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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended June 30, 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)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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 June 30, 2004: 16,619,629, including treasury shares.



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##### Table of Contents

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 |  | 20  
|                              |  |         | 
|                              |  | Item 3. |  | Quantitative and Qualitative Discussions about Market Risk                            |  | 32  
|                              |  |         | 
|                              |  | Item 4. |  | Controls and Procedures                                                               |  | 33  
|                              | 
|PART II. OTHER INFORMATION    |  | 34     
|                              |  |         | 
|                              |  | Item 1. |  | Legal Proceedings                                                                     |  | 34  
|                              |  |         | 
|                              |  | Item 2. |  | Changes In Securities, Use of Proceeds and Issuer Purchases of Equity Securities      |  | 34  
|                              |  |         | 
|                              |  | Item 3. |  | Defaults Upon Senior Securities                                                       |  | 34  
|                              |  |         | 
|                              |  | Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  | 34  
|                              |  |         | 
|                              |  | Item 5. |  | Other Information                                                                     |  | 34  
|                              |  |         | 
|                              |  | Item 6. |  | Exhibits and Reports on Form 8K                                                      |  | 35  



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



EDUCATION LENDING GROUP, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                   |  |               |               |   |                   |   |               |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------------- | - | ----------------- | - | ------------- | -
|                                                                                                                                   |  | June 30, 2004 |               |   | December 31, 2003 |  
|                                                                                                                                   |  | (Unaudited)   |               |   |                   |  
|ASSETS                                                                                                                             |  |               |               |   |                   |   |               |  
|Student loans, net of loan loss reserve                                                                                            |  | $             | 189,132,905   |   |                   | $ | 540,561,502   |  
|Student loans, net of loan loss reserve (securitized)                                                                              |  |               | 3,565,004,063 |   |                   |   | 2,750,239,082 |  
|Student loans held for resale at the lower of cost or market                                                                       |  |               | 68,478,116    |   |                   |   | 75,441,990    |  
|Restricted cash and investments                                                                                                    |  |               | 179,271,741   |   |                   |   | 141,846,261   |  
|Cash and cash equivalents                                                                                                          |  |               | 22,786,019    |   |                   |   | 33,557,879    |  
|Interest & other receivables                                                                                                       |  |               | 35,020,963    |   |                   |   | 28,191,861    |  
|Property and equipment, net                                                                                                        |  |               | 3,115,815     |   |                   |   | 1,600,606     |  
|Deferred financing costs                                                                                                           |  |               | 15,179,923    |   |                   |   | 12,268,239    |  
|Other                                                                                                                              |  |               | 1,225,450     |   |                   |   | 133,448       |  
|                                                                                                                                   |  |               |               |   |                   |   |               |  
|Total Assets                                                                                                                       |  | $             | 4,079,214,995 |   |                   | $ | 3,583,840,868 |  
|                                                                                                                                   |  |               |               |   |                   |   |               |  
|LIABILITIES AND STOCKHOLDERS EQUITY/(DEFICIT)                                                                                     |  |               |               |   |                   |   |               |  
|                                                                                                                                   |  |              
|Accounts payable                                                                                                                   |  | $             | 2,518,951     |   |                   | $ | 4,470,680     |  
|Government payable                                                                                                                 |  |               | 5,842,656     |   |                   |   | 7,917,689     |  
|Accrued expenses and other liabilities                                                                                             |  |               | 6,927,219     |   |                   |   | 8,217,111     |  
|Education Loan Backed Notes related to securitized student loans structured as collateralized borrowings                           |  |               | 3,775,408,222 |   |                   |   | 2,905,121,844 |  
|Warehouse loan facilities                                                                                                          |  |               | 280,578,608   |   |                   |   | 660,353,242   |  
|                                                                                                                                   |  |               |               |   |                   |   |               |  
|Total Liabilities                                                                                                                  |  |               | 4,071,275,656 |   |                   |   | 3,586,080,566 |  
|                                                                                                                                   |  |               |               |   |                   |   |               |  
|Commitments and contingencies (Note 8)                                                                                             |  |               |               |   |                   |   |               |  
|Preferred stock$0.001 par value, 10,000,000 shares authorized                                                                     |  |               |               |   |                   |   |               |  
|Common stock$0.001 par value, 40,000,000 shares authorized, 16,619,629 and 15,917,705 shares issued and outstanding,
respectively |  |               | 16,620        |   |                   |   | 15,918        |  
|Additional paid in capital                                                                                                         |  |               | 43,138,198    |   |                   |   | 40,673,609    |  
|Accumulated deficit                                                                                                                |  |               | (34,074,620   | ) |                   |   | (41,548,168   | )
|Accumulated other comprehensive loss, net of taxes of $0                                                                           |  |               | (1,140,859    | ) |                   |   | (1,381,057    | )
|                                                                                                                                   |  |               |               |   |                   |   |               |  
|Total Stockholders Equity/(Deficit)                                                                                               |  |               | 7,939,339     |   |                   |   | (2,239,698    | )
|                                                                                                                                   |  |               |               |   |                   |   |               |  
|Total Liabilities and Stockholders Equity/(Deficit)                                                                               |  | $             | 4,079,214,995 |   |                   | $ | 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 and Six Months Ended June 30, 2004 and 2003

(Unaudited)



|                                            |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|------------------------------------------- |  | --------------------------- | ---------- | ---- | ------------------------- | ---------- | ---- |  | ---- | ---------- |  | - | ---------- | -
|                                            |  | Three Months Ended June 30, |            |      | Six Months Ended June 30, |           
|                                            |  | 2004                        |            | 2003 |                           |            | 2004 |  | 2003 |           
|Interest income:                            |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Student loans, net                          |  | $                           | 32,146,320 |      | $                         | 19,516,152 |      |  | $    | 62,282,179 |  | $ | 34,228,804 |  
|Investments                                 |  |                             | 386,832    |      |                           | 386,050    |      |  |      | 743,052    |  |   | 576,955    |  
|                                            |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|                                            |  |                             | 32,533,152 |      |                           | 19,902,202 |      |  |      | 63,025,231 |  |   | 34,805,759 |  
|Cost of interest income                     |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Interest-related expenses                   |  |                             | 15,832,230 |      |                           | 10,496,576 |      |  |      | 30,546,333 |  |   | 19,103,579 |  
|Valuation of interest rate swap             |  |                             |           |      |                           | (308,160   | )    |  |      |           |  |   | 604,542    |  
|Loan servicing and other fees               |  |                             | 1,974,759  |      |                           | 1,035,379  |      |  |      | 3,838,462  |  |   | 1,762,988  |  
|                                            |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Total cost of interest income               |  |                             | 17,806,989 |      |                           | 11,223,795 |      |  |      | 34,384,795 |  |   | 21,471,109 |  
|                                            |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Net interest income                         |  |                             | 14,726,163 |      |                           | 8,678,407  |      |  |      | 28,640,436 |  |   | 13,334,650 |  
|Less: provision for losses                  |  |                             | 296,680    |      |                           | 432,554    |      |  |      | 734,203    |  |   | 987,184    |  
|                                            |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Interest income after provision for losses  |  |                             | 14,429,483 |      |                           | 8,245,853  |      |  |      | 27,906,233 |  |   | 12,347,466 |  
|Other income                                |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Gain on sale of student loans               |  |                             | 1,682,295  |      |                           | 2,360,474  |      |  |      | 4,108,841  |  |   | 10,101,892 |  
|Other                                       |  |                             | 57,118     |      |                           | 10,325     |      |  |      | 115,129    |  |   | 17,370     |  
|                                            |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Total other income                          |  |                             | 1,739,413  |      |                           | 2,370,799  |      |  |      | 4,223,970  |  |   | 10,119,262 |  
|Operating expenses:                         |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|                                            |  |                             |            |     
|General and administrative                  |  |                             | 2,585,629  |      |                           | 2,148,835  |      |  |      | 5,114,559  |  |   | 4,047,748  |  
|Servicing                                   |  |                             | 465,510    |      |                           |           |      |  |      | 629,613    |  |   |           |  
|Sales & marketing                           |  |                             | 8,487,590  |      |                           | 10,229,691 |      |  |      | 18,680,448 |  |   | 21,739,642 |  
|                                            |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Total operating expenses                    |  |                             | 11,538,729 |      |                           | 12,378,526 |      |  |      | 24,424,620 |  |   | 25,787,390 |  
|                                            |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Income/(loss) before income tax provision   |  |                             | 4,630,167  |      |                           | (1,761,874 | )    |  |      | 7,705,583  |  |   | (3,320,662 | )
|Income tax provision                        |  |                             | 127,082    |      |                           | 1,200      |      |  |      | 232,035    |  |   | 37,256     |  
|                                            |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Net income/(loss)                           |  | $                           | 4,503,085  |      | $                         | (1,763,074 | )    |  | $    | 7,473,548  |  | $ | (3,357,918 | )
|                                            |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Net income/(loss) per share:                |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Basic                                       |  | $                           | 0.27       |      | $                         | (0.15      | )    |  | $    | 0.46       |  | $ | (0.30      | )
|Diluted                                     |  | $                           | 0.24       |      | $                         | (0.15      | )    |  | $    | 0.40       |  | $ | (0.30      | )
|Weighted average common shares outstanding: |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Basic                                       |  |                             | 16,520,361 |      |                           | 11,433,758 |      |  |      | 16,249,899 |  |   | 11,372,803 |  
|Diluted                                     |  |                             | 18,710,303 |      |                           | 11,433,758 |      |  |      | 18,613,840 |  |   | 11,372,803 |  



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 Six Months Ended June 30, 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                         |  | 701,924         |  |        | 702    |                          |   | 1,486,206  |                    |  |   |                                  |   |  |       |           |   |                          |   | 1,486,908  |   |  |   |          
|Performance-based option vesting                         |  |                |  |        |       |                          |   | 983,422    |                    |  |   |                                  |   |  |       |           |   |                          |   | 983,422    |   |  |   |          
|2003 secondary offering-additional issuance costs        |  |                |  |        |       |                          |   | (5,039     | )                  |  |   |                                  |   |  |       |           |   |                          |   | (5,039     | ) |  |   |          
|Other comprehensive income related to interest rate swap |  |                |  |        |       |                          |   |           |                    |  |   |                                  |   |  |       | 240,198    |   |                          |   | 240,198    |   |  | $ | 240,198  
|Net income                                               |  |                |  |        |       |                          |   |           |                    |  |   | 7,473,548                         |   |  |       |           |   |                          |   | 7,473,548  |   |  |   | 7,473,548
|                                                         |  |                 |  |        |        |                          |   |            |                    |  |   |                                   |   |  |       |            |   |                          |   |            |   |  |   |          
|Balance, June 30, 2004                                   |  | 16,619,629      |  | $      | 16,620 |                          | $ | 43,138,198 |                    |  | $ | (34,074,620                       | ) |  | $     | (1,140,859 | ) |                          | $ | 7,939,339  |   |  | $ | 7,713,746
|                                                         |  |                 |  |        |        |                          |   |            |                    |  |   |                                   |   |  |       |            |   |                          |   |            |   |  |   |          



See accompanying notes
to consolidated financial statements



5



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##### Table of Contents

EDUCATION LENDING GROUP, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2004 and 2003

(Unaudited)



|                                                                                   |  |      |              |   |      |   |                |  
|---------------------------------------------------------------------------------- |  | ---- | ------------ | - | ---- | - | -------------- | -
|                                                                                   |  | 2004 |              |   | 2003 |  
|Cash Flows From Operating Activities:                                              |  |      |              |   |      |   |                |  
|Net income/(loss)                                                                  |  | $    | 7,473,548    |   |      | $ | (3,357,918     | )
|Adjustments to reconcile net income/(loss) to net cash used by operations:         |  |      |              |   |      |   |                |  
|Depreciation, amortization and non-cash stock-based compensation                   |  |      | 3,625,041    |   |      |   | 2,541,532      |  
|Loan loss reserve                                                                  |  |      | 734,203      |   |      |   | 987,184        |  
|Valuation of interest rate swap                                                    |  |      |             |   |      |   | 604,542        |  
|(Increase) decrease in assets:                                                     |  |      |              |   |      |   |                |  
|Interest and other receivables                                                     |  |      | (6,829,101   | ) |      |   | (8,538,463     | )
|Other assets                                                                       |  |      | (853,171     | ) |      |   | 159,105        |  
|Increase (decrease) in liabilities:                                                |  |      |              |   |      |   |                |  
|Accounts payable                                                                   |  |      | (1,951,729   | ) |      |   | 623,732        |  
|Government payable                                                                 |  |      | (2,075,033   | ) |      |   | (431,217       | )
|Accrued expenses and other liabilities                                             |  |      | (1,450,320   | ) |      |   | (2,536,092     | )
|                                                                                   |  |      |              |   |      |   |                |  
|Net cash used by operating activities                                              |  |      | (1,326,562   | ) |      |   | (9,947,595     | )
|                                                                                   |  |      |              |   |      |   |                |  
|Cash flows from investing activities:                                              |  |      |              |   |      |   |                |  
|Purchase/origination of student loans                                              |  |      | (631,789,310 | ) |      |   | (1,128,375,499 | )
|Sales of student loans                                                             |  |      | 173,810,848  |   |      |   | 315,215,950    |  
|Acquisition of property and equipment                                              |  |      | (1,950,267   | ) |      |   | (575,463       | )
|Acquisition of intangible assets                                                   |  |      | (148,830     | ) |      |   |               |  
|Other investments                                                                  |  |      | (90,000      | ) |      |   |               |  
|                                                                                   |  |      |              |   |      |   |                |  
|Net cash used in investing activities                                              |  |      | (460,167,559 | ) |      |   | (813,735,012   | )
|                                                                                   |  |      |              |   |      |   |                |  
|Cash flows from financing activities:                                              |  |      |              |   |      |   |                |  
|Net payments on credit facility                                                    |  |      | (365,463,198 | ) |      |   | (89,927,948    | )
|Proceeds from Education Loan Backed                                                |  |      |              |   |      |   |                |  
|Notes related to securitized student loans structured as collateralized borrowings |  |      | 948,263,083  |   |      |   | 963,735,429    |  
|Payments on Education Loan Backed                                                  |  |      |              |   |      |   |                |  
|Notes related to securitized student loans structured as collateralized borrowings |  |      | (129,713,622 | ) |      |   | (44,931,750    | )
|Costs related to securitizations                                                   |  |      | (3,845,871   | ) |      |   | (4,599,902     | )
|Net proceeds from issuance of stock                                                |  |      | 1,481,869    |   |      |   | 327,667        |  
|                                                                                   |  |      |              |   |      |   |                |  
|Net cash provided by financing activities                                          |  |      | 450,722,261  |   |      |   | 824,603,496    |  
|                                                                                   |  |      |              |   |      |   |                |  
|Net increase/(decrease) in cash                                                    |  |      | (10,771,860  | ) |      |   | 920,889        |  
|Cash and cash equivalents at beginning of period                                   |  |      | 33,557,879   |   |      |   | 2,042,527      |  
|                                                                                   |  |      |              |   |      |   |                |  
|Cash and cash equivalents at end of period                                         |  | $    | 22,786,019   |   |      | $ | 2,963,416      |  
|                                                                                   |  |      |              |   |      |   |                |  



See accompanying notes
to consolidated financial statements



6



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##### Table of Contents

Education Lending Group, Inc.

Notes to Consolidated Financial Statements

June 30, 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 estimated 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 estimated life of the student loan using the straight-line method. The overall effect of this treatment is approximation of the effective interest method. The unamortized portion of deferred fees and costs associated with
loans that have been repaid or sold are expensed in the income statement in the period of repayment.



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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. Loans may be sold after initial or final disbursement. Deferred costs related to the origination of loans sold after initial disbursement are netted against gain on sale when
the loans are sold rather than capitalized and amortized as discussed above. Interest on loans sold after final disbursement 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 in Gain on Sale of Student Loans below. Costs related to the origination of these loans are capitalized and netted against gain on sale once the loan is sold. 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, net of 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. At June 30, 2004 all of our student loans were being serviced by 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. Loans may be sold subsequent to either the initial or 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, overall industry norms and experience related to defaults 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 on the income statement.



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



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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. Substantially all these funds are invested in guaranteed investment contracts, which are all triple A rated. At June 30, 2004 there was approximately $22.0
million of restricted cash held in our warehouse line, and $157.3 million held in our securitizations.



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 under the
provisions of 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.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 and during the second quarter of 2004 we entered into additional interest rate swap agreements, all of which were designated as and are effective as cash flow hedges. These swaps are also 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



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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 2004 Notes, 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 SFAS 140 have not been met. Therefore these transactions are accounted for as secured borrowings in accordance with the provisions 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 and six months ended June 30, 2004. It excludes 63,100 and 164,350 shares that were not included in the calculations for the quarter and six months ended June 30, 2004,
respectively, as they would have been antidilutive. (There was no difference between our basic and diluted loss per share in the quarter and six months ended June 30, 2003.)



|                                            |  |                                         |            |                    |   |     
|------------------------------------------- |  | --------------------------------------- | ---------- | ------------------ | - | ----
|                                            |  | For the threemonths ended June 30, 2004 |            | Earnings per Share
|Net income                                  |  | $                                       | 4,503,085  |                    |   |     
|                                            |  |                                         |            |                    |   |     
|Basic weighted average shares outstanding   |  |                                         | 16,520,361 |                    | $ | 0.27
|Dilutive shares                             |  |                                         | 2,189,942  |                    |   |     
|                                            |  |                                         |            |                    |   |     
|Diluted weighted average shares outstanding |  |                                         | 18,710,303 |                    | $ | 0.24
|                                            |  |                                         |            |                    |   |     
|                                            |  |                                        
|                                            |  | For the six months ended June 30, 2004  |            | Earnings per Share
|Net income                                  |  | $                                       | 7,473,548  |                    |   |     
|                                            |  |                                         |            |                    |   |     
|Basic weighted average shares outstanding   |  |                                         | 16,249,899 |                    | $ | 0.46
|Dilutive shares                             |  |                                         | 2,363,941  |                    |   |     
|                                            |  |                                         |            |                    |   |     
|Diluted weighted average shares outstanding |  |                                         | 18,613,840 |                    | $ | 0.40
|                                            |  |                                         |            |                    |   |     



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.



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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 quarter and six months ended June 30, 2004 and 2003 would have been as follows:



|                                                                                                            |  |                                     |            |   |      |   |            |  
|----------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                            |  | For the three months ended June 30, |           
|                                                                                                            |  | 2004                                |            |   | 2003 |  
|Net income/(loss), as reported                                                                              |  | $                                   | 4,503,085  |   |      | $ | (1,763,074 | )
|Deduct, total stock-based compensation expense determined under fair value based method, net of tax effects |  |                                     | (667,818   | ) |      |   | (238,827   | )
|                                                                                                            |  |                                     |            |   |      |   |            |  
|Pro forma net income/(loss)                                                                                 |  | $                                   | 3,835,267  |   |      | $ | (2,001,901 | )
|                                                                                                            |  |                                     |            |   |      |   |            |  
|Income/(loss) per share:                                                                                    |  |                                     |            |   |      |   |            |  
|Basic as reported                                                                                           |  | $                                   | 0.27       |   |      | $ | (0.15      | )
|Basic pro forma                                                                                             |  | $                                   | 0.23       |   |      | $ | (0.18      | )
|Diluted as reported                                                                                         |  | $                                   | 0.24       |   |      | $ | (0.15      | )
|Diluted pro forma                                                                                           |  | $                                   | 0.21       |   |      | $ | (0.18      | )
|                                                                                                            | 
|                                                                                                            |  | For the six monthsended June 30,    |           
|                                                                                                            |  | 2004                                |            |   | 2003 |  
|Net income/(loss), as reported                                                                              |  | $                                   | 7,473,548  |   |      | $ | (3,357,918 | )
|Deduct, total stock-based compensation expense determined under fair value based method, net of tax effects |  |                                     | (1,138,798 | ) |      |   | (446,575   | )
|                                                                                                            |  |                                     |            |   |      |   |            |  
|Pro forma net income/(loss)                                                                                 |  | $                                   | 6,334,750  |   |      | $ | (3,804,493 | )
|                                                                                                            |  |                                     |            |   |      |   |            |  
|Income/(loss) per share:                                                                                    |  |                                     |            |   |      |   |            |  
|Basic as reported                                                                                           |  | $                                   | 0.46       |   |      | $ | (0.30      | )
|Basic pro forma                                                                                             |  | $                                   | 0.39       |   |      | $ | (0.33      | )
|Diluted as reported                                                                                         |  | $                                   | 0.40       |   |      | $ | (0.30      | )
|Diluted pro forma                                                                                           |  | $                                   | 0.34       |   |      | $ | (0.33      | )



Proposed Accounting Pronouncements



Proposed FAS, Share-Based Payment-an
amendment of FAS 123 and FAS 95, Statement of Cash Flows



The FASB is currently considering amending SFAS 123, APB Opinion No. 25 and FAS 95, Statement of Cash Flows. 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 as we would be required to record an expense on our income statement for all options granted.



Statement of Position (SOP) 03-3, Accounting for
Certain Loans or Debt Securities Acquired in a Transfer



In December 2003 the Accounting Standards Executive Committee issued SOP 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.This SOP addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an investors initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. This SOP is effective for
loans acquired in fiscal years beginning after December 15, 2004. We have determined that SOP 03-3 will not have an impact on our financial statements.



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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 composition of the student
loans held at June 30, 2004 was as follows:



|                                                |  |                                         |             |   |                            |   |               |       |  |   |               |  
|----------------------------------------------- |  | --------------------------------------- | ----------- | - | -------------------------- | - | ------------- | ----- |  | - | ------------- | -
|                                                |  | As of June 30, 2004                     |            
|                                                |  | Student Loans(including heldfor resale) |             |   | Student Loans(securitized) |   |               | Total | 
|FFELP Loans:                                    |  |                                         |             |   |                            |   |               |       |  |   |               |  
|Stafford                                        |  | $                                       | 125,089,517 |   |                            | $ |              |       |  | $ | 125,089,517   |  
|PLUS                                            |  |                                         | 6,036,031   |   |                            |   |              |       |  |   | 6,036,031     |  
|Consolidation                                   |  |                                         | 111,061,595 |   |                            |   | 3,543,285,394 |       |  |   | 3,654,346,989 |  
|                                                |  |                                         |             |   |                            |   |               |       |  |   |               |  
|FFELP sub-total                                 |  |                                         | 242,187,143 |   |                            |   | 3,543,285,394 |       |  |   | 3,785,472,537 |  
|Alternative supplemental loans                  |  |                                         | 12,412,873  |   |                            |   |              |       |  |   | 12,412,873    |  
|                                                |  |                                         |             |   |                            |   |               |       |  |   |               |  
|Total student loans, gross                      |  |                                         | 254,600,016 |   |                            |   | 3,543,285,394 |       |  |   | 3,797,885,410 |  
|Deferred origination costs, net of amortization |  |                                         | 3,242,943   |   |                            |   | 25,970,612    |       |  |   | 29,213,555    |  
|Loan loss reserve                               |  |                                         | (231,938    | ) |                            |   | (4,251,943    | )     |  |   | (4,483,881    | )
|                                                |  |                                         |             |   |                            |   |               |       |  |   |               |  
|Total student loans, net                        |  | $                                       | 257,611,021 |   |                            | $ | 3,565,004,063 |       |  | $ | 3,822,615,084 |  
|                                                |  |                                         |             |   |                            |   |               |       |  |   |               |  



The composition 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 1st 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 the applicable floating rate (91-day Treasury bill, commercial paper, 52-week Treasury bill, or the constant maturity Treasury rate) for 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.



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 June 30, 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 or 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.



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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. 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 June 30, 2004 is as follows:



|                                       |  |               |              |   |                          |   |               |       |  |   |               |  
|-------------------------------------- |  | ------------- | ------------ | - | ------------------------ | - | ------------- | ----- |  | - | ------------- | -
|                                       |  | Student Loans |              |   | Student LoansSecuritized |   |               | Total | 
|Balance at 12/31/03                    |  | $             | 616,003,492  |   |                          | $ | 2,750,239,082 |       |  | $ | 3,366,242,574 |  
|                                       |  |               |             
|Additions                              |  |               |              |   |                          |   |               |       |  |   |               |  
|Originations and purchases             |  |               | 776,508,855  |   |                          |   |              |       |  |   | 776,508,855   |  
|Capitalized interest                   |  |               | 740,448      |   |                          |   | 10,586,307    |       |  |   | 11,326,755    |  
|*Additions to capitalized costs        |  |               | 4,048,438    |   |                          |   | 6,303,295     |       |  |   | 10,351,733    |  
|                                       |  |               |             
|Deductions                             |  |               |              |   |                          |   |               |       |  |   |               |  
|Borrower payments                      |  |               | (26,376,194  | ) |                          |   | (67,836,272   | )     |  |   | (94,212,466   | )
|Sales to third parties                 |  |               | (173,810,848 | ) |                          |   |              |       |  |   | (173,810,848  | )
|Refunds, cancellations and adjustments |  |               | (15,738,173  | ) |                          |   | (50,480,411   | )     |  |   | (66,218,584   | )
|Net additions to loan loss reserve     |  |               | 362,166      |   |                          |   | (1,096,369    | )     |  |   | (734,203      | )
|*Reductions in capitalized costs       |  |               | (5,650,383   | ) |                          |   | (1,197,553    | )     |  |   | (6,847,936    | )
|                                       |  |               |             
|Other                                  |  |               |              |   |                          |   |               |       |  |   |               |  
|Transfer to securitizations            |  |               | (918,478,114 | ) |                          |   | 918,478,114   |       |  |   |              |  
|Other                                  |  |               | 1,334        |   |                          |   | 7,870         |       |  |   | 9,204         |  
|                                       |  |               |              |   |                          |   |               |       |  |   |               |  
|Balance at 6/30/04                     |  | $             | 257,611,021  |   |                          | $ | 3,565,004,063 |       |  | $ | 3,822,615,084 |  
|                                       |  |               |              |   |                          |   |               |       |  |   |               |  

---

|* | Activity includes transfers between Student Loans and Student Loans Securitized columns due to securitization completed in May 2004.
|- | ----------------------------------------------------------------------------------------------------------------------------------------



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 June 30, 2004 all alternative supplemental loans were 100% guaranteed by third-party guarantors.



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The following table summarizes changes in the loan loss reserve for the quarter and six months ended June
30, 2004 and June 30, 2003:



|                               |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|------------------------------ |  | --------------------------- | --------- | - | ------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                               |  | Three Months Ended June 30, |           |   | Six Months Ended June 30, |  
|                               |  | 2004                        |           |   | 2003                      |   |           | 2004 |  |   | 2003      |  
|Balance at beginning of period |  | $                           | 4,273,649 |   |                           | $ | 2,140,931 |      |  | $ | 3,910,104 |   |  | $ | 1,592,669 |  
|Provision                      |  |                             | 296,680   |   |                           |   | 432,554   |      |  |   | 734,203   |   |  |   | 987,184   |  
|Charge-offs                    |  |                             | (86,449   | ) |                           |   | (7,388    | )    |  |   | (160,427  | ) |  |   | (13,756   | )
|                               |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Balance at end of period       |  | $                           | 4,483,880 |   |                           | $ | 2,566,097 |      |  | $ | 4,483,880 |   |  | $ | 2,566,097 |  
|                               |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  



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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. As of June 30, 2004, the Conduit Facility had been approved for advances of up to $500 million, however from time to time, as the need has arisen, the Conduit Facility has been approved for advances of up
to $1.25 billion. 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 June 30, 2004, the balance outstanding on the
Conduit Facility was approximately $281 million.



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 (1.16% at June 30, 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 May of 2004, we
completed a $1 billion LIBOR/auction rate student loan securitization. This securitization has been accounted for as a securitized borrowing because 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 0.04% to 0.19%. Other notes bear interest at a rate
determined by Dutch Auction. All notes mature no later than June 15, 2043. 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 June 30, 2004 the notes principal amounts and interest rates were as follows:



$1,000,000,000 Education Loan Backed Notes Issued in May, 2004



|               |  |                     |               |               |                      |   |               |           |  |           
|-------------- |  | ------------------- | ------------- | ------------- | -------------------- | - | ------------- | --------- |  | ----------
|               |  | As of June 30, 2004 |               |               | Initial Auction Date |   | Maturity Date
|               |  | Principal Amount    |               | Interest Rate |                      |   |              
|Series 2004A-1 |  | $                   | 170,000,000   |               | 1.38                 | % |               | n/a       |  | 12/17/2012
|Series 2004A-2 |  |                     | 390,000,000   |               | 1.50                 |   |               | n/a       |  | 12/15/2022
|Series 2004A-3 |  |                     | 100,000,000   |               | 1.53                 |   |               | n/a       |  | 12/16/2024
|Series 2004A-4 |  |                     | 100,000,000   |               | 1.44                 |   |               | 6/14/2004 |  | 6/15/2043 
|Series 2004A-5 |  |                     | 100,000,000   |               | 1.45                 |   |               | 6/18/2004 |  | 6/15/2043 
|Series 2004A-6 |  |                     | 90,000,000    |               | 1.52                 |   |               | 6/25/2004 |  | 6/15/2043 
|Series 2004B-1 |  |                     | 50,000,000    |               | 1.60                 |   |               | 6/25/2004 |  | 6/15/2043 
|               |  |                     |               |               |                      |   |               |           |  |           
|Total          |  | $                   | 1,000,000,000 |               |                      |   |               |           |  |           
|               |  |                     |               |               |                      |   |               |           |  |           



In October of 2003, we
completed a $1 billion LIBOR/auction rate student loan securitization. This securitization has been accounted for as a securitized borrowing because 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



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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 June 30, 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 June 30, 2004 |             |               | Initial Auction Date |   | Maturity Date
|                         |  | Principal Amount    |             | Interest Rate |                      |   |              
|Series 2003A-1 (October) |  | $                   | 45,928,062  |               | 1.56                 | % |               | n/a        |  | 9/15/2008 
|Series 2003A-2 (October) |  |                     | 118,500,000 |               | 1.62                 |   |               | n/a        |  | 12/17/2012
|Series 2003A-3 (October) |  |                     | 319,000,000 |               | 1.79                 |   |               | n/a        |  | 3/16/2020 
|Series 2003A-4 (October) |  |                     | 100,000,000 |               | 1.39                 |   |               | 12/8/2003  |  | 12/15/2032
|Series 2003A-5 (October) |  |                     | 83,750,000  |               | 1.37                 |   |               | 11/24/2003 |  | 12/15/2042
|Series 2003A-6 (October) |  |                     | 83,750,000  |               | 1.40                 |   |               | 12/1/2003  |  | 12/15/2042
|Series 2003A-7 (October) |  |                     | 83,750,000  |               | 1.47                 |   |               | 12/8/2003  |  | 12/15/2042
|Series 2003A-8 (October) |  |                     | 83,750,000  |               | 1.50                 |   |               | 12/15/2003 |  | 12/15/2042
|Series 2003B-1 (October) |  |                     | 50,000,000  |               | 1.55                 |   |               | 12/8/2003  |  | 12/15/2042
|                         |  |                     |             |               |                      |   |               |            |  |           
|Total                    |  | $                   | 968,428,062 |               |                      |   |               |            |  |           
|                         |  |                     |             |               |                      |   |               |            |  |           



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 because 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 June 30, 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 June 30, 2004 |             |              | Initial Auction Date |   | Maturity Date
|                       |  | Principal Amount    |             | InterestRate |                      |   |              
|Series 2003A-1 (April) |  | $                   | 16,480,160  |              | 1.57                 | % |               | n/a       |  | 3/15/2007 
|Series 2003A-2 (April) |  |                     | 144,000,000 |              | 1.62                 |   |               | n/a       |  | 12/15/2011
|Series 2003A-3 (April) |  |                     | 276,000,000 |              | 1.82                 |   |               | n/a       |  | 12/15/2017
|Series 2003A-4 (April) |  |                     | 75,000,000  |              | 1.35                 |   |               | 5/9/2003  |  | 3/15/2032 
|Series 2003A-5 (April) |  |                     | 75,000,000  |              | 1.42                 |   |               | 5/23/2003 |  | 3/15/2032 
|Series 2003A-6 (April) |  |                     | 100,000,000 |              | 1.40                 |   |               | 5/7/2003  |  | 3/17/2042 
|Series 2003A-7 (April) |  |                     | 100,000,000 |              | 1.39                 |   |               | 5/14/2003 |  | 3/17/2042 
|Series 2003A-8 (April) |  |                     | 100,000,000 |              | 1.40                 |   |               | 5/21/2003 |  | 3/17/2042 
|Series 2003B-1 (April) |  |                     | 50,000,000  |              | 1.52                 |   |               | 5/21/2003 |  | 3/17/2042 
|                       |  |                     |             |              |                      |   |               |           |  |           
|Total                  |  | $                   | 936,480,160 |              |                      |   |               |           |  |           
|                       |  |                     |             |              |                      |   |               |           |  |           



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. If certain parity percentages are not met, the



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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. The notes bear
interest at a rate determined by a Dutch Auction and mature no later than June 1, 2042. At June 30, 2004, the notes principal amounts and interest rates were as follows:



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



|               |  |                     |             |               |                      |   |               |           |  |         
|-------------- |  | ------------------- | ----------- | ------------- | -------------------- | - | ------------- | --------- |  | --------
|               |  | As of June 30, 2004 |             |               | Initial Auction Date |   | Maturity Date
|               |  | Principal Amount    |             | Interest Rate |                      |   |              
|Series 2002A-1 |  | $                   | 75,000,000  |               | 1.30                 | % |               | 2/11/2003 |  | 6/1/2042
|Series 2002A-2 |  |                     | 50,650,000  |               | 1.38                 |   |               | 5/13/2003 |  | 6/1/2042
|Series 2002A-3 |  |                     | 75,000,000  |               | 1.40                 |   |               | 5/20/2003 |  | 6/1/2042
|Series 2002A-4 |  |                     | 67,800,000  |               | 1.45                 |   |               | 8/19/2003 |  | 6/1/2042
|Series 2002A-5 |  |                     | 61,500,000  |               | 1.40                 |   |               | 6/13/2002 |  | 6/1/2042
|Series 2002A-6 |  |                     | 66,000,000  |               | 1.42                 |   |               | 6/20/2002 |  | 6/1/2042
|Series 2002A-7 |  |                     | 66,000,000  |               | 1.52                 |   |               | 6/27/2002 |  | 6/1/2042
|Series 2002B-1 |  |                     | 33,700,000  |               | 1.55                 |   |               | 6/20/2002 |  | 6/1/2042
|               |  |                     |             |               |                      |   |               |           |  |         
|Total          |  | $                   | 495,650,000 |               |                      |   |               |           |  |         
|               |  |                     |             |               |                      |   |               |           |  |         



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



|                |  |                     |             |              |                     |   |              |            |  |         
|--------------- |  | ------------------- | ----------- | ------------ | ------------------- | - | ------------ | ---------- |  | --------
|                |  | As of June 30, 2004 |             |              | InitialAuction Date |   | MaturityDate
|                |  | PrincipalAmount     |             | InterestRate |                     |   |             
|Series 2002A-8  |  | $                   | 50,000,000  |              | 1.50                | % |              | 9/23/2002  |  | 6/1/2042
|Series 2002A-9  |  |                     | 65,000,000  |              | 1.40                |   |              | 10/24/2002 |  | 6/1/2042
|Series 2002A-10 |  |                     | 49,850,000  |              | 1.40                |   |              | 9/3/2002   |  | 6/1/2042
|Series 2002A-11 |  |                     | 52,000,000  |              | 1.44                |   |              | 9/9/2002   |  | 6/1/2042
|Series 2002A-12 |  |                     | 62,000,000  |              | 1.40                |   |              | 9/12/2002  |  | 6/1/2042
|Series 2002A-13 |  |                     | 64,000,000  |              | 1.47                |   |              | 9/16/2002  |  | 6/1/2042
|Series 2002B-2  |  |                     | 32,000,000  |              | 1.63                |   |              | 9/18/2002  |  | 6/1/2042
|                |  |                     |             |              |                     |   |              |            |  |         
|Total           |  | $                   | 374,850,000 |              |                     |   |              |            |  |         
|                |  |                     |             |              |                     |   |              |            |  |         



On January 16, 2004 we
filed a shelf registration statement with the SEC. Our May 2004 securitization was issued under this registration statement. This registration statement will also allow us to issue additional Education Loan Backed Notes in the amount of $1 billion
over the next 18 months.



As of June 30, 2004, we are in
compliance with the debt covenants on both the warehouse loan facilities and the securitizations.



Note 6Interest-Rate Swaps



To lock in portions of floor income associated with some of our loan assets or to minimize the basis risk associated with having out debt costs track off one index (i.e. LIBOR) and our student loan income track off another index (i.e. CP),
from time to time we enter into interest-rate swap agreements on portions of our portfolio. These swaps were completed as requirements of the corresponding securitizations which are discussed in Note 5.



These swaps usually possess a term between one and three years. 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. Management expects our hedge program to be effective in offsetting changes in cash flows for the risk
being hedged. They are discussed in more detail below.



In May
of 2004 we entered into an interest-rate swap related to $950 million of our Education Loan Backed Notes (the notional amount). The notional amount of the swap will decline over the life of the swap to a minimum amount of $755 million in March 2007.
Under the terms of the agreement, on each quarterly distribution date, commencing September 15, 2004 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
| | - | -----------------------------------------



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| |  | the notional amount of the swap for the relevant period 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:



| |  | the one month US dollar CP rate plus 11.5 basis points (computed on the basis of a 360-day year consisting of twelve 30 day months) and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | the notional amount of the swap for the relevant 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 June 15, 2007. Since the underlying debt is tied to LIBOR, we expect this swap to limit our vulnerability to adverse swings in CP rates in relation to LIBOR rates, thus protecting our spread and
corresponding cash flows.



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 June 30, 2004 we recorded a charge of $1.5 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 fair market value of the interest-rate swap at June 30, 2004 was a liability of $1.5 million. Further, during the quarter and six months ended June 30, 2004, we recorded a reduction in interest expense of $0.2 million related to
the interest-rate swap, but not related to the mark-to-market adjustment, on our income statement.



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 and six months ended June 30, 2004 we recorded credit of $1.3 million and $1.0 million,
respectively, 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 June 30, 2004 was an asset of $0.3 million. Further, during the quarter and six months ended June 30, 2004, we recorded additional interest expense of $0.4 million and $0.8 million, respectively, related to the
interest-rate swap, but not related to the mark-to-market adjustment, on our income statement.



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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 and six months ended June 30, 2004, we recorded zero, and a credit of $0.7 million,
respectively, to accumulated other comprehensive loss on the balance sheet related to this swap. During the quarter and six months ended June 30, 2003, there we charged zero and $1.5 million, respectively 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 June 30, 2004 was zero. Further, during the quarter and six months ended June 30, 2004, we recorded additional interest
expense of $0.3 million and $0.6 million, respectively, related to the interest-rate swap, but not related to the mark-to-market adjustment, on our income statement. For both the quarter and six months ended June 30, 2003, we recorded additional
interest expense of $0.2 million related to the interest-rate swap, but not related to the mark-to-market adjustment, on our income statement.



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 credit of $0.3 million and a charge of
$0.6 million, respectively, during the quarter and six months ended June 30, 2003 (the difference between the fair market value of the swap at December 31, 2002 and at June 30, 2003) as a mark-to-market adjustment. As the hedge expired in 2003,
there was no corresponding charge during the quarter and six months ended June 30, 2004. We also recorded additional interest expense related to this interest-rate swap (but not related to the mark-to-market adjustment) of $0.4 million and $0.8
million during the quarter and six months ended June 30, 2003, respectively.



Note 7Sale of Common Stock



During the
three and six months ended June 30, 2004 we received proceeds of $0.7 million and $1.5 million, for the issuance of 323,292 and 701,924, respectively, shares of common stock from the exercise of warrants and employee stock options.



Note 8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
|           |  |        |          



During the second
quarter we also entered into an agreement to sell up to $100 million of loans over the next three years, based on pre-determined pricing related to the characteristics of the loans to be sold. We expect that most of these loans will be consolidation
loans. In addition, we have entered into another agreement to sell other various loans throughout the coming years.



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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 9Fair Value of Financial Instruments



The following table summarizes the fair value of our financial assets and
liabilities, including our derivative instruments, as of June 30, 2004 and December 31, 2003.



|                                         |  |                     |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|---------------------------------------- |  | ------------------- | ------------- | ----------------------- | -------------- | - | ------------- | ---------- |  | ---------- | ----------- |  | -------------- | ------------- | - | ---------- | - | ------------- | - |  | - | -----------
|                                         |  | As of June 30, 2004 |               | As of December 31, 2003
|                                         |  | Fair Value          |               |                         | Carrying Value |   |               | Difference |  | Fair Value |             |  | Carrying Value |               |   | Difference
|Earning assets                           |  |                     |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Student loans                            |  | $                   | 3,971,411,476 |                         |                | $ | 3,822,615,084 |            |  | $          | 148,796,392 |  | $              | 3,496,860,718 |   |            | $ | 3,366,242,574 |   |  | $ | 130,618,144
|Cash and investments                     |  |                     | 22,786,019    |                         |                |   | 22,786,019    |            |  |            |            |  |                | 33,557,879    |   |            |   | 33,557,879    |   |  |   |           
|                                         |  |                     |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Total earning assets                     |  | $                   | 3,994,197,495 |                         |                | $ | 3,845,401,103 |            |  | $          | 148,796,392 |  | $              | 3,530,418,597 |   |            | $ | 3,399,800,453 |   |  | $ | 130,618,144
|                                         |  |                     |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Interest-bearing liabilities             |  |                     |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Accounts payable                         |  | $                   | 2,518,951     |                         |                | $ | 2,518,951     |            |  | $          |            |  | $              | 4,470,680     |   |            | $ | 4,470,680     |   |  | $ |           
|Government payable                       |  |                     | 5,842,656     |                         |                |   | 5,842,656     |            |  |            |            |  |                | 7,917,689     |   |            |   | 7,917,689     |   |  |   |           
|Short-term borrowings                    |  |                     | 280,578,608   |                         |                |   | 280,578,608   |            |  |            |            |  |                | 660,353,242   |   |            |   | 660,353,242   |   |  |   |           
|Long-term notes                          |  |                     | 3,775,408,222 |                         |                |   | 3,775,408,222 |            |  |            |            |  |                | 2,905,121,845 |   |            |   | 2,905,121,845 |   |  |   |           
|                                         |  |                     |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Total interest-bearing liabilities       |  | $                   | 4,064,348,437 |                         |                | $ | 4,064,348,437 |            |  | $          |            |  | $              | 3,577,863,456 |   |            | $ | 3,577,863,456 |   |  | $ |           
|                                         |  |                     |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Derivative financial instruments         |  |                     |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            
|Interest rate swaps                      |  | $                   | (1,140,859    | )                       |                | $ | (1,140,859    | )          |  | $          |            |  | $              | (1,381,057    | ) |            | $ | (1,381,057    | ) |  | $ |           
|Excess of fair value over carrying value |  |                     |               |                         |                |   |               |            |  | $          | 148,796,392 |  |                |               |   |            |   |               |   |  | $ | 130,618,144
|                                         |  |                     |               |                         |                |   |               |            |  |            |             |  |                |               |   |            |   |               |   |  |   |            



Note 10Provision for Income
Taxes



Our effective income tax rate was 2.7% and 3.0% in
the three and six months ended June 30, 2004, respectively. In prior years, we had net operating losses for which we recorded no financial statement benefit when incurred due to the creation of a full valuation allowance. Utilization of net
operating loss carryovers for the period ended June 30, 2004 has resulted in a reduction of the valuation allowance and a corresponding reduction in the provisional tax rate below the statutory rate. Our computed 2004 income tax liability is based
on the alternative minimum tax computation and state franchise taxes.



Note
11Subsequent Events



Education Funding Resources II,
LLC was formed in Delaware on July 9, 2004. Education Lending Services, Inc. is the sole equity member of Education Funding Resources II, LLC. Education Funding Resources II, 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.



On July 27, 2004, Education Lending Services Corporation, our servicing entity, disbursed its first loans. These loans
were marketed through our Consolidation Assistance Program. We intend to focus on servicing our consolidation loan portfolio as we solidify our plans to begin servicing Federal Stafford and Parent Loan for Undergraduate Students (PLUS) loans.



In July of 2004 we reached an agreement to lease 4,728
additional square feet of office space in the same building as our current facility in Cincinnati, Ohio. This agreement was effective August 1, 2004. It provides for annual rent of approximately $58,000 throughout the lease term, which expires on
March 31, 2007, concurrently with our existing lease agreement.



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##### Table of Contents

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 June 30, 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. As of June 30, 2004 all of our student loans were serviced by third-party servicers.



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 income sufficient to absorb our expenses, including these marketing partner fees, resulting in net income for the quarter, continuing in to the second 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.



The
quarter ended June 30, 2004 marks our second consecutive quarter of profitability. We recorded net income of $4.5 million, or $0.27 per share (basic) for the quarter, reflecting a 52% increase over our net income for the quarter ended March 31,
2004. For the six months ended June 30, 2004, we have recorded net income of $7.5 million, or $0.46 per share (basic.) As we expected, during the second quarter we continued to see decreased originations in consolidation loans, while our Stafford
and PLUS business continued to experience aggressive growth, with Stafford and PLUS originations 84% higher in the second quarter of 2004 than in the comparable period of the prior year. During the quarter ended June 30, 2004, we originated
approximately $292 million in loans, of which $61.7 million, or 21%, were Stafford and PLUS loans.



As illustrated below, from the quarter ended June 30, 2003 to the quarter ended June 30, 2004, Stafford and PLUS loans have increased significantly in
terms of dollars and as a percentage of 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 quarter and six months ended June 30, 2004 and 2003.



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|                         |  |                                     |             |            |   |               |           |   |              |   |  |     |   
|------------------------ |  | ----------------------------------- | ----------- | ---------- | - | ------------- | --------- | - | ------------ | - |  | --- | --
|                         |  | For the three months ended June 30, |             | Change ($) |   |               | Change(%) |  
|Loan Type                |  | 2004                                |             | 2003       |   |              
|Consolidation            |  | $                                   | 229,558,601 |            | $ | 443,761,840   |           | $ | (214,203,239 | ) |  | (48 | )%
|Stafford                 |  |                                     | 53,248,159  |            |   | 29,906,875    |           |   | 23,341,284   |   |  | 78  |   
|PLUS                     |  |                                     | 8,450,356   |            |   | 3,647,532     |           |   | 4,802,824    |   |  | 132 |   
|Alternative Supplemental |  |                                     | 756,881     |            |   | 2,608,785     |           |   | (1,851,904   | ) |  | (71 | ) 
|                         |  |                                     |             |            |   |               |           |   |              |   |  |     |   
|Total                    |  | $                                   | 292,013,997 |            | $ | 479,925,032   |           | $ | (187,911,035 | ) |  | (39 | )%
|                         |  |                                     |             |            |   |               |           |   |              |   |  |     |   
|                         |  |                                     |            
|                         |  | For the six months ended June 30,   |             | Change ($) |   |               | Change(%) |  
|Loan Type                |  | 2004                                |             | 2003       |   |              
|Consolidation            |  | $                                   | 585,667,050 |            | $ | 1,108,664,294 |           | $ | (522,997,244 | ) |  | (47 | )%
|Stafford                 |  |                                     | 138,937,530 |            |   | 79,807,680    |           |   | 59,129,850   |   |  | 74  |   
|PLUS                     |  |                                     | 49,663,448  |            |   | 13,155,680    |           |   | 36,507,768   |   |  | 277 |   
|Alternative Supplemental |  |                                     | 2,240,827   |            |   | 5,438,449     |           |   | (3,197,622   | ) |  | (59 | ) 
|                         |  |                                     |             |            |   |               |           |   |              |   |  |     |   
|Total                    |  | $                                   | 776,508,855 |            | $ | 1,207,066,103 |           | $ | (430,557,248 | ) |  | (36 | )%
|                         |  |                                     |             |            |   |               |           |   |              |   |  |     |   



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, our 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



Earnings Summary.



|                                    |  |                                     |               |      |   |               |  
|----------------------------------- |  | ----------------------------------- | ------------- | ---- | - | ------------- | -
|                                    |  | For the three months ended June 30, |              
|                                    |  | 2004                                |               | 2003 |  
|Student loan income                 |  | $                                   | 32,146,320    |      | $ | 19,516,152    |  
|Gain on sale of loans               |  |                                     | 1,682,295     |      |   | 2,360,474     |  
|Marketing partner fees and expenses |  |                                     | 3,502,345     |      |   | 7,144,998     |  
|Employee compensation and benefits  |  |                                     | 3,240,952     |      |   | 3,045,882     |  
|Net income/(loss)                   |  |                                     | 4,503,085     |      |   | (1,763,074    | )
|Income/(loss) per share, diluted    |  |                                     | 0.24          |      |   | (0.15         | )
|                                    | 
|                                    |  | For the six months ended June 30,   |              
|                                    |  | 2004                                |               | 2003 |  
|Student loan income                 |  | $                                   | 62,282,179    |      | $ | 34,228,804    |  
|Gain on sale of loans               |  |                                     | 4,108,841     |      |   | 10,101,892    |  
|Marketing partner fees and expenses |  |                                     | 9,638,087     |      |   | 14,895,314    |  
|Employee compensation and benefits  |  |                                     | 6,111,981     |      |   | 5,630,178     |  
|Net income/(loss)                   |  |                                     | 7,473,548     |      |   | (3,357,918    | )
|Income/(loss) per share, diluted    |  |                                     | 0.40          |      |   | (0.30         | )
|                                    | 
|                                    |  | As of June 30,                      |              
|                                    |  | 2004                                |               | 2003 |  
|Net student loans outstanding       |  | $                                   | 3,822,615,084 |      | $ | 2,160,918,102 |  



For the quarter ended
June 30, 2004, our net income calculated in accordance with GAAP was $4.5 million, or $0.27 per share (basic) and $0.24 per share (diluted), compared to a loss of $1.8 million, or $0.15 per share (basic and diluted) in the quarter ended June 30,
2003. Net income for the six months ended June 30, 2004 was $7.5 million or $0.46 per share (basic) and $0.40 per share (diluted), compared to a loss of $3.4 million, or $0.30 per share (basic and diluted) in the six months ended June 30, 2003.



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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 cost of student loan income 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 that period, and for the second 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.



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 $1.7 million in the quarter ended June 30,
2004, compared to $2.4 million in the quarter ended June 30, 2003, and were $4.1 million and $10.1 million in the six months ended June 30, 2004 and 2003, respectively.



Employee compensation is another significant component of our net earnings. Employee compensation increased from $3.0
million to $3.2 million from the quarter ended June 30, 2003 to the quarter ended June 30, 2004, and from $5.6 million to $6.1 million from the six months ended June 30, 2003 to the six months ended June 30, 2004, reflecting increased headcount
between the periods. Our headcount increased from 99 at June 30, 2003 to 147 at June 30, 2004. The increase in expense related to the higher headcount at June 30, 2004 than at June 30, 2003 was partially offset by lower bonus accruals in the quarter
and six months ended June 30, 2004 than in the quarter and six months ended June 30, 2003.



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. 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 and six months ended June 30, 2004 as compared to the quarter and six months ended June 30, 2003.



|                                               |  |                             |            |      |                     |            |               |  |   |            |   |  |      |  
|---------------------------------------------- |  | --------------------------- | ---------- | ---- | ------------------- | ---------- | ------------- |  | - | ---------- | - |  | ---- | -
|                                               |  | Three months ended June 30, |            |      | Increase (decrease) |           
|                                               |  | 2004                        |            | 2003 |                     |            | 2004 vs. 2003 | 
|Interest income                                |  |                             |            |      |                     |            |               |  |   |            |   |  |      |  
|Student loans, net                             |  | $                           | 32,146,320 |      | $                   | 19,516,152 |               |  | $ | 12,630,168 |   |  | 65   | %
|Investments                                    |  |                             | 386,832    |      |                     | 386,050    |               |  |   | 782        |   |  |     |  
|                                               |  |                             |            |      |                     |            |               |  |   |            |   |  |      |  
|Total interest income                          |  |                             | 32,533,152 |      |                     | 19,902,202 |               |  |   | 12,630,950 |   |  | 63   |  
|Cost of interest income                        |  |                             |            |      |                     |            |               |  |   |            |   |  |      |  
|Interest related expenses                      |  |                             | 15,832,230 |      |                     | 10,496,576 |               |  |   | 5,335,654  |   |  | 51   |  
|Valuation of interest-rate swap                |  |                             |           |      |                     | (308,160   | )             |  |   | 308,160    |   |  | (100 | )
|Loan servicing and other fees                  |  |                             | 1,974,759  |      |                     | 1,035,379  |               |  |   | 939,380    |   |  | 91   |  
|                                               |  |                             |            |      |                     |            |               |  |   |            |   |  |      |  
|Total cost of interest income                  |  |                             | 17,806,989 |      |                     | 11,223,795 |               |  |   | 6,583,194  |   |  | 59   |  
|Net interest income                            |  |                             | 14,726,163 |      |                     | 8,678,407  |               |  |   | 6,047,756  |   |  | 70   |  
|Less: provision for losses                     |  |                             | 296,680    |      |                     | 432,554    |               |  |   | (135,874   | ) |  | (31  | )
|                                               |  |                             |            |      |                     |            |               |  |   |            |   |  |      |  
|Net interest income after provision for losses |  | $                           | 14,429,483 |      | $                   | 8,245,853  |               |  | $ | 6,183,630  |   |  | 75   | %
|                                               |  |                             |            |      |                     |            |               |  |   |            |   |  |      |  
|                                               |  |                            
|                                               |  | Six months ended June 30,   |            |      | Increase (decrease) |           
|                                               |  | 2004                        |            | 2003 |                     |            | 2004 vs. 2003 | 
|Interest income                                |  |                             |            |      |                     |            |               |  |   |            |   |  |      |  
|Student loans, net                             |  | $                           | 62,282,179 |      | $                   | 34,228,804 |               |  | $ | 28,053,375 |   |  | 82   | %
|Investments                                    |  |                             | 743,052    |      |                     | 576,955    |               |  |   | 166,097    |   |  | 29   |  
|                                               |  |                             |            |      |                     |            |               |  |   |            |   |  |      |  
|Total interest income                          |  |                             | 63,025,231 |      |                     | 34,805,759 |               |  |   | 28,219,472 |   |  | 81   |  
|Cost of interest income                        |  |                             |            |      |                     |            |               |  |   |            |   |  |      |  
|Interest related expenses                      |  |                             | 30,546,333 |      |                     | 19,103,579 |               |  |   | 11,442,754 |   |  | 60   |  
|Valuation of interest-rate swap                |  |                             |           |      |                     | 604,542    |               |  |   | (604,542   | ) |  | (100 | )
|Loan servicing and other fees                  |  |                             | 3,838,462  |      |                     | 1,762,988  |               |  |   | 2,075,474  |   |  | 118  |  
|                                               |  |                             |            |      |                     |            |               |  |   |            |   |  |      |  
|Total cost of interest income                  |  |                             | 34,384,795 |      |                     | 21,471,109 |               |  |   | 12,913,686 |   |  | 60   |  
|Net interest income                            |  |                             | 28,640,436 |      |                     | 13,334,650 |               |  |   | 15,305,786 |   |  | 115  |  
|Less: provision for losses                     |  |                             | 734,203    |      |                     | 987,184    |               |  |   | (252,981   | ) |  | (26  | )
|                                               |  |                             |            |      |                     |            |               |  |   |            |   |  |      |  
|Net interest income after provision for losses |  | $                           | 27,906,233 |      | $                   | 12,347,466 |               |  | $ | 15,558,767 |   |  | 126  | %
|                                               |  |                             |            |      |                     |            |               |  |   |            |   |  |      |  



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##### Table of Contents

Our interest income and cost of interest income were higher in the quarter and six months ended June 30,
2004 as compared to the quarter and six months ending June 30, 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.



|                                                                                                                                           |  |                            |            |                                               |        |             |   |  |   |           
|------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ---------- | --------------------------------------------- | ------ | ----------- | - |  | - | ----------
|Analysis of change in net interest income for three monthperiod ended June 30, 2004 compared to the three month period ended June 30, 2003 |  | Interestincrease(decrease) |            | Increase (decrease) attributable to change in
|                                                                                                                                           |  | Rate                       |            |                                               | Volume
|Interest income                                                                                                                            |  | $                          | 12,630,950 |                                               | $      | (5,038,702  | ) |  | $ | 17,669,652
|Cost of interest income                                                                                                                    |  |                            | 6,583,194  |                                               |        | (7,612,319  | ) |  |   | 14,195,513
|                                                                                                                                           |  |                            |            |                                               |        |             |   |  |   |           
|Net interest income before provision for losses                                                                                            |  | $                          | 6,047,756  |                                               | $      | 2,573,617   |   |  | $ | 3,474,139 
|                                                                                                                                           |  |                            |            |                                               |        |             |   |  |   |           
|                                                                                                                                           |  |                           
|Analysis of change in net interest income for six month period ended June 30, 2004 compared to the six month period ended June 30, 2003    |  | Interestincrease(decrease) |            | Increase (decrease) attributable to change in
|                                                                                                                                           |  | Rate                       |            |                                               | Volume
|Interest income                                                                                                                            |  | $                          | 28,219,472 |                                               | $      | (8,879,662  | ) |  | $ | 37,099,134
|Cost of interest income                                                                                                                    |  |                            | 12,913,686 |                                               |        | (12,374,119 | ) |  |   | 25,287,805
|                                                                                                                                           |  |                            |            |                                               |        |             |   |  |   |           
|Net interest income before provision for losses                                                                                            |  | $                          | 15,305,786 |                                               | $      | 3,494,457   |   |  | $ | 11,811,329
|                                                                                                                                           |  |                            |            |                                               |        |             |   |  |   |           



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 quarter and six month periods ended June 30, 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 June 30, |              
|                        |  | 2004                        |               |             | 2003 |  
|Index                   |  | Average Balance             |               | AverageRate |      |   | Average Balance |   | AverageRate   | 
|Commercial paper        |  | $                           | 636,043,956   |             | 1.48 | % |                 | $ | 414,615,385   |  | 1.71 | %
|LIBOR                   |  |                             | 1,315,074,046 |             | 1.44 |   |                 |   | 416,522,239   |  | 1.47 |  
|Auction rate securities |  |                             | 2,057,532,967 |             | 1.49 |   |                 |   | 1,414,544,665 |  | 1.75 |  
|                        |  |                             |               |             |      |   |                 |   |               |  |      |  
|Total                   |  | $                           | 4,008,650,969 |             | 1.47 | % |                 | $ | 2,245,682,289 |  | 1.69 | %
|                        |  |                             |               |             |      |   |                 |   |               |  |      |  
|                        | 
|                        |  | Six months ended June 30,   |              
|                        |  | 2004                        |               |             | 2003 |  
|Index                   |  | Average Balance             |               | AverageRate |      |   | Average Balance |   | AverageRate   | 
|Commercial paper        |  | $                           | 759,917,582   |             | 1.50 | % |                 | $ | 523,646,409   |  | 1.76 | %
|LIBOR                   |  |                             | 1,148,334,870 |             | 1.41 |   |                 |   | 209,411,733   |  | 1.47 |  
|Auction rate securities |  |                             | 1,984,016,484 |             | 1.46 |   |                 |   | 1,219,190,964 |  | 1.89 |  
|                        |  |                             |               |             |      |   |                 |   |               |  |      |  
|Total                   |  | $                           | 3,892,268,936 |             | 1.45 | % |                 | $ | 1,952,249,106 |  | 1.81 | %
|                        |  |                             |               |             |      |   |                 |   |               |  |      |  



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##### Table of Contents

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 June 30, 2004 and December 31, 2003.



|                                                  |  |                     |               |   |                         |     |   |         |   |               |   |  |     |  
|------------------------------------------------- |  | ------------------- | ------------- | - | ----------------------- | --- | - | ------- | - | ------------- | - |  | --- | -
|                                                  |  | As of June 30, 2004 |               |   | As of December 31, 2003 |    
|                                                  |  | Balance             |               |   | %                       |     |   | Balance |   |               | % | 
|FFELP Loans (Gross)                               |  |                     |               |   |                         |     |   |         |   |               |   |  |     |  
|Loans in school/grace/deferment                   |  | $                   | 693,598,983   |   |                         |     |   |         | $ | 543,959,548   |   |  |     |  
|Loans in forbearance                              |  |                     | 251,787,026   |   |                         |     |   |         |   | 196,248,290   |   |  |     |  
|Loans in repayment and percentage of each status: |  |                     |               |   |                         |     |   |         |   |               |   |  |     |  
|Loans current                                     |  |                     | 2,671,995,829 |   |                         | 94  | % |         |   | 2,427,262,085 |   |  | 94  | %
|Loans delinquent 30-59 days                       |  |                     | 82,213,812    |   |                         | 3   |   |         |   | 76,823,113    |   |  | 3   |  
|Loans delinquent 60-89 days                       |  |                     | 33,620,069    |   |                         | 1   |   |         |   | 37,586,386    |   |  | 1   |  
|Loans delinquent 90 days or greater               |  |                     | 52,256,818    |   |                         | 2   |   |         |   | 52,430,611    |   |  | 2   |  
|                                                  |  |                     |               |   |                         |     |   |         |   |               |   |  |     |  
|Total loans in repayment                          |  |                     | 2,840,086,528 |   |                         | 100 | % |         |   | 2,594,102,195 |   |  | 100 | %
|                                                  |  |                     |               |   |                         |     |   |         |   |               |   |  |     |  
|Total FFELP student loans                         |  | $                   | 3,785,472,537 |   |                         |     |   |         | $ | 3,334,310,033 |   |  |     |  
|FFELP student loan reserves                       |  |                     | (4,483,881    | ) |                         |     |   |         |   | (3,910,104    | ) |  |     |  
|                                                  |  |                     |               |   |                         |     |   |         |   |               |   |  |     |  
|FFELP student loans, net                          |  | $                   | 3,780,988,656 |   |                         |     |   |         | $ | 3,330,399,929 |   |  |     |  
|                                                  |  |                     |               |   |                         |     |   |         |   |               |   |  |     |  
|Percentage of FFELP student loans in repayment    |  |                     |               |   |                         | 75  | % |         |   |               |   |  | 78  | %
|                                                  |  |                     |               |   |                         |     |   |         |   |               |   |  |     |  



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 and six months ended June 30, 2003 we chose to sell approximately $41.2 million and $247.0 million, respectively, of consolidation loans. This resulted in gain on sale of approximately $1.7 million
and $8.5 million for the June 30, 2003 quarter and six months, respectively, compared to no sales from this source in the quarter and six months ended June 30, 2004. As a result, we had total gain on sale during the quarter ended June 30, 2004 of
approximately $1.7 million compared to $2.4 million during the quarter ended June 30, 2003, and of $4.1 million for the six months ended June 30, 2004, compared to $10.1 million for the six months ended June 30, 2003.



24



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##### Table of Contents

The following tables show total loans sold, by type for the three and six months periods ended June 30,
2004 and 2003, along with the gains on those sales and the corresponding premiums earned.



|                 |  |                                     |             |   |      |   |             |  
|---------------- |  | ----------------------------------- | ----------- | - | ---- | - | ----------- | -
|                 |  | For the three months ended June 30, |            
|                 |  | 2004                                |             |   | 2003 |  
|Loans Sold       |  |                                     |             |   |      |   |             |  
|Consolidated     |  | $                                   |            |   |      | $ | 41,196,062  |  
|Non-consolidated |  |                                     | 75,025,357  |   |      |   | 27,086,945  |  
|                 |  |                                     |             |   |      |   |             |  
|Total            |  | $                                   | 75,025,357  |   |      | $ | 68,283,007  |  
|                 |  |                                     |             |   |      |   |             |  
|Gain on Sale     |  |                                     |             |   |      |   |             |  
|Consolidated     |  | $                                   |            |   |      | $ | 1,729,517   |  
|Non-consolidated |  |                                     | 1,682,295   |   |      |   | 630,957     |  
|                 |  |                                     |             |   |      |   |             |  
|Total            |  | $                                   | 1,682,295   |   |      | $ | 2,360,474   |  
|                 |  |                                     |             |   |      |   |             |  
|Net Premium      |  |                                     |             |   |      |   |             |  
|Consolidated     |  |                                     |            | % |      |   | 4.20        | %
|Non-consolidated |  |                                     | 2.24        |   |      |   | 2.33        |  
|                 |  |                                     |             |   |      |   |             |  
|Total            |  |                                     | 2.24        | % |      |   | 3.46        | %
|                 |  |                                     |             |   |      |   |             |  
|                 | 
|                 |  | For the six months ended June 30,   |            
|                 |  | 2004                                |             |   | 2003 |  
|Loans Sold       |  |                                     |             |   |      |   |             |  
|Consolidated     |  | $                                   |            |   |      | $ | 247,010,949 |  
|Non-consolidated |  |                                     | 173,810,848 |   |      |   | 68,205,001  |  
|                 |  |                                     |             |   |      |   |             |  
|Total            |  | $                                   | 173,810,848 |   |      | $ | 315,215,950 |  
|                 |  |                                     |             |   |      |   |             |  
|Gain on Sale     |  |                                     |             |   |      |   |             |  
|Consolidated     |  | $                                   |            |   |      | $ | 8,532,268   |  
|Non-consolidated |  |                                     | 4,108,841   |   |      |   | 1,569,624   |  
|                 |  |                                     |             |   |      |   |             |  
|Total            |  | $                                   | 4,108,841   |   |      | $ | 10,101,892  |  
|                 |  |                                     |             |   |      |   |             |  
|Net Premium      |  |                                     |             |   |      |   |             |  
|Consolidated     |  |                                     |            | % |      |   | 3.45        | %
|Non-consolidated |  |                                     | 2.36        |   |      |   | 2.30        |  
|                 |  |                                     |             |   |      |   |             |  
|Total            |  |                                     | 2.36        | % |      |   | 3.20        | %
|                 |  |                                     |             |   |      |   |             |  



At June 30, 2004,
total student loans on our balance sheet included approximately $68.5 million of loans held for sale.



Other income, net.Other income, net consists of late fees and was approximately $57,000 and $10,000 for the quarters ended June 30, 2004 and 2003,
respectively. It was approximately $115,000 and $17,000 for the six month periods ended June 30, 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 June 30, 2004 as compared to loans held at June 30, 2003.



General and Administrative Expenses.



|                                   |  |                                     |           |      |            |           |   |            |   |           |   |  |       |  
|---------------------------------- |  | ----------------------------------- | --------- | ---- | ---------- | --------- | - | ---------- | - | --------- | - |  | ----- | -
|                                   |  | For the three months ended June 30, |           |      | Change ($) |           |   | Change (%) |  
|                                   |  | 2004                                |           | 2003 |            |           |  
|Total                              |  | $                                   | 2,585,629 |      | $          | 2,148,835 |   |            | $ | 436,794   |   |  | 20    | %
|Employee compensation and benefits |  |                                     | 1,541,984 |      |            | 1,610,176 |   |            |   | (68,192   | ) |  | (4    | )
|Travel                             |  |                                     | 125,687   |      |            | 32,361    |   |            |   | 93,326    |   |  | 288   |  
|Public administration              |  |                                     | 76,895    |      |            | (1,239    | ) |            |   | 78,134    |   |  | 6,306 |  
|Accounting and auditing            |  |                                     | 95,150    |      |            | 26,700    |   |            |   | 68,450    |   |  | 256   |  
|Trustee fees                       |  |                                     | 161,122   |      |            | 98,564    |   |            |   | 62,558    |   |  | 63    |  
|Corporate insurance                |  |                                     | 186,560   |      |            | 129,961   |   |            |   | 56,599    |   |  | 44    |  
|Legal                              |  |                                     | 107,057   |      |            | 59,281    |   |            |   | 47,776    |   |  | 81    |  
|                                   |  |                                     |          
|                                   |  | For the six months ended June 30,   |           |      | Change ($) |           |   | Change(%)  |  
|                                   |  | 2004                                |           | 2003 |            |           |  
|Total                              |  | $                                   | 5,114,559 |      | $          | 4,047,748 |   |            | $ | 1,066,811 |   |  | 26    | %
|Employee compensation and benefits |  |                                     | 2,791,319 |      |            | 2,904,934 |   |            |   | (113,615  | ) |  | (4    | )
|Consulting                         |  |                                     | 362,219   |      |            | 163,489   |   |            |   | 198,730   |   |  | 122   |  
|Travel                             |  |                                     | 239,590   |      |            | 74,851    |   |            |   | 164,739   |   |  | 220   |  
|Accounting and auditing            |  |                                     | 228,171   |      |            | 104,612   |   |            |   | 123,559   |   |  | 118   |  
|Public administration              |  |                                     | 134,134   |      |            | 39,005    |   |            |   | 95,129    |   |  | 244   |  
|Trustee fees                       |  |                                     | 326,806   |      |            | 170,843   |   |            |   | 155,963   |   |  | 91    |  
|Corporate insurance                |  |                                     | 388,627   |      |            | 170,929   |   |            |   | 217,698   |   |  | 127   |  
|Legal                              |  |                                     | 307,514   |      |            | 125,313   |   |            |   | 182,201   |   |  | 145   |  



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##### Table of Contents

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 $2.1 million in the quarter ended June 30, 2003 to $2.6 million in the quarter ended June 30, 2004, and from $4.0 million in the six months ended June 30, 2003 to $5.1 million in the six months ended June 30, 2004. This
increase was related to a number of factors, primarily a function of our growth. Components of the increase in general and administrative spending include travel expenses which increased primarily related to our efforts to launch our new servicing
entity, as employees from our existing offices traveled to our new facility to assist in the design and implementation of new business systems and processes. Accounting expenses were higher than in the comparable periods of the previous year
partially due to charges for consents required for various public filings, and due to increased costs for audit and review work of a more complex organization. Public administrative fees in the June 2004 quarter and six month period were higher than
those in the June 2003 quarter and six month period as our annual stockholder meeting was held earlier in the year in 2004 than it had been in 2003, resulting in an acceleration of the related charges, in addition to higher costs related to filing
our annual report on Form 10-K. Trustee fees (fees paid to the entities serving as trustees for our permanent financings) increased as we added two indentures to our debt structure since the June 2003 quarter. Premiums paid for our corporate
insurances policies, including our corporate umbrella policy and director and officer liability policies, also increased from the June 2003 quarter and six months to the June 2004 quarter and six months, as did our fees paid to outside legal
counsel.



Additionally, in the six months ended June 30, 2004,
consulting expenses were higher than those in the six months ended June 30, 2003 primarily due to payments to consultants retained to assist us in our efforts to move towards compliance with the Sarbanes-Oxley Act of 2002.



The increases described above were partially offset by lower employee
compensation and benefit expense. Increased costs related to headcount additions (there were 48 administrative employees at June 30, 2003, as compared to 66 at June 30, 2004) were more than offset by lower bonus accruals in the quarter and six
months ended June 30, 2004 than in the quarter and six months ended June 30, 2003. Included in compensation and benefit expense is a 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. This charge was $41,000 and $175,000 for the quarters ended June 30, 2004 and 2003, respectively, and $82,000 and $175,000 for the six month
periods ended June 30, 2004 and 2003, respectively, further contributing to the reduced expenses for salaries and benefits in 2004 as compared to 2003.



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 and six months ended June 30, 2004, we incurred approximately $465,000 and $630,000 of costs, respectively, primarily related to employee compensation and benefits,
depreciation expense and other costs associated with establishing the facility. There were no costs related to the servicing organization during the quarter or six months ended June 30, 2003.



Sales and Marketing Expenses.



|                                   |  |                                     |            |            |   |            |           |   |            |   |  |     |   
|---------------------------------- |  | ----------------------------------- | ---------- | ---------- | - | ---------- | --------- | - | ---------- | - |  | --- | --
|                                   |  | For the three months ended June 30, |            | Change ($) |   |            | Change(%) |  
|                                   |  | 2004                                |            | 2003       |   |           
|Total                              |  | $                                   | 8,487,590  |            | $ | 10,229,691 |           | $ | (1,742,101 | ) |  | (17 | )%
|Marketing partner fees             |  |                                     | 3,502,345  |            |   | 7,144,998  |           |   | (3,642,653 | ) |  | (51 | ) 
|Direct marketing                   |  |                                     | 2,421,899  |            |   | 1,099,575  |           |   | 1,322,324  |   |  | 120 |   
|Employee compensation and benefits |  |                                     | 1,698,968  |            |   | 1,435,706  |           |   | 263,262    |   |  | 18  |   
|                                   |  |                                     |           
|                                   |  | For the six months ended June 30,   |            | Change ($) |   |            | Change(%) |  
|                                   |  | 2004                                |            | 2003       |   |           
|Total                              |  | $                                   | 18,680,448 |            | $ | 21,739,642 |           | $ | (3,059,194 | ) |  | (14 | )%
|Marketing partner fees             |  |                                     | 9,638,087  |            |   | 14,895,314 |           |   | (5,257,227 | ) |  | (35 | ) 
|Direct marketing                   |  |                                     | 3,460,711  |            |   | 2,686,875  |           |   | 773,836    |   |  | 29  |   
|Employee compensation and benefits |  |                                     | 3,320,662  |            |   | 2,725,245  |           |   | 595,417    |   |  | 22  |   



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



26



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##### Table of Contents

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.



Total sales and marketing expenses decreased from $10.2 million in the quarter ended June 30, 2003 to $8.5 million in the quarter ended June 30, 2004,
and from $21.7 million in the six months ended June 30, 2003 to $18.7 million in the six months ended June 30, 2004, primarily due to a reduction in fees paid to our marketing partners. During the quarter and six months ended June 30, 2004 we
incurred $3.5 million and $9.6 million, respectively, in fees paid to marketing partners who market consolidation loans on our behalf, then provide us with completed applications, compared to compared to $7.1 million and $14.9 million of these fees
for the quarter and six months ended June 30, 2003, respectively. For the three and six months ended June 30, 2004, this amount includes approximately $47,000 and $0.8 million, respectively, in non-cash charges related to performance-based options
granted to some of these partners. These non-cash charges were $1.5 million for both the quarter and six months ended June 30, 2003. As discussed above, these fees are expensed as incurred and represent a significant portion of our expenses.
Marketing partner fees declined from the quarter and six months ended June 30, 2003 to the quarter and six months ended June 30, 2004, reflecting the lower consolidation loan originations in the June 2004 quarter and six months. Despite the decline,
these costs represent a significant component of our total sales and marketing expenses. Marketing partner fees represented 41% and 70% of sales and marketing expenses for the quarters ended June 30, 2004 and June 30, 2003, respectively. They
represented 30% and 58% of total operating expenses for those respective periods. For the six month periods ended June 30, 2004 and 2003 respectively, marketing partner fees represented 52% and 69% of sales and marketing expenses. They represented
39% and 58% of total operating expenses for those respective periods.



The decrease in marketing partner fees from the quarter and six months ended June 30, 2003 to the quarter and six months ended June 30, 2004 was partially offset by increased costs for employee compensation and benefits. The increase in
employee compensation and benefits expense from the quarter and six months ended June 30, 2003 to the quarter and six months ended June 30, 2004 primarily reflects the increased headcount between the periods (51 employees at June 30, 2003 compared
to 57 employees at June 30, 2004). Included in compensation and benefit expense is a 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. This charge was approximately $34,000 and $115,000 for the quarters ended June 30, 2004 and 2003, respectively and was approximately $70,000 and $115,000 for the six months ended June 30, 2004
and 2003, respectively.



Also offsetting the decrease in
marketing partner payments in the three and six month periods ended June 30, 2004 as compared to June 30, 2003, are increased costs for direct marketing. As we have redirected our focus away from consolidation loans which are heavily reliant on our
marketing partners, and towards the Stafford and PLUS business, we have significantly increased our spending on direct marketing of Stafford and PLUS loans in order to increase our market share in that area.



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. These measures are discussed in the following sections.



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 three and six month periods ended June 30, 2004 and 2003.



|                                              |  |                                          |             |                         |   |         |  |   |            
|--------------------------------------------- |  | ---------------------------------------- | ----------- | ----------------------- | - | ------- |  | - | -----------
|                                              |  | For the three months ended June 30, 2004
|                                              |  | FFELP                                    |             | AlternativeSupplemental |   | Total  
|Consolidations through internal sources       |  | $                                        | 37,094,014  |                         | $ |        |  | $ | 37,094,014 
|Consolidations through marketing partners     |  |                                          | 192,458,181 |                         |   |        |  |   | 192,458,181
|Consolidations through other sources          |  |                                          | 6,406       |                         |   |        |  |   | 6,406      
|Traditional school channel (internal sources) |  |                                          | 55,222,766  |                         |   |        |  |   | 55,222,766 
|Other (internal sources)                      |  |                                          | 6,475,749   |                         |   | 756,881 |  |   | 7,232,630  
|                                              |  |                                          |             |                         |   |         |  |   |            
|Total originations and purchases              |  |                                          | 291,257,116 |                         |   | 756,881 |  |   | 292,013,997
|                                              |  |                                          |             |                         |   |         |  |   |            
|Capitalized interest and other                |  |                                          | 5,721,553   |                         |   | 25,606  |  |   | 5,747,159  
|                                              |  |                                          |             |                         |   |         |  |   |            
|Total student loan acquisitions               |  | $                                        | 296,978,669 |                         | $ | 782,487 |  | $ | 297,761,156
|                                              |  |                                          |             |                         |   |         |  |   |            



27



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##### Table of Contents

|                                              |  |                                          |               |                         |   |           |  |   |              
|--------------------------------------------- |  | ---------------------------------------- | ------------- | ----------------------- | - | --------- |  | - | -------------
|                                              |  | For the three months ended June 30, 2003
|                                              |  | FFELP                                    |               | AlternativeSupplemental |   | Total    
|Consolidations through internal sources       |  | $                                        | 122,403,841   |                         | $ |          |  | $ | 122,403,841  
|Consolidations through marketing partners     |  |                                          | 321,311,205   |                         |   |          |  |   | 321,311,205  
|Consolidations through other sources          |  |                                          | 46,794        |                         |   |          |  |   | 46,794       
|Traditional school channel (internal sources) |  |                                          | 29,377,094    |                         |   |          |  |   | 29,377,094   
|Other (internal sources)                      |  |                                          | 4,177,313     |                         |   | 2,608,785 |  |   | 6,786,098    
|                                              |  |                                          |               |                         |   |           |  |   |              
|Total originations and purchases              |  |                                          | 477,316,247   |                         |   | 2,608,785 |  |   | 479,925,032  
|                                              |  |                                          |               |                         |   |           |  |   |              
|Capitalized interest and other                |  |                                          | 2,267,739     |                         |   | 520       |  |   | 2,268,259    
|                                              |  |                                          |               |                         |   |           |  |   |              
|Total student loan acquisitions               |  | $                                        | 479,583,986   |                         | $ | 2,609,305 |  | $ | 482,193,291  
|                                              |  |                                          |               |                         |   |           |  |   |              
|                                              | 
|                                              |  | For the six months ended June 30, 2004  
|                                              |  | FFELP                                    |               | AlternativeSupplemental |   | Total    
|Consolidations through internal sources       |  | $                                        | 90,317,932    |                         | $ |          |  | $ | 90,317,932   
|Consolidations through marketing partners     |  |                                          | 495,342,945   |                         |   |          |  |   | 495,342,945  
|Consolidations through other sources          |  |                                          | 6,173         |                         |   |          |  |   | 6,173        
|Traditional school channel (internal sources) |  |                                          | 175,904,630   |                         |   |          |  |   | 175,904,630  
|Other (internal sources)                      |  |                                          | 12,696,348    |                         |   | 2,240,827 |  |   | 14,937,175   
|                                              |  |                                          |               |                         |   |           |  |   |              
|Total originations and purchases              |  |                                          | 774,268,028   |                         |   | 2,240,827 |  |   | 776,508,855  
|                                              |  |                                          |               |                         |   |           |  |   |              
|Capitalized interest and other                |  |                                          | 11,248,539    |                         |   | 78,216    |  |   | 11,326,755   
|                                              |  |                                          |               |                         |   |           |  |   |              
|Total student loan acquisitions               |  | $                                        | 785,516,567   |                         | $ | 2,319,043 |  | $ | 787,835,610  
|                                              |  |                                          |               |                         |   |           |  |   |              
|                                              | 
|                                              |  | For the six months ended June 30, 2003  
|                                              |  | FFELP                                    |               | AlternativeSupplemental |   | Total    
|Consolidations through internal sources       |  | $                                        | 363,847,320   |                         | $ |          |  | $ | 363,847,320  
|Consolidations through marketing partners     |  |                                          | 744,642,173   |                         |   |          |  |   | 744,642,173  
|Consolidations through other sources          |  |                                          | 174,801       |                         |   |          |  |   | 174,801      
|Traditional school channel (internal sources) |  |                                          | 73,489,076    |                         |   |          |  |   | 73,489,076   
|Other (internal sources)                      |  |                                          | 19,474,284    |                         |   | 5,438,449 |  |   | 24,912,733   
|                                              |  |                                          |               |                         |   |           |  |   |              
|Total originations and purchases              |  |                                          | 1,201,627,654 |                         |   | 5,438,449 |  |   | 1,207,066,103
|                                              |  |                                          |               |                         |   |           |  |   |              
|Capitalized interest and other                |  |                                          | 3,876,807     |                         |   | 5,028     |  |   | 3,881,835    
|                                              |  |                                          |               |                         |   |           |  |   |              
|Total student loan acquisitions               |  | $                                        | 1,205,504,461 |                         | $ | 5,443,477 |  | $ | 1,210,947,938
|                                              |  |                                          |               |                         |   |           |  |   |              



The table below
presents the above loan acquisition information as percentages of the total loans generated for the three and six month periods ended June 30, 2004 and 2003.



|                                              |  |                                    |   |  |      |  
|--------------------------------------------- |  | ---------------------------------- | - |  | ---- | -
|                                              |  | For the three months endedJune 30, |  
|                                              |  | 2004                               |   |  | 2003 |  
|Consolidations through internal sources       |  | 13                                 | % |  | 26   | %
|Consolidations through marketing partners     |  | 66                                 |   |  | 67   |  
|Consolidations through other sources          |  |                                   |   |  |     |  
|Traditional school channel (internal sources) |  | 19                                 |   |  | 6    |  
|Other (internal sources)                      |  | 2                                  |   |  | 1    |  
|                                              |  |                                    |   |  |      |  
|Total originations and purchases              |  | 100                                | % |  | 100  | %
|                                              |  |                                    |   |  |      |  
|                                              | 
|                                              |  | For the six months endedJune 30,   |  
|                                              |  | 2004                               |   |  | 2003 |  
|Consolidations through internal sources       |  | 12                                 | % |  | 30   | %
|Consolidations through marketing partners     |  | 64                                 |   |  | 62   |  
|Consolidations through other sources          |  |                                   |   |  |     |  
|Traditional school channel (internal sources) |  | 23                                 |   |  | 6    |  
|Other (internal sources)                      |  | 1                                  |   |  | 2    |  
|                                              |  |                                    |   |  |      |  
|Total originations and purchases              |  | 100                                | % |  | 100  | %
|                                              |  |                                    |   |  |      |  



28



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##### Table of Contents

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 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 to the next reset date. Floor income is included in student loan
income. During the quarters ended June 30, 2004 and 2003 our floor income was $6.0 million and $5.5 million, respectively. For the six month periods ended June 30, 2004 and 2003, our floor income was $12.7 million and $9.7 million, respectively.



The following table details the volume of loans that were
earning floor income during the quarters ended June 30, 2004 and 2003. CP rate loans are based on the quarter-average CP rates of 1.23% and 1.17% for the quarters ended June 30, 2004 and 2003, respectively.



|                                                  |  |                                          |               |                             |   |             |  |   |              
|------------------------------------------------- |  | ---------------------------------------- | ------------- | --------------------------- | - | ----------- |  | - | -------------
|                                                  |  | For the three months ended June 30, 2004
|                                                  |  | Fixed borrowerrate                       |               | Annually resetborrower rate |   | Total      
|Student loans eligible to earn floor income:      |  |                                          |               |                             |   |             |  |   |              
|Student loans                                     |  | $                                        | 108,843,060   |                             | $ | 133,344,083 |  | $ | 242,187,143  
|Securitized student loans                         |  |                                          | 3,543,285,394 |                             |   |            |  |   | 3,543,285,394
|                                                  |  |                                          |               |                             |   |             |  |   |              
|Total student loans eligible to earn floor income |  | $                                        | 3,652,128,454 |                             | $ | 133,344,083 |  | $ | 3,785,472,537
|                                                  |  |                                          |               |                             |   |             |  |   |              
|Net managed student loans earning floor income    |  |                                          |               |                             |   |             |  |   |              
|Earning 1-25 bps floor income                     |  | $                                        | 223,831,337   |                             | $ |            |  | $ | 223,831,337  
|Earning 26-50 bps floor income                    |  |                                          | 541,981,172   |                             |   | 192,471     |  |   | 542,173,643  
|Earning 51-75 bps floor income                    |  |                                          | 315,179,929   |                             |   |            |  |   | 315,179,929  
|Earning 76-100 bps floor income                   |  |                                          | 229,090,320   |                             |   |            |  |   | 229,090,320  
|Earning 101-200 bps floor income                  |  |                                          | 548,966,248   |                             |   |            |  |   | 548,966,248  
|Earning 201+ bps floor income                     |  |                                          | 496,607,277   |                             |   |            |  |   | 496,607,277  
|                                                  |  |                                          |               |                             |   |             |  |   |              
|Total                                             |  | $                                        | 2,355,656,283 |                             | $ | 192,471     |  | $ | 2,355,848,754
|                                                  |  |                                          |               |                             |   |             |  |   |              
|                                                  | 
|                                                  |  | For the three months ended June 30, 2003
|                                                  |  | Fixed borrowerrate                       |               | Annually resetborrower rate |   | Total      
|Student Loans Eligible to earn floor income:      |  |                                          |               |                             |   |             |  |   |              
|Student loans                                     |  | $                                        | 227,330,535   |                             | $ | 50,484,110  |  | $ | 277,814,645  
|Securitized student loans                         |  |                                          | 1,860,107,241 |                             |   |            |  |   | 1,860,107,241
|                                                  |  |                                          |               |                             |   |             |  |   |              
|Total student loans eligible to earn floor income |  | $                                        | 2,087,437,776 |                             | $ | 50,484,110  |  | $ | 2,137,921,886
|                                                  |  |                                          |               |                             |   |             |  |   |              
|Net managed student loans earning floor income    |  |                                          |               |                             |   |             |  |   |              
|Earning 1-25 bps floor income                     |  | $                                        | 159,167,201   |                             | $ |            |  | $ | 159,167,201  
|Earning 26-50 bps floor income                    |  |                                          | 341,670,836   |                             |   |            |  |   | 341,670,836  
|Earning 51-75 bps floor income                    |  |                                          | 316,279,664   |                             |   | 48,132,600  |  |   | 364,412,264  
|Earning 76-100 bps floor income                   |  |                                          | 268,225,460   |                             |   | 364,123     |  |   | 268,589,583  
|Earning 101-200 bps floor income                  |  |                                          | 402,705,496   |                             |   | 1,128,821   |  |   | 403,834,317  
|Earning 201+ bps floor income                     |  |                                          | 401,216,003   |                             |   |            |  |   | 401,216,003  
|                                                  |  |                                          |               |                             |   |             |  |   |              
|Total                                             |  | $                                        | 1,889,264,660 |                             | $ | 49,625,544  |  | $ | 1,938,890,204
|                                                  |  |                                          |               |                             |   |             |  |   |              



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 quarter and six month
periods ended June 30, 2004 and 2003.



29



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|                                                            |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|----------------------------------------------------------- |  | ----------------------------------- | ----------- | - | ---- | ------- | - |  | - | ----------- | - |  | ------- | -
|                                                            |  | For the three months ended June 30, |            
|                                                            |  | 2004                                |             |   | 2003 |        
|Student Loan Net Interest Margin Analysis                   |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|Student loan interest received                              |  | $                                   | 41,664,372  |   |      | 4.4741  | % |  | $ | 24,906,534  |   |  | 4.9093  | %
|Less:                                                       |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|Consolidation loan rebate fee                               |  |                                     | (9,518,052  | ) |      | (1.0221 | ) |  |   | (5,390,385  | ) |  | (1.0596 | )
|Cost of debt                                                |  |                                     | (14,764,612 | ) |      | (1.5855 | ) |  |   | (9,565,350  | ) |  | (1.8802 | )
|Premium amortization                                        |  |                                     | (51,469     | ) |      | (0.0055 | ) |  |   | (32,303     | ) |  | (0.0063 | )
|DOE fee amortization                                        |  |                                     | (490,739    | ) |      | (0.0527 | ) |  |   | (154,952    | ) |  | (0.0305 | )
|Loan loss reserve                                           |  |                                     | (296,680    | ) |      | (0.0319 | ) |  |   | (432,553    | ) |  | (0.0850 | )
|Loan servicing costs*                                       |  |                                     | (1,432,552  | ) |      | (0.1538 | ) |  |   | (848,124    | ) |  | (0.1668 | )
|                                                            |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|Total Costs                                                 |  |                                     | (26,554,104 | ) |      | (2.8515 | ) |  |   | (16,423,667 | ) |  | (3.2284 | )
|Student loan net interest margin with floor income          |  |                                     | 15,110,268  |   |      | 1.6226  |   |  |   | 8,482,867   |   |  | 1.6809  |  
|Additional interest expense to lock-in part of floor income |  |                                     | 532,315     |   |      | 0.0572  |   |  |   | 1,232,598   |   |  | 0.2423  |  
|Floor incomerevenue                                        |  |                                     | (5,997,811  | ) |      | (0.6441 | ) |  |   | (5,454,748  | ) |  | (1.0722 | )
|                                                            |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|Student loan net interest margin before floor income        |  | $                                   | 9,644,772   |   |      | 1.0357  | % |  | $ | 4,260,717   |   |  | 0.8510  | %
|                                                            |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|Consolidated Company Net Interest Margin Analysis           |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|Student loan net interest margin before floor income        |  | $                                   | 9,644,772   |   |      | 1.0357  | % |  | $ | 4,260,717   |   |  | 0.8510  | %
|Floor income after swap to lock-in part of floor income     |  |                                     | 5,465,495   |   |      | 0.5869  |   |  |   | 4,222,150   |   |  | 0.8299  |  
|Mark to market of interest rate swap                        |  |                                     |            |   |      |        |   |  |   | 308,160     |   |  | 0.0606  |  
|Negative interest carry                                     |  |                                     | (680,784    | ) |      | (0.0731 | ) |  |   | (545,174    | ) |  | (0.1072 | )
|                                                            |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|Net interest margin reported on financial statement         |  | $                                   | 14,429,483  |   |      | 1.5495  | % |  | $ | 8,245,853   |   |  | 1.6343  | %
|                                                            |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|                                                            | 
|                                                            |  | For the six months ended June 30,   |            
|                                                            |  | 2004                                |             |   | 2003 |        
|Student loan interest received                              |  | $                                   | 80,794,330  |   |      | 4.4487  | % |  | $ | 43,795,916  |   |  | 4.9434  | %
|Less:                                                       |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|Consolidation loan rebate fee                               |  |                                     | (18,512,151 | ) |      | (1.0193 | ) |  |   | (9,567,113  | ) |  | (1.0710 | )
|Cost of debt                                                |  |                                     | (28,640,022 | ) |      | (1.5770 | ) |  |   | (17,562,417 | ) |  | (1.9660 | )
|Premium amortization                                        |  |                                     | (98,232     | ) |      | (0.0054 | ) |  |   | (59,483     | ) |  | (0.0067 | )
|DOE fee amortization                                        |  |                                     | (933,944    | ) |      | (0.0514 | ) |  |   | (262,287    | ) |  | (0.0294 | )
|Loan loss reserve                                           |  |                                     | (734,203    | ) |      | (0.0404 | ) |  |   | (987,184    | ) |  | (0.1105 | )
|Loan servicing costs*                                       |  |                                     | (2,806,287  | ) |      | (0.1545 | ) |  |   | (1,441,218  | ) |  | (0.1613 | )
|                                                            |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|Total Costs                                                 |  |                                     | (51,724,839 | ) |      | (2.8481 | ) |  |   | (29,879,702 | ) |  | (3.3449 | )
|Student loan net interest margin with floor income          |  |                                     | 29,069,491  |   |      | 1.6006  |   |  |   | 13,916,214  |   |  | 1.5985  |  
|Additional interest expense to lock-in part of floor income |  |                                     | 1,322,979   |   |      | 0.0728  |   |  |   | 2,608,519   |   |  | 0.2920  |  
|Floor incomerevenue                                        |  |                                     | (12,691,463 | ) |      | (0.6988 | ) |  |   | (9,652,330  | ) |  | (1.0805 | )
|                                                            |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|Student loan net interest margin before floor income        |  | $                                   | 17,701,007  |   |      | 0.9747  | % |  | $ | 6,872,403   |   |  | 0.8100  | %
|                                                            |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|Consolidated Company Net Interest Margin Analysis           |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|Student loan net interest margin before floor income        |  | $                                   | 17,701,007  |   |      | 0.9747  | % |  | $ | 6,872,403   |   |  | 0.8100  | %
|Floor income after swap to lock-in part of floor income     |  |                                     | 11,368,484  |   |      | 0.6260  |   |  |   | 7,043,811   |   |  | 0.7885  |  
|Mark to market of interest rate swap                        |  |                                     |            |   |      |        |   |  |   | (604,542    | ) |  | (0.0677 | )
|Negative interest carry                                     |  |                                     | (1,163,258  | ) |      | (0.0641 | ) |  |   | (964,206    | ) |  | (0.1079 | )
|                                                            |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  
|Net interest margin reported on financial statement         |  | $                                   | 27,906,233  |   |      | 1.5366  | % |  | $ | 12,347,466  |   |  | 1.4229  | %
|                                                            |  |                                     |             |   |      |         |   |  |   |             |   |  |         |  

---

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



Average student loan balances outstanding for the quarters ended June 30, 2004 and 2003 were $3,735,200,669 and
$2,034,923,908, respectively. Average student loan balances outstanding for the six months ended June 30, 2004 and 2003 were $3,642,597,583 and $1,786,574,987, respectively.



We have no off-balance sheet arrangements.



LIQUIDITY AND CAPITAL RESOURCES



At June 30, 2004, we had operating cash and cash equivalents of approximately $22.8 million (excluding restricted cash and investments). Since inception,
we have financed our operations from debt and equity financings. During the six months ended June 30, 2004, we used cash of approximately $1.3 million to fund our operations, and we acquired property and equipment of approximately $1.9 million. At
June 30, 2004, we had advances of approximately $281 million outstanding against our warehouse loan facilities and $3.8 billion of LIBOR/auction rate Education Loan Backed Notes were outstanding and included on our balance sheet. During the six
months ended June 30, 2004, our gross recorded loans increased $453 million to $3.8 billion. During the six months ended June 30, 2004, we received proceeds of approximately $1.5 million for the issuance of 701,924 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. Effective on May
12, 2004, it was reduced to $500 million in connection with the securitization we completed at that time. At June 30, 2004, the balance outstanding on the Conduit Facility was



30



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##### Table of Contents

approximately $281 million. 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 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 and we issued Series 2004 Notes in May 2004. 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. The interest rates of some of the Series 2004 Notes are tied to
the three-month LIBOR rate plus an incremental amount ranging from 0.04% to 0.19%, while the rates of other Series 2004 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. The
Series 2004 Notes have staggered final maturity dates as follows: $170 million at December 17, 2012, $390 million at December 15, 2022, $100 million at December 16, 2024, and $340 million at June 15, 2043.



As of June 30, 2004, we are in compliance with all of our debt covenants.



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 securitization 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 2005.



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.



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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 and six months ended June 30, 2004, we earned $6.0 million
and $12.7 million, respectively in floor income, representing over 40% 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.



Additionally, our
underlying debt is tied to LIBOR. Our revenues are partially dependent on the SAP made by the government. SAP calculations are based on CP rates. We have also entered into an additional swap in order to prevent the spread between debt costs and SAP
from deteriorating to a point where our margins are significantly adversely affected. We expect this swap to limit our vulnerability to adverse swings in CP rates in relation to LIBOR rates, thus protecting our spread and corresponding cash flows.



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 June 30, 2004 and is not necessarily reflective of positions that existed throughout the period, or that are expected to exist in the future.



|                                                                     |  |                     |               |    |                     |   |             |                    |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|-------------------------------------------------------------------- |  | ------------------- | ------------- | -- | ------------------- | - | ----------- | ------------------ |  | - | ------------ | - |  | ------------ | ----------- | - | ------------ | - | ----------- | - |  | - | ---------- | -
|                                                                     |  | As of June 30, 2004 |              
|                                                                     |  | 3 months or less    |               |    | 3 months to 6months |   |             | 6 months to 1 year |  |   | 1 to 2 years |   |  | 2 to 5 years |             |   | Over 5 years |  
|Assets                                                               |  |                     |               |    |                     |   |             |                    |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Student loans                                                        |  | $                   | 3,822,615,084 |    |                     | $ |            |                    |  | $ |             |   |  | $            |            |   |              | $ |            |   |  | $ |           |  
|Cash and investments                                                 |  |                     | 202,057,760   |    |                     |   |            |                    |  |   |             |   |  |              |            |   |              |   |            |   |  |   |           |  
|Interest and other receivables                                       |  |                     | 35,020,963    |    |                     |   |            |                    |  |   |             |   |  |              |            |   |              |   |            |   |  |   |           |  
|Other assets                                                         |  |                     |              |    |                     |   |            |                    |  |   |             |   |  |              |            |   |              |   |            |   |  |   | 19,521,188 |  
|                                                                     |  |                     |               |    |                     |   |             |                    |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Total assets                                                         |  | $                   | 4,059,693,807 |    |                     | $ |            |                    |  | $ |             |   |  | $            |            |   |              | $ |            |   |  | $ | 19,521,188 |  
|                                                                     |  |                     |               |    |                     |   |             |                    |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Liabilities and Stockholders Equity                                 |  |                     |               |    |                     |   |             |                    |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Long-term borrowings                                                 |  | $                   | 4,055,986,830 |    |                     | $ |            |                    |  | $ |             |   |  | $            |            |   |              | $ |            |   |  | $ |           |  
|Other liabilities                                                    |  |                     | 15,288,826    |    |                     |   |            |                    |  |   |             |   |  |              |            |   |              |   |            |   |  |   |           |  
|Stockholders equity                                                 |  |                     |              |    |                     |   |            |                    |  |   |             |   |  |              |            |   |              |   |            |   |  |   | 7,939,339  |  
|                                                                     |  |                     |               |    |                     |   |             |                    |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Total liabilities and stockholders equity                           |  | $                   | 4,071,275,656 |    |                     | $ |            |                    |  | $ |             |   |  | $            |            |   |              | $ |            |   |  | $ | 7,939,339  |  
|                                                                     |  |                     |               |    |                     |   |             |                    |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Period gap before adjustments                                        |  | $                   | (11,581,849   | )  |                     | $ |            |                    |  | $ |             |   |  | $            |            |   |              | $ |            |   |  |   | 11,581,849 |  
|Interest rate derivatives                                            |  |                     | (485,000,000  | )  |                     |   | 485,000,000 |                    |  |   |             |   |  |              |            |   |              |   |            |   |  |   |           |  
|                                                                     |  |                     |               |    |                     |   |             |                    |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Period gap                                                           |  | $                   | (496,581,849  | )  |                     | $ | 485,000,000 |                    |  | $ |             |   |  | $            |            |   |              | $ |            |   |  | $ | 11,581,849 |  
|                                                                     |  |                     |               |    |                     |   |             |                    |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Cumulative gap                                                       |  | $                   | (496,581,849  | )  |                     | $ | (11,581,849 | )                  |  | $ | (11,581,849  | ) |  | $            | (11,581,849 | ) |              | $ | (11,581,849 | ) |  | $ |           |  
|                                                                     |  |                     |               |    |                     |   |             |                    |  |   |              |   |  |              |             |   |              |   |             |   |  |   |            |  
|Ratio of interest-sensitive assets to interest-sensitive liabilities |  |                     | 100           | %  |                     |   | n/a         |                    |  |   | n/a          |   |  |              | n/a         |   |              |   | n/a         |   |  |   | 246        | %
|Ratio of cumulative gap to total assets at June 30, 2004             |  |                     | (12           | )% |                     |   | n/a         |                    |  |   | n/a          |   |  |              | n/a         |   |              |   | n/a         |   |  |   | n/a        |  



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The following table reflects the average terms to maturity for our earning assets and liabilities, as of
June 30, 2004.



|                      |  |      
|--------------------- |  | -----
|                      |  | Years
|Earning assets        |  |      
|Student loans         |  | 21.33
|Cash and investments  |  | 0    
|Total earning assets  |  | 20.25
|Borrowings            |  |      
|Short-term borrowings |  | 0.28 
|Long-term borrowings  |  | 27.69
|Total borrowings      |  | 25.80



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 three and six month periods ended June 30, 2004 and 2003.



|                                                                               |  |                                          |            |   |                                          |     |    |                                          |   |          |                                          |  |     |    |  |   |          |   |  |     |    |  |   |           |  |     |  
|------------------------------------------------------------------------------ |  | ---------------------------------------- | ---------- | - | ---------------------------------------- | --- | -- | ---------------------------------------- | - | -------- | ---------------------------------------- |  | --- | -- |  | - | -------- | - |  | --- | -- |  | - | --------- |  | --- | -
|                                                                               |  | Three months ended June 30, 2004         |            |   | Three months ended June 30, 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               |  | $                                        | (2,817,892 | ) |                                          | (61 | )% |                                          | $ | (610,490 | )                                        |  | (13 | )% |  | $ | (503,322 | ) |  | (29 | )% |  | $ | 3,226,937 |  | 183 | %
|Increase/(decrease) in basic income/(loss) per share (diluted) before SFAS 133 |  | $                                        | (0.15      | ) |                                          | (61 | )% |                                          | $ | (0.03    | )                                        |  | (13 | )% |  | $ | (0.05    | ) |  | (29 | )% |  | $ | 0.28      |  | 183 | %
|                                                                               |  |                                         
|                                                                               |  | Six months ended June 30, 2004           |            |   | Six months ended June 30, 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               |  | $                                        | (4,549,032 | ) |                                          | (59 | )% |                                          | $ | (443,566 | )                                        |  | (6  | )% |  | $ | (309,970 | ) |  | (9  | )% |  | $ | 6,972,288 |  | 210 | %
|Increase/(decrease) in basic income/(loss) per share (diluted) before SFAS 133 |  | $                                        | (0.24      | ) |                                          | (59 | )% |                                          | $ | (0.02    | )                                        |  | (6  | )% |  | $ | (0.02    | ) |  | (9  | )% |  | $ | 0.62      |  | 208 | %



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 June 30, 2004, we continued to implement procedural enhancements designed to facilitate the flow and accuracy of our reporting into our financial statements. These enhancements include additional levels of review of transactions,
improvements in our system of controls and the development of detailed documentation of our procedures. During the quarter we hired a director of internal audit to establish an internal control department and to lead our efforts in monitoring and
evaluating our internal control structure 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.



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##### Table of Contents

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 June 30, 2004, we received proceeds of $709,634 related to the issuance of 323,292 shares of common stock in connection with the
exercise of warrants and employee options. During the six months ended June 30, 2004, we received proceeds of $1,486,908 related to the issuance of 701,924 shares of common stock in connection with the exercise of warrants and employee options.



During the quarter and six months ended June 30, 2004 we
granted additional stock options under our Stock Option Plan. We granted incentive stock options (net of cancellations) during the quarter and six months ended June 30, 2004 for the purchase of 56,351 shares and 131,417 shares, respectively, 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



At our 2004 Annual Meeting of Stockholders held on May 17, 2004, the stockholders elected the eight nominees for the Board of Directors nominated by the Board: Robert deRose, Michael H. Shaut, Samuel Belzberg, C.
David Bushley, Richard J. Hughes, Leo Kornfeld, Jeffrey E. Stiefler and Robert V. Antonucci.



Voting for the election of directors was as follows:



|          |  |            |  |            |  |             |  |              |  |            |  |            |  |             |  |             
|--------- |  | ---------- |  | ---------- |  | ----------- |  | ------------ |  | ---------- |  | ---------- |  | ----------- |  | ------------
|          |  | R. deRose  |  | M. Shaut   |  | S. Belzberg |  | C.D. Bushley |  | R.J.Hughes |  | L.Kornfeld |  | J. Stiefler |  | R. Antonucci
|For:      |  | 13,151,980 |  | 13,134,647 |  | 13,151,980  |  | 13,150,880   |  | 13,152,980 |  | 13,149,871 |  | 13,152,880  |  | 13,146,213  
|Withheld: |  | 114,620    |  | 131,953    |  | 114,620     |  | 115,720      |  | 113,620    |  | 116,729    |  | 113,720     |  | 120,387     



Additionally, at our
2004 Annual Meeting of Stockholders, the stockholders voted on the adoption of a new Long Term Incentive Plan. A summary of the voting was as follows:



For: 7,207,898 Against: 2,163,660



Item 5. Other Information



Not applicable.



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##### Table of Contents

Item 6. Exhibits and Reports on Form 8-K



(a) Exhibits.



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



|              |  |                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                    
|3.1           |  | Amended and Restated Certificate of Incorporation of the Company (1)                                                                                                                           
|              | 
|3.2           |  | Bylaws of the Company (2)                                                                                                                                                                      
|              | 
|10.1          |  | Indenture of Trust dated as of May 1, 2004, among Education Funding Capital Trust - IV, U.S. Bank National Association as Indenture Trustee and Fifth Third Bank as Eligible Lender Trustee
(3)
|              | 
|10.2          |  | Remote Servicing Agreement between Pennsylvania Higher Education Assistance Agency and Education Loan Servicing Corporation, dated March 5, 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)                                                                                                                                       

---

|(1) | Incorporated by reference from the Companys Proxy Statement filed April 15, 2002.
|--- | ----------------------------------------------------------------------------------

|(2) | Incorporated by reference from the Companys Form 10-SB Registration Statement filed March 17, 2000.
|--- | ----------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference from Education Funding Capital Trust - IVs Exhibit 4.1 to Form 8-K filed May 26, 2004
|--- | ----------------------------------------------------------------------------------------------------------------



(b) Form 8-K.



During the quarter ended June 30, 2004, we filed one Report
on Form 8-K, dated May 6, 2004.



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##### Table of Contents

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: August 9, 2004 |  | EDUCATION LENDING GROUP, INC.
|                     |  |                              
|                     |  | By:                           |  | /s/ James G. Clark                                                  
|                     |  | Name:                         |  | James G. Clark                                                      
|                     |  | Title:                        |  | Chief Financial Officer (Principal Financial and Accounting Officer)



36