adjustments. This
line item relates to adjustments and receipts on student loans that are not part of payments directly from borrowers or claim payments from guarantee agencies. The primary components of this line item are cash refunds from schools and lenders
related to disbursements on loan originations we have previously made, plus payments related to cancellations of existing loans as consolidation loans are processed on behalf of borrowers. (For example, a borrower has an existing consolidation loan
and adds another loan to it. The existing loan is included above as a cancellation.)



Note 4Student LoansLoan Loss Reserve



The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses, net of recoveries, inherent in our portfolio of student loans. We evaluate the adequacy of the provision for losses on
our guaranteed student loan portfolio separately from our alternative supplemental loan portfolio. For our guaranteed student loan portfolio, we primarily consider trends in student loan claims rejected for payment by guarantors due to servicing
defects as well as overall default rates on those FFELP student loans subject to the two percent risk-sharing, i.e., those loans that are insured as to 98% of principal and accrued interest. Loans are placed on non-accrual status and charged off at
the point that a loan claim is rejected for payment by guarantors.



At March 31, 2004 all alternative supplemental loans were 100% guaranteed by third-party guarantors.



The following table summarizes changes in the loan loss reserve for the quarters ended March 31, 2004 and March 31, 2003:



|                               |  |                                  |           |   |      |   |           |  
|------------------------------ |  | -------------------------------- | --------- | - | ---- | - | --------- | -
|                               |  | For the quarters ended March 31, |          
|                               |  | 2004                             |           |   | 2003 |  
|Balance at beginning of period |  | $                                | 3,910,104 |   |      | $ | 1,592,669 |  
|Provision                      |  |                                  | 437,523   |   |      |   | 554,630   |  
|Charge-offs                    |  |                                  | (73,978   | ) |      |   | (6,368    | )
|Recoveries                     |  |                                  |          |   |      |   |          |  
|                               |  |                                  |           |   |      |   |           |  
|Balance at end of period       |  | $                                | 4,273,649 |   |      | $ | 2,140,931 |  
|                               |  |                                  |           |   |      |   |           |  



The additions to the
loan loss reserve are expensed on the income statement during the period incurred. The balance at the end of the period is netted against student loans outstanding and included in Student Loans, net of loan loss reserve and Student
Loans, net of loan loss reserve (securitized) on the balance sheet.



Note 5Investments



We are required to
maintain certain cash levels in our securitizations. Restricted cash and investments shown on the balance sheet reflect these cash balances and are restricted to use as outlined in the indentures. Substantially all these funds are invested in
guaranteed investment contracts, which are all AAA-rated.



Note
6Warehouse Loan Facilities and Securitizations



We
have a $500 million warehouse loan facility (our Conduit Facility) and a $19 million warehouse loan facility that we use to fund the origination and purchase of student loans. Our $500 million loan facility was established in the fourth quarter of
2002. From time to time the lender has approved temporary increases in the Conduit Facility. As of March 31, 2004, the Conduit Facility had been approved for advances of up to $1.25 billion. We use this facility to fund the origination and purchase
of student loans. Our Conduit Facility capacity allows us to fund and pool student loans until we aggregate sufficient volume to access the securitization markets for more cost-efficient financing. At March 31, 2004, the balance outstanding on the
Conduit Facility was approximately $1.0 billion.



13



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This Conduit Facility is governed by an indenture and other program documents which were entered into as
of October 18, 2002, with a financial institution. The term of the financing is three years. However, the financing is backed by a 364-day liquidity facility which must be renewed on an annual basis. Failure to renew the liquidity facility will
result in early termination of the financing. The financing is secured by the assets of the indenture which primarily consist of cash, student loans, and their applicable accrued interest. Interest is calculated and paid on a monthly basis. The
interest rate is based upon the CP rate (1.07% at March 31, 2004) of the financial institution providing the liquidity facility. In addition to interest charges, we also pay trustee fees as well as a commitment fee on the unused portion of the
facility. The Conduit Facility includes a number of covenants and compliance features that we must meet to continue to make additional draws on the facility as well as to maintain the existing loan balances.



In October of 2003, we completed a $1 billion LIBOR/auction rate student loan
securitization. As the assets are merely a pledge of collateral, the secured party does not have the right to sell or repledge the collateral and we have not defaulted under the terms of the securitization, this securitization has been accounted for
as a securitized borrowing. Therefore, the securitization is included as student loans (securitized) and Education Loan Backed Notes related to securitized student loans structured as collateralized borrowings on the balance sheet. The notes were
issued pursuant to an indenture of trust and consist of senior (Class A) and subordinate (Class B) notes, the proceeds of which were used to pay down the warehouse loan and pre-fund a portfolio of student loans. The student loans are serviced by
third-party servicers. Interest rates for certain notes are tied to three-month LIBOR plus an incremental amount ranging from 0.04% to 0.27%. Other notes bear interest at a rate determined by Dutch Auction. All notes mature no later than December
15, 2042. The notes are subject to mandatory redemption, in whole or in part, on any interest payment date with monies on deposit in the principal fund. Additionally, the notes are subject to optional redemption by us on any regularly scheduled
interest payment date. At March 31, 2004 the notes principal amounts and interest rates were as follows:



$1,000,000,000 Education Loan Backed Notes Issued in October, 2003



|                         |  |                      |             |               |      |   |                      |            |               |           
|------------------------ |  | -------------------- | ----------- | ------------- | ---- | - | -------------------- | ---------- | ------------- | ----------
|                         |  | As of March 31, 2004 |             |               |      |   |                     
|                         |  | Principal Amount     |             | Interest Rate |      |   | Initial Auction Date |            | Maturity Date
|Series 2003A-1 (October) |  | $                    | 63,236,954  |               | 1.15 | % |                      | n/a        |               | 9/15/2008 
|Series 2003A-2 (October) |  |                      | 118,500,000 |               | 1.21 |   |                      | n/a        |               | 12/17/2012
|Series 2003A-3 (October) |  |                      | 319,000,000 |               | 1.38 |   |                      | n/a        |               | 3/16/2020 
|Series 2003A-4 (October) |  |                      | 100,000,000 |               | 1.10 |   |                      | 12/8/2003  |               | 12/15/2032
|Series 2003A-5 (October) |  |                      | 83,750,000  |               | 1.10 |   |                      | 11/24/2003 |               | 12/15/2042
|Series 2003A-6 (October) |  |                      | 83,750,000  |               | 1.09 |   |                      | 12/1/2003  |               | 12/15/2042
|Series 2003A-7 (October) |  |                      | 83,750,000  |               | 1.12 |   |                      | 12/8/2003  |               | 12/15/2042
|Series 2003A-8 (October) |  |                      | 83,750,000  |               | 1.09 |   |                      | 12/15/2003 |               | 12/15/2042
|Series 2003B-1 (October) |  |                      | 50,000,000  |               | 1.25 |   |                      | 12/8/2003  |               | 12/15/2042
|                         |  |                      |             |               |      |   |                      |            |               |           
|Total                    |  | $                    | 985,736,954 |               |      |   |                      |            |               |           
|                         |  |                      |             |               |      |   |                      |            |               |           



We also completed a $1
billion, LIBOR/auction rate student loan securitization in April 2003. This securitization has also been accounted for as a securitized borrowing as the assets are merely a pledge of collateral, the secured party does not have the right to sell or
repledge the collateral and we have not defaulted under the terms of the securitization. Therefore, the securitization is included as student loans (securitized) and Education Loan Backed Notes related to securitized student loans structured as
collateralized borrowings on the balance sheet. The notes were issued pursuant to an indenture of trust and consist of senior (Class A) and subordinate (Class B) notes, the proceeds of which were used to pay down the warehouse loan and pre-fund a
portfolio of student loans. The student loans are serviced by third-party servicers. Interest rates for certain notes are tied to three-month LIBOR plus an incremental amount ranging from 0.05% to 0.30%. Other notes bear interest at a rate
determined by Dutch Auction. All notes mature no later than March 17, 2042. The notes are subject to mandatory redemption, in whole or in part, on any interest payment date with monies on deposit in the principal fund. Additionally, the notes are
subject to optional redemption by us on any regularly scheduled interest payment date. At March 31, 2004 the notes principal amounts and interest rates were as follows:



$1,000,000,000 Education Loan Backed Notes Issued in April, 2003



|                       |  |                      |             |              |      |   |                      |           |               |           
|---------------------- |  | -------------------- | ----------- | ------------ | ---- | - | -------------------- | --------- | ------------- | ----------
|                       |  | As of March 31, 2004 |             |              |      |   |                     
|                       |  | Principal Amount     |             | InterestRate |      |   | Initial Auction Date |           | Maturity Date
|Series 2003A-1 (April) |  | $                    | 37,298,659  |              | 1.16 | % |                      | n/a       |               | 3/15/2007 
|Series 2003A-2 (April) |  |                      | 144,000,000 |              | 1.21 |   |                      | n/a       |               | 12/15/2011
|Series 2003A-3 (April) |  |                      | 276,000,000 |              | 1.41 |   |                      | n/a       |               | 12/15/2017
|Series 2003A-4 (April) |  |                      | 75,000,000  |              | 1.10 |   |                      | 5/9/2003  |               | 3/15/2032 
|Series 2003A-5 (April) |  |                      | 75,000,000  |              | 1.10 |   |                      | 5/23/2003 |               | 3/15/2032 
|Series 2003A-6 (April) |  |                      | 100,000,000 |              | 1.10 |   |                      | 5/7/2003  |               | 3/17/2042 
|Series 2003A-7 (April) |  |                      | 100,000,000 |              | 1.10 |   |                      | 5/14/2003 |               | 3/17/2042 
|Series 2003A-8 (April) |  |                      | 100,000,000 |              | 1.12 |   |                      | 5/21/2003 |               | 3/17/2042 
|Series 2003B-1 (April) |  |                      | 50,000,000  |              | 1.25 |   |                      | 5/21/2003 |               | 3/17/2042 
|                       |  |                      |             |              |      |   |                      |           |               |           
|Total                  |  | $                    | 957,298,659 |              |      |   |                      |           |               |           
|                       |  |                      |             |              |      |   |                      |           |               |           



14



---

In May and August of 2002, we completed $525 million and $500 million, respectively, auction rate student
loan securitizations that have been accounted for as collateralized borrowings as the assets are merely a pledge of collateral and the secured party does not have the right to sell or repledge the collateral and we have not defaulted under the terms
of the securitization. Therefore, the securitization is included as student loans (securitized) and Education Loan Backed Notes related to securitized student loans structured as collateralized borrowings on the balance sheet. The notes were issued
pursuant to an indenture of trust and consist of senior (Class A) and subordinate (Class B) notes, the proceeds of which were used to pay down the warehouse loan and pre-fund a portfolio of student loans. The student loans are sub-serviced by a
third-party servicer. The notes bear interest at a rate determined by a Dutch Auction and mature no later than June 1, 2042. At March 31, 2004, the notes bore interest as follows:



$525,000,000 Auction Rate Education Loan Backed Notes Issued in May, 2002



|               |  |                      |             |               |      |   |                      |           |               |         
|-------------- |  | -------------------- | ----------- | ------------- | ---- | - | -------------------- | --------- | ------------- | --------
|               |  | As of March 31, 2004 |             |               |      |   |                     
|               |  | Principal Amount     |             | Interest Rate |      |   | Initial Auction Date |           | Maturity Date
|Series 2002A-1 |  | $                    | 75,000,000  |               | 1.08 | % |                      | 2/11/2003 |               | 6/1/2042
|Series 2002A-2 |  |                      | 68,650,000  |               | 1.08 |   |                      | 5/13/2003 |               | 6/1/2042
|Series 2002A-3 |  |                      | 75,000,000  |               | 1.10 |   |                      | 5/20/2003 |               | 6/1/2042
|Series 2002A-4 |  |                      | 67,800,000  |               | 1.08 |   |                      | 8/19/2003 |               | 6/1/2042
|Series 2002A-5 |  |                      | 64,500,000  |               | 1.09 |   |                      | 6/13/2002 |               | 6/1/2042
|Series 2002A-6 |  |                      | 66,000,000  |               | 1.11 |   |                      | 6/20/2002 |               | 6/1/2042
|Series 2002A-7 |  |                      | 66,000,000  |               | 1.09 |   |                      | 6/27/2002 |               | 6/1/2042
|Series 2002B-1 |  |                      | 33,700,000  |               | 1.25 |   |                      | 6/20/2002 |               | 6/1/2042
|               |  |                      |             |               |      |   |                      |           |               |         
|Total          |  | $                    | 516,650,000 |               |      |   |                      |           |               |         
|               |  |                      |             |               |      |   |                      |           |               |         



$500,000,000 Auction Rate Education
Loan Backed Notes Issued in August, 2002



|                |  |                      |             |              |      |   |                     |            |              |         
|--------------- |  | -------------------- | ----------- | ------------ | ---- | - | ------------------- | ---------- | ------------ | --------
|                |  | As of March 31, 2004 |             |              |      |   |                    
|                |  | PrincipalAmount      |             | InterestRate |      |   | InitialAuction Date |            | MaturityDate
|Series 2002A-8  |  | $                    | 50,000,000  |              | 1.09 | % |                     | 9/23/2002  |              | 6/1/2042
|Series 2002A-9  |  |                      | 65,000,000  |              | 1.09 |   |                     | 10/24/2002 |              | 6/1/2042
|Series 2002A-10 |  |                      | 49,850,000  |              | 1.08 |   |                     | 9/3/2002   |              | 6/1/2042
|Series 2002A-11 |  |                      | 59,000,000  |              | 1.10 |   |                     | 9/9/2002   |              | 6/1/2042
|Series 2002A-12 |  |                      | 62,000,000  |              | 1.09 |   |                     | 9/12/2002  |              | 6/1/2042
|Series 2002A-13 |  |                      | 78,000,000  |              | 1.09 |   |                     | 9/16/2002  |              | 6/1/2042
|Series 2002B-2  |  |                      | 32,000,000  |              | 1.20 |   |                     | 9/18/2002  |              | 6/1/2042
|                |  |                      |             |              |      |   |                     |            |              |         
|Total           |  | $                    | 395,850,000 |              |      |   |                     |            |              |         
|                |  |                      |             |              |      |   |                     |            |              |         



If certain parity
percentages are not met, the notes are subject to mandatory redemption. As long as the parity percentage is less than 100.5%, the notes are subject to mandatory redemption, in whole or in part, on any interest payment date with monies on deposit in
the principal fund. Additionally, the notes are subject to optional redemption by us on any regularly scheduled interest payment date.



On January 16, 2004 we filed a shelf registration statement with the SEC. This registration statement will allow us to issue additional Education Loan
Backed Notes in the amount of $2 billion over the next two years.



We are in compliance with the debt covenants on both the warehouse loan facilities and the securitizations.



Note 7Interest-Rate Swaps



To lock in portions of floor income associated with some of our loan assets, from time to time we enter into interest-rate swap agreements on portions of
our portfolio. Management expects our hedge program to be effective in offsetting changes in cash flows for the risk being hedged.



We use interest-rate swaps to convert floating-rate debt to fixed rates in order to lock-in a desired spread between our interest-earning assets and
interest-bearing liabilities. These swaps usually possess a term between one and one and one-half years, with a



15



---

fixed pay rate and a receive rate indexed to the rates paid on our borrowings. The specific terms and notional amounts of
the swaps are determined based on costs to initiate swaps and the length of the agreements which may be entered into.



In order to take advantage of the low interest rate environment, since December of 2002, we have entered into three interest-rate swaps which are
described below. Additionally, the swaps entered into in April of 2003 and in October of 2003 were completed as requirements of the corresponding securitizations which are discussed in Note 6.



In October of 2003 we entered into an interest-rate swap related to $485
million of our Education Loan Backed Notes (the notional amount). Under the terms of the agreement, on each quarterly distribution date, commencing December 15, 2003 through the termination date of the agreement, the Counterparty must pay us an
amount equal to the product of:



| |  | three-month LIBOR for the relevant period
| | - | -----------------------------------------



| |  | the $485 million notional amount of the swap and
| | - | ------------------------------------------------



| |  | the quotient of the actual number of days in that period divided by 360
| | - | -----------------------------------------------------------------------



In exchange for the above payments, on each quarterly distribution date, we must pay the Counterparty an amount equal to the product of:



| |  | 1.53% per annum (computed on the basis of a 360-day year consisting of twelve 30-day months) and
| | - | ------------------------------------------------------------------------------------------------



| |  | the $485 million notional amount of the swap for that period
| | - | ------------------------------------------------------------



In accordance with the terms of the agreement, any payment amounts will be netted, so that only the net difference in the above amounts will actually be
paid quarterly. The agreement is in effect until November 2, 2004. Since the underlying debt is tied to LIBOR, we are effectively fixing the variable component of the cost related to the $485 million notional amount at 1.53% for the period.



This swap was designated as a cash flow hedge under SFAS 133
and as such under the requirements outlined in SFAS 133, we are required to mark-to-market the value of the swap at the end of the quarter. During the quarter ended March 31, 2004 we recorded a charge of $0.3 million to accumulated other
comprehensive loss on the balance sheet, representing the effective portion of the hedge. There is no net tax impact related to this charge, as we have established a valuation allowance that fully offsets any deferred tax assets we have recorded.
The hedge will expire during 2004. Correspondingly, this amount will reverse out of other comprehensive loss and flow through the interest expense section of the income statement during the year. The fair market value of the interest-rate swap at
March 31, 2004 was a liability of $1.0 million. Further, during the quarter ended March 31, 2004, we recorded additional interest expense of $0.4 million related to the interest-rate swap, but not related to the mark-to-market adjustment, on our
income statement.



In April of 2003 we entered into an
interest-rate swap related to $350 million of our Education Loan Backed Notes (the notional amount). Under the terms of the agreement, on each quarterly distribution date, commencing June 16, 2003 through the termination date of the agreement, the
Counterparty must pay us an amount equal to the product of:



| |  | three-month LIBOR for the relevant period
| | - | -----------------------------------------



| |  | the $350 million notional amount of the swap and
| | - | ------------------------------------------------



| |  | the quotient of the actual number of days in that period divided by 360
| | - | -----------------------------------------------------------------------



In exchange for the above payments, on each quarterly distribution date, we must pay the Counterparty an amount equal to the product of:



| |  | 1.56% per annum (computed on the basis of a 360-day year consisting of twelve 30-day months) and
| | - | ------------------------------------------------------------------------------------------------



| |  | the $350 million notional amount of the swap for that period
| | - | ------------------------------------------------------------



In accordance with the terms of the agreement, any payment amounts will be netted, so that only the net difference in the above amounts will actually be
paid quarterly. The agreement is in effect until September 15, 2004. Since the underlying debt is tied to LIBOR, we are effectively paying 1.56% over LIBOR for the debt related to the $350 million of the portfolio, for the effective period of the
swap.



This swap was designated as a cash flow hedge under SFAS
133 and as such under the requirements outlined in SFAS 133, we are required to mark-to-market the value of the swap at the end of the period. During the quarter ended March 31, 2004, there was no charge to accumulated other comprehensive loss on
the balance sheet related to this swap. The hedge will expire during 2004. The fair market value of the interest-rate swap at March 31, 2004 was a liability of $0.7 million. Further, during the quarter ended March 31, 2004, we recorded additional
interest expense of $0.3 million, related to the interest-rate swap, but not related to the mark-to-market adjustment, on our income statement.



16



---

In December of 2002 we entered into an interest-rate swap related to $700 million of our Education Loan
Backed Notes. This swap was not designated as a hedge under SFAS 133. Under the requirements outlined in SFAS 133, we are required to mark-to-market the value of the swap at the end of the quarter. However, since this swap was not designated as a
cash flow hedge, the mark-to-market adjustments were recorded to expense/(income) on the income statement. This swap expired December 31, 2003. Correspondingly, the fair market value of this interest-rate swap at December 31, 2003 was zero. We
recorded a charge of $0.9 million during the quarter ended March 31, 2003 (the difference between the fair market value of the swap at December 31, 2002 and at March 31, 2003) as a mark-to-market adjustment. As the hedge expired in 2003, there was
no corresponding charge during the quarter ended March 31, 2004. We also recorded additional interest expense related to this interest-rate swap (but not related to the mark-to-market adjustment) of $0 and $0.4 million during the quarters ended
March 31, 2004 and 2003, respectively.



Note 8Sale of Common Stock



During the three months ended March 31, 2004 we received
proceeds of $0.8 million for the issuance of 378,632 shares of common stock from the exercise of warrants and employee stock options.



Note 9Commitments and Contingencies



In March 2004, we signed an operating lease for approximately 23,985 rentable square feet of office space in Cleveland, Ohio, to be used as the central
location for our new loan servicing company, Education Loan Servicing Corporation. The lease term is for a period of ten years and is renewable for two five-year periods subsequent to the expiration of the initial lease term. At the commencement of
the lease, the premises will be approximately 16,192 rentable square feet. Within the first 16 months of the commencement, the premises will increase in size to be approximately 20,102 rentable square feet. Within 25 months of the commencement, the
premises will increase in size to be approximately 23,985 rentable square feet. Expected lease payments under this lease are as follows:



|           |  |        |          
|---------- |  | ------ | ---------
|Year       |  | Amount
|2004       |  | $      | 125,490  
|2005       |  |        | 261,080  
|2006       |  |        | 341,676  
|2007       |  |        | 371,772  
|2008       |  |        | 371,772  
|thereafter |  |        | 2,164,626
|           |  |        |          
|Total      |  | $      | 3,636,416
|           |  |        |          



The FFELP is subject
to comprehensive reauthorization every five years and to frequent statutory and regulatory changes. The Higher Education Act is scheduled to expire on September 30, 2004, and reauthorization is currently under consideration by the United States
Congress. Should Congress fail to reauthorize the Higher Education Act, our business would be significantly adversely impacted. Our business could also be significantly adversely impacted by a range of other changes in the Higher Education Act, or
by other legislation that might be enacted.



Note 10Fair Value of
Financial Instruments



The following table summarizes the
fair value of our financial assets and liabilities, including our derivative instruments, as of March 31, 2004 and December 31, 2003.



|                                         |  |                      |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|---------------------------------------- |  | -------------------- | ------------- | ----------------------- | -------------- | - | ------------- | ---------- |  | ---------- | ----------- |  | -------------- | ------------- | - | ---------- | - | ------------- | - |  | - | -----------
|                                         |  | As of March 31, 2004 |               | As of December 31, 2003
|                                         |  | Fair Value           |               |                         | Carrying Value |   |               | Difference |  | Fair Value |             |  | Carrying Value |               |   | Difference
|Earning assets                           |  |                      |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Student loans                            |  | $                    | 3,820,075,688 |                         |                | $ | 3,674,006,571 |            |  | $          | 146,069,117 |  | $              | 3,486,727,830 |   |            | $ | 3,366,242,574 |   |  | $ | 120,485,256
|Cash and investments                     |  |                      | 27,426,833    |                         |                |   | 27,426,833    |            |  |            |            |  |                | 33,557,879    |   |            |   | 33,557,879    |   |  |   |           
|                                         |  |                      |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Total earning assets                     |  | $                    | 3,847,502,521 |                         |                | $ | 3,701,433,404 |            |  | $          | 146,069,117 |  | $              | 3,520,285,709 |   |            | $ | 3,399,800,453 |   |  | $ | 120,485,256
|                                         |  |                      |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Interest-bearing liabilities             |  |                      |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Accounts payable                         |  | $                    | 2,880,489     |                         |                | $ | 2,880,489     |            |  | $          |            |  | $              | 4,470,680     |   |            | $ | 4,470,680     |   |  | $ |           
|Government payable                       |  |                      | 7,777,357     |                         |                |   | 7,777,357     |            |  |            |            |  |                | 7,917,689     |   |            |   | 7,917,689     |   |  |   |           
|Short-term borrowings                    |  |                      | 1,025,333,858 |                         |                |   | 1,025,333,858 |            |  |            |            |  |                | 660,353,242   |   |            |   | 660,353,242   |   |  |   |           
|Long-term notes                          |  |                      | 2,855,535,613 |                         |                |   | 2,855,535,613 |            |  |            |            |  |                | 2,905,121,845 |   |            |   | 2,905,121,845 |   |  |   |           
|                                         |  |                      |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Total interest-bearing liabilities       |  | $                    | 3,891,527,317 |                         |                | $ | 3,891,527,317 |            |  | $          |            |  | $              | 3,577,863,456 |   |            | $ | 3,577,863,456 |   |  | $ |           
|                                         |  |                      |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Derivative financial instruments         |  |                      |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Interest rate swaps                      |  | $                    | (1,687,384    | )                       |                | $ | (1,687,384    | )          |  | $          |            |  | $              | (1,381,057    | ) |            | $ | (1,381,057    | ) |  | $ |           
|Excess of fair value over carrying value |  |                      |               |                         |                |   |               |            |  | $          | 146,069,117 |  |                |               |   |            |   |               |   |  | $ | 120,485,256
|                                         |  |                      |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            



17



---

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



The discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted (GAAP) in the United States of America. Preparation of the financial statements in accordance with GAAP requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related notes. Actual results may differ from these estimates. Refer to the 10-K we filed March 12, 2004 and to Note 2 to the Consolidated Financial
Statements of this Form 10-Q for our critical accounting policies. There have been no accounting changes during 2004.



Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with, and is qualified in its
entirety by, our Consolidated Financial Statements and the Notes thereto included in this report. Historical operating results are not necessarily indicative of the trends in operating results for any future period. Please refer to our discussion of
Forward-Looking Statements and Other Risk Factors below.



BUSINESS OVERVIEW



We are a specialty finance
company principally engaged in providing student loan products, services and solutions to students, parents, schools and alumni associations. Our business is focused on originating and purchasing guaranteed student loans made under the Federal
Family Education Loan Program, known as FFELP, which includes consolidation loans, Stafford loans and Parent Loans for Undergraduate Students (PLUS). We also offer and purchase alternative supplemental loans that may be guaranteed by a third-party
guarantor. As of March 31, 2004, all of our alternative supplemental loans were guaranteed by a third-party guarantor. Currently, we sell the majority of Stafford and PLUS loans we originate in the secondary market. All of our student loans are
currently serviced by third-party servicers.



With this quarter
we reached a significant milestone in our history by entering profitability. We recorded net income of $3.0 million, or $0.19 per share (basic). As we expected, during the quarter we began to see decreased originations in consolidation loans, while
we experienced aggressive growth (a 113% increase) in our Stafford and PLUS business. We originated over $484 million in loans during the quarter of which $126.9 million or 26% were Stafford and PLUS loans.



During the quarter we grew our student loan portfolio by over $300 million,
bringing our total loan portfolio to approximately $3.7 billion, which is more than double its size a year ago. Our student loan portfolio has reached a level sufficient to produce income in excess of our expenses, resulting in our first quarter of
profitability. Additionally, we have been added to the preferred lender-list at over 100 schools during the quarter, putting us on a total of over 500 lender-lists.



As illustrated below, from the quarter ended March 31, 2003 to the quarter ended March 31, 2004, Stafford and PLUS loans
have increased significantly as a percentage of the total originations for our portfolio, partially offsetting the decline in overall volume of consolidation loans generated during those same periods. We had anticipated this decline in consolidation
loan volume. Over the past two years we have benefited from our ability to meet what we believe was a pent-up demand for consolidation loans. We believe that this demand has largely been met and that the number of loans eligible for consolidation
has significantly diminished. We expect this trend will continue. The following table presents loan originations by type for the quarters ended March 31, 2004 and 2003.



|                         |  |                                 |             |        |   |             |        |   |              |   |  |     |   
|------------------------ |  | ------------------------------- | ----------- | ------ | - | ----------- | ------ | - | ------------ | - |  | --- | --
|                         |  | For the quarter ended March 31, |             | Change |   |             | Change |  
|Loan Type                |  | 2004                            |             | 2003   |   | ($)         |        |   | (%)          |  
|Consolidation            |  | $                               | 356,108,450 |        | $ | 664,902,454 |        | $ | (308,794,004 | ) |  | (46 | )%
|Stafford                 |  |                                 | 85,689,370  |        |   | 49,900,804  |        |   | 35,788,566   |   |  | 72  |   
|PLUS                     |  |                                 | 41,213,092  |        |   | 9,508,148   |        |   | 31,704,944   |   |  | 333 |   
|Alternative Supplemental |  |                                 | 1,483,946   |        |   | 2,829,665   |        |   | (1,345,719   | ) |  | (48 | ) 
|                         |  |                                 |             |        |   |             |        |   |              |   |  |     |   
|Total                    |  | $                               | 484,494,858 |        | $ | 727,141,071 |        | $ | (242,646,213 | ) |  | (33 | )%
|                         |  |                                 |             |        |   |             |        |   |              |   |  |     |   



We have recently
created a wholly-owned subsidiary which we intend to use to service some of our loans.



We generate revenue primarily by earning interest income on our student loan portfolio. This financial model allows us to benefit from the predictable revenue stream of our portfolio, unlike specialty finance
companies whose revenues are primarily derived from one-time gains upon the sale of their assets. When we do sell loans, we record a gain on the sale of the loans on our income statement. We have agreements with a number of third-party marketing
partners who we engage to provide us with completed loan applications. In accordance with GAAP, we expense these marketing partner fees as they are incurred. These fees have historically represented more than 50% of our operating expenses.
Accordingly, as a make-and-hold lender, we have historically recorded net losses. During the first quarter of 2004, our portfolio attained scale to generate net interest



18



---

income sufficient to absorb our expenses, including these marketing partner fees, resulting in net income for the
quarter. This was partially due to marketing partner fees for the quarter being lower than those in previous quarters, reflecting a slowing in the generation of consolidation loans. Should the volume of loans generated by (and corresponding fees
paid to) our marketing partners increase dramatically in a future period, we may record additional operating losses.



The low interest rate environment in the last two years has encouraged many borrowers to consolidate their variable rate student loans into one loan with
a low, fixed interest rate. Since we began our student loan operations in September 2001, we have addressed this demand by offering a consolidation loan product through our multiple marketing channels. Our success in originating consolidation loans
has allowed us to fund the further development of these channels for offering other student loan products, such as Stafford and PLUS loans. Our management team has developed important relationships in the student loan industry, and has extensive
experience marketing loans directly to potential borrowers and in marketing and financing all types of student loans.



Company History and Structure



We were incorporated in Delaware on March 26, 1999. All of the outstanding shares of capital stock of the corporation were initially owned by Whirlwind
Ventures, Inc., a public company incorporated in Florida. Whirlwind Ventures never had any business operations. On May 24, 1999, Whirlwind Ventures was merged into us. We were the surviving corporation and assumed all obligations and obtained all
rights of Whirlwind Ventures.



We have incorporated Education
Lending Services, Inc. (ELS) and Student Loan Xpress, Inc. (SLX) as wholly-owned subsidiaries. In addition, a special purpose bankruptcy remote entity, Education Funding Resources, LLC (EFR), was formed by ELS, with ELS as its sole member, in order
to facilitate the loan origination and funding process and secondary market acquisitions. We have also formed Education Funding Capital I, LLC (EFC I) to participate in the permanent financing securitization of our student loans assets. ELS is the
sole member of EFC I. Additionally, we have formed Education Funding Capital Trust I, Education Funding Capital Trust II, Education Funding Capital Trust III and Education Funding Capital Trust IV, all of which are Delaware statutory trusts and
wholly-owned subsidiaries of EFC I.



RESULTS OF OPERATIONS



Three Months Ended March 31, 2004 Compared to March 31, 2003



Earnings Summary.



|                                    |  |                                 |               |      |   |               |  
|----------------------------------- |  | ------------------------------- | ------------- | ---- | - | ------------- | -
|                                    |  | For the quarter ended March 31, |              
|                                    |  | 2004                            |               | 2003 |  
|Student loan income                 |  | $                               | 30,135,859    |      | $ | 14,712,652    |  
|Gain on sale of loans               |  |                                 | 2,426,546     |      |   | 7,741,418     |  
|Marketing partner fees and expenses |  |                                 | 6,184,792     |      |   | 7,750,316     |  
|Employee compensation and benefits  |  |                                 | 2,871,024     |      |   | 2,585,627     |  
|Net income/(loss)                   |  |                                 | 2,970,463     |      |   | (1,594,844    | )
|Income/(loss) per share, diluted    |  |                                 | 0.16          |      |   | (0.14         | )
|                                    | 
|                                    |  | As of March 31,                 |              
|                                    |  | 2004                            |               | 2003 |  
|Net student loans outstanding       |  | $                               | 3,674,006,571 |      | $ | 1,793,565,133 |  



For the quarter ended
March 31, 2004, our net income calculated in accordance with GAAP was $3.0 million, or $0.19 per share (basic) and $0.16 per share (diluted), compared to a loss of $1.6 million, or $0.14 per share (basic and diluted) in the quarter ended March 31,
2003.



Our net earnings are driven by several key components,
the most significant of which is loan volume. As our loan volume increases (measured by the amount of loans held on our balance sheet), our student loan income and corresponding expenses increase accordingly. We have several marketing partners who
advertise, identify and attract potential borrowers. We pay these marketing partners for each completed student loan application they provide to us. These fees are expensed during the period incurred. Therefore, as our loan origination volume
increases, marketing partner fees increase. Since the interest we earn on the loan is spread over the loans life, the recording of the expense of the marketing partner fees at the loans inception caused operating losses until our balance
sheet reached sufficient scale for the interest income related to existing loans to offset the marketing partner fees related to new loans. During the first quarter of 2004, the loans held on our balance sheet had attained a scale sufficient to
generate income in excess of all our expenses, including our marketing partner fees, resulting in net income for the period. This was partially due to marketing partner fees for the quarter being lower than those in previous quarters, reflecting a
slowing in the generation of consolidation loans. Should the volume of loans generated by (and corresponding fees paid to) our marketing partners increase dramatically in a future period, we may record additional operating losses.



19



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Although we are primarily a make-and-hold lender, under certain circumstances, discussed more fully
below, we sell some of our loans to third parties. When we sell loans, we record a gain on the sale of student loans on our income statement. Gains on sales of loans were $2.4 million in the quarter ended March 31, 2004, compared to $7.7 million in
the quarter ended March 31, 2003.



Employee compensation is
another significant component of our net earnings. Employee compensation increased $0.3 million from the quarter ended March 31, 2003 to the quarter ended March 31, 2004, reflecting increased headcount between the periods.



Net Interest Income and Income after Provision for Loan Losses.Net
interest income is derived largely from our portfolio of student loans that remains on our balance sheet. It represents the spread between interest earned on student loans and our cost of generating that interest income. All servicing of our student
loans is outsourced to third-party servicers. The cost of interest income is composed of interest expense on the warehouse facility and the permanent financings we use to fund our loan portfolio, income or expense related to mark-to-market
adjustments for interest rate swaps that are not designated as cash flow hedges as well as interest expense related to all our interest-rate swaps, costs paid to third-party servicers to service our loans, amortization of DOE fees and deferred
financing costs, the provision for loan losses, and amortization of premiums paid to acquire loans. We are currently in the process of establishing our own servicing division, which we will use to service a portion of our student loan portfolio.



Following is a comparison of the components of net interest
income for the quarter ended March 31, 2004 as compared to the quarter ended March 31, 2003.



|                                               |  |                              |            |                     |   |               |  |   |            |   |  |      |  
|---------------------------------------------- |  | ---------------------------- | ---------- | ------------------- | - | ------------- |  | - | ---------- | - |  | ---- | -
|                                               |  | Three months ended March 31, |            | Increase (decrease) |  
|                                               |  | 2004                         |            | 2003                |   | 2004 vs. 2003 | 
|Interest income                                |  |                              |            |                     |   |               |  |   |            |   |  |      |  
|Student loans, net                             |  | $                            | 30,135,859 |                     | $ | 14,712,652    |  | $ | 15,423,207 |   |  | 105  | %
|Investments                                    |  |                              | 356,220    |                     |   | 190,905       |  |   | 165,315    |   |  | 87   |  
|                                               |  |                              |            |                     |   |               |  |   |            |   |  |      |  
|Total interest income                          |  |                              | 30,492,079 |                     |   | 14,903,557    |  |   | 15,588,522 |   |  | 105  |  
|                                               |  |                              |            |                    
|Cost of interest income                        |  |                              |            |                     |   |               |  |   |            |   |  |      |  
|Interest related expenses                      |  |                              | 14,714,103 |                     |   | 8,607,003     |  |   | 6,107,100  |   |  | 71   |  
|Valuation of interest-rate swap                |  |                              |           |                     |   | 912,702       |  |   | (912,702   | ) |  | (100 | )
|Loan servicing and other fees                  |  |                              | 1,863,703  |                     |   | 727,609       |  |   | 1,136,094  |   |  | 156  |  
|                                               |  |                              |            |                     |   |               |  |   |            |   |  |      |  
|Total cost of interest income                  |  |                              | 16,577,806 |                     |   | 10,247,314    |  |   | 6,330,492  |   |  | 62   |  
|                                               |  |                              |            |                    
|Net interest income                            |  |                              | 13,914,273 |                     |   | 4,656,243     |  |   | 9,258,030  |   |  | 199  |  
|                                               |  |                              |            |                    
|Less: provision for losses                     |  |                              | 437,523    |                     |   | 554,630       |  |   | (117,107   | ) |  | (21  | )
|                                               |  |                              |            |                     |   |               |  |   |            |   |  |      |  
|Net interest income after provision for losses |  | $                            | 13,476,750 |                     | $ | 4,101,613     |  | $ | 9,375,137  |   |  | 229  | %
|                                               |  |                              |            |                     |   |               |  |   |            |   |  |      |  



Our interest income
and cost of interest income were higher in the quarter ended March 31, 2004 as compared to the quarter ending March 31, 2003, primarily due to the increase in our student loan portfolio. The increases in interest income and the cost of interest
income due to increased loan volume from the 2003 quarter to the 2004 quarter were partially offset by lower interest rates related to both our earning assets and our borrowings. These changes are detailed in the following rate/volume analysis which
shows the relative contribution of changes in interest rates and asset volumes.



|                                                |  |                  |            |                                              |   |            |        |  |   |           
|----------------------------------------------- |  | ---------------- | ---------- | -------------------------------------------- | - | ---------- | ------ |  | - | ----------
|                                                |  | Interestincrease |            | Increase (decrease) attributableto change in
|                                                |  | (decrease)       |            | Rate                                         |   |            | Volume
|Interest income                                 |  | $                | 15,588,522 |                                              | $ | (4,335,674 | )      |  | $ | 19,924,196
|Cost of interest income                         |  |                  | 6,330,492  |                                              |   | (4,975,852 | )      |  |   | 11,306,344
|                                                |  |                  |            |                                              |   |            |        |  |   |           
|Net interest income before provision for losses |  | $                | 9,258,030  |                                              | $ | 640,178    |        |  | $ | 8,617,852 
|                                                |  |                  |            |                                              |   |            |        |  |   |           



20



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Our borrowings are generally variable rate and are indexed primarily to commercial paper, LIBOR and our
auction rate securities. The following table summarizes the average balance of our debt by index and the corresponding average interest rate paid on the debt related to each index, respectively, for the quarters ended March 31, 2004 and 2003. The
table does not give effect to the impact of interest-rate swaps. We have no off-balance sheet debt or financing.



|                        |  |                              |               |             |      |   |                 |   |               |  |      |  
|----------------------- |  | ---------------------------- | ------------- | ----------- | ---- | - | --------------- | - | ------------- |  | ---- | -
|                        |  | Three months ended March 31, |              
|                        |  | 2004                         |               |             | 2003 |  
|Index                   |  | Average Balance              |               | AverageRate |      |   | Average Balance |   | AverageRate   | 
|Commercial paper        |  | $                            | 883,791,209   |             | 1.49 | % |                 | $ | 633,888,889   |  | 1.77 | %
|                        |  |                              |               |            
|LIBOR                   |  |                              | 981,595,694   |             | 1.38 |   |                 |   |              |  |     |  
|Auction rate securities |  |                              | 1,910,500,000 |             | 1.42 |   |                 |   | 1,021,666,666 |  | 2.10 |  
|                        |  |                              |               |             |      |   |                 |   |               |  |      |  
|Total                   |  | $                            | 3,775,886,903 |             | 1.42 | % |                 | $ | 1,655,555,555 |  | 1.97 | %
|                        |  |                              |               |             |      |   |                 |   |               |  |      |  



We provide an
allowance for potential loan losses on our balance sheet. The allowance is based on periodic evaluations of our loan portfolio, changes to federal student loan programs, current economic conditions and other relevant factors. We utilize these
factors to estimate a projected default rate for our student loan portfolio. This estimate, along with the applicable risk-sharing percentage, is used to calculate the allowance for student loan losses. The allowance is maintained at a level that
management believes is adequate to provide for probable credit losses. Currently, approximately 98% of our student loan portfolio is guaranteed. The allowance for student loan losses is calculated by multiplying the principal balance of the student
loans we carry on our balance sheet by 2% (the uninsured portion of the federally sponsored student loans on our balance sheet) and then multiplying that amount by the projected default rate. We do not reserve for loan losses related to the
alternative supplemental loan portion of our portfolio as currently these loans are 100% guaranteed by a third-party agency. Should this situation change, we would reserve for such potential losses as appropriate.



Although our FFELP loans are currently 98% guaranteed, we track delinquency
trends related to these loans for informational purposes and as historical data should future loans not be guaranteed at this level and therefore require an additional loss reserve. The following table shows delinquency trends related to FFELP loans
as of March 31, 2004 and December 31, 2003.



|                                                  |  |                      |               |   |                         |     |   |         |   |               |   |  |     |  
|------------------------------------------------- |  | -------------------- | ------------- | - | ----------------------- | --- | - | ------- | - | ------------- | - |  | --- | -
|                                                  |  | As of March 31, 2004 |               |   | As of December 31, 2003 |    
|                                                  |  | Balance              |               |   | %                       |     |   | Balance |   |               | % | 
|FFELP Loans (Gross)                               |  |                      |               |   |                         |     |   |         |   |               |   |  |     |  
|                                                  |  |                      |               |  
|Loans in school/grace/deferment                   |  | $                    | 666,023,937   |   |                         |     |   |         | $ | 543,959,548   |   |  |     |  
|Loans in forbearance                              |  |                      | 224,210,524   |   |                         |     |   |         |   | 196,248,290   |   |  |     |  
|Loans in repayment and percentage of each status: |  |                      |               |   |                         |     |   |         |   |               |   |  |     |  
|Loans current                                     |  |                      | 2,591,495,388 |   |                         | 94  | % |         |   | 2,427,262,085 |   |  | 94  | %
|Loans delinquent 30-59 days                       |  |                      | 70,163,966    |   |                         | 3   |   |         |   | 76,823,113    |   |  | 3   |  
|Loans delinquent 60-89 days                       |  |                      | 33,251,633    |   |                         | 1   |   |         |   | 37,586,386    |   |  | 1   |  
|Loans delinquent 90 days or greater               |  |                      | 53,337,383    |   |                         | 2   |   |         |   | 52,430,611    |   |  | 2   |  
|                                                  |  |                      |               |   |                         |     |   |         |   |               |   |  |     |  
|Total loans in repayment                          |  |                      | 2,748,248,370 |   |                         | 100 | % |         |   | 2,594,102,195 |   |  | 100 | %
|                                                  |  |                      |               |   |                         |     |   |         |   |               |   |  |     |  
|Total FFELP student loans                         |  | $                    | 3,638,482,831 |   |                         |     |   |         | $ | 3,334,310,033 |   |  |     |  
|FFELP student loan reserves                       |  |                      | (4,273,649    | ) |                         |     |   |         |   | (3,910,104    | ) |  |     |  
|                                                  |  |                      |               |   |                         |     |   |         |   |               |   |  |     |  
|FFELP student loans, net                          |  | $                    | 3,634,209,182 |   |                         |     |   |         | $ | 3,330,399,929 |   |  |     |  
|                                                  |  |                      |               |   |                         |     |   |         |   |               |   |  |     |  
|Percentage of FFELP student loans in repayment    |  |                      |               |   |                         | 76  | % |         |   |               |   |  | 78  | %
|                                                  |  |                      |               |   |                         |     |   |         |   |               |   |  |     |  



21



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Gain on Sale of Student Loans.As market conditions have dictated, we currently sell the majority
of loans we originate in the preferred lender-list marketing channel while retaining loans originated in the consolidation marketing channel. The preferred lender-list business is rather seasonal as the majority of the loans are originated in the
August/September/October and January/February/March time frame which corresponds to the college disbursement calendar. From time to time, we may also elect to sell some portion of our consolidation loans to take advantage of a specific business
opportunity or if required to generate cash for operations.



As
mentioned above, from time to time we may choose to sell consolidation loans. Accordingly, in addition to the sale of loans generated in the school preferred lender-list channel, during the quarter ended March 31, 2003 we chose to sell approximately
$206 million of consolidation loans. This resulted in additional gain on sale of approximately $6.8 million for the March 31, 2003 quarter, compared to no sales from this source in the quarter ended March 31, 2004. As a result, we had total gain on
sale during the quarter ended March 31, 2004 of approximately $2.4 million compared to $7.7 million during the quarter ended March 31, 2003.



The following table shows the gain on sale of student loans that we recorded for the quarters ended March 31, 2004 and 2003.



|                    |  |                                 |           |        |   |           |  |      |   
|------------------- |  | ------------------------------- | --------- | ------ | - | --------- |  | ---- | --
|                    |  | For the quarter ended March 31, |           | Change |  
|                    |  | 2004                            |           | 2003   |   | (%)       | 
|Lender-list loans   |  | $                               | 2,426,546 |        | $ | 938,667   |  | 159  | % 
|Consolidation loans |  |                                 |          |        |   | 6,802,751 |  | (100 | ) 
|                    |  |                                 |           |        |   |           |  |      |   
|Total               |  | $                               | 2,426,546 |        | $ | 7,741,418 |  | (69  | )%
|                    |  |                                 |           |        |   |           |  |      |   



The following table
shows total loans sold, by type for the quarters ended March 31, 2004 and 2003, along with the gains on those sales and the corresponding premiums earned.



|                 |  |                                 |            |   |      |   |             |  
|---------------- |  | ------------------------------- | ---------- | - | ---- | - | ----------- | -
|                 |  | For the quarter ended March 31, |           
|                 |  | 2004                            |            |   | 2003 |  
|Loans Sold       |  |                                 |            |   |      |   |             |  
|Consolidated     |  | $                               |           |   |      | $ | 205,814,887 |  
|Non-consolidated |  |                                 | 98,785,491 |   |      |   | 41,118,056  |  
|                 |  |                                 |            |   |      |   |             |  
|Total            |  | $                               | 98,785,491 |   |      | $ | 246,932,943 |  
|                 |  |                                 |            |   |      |   |             |  
|Gain on Sale     |  |                                 |            |   |      |   |             |  
|Consolidated     |  | $                               |           |   |      | $ | 6,802,751   |  
|Non-consolidated |  |                                 | 2,426,546  |   |      |   | 938,667     |  
|                 |  |                                 |            |   |      |   |             |  
|Total            |  | $                               | 2,426,546  |   |      | $ | 7,741,418   |  
|                 |  |                                 |            |   |      |   |             |  
|Net Premium      |  |                                 |            |   |      |   |             |  
|Consolidated     |  |                                 |           | % |      |   | 3.31        | %
|Non-consolidated |  |                                 | 2.46       |   |      |   | 2.28        |  
|                 |  |                                 |            |   |      |   |             |  
|Total            |  |                                 | 2.46       | % |      |   | 3.14        | %
|                 |  |                                 |            |   |      |   |             |  



At March 31, 2004,
total student loans on our balance sheet included approximately $76.7 million of loans held for sale. None of these loans are consolidation loans.



Other income, net.Other income, net consists of late fees and was approximately $58,000 and $7,000 for the quarters ended March 31, 2004 and 2003,
respectively. The increase in other income is due primarily to increased late fees received, which is directly related to the greater number of student loans held on the balance sheet at March 31, 2004 as compared to loans held at March 31, 2003.



General and Administrative Expenses.



|                                   |  |                                 |           |        |   |           |        |   |          |   |  |     |  
|---------------------------------- |  | ------------------------------- | --------- | ------ | - | --------- | ------ | - | -------- | - |  | --- | -
|                                   |  | For the quarter ended March 31, |           | Change |   |           | Change |  
|                                   |  | 2004                            |           | 2003   |   | ($)       |        |   | (%)      |  
|Total                              |  | $                               | 2,528,930 |        | $ | 1,898,913 |        | $ | 630,017  |   |  | 33  | %
|                                   |  |                                 |           |       
|Employee compensation and benefits |  |                                 | 1,145,619 |        |   | 1,302,109 |        |   | (156,490 | ) |  | (12 | )
|Consulting                         |  |                                 | 237,292   |        |   | 63,557    |        |   | 173,735  |   |  | 273 |  
|Corporate insurance                |  |                                 | 202,066   |        |   | 40,949    |        |   | 161,117  |   |  | 393 |  



22



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General and administrative expenses are those expenses associated with the infrastructure that supports
our student loan operations, including but not limited to, salaries and benefits for our administrative and research and development employees, consulting, premiums paid for corporate insurance policies, rents, utilities, legal expenses and fees
paid to our independent auditors.



General and administrative
expenses increased from $1.9 million in the quarter ended March 31, 2003 to $2.5 million in the quarter ended March 31, 2004. Contributing to this increase were consulting fees which increased from the March 31, 2003 quarter to the March 31, 2004
quarter, primarily related to payment to consultants retained to assist us in our efforts to move towards compliance with the Sarbanes-Oxley Act of 2002. Premiums paid for our corporate insurances policies, including our corporate umbrella policy
and director and officer liability policies, also increased significantly from the March 2003 quarter to the March 2004 quarter. Additionally, costs related to employee travel, independent auditors and legal services were higher in the quarter ended
March 31, 2004 than in the quarter ended March 31, 2003. Employee compensation and benefit expense declined, as increased expenses related to headcount additions were more than offset by lower bonus accruals than in the March 2003 quarter. Included
in compensation and benefit expense is a $41,000 non-cash charge related to performance-based options that were granted in 2003 and are being expensed over their vesting period (2003-2005), as discussed in Note 2 of the Notes to the consolidated
financial statements.



Servicing Expenses.We are in the
process of establishing an organization that will service our loan portfolio. We have hired several key employees and leased office space for the new loan servicing company. During the quarter ended March 31, 2004 we incurred approximately $164,000
of costs, primarily related to employee compensation and benefits, in conjunction with this effort.



Sales and Marketing Expenses.



|                                   |  |                                 |            |        |   |            |        |   |            |   |  |     |   
|---------------------------------- |  | ------------------------------- | ---------- | ------ | - | ---------- | ------ | - | ---------- | - |  | --- | --
|                                   |  | For the quarter ended March 31, |            | Change |   |            | Change |  
|                                   |  | 2004                            |            | 2003   |   | ($)        |        |   | (%)        |  
|Total                              |  | $                               | 10,192,858 |        | $ | 11,509,951 |        | $ | (1,317,093 | ) |  | (11 | )%
|                                   |  |                                 |            |       
|Marketing partner fees             |  |                                 | 6,184,792  |        |   | 7,750,316  |        |   | (1,565,524 | ) |  | (20 | ) 
|Employee compensation and benefits |  |                                 | 1,621,691  |        |   | 1,283,518  |        |   | 338,173    |   |  | 26  |   



Sales and marketing
expenses include the fees we pay to various marketing partners to market loans on our behalf. This category also includes the salaries and benefits we pay to our internal sales force and Education Finance Loan CenterSMpersonnel, as well as associated expenses such as travel, telephone and meals and entertainment. The costs of marketing our
products are also included in this category. These expenses include the printing of collateral material, direct mail campaigns and our attendance at various trade shows.



During the quarter ended March 31, 2004 we incurred $6.2 million in fees paid to marketing partners who market loans on our
behalf, then provide us with completed applications. This amount includes $0.8 million in non-cash charges related to performance-based options granted to some of these partners. As discussed above, these fees are expensed as incurred and represent
a significant portion of our expenses. Marketing partner fees declined from the quarter ended March 31, 2003 to the quarter ended March 31, 2004, reflecting the lower loan originations in the March 2004 quarter. Despite the decline, these costs
represent a significant component of our total sales and marketing expenses. Marketing partner fees represented 61% and 67% of sales and marketing expenses for the quarters ended March 31, 2004 and March 31, 2003, respectively. They represented 48%
and 58% of total operating expenses for those respective periods.



The decrease in marketing partner fees from the quarter ended March 31, 2003 to the quarter ended March 31, 2004 was partially offset by increased costs for employee compensation and benefits. The increase in employee compensation and
benefits expense from the quarter ended March 31, 2003 to the quarter ended March 31, 2004 primarily reflects the increased headcount between the periods. Included in compensation and benefit expense is a $35,000 non-cash charge related to
performance-based options that were granted in 2003 and are being expensed over their vesting period (2003-2005), as discussed in Note 2 of the Notes to the Consolidated Financial Statements.



Alternative Performance Measures. In addition to evaluating our
GAAP-based data, management, credit rating agencies, and analysts also evaluate our performance in terms of certain non-financial (or non-GAAP) measures.



Loan Originations.We analyze the ratio of loans generated internally versus those generated externally through our marketing partners. Following
is a table which provides detail of loan originations for each of our origination channels for the quarters ended March 31, 2004 and 2003.



23



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|                                              |  |                                      |             |                         |   |           |  |   |            
|--------------------------------------------- |  | ------------------------------------ | ----------- | ----------------------- | - | --------- |  | - | -----------
|                                              |  | For the quarter ended March 31, 2004
|                                              |  | FFELP                                |             | AlternativeSupplemental |   | Total    
|Consolidations through internal sources       |  | $                                    | 53,223,919  |                         | $ |          |  | $ | 53,223,919 
|Consolidations through marketing partners     |  |                                      | 302,884,763 |                         |   |          |  |   | 302,884,763
|Traditional school channel (internal sources) |  |                                      | 120,681,863 |                         |   |          |  |   | 120,681,863
|Other (internal sources)                      |  |                                      | 6,220,367   |                         |   | 1,483,946 |  |   | 7,704,313  
|                                              |  |                                      |             |                         |   |           |  |   |            
|Total originations and purchases              |  |                                      | 483,010,912 |                         |   | 1,483,946 |  |   | 484,494,858
|                                              |  |                                      |             |                         |   |           |  |   |            
|Capitalized interest and other                |  |                                      | 5,526,986   |                         |   | 52,610    |  |   | 5,579,596  
|                                              |  |                                      |             |                         |   |           |  |   |            
|Total student loan acquisitions               |  | $                                    | 488,537,898 |                         | $ | 1,536,556 |  | $ | 490,074,454
|                                              |  |                                      |             |                         |   |           |  |   |            



24



---

|                                              |  |                                      |             |                         |   |           |  |   |            
|--------------------------------------------- |  | ------------------------------------ | ----------- | ----------------------- | - | --------- |  | - | -----------
|                                              |  | For the quarter ended March 31, 2003
|                                              |  | FFELP                                |             | AlternativeSupplemental |   | Total    
|Consolidations through internal sources       |  | $                                    | 241,443,479 |                         | $ |          |  | $ | 241,443,479
|Consolidations through marketing partners     |  |                                      | 423,330,968 |                         |   |          |  |   | 423,330,968
|Traditional school channel (internal sources) |  |                                      | 44,111,981  |                         |   |          |  |   | 44,111,981 
|Other (internal sources)                      |  |                                      | 15,424,978  |                         |   | 2,829,665 |  |   | 18,254,643 
|                                              |  |                                      |             |                         |   |           |  |   |            
|Total originations and purchases              |  |                                      | 724,311,406 |                         |   | 2,829,665 |  |   | 727,141,071
|                                              |  |                                      |             |                         |   |           |  |   |            
|Capitalized interest and other                |  |                                      | 1,609,069   |                         |   | 4,507     |  |   | 1,613,576  
|                                              |  |                                      |             |                         |   |           |  |   |            
|Total student loan acquisitions               |  | $                                    | 725,920,475 |                         | $ | 2,834,172 |  | $ | 728,754,647
|                                              |  |                                      |             |                         |   |           |  |   |            



The table below
presents the above loan acquisition information as percentages of the total loans generated for the quarters ended March 31, 2004 and 2003.



|                                              |  |                                |   |  |      |  
|--------------------------------------------- |  | ------------------------------ | - |  | ---- | -
|                                              |  | For the quarter endedMarch 31, |  
|                                              |  | 2004                           |   |  | 2003 |  
|Consolidations through internal sources       |  | 11                             | % |  | 33   | %
|Consolidations through marketing partners     |  | 63                             |   |  | 58   |  
|Traditional school channel (internal sources) |  | 25                             |   |  | 6    |  
|Other (internal sources)                      |  | 1                              |   |  | 3    |  
|                                              |  |                                |   |  |      |  
|Total originations and purchases              |  | 100                            | % |  | 100  | %
|                                              |  |                                |   |  |      |  



Floor Income.Our portfolio of FFELP student loans generally earns interest at the higher of a floating rate based on the SAP formula set by the DOE and the borrower rate, which is fixed over a period of time. We generally finance our student loan portfolio
with floating rate debt over all interest rate levels. In low interest rate environments, when student loans are earning at the fixed borrower rate and the interest on our floating rate debt is continuing to decline, we earn additional spread income
and refer to it as floor income. Depending on the type of student loan and when it is originated, the borrower rate is either fixed to term (as is the case for consolidation loans) or is reset to a market rate each July first (as is the case for
Stafford and PLUS loans). As a result, for loans where the borrower rate is fixed to term, we may earn floor income for an extended period of time, and for those loans where the borrower



25



---

interest rate is reset annually July first, we may earn floor income to the next reset date. Floor income is included in student loan income. During the
quarters ended March 31, 2004 and 2003 our floor income was $6.6 million and $4.2 million, respectively.



The following table details the volume of loans that were earning floor income during the quarters ended March 31, 2004 and 2003. CP rate loans are based
on the quarter-average CP rates of 1.05% and 1.24% for the quarters ended March 31, 2004 and 2003, respectively.



|                                                  |  |                                      |               |                             |   |             |  |   |              
|------------------------------------------------- |  | ------------------------------------ | ------------- | --------------------------- | - | ----------- |  | - | -------------
|                                                  |  | For the quarter ended March 31, 2004
|                                                  |  | Fixed borrowerrate                   |               | Annually resetborrower rate |   | Total      
|Student loans eligible to earn floor income:      |  |                                      |               |                             |   |             |  |   |              
|Student loans                                     |  | $                                    | 807,658,698   |                             | $ | 152,268,457 |  | $ | 959,927,155  
|                                                  |  |                                      |              
|Securitized student loans                         |  |                                      | 2,678,555,676 |                             |   |            |  |   | 2,678,555,676
|                                                  |  |                                      |               |                             |   |             |  |   |              
|                                                  |  |                                      |              
|Total student loans eligible to earn floor income |  | $                                    | 3,486,214,374 |                             | $ | 152,268,457 |  | $ | 3,638,482,831
|                                                  |  |                                      |               |                             |   |             |  |   |              
|                                                  |  |                                      |              
|Net managed student loans earning floor income    |  |                                      |               |                             |   |             |  |   |              
|Earning 1-25 bps floor income                     |  | $                                    | 250,100,058   |                             | $ | 139,468,314 |  | $ | 389,568,372  
|                                                  |  |                                      |              
|Earning 26-50 bps floor income                    |  |                                      | 360,419,350   |                             |   |            |  |   | 360,419,350  
|                                                  |  |                                      |              
|Earning 51-75 bps floor income                    |  |                                      | 430,894,550   |                             |   |            |  |   | 430,894,550  
|                                                  |  |                                      |              
|Earning 76-100 bps floor income                   |  |                                      | 266,168,899   |                             |   | 10,146,371  |  |   | 276,315,270  
|                                                  |  |                                      |              
|Earning 101-200 bps floor income                  |  |                                      | 625,053,061   |                             |   | 231,870     |  |   | 625,284,931  
|                                                  |  |                                      |              
|Earning 201+ bps floor income                     |  |                                      | 506,735,283   |                             |   |            |  |   | 506,735,283  
|                                                  |  |                                      |               |                             |   |             |  |   |              
|                                                  |  |                                      |              
|Total                                             |  | $                                    | 2,439,371,201 |                             | $ | 149,846,555 |  | $ | 2,589,217,756
|                                                  |  |                                      |               |                             |   |             |  |   |              
|                                                  | 
|                                                  |  | For the quarter ended March 31, 2003
|                                                  |  | Fixed borrowerrate                   |               | Annually resetborrower rate |   | Total      
|Student Loans Eligible to earn floor income:      |  |                                      |               |                             |   |             |  |   |              
|Student loans                                     |  | $                                    | 781,712,667   |                             | $ | 47,023,690  |  | $ | 828,736,357  
|                                                  |  |                                      |              
|Securitized student loans                         |  |                                      | 946,535,440   |                             |   |            |  |   | 946,535,440  
|                                                  |  |                                      |               |                             |   |             |  |   |              
|                                                  |  |                                      |              
|Total student loans eligible to earn floor income |  | $                                    | 1,728,248,107 |                             | $ | 47,023,690  |  | $ | 1,775,271,797
|                                                  |  |                                      |               |                             |   |             |  |   |              
|Net managed student loans earning floor income    |  |                                      |               |                             |   |             |  |   |              
|Earning 1-25 bps floor income                     |  | $                                    | 222,531,419   |                             | $ |            |  | $ | 222,531,419  
|                                                  |  |                                      |              
|Earning 26-50 bps floor income                    |  |                                      | 229,626,590   |                             |   | 44,973,574  |  |   | 274,600,164  
|                                                  |  |                                      |              
|Earning 51-75 bps floor income                    |  |                                      | 229,690,428   |                             |   |            |  |   | 229,690,428  
|                                                  |  |                                      |              
|Earning 76-100 bps floor income                   |  |                                      | 266,060,042   |                             |   | 598,374     |  |   | 266,658,416  
|                                                  |  |                                      |              
|Earning 101-200 bps floor income                  |  |                                      | 188,627,477   |                             |   |            |  |   | 188,627,477  
|                                                  |  |                                      |              
|Earning 201+ bps floor income                     |  |                                      | 374,287,306   |                             |   |            |  |   | 374,287,306  
|                                                  |  |                                      |               |                             |   |             |  |   |              
|                                                  |  |                                      |              
|Total                                             |  | $                                    | 1,510,823,262 |                             | $ | 45,571,948  |  | $ | 1,556,395,210
|                                                  |  |                                      |               |                             |   |             |  |   |              



26



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Net Interest Margin Analysis.We review our net interest margin on an ongoing basis in order to
assess whether the earnings spread we actually received was in line with our expectations. Following is our net interest margin analysis for the quarters ended March 31, 2004 and 2003.



|                                                            |  |                                 |             |   |      |         |   |  |   |             |   |  |         |  
|----------------------------------------------------------- |  | ------------------------------- | ----------- | - | ---- | ------- | - |  | - | ----------- | - |  | ------- | -
|Student Loan Net Interest Margin Analysis                   |  | For the quarter ended March 31, |            
|                                                            |  | 2004                            |             |   | 2003 |        
|Student loan interest received                              |  | $                               | 39,129,958  |   |      | 4.4220  | % |  | $ | 18,889,382  |   |  | 4.9892  | %
|                                                            |  |                                 |             |  
|Less:                                                       |  |                                 |             |   |      |         |   |  |   |             |   |  |         |  
|Consolidation loan rebate fee                               |  |                                 | (8,994,099  | ) |      | (1.0136 | ) |  |   | (4,176,729  | ) |  | (1.0881 | )
|Cost of debt                                                |  |                                 | (13,874,530 | ) |      | (1.5637 | ) |  |   | (8,007,346  | ) |  | (2.0860 | )
|Premium amortization                                        |  |                                 | (46,763     | ) |      | (0.0053 | ) |  |   | (27,181     | ) |  | (0.0071 | )
|DOE fee amortization                                        |  |                                 | (443,205    | ) |      | (0.0499 | ) |  |   | (101,897    | ) |  | (0.0265 | )
|Loan loss reserve                                           |  |                                 | (437,523    | ) |      | (0.0493 | ) |  |   | (560,998    | ) |  | (0.1461 | )
|Loan servicing costs*                                       |  |                                 | (1,373,734  | ) |      | (0.1549 | ) |  |   | (592,162    | ) |  | (0.1543 | )
|                                                            |  |                                 |             |   |      |         |   |  |   |             |   |  |         |  
|Total Costs                                                 |  |                                 | (25,169,854 | ) |      | (2.8367 | ) |  |   | (13,466,313 | ) |  | (3.5081 | )
|Student loan net interest margin with floor income          |  |                                 | 13,960,104  |   |      | 1.5853  |   |  |   | 5,423,069   |   |  | 1.4811  |  
|                                                            |  |                                 |             |  
|Additional interest expense to lock-in part of floor income |  |                                 | 790,664     |   |      | 0.0891  |   |  |   | 1,378,881   |   |  | 0.3592  |  
|Floor incomerevenue                                        |  |                                 | (6,618,756  | ) |      | (0.7459 | ) |  |   | (4,191,891  | ) |  | (1.0920 | )
|                                                            |  |                                 |             |   |      |         |   |  |   |             |   |  |         |  
|Student loan net interest margin before floor income        |  | $                               | 8,132,012   |   |      | 0.9285  | % |  | $ | 2,610,059   |   |  | 0.7483  | %
|                                                            |  |                                 |             |   |      |         |   |  |   |             |   |  |         |  
|                                                            |  |                                 |             |  
|Consolidated Company Net Interest Margin Analysis           |  |                                 |             |   |      |         |   |  |   |             |   | 
|Student loan net interest margin before floor income        |  | $                               | 8,132,012   |   |      | 0.9285  | % |  | $ | 2,610,059   |   |  | 0.7483  | %
|Floor income after swap to lock-in part of floor income     |  |                                 | 5,828,092   |   |      | 0.6568  |   |  |   | 2,813,010   |   |  | 0.7328  |  
|Mark to market of interest rate swap                        |  |                                 |            |   |      |        |   |  |   | (912,702    | ) |  | (0.2378 | )
|Negative interest carry                                     |  |                                 | (483,354    | ) |      | (0.0545 | ) |  |   | (408,754    | ) |  | (0.1065 | )
|                                                            |  |                                 |             |   |      |         |   |  |   |             |   |  |         |  
|Net interest margin reported on financial statement         |  | $                               | 13,476,750  |   |      | 1.5308  | % |  | $ | 4,101,613   |   |  | 1.1368  | %
|                                                            |  |                                 |             |   |      |         |   |  |   |             |   |  |         |  

|* | Includes monthly servicing fees, cancellations fees, and amortization of loan origination costs
|- | -----------------------------------------------------------------------------------------------



Average student loan balances outstanding for the quarters ended March 31, 2004 and 2003 were $3,549,256,328 and
$1,535,466,633, respectively.



We have no off-balance sheet
arrangements.



27



---

LIQUIDITY AND CAPITAL RESOURCES



At March 31, 2004, we had operating cash and cash equivalents of approximately $27.4 million (excluding restricted cash and
investments). Since inception, we have financed our operations from debt and equity financings. During the quarter ended March 31, 2004, we used cash of approximately $5.8 million to fund our operations, and we acquired property and equipment of
approximately $0.3 million. At March 31, 2004, we had advances of approximately $1.0 billion outstanding against our warehouse loan facilities and $2.9 billion of LIBOR/auction rate Education Loan Backed Notes were outstanding and included on our
balance sheet. During the quarter ended March 31, 2004, our net recorded loans increased $308 million to $3.7 billion. During the quarter ended March 31, 2004, we received proceeds of approximately $0.8 million for the issuance of 378,632 shares of
common stock in connection with the exercise of warrants and employee stock options.



We have two warehouse loan facilities which we use to fund the origination and purchase of student loans. One of the facilities is a $19 million facility. The second facility (our Conduit Facility) was established in
the fourth quarter of 2002 for $500 million and is renewable on a 364-day basis until expiration of the facility in the fourth quarter of 2005. On January 6, 2004 it was increased to $1.0 billion, and was then increased to $1.25 billion on March 1,
2004. At March 31, 2004, the balance outstanding on the Conduit Facility was approximately $1.0 billion. We must comply with certain covenants in the Conduit Facility agreements. These include, but are not limited to, financial covenants such as a
required minimum spread, asset coverage ratio, net consolidation ratio and default ratio, limits on the concentration of certain types of student loans purchased with proceeds from the warehouse loan facility and maintaining the status of Education
Funding Resources, LLC as a single purpose bankruptcy remote limited liability company.



We also do not have any scheduled mandatory repayment obligations under the $500 million Conduit Facility. Upon notice from the lender, this facility can be terminated at the end of each 364-day period. If this notice
were to be given, paydown of the Conduit Facility would be required in October 2004.



In May and August of 2002, we issued Series 2002 Notes of $525 million and $500 million, respectively, in order to provide permanent financing opportunities for our consolidation loan operations. In April 2003, we
issued Series 2003 (April) Notes of $1 billion to provide additional permanent financings for our consolidation loan operations, as mentioned above. We issued Series 2003 (October) Notes in October 2003. The interest rates for the Series 2002 Notes
are determined by Dutch Auction. The interest rates of some of the Series 2003 (April) Notes are tied to the three-month LIBOR rate plus an incremental amount ranging from 0.05% to 0.30%, while the rates of other Series 2003 (April) Notes bear
interest at a rate determined by Dutch Auction. The interest rates of some of the Series 2003 (October) Notes are tied to the three-month LIBOR rate plus an incremental amount ranging from 0.04% to 0.27%, while the rates of other Series 2003
(October) Notes bear interest at a rate determined by Dutch Auction.



We do not have any scheduled mandatory repayment obligations under the Series 2002 Notes or the Series 2003 Notes. However, paydowns of the notes are required to be made on interest payment dates as principal payments on the underlying
student loans are received. The Series 2002 Notes have a final maturity date of June 1, 2042. The Series 2003 (April) Notes have staggered final maturity dates as follows: $80 million at March 15, 2007, $144 million at December 15, 2011, $276
million at December 15, 2017, $150 million at March 15, 2032 and the remaining $350 million at March 17, 2042. The Series 2003 (October) Notes have staggered final maturity dates as follows: $77.5 million at September 15, 2008, $118.5 million at
December 17, 2012, $319 million at March 16, 2020, $100 million at December 15, 2032 and $385 million at December 15, 2042.



We are in compliance with all of our debt covenants.



28



---

Management believes that we have sufficient funds and access to financing to meet expenses in the
foreseeable future. We are currently able to meet our operating cash requirements from cash held on our balance sheet, along with borrowing against the value of the student loans originated each month. Additionally, later this year we will achieve
parity in our 2002 indenture and will be able to draw cash from that source. If necessary, working capital can be raised through the sale of a portion of our student loan portfolio.



We also have a $3 million line of credit available for working capital needs. No draws have been made on this line to date.
This line of credit expires in June 2004.



FORWARD-LOOKING STATEMENTS AND
OTHER RISK FACTORS



Certain statements contained in this
report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Our actual results may differ materially from those suggested by the forward-looking statements, which are
typically identified by the words or phrases believe, expect, anticipate, intend, estimate, may increase, may result in, and similar expressions or future or
conditional verbs such as will, should, would and could. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: the effects of legislative
changes, including those affecting the interest rates borrowers pay on certain loans, the magnitude of certain loan subsidies and the related introduction of competitive loan programs by other lenders; the effects of changes in accounting standards;
actual credit losses we experience in future periods compared to the estimates used in calculating reserves; fluctuations in the interest rates we pay for our funding and receive on our loan portfolio; our ability to service our loan portfolio in
accordance with its contractual obligations (or our ability to continue to retain a third-party servicer); the actual cost of employee stock option awards and the effects of changes made to various stock-based compensation programs; the success of
our hedging policies; our ability to acquire or originate loans in the amounts anticipated and with interest rates adequate to generate sufficient yields and margins; our success in expanding our guarantor relationships and products; whether
risk-sharing expenses for defaults on new loan originations are offset by lower insurance premiums; our ability to utilize alternative sources of funding, including our ability to continue to securitize loan portfolios; our ability to derive
incremental economic benefits from greater economies of scale as our portfolio grows; as well as general economic conditions, including the performance of financial markets and the implementation of regulatory changes. Risks related to our business
are discussed in greater detail in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission on March 12, 2004.



|Item 3. | Quantitative and Qualitative Discussions About Market Risk
|------- | ----------------------------------------------------------



Market risk is the risk of loss from adverse changes in the market prices and/or interest rates related to our financial instruments. Our primary market
risk is from changes in interest rates and interest spreads. Our loan portfolio has both fixed and variable rate components, while our financings are composed of multiple types of variable rate debt. Some of our debt is auction rate. This debt
typically reprices every 28 days and is therefore particularly sensitive to fluctuations in the market.



We follow a policy to minimize our sensitivity to changing interest rates by generally funding our floating rate loan portfolio with floating rate debt.
However, in the current low interest rate environment, our FFELP student loan portfolio is earning floor income due to the reduction in the variable rates on our debt while the rates on the majority of our student loans have remained at the fixed
borrower rate. Therefore, absent other hedges, in a low interest rate environment a hypothetical rise in interest rates would have a greater adverse effect on earnings and fair values due to the reduction in potential floor income. Once rates have
risen sufficiently to eliminate floor income, further increases have only minimal impact on earnings as both the interest rates earned on the student loan portfolio and the interest rates paid on the debt would rise together. We use derivative
instruments to protect a portion of our floor income, but inherent in our hedging activities are risks that we are not hedging all potential interest rate exposures or that the hedges will not perform as designed.



During the quarter ended March 31, 2004, we earned $6.6 million in floor
income, representing approximately 50% of our net interest income after the provision for loan losses. An increase in interest rates to a level where we are no longer able to earn floor income would have a significant adverse affect on our net
interest income after the provision for loan losses as well as overall net income or loss.



During 2003 and 2004, we had FFELP loans that were earning floor income. We entered into two interest rate swap contracts to lock-in a portion of that floor income. The result of these hedging transactions was to
convert a portion of floating rate debt into fixed rate debt, matching the temporary fixed rate nature of the student loans and fixing the relative spread between the student loan asset rate and the converted fixed rate liability.



29



---

In the following table, our variable rate assets and liabilities are categorized by the reset date of the
underlying index. An interest rate gap is the difference between volumes of assets and liabilities maturing or repricing during specific future time intervals. The following gap analysis reflects rate-sensitive positions as of March 31, 2004 and is
not necessarily reflective of positions that existed throughout the period, or that are expected to exist in the future.



|                                                                     |  |                      |               |    |                     |   |              |                   |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|-------------------------------------------------------------------- |  | -------------------- | ------------- | -- | ------------------- | - | ------------ | ----------------- |  | - | ------------ | - |  | ------------ | ----------- | - | ------------ | - | ----------- | - |  | - | ---------- | -
|                                                                     |  | As of March 31, 2004 |              
|                                                                     |  | 3 months or less     |               |    | 3 months to 6months |   |              | 6 months to1 year |  |   | 1 to 2 years |   |  | 2 to 5 years |             |   | Over 5 years |  
|Assets                                                               |  |                      |               |    |                     |   |              |                   |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Student loans                                                        |  | $                    | 3,674,006,571 |    |                     | $ |             |                   |  | $ |             |   |  | $            |            |   |              | $ |            |   |  | $ |           |  
|Cash and investments                                                 |  |                      | 176,449,264   |    |                     |   |             |                   |  |   |             |   |  |              |            |   |              |   |            |   |  |   |           |  
|Interest and other receivables                                       |  |                      | 34,451,863    |    |                     |   |             |                   |  |   |             |   |  |              |            |   |              |   |            |   |  |   |           |  
|Other assets                                                         |  |                      |              |    |                     |   |             |                   |  |   |             |   |  |              |            |   |              |   |            |   |  |   | 14,933,087 |  
|                                                                     |  |                      |               |    |                     |   |              |                   |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Total assets                                                         |  | $                    | 3,884,907,698 |    |                     | $ |             |                   |  | $ |             |   |  | $            |            |   |              | $ |            |   |  | $ | 14,933,087 |  
|                                                                     |  |                      |               |    |                     |   |              |                   |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|                                                                     |  |                      |               |    |                     |  
|Liabilities and Stockholders Equity                                 |  |                      |               |    |                     |   |              |                   |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Long-term borrowings                                                 |  | $                    | 3,880,869,471 |    |                     | $ |             |                   |  | $ |             |   |  | $            |            |   |              | $ |            |   |  | $ |           |  
|Other liabilities                                                    |  |                      | 16,913,496    |    |                     |   |             |                   |  |   |             |   |  |              |            |   |              |   |            |   |  |   |           |  
|Stockholders equity                                                 |  |                      |              |    |                     |   |             |                   |  |   |             |   |  |              |            |   |              |   |            |   |  |   | 2,057,818  |  
|                                                                     |  |                      |               |    |                     |   |              |                   |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Total liabilities and stockholders equity                           |  | $                    | 3,897,782,967 |    |                     | $ |             |                   |  | $ |             |   |  | $            |            |   |              | $ |            |   |  | $ | 2,057,818  |  
|                                                                     |  |                      |               |    |                     |   |              |                   |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Period gap before adjustments                                        |  | $                    | (12,875,269   | )  |                     | $ |             |                   |  | $ |             |   |  | $            |            |   |              | $ |            |   |  |   | 12,875,269 |  
|Interest rate derivatives                                            |  |                      | (835,000,000  | )  |                     |   | 350,000,000  |                   |  |   | 485,000,000  |   |  |              |            |   |              |   |            |   |  |   |           |  
|                                                                     |  |                      |               |    |                     |   |              |                   |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Period gap                                                           |  | $                    | (847,875,269  | )  |                     | $ | 350,000,000  |                   |  | $ | 485,000,000  |   |  | $            |            |   |              | $ |            |   |  | $ | 12,875,269 |  
|                                                                     |  |                      |               |    |                     |   |              |                   |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Cumulative gap                                                       |  | $                    | (847,875,269  | )  |                     | $ | (497,875,269 | )                 |  | $ | (12,875,269  | ) |  | $            | (12,875,269 | ) |              | $ | (12,875,269 | ) |  | $ |           |  
|                                                                     |  |                      |               |    |                     |   |              |                   |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Ratio of interest-sensitive assets to interest-sensitive liabilities |  |                      | 100           | %  |                     |   | n/a          |                   |  |   | n/a          |   |  |              | n/a         |   |              |   | n/a         |   |  |   | 726        | %
|Ratio of cumulative gap to total assets at March 31, 2004            |  |                      | (22           | )% |                     |   | n/a          |                   |  |   | n/a          |   |  |              | n/a         |   |              |   | n/a         |   |  |   | n/a        |  



The following table
reflects the average terms to maturity for our earning assets and liabilities, as of March 31, 2004.



|                      |  |      
|--------------------- |  | -----
|                      |  | Years
|Earning assets        |  |      
|Student loans         |  | 21.41
|Cash and investments  |  | 0    
|Total earning assets  |  | 20.42
|                      | 
|Borrowings            |  |      
|Short-term borrowings |  | 0.53 
|Long-term borrowings  |  | 29.08
|Total borrowings      |  | 21.04



The following table
illustrates the impact interest rate increases of 100 basis points and 300 basis points would have on our net income/(loss) and our net income/(loss) per share for the quarters ended March 31, 2004 and 2003.



|                                                                               |  |                                          |             |                                          |       |                                          |   |                                          |  |     |  |   |           |  |        |  |   |           |  |     
|------------------------------------------------------------------------------ |  | ---------------------------------------- | ----------- | ---------------------------------------- | ----- | ---------------------------------------- | - | ---------------------------------------- |  | --- |  | - | --------- |  | ------ |  | - | --------- |  | ----
|                                                                               |  | Quarter ended March 31, 2004             |             | Quarter ended March 31, 2003            
|                                                                               |  | Change from increase of 100 basis points |             | Change from increase of 300 basis points |       | Change from increase of 100 basis points |   | Change from increase of 300 basis points
|Increase/(decrease) in pre-tax net income/(loss) before SFAS 133               |  | $                                        | (1,643,360) |                                          | (53)% |                                          | $ | 430,265                                  |  | 14% |  | $ | (178,754) |  | (11)%  |  | $ | 2,629,032 |  | 169%
|Increase/(decrease) in basic income/(loss) per share (diluted) before SFAS 133 |  |                                          | (0.09)      |                                          | (56)% |                                          |   | 0.02                                     |  | 13% |  |   | (0.02)    |  | (143)% |  |   | 0.23      |  | 164%



|Item 4. | Controls and Procedures
|------- | -----------------------





Based on their most recent evaluation, which was completed as of the end of
the reporting period of this Form 10-Q, our principal executive officer and principal financial officer believe our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective.



During the quarter ended March 31, 2004, we implemented improved procedures
designed to facilitate the flow and accuracy of our reporting into our financial statements. These procedures include additional levels of review of transactions, improvements in our system of controls and the development of detailed documentation
of our procedures. Additionally, our current internal control structure continues to undergo an extensive evaluation as we move towards compliance with the Sarbanes-Oxley Act of 2002. We have completed documenting our internal controls and are
currently engaged in a process of evaluating and testing those controls in order to determine what additional changes would further enhance the integrity of our financial reporting.



30



---

PART II. OTHER INFORMATION



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



None.



|Item 2. | Changes In Securities, Use of Proceeds and Issuer Purchases of Equity Securities
|------- | --------------------------------------------------------------------------------



During the quarter ended March 31, 2004, we received proceeds of $777,274 related to the issuance of 378,632 shares of
common stock in connection with the exercise of warrants and employee options.



During the quarter ended March 31, 2004 we granted additional stock options under our Stock Option Plan. We granted incentive stock options (net of cancellations) during the quarter ended March 31, 2004 for the
purchase of 75,066 shares, with an exercise price equal to the fair market value at date of grant. All employee stock options granted vest over three years and expire at the end of ten years. The exercise price was determined by the Compensation
Committee of the Board of Directors pursuant to the provisions of the Stock Option Plan.



Our stock has been trading on the Nasdaq National Market System since September 18, 2003 under the symbol EDLG. From July 25, 2003 until September 18, 2003 our stock was listed on the Nasdaq Small Cap
exchange. Prior to that time, our stock had been quoted on the Over-the-Counter Bulletin Board system.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------



Not applicable.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------



Not applicable.



|Item 5. | Other Information
|------- | -----------------



Not applicable.



|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------



(a) Exhibits.



The exhibits listed below are filed as part of this document.



|              |  |                                                                                                                          
|------------- |  | -------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                              
|10.1          |  | Office Lease between Education Loan Servicing Corporation and Post Office Plaza Limited Partnership dated March 16, 2004.
|31.1          |  | CEO Certification under Sarbanes-Oxley Act (Section 302)                                                                 
|31.2          |  | CFO Certification under Sarbanes-Oxley Act (Section 302)                                                                 
|32.1          |  | CEO Certification under Sarbanes-Oxley Act (Section 906)                                                                 
|32.2          |  | CFO Certification under Sarbanes-Oxley Act (Section 906)                                                                 



(b) Form 8-K.



During the quarter ended March 31, 2004,
we filed one Report on Form 8-K, dated February 26, 2004.



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---

SIGNATURES



In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.



|                   |  |  |  |                               |  |        |  |                                                                     
|------------------ |  |  |  | ----------------------------- |  | ------ |  | --------------------------------------------------------------------
|Date: May 10, 2004 |  |  |  | EDUCATION LENDING GROUP, INC.
|                   |  |  |  |                              
|                   |  |  |  |                               |  | By:    |  | /s/    James G. Clark                                               
|                   |  |  |  |                               |  | Name:  |  | James G. Clark                                                      
|                   |  |  |  |                               |  | Title: |  | Chief Financial Officer (Principal Financial and Accounting Officer)



32