**EXHIBIT 99.1**
**Risks Factors Related to Our Industry and Our Company**
**Changes in federal laws and regulations relating to education loans,particularly legislation affecting federally guaranteed consolidation loans,could materially adversely affect our results of operations.**
                The Higher Education Act of 1965 must be reauthorized by Congress everyfive years and the FFEL Program is periodically amended. The United StatesCongress is currently considering reauthorization of the Act, which isscheduled to expire in 2004. Changes in the Higher Education Act made in thetwo most recent reauthorizations have resulted in reductions in education loanyields paid to lenders, increased fees paid by lenders and a decreased level offederal guarantee. Federally guaranteed consolidation loans made up 94.9% ofour loan originations for the year ended December 31, 2003 and 99.9% of ourloan portfolio as of June 30, 2004, and efforts underway to pass legislationthat affects federal consolidation loans would have a significant impact on us.Some of the key changes that may be considered in the reauthorization debatethat could have a negative effect on our business include:
• *Eliminating fixed-rate consolidation loans and requiring that allconsolidation loans be made at a variable rate*. If consolidation loansare required to be made at a variable rate rather than a fixed rate, asvirtually all consolidation loans are currently made, it could reducethe amount of income we can earn on the loans we originate in thefuture and reduce the demand for consolidation loans. A bill recentlyintroduced by the Chair of the House Committee on Education and theWorkforce contains this provision. • *Permitting borrowers to refinance consolidation loans*. Ifborrowers holding consolidation loans are permitted to refinance theirconsolidation loans under the FFEL Program, this would open theconsolidation loans in our portfolio to refinancing.
                Any of these legislative changes, if enacted, could materially reduce ourloan originations and earnings.
                Senator John Kerry, the Democratic candidate for president, has proposedas part of his presidential campaign, a requirement that lenders bid in anauction in order to offer FFELP loans, effectively replacing the currentgovernment guaranteed minimum interest rate. This proposal would alsoeliminate the Special Allowance Payments made by the federal government tolenders to provide them a guaranteed rate of return on FFELP loans made afterenactment of such proposal. If the Kerry proposal is enacted, it couldmaterially reduce our loan originations and earnings.
                In addition, legislation has been introduced proposing a number ofinitiatives aimed at supporting the William D. Ford Federal Direct LoanProgram, which we refer to as the FDL Program or FDLP. Under the FDL Program,the U.S. Department of Education, or DOE, makes loans directly to studentborrowers through the educational institutions they attend. If legislationpromoting the FDL Program to the detriment of the FFEL Program were to beenacted, it could materially reduce our loan originations and earnings.
 

 

                Further amendments, the nature of which we cannot currently anticipate,could also hurt our business and our results of operations. Moreover, therecan be no assurance that the provisions of the Higher Education Act will bereauthorized this year. While Congress has consistently extended the effectivedate of the Higher Education Act, it may elect not to reauthorize the DOE’sability to provide interest subsidies and federal guarantees for student loans.Such a failure to reauthorize would reduce the number of federally guaranteedstudent loans available for us to originate in the future and could materiallyreduce our results of operations.
**Changes in the interpretations of the Higher Education Act issued by the U.S.Department of Education could negatively impact our loan originations.**
                The U.S. Department of Education oversees and implements the HigherEducation Act and periodically issues regulations and interpretations of thatAct. Changes in such regulations and interpretations could negatively impactour business.
                Currently, if only one lender holds all of a student’s FFELP loans, thenanother lender cannot consolidate the loans away from the current holder unlessthe current holder refuses to, or does not offer to, consolidate the loans forthe borrower. We refer to this as the single holder rule. Historically, wedid not believe the single holder rule limited the ability of a borrower toconsolidate FFELP loans held by a single lender with FDLP loans. However, theU.S. Department of Education issued a letter on April 29, 2004 that limits theability of borrowers having FFELP loans that are held by a single lender andFDLP loans to obtain a FFELP consolidation loan with any lender other than thelender holding all of the borrower’s FFELP loans. This new ruling is scheduledto go into effect in September 2004. During the second half of 2003 and thefirst quarter of 2004, we marketed to borrowers who had FDLP loans and FFELPloans made by a single lender. In May 2004, as a result of this ruling, wereduced marketing to these types of borrowers and increased our marketingefforts to other types of borrowers. We estimate that our loan originations ofthis type peaked in the fourth quarter of 2003 at approximately $133 millionand declined to approximately $94 million in the first quarter of 2004. Unlessour new marketing campaigns are as successful as the prior ones, this newruling could adversely affect the volume of our loan originations.
                In addition, until recently, we marketed and offered FFELP consolidationloans to borrowers seeking to refinance only their FDLP consolidation loans.However, in June 2004, the U.S. Department of Education’s servicers for the FDLProgram informed us and, we believe, other FFELP loan originators that FFELPloans which refinance only FDLP consolidation loans will no longer bepermitted. We can provide no assurance that this position will not beofficially endorsed by the U.S. Department of Education or that we will be ableto originate these loans in the future. As a result, we have currently ceasedmarketing loans to these types of borrowers and are reallocating marketingresources to other types of borrowers. For 2002, 2003 and the first six monthsof 2004, we estimate that approximately $0, $250 million and $218 million,respectively, of our loan originations were FFELP consolidation loans thatrefinanced only FDLP consolidation loans. Because this change is effectiveimmediately, we expect that, in the short term, this change will adverselyaffect the volume of our loan originations. Furthermore, unless our newmarketing campaigns are as successful as the prior ones, this new ruling couldadversely affect the volume of our loan originations in the future.
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**Significantly decreased demand for consolidation loans would materially reduceour revenue.**
                A combination of increased consumer awareness, rising education debtvolume and historically low interest rates available to borrowers in the lastthree years has increased the number of borrowers seeking to consolidate theirvariable-rate education loans into one loan. For the year ended December 31,2003, 94.9% of our loan originations were consolidation loans. One of theadvantages of consolidation loans is that borrowers are able to fix theinterest rate on their variable rate student loans at the then existing rate.If rates rise, students may have less incentive to consolidate their loans at afixed rate. Demand for consolidation loans could also decrease in the futureas a result of a decrease in the pool of potential borrowers eligible toconsolidate their loans. The DOE projects that FFELP consolidation loan volumewill decrease from $35.3 billion in federal fiscal year 2003 to an estimated$25.9 billion in federal fiscal year 2004 and to $22.3 billion in federalfiscal year 2005. A significant portion of the borrowers eligible toconsolidate their loans have loans held by one lender and, as a result of thesingle holder rule discussed in the prior risk factor, those loans are notavailable for consolidation by other lenders unless the original lender doesnot offer or refuses to consolidate those loans. Demand for consolidationloans could also decrease as a result of regulatory changes or if any of thelegislative proposals described above are enacted. A significant decrease indemand for consolidation loans would have a material adverse effect upon ourrevenue, particularly our fees on loan sales.
**We must comply with governmental regulations relating to our FFELP loans andguaranty agency rules and our business and results of operations could bematerially adversely affected if we fail to meet these requirements.**
                Our principal business is comprised of originating, holding and servicingeducation loans made and guaranteed pursuant to the FFEL Program. Mostsignificant aspects of our lines of business are governed by the HigherEducation Act. We must also meet various requirements of the guarantyagencies, which are private not-for-profit organizations or state agencies thathave entered into federal reinsurance contracts with the DOE, in order tomaintain the federal guarantee on our FFELP loans. These requirementsestablish origination and servicing requirements and procedural guidelines andspecify school and borrower eligibility criteria. The federal guarantee ofFFELP loans is conditioned on compliance with origination, servicing andcollection standards set by the DOE and guaranty agencies. FFELP loans thatare not originated, disbursed or serviced in accordance with DOE regulationsrisk loss of their guarantee, in full or in part.
                Our failure to comply with the regulatory regimes described above mayarise from:
• breaches of our internal control system, such as a failure toadjust manual or automated servicing functions following a change inregulatory requirements; • unintentional employee errors, such as inputting erroneous data orfailure to adhere to established company processes;
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• technological defects, such as a malfunction in or destruction ofour computer systems; • fraud by third parties who refer loan applications to us or fromwhom we acquire originated loan applications; or • fraud by our employees or other persons in activities such asorigination or borrower payment processing.
                If we fail to comply with any of the above requirements, we could incurpenalties or lose the federal guarantee on some or all of our FFELP loans. Inaddition, even if we comply with the above requirements, a failure to comply bythird parties with whom we conduct business may be attributable to us andresult in us incurring penalties or losing the federal guarantee on some or allof our FFELP loans. If we experience a high rate of servicing deficiencies, wecould incur costs associated with remedial servicing, and, if we areunsuccessful in curing such deficiencies, the eventual losses on the loans thatare not cured could be material. In addition, failure to comply with theselaws and regulations could result in our liability to borrowers and potentialclass action suits.
                Our actual loss experience on denied guarantee claims historically has notbeen material to our operations, but the impact on us could become material ifdenied guarantee claims were to increase substantially in future periods. In2002, we lost $32,000 and, in 2003, we lost $8,000 due to denied guaranteeclaims.
**We have only recently begun retaining a significant portion of the loans weoriginate in our portfolio and servicing loans and we cannot predict whether wewill suffer losses as a result of the performance of our assets and operationsover the long term.**
                We were formed in June 1998. Prior to 2002, we did not retain in ourportfolio a significant amount of the loans we originated. We retainedapproximately 50% and 21% of the FFELP loans we originated in 2003 and 2002,respectively. Although we believe that the retained loans are valuable assets,due to their long duration and high quality (due to the federal guarantee), wecannot assure you that over the long term our earnings from retaining loans inour portfolio will exceed the value of the income we would have received fromselling those loans. The loans retained in our portfolio may be repaid priorto maturity which would reduce the amount of interest we earn and expose us toreinvestment risk. Moreover, the loans retained in our portfolio could performpoorly in the future and our allowance for loan losses could be insufficient,which could materially reduce our earnings and impair our ability to access theasset-backed securitization market in the future on favorable terms.
                In addition, we only began servicing loans in April 2003, following ouracquisition of SunTech. Although SunTech has been in business for more than 15years and has serviced a significant portion of the loans we have originatedsince our formation in 1998, we have operated as a vertically integratedcompany offering loan servicing for only one year. If SunTech does not performat the level of its historical performance, our business and results ofoperations could be materially adversely affected.
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**Our quarterly results of operations have varied significantly in the past andare expected to continue to do so, which may cause our stock price tofluctuate.**
                Our quarterly results of operations have varied significantly in the pastand are expected to continue to do so in the future. Over the past two fiscalyears, our quarterly income (loss) before income tax provision (benefit) andaccretion of dividends on preferred stock has ranged from a low of a $13.5million loss in the second quarter of 2003 to a high of $18.2 million of incomein the third quarter of 2002. In addition, over this period, our quarterlyoriginations as a percentage of total annual originations have ranged from alow of 9.4% to a high of 36.4%. The market price of our common stock maydecline significantly if our future quarterly results of operations fall belowthe expectations of securities or industry analysts or investors.
                Our quarterly results of operations in any period will be particularlyaffected by the amount and timing of our loan sales. Because we target apercentage of our loan originations to be retained on an annual, rather thanquarterly basis, our quarterly results of operations will fluctuate. A numberof additional factors, some of which are outside of our control, will alsocause our quarterly results to fluctuate, including:
• an increase in loan consolidation in November and December, as aresult of the expiration of the six-month grace period; • the effects of the July 1 reset in borrower interest rates. Wegive borrowers who complete loan applications during the second quarterthe option to fund their loans prior to July 1, when the old rate iseffective, or after July 1, when the new rate is effective.Accordingly, if any year’s borrower rate decreases over the prioryear’s borrower rate, the origination of a significant portion of theloan applications completed in the second quarter will be shifted tothe third quarter; conversely, if any year’s borrower rate increasesfrom the prior year’s borrower rate, a higher percentage of completedapplications will be originated in the second quarter. • seasonal patterns affecting private in-school loans, primarily anincrease in private in-school loan originations in the third and fourthquarter as students obtain loans to pay tuition, and a decrease inprivate in-school loan activity in the second quarter; • seasonal patterns affecting marketing expenses, as we generallymarket most heavily in the second and third quarters of the year in aneffort to inform recent college graduates of their consolidationoptions and offer private in-school loans to students paying tuition; • the impact of general economic conditions; • changes in interest rates; and • the introduction of new product offerings.
                We forecast the volume and timing of our loan originations for ouroperational and financial planning on the basis of many factors and subjectivejudgments. Therefore, failure
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to generate originations according to our expectations in a particularquarter could materially decrease our net income for that quarter and the next,at a minimum.
**“Do not call” registries may limit our ability to market our products andservices.**
                Our direct marketing operations are subject to various federal and state“do not call” list requirements and may become subject to additional state “donot call” list requirements. The Federal Trade Commission has recently amendedits rules to provide for a centralized national “do not call” registry. Underthese new federal regulations, consumers may have their phone numbers added tothe national “do not call” registry.
                Generally, we are prohibited from calling anyone on that registry unlesswe have an existing relationship with that person. We also are required to paya fee to access the registry on a quarterly basis. Federal enforcement of the“do not call” provisions began in the fall of 2003, and the rule provides forfines of up to $11,000 per violation and other possible penalties. This rulemay restrict our ability to market effectively our products and services to newcustomers. Furthermore, compliance with this new rule may prove difficult, andwe may incur penalties for improperly conducting our marketing activities. Inaddition, failure to comply with the terms of this new rule could have anegative impact on our reputation.
                Forty-threestates have “do not call” rules. Twenty-seven states usethe national “do not call” registry and sixteen statesmaintain their own “do not call” registry. The states havevarying penalties and fines for noncompliance. Compliance and coordinationwith these state lists and with federal lists may prove difficult and we mayincur additional penalties for failure to comply with any of these lists, whichcould also have a negative impact on our business.
**We derive a significant portion of our fee income under a small number offorward purchase agreements, and if we are not able to retain these agreements,or if our counterparties under these agreements reduce their willingness toacquire originated loans from us, our net revenue would be reduced and ourresults of operations would suffer.**
                We enter into forward purchase agreements with financial institutions whoagree to purchase and require that we sell to them, a portion of the FFELPconsolidation loan applications we originate. We also enter into forwardpurchase agreements with financial institutions who agree to purchase all ofthe private consolidation applications we originate. Under these agreements,which are typically one- to three-year agreements, we generate loanapplications that are then forwarded to partnering financial institutions overpre-determined periods of time and for agreed upon fees. Three of our forwardpurchase agreements accounted for approximately 72.5% and 79.9% of our feeincome and 60.5% and 46.9% of our net revenue in fiscal 2003 and the first sixmonths of fiscal 2004, respectively. Revenue under our forward purchaseagreement with Citibank (New York State), our largest forward purchaseagreement, represented 43.4% and 50.3% of our fee income and 36.2% and 29.6% ofour net revenue for fiscal 2003 and the first six months of fiscal 2004,respectively. We may not be able to retain or renew our key forward purchaseagreements or our counterparties may decrease the level of originated loansthey are willing to acquire from us. If a large forward purchase contract werecancelled or not renewed and not replaced, our fee income would significantlydecline, and the loss of or a significant reduction of purchases by, one ormore of our significant forward purchase agreement counterparties couldmaterially adversely affect our business, operating
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results and financial condition. We can provide no assurance that we willbe able to renew these agreements or that suitable replacements can be found atacceptable rates or on acceptable terms.
**Our inability to maintain relationships with our eligible lender or withlenders that originate our private loans could have material adverse effect onour ability to sustain or increase our business.**
                When we originate FFELP loans on our own behalf or when we acquire FFELPloans from others, we engage U.S. Bank National Association as our “eligiblelender,” as defined in the Higher Education Act, to act as our trustee to holdtitle to all such originated and acquired FFELP loans. This eligible lendertrustee holds the legal title to our FFELP loans, and we hold 100% of thebeneficial interests in those loans. If we are unable to renew our contractwith U.S. Bank, or if the contract is terminated, we would have to find anotherinstitution to serve as our eligible lender. We can provide no assurance thatwe will be able to renew this contract or that a replacement eligible lendercan be found at acceptable rates or on acceptable terms.
                Moreover, we have a relationship with a lender for whom we market andfacilitate the origination of private in-school loans. The number of financialinstitutions willing to originate and finance these private in-school loanswill be a significant factor in the growth of this market. As the market isless mature than that for federally guaranteed loans, there are, at present,fewer institutions originating and acquiring these loans. Accordingly, we canprovide no assurance that we will be able to renew this contract or thatsuitable replacements could be found or that we will find additional lenderswilling to finance the volume of private loans that we may seek to market ororiginate.
                Any failure to maintain or replace contractual relationships with thesefinancial institutions or lenders could seriously impair our ability tooriginate loans and generate revenue from originated loans, and to sustain orincrease our business.
**If we are unable to increase our private education loan originations and expandour channels of distribution as we plan, our business may not grow.**
                Our strategy includes increasing the amount of private loans we originateor whose origination we facilitate, as well as expanding our channels ofdistribution. We have much more limited experience in these products andchannels than in our business of marketing and originating FFELP consolidationloans through our DTC channel. In connection with these strategies, we haveinvested and will continue to invest resources in market research andtechnology and have hired and trained and will continue to hire and trainadditional personnel, when necessary. If these strategies are not successful,our earnings may be adversely affected.
**We may not be able to successfully make acquisitions or increase our profitsfrom these acquisitions.**
                We intend to pursue continued growth through acquisitions in the educationfinance industry. Such an acquisition strategy includes certain risks. Forexample:
• we may be unable to identify acquisition candidates, negotiatedefinitive agreements on acceptable terms or, as necessary, secureadditional financing;
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• we may encounter unforeseen expenses, difficulties, complicationsor delays in connection with the integration of acquired entities; • we may fail to achieve acquisition synergies; • our acquisition strategy, including the focus on the integration ofoperations of acquired entities, may divert management’s attention fromthe day-to-day operation of our businesses; • acquired loan or servicing portfolios may have unforeseen problems; or • key personnel at acquired companies may leave employment.
                In addition, we may compete for certain acquisition targets with companieshaving greater financial resources than us. We cannot assure you that we willbe able to successfully make future acquisitions or what effects thoseacquisitions may have on our financial condition and results of operations.Inherent in any future acquisition is the risk of transitioning companycultures and facilities. The failure to efficiently and effectively achievesuch transitions could have a material adverse effect on our financialcondition and results of operations, particularly during the period immediatelyfollowing any acquisitions.
                We anticipate that we would finance potential acquisitions through cashprovided by operating activities and/or borrowings, which would reduce our cashavailable for other purposes and our debt capacity, as well as our debt servicerequirements. We cannot assure you, however, that we would be able to obtainneeded financing in the event acquisition opportunities are identified. We mayalso consider financing acquisitions by issuing additional shares of commonstock to raise capital or as consideration, which would dilute your ownership.
**Our inability to maintain our relationships with third parties for whom weservice loans could reduce our net income.**
                Our inability to maintain strong relationships with servicing customerscould result in loss of loan servicing volume generated by some of our loanservicing customers. We cannot assure you that these relationships willcontinue. As of December 31, 2003 and June 30, 2004, approximately 69.4% and63.6%, respectively, of the loans we serviced were owned by third parties. Ofthese, a majority are governed by agreements with terms of three years or less.To the extent that our third-party servicing clients reduce the volume ofeducation loans that we service on their behalf, our income would be reduced,and, to the extent the related costs could not be reduced correspondingly, ournet income could be reduced. We might lose third-party servicing volume for avariety of reasons, including if our third-party servicing clients begin orincrease internal servicing activities, shift volume to another serviceprovider, exit the FFEL Program completely or if we fail to comply withapplicable laws and regulations. The loss of such loan servicing volume couldresult in an adverse effect on our business.
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**If loan applications for federally guaranteed loans that we sell aresubsequently found to be ineligible for the federal guarantee, we may berequired to purchase such loans and reimburse the DOE for certain fees.**
                Pursuant to the terms of our forward purchase agreements, FFELP loans thatwe originate must comply with all applicable laws and regulations and must beeligible for federal guarantee. A portion of the loan applications that weoriginate and sell are generated by third-party marketing entities with whom wehave marketing contracts. If any of the loan applications that we sell underour forward purchase agreements, whether marketed by us or by a third-partymarketer, are deemed ineligible for federal guarantee by a guaranty agency, wemay be obligated to purchase those loans. We would also be required toreimburse the DOE for fees associated with those loans. Prior to 2001, aportion of the loan applications we originated were generated by referrals fromcollection agencies, including approximately $3.9 million in principal amountof loans generated by referrals from the Valley Acceptance Corporation.Individuals associated with Valley Acceptance have been charged with improperprocessing of loans, including loan applications which we originated and soldto third parties. To date, a small number of claims relating to these loanshave been returned to us by the applicable guarantee agency, and, accordingly,we may be required to purchase these loans and reimburse the DOE for theassociated fees. If any loan applications which we originated are found to beineligible for federal guarantee after they are funded, including loansreferred by other third-party marketers, we may be required to purchaseadditional loans in the future and reimburse the DOE for the associated feeswhich could have an adverse effect on our results of operations.
**We could experience cash flow problems if a guaranty agency defaults on itsguarantee obligation.**
                A deterioration in the financial status of guaranty agencies, which areprivate not-for-profit organizations or state agencies, or in their ability tohonor guarantee claims on defaulted student loans could result in a failure ofthese guaranty agencies to make their guarantee payments in a timely manner, ifat all. If the DOE has determined that a guaranty agency is unable to meet itsguarantee obligations, we may submit claims directly to the DOE, and the DOEwould be required to pay the full guarantee claim. In such event, payment ofthe guarantee claims may not be made in a timely manner, which could adverselyaffect our liquidity.
**Fluctuations in interest rates may materially and adversely affect our netincome.**
                Because we expect to generate a significant portion of our earnings fromthe difference, or spread, between the yield we receive on our portfolio ofloans and the cost of financing these loans, changes in interest rates couldhave a material effect on our results of operations. Substantially all theloans in our portfolio are FFELP consolidation loans which bear interest at afixed rate, however, the yield we receive is the higher of the fixed rate or avariable rate determined under the FFEL Program. For consolidation loans inour portfolio, the FFELP-determined variable rate is 2.64% over the 91-dayfinancial commercial paper rate. Substantially all interest costs on our debtobligations are determined based upon LIBOR, commercial paper or the result ofauctions. Using the portfolio as of December 31, 2003 and June 30, 2004, andassuming normal portfolio payment patterns for the following 12-month period,an increase in
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interest rates of 200 basis points would decrease our net interest incomefor that period by approximately $20.3 million and $20.7 million, respectivelyand an increase in interest rates of 100 basis points would decrease our netinterest income for that period by approximately $13.5 million and $12.7million, respectively, while a corresponding decrease in these interest ratesof 100 basis points would increase our net interest income for that period byapproximately $21.8 million and $26.4 million, respectively. Changes ininterest rates, the composition of our loan portfolio and derivativeinstruments will impact the effect of interest rates on our earnings, and wecannot predict any such impact with any level of certainty. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Interest Rate Risk”.
**The effect of our borrower benefit programs may adversely affect our netinterest income.**
                Our borrower benefit programs, which reduce the interest rates borrowerspay on their loans, could significantly reduce our net interest income. Weoffer borrower benefits as incentives to attract new borrowers and to improveour borrowers’ payment behavior. One incentive program reduces a borrower’sinterest rate by 0.25% per annum for so long as the borrower makes monthlypayments through automatic deductions from his or her checking or savingsaccount. Approximately 30% of our borrowers currently participate in thisprogram. In addition, we offer borrowers an on-time incentive program thatreduces their interest rates by 1.00% per annum after they have made theirinitial 36 payments on time and for so long as they continue to make subsequentpayments on time. Although the on-time program has not been in place forsufficient time to have had any impact on our net interest income, our borrowerbenefits will in the future reduce the yield on our loan portfolio and reduceour net interest income.
**Our derivative instruments may not be successful in managing our interest raterisk and failure of counterparties to perform under certain derivativeinstruments could harm our business.**
                When we utilize derivative instruments, we utilize them to manage ourinterest rate sensitivity. Although we do not use derivative instruments forspeculative purposes, our derivative instruments do not meet the criteria setforth in Statement of Financial Accounting Standards, or SFAS, No. 133,Accounting for Derivatives Instruments and Hedging Activities, which allowoffset of the changes in the fair value of the derivative instrument againstthe effects of the changes in the hedged item in the statement of income.Therefore, we only mark-to-market the derivative instruments with changesreflected in the income statement. The derivative instruments we use aretypically in the form of interest rate swaps and interest rate caps, which havea duration of between twelve and twenty four months. Our interest rate hedgingstrategy is designed to address fluctuations in the short term, rather than thelong term. Developing an effective strategy for dealing with movements ininterest rates is complex, and no strategy can completely insulate us fromrisks associated with such fluctuations. In addition, a counterparty to aderivative instrument could default on its obligation, thereby exposing us tocredit risk. Further, we may have to repay certain costs, such as transactionfees or brokerage costs, if a derivative instrument is terminated by us. As aresult, we cannot assure you that our economic hedging activities will not havean adverse impact on our results of operations or financial condition.
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**If we fail to renew our warehouse facility and revolving line of credit, ourliquidity and results of operations could be adversely affected.**
                Our primary funding needs are those required to finance our loan portfolioand satisfy our cash requirements for acquisitions, operating expenses andtechnological development. We rely upon a conduit warehouse facility tosupport our funding needs on a short-term basis. The term of the facility isone year, and it is renewable at the option of the lender and may be terminatedat any time for cause. Currently, the aggregate short-term availability underour warehouse facility is $500 million. There can be no assurance that we willbe able to maintain such conduit facility, increase the availability under suchfacility or find alternative funding, if necessary. Our revolving line ofcredit may be terminated at any time upon the occurrence of an event ofdefault. Unavailability of warehouse or revolving financing sources maysubject us to the risk that we may be unable to meet our financial commitmentsto borrowers and creditors when due, unless we find alternative fundingmechanisms. If the availability under our warehouse facility were to decreaseor terminate, our ability to retain loans could be adversely affected, whichcould adversely affect our results of operation on a short- and/or long-termbasis.
**If we are unable to access the asset-backed securitization market, which werely on for substantially all our long-term funding of loan originations, ourliquidity and results of operations could be adversely affected.**
                We have begun to rely upon, and expect to rely increasingly upon,asset-backed securitizations as our most significant source of long-termfunding for our loan portfolio. We have issued approximately $4.0 billion inasset-backed notes since 2001. Our access to the asset-backed securitizationmarket is subject to conditions in the asset-backed securitization market overwhich we have no control. If the loans in our securitizations perform poorly,our ability to access the asset-backed securitization market may be impaired orthe terms of future securitization may be more costly. If our access to theasset-backed securitization market were to decrease, we would have to findother methods to finance our loan originations on a long-term basis or berequired to sell a larger portion of our originated loan applications either ofwhich option, if available, may be less favorable than the asset-backedsecuritization market has been historically. In such event, our liquidity andresults of operations could be adversely affected on a short- and/or long-termbasis.
**Our right to receive cash in excess of the principal balance of the loansfunded from our securitizations is limited by their terms and performance.**
                As part of our securitization transactions since 2002, we borrowed fundsin excess of the principal balance of the loans included in the applicablesecuritization transactions. A portion of these additional funds was used torepay other indebtedness and to fund our operations. We are also entitled toreceive excess spread from securitizations in the future, generally after theprincipal balance of the loans and restricted cash held in the securitizationsequals the outstanding indebtedness. We currently expect to receive excessspread from our November 2001, February 2003 and November 2003 issuances inSeptember 2006, October 2005 and April 2008, respectively. However, our rightsto cash flows from securitized loans are subordinate to noteholder interests,and these loans may fail to generate any cash flows beyond
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what is due to pay noteholders. Moreover, the cash generated from theseloans may be restricted by these securitization vehicles for certain periods.Accordingly, adverse developments in the performance of our current and futuresecuritizations could adversely affect our liquidity and cash flows.
**Higher rates of prepayments of student loans could reduce our profits.**
                Pursuant to the Higher Education Act, borrowers may prepay loans madeunder the FFEL Program at any time. Prepayments may result from consolidatingstudent loans, which has historically tended to occur more frequently in lowinterest rate environments, from borrower defaults, which will result in thereceipt of a guarantee payment and from voluntary full or partial prepayments,among other things. The rate of voluntary prepayments of student loans may beinfluenced by a variety of economic, social and other factors affectingborrowers, including interest rates, the availability of alternative financingand legislative changes. Any legislation that permits borrowers to refinanceexisting consolidation loans at possibly lower interest rates couldsignificantly increase the rate of prepayments on our student loans. Higherloan prepayments reduce the amount of cash generated in our securitizations,which, as described above, would adversely affect the amount of excess cash wereceive from securitizations. In addition, loan prepayments generally resultin a reduction in aggregate net interest income over the life of the loan.
**If auctions for our auction-rate asset-backed notes are not successful, ourcost of funding will increase and future securitizations may become morecostly.**
                The interest rates on certain of our asset-backed securities are set andperiodically reset via a “dutch auction” utilizing remarketing agents forvarying intervals ranging from seven to 91 days. Of our $4.0 billion ofasset-backed notes outstanding at June 30, 2004, 53.2% bear interest at ratesbased on auction rates. If there are insufficient potential bid orders in theauctions to purchase all of the notes offered for sale or being repriced, wecould be subject to interest costs substantially above the anticipated andhistorical rates paid on these types of securities. A failed auction orremarketing could also reduce the investor base of our future securitizationsand other financing and debt instruments.
**Future losses due to defaults on loans held by us present credit risk whichcould adversely affect our earnings.**
                As of June 30, 2004, 100% our loan portfolio was comprised of FFELP loans.These loans typically benefit from a federal guarantee of 98% of theirprincipal balance and accrued interest. We bear full risk of lossesexperienced with respect to the 2% non-guaranteed portion of the loans. In May2004, the DOE awarded us Exceptional Performance status. As a result, theFFELP loans in our portfolio benefit from a federal guarantee of 100% of theunpaid principal and accrued interest for the twelve month period ending May31, 2005, however there can be no assurance that this designation will beextended beyond that date.
                The performance of the FFELP loans in our portfolio is affected by theeconomy and other factors outside of our control, and a prolonged economicdownturn may have an adverse effect on the credit performance of these loans.While we provide allowances estimated
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to cover losses that may be experienced in our loans that are federallyguaranteed under the FFEL Program, there can be no assurance that suchallowances will be sufficient to cover actual losses in the future,particularly since we do not have a long history of holding these loans.Increases in losses in excess of our allowance could adversely affect ourresults of operations in the future.
**Access to alternative means of financing the costs of education may reducedemand for government guaranteed and private education loans.**
                The demand for government guaranteed and private education loans couldweaken if borrowers use other sources of funds to finance their post-secondaryeducation. These sources include, among others:
• home equity loans or lines of credit, under which families borrowmoney based on the value of their real estate; • Federal Direct Loan Program loans, if the DOE or schools increasethe education loans available through the FDL Program; • pre-paid tuition plans, which allow students to pay tuition attoday’s rates to cover tuition costs in the future; • 529 plans, which are state-sponsored investment plans that allow afamily to save funds for education expenses; and • education IRAs, now known as Coverdell Education Savings Accounts,under which a holder can make annual contributions for educationsavings.
                If demand for government guaranteed or private education loans weakens, wewould experience reduced demand for our products and services.
**Competition from other originators, lenders and servicers and competitioncreated by the Federal Direct Loan Program may materially adversely impact ourbusiness.**
                We face significant competition from SLM Corporation, the parent companyof Sallie Mae. SLM Corporation originated $15.2 billion of education loansthrough its preferred channel in 2003, services nearly half of all outstandingFFELP loans and is the largest holder of education loans, with a managedportfolio of approximately $95 billion as of June 30, 2004. We also faceintense competition from other education-related entities, such as EducationLending Group and College Loan Corporation. As we seek to further expand ourbusiness, we will face numerous other competitors, many of which will be wellestablished in the markets we seek to penetrate. Some of our current andpotential competitors are much larger than we are, have better name recognitionthan we do and have greater financial and other resources than we do. Severalof these competitors have large market capitalizations or cash reserves and arebetter positioned to acquire companies or portfolios in order to gain marketshare than we are. Consequently, such competitors may have more flexibility toaddress the risks inherent in the education finance business. Finally, some ofour competitors are tax-exempt organizations that
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do not pay federal or state income taxes. As a result of their tax-exemptstatus, these organizations may have access to a lower cost of funding theireducation loans than we do. These factors could give our competitorssignificant advantages.
                In 1992, Congress created the William D. Ford Federal Direct Loan Program,which we refer to as the FDL Program or the FDLP. Under the FDL Program, theDOE makes loans directly to student borrowers through the educationalinstitutions they attend. FDL loans are available to students only if theinstitution they attend participates in the FDL Program. The volume of studentloans made under the FFEL Program and available for us to originate may bereduced to the extent loans are made to students under the FDL Program.
**Failures in our information technology system could materially disrupt ourbusiness.**
                Our servicing and operating processes are highly dependent upon ourinformation technology system infrastructure, and we face the risk of businessdisruption if failures in our information systems occur, which could have amaterial impact upon our business and operations. We depend heavily on our owncomputer-based data processing systems in servicing both our own loans andthose of third-party servicing customers. Problems or errors may occur in thefuture in connection with the conversion of newly originated and acquired loansto our platform. If servicing errors do occur, they may result in a loss ofthe federal guarantee on the FFELP loans that we service or in a failure tocollect amounts due on the student loans that we service. A major physicaldisaster or other calamity that causes significant damage to our informationsystems could adversely affect our business. Additionally, loss of ourinformation systems for a sustained period of time could have a negative impacton our performance and ultimately on our cash flow in the event we were unableto process borrower payments.
**If we fail to comply with governmental regulations relating to our private loanbusiness, our business and results of operations could be adversely affected.**
                We are expanding our private loan business and currently originate andfacilitate the origination of private loans for third parties. The originationof private loans is subject to federal and state consumer protection laws andregulations, including state usury and disclosure laws and related regulations,and the Federal Truth in Lending Act. These laws and regulations imposesubstantial requirements upon lenders and their agents and servicers involvedin consumer finance. Failure to comply with these governmental regulationscould have an adverse effect on our business and results of operations.
**If we become subject to the licensing laws of any jurisdiction or anyadditional government regulation, our compliance costs could increasesignificantly.**
                In addition to being subject to certain state and federal consumerprotection laws, which may change, we are currently licensed as telemarketersin two states. We could also become subject to other licensing laws due tochanges in existing federal and state regulations. As a result, we could berequired to (1) implement additional or different programs and informationtechnology systems, (2) meet new licensing capital and reserve requirements or(3) incur additional administrative, compliance and third-party service costs.Furthermore, we could become subject to licensing laws in other states if weengage in licensable activities in the future.
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This includes the risk that even if we were not physically present, astate could assert jurisdiction over our operations for services we providethrough the mail, by phone, through the Internet or by other remote means. Ourfailure to comply with such requirements could subject us to civil or criminalpenalties and could curtail our ability to continue to conduct business in thatjurisdiction. Moreover, compliance with such requirements could involveadditional costs. Either of these consequences could have a material adverseeffect on our business.
                Additionally, other organizations with which we work are subject tolicensing and extensive governmental regulations, including truth-in-lendinglaws and other consumer protection regulations. From time to time we have, andwe may in the future, become responsible for compliance with these regulationsunder contractual arrangements with our clients. If we fail to comply withthese regulations, we could be subject to civil or criminal penalties.
**A failure to obtain trademark registrations and potential trademarkinfringement claims could cause us to incur additional costs and impede ourmarketing efforts.**
                We believe that our success depends to a degree upon our ability todevelop and maintain awareness of our corporate identifiers and brand names.We have applied for a U.S. service mark registration to protect our corporatename and will continue to evaluate the registration of additional service marksand trademarks, as appropriate. We cannot guarantee that any of our pendingapplications will be approved by the applicable governmental authorities, andwe are aware that one of our applications has initially been rejected and isnow under appeal. We may be subject to claims of alleged infringement of thetrademarks or other intellectual property rights of third parties. Any suchclaims, whether or not meritorious, could result in litigation and divert theefforts of our personnel. Moreover, should we be found liable forinfringement, we may be required to enter into licensing agreements (ifavailable on acceptable terms or at all) or to pay damages and to cease usingcertain names or identifiers. Any of the foregoing could cause us to incuradditional costs and impede our marketing efforts.
**Failure to comply with restrictions on inducements under the Higher EducationAct could harm our business.**
                The Higher Education Act generally prohibits a lender from providinginducements to educational institutions or individuals in order to secureapplicants for FFELP loans. However, the DOE permits de minimis gifts inconnection with advertising FFELP loans. If the DOE were to change itsposition on these matters, this could potentially result in the DOE imposingsanctions upon us if we fail to adapt our policies to comply with the newguidelines, and such failure could impact our business.
                We have also entered into various agreements to use marketing lists ofprospective borrowers from sources such as associations. On occasion, we payto acquire these lists and for completed loan applications resulting from theselists. We believe that such arrangements are permissible and do not violaterestrictions on inducements, as they fit within a regulatory exceptionrecognized by the DOE for generalized marketing and advertising activities.The DOE has provided subregulatory guidance that such arrangements do not raiseany improper inducement issues, since such arrangements fall within thegeneralized marketing exception. If
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the DOE were to change its position, this could hurt our reputation andpotentially result in the DOE imposing sanctions on us. These sanctions couldnegatively impact our business.
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