UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             -----------------------

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                        PURSUANT TO SECTIONS 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934
                   For the fiscal year ended December 31, 1997
                                       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 333-08929
                         ------------------------------

                        UNION FINANCIAL SERVICES-1, INC.
             (Exact name of registrant as specified in its charter)

                                     Nevada
         (State or other jurisdiction of incorporation or organization)

                                   86-0817755
                      (I.R.S. Employer Identification No.)

                      6991 East Camelback Road, Suite B290
                            Scottsdale, Arizona          85251
               (Address of principal executive offices) (Zip Code)

                                 (602) 947-7703
              (Registrant's telephone number, including area code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                      None

               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  IF  DISCLOSURE  OF  DELINQUENT  FILERS
PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN,  AND WILL NOT BE
CONTAINED,  TO THE  BEST OF  REGISTRANT'S  KNOWLEDGE,  IN  DEFINITIVE  PROXY  OR
INFORMATION  STATEMENTS  INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K
OR ANY AMENDMENT TO THIS FORM 10-K. [X]

               THE   AGGREGATE   MARKET  VALUE  OF  THE  VOTING  STOCK  HELD  BY
NON-AFFILIATES OF THE REGISTRANT ON DECEMBER 31, 1997:   NONE

               THE NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S  COMMON STOCK AS
OF MARCH 16, 1998 WAS 1,000.
                       -----------------------------------

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  following  document is  incorporated  in Parts I and IV of this
report by reference:  The Registrant's  Registration Statement on Form S-3 (File
No.  333-28551),  as amended and supplemented,  as filed with the Securities and
Exchange Commission on June 5, July 21, and October 14, 1997.
<PAGE>

                                TABLE OF CONTENTS

                                                                           Page

PART I
 ITEM 1.     BUSINESS.......................................................  1
 ITEM 2.     PROPERTIES..................................................... 15
 ITEM 3.     LEGAL PROCEEDINGS.............................................. 16
 ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 16

PART II
 ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
             STOCKHOLDER MATTERS............................................ 16
 ITEM 6.     SELECTED FINANCIAL DATA........................................ 16
 ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATIONS...................................... 18
 ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 19
 ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 20
 ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                       AND FINANCIAL DISCLOSURE............................. 20

PART III
 ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 21
 ITEM 11.    EXECUTIVE COMPENSATION......................................... 22
 ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
             MANAGEMENT..................................................... 23
 ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 23

PART IV
 ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
             FORM 8-K....................................................... 24

SIGNATURES

<PAGE>

                                     PART I

ITEM 1. BUSINESS

THE COMPANY

               Union Financial Services-1, Inc. (the "Company") was incorporated
under the laws of the State of Nevada on  February  28,  1996.  The Company is a
wholly owned subsidiary of Union Financial Services,  Inc., a Nevada corporation
("UFS").  UFS is a privately held  corporation and is affiliated with Union Bank
and Trust Company,  a Nebraska  corporation and state bank ("Union  Bank").  The
Company  was formed  solely for the  purpose  of  acquiring,  from time to time,
guaranteed educational loans made to students and parents of students ("Eligible
Loans")  under  the  Higher  Education  Act of 1965,  as  amended  (the  "Higher
Education Act"), and pledging such Eligible Loans and certain related collateral
to a trustee to secure one or more series of Taxable  Student Loan  Asset-Backed
Notes  that are issued by the  Company  from time to time  pursuant  to a Second
Amended and Restated  Indenture of Trust,  dated as of November 1, 1996, between
the Company and Norwest Bank Minnesota, National Association (the "Trustee"), as
amended and supplemented from time to time (collectively, the "Indenture").

BUSINESS OF COMPANY

               RECENT  REGISTRATION.  A  registration  statement  on  Form  S-3,
Registration No. 333-28551 (the  "Registration  Statement"),  was filed with the
Securities  and  Exchange  Commission  (the  "SEC")  by the  Company  under  the
Securities Act of 1933, as amended (the  "Securities  Act"), for $500,000,000 of
notes (the "Offered Notes"),  and was declared  effective by order of the SEC in
October 1997. For a more detailed  discussion of the terms of the Offered Notes,
please see the caption entitled "DESCRIPTION OF THE NOTES" in the Company's base
prospectus as set forth in the Registration Statement (the "Base Prospectus").

               ISSUANCE  OF  PRIOR  NOTES  AND  PRIVATE  NOTES.   Prior  to  the
registration  of the Offered Notes under the Securities  Act, the Company issued
Taxable Student Loan  Asset-Backed  Notes, in the aggregate  principal amount of
$346,700,000,  pursuant  to a  registration  statement  on Form  S-3  which  was
declared effective in October 1996 (the "Prior Notes"). The Prior Notes included
in the Series 1996C (the "Series 1996C Notes") consisting of (i) Senior Treasury
Rate Class A-5 Notes in the  principal  amount of  $225,000,000  (the "Class A-5
Notes"),  (ii) Senior  Auction Rate Class A-6 Notes in the  principal  amount of
$75,500,000 (the "Class A-6 Notes") and (iii)  Subordinate  LIBOR Rate Class B-3
Notes in the principal  amount of $15,600,000  (the "Class B-3 Notes");  and the
Series 1997A (the "Series 1997A Notes") consisting of Subordinated Class 1997B-4
LIBOR Rate Notes in the principal amount of $30,600,000 (the "Class B-4 Notes").
In March and June of 1996, the Company issued Taxable Student Loan  Asset-Backed
Notes in two  series  in the  aggregate  principal  amount  of  $249,900,000  in
transactions  exempt from the  registration  requirements  of the Securities Act
(the  "Private  Notes").  The Private  Notes were  designated as (i) the Taxable
Student  Loan  Asset-Backed  Notes,  Series 1996A (the  "Series  1996A  Notes"),
consisting of $48,300,000 of its Senior Auction Rate Class A-1 Notes (the "Class
A-1 Notes"),  $48,300,000 of its Senior Auction Rate Class A-2 Notes (the "Class
A-2 Notes") and  $11,100,000  of its  Subordinate  LIBOR Rate Class B Notes (the
"Class B-1 Notes"), and (ii) the Taxable Student Loan Asset-Backed Notes, Series
1996B (the  "Series  1996B  Notes"),  consisting  of  $73,700,000  of its Senior
Auction Rate Class A-3 Notes (the "Class A-3 Notes"),  $54,300,000 of its Senior
Auction  Rate Class A-4 Notes (the  "Class A-4 Notes")  and  $14,200,000  of its
Subordinate  LIBOR Rate Class B-2 Notes (the "Class B-2 Notes").  The Class A-1,
Class A-2, Class A-3 and Class A-4 Notes are collectively  referred to herein as
the  "Private  Class A  Notes,"  and the  Class  B-1 and  Class  B-2  Notes  are
collectively referred to herein as the "Private Class B Notes." The Prior Notes,
the

                                        1

<PAGE>

Private Notes,  the Offered Notes and any additional notes that may be issued in
the future are referred to collectively herein as the "Notes." The Notes are and
will be secured by the same pool of Eligible  Loans to the extent  described  in
the Indenture.

               TRUST  ESTATE.  The  Notes are  secured  by a  revolving  pool of
Eligible Loans and certain other property held for the benefit of the registered
owners of the Notes (the "Trust Estate").  For a more detailed discussion of the
Trust Estate,  please see the captions entitled "SUMMARY OF THE  OFFERING--Trust
Estate" and  "SECURITY  AND  SOURCES OF PAYMENT FOR THE NOTES" in the  Company's
Base Prospectus.

               SUBORDINATION OF VARIOUS CLASSES. The Offered Notes and the Prior
Notes that are designated as Class B Notes (the "Class B Notes") and the Private
Notes that have been  designated  as Private Class B Notes are  subordinated  in
certain respects to the Offered Notes and the Prior Notes that are designated as
Class A Notes and the Private Notes that have been designated as Private Class A
Notes,  and the Notes of any series  that are  designated  as Class C Notes (the
"Class C Notes") are  subordinated in certain  respects to the Offered Notes and
the Prior Notes that are  designated  as Class A Notes and Class B Notes and the
Private  Notes that have been  designated  as Private  Class A Notes and Private
Class B Notes, as more fully described in the Base  Prospectus.  Currently there
are no Class C Notes.

               NOTES ISSUED.  The following table  summarizes the various series
and classes of Notes issued by the Company since its inception.


--------------------------------------------------------------------------------

                           NOTES ISSUED BY THE COMPANY

Series    Class     Date Issued         Maturity Dates Original Principal Amount

1996A     A-1       March 8, 1996         July 1, 2014           $ 48,300,000
1996A     A-2       March 8, 1996         July 1, 2014             48,300,000
1996A     B-1(*)    March 8, 1996         July 1, 2014             11,100,000
1996B     A-3       June 18, 1996         July 1, 2014             73,700,000
1996B     A-4       June 18, 1996         July 1, 2014             54,300,000
1996B     B-2(*)    June 18, 1996         July 1, 2014             14,200,000
1996C     A-5       October 31, 1996      July 1, 2005            225,000,000
1996C     A-6       October 31, 1996      July 1, 2014             75,500,000
1996C     B-3       October 31, 1996      July 1, 2025             15,600,000
1997A     B-4       March 20, 1997        July 1, 2030             30,800,000
                                                                   ----------
                                                                $ 596,800,000
------------
(*) These Notes were defeased with the proceeds of the Series 1997A Notes and as
of March 20, 1997 are no longer deemed to be outstanding under the Indenture.
--------------------------------------------------------------------------------

               PURCHASE OF ELIGIBLE LOANS. The Company has purchased and expects
to purchase  Eligible Loans from Union Bank pursuant to the terms and conditions
stated in student loan  purchase  agreements  (such  agreements,  together  with
similar agreements entered into by other eligible lenders,  each a "Student Loan
Purchase  Agreement").  The Company will only acquire  Eligible Loans from Union
Bank or from other  eligible  lenders as defined under the Higher  Education Act
("Eligible Lenders" and, together with Union Bank,

                                        2

<PAGE>



each, a "Seller" and  collectively,  the  "Sellers").  Eligible Loans consist of
federal loans  originated  pursuant to the Federal Family Education Loan Program
(defined below).

               THE FEDERAL FAMILY  EDUCATION LOAN PROGRAM.  The Higher Education
Act provides  for a program of (a) direct  federal  insurance  of student  loans
("FISLP") and (b) reinsurance of student loans  guaranteed or insured by a state
agency  or  private  non-profit  corporation   (collectively,   "Federal  Family
Education  Loans," with such program  referred to herein as the "Federal  Family
Education  Loan  Program").  Several types of loans are currently  authorized as
Federal Family  Education  Loans  pursuant to the Federal Family  Education Loan
Program.  These include: (a) loans to students with respect to which the federal
government  makes interest  payments  available to reduce student  interest cost
during periods of enrollment ("Subsidized Federal Stafford Loans"); (b) loans to
students  with  respect  to which  the  federal  government  does not make  such
interest payments  ("Unsubsidized Federal Stafford Loans" and, collectively with
Subsidized Federal Stafford Loans,  "Federal Stafford Loans");  (c) supplemental
loans to parents of dependent students ("Federal PLUS Loans");  and (d) loans to
fund  payment  and  consolidation  of  certain  of  the  borrower's  obligations
("Federal  Consolidation  Loans").  Prior to July 1, 1994,  the  Federal  Family
Education  Loan  Program also  included a separate  type of loan to graduate and
professional students and independent  undergraduate students and, under certain
circumstances,  dependent  undergraduate  students, to supplement their Stafford
Loans ("Federal  Supplemental Loans for Students" or "Federal SLS Loans"). For a
more detailed  discussion of the Federal Family  Education Loan Program,  please
see the caption  entitled  "DESCRIPTION  OF THE FEDERAL  FAMILY  EDUCATION  LOAN
PROGRAM" in the Company's Base Prospectus.

               GUARANTEE  AGENCIES.  Each  Eligible Loan is guaranteed as to the
payment of  principal  and interest by a state or private  non-profit  guarantor
(each, a "Guarantee Agency"). Eligible Loans originated prior to October 1, 1993
are  fully  guaranteed  as to the  principal  amount of such  loans and  accrued
interest by the applicable  Guarantee  Agency.  Eligible Loans  originated on or
after October 1, 1993 are  guaranteed as to 98% of the principal  amount of such
loans and  accrued  interest by the  applicable  Guarantee  Agency.  Each of the
Guarantee  Agencies has a reinsurance  contract with the Department of Education
(the "Department").  The Department reimburses the Guarantee Agencies for claims
paid by the  Guarantee  Agencies.  The  amount of such  reinsurance  payment  is
calculated  annually  and is subject to reduction  based upon the annual  claims
rate of the  Guarantee  Agency  to the  Department.  Regardless  of the level of
reinsurance  that the applicable  Guarantee Agency receives from the Department,
the Trustee will  continue to be entitled to  reimbursement  for the  applicable
guaranteed  portion of an Eligible Loan (either 98% or 100%, as applicable) from
such Guarantee Agency.  The obligations of each of the Guarantee Agencies to the
holders of Eligible  Loans  reinsured by the Department  (the "Federal  Loans"),
such as the  Trustee,  are payable  from the  general  funds  available  to such
Guarantee Agency,  including cash on deposit therewith,  reimbursements received
from the  Department and reserve funds  maintained by such  Guarantee  Agency as
required by the Higher  Education  Act. The Higher  Education Act provides that,
subject to the provisions thereof including the proper origination and servicing
of Eligible Loans,  the full faith and credit of the United States is pledged to
the  reinsurance  payments  by the  Department  to the  Guarantee  Agencies.  In
addition, the Higher Education Act provides that if a Guarantee Agency is unable
to meet its obligations to holders of Federal Loans,  such as the Trustee,  then
the  holders  of Federal  Loans may  submit  guarantee  claims  directly  to the
Department  and the  Department  is  required  to pay to the  holders  the  full
insurance obligation of such Guarantee Agency until such time as the obligations
are  transferred by the Department to a new Guarantee  Agency capable of meeting
such  obligations or until a qualified  successor  Guarantee Agency assumes such
obligations.  Certain  delays  in  receiving  reimbursement  could  occur  if  a
Guarantee Agency fails to meet its obligations. In addition, failure to properly
originate  or service an Eligible  Loan can cause an  Eligible  Loan to lose its
guarantee. For a more detailed discussion of the Guarantee Agencies,  please see
the caption entitled "DESCRIPTION OF

                                        3

<PAGE>

THE FEDERAL FAMILY EDUCATION LOAN  PROGRAM--Federal  Insurance and Reimbursement
of Guarantee Agencies" in the Company's Base Prospectus.

                SERVICING OF ELIGIBLE  LOANS.  Union Bank acts as servicer  (the
"Servicer")  of the Eligible  Loans in  accordance  with an Amended and Restated
Servicing  Agreement,  dated as of June 19,  1996 (the  "Servicing  Agreement").
UNIPAC  Service  Corporation,   a  Nebraska  corporation  ("UNIPAC"),   acts  as
subservicer (the  "Subservicer") and custodian (the "Custodian") of the Eligible
Loans in accordance with a Subservicing Agreement (the "Subservicing Agreement")
between Union Bank and UNIPAC.  The Company may appoint other entities to act as
a servicer or  subservicer  if approved  by the rating  agencies  which rate the
Notes. UNIPAC began its education loan servicing  operations on January 1, 1978,
and provides  education loan servicing,  time sharing,  administration and other
services  to  lenders,   secondary  market  purchasers  and  Guarantee  Agencies
throughout the United  States.  UNIPAC is a privately  held  corporation,  owned
primarily  by Union Bank,  with a minority  ownership  interest  held by Packers
Service Group,  Inc.,  Lincoln,  Nebraska.  UNIPAC's  corporate  headquarters is
located in Aurora, Colorado.

INFORMATION ON THE NOTES AND ELIGIBLE LOANS

               In  accordance  with the  Indenture,  the  Company is required to
provide information periodically to the Trustee regarding the Notes and Eligible
Loans,  which information is then forwarded to registered  holders of the Notes.
The following  unaudited  information was reported to registered  holders of the
Notes on March 16, 1998 and  represents  figures as of the last  business day of
February  1998.   Although  the   information  set  forth  below  has  not  been
independently  verified by third parties, the Company believes it to be accurate
to the best of its knowledge. Undefined capitalized terms used in the Tables and
narrative  herein  have the  meanings  set forth in the  Company's  Registration
Statement.

               The principal  balance of Eligible  Loans as of February 28, 1998
was  $509,345,400.99.  Set forth in Table A below is the  aggregate  outstanding
principal amount of Notes of each Class as of February 28, 1998.


                                        4

<PAGE>


----------------------------------------------------------------

                           TABLE A
       OUTSTANDING AGGREGATE PRINCIPAL AMOUNT PER CLASS
                     (February 28, 1998)

          Class                   Principal outstanding*
          -----                   ---------------------
           A-1                            $48,300,000
           A-2                             48,300,000
           A-3                             73,700,000
           A-4                             54,300,000
           A-5                            225,000,000
           A-6                             75,500,000
           B-1                                     --
           B-2                                     --
           B-3                             15,600,000
           B-4                             30,800,000
-----------------
*       The principal amounts reflect the issuance of the
        Series 1997A Notes in the amount of $30,800,000, the
        proceeds of which were used to defease the Class B-1 Notes
        and Class B-2 Notes.
----------------------------------------------------------------


               Set  forth  in  Table  B  below  is the  interest  rate  for  the
applicable Class of Notes,  indicating  whether such interest rate is calculated
based on the Net Loan  Rate or based on the  applicable  Auction  Rate (for each
Class of the Auction Rate Notes  only),  LIBOR Rate (for each class of the LIBOR
Rate Notes only),  or Treasury  Rate (for each Class of the Treasury  Rate Notes
only),  as the case may be, and  specifying  what each such interest  would have
been using the alternate basis for such calculation.


                                        5

<PAGE>


-------------------------------------------------------------------

                             TABLE B
               APPLICABLE INTEREST RATE PER CLASS
                         (February 1998)
            CLASS                      CALCULATION METHOD
                                          AUCTION RATE
             A-1                             5.5928%
             A-2                             5.6036%
             A-3                             5.6001%
             A-4                             5.5616%
             A-6                             5.5766%

                                         TREASURY RATE*
             A-5                             6.0689%

                                           LIBOR RATE*
             B-3                             6.1050%
             B-4                             5.9814%
--------------------
(*)     Treasury  Bill Rate  based on  average  rate and LIBOR Rate based on the
        Smith Barney stated rate.
-------------------------------------------------------------------

               Set forth in Table C below is the number and principal  amount of
financed  student  loans as of the close of business on the last day of February
1998 that are (i) 30 to 60 days delinquent, (ii) 61 to 90 days delinquent, (iii)
91 to 120 days delinquent,  (iv) more than 120 days delinquent and (v) for which
claims  have been  filed  with the  appropriate  Guarantee  Agency and which are
awaiting payment.

----------------------------------------------------------------

                           TABLE C
                      DELINQUENCY RATES
                     (February 28, 1998)

Delinquencies
30 - 60 Days                          $20,267,525
61 - 90 Days                          12,322,672
91 - 120 Days                         5,572,883
Greater than 120 Days                 5,941,820
Claims outstanding                    5,104,829
----------------------------------------------------------------

               Set  forth in Table D below is the  Program  Equity  in the Trust
Estate and the  outstanding  principal  amount of the Notes as of  February  28,
1998.

                                        6

<PAGE>


----------------------------------------------------------------

                           TABLE D
                        PROGRAM EQUITY
                     (February 28, 1998)
ASSETS

Cash and Cash Equivalents                    $    8,523,353
Student Loan Receivable                         509,345,401
Debt Service Reserve                              7,693,031
Recycling Account                                36,938,765
                                            ---------------
               Total                            562,500,550

LIABILITIES
Series 1996 A-1                              $   48,300,000
Series 1996 A-2                                  48,300,000
Series 1996 A-3                                  73,700,000
Series 1996 A-4                                  54,300,000
Series 1996 A-5                                 225,000,000
Series 1996 A-6                                  75,500,000
Series 1996 B-3                                  15,600,000
Series 1997 B-4                                  30,800,000
                                              -------------
               Total                           $571,500,000

               Program Equity                  $(8,999,450)

               Parity Ratio                     98.4%

               Senior Parity Ratio             107.1%
----------------------------------------------------------------


CHARACTERISTICS OF ELIGIBLE LOANS.

               Set forth in the tables below are the characteristics of Eligible
Loans held in the Trust  Estate on February 28,  1998.  Although  the  unaudited
information  set  forth  below  has not  been  independently  verified  by third
parties, the Company believes it to be accurate to the best of its knowledge.


                                        7

<PAGE>


                             CHARACTERISTICS OF THE
                                 ELIGIBLE LOANS

--------------------------------------------------------------------------------

                                     TABLE E
                        COMPOSITION OF THE ELIGIBLE LOANS
                               (February 28, 1998)

Aggregate Outstanding Principal Balance.........................  $509,345,400
Number of Borrowers.............................................        67,916
Average Outstanding Principal Balance Per Borrower..............         7,500
Number of Loans.................................................       145,648
Average Outstanding Principal Balance Per Loan..................         3,497
Approximate Weighted Average Remaining Term (months) (does not
include school, grace, deferment or forbearance)................           102

Weighted Average Borrower Interest Rate.........................         8.09%
--------------------------------------------------------------------------------



--------------------------------------------------------------------------------

                                     TABLE F
                 DISTRIBUTION OF THE ELIGIBLE LOANS BY LOAN TYPE
                               (February 28, 1998)


                                             Outstanding        Percent of Loans
                         Number of            Principal          by Outstanding
        Loan Types         Loans               Balance              Balance

Consolidated                    10,867          $144,884,157             28.45%
PLUS                               786             1,834,743               .36
SLS                                214               628,222               .12
Stafford-Subsidized            107,898           256,796,005             50.42
Stafford-Unsubsidized           25,883           105,202,273             20.65
                                ------           -----------             -----

    Total                      145,648         $509,345,400             100.00%
                               =======         =============            ======
--------------------------------------------------------------------------------


                                        8

<PAGE>


--------------------------------------------------------------------------------

                                     TABLE G
               DISTRIBUTION OF THE ELIGIBLE LOANS BY INTEREST RATE
                               (February 28, 1998)


                                         Outstanding       Percent of Loans
                         Number of          Principal         by Outstanding
  Interest Rate Range      Loans             Balance              Balance

Less than 7.50%              5,622          $41,243,522             8.10%
7.50% to 8.49%             131,523          390,989,274            76.76
8.50% to 9.49%               8,269           74,442,093            14.62
9.50% or greater               234            2,670,511              .52
                               ---            ---------              ---

    Total                  145,648         $509,345,400           100.00%
                           =======         ============           ======
-----------------------------------------------------------------------------



     -------------------------------------------------------------------

                                     TABLE H
               DISTRIBUTION OF THE ELIGIBLE LOANS BY SCHOOL TYPES
                               (February 28, 1998)


                                         Outstanding        Percent of Loans
                       Number of          Principal          by Outstanding
   School Type           Loans             Balance              Balance

2-Year                        10,506         $25,545,335            5.02%
4-Year                       123,312         433,370,460           85.08
Proprietary                    9,579          29,072,471            5.71
Consolidation                  2,251          21,357,134            4.19
                               -----          ----------            ----

    Total                    145,648        $509,345,400          100.00%
                             =======        ============          ======
--------------------------------------------------------------------------------


                                        9

<PAGE>


--------------------------------------------------------------------------------

                                     TABLE I
          DISTRIBUTION OF THE ELIGIBLE LOANS BY BORROWER PAYMENT STATUS
                               (February 28, 1998)


                                           Outstanding      Percent of Loans
                             Number of      Principal        by Outstanding
   Borrower Payment Status     Loans         Balance            Balance

Claim                              1,639       $5,104,829            1.00%
Deferment                         11,461       38,987,218            7.65
Grace                              5,823       23,461,782            4.61
School                            26,596      103,752,296           20.37
Repayment                        100,129      338,039,275           66.37
                                 -------      -----------           -----
    Total                        145,648     $509,345,400          100.00%
                                 =======     ============          ======
------------------------------------------------------------------------------


                                       10

<PAGE>


--------------------------------------------------------------------------------

                                     TABLE J
                  GEOGRAPHIC DISTRIBUTION OF THE ELIGIBLE LOANS
                               (February 27, 1998)


                                            Outstanding         Percent of Loans
                         Number of           Principal           by Outstanding
    Location(1)          Borrowers            Balance                Balance

Alabama                    12,797             69,503,744                13.65%
Alaska                        119              1,201,670                 0.24
Arizona                     5,427             39,053,164                 7.67
Arkansas                      216              1,838,754                 0.36
California                  3,462             27,649,282                 5.43
Colorado                    3,031             29,223,726                 5.74
Connecticut                   116              1,041,163                 0.20
Delaware                       29                371,353                 0.07
District of Columbia          100                784,943                 0.15
Florida                     1,568             10,961,667                 2.15
Foreign Country               109              1,454,822                 0.29
Georgia                     1,486              9,675,301                 1.90
Guam                            4                 22,240                 0.00
Hawaii                        177              1,382,692                 0.27
Idaho                         131              1,110,738                 0.22
Illinois                    1,870             17,956,461                 3.53
Indiana                       379              3,720,728                 0.73
Iowa                       10,163             80,566,878                15.82
Kansas                      4,854             40,383,459                 7.93
Kentucky                      274              2,615,359                 0.51
Louisiana                     469              2,835,817                 0.56
Maine                          57                840,676                 0.17
Maryland                      314              2,303,177                 0.45
Massachusetts                 261              3,340,360                 0.66
Michigan                      620              6,356,677                 1.25
Military (Atlantic)             4                 19,302                 0.00
Military (Europe)              97                612,446                 0.12
Military (Pacific)             23                175,676                 0.03
Minnesota                   5,368             31,116,834                 6.11
Mississippi                   331              2,154,177                 0.42
Missouri                    1,171             10,246,089                 2.01
Montana                       121              1,088,611                 0.21
Nebraska                      567              4,326,410                 0.85
Nevada                      1,610              9,922,939                 1.95
New Hampshire                  55                482,990                 0.09
New Jersey                    260              2,804,191                 0.55
New Mexico                    535              4,005,771                 0.79
New York                      578              6,816,438                 1.34
North Carolina                478              3,874,985                 0.76
North Dakota                  215              1,322,861                 0.26
Ohio                          548              6,447,064                 1.27
Oklahoma                    1,451             10,346,457                 2.03
Oregon                        326              2,435,856                 0.48
Pennsylvania                  444              6,114,602                 1.20
Puerto Rico                    36                268,144                 0.05
Rhode Island                   37                361,167                 0.07
South Carolina                229              2,102,973                 0.41
South Dakota                  265              2,082,083                 0.41
Tennessee                     844              6,221,022                 1.22
Texas                       1,912             15,588,780                 3.06
Utah                          216              1,804,641                 0.35
Vermont                        22                401,904                 0.08
Virgin Islands                  5                  6,307                 0.00
Virginia                      493              3,918,121                 0.77
Washington                    573              5,178,168                 1.02
West Virginia                 127              1,373,237                 0.27
Wisconsin                     810              8,540,553                 1.68
Wyoming                       132                989,751                 0.19
                              ---                -------                 ----

Total                      67,916            509,345,400               100.00%
                           ======            ===========               =======

---------------
(1)     Based  on  the  permanent  billing  addresses  of the  borrowers  of the
        Eligible Loans shown on the Servicer's records.
--------------------------------------------------------------------------------

                                       11

<PAGE>


--------------------------------------------------------------------------------

                                     TABLE K
           DISTRIBUTION OF THE ELIGIBLE LOANS BY DATE OF DISBURSEMENT
                               (February 28, 1998)


                                            Outstanding        Percent of Loans
    Disbursement         Number of           Principal          by Outstanding
        Date               Loans              Balance              Balance

Pre 10/01/93                 68,869           $146,414,547              28.75%
Post 10/01/93                76,779            362,930,853              71.25
                             ------            -----------              -----

  Total                     145,648           $509,345,400             100.00%
                            =======            ===========             ======
--------------------------------------------------------------------------------



--------------------------------------------------------------------------------

                                     TABLE L
             DISTRIBUTION OF THE ELIGIBLE LOANS BY GUARANTEE AGENCY
                               (February 28, 1998)


                                                                    Percent
                                               Outstanding        of Loans by
                              Number of         Principal         Outstanding
     Guarantee Agencies(1)      Loans            Balance            Balance
     ------------------         -----            -------            -------
AELP                             8,244          $31,420,411           6.17%
ALAB                                26               41,694            .00
ICSAC                           42,929          136,619,298          26.82
KHEAA                           42,452           97,290,333          19.10
NORTHSTAR                        7,385           12,729,291           2.50
NSLP                            22,850          146,891,708          28.84
OGSLP                            3,003            8,181,859           1.61
USAF                            15,580           60,275,743          11.83
U.S. Dept. of Education            787              645,935            .13
COLO                             2,382           15,229,832           3.00
TGAI                                10               19,296            .00
                               -------          -----------         ------

  Total                        145,648         $509,345,400         100.00%
                               =======         ============         =======


(1) As defined herein and in the Company's Prospectus Supplement.
--------------------------------------------------------------------------------


                                       12

<PAGE>


--------------------------------------------------------------------------------

                                     TABLE M
        DISTRIBUTION OF THE ELIGIBLE LOANS BY RANGE OF PRINCIPAL BALANCE
                               (February 28, 1998)
                                                                      Percent
                                                Outstanding         of Loans by
                            Number of            Principal          Outstanding
Principal Balance Range     Borrowers             Balance             Balance

Less than $1,000              6,196              $2,664,014            0.52%
$1,000-$1,999                 7,639              11,445,077            2.25
$2,000-$2,999                10,294              26,024,245            5.11
$3,000-$3,999                 6,411              22,251,307            4.37
$4,000-$4,999                 4,799              21,503,249            4.22
$5,000-$5,999                 5,070              27,693,493            5.44
$6,000-$6,999                 3,984              25,705,195            5.05
$7,000-$7,999                 3,188              23,310,302            4.58
$8,000-$8,999                 2,752              23,314,090            4.58
$9,000-$9,999                 2,160              20,458,456            4.02
$10,000-$10,999               2,036              21,417,083            4.20
$11,000-$11,999               1,960              22,476,003            4.41
$12,000-$12,999               1,272              15,868,500            3.12
$13,000-$13,999               1,106              14,912,285            2.92
$14,000-$14,999               1,030              14,934,254            2.93
$15,000 or greater            8,089             214,367,847           42.28
                              -----             -----------           -----

  Total                      67,916           $ 509,345,400           100%
                             ======             ===========           ====
--------------------------------------------------------------------------------

                                       13

<PAGE>

COMPETITION

               The Company experiences competition from other private companies,
non-profit  companies,  trusts and financial  firms issuing debt  securities the
proceeds of which are used to  purchase  pools of student  loans.  Many of these
entities have greater financial,  technical, management and other resources than
does the  Company.  The  Company  believes  that key  factors in its  ability to
compete  will be its  ability  to  purchase  Eligible  Loans and its  ability to
structure notes or other  securities in a manner which will be competitive  with
securities offered by competitors.

EMPLOYEES

               The Company  does not employ any  employees.  The Company and UFS
have  entered  into an  Administrative  Services  Agreement  which is more fully
described in ITEM 13 hereof.  The Company does not plan to hire any employees in
the next fiscal year.

FORWARD LOOKING STATEMENTS

               Statements regarding the Company's expectations as to its ability
to purchase Eligible Loans, to structure and issue competitive securities and to
compete  generally,  and certain of the  information  presented  in this report,
constitute  forward  looking  statements  within  the  meaning  of  the  Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations  are  based on  reasonable  assumptions  within  the  bounds of its
knowledge of its business and operations,  there can be no assurance that actual
results will not differ materially from its expectations. In addition to matters
affecting  the  economy  and the  asset-backed  securities  industry  generally,
factors which could cause actual results to differ from expectations include the
following:

                      NATURE OF THE  NOTES.  The  Company  is a special  purpose
        corporation and the Notes represent  obligations  solely of the Company.
        The Notes are not  insured or  guaranteed  by any  government  agency or
        instrumentality,  by any  affiliate  of the  Company,  by any  insurance
        company  or by any other  person or  entity.  The  Company  will have no
        significant assets other than its interest in the Eligible Loans and the
        other property  granted to the Trustee for the benefit of the registered
        owners of the Notes.  Payments  on the Notes will  depend  solely on the
        amount and timing of payments and collections in respect of the Eligible
        Loans,  interest  paid or earnings on the various  accounts  established
        pursuant  to the  Indenture,  the payment  priority of Notes  previously
        issued and any Additional Notes to be issued in the future,  and amounts
        on deposit with the Trustee. There will be no additional recourse to the
        Company or any other  person if such  proceeds  are  insufficient.  As a
        result,  registered  owners of Notes  must  depend on the cash flow with
        respect to the Eligible  Loans and funds on deposit with the Trustee for
        payment of principal of and interest on the Notes.

                      FAILURE  TO COMPLY  WITH LOAN  ORIGINATION  AND  SERVICING
        PROCEDURES FOR ELIGIBLE LOANS. The Higher  Education Act,  including the
        implementing regulations thereunder, require lenders and their assignees
        making and servicing Eligible Loans and guarantors guaranteeing Eligible
        Loans to follow specified  procedures,  including  certain due diligence
        procedures,  to ensure that the  Eligible  Loans are  properly  made and
        disbursed  to,  and  repaid  on a  timely  basis  by  or on  behalf  of,
        borrowers.  The Servicer has agreed pursuant to the Servicing  Agreement
        to perform (or provide for a third party servicer to perform)  servicing
        and collection procedures on behalf of the Company.  However, failure to
        follow these procedures or failure of any Seller or any other originator
        of the Eligible Loans to follow  procedures  relating to the origination
        of any  Eligible  Loans may result in the  Department's  refusal to make
        reinsurance  payments  to the  Guarantee  Agencies  or to  make  special
        allowance payments to the Trustee with respect to such Eligible Loans or
        in the Guarantee  Agencies' refusal to honor their Guarantee  Agreements
        with the Trustee with  respect to such  Eligible  Loans.  Failure of the
        Guarantee Agencies to receive  reinsurance  payments from the Department
        could

                                       14

<PAGE>


        adversely affect the Guarantee  Agencies' ability or legal obligation to
        make payments under the Guarantee Agreements  ("Guarantee  Payments") to
        the Trustee.  Loss of any such  Guarantee  Payments,  Special  Allowance
        Payments or Federal  Interest  Subsidy Payments with respect to Eligible
        Loans,  could adversely  affect the amount of revenues and the Company's
        ability to pay principal and interest on the Notes.

                      RELIANCE  UPON  SELLERS.  The  Company  expects to acquire
        additional  Eligible  Loans  from the  Sellers  from  time to time,  all
        pursuant to the Student Loan Purchase Agreements under which each Seller
        will sell to the  Company  Eligible  Loans  which  comply  with  certain
        representations  and  warranties  with respect to each Eligible Loan and
        certain  overall  portfolio  characteristics  in  connection  with  such
        acquisitions. No assurance can be given that the Company will be able to
        acquire Eligible Loans from Sellers on terms or conditions acceptable to
        the Company.

YEAR 2000 COMPLIANCE.

               Although  the  Company  does not  itself  rely  significantly  on
computer  programs,  the Subservicer  depends heavily on a computerized  student
loan servicing  system.  To the extent this system is incapable of appropriately
interpreting the upcoming change in the century, some level of modification will
be necessary to become "Year 2000  compliant."  The Subservicer has informed the
Company  that  it has  completed  major  program  changes  to its  student  loan
servicing  mainframe system and has assured the Company that its system has been
modified  to  process  dates  into the next  century.  Given  the  Subservicer's
determination  that its mainframe  system is "Year 2000  compliant," the Company
does not  anticipate  that "Year  2000"  issues will have any  material  adverse
impact on the Company's business,  financial condition or results of operations.
However,  the  Subservicer  is  continuing to evaluate and upgrade its operating
system and all third party  software/products  and, to the extent these systems,
software or products  are not "Year 2000  compliant,"  there can be no assurance
that potential systems interruptions would not have a material adverse effect on
the business of the Company.

CHANGES IN LEGISLATION.

               On July 1, 1998,  an amendment to the Higher  Education  Act will
take  effect  that is  expected  to reduce  the  amount of  interest  payable on
Eligible  Loans  originated  after  that date.  Under the  current  formula  for
calculating Eligible Loan interest rates, lenders receive the bond-equivalent of
the 3 month  Treasury  Bill plus 2.5% for  in-school  loans and 3.1% on loans in
repayment.  Loans are reset  annually  for  borrowers,  with an 8.25% cap on the
borrower's rate. For Eligible Loans originated after July 1, 1998,  lenders will
receive  the  bond-equivalent  yield  of  Treasury  securities  with a  maturity
comparable  to that  of  Eligible  Loans  as  established  by the  Secretary  of
Education,  plus 1%. Several  lenders have indicated that they will not continue
to  originate  Eligible  Loans  once the new  interest  rate takes  effect.  Any
reduction in the  originations of Eligible Loans could have an adverse impact on
the ability of the Company to purchase  Eligible Loans in the future.  There can
be no assurance that the Higher Education Act or other relevant federal or state
laws, rules and regulations and the programs implemented  thereunder will not be
amended or  modified in the future in a matter  that will  adversely  impact the
programs described herein and the loans made thereunder,  including the Eligible
Loans, or the Guarantee Agencies.

               For a  description  of  additional  risks  which may  affect  the
Company's  operations,  please see the caption  entitled  "RISK  FACTORS" in the
Company's Base Prospectus.

ITEM 2. PROPERTIES

               The Company has no physical properties.

                                       15

<PAGE>


ITEM 3. LEGAL PROCEEDINGS

               None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

               None

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS

               The  Company  is a  wholly  owned  subsidiary  of  UFS.  UFS is a
privately  held  corporation  and there is no market for its common  stock.  The
minority  owners of UFS  include  certain  employees  of Union Bank and  certain
relatives of such  employees.  The minority  owners of UFS also  indirectly  own
Union Bank.

               As of December  31, 1997,  UFS was the only record  holder of the
Company's outstanding shares of common stock. The Company has not paid dividends
to date and does not intend to pay dividends in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

               The following table sets forth the Company's  selected  financial
data as of and for the period ended  December  31, 1997,  which was derived from
the  financial  statements  of the Company  which have been audited by KPMG Peat
Marwick  LLP.  The  information  below  should be read in  conjunction  with the
Financial Statements and notes thereto appearing elsewhere in this document.


                                       16

<PAGE>
<TABLE>
<CAPTION>


                        UNION FINANCIAL SERVICES-1, INC.

                             SELECTED FINANCIAL DATA



-------------------------------------------------------------------------------------------------
                                                            Period Ended            Year Ended
STATEMENT OF INCOME DATA:                                   December 31,           December 31,
                                                              1996 (1)                 1997

Revenues:
<S>                                                          <C>                     <C>
        Loan interest.................................       $ 15,636,042            $42,757,006
        Investment interest...........................          1,373,140              2,268,878
        Other.........................................             17,449                195,084
                                                              -----------            -----------
               Total revenues.........................         17,026,631             45,220,968
                                                              -----------            -----------

Expenses:
        Interest on Notes.............................         11,987,255             32,782,396
        Loan Servicing (2)............................          2,255,564              4,917,318
        Financing fees to parent (2)..................          1,919,207                423,112
        Trustee and broker fees.......................            550,899                915,380
        Amortization of debt issuance costs...........            250,992                494,106
        Amortization of loan premiums.................            438,584              1,441,526
        Other general and administrative (2)..........            437,956              2,240,328
                                                             ------------            -----------
               Total expenses                                  17,840,457             43,214,166
               Income (loss) before income taxes......          (813,826)              2,006,802

Income tax expense (benefit) (2)......................            274,968                710,717
                                                             ------------            -----------
               Net income (loss) .....................     $    (538,858)            $ 1,296,085
                                                            =============             ==========
Per common share:
        Income (loss) from continuing operations......       $      (538.86)            $  1,296.09
        Net income (loss).............................       $      (538.86)            $  1,296.09
Shares used to compute per share amounts..............             1,000                   1,000

BALANCE SHEET DATA:
Cash and cash equivalents (2).........................       $ 65,402,585             39,542,382
Student loans receivable, including premiums (2)......        491,046,915            525,005,954
Total Assets..........................................        568,171,986            575,292,144
Notes payable (2).....................................        566,000,000            571,500,000
Total liabilities.....................................        568,709,844            574,533,917
Shareholders' equity (deficit)........................          (537,858)                758,227

(1)     The Company was incorporated on February 28, 1996. Accordingly, selected
        financial data for prior fiscal years is not available.
(2)     See ITEM 14 for the Company's audited financial statements and
        accompanying notes.
--------------------------------------------------------------------------------
</TABLE>

                                       17

<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

               The  following   discussion  and  analysis   should  be  read  in
conjunction  with the  information  set forth under the caption  entitled  "ITEM
6.--SELECTED  FINANCIAL  DATA" and the  financial  statements  and notes thereto
included  elsewhere herein.  Moreover,  any forward looking statements should be
read in conjunction  with  information  set forth in "ITEM 1 -- Forward  Looking
Statements."

GENERAL

               The  Company  was  formed on  February  28,  1996  solely for the
purpose of acquiring,  from time to time, Eligible Loans and issuing notes, such
as the Notes,  secured by such Eligible Loans. Since its inception,  the Company
has issued four (4) series of Notes  consisting of ten (10)  classes.  The Notes
shown in the  audited  financial  statements  of the Company  represent  limited
obligations of the Company secured solely by the Eligible Loans and other assets
in the Trust Estate.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 COMPARED TO PERIOD ENDED DECEMBER 31, 1996

                REVENUES.   Revenues  for  the  year  ended  December  31,  1997
consisted   primarily  of  interest  on  the  Eligible   Loans  subject  to  the
indebtedness of the Notes,  which totaled  $42,757,006,  compared to $15,636,042
for the period  ended  December  31,  1996,  an increase of 173%.  The amount of
interest reported for the year ended December 31, 1997 was derived from Eligible
Loans in an aggregate principal amount of $525,005,954, compared to $491,046,915
as of December 31, 1996. The Company's  average net investment in Eligible Loans
during  the  year  ended  December  31,  1997  was  approximately   $509,142,849
(excluding  funds held by the Trustee),  compared to $235,985,000 for the period
ended  December 31, 1996,  and the average  effective  annual  interest  rate of
interest  income on Eligible  Loans was  approximately  8.40% for the year ended
December 31, 1997, compared to 7.95% for the period ended December 31, 1996. The
Company  also  received  investment  income and other  income for the year ended
December  31,  1997 in the amounts of  $2,268,878  and  $195,084,  respectively,
compared to $1,373,140 and $17,449,  respectively, for the period ended December
31, 1996.

                EXPENSES.   Expenses  for  the  year  ended  December  31,  1997
consisted primarily of interest on the Company's outstanding Notes which totaled
$32,782,396,  compared to $11,987,255 for the period ended December 31, 1996, an
increase of 173%. The amount of interest  expense reported during the year ended
December 31, 1997 depended primarily upon the amount of Notes outstanding during
that year and the  interest  rates on such Notes.  The  Company's  average  debt
outstanding was approximately $525,737,324 for the year ended December 31, 1997,
compared to $213,533,000 for the period ended December 31, 1996, and the average
annual cost of borrowings  was  approximately  6.24% for the year ended December
31, 1997,  compared to  approximately  5.61% for the period  ended  December 31,
1996.  The Company also incurred loan servicing fees to Union Bank and financing
fees to UFS in the amounts of $4,917,318 and $423,112, respectively, compared to
$2,255,564 and $1,919,207, respectively, for the period ended December 31, 1996.
See "ITEM 13--CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS" for a description
of the Servicing  Agreement and  Administrative  Services  Agreement pursuant to
which such fees are owed. Trustee and broker fees, amortization of debt issuance
costs and  amortization  of loan  premiums for the year ended  December 31, 1997
amounted  to  $915,380,  $494,106  and  $1,441,526,  respectively,  compared  to
$550,899, $250,992 and $438,584, respectively, for the period ended December 31,
1996. Other general and administrative  expenses for the year ended December 31,
1997 amounted to $2,240,328,  compared to $437,956 for the period ended December
31, 1996.  Income tax expense for the year ended  December 31, 1997  amounted to
$710,717,  compared to an income tax  benefit in the amount of $274,968  for the
period ended December 31, 1996,  which resulted from the Company's net operating
loss.

                                       18

<PAGE>

                For the year ended  December 31, 1997,  there were no unusual or
infrequent  events or  transactions  or any  significant  economic  dangers that
materially affected the amount of reported income from continuing operations.

LIQUIDITY AND CAPITAL RESOURCES

               Eligible  Loans held by the Company are pledged as collateral for
the Notes,  the terms of which provide for the  retirement of all Notes from the
proceeds of the Eligible Loans.  Cash flows from payments on the Eligible Loans,
together with proceeds of reinvestment  income earned on the Eligible Loans, are
intended to provide cash  sufficient to make all required  payments of principal
and interest on each outstanding series of Notes. Withdrawals were made from the
Reserve Fund in the Trust Estate  during 1997 to cover  shortages in the Revenue
Fund  caused by slow  payment to the Company of  interest  due on the  Company's
Eligible  Loans.  The  Reserve  Fund is  fully  funded  under  the  terms of the
Indenture and the Company  anticipates  that it will require no additional funds
to meet the obligation on its outstanding Notes.

               It is  anticipated  that regular  payments under the terms of the
Eligible Loans, as well as early prepayment,  will reduce the number of Eligible
Loans held in the Trust Estate. The Company is authorized under the Indenture to
use principal receipts from Eligible Loans to purchase additional Eligible Loans
until April 1, 1999. Thereafter,  principal receipts from Eligible Loans will be
used to reduce the amount of Notes outstanding.  The Company also plans to issue
additional  Notes  the  proceeds  of which  will be used to  acquire  additional
Eligible Loans.

IMPACT OF INFLATION

                For the year ended  December  31,  1997,  cost  increases to the
Company were not materially impacted by inflation.

ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                The interest  rates with respect to the Notes may fluctuate from
one  interest  period to another in  response to changes in  benchmark  rates or
general market  conditions.  The Company can make no  representation  as to what
such rates may be in the future.  The  interest  rates on each series of Auction
Rate Notes will be based generally on the outcome of each Auction of such series
of Notes.  The  interest  rates on each series of LIBOR Rate Notes and  Treasury
Rate Notes  will based  generally  on the LIBOR  Rate or  Treasury  Rate then in
effect for the applicable  interest rate period.  The Eligible  Loans,  however,
generally  bear  interest at an effective  rate (taking into account any Special
Allowance Payments, the "Loan Rates") equal to the average bond equivalent rates
of weekly  auctions  of 91-day  Treasury  bills for each  quarter  (the  "91-day
Treasury Bill Rate") (or, in certain circumstances, 52-week Treasury bills) plus
margins  specified for such Eligible Loans.  As a result of differences  between
the  indices  used to  determine  the Loan Rates and the  interest  rates on the
Notes,  there  could be periods of time when the Loan  Rates are  inadequate  to
cover the interest on the Notes and the  expenses  required to be paid under the
Indenture.  Additionally, in a period of rapidly rising interest rates, the Loan
Rate may not increase as quickly as the variable  interest rates with respect to
the  Notes.  If there  is a  decline  in the Loan  Rates,  the  amount  of funds
representing  interest  deposited into the Trust Estate may be reduced and, even
if there is a similar reduction in the variable interest rates applicable to any
series of Notes,  there may not necessarily be a similar  reduction in the other
amounts required to be funded out of such funds (such as certain  administrative
expenses).  In addition,  proceeds of and revenues  relating to the Notes in the
Reserve Fund and in other  accounts  created under the Indenture will be used to
acquire investment  agreements that pay interest at fluctuating rates.  Although
the Company will  structure  such  investment  agreements to minimize such risk,
there can be no assurance that the interest rates on such investment  agreements
will keep pace with the fluctuating interest rates on the Notes.

                                       19

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

               The  financial   statements  and  supplementary   financial  data
required  by this  ITEM 8 are set  forth  in ITEM  14 of  this  Form  10-K.  All
information which has been omitted is either inapplicable or not required.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
        AND FINANCIAL DISCLOSURE

               There were no adverse  opinions or  disclaimers  of opinion,  nor
were there any  modifications  as to  uncertainty,  audit scope,  or  accounting
principles  rendered by the current accounting firm. There were no disagreements
with the  current  accounting  firm on any matter of  accounting  principles  or
practices, financial statement disclosure, or auditing scope or procedure.

               The  accounting  firm of KPMG Peat  Marwick  LLP was  engaged  to
perform the annual audit of the Company for the year ended December 31, 1997.

               There are no other changes in or  disagreements on accounting and
financial statement disclosure.

                                       20

<PAGE>

                                    PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

               The  Company  is  governed  by a Board  of  Directors,  which  is
required by the Company's  Articles of  Incorporation  to include at least three
directors.  Directors  are required to be elected at each annual  meeting of the
shareholders.   The  present   directors  and  their   addresses  and  principal
occupations or affiliations are as follows:
<TABLE>
<CAPTION>


                                                                      Principal           Officers and
                       Other                                         Occupation         Directors Term
Name of Director    Offices Held     Age        Address             or Affiliation          From To*
----------------    ------------     ---        -------             --------------          ------

<S>                   <C>           <C>           <C>                 <C>                     <C>
Michael S.            Chairman       34   4732 Calvert Street         Executive Vice     February    Present
Dunlap                                    Lincoln, Nebraska 68506     President of       1996
                                                                      Union Bank and
                                                                      Trust Company

Stephen F.           President       45   6991 East Camelback         President of       February    Present
Butterfield                               Road, Suite B290            Union Financial    1996
                                          Scottsdale, AZ 85251        Services, Inc.

Ronald W. Page     Vice President,   49   3015 S. Parker Road         Senior Vice        February    Present
                   Treasurer and          Aurora, CO  80014           President of       1996
                     Secretary                                        Union Financial
                                                                      Services, Inc.

Ross Wilcox              --          55   4732 Calvert Street         Chief Executive    February    Present
                                          Lincoln, Nebraska 68506     Officer of Union   1996
                                                                      Bank and Trust
                                                                      Company

Dr. Paul R. Hoff         --          63   Hernia Hill, Rural Route 1  Retired Physician  February    Present
                                          Seward, Nebraska  68434                     1996

-------------
(*)     Each director holds office until the next annual meeting of shareholders
        following his or her election  until such  director's  successors  shall
        have been elected and  qualified.  The Company's  next annual meeting is
        scheduled for March 31, 1998.
</TABLE>

EXECUTIVE MANAGEMENT

         The Board of  Directors  and  executive  officers  described  below are
responsible for overall  management of the Company.  The Company's  officers and
directors are  shareholders,  officers and  directors of business  entities that
have engaged in the business of purchasing, holding and selling student loans.

         MICHAEL S. DUNLAP,  CHAIRMAN OF THE BOARD. As the Chairman of the Board
of Directors,  Mr.  Dunlap is  responsible  for the  executive  direction of the
Company.  Mr. Dunlap is also  Executive  Vice  President of Union Bank and Trust
Company,  and  President of Farmers & Merchants  Investment  Inc. He has been an
employee of Union Bank and Trust Company for  approximately 15 years. Mr. Dunlap
is also a director of Stratus Fund,  Inc.,  Comprehensive  Assistance in Student
Lending  Corporation,  Union Bank and Trust Company,  Union Financial  Services,
Inc., UNIPAC and various other organizations.  Mr. Dunlap received a Bachelor of
Science  degree in finance and  accounting  and a Juris  Doctor  degree from the
University of Nebraska.

         STEPHEN F.  BUTTERFIELD,  PRESIDENT  AND DIRECTOR.  As  President,  Mr.
Butterfield  is  responsible  for the overall  management  and  direction of the
Company.  Included in his  responsibilities  are loan  purchasing,  marketing of
corporate  services and coordination of the Company's capital market activities.
Mr. Butterfield

                                       21

<PAGE>

has been a member of the student loan  industry  since  January  1989,  first as
President of a for-profit  student loan secondary  marketing facility located in
Scottsdale,  Arizona and  currently as  President  of a non-profit  student loan
secondary  marketing facility in Scottsdale,  Arizona.  Prior to his work in the
student loan industry,  Mr.  Butterfield  spent 15 years as an investment banker
specializing  in municipal  finance.  Mr.  Butterfield  is a director of Outdoor
Systems, Inc. and Comprehensive  Assistance in Student Lending Corporation.  Mr.
Butterfield received a Bachelor of Science degree in Business from Arizona State
University.

         RONALD W. PAGE, VICE PRESIDENT,  TREASURER,  SECRETARY AND DIRECTOR. As
Vice  President,  Treasurer  and  Secretary,  Mr.  Page is  responsible  for the
financial  operations  and  record  keeping  of  the  Company.  Included  in his
responsibilities are financial planning and capital market operations.  Mr. Page
spent 20 years as an investment  banker  specializing  in tax-exempt and taxable
asset-backed  finance,  with a specialty in the securitization of student loans.
Mr. Page received a Bachelor of Science degree in Business  Administration  from
the  University  of  Colorado,  Boulder,  Colorado,  and  a  Masters  of  Public
Administration   in  Public  Policy  Analysis  from  the  American   University,
Washington, DC.

         ROSS WILCOX,  DIRECTOR.  Mr. Wilcox is the Chief  Executive  Officer of
Union Bank and Trust Company and has been employed or affiliated with Union Bank
and Trust Company for over 30 years. Mr. Wilcox is the Chairman of the Board for
Mills County State Bank and is on the Board of Directors  for UNIPAC,  Southeast
Lincoln Insurance Agency and the Lincoln Chamber of Commerce.

         DR. R. PAUL HOFF, DIRECTOR.  Dr. Hoff is a medical doctor who practiced
as a family physician in Seward,  Nebraska for approximately 30 years, until his
retirement  three  years  ago.  Dr.  Hoff also  serves as member of the Board of
Directors of Packers Service Group,  Inc. Dr. Hoff has been involved in a number
of business  enterprises over the years and currently owns and operates a retail
antique store in Ennis, Montana.

         The Company's  executive  officers are elected annually by the Board of
Directors and serve at the discretion of the Board. The Company's directors hold
office until the next annual meeting of stockholders  and until their successors
have been duly elected and qualified.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

               Section  16(a)  of the  Securities  Exchange  Act of  1934 is not
applicable to the Company, because the Company has no class of equity securities
registered pursuant to Section 12 thereof.

ITEM 11.       EXECUTIVE COMPENSATION

               The  Company's  executive  officers  are not  compensated  by the
Company for services rendered by them,  although some of the Company's  officers
are compensated by UFS, which receives remuneration from the Company pursuant to
an  Administrative  Services  Agreement  by and between UFS and the  Company.  A
detailed  description of the  Administrative  Services Agreement is set forth in
ITEM 13 of this Form 10-K.

AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES IN 1997

               The Company has not issued any options.

LONG-TERM INCENTIVE PLAN -- AWARDS IN 1997

               The Company has no long-term incentive plan.


                                       22

<PAGE>

DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE IN 1997

               The Company has no such benefit plans.

EMPLOYMENT AGREEMENTS

               The Company has not entered into any employment agreements.

DIRECTOR COMPENSATION

               Directors of the Company are not  compensated  as directors,  but
may  receive   reimbursement  of  out-of-pocket   expenses  in  connection  with
attendance at Board meetings.

OFFICER COMPENSATION

               The Company has not adopted a compensation plan for officers.

BOARD MEETINGS

               During fiscal year 1997, the Board held regular meetings on March
11th and May 3rd. All directors,  with the exception of Stephen F.  Butterfield,
attended  the March 11th  meeting.  All  directors,  with the  exception of Ross
Wilcox, attended the May 3rd meeting.

COMMITTEES OF THE BOARD

               The Board of Directors has not  established an Audit Committee or
a Compensation Committee.

ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT

               As of March 16, 1998,  there were 1,000  shares of the  Company's
common  stock,  no par value,  outstanding,  all of which  were held by UFS.  No
director or  executive  officer  owns any shares of the Company and there are no
other beneficial owners.

CHANGES IN CONTROL.

               The Company knows of no arrangement,  including the pledge by any
person of  securities of the Company,  which may at a subsequent  date result in
change of control of the Company.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

               ADMINISTRATIVE  SERVICES  AGREEMENT.  The  Company  and UFS,  the
Company's parent corporation,  entered into an Administrative Services Agreement
(the "Agreement") dated as of August 1, 1996. Under the Agreement, UFS provides,
through its officers and employees,  the following services to the Company:  (i)
to assist the Company in developing and implementing  financing  transactions to
enable the Company to purchase loans made to borrowers  under the Federal Family
Education  Loan  Program  (the  "Loans");  (ii) to  monitor,  and to the  extent
required,  direct the Servicer in  connection  with its  servicing of the Loans;
(iii) to  respond to  inquiries  and  requests  made by  borrowers,  educational
institutions, Guarantee Agencies, the Trustee, and other parties with respect to
the Loans and respond to  requests by the  Company's  independent  auditors  for
information  concerning  the  Company's  financial  affairs;  (iv)  to  maintain
financial records  concerning the Loans and, if furnished  adequate  information
with respect to financial affairs not related to the Loans, prepare and maintain
a general ledger and financial statements for the Company; (v) to

                                       23

<PAGE>

                furnish or cause to be  furnished  to the Company or the Trustee
copies  of  reports  received  with  respect  to the  Loans,  and  prepare  such
additional  reports  with respect to the Loans as the Company or the Trustee may
reasonably  request  from time to time;  (vi) to prepare  for and furnish to the
Company  estimates  of  Maintenance  and  Operating  Expenses (as defined in the
Indenture)  and such  statistical  reports and cash flow  projections  as may be
required  under the Indenture or requested by the Company;  and (vii) to provide
such other services with respect to administration of its program as the Company
may reasonably  request.  The Agreement  expires upon the stated maturity of the
Notes.  Pursuant to the Agreement,  the Company paid UFS approximately  $423,000
and $1,919,000, in 1997 and 1996,  respectively,  as  compensation  for services
provided by UFS in connection  with issuance of Notes.  The Company also pays to
UFS on the first  day of each  calendar  month an amount  equal to 0.015% of the
average  outstanding  balance  of the Loans  during  the  preceding  month.  The
obligation  of  the  Company  to pay  fees  under  the  Agreement  is a  limited
obligation to be satisfied solely from  distributions made by the Trustee to the
Company under the terms of the  Indenture.  Although the Company is obligated to
pay to UFS  the  full  amount  of all  accrued  fees,  such  payments  are  made
exclusively  from  amounts  deposited in the  Operating  Fund for payment of the
Company's  Maintenance and Operating Expenses (as defined in the Indenture).  If
the Company does not have funds on hand to cover the full amount of the fees due
under the Agreement,  then payment of the unpaid balance is deferred until there
are sufficient funds available from such sources to satisfy part, or all, of the
outstanding  debt.  The fee payable to UFS under the Agreement may be revised on
January  1,  1999,  and on each  January  1  thereafter  during  the term of the
Agreement. To alter the fee, UFS must provide written notice of the proposed new
fee to the Company  ninety (90) days prior to the next January 1. If UFS and the
Company  cannot reach an agreement  within sixty (60) days of the receipt of the
notice,  either party may terminate the Agreement upon thirty (30) day's written
notice to the other  party.  The Company  paid UFS  approximately  $911,000  and
$216,000 in 1997 and 1996, respectively as compensation for services provided by
UFS in  connection  with the  service  agreement.  The  administrative  Services
Agreement has been filed as an Exhibit to this Form 10-K.

               SERVICING  AGREEMENT.  The Company and Union Bank entered into an
Amended and Restated Servicing Agreement (the "Servicing Agreement") dated as of
June 15, 1996. Under the Servicing  Agreement,  Union Bank services the Eligible
Loans.  Although certain officers and directors of the Company are also officers
and directors of Union Bank,  which owns 80.5% of UNIPAC,  the Company  believes
that the terms and conditions of the Servicing  Agreement (and the  subservicing
arrangement)  are  comparable  to those  offered by or  available  to  unrelated
parties.  The  servicing  fee to  Union  Bank  is  calculated  using  an  annual
asset-based  charge of 1.25  percent  of the  student  loan  principal  balance,
calculated monthly. The Servicing Agreement has been filed as an Exhibit to this
Form 10-K.

               STUDENT LOAN PURCHASE AGREEMENTS. The Company and Union Bank have
entered into, and plan to enter into,  Student Loan Purchase  Agreements whereby
the Company  will  purchase  Eligible  Loans from Union Bank.  Although  certain
owners and  directors of the Company are also  officers  and  directors of Union
Bank,  the Company  believes  that the terms and  conditions of the Student Loan
Purchase Agreements are comparable to those offered by or available to unrelated
parties. The Student Loan Purchase Agreements with Union Bank have been filed as
Exhibits to this Form 10-K.


                                     PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

FINANCIAL STATEMENTS

               The  financial  statements  and financial  statement  information
required by this Item are  included in this report  commencing  on page F-1. The
Report of Independent Public Accountants appears on page F-1 of this report. All
other schedules have been omitted because they are  inapplicable,  not required,
or the  information is included  elsewhere in the financial  statements or notes
thereto.

                                       24

<PAGE>

EXHIBITS

               All exhibits listed hereunder,  unless otherwise indicated,  have
previously  been  filed as  exhibits  to the  Company's  Registration  Statement
declared  effective  in October  1997.  Such  exhibits  have been filed with the
Commission  pursuant  to  the  requirements  of  the  Acts  administered  by the
Commission. Such exhibits are incorporated herein by reference under Rule 12b-23
of the Securities Exchange Act of 1934.


                                       25

<PAGE>



        The  following  is a  complete  list of  exhibits  filed  as part of the
Company's  Registration Statement and this Form 10-K. Exhibit numbers correspond
to the numbers in the Exhibit Table of Item 601 of Regulation S-K.




Exhibit No.                    Description                             Location

   3.1   Articles of Incorporation of the Company                            *

   3.2   Bylaws of the Company                                               *

   4.1   Form of Second Amended and Restated Indenture                       **

   4.2   Form of Supplemental Indenture                                      **

  10.1   Administrative Services Agreement, dated as of August 1, 1996,      **
         by and between Union Financial Services, Inc. and the Company

  10.1.1 Amendment to Administrative Services Agreement, dated as of         **
         November 1, 1996, by and between Union Financial Services,
         Inc. and the Company

  10.2   Amended and Restated Servicing Agreement, dated as of June 19,      **
         1996, by and between Union Bank and Trust Company and the Company

  24.1   Consent of KPMG Peat Marwick LLP, Independent Auditors              **

  27.1   Financial Data Schedule                                            ***

  99.1   Loan Sale and Commitment Agreement, dated as of March 1, 1996, by   **
         and between Union Bank and Trust Company and the Company

  99.2   Loan Sale and Commitment Agreement, dated as of June 19, 1996, by   **
         and between Union Bank and Trust Company and the Company

  99.3   Loan Sale and Commitment Agreement, dated as of November 1, 1996,   **
         by and between Union Bank and Trust Company and the Company

  99.4   Risk  Factors and  Glossary  Terms  sections  of the  Company's
         Registration * Statement filed in October 1997 (Exhibit 99.4 to
         Company's  Annual  Report on Form 10-K for  fiscal  year  ended
         December 31, 1996).

--------------------
*       Incorporated by reference  herein to the Company's Annual Report on Form
        10-K for the fiscal year ended December 31, 1996.

**      Incorporated by reference herein to the Company's Registration Statement
        on Form S-3 (File No. 333-28551).

***     Filed herewith.

REPORTS ON FORM 8-K

               The Company has not filed any reports on Form 8-K during the last
quarter of the period covered by this report.

                                       26

<PAGE>


                          INDEX TO FINANCIAL STATEMENTS





FINANCIAL STATEMENTS OF UNION FINANCIAL SERVICES-1, INC.

Report of Independent Auditors..........................................    F-1

Balance Sheets as of December 31, 1997 and 1996..........................    F-2

Statements of Operations for the year ended December 31, 1997
and for the period from inception (February 28, 1996)
to December 31, 1996....................................................    F-3

Statements of Stockholders' Equity (Deficit) for the year
ended December 31, 1997 and for the period from inception
(February 28, 1996) to December 31, 1996................................    F-4

Statements of Cash Flows for the year ended December 31, 1997
and for the period from inception (February 28, 1996)
to December 31, 1996....................................................    F-5

Notes to Financial Statements...........................................    F-6



                                       27
<PAGE>
                       UNION FINANCIAL SERVICES - 1, INC.

                              FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

                   (WITH INDEPENDENT AUDITORS' REPORT THEREON)

--------------------------------------------------------------------------------
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

  The Board of Directors
  Union Financial Services - 1, Inc.:


  We have audited the accompanying  balance sheets of Union Financial Services -
  1,  Inc.  as of  December  31,  1997 and 1996 and the  related  statements  of
  operations,  stockholders'  equity (deficit) and cash flows for the years then
  ended.  These  financial  statements are the  responsibility  of the Company's
  management.  Our  responsibility  is to express an opinion on these  financial
  statements based on our audits.

  We  conducted  our  audits in  accordance  with  generally  accepted  auditing
  standards.  These  standards  require  that we plan and  perform the audits to
  obtain reasonable assurance about whether the financial statements are free of
  material misstatement.  An audit includes examining, on a test basis, evidence
  supporting the amounts and disclosures in the financial  statements.  An audit
  also  includes  assessing  the  accounting  principles  used  and  significant
  estimates  made by  management,  as well as evaluating  the overall  financial
  statement presentation.  We believe that our audits provide a reasonable basis
  for our opinion.

  In our opinion,  the financial statements referred to above present fairly, in
  all material respects, the financial position of Union Financial Services - 1,
  Inc. at December 31, 1997 and 1996 and the results of its  operations  and its
  cash flows for the years then ended,  in conformity  with  generally  accepted
  accounting principles.





  February 20, 1998
  Lincoln, Nebraska


                                      F-1
<PAGE>

       UNION FINANCIAL SERVICES - 1, INC.

Balance Sheets

December 31, 1997 and 1996

--------------------------------------------------------------------------------

                              ASSETS                      1997            1996
--------------------------------------------------------------------------------

Cash and cash equivalents (note 2)                  $ 39,542,382      65,402,585
Student loans receivable, including net
   premiums (notes 3, 7 and 8)                       525,005,954     491,046,915
Accrued interest receivable (note 3)                   7,735,292       8,250,825
Debt issuance cost, net of amortization of
   $715,252 in 1997 and $250,992 in 1996 (note 4)      2,997,516       3,182,805
Deferred tax asset (note 5)                                -             274,968
Other assets                                              11,000          13,888
--------------------------------------------------------------------------------

Total assets                                        $575,292,144     568,171,986
--------------------------------------------------------------------------------

          LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------

Liabilities:
   Notes payable (note 4)                           $571,500,000     566,000,000
   Accrued interest payable                            1,607,350       1,493,141
   Income taxes payable                                  436,748           -
   Other liabilities (note 10)                           989,819       1,216,703
--------------------------------------------------------------------------------

Total liabilities                                    574,533,917     568,709,844
--------------------------------------------------------------------------------

Stockholders' equity (deficit):
   Common stock, no par value.
     Authorized 1,000 shares;
     issued 1,000 shares                                   1,000           1,000
   Retained earnings (deficit)                          757,227        (538,858)
--------------------------------------------------------------------------------

Total stockholders' equity (deficit)                    758,227        (537,858)

Commitments and contingencies (notes 7, 8 and 9)
--------------------------------------------------------------------------------

Total liabilities and stockholders'
     equity (deficit)                               $575,292,144     568,171,986
--------------------------------------------------------------------------------


See accompanying notes to financial statements.

                                      F-2
<PAGE>


UNION FINANCIAL SERVICES - 1, INC.

Statements of Operations

Years ended December 31, 1997 and 1996

-------------------------------------------------------------------------------

                                                          1997          1996
-------------------------------------------------------------------------------

Revenues:
   Loan interest                                      $ 42,757,006    15,636,042
   Investment interest                                   2,268,878     1,373,140
   Other                                                   195,084        17,449
-------------------------------------------------------------------------------

Total revenues                                          45,220,968    17,026,631
-------------------------------------------------------------------------------

Expenses:
   Interest on notes                                    32,782,396    11,987,255
   Loan servicing (note 10)                              4,917,318     2,255,564
   Financing fees to parent (note 10)                      423,112     1,919,207
   Trustee and broker fees                                 915,380       550,899
   Amortization of debt issuance costs                     494,106       250,992
   Amortization of loan premiums                         1,441,526       438,584
   Other general and administrative (note 10)            2,240,328       437,956
-------------------------------------------------------------------------------

Total expenses                                          43,214,166    17,840,457
-------------------------------------------------------------------------------

Income (loss) before income taxes                       2,006,802      (813,826)

Income tax expense (benefit) (note 5)                     710,717      (274,968)
--------------------------------------------------------------------------------

Net income (loss)                                     $ 1,296,085      (538,858)
--------------------------------------------------------------------------------

Basic and diluted net income (loss) per common share   $  1,296.09      (538.86)
--------------------------------------------------------------------------------


See accompanying notes to financial statements.

                                       F-3
<PAGE>

UNION FINANCIAL SERVICES - 1, INC.

Statements of Stockholders' Equity (Deficit)

Years ended December 31, 1997 and 1996

--------------------------------------------------------------------------------

                                                                     Total
                                                   Retained       stockholders'
                                      Common       earnings          equity
                                      stock        (deficit)       (deficit)
--------------------------------------------------------------------------------

Balance at inception
   (February 28, 1996)              $     -            -                -

Issuance of common stock                1,000          -                1,000

Net loss                                  -         (538,858)        (538,858)
-------------------------------------------------------------------------------

Balance at December 31, 1996            1,000       (538,858)        (537,858)

Net income                                -        1,296,085        1,296,085
--------------------------------------------------------------------------------

Balance at December 31, 1997        $   1,000        757,227          758,227
--------------------------------------------------------------------------------


See accompanying notes to financial statements.

                                      F-4
<PAGE>

UNION FINANCIAL SERVICES - 1, INC.

Statements of Cash Flows

Years ended December 31, 1997 and 1996

--------------------------------------------------------------------------------

                                                         1997            1996
--------------------------------------------------------------------------------

Net income (loss)                                    $  1,296,085      (538,858)
Adjustments to reconcile net income (loss to net
   cash provided by (used in) operating activities:
   Amortization                                       1,935,632         689,576
   Deferred tax expense (benefit)                       274,968        (274,968)
   (Increase) decrease in accrued interest receivable   515,533      (8,250,825)
   (Increase) decrease in other assets                    2,888         (13,888)
   Increase in accrued interest payable                 114,209       1,493,141
   (Decrease) increase in other liabilities            (226,884)      1,216,703
   Increase in income taxes payable                     436,748           -
--------------------------------------------------------------------------------

Net cash provided by (used in) operating activities   4,349,179      (5,679,119)
--------------------------------------------------------------------------------

Cash flows used in investing activities:
   Purchase of student loans, including premiums   (101,061,642)   (515,058,073)
   Proceeds from sale of student loans                6,139,464           -
   Net proceeds from student loan principal payments
     and loan consolidations                         59,491,767      23,572,574
--------------------------------------------------------------------------------

Net cash used in investing activities               (35,430,411)   (491,485,499)
--------------------------------------------------------------------------------

Cash flows provided by financing activities:
   Proceeds from issuance of common stock                  -               1,000
   Proceeds from issuance of notes payable            30,800,000     566,000,000
   Payment for debt issuance costs                     (278,971)     (3,433,797)
   Payment to defease notes payable                 (25,300,000)          -
--------------------------------------------------------------------------------

Net cash provided by financing activities              5,221,029     562,567,203
--------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents (25,860,203)     65,402,585

Cash and cash equivalents, beginning of year          65,402,585           -
--------------------------------------------------------------------------------

Cash and cash equivalents, end of year              $ 39,542,382      65,402,585
--------------------------------------------------------------------------------

Supplemental disclosures:
   Interest paid                                    $ 32,668,187      10,494,114
--------------------------------------------------------------------------------


See accompanying notes to financial statements.

                                      F-5

<PAGE>

UNION FINANCIAL SERVICES - 1, INC.

Notes to Financial Statements

December 31, 1997 and 1996

--------------------------------------------------------------------------------

 (1)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

           DESCRIPTION OF BUSINESS

       Union  Financial  Services  -  1,  Inc.  (the  Company),  a  wholly-owned
       subsidiary  of Union  Financial  Services,  Inc.,  was  organized  as a C
       Corporation on February 28, 1996  (inception  date) to invest in eligible
       student  loans issued under Title IV of the Higher  Education Act of 1965
       as amended (the Act).  Student  loans  beneficially  owned by the Company
       include  those  originated  under the Stafford  Loan Program  (SLP),  the
       Parent Loan  Program  for  Undergraduate  Students  (PLUS)  program,  the
       Supplemental Loans for Students (SLS) program and loans which consolidate
       certain borrower obligations (Consolidation).  Title to the loans is held
       by an  eligible  lender  trustee  under  the Act for the  benefit  of the
       Company.  The  majority  of the  financed  eligible  loan  borrowers  are
       geographically  concentrated  in the  midwest  area and are in  school or
       their first year of repayment.

       The notes payable  outstanding  are payable  primarily  from interest and
       principal  payments on the student  loans  receivable as specified in the
       bond offering statements.

       Union  Financial  Services,  Inc.,  the  parent,  is  a  holding  company
       organized  for the  purpose  of  establishing  and  owning  the  stock of
       corporations like the Company engaged in the  securitization of financial
       assets. The parent also provides managerial and administrative support to
       the Company.

           STUDENT LOANS RECEIVABLE

       Investments in student loans,  including premiums,  are recorded at cost,
       net of premium  amortization.  Premiums are amortized  over the estimated
       principal life of the related loans.

       In June 1996, the Financial  Accounting  Standards Board issued Statement
       of  Financial   Accounting  Standards  (SFAS)  No.  125,  ACCOUNTING  FOR
       TRANSFERS  AND  SERVICING  OF  FINANCIAL  ASSETS AND  EXTINGUISHMENTS  OF
       LIABILITIES.  SFAS No. 125 is effective  for  transfers  and servicing of
       financial  assets and  extinguishments  of  liabilities  occurring  after
       December  31,  1996 and is to be applied  prospectively.  This  statement
       provides  accounting and reporting  standards for transfers and servicing
       of  financial  assets  and   extinguishments   of  liabilities  based  on
       consistent application of a financial-components approach that focuses on
       control.  It  distinguishes  transfers of financial assets that are sales
       from transfers that are secured borrowings.  The adoption of SFAS No. 125
       did not have a material impact on the Company's financial statements.

           INTEREST ON STUDENT LOANS

       Interest  on student  loans is accrued  when earned and is either paid by
       the  Department  of Education or the borrower  depending on the status of
       the loan at the time of accrual. In addition, the Department of Education
       makes quarterly  interest subsidy payments on certain  qualified Title IV
       loans until the student is required  under the  provisions  of the Act to
       begin  repayment.  Repayment on guaranteed  student loans normally begins
       within six months  after  completion  of their  course of study,  leaving
       school  or  ceasing  to carry  at least  one-half  the  normal  full-time
       academic load as determined by the educational institution.  Repayment of
       PLUS  loans  normally  begins  within  sixty  days  from the date of loan
       disbursement  and  repayment of SLS loans  begins  within one month after
       completion of course study,  leaving  school or ceasing to carry at least
       the normal  full-time  academic  load as  determined  by the  educational
       institution.

                                      F-6
<PAGE>


           CASH EQUIVALENTS

       Cash equivalents  consist of marketable  short-term  investment trust and
       lockbox  receivables  in transit.  For purposes of the statements of cash
       flows, the Company considers all investments with original  maturities of
       three months or less to be cash equivalents.

           INCOME TAXES

       The Company and its parent will file a  consolidated  federal tax return.
       The financial  statements reflect income taxes computed as if the Company
       filed a separate tax return.  Income tax payments are made by the Company
       to its parent as if the Company were a separate tax paying entity.

           INCOME (LOSS) PER COMMON SHARE

       The Company adopted SFAS No. 128, EARNINGS PER SHARE,  effective December
       31, 1997, which specifies the computation,  presentation,  and disclosure
       requirements for earnings per share. Basic income (loss) per common share
       was  computed by dividing the net income  (loss) by the  weighted-average
       common  shares  outstanding,  which was 1,000 shares in 1997 and 1996. As
       the Company has no stock option  program,  the diluted  income (loss) per
       common share are the same as the basic income  (loss) per common share in
       1997 and 1996.

           USE OF ESTIMATES

       Management of the Company has made a number of estimates and  assumptions
       relating to the reporting of assets and liabilities and the disclosure of
       contingent  assets and liabilities to prepare these financial  statements
       in conformity  with  generally  accepted  accounting  principles.  Actual
       results could differ from those estimates.


 (2)   CASH AND CASH EQUIVALENTS

       The Company's cash and cash equivalents at December 31, 1997 and 1996 are
       held by the trustee in various  accounts  subject to use  restrictions as
       shown on the following page.

                                      F-7
<PAGE>


                                                            1997        1996
--------------------------------------------------------------------------------

       LOAN ACCOUNT FUND - Established for the
           purpose of purchasing eligible student
           loans with proceeds of the borrowing       $        -      38,459,716
       RECYCLING ACCOUNT FUND - Established to
           maintain excess funds for future
           operating needs, if necessary, and
           purchases of eligible student loans         27,723,005     14,843,885
       RESERVE FUND - Established to cure any
           deficiencies in the debt service
           requirements                                 7,706,756     11,373,233
       COST OF ISSUANCE FUND - Established to
           pay administrative and issuance costs
           incurred with the issuance of Company debt          -         253,880
       REVENUE FUND - Established for the receipt of
           interest payments on eligible student loans
           and investment securities and to paY fees
           and expenses incurred under the indenture     150,768        (13,249)
       INTEREST FUND - Established for the payment
           of debt service interest requirements              -              -
       RESTRICTED CASH 97A ESCROW - Excess funds
           required for potential interest payments
           on defeased debt (see note 4)               3,320,995             -
       Operating cash and cash equivalents               640,858        485,120
--------------------------------------------------------------------------------

       Total cash and cash equivalents              $ 39,542,382     65,402,585
--------------------------------------------------------------------------------


 (3)   STUDENT LOANS RECEIVABLE AND CONCENTRATION OF CREDIT RISK

       Student  loans  are  recorded  at  cost,  which  includes  premiums,  and
       approximates  market  value.  Guaranteed  loans  may be made  under  this
       program by certain lenders as defined by the Act. These loans,  including
       related accrued interest, are guaranteed at their maximum level permitted
       under the Act by an authorized  guarantee  agency which has a contract of
       reinsurance  with the  Department of  Education.  The terms of the loans,
       which vary on an  individual  basis,  generally  provide for repayment in
       monthly  installments  of principal  and interest  over a period of up to
       twenty years. Interest rates on loans may be fixed or variable,  and will
       vary based on the  average of the 91-day U. S.  Treasury  bill rate,  and
       currently  range  from  7% to 10%  dependent  upon  type,  terms  of loan
       agreements and date of origination.  For Title IV loans,  the Company has
       entered  into  a  trust   agreement  in  which  an  unrelated   financial
       institution  will serve as the eligible  lender  trustee.  As an eligible
       lender trustee, the financial  institution acts as the eligible lender in
       acquiring  certain  eligible  student  loans as an  accommodation  to the
       Company who holds a beneficial interest in the student loan assets as the
       beneficiary of such trust.

       Substantially all student loan principal and related accrued interest are
       guaranteed as defined by the Act.  These  guarantees  are made subject to
       the  performance  of certain  loan  servicing  procedures  stipulated  by
       applicable  regulations.  If these procedures are not met, affected loans
       may not be covered by the  guarantees  should the borrower  default.  The
       Company retains and enforces  recourse  provisions  against servicers and
       lenders under certain  circumstances.  Should loans lose their guaranteed
       status and recourse  provisions  prove  unenforceable,  the  unguaranteed
       portion has been reserved in a trustee account (Reserve Fund). Such loans
       are subject to "cure" procedures and reinstatement of the guarantee under
       certain  circumstances.  Also, in accordance with Student Loan Reform Act
       of 1993,  loans  disbursed prior to October 1, 1993 are fully insured and
       loans disbursed  subsequent to October 1, 1993  (approximately 60% of the
       student loans) are insured up to 98%.


                                      F-8
<PAGE>


 (4)   NOTES PAYABLE

       The Company  periodically  issues taxable student loan asset-backed notes
       to finance the  acquisition  of student  loans.  All notes are  primarily
       secured by the student loans receivable,  related accrued  interest,  and
       other property and funds held in trust. All notes are variable rate notes
       with interest  rates reset from time to time based upon auction rates and
       national indices.

<TABLE>
<CAPTION>
       The  following  tables  summarize  outstanding  notes payable at December 31, 1997 and 1996 by
       issue:
-----------------------------------------------------------------------------------------------------

                                                             Final        Carrying       Interest
                          1997                             maturity        amount          range
-----------------------------------------------------------------------------------------------------

      <S>                                                   <C>           <C>            <C>
       1996A Senior Auction Rate Notes, Class A-1 and A-2    7/01/14   $ 96,600,000   5.19% - 6.20%
       1996B Senior Auction Rate Notes, Class A-3 and A-4    7/01/14    128,000,000   5.34% - 5.91%
       1996C Senior Treasury Rate Notes, Class A-5           7/01/05    225,000,000   5.45% - 5.73%
       1996C Senior Auction Rate Notes, Class A-6            7/01/14     75,500,000   5.32% - 6.05%
       1996C Subordinate LIBOR Rate Notes, Class B-3         7/01/25     15,600,000   5.86% - 5.92%
-----------------------------------------------------------------------------------------------------
       1997A Subordinate LIBOR Rate Notes, Class B-4         7/01/30     30,800,000   5.95% - 6.14%
-----------------------------------------------------------------------------------------------------

                                                                       $571,500,000
-----------------------------------------------------------------------------------------------------

                          1996
-----------------------------------------------------------------------------------------------------

       1996A Senior Auction Rate Notes, Class A-1 and A-2    7/01/14   $ 96,600,000   5.19% - 6.20%
       1996A Subordinate LIBOR Rate Notes, Class B           7/01/14     11,100,000   6.13% - 6.25%
       1996B Senior Auction Rate Notes, Class A-3 and A-4    7/01/14    128,000,000   5.34% - 5.91%
       1996B Subordinate LIBOR Rate Notes, Class B-2         7/01/14     14,200,000   6.12% - 6.24%
       1996C Senior Treasury Rate Notes, Class A-5           7/01/05    225,000,000   5.45% - 5.73%
       1996C Senior Auction Rate Notes, Class A-6            7/01/14     75,500,000   5.32% - 6.05%
       1996C Subordinate LIBOR Rate Notes, Class B-3         7/01/25     15,600,000   5.86% - 5.92%
-----------------------------------------------------------------------------------------------------

                                                                       $566,000,000
-----------------------------------------------------------------------------------------------------
</TABLE>

       Generally,  the notes can be redeemed on any interest payment date at par
       plus accrued interest.  Subject to note provisions, all notes are subject
       to redemption  prior to maturity at the option of the Company,  without a
       prepayment penalty.

       The  indenture of trust  contains,  among other  requirements,  covenants
       related to the  restriction  of funds to be maintained in a reserve fund.
       Management  believes the Company is in  compliance  with all covenants of
       the note agreements at December 31, 1997.

       On March 20, 1997,  the Company  issued $30.8 million of Taxable  Student
       Loan  Asset-Backed  Notes,  Series 1997A,  due July 1, 2030. The proceeds
       were  deposited  in an escrow fund to provide for the  defeasance  of the
       $11.1  million of the Series  1996A Class B  Subordinate  Notes and $14.2
       million of the Series 1996B Class B-2 Subordinate Notes, respectively, in
       May 1999.  As a result of the  transaction,  the  Company  recognized  an
       accounting loss of approximately $145,000 on the defeasance in 1997.

       The Company has an existing shelf registration allowing it to issue up to
       $700 million in debt  securities.  In October 1997,  the Company's  shelf
       registration  statement for an additional $500 million of debt securities
       was declared effective.

                                      F-9
<PAGE>


 (5)   INCOME TAXES

       Components  of  income  tax  expense  (benefit)  in 1997  and 1996 are as
follows:

-------------------------------------------------------------------------------

                                                               1997      1996
-------------------------------------------------------------------------------

       Current:
           Federal                                        $  395,099     -
           State                                              40,650     -
-------------------------------------------------------------------------------

                                                             435,749     -
-------------------------------------------------------------------------------

       Deferred:
           Federal                                           256,693  (256,693)
           State                                              18,275   (18,275)
-------------------------------------------------------------------------------

                                                             274,968  (274,968)
-------------------------------------------------------------------------------

                                                          $  710,717  (274,968)
-------------------------------------------------------------------------------

       The actual  income tax  expense  (benefit)  differs  from the  "expected"
       income tax expense,  computed by applying the federal statutory corporate
       tax rates to income (loss) before income taxes for 1997 and 1996 as shown
       below:

-------------------------------------------------------------------------------

                                                               1997      1996
-------------------------------------------------------------------------------

       Computed "expected" income tax expense (benefit)   $  682,313  (276,701)
       Increase (decrease) in income taxes resulting from:
           State taxes, net of federal income tax benefit     26,829   (12,062)
           Other                                               1,575    13,795
-------------------------------------------------------------------------------

                                                          $  710,717  (274,968)
-------------------------------------------------------------------------------

       Deferred   income  taxes   reflect  the  net  tax  effects  of  temporary
       differences  between the carrying  amounts of assets and  liabilities for
       financial  reporting  purposes  and  the  amounts  used  for  income  tax
       purposes.

       The Company's deferred tax assets at December 31, 1996 resulted primarily
       from the future tax benefit of the net  operating  loss for the year then
       ended.  There were no deferred tax assets or  liabilities at December 31,
       1997.


                                      F-10
<PAGE>


 (6)   FAIR VALUE OF FINANCIAL INSTRUMENTS

       Fair value estimates, methods and assumptions are set forth below:

       O  ACCRUED INTEREST RECEIVABLE/PAYABLE, OTHER ASSETS AND ACCOUNTS PAYABLE
          - The carrying value of certain asset and liability accounts including
          accrued interest  receivable,  other assets,  accrued interest payable
          and  other  liabilities  approximate  fair  value  due to their  short
          maturities.

       O  STUDENT  LOANS - The fair  value  of net  student  loans  approximates
          carrying value. Premiums paid for student loans purchased which have a
          higher than market rate of interest would  typically  range from 1% to
          3%,  depending on the type of loan,  balance,  payment status,  stated
          interest rate and other various factors.

       O  NOTES  PAYABLE  - The fair  value of the  notes  payable  approximates
          carrying  value due to the nature of the  financing  arrangement.  The
          terms of the arrangement specify that the outstanding debt is callable
          at par at specified interest payment dates.


 (7)   GUARANTEE AGENCIES

       As of December 31, 1997 and 1996,  Iowa College  Student Aid  Commission,
       Nebraska  Student  Loan  Program,  Inc.  and  Kentucky  Higher  Education
       Assistance   Authority   were  the   primary   guarantors,   guaranteeing
       approximately  75% and 81%,  respectively,  of the  total  student  loans
       beneficially owned by the Company.  Management  periodically  reviews the
       financial  condition of its  guarantors and does not believe the level of
       concentration  creates  an  unusual  or  unanticipated  credit  risk.  In
       addition,   management  believes  that  based  on  the  Higher  Education
       Amendments of 1992,  the security for and payment of any of the Company's
       obligations  would not be  materially  adversely  affected as a result of
       legislative  action or other failure to perform on its obligations on the
       part of any guarantee agency. The Company,  however, offers no assurances
       to that effect.


 (8)   RECENT STUDENT LOAN LEGISLATION

       Legislative  changes  to  the  Act  affecting  competition,   loan  asset
       characteristics,  debt structure provisions and regulatory compliance may
       from time to time  affect the  operations  of the  Company.  The Act will
       expire  in  September   1998.   In  the  months   before  such  laws  are
       reauthorized, Congress will conduct detailed studies of their programs to
       determine if the program should  continue and whether  adjustments to the
       program are needed.

       Pending  legislation  will likely also include  provisions for additional
       changes in the existing  Federal Family  Education Loan Program  (FFELP),
       including  changes  to  interest  rates,   special  allowance   payments,
       guarantee  fees and the Federal  Direct  Student  Loan  Program  (FDSLP).
       Various  factors in the  legislation,  if enacted,  could have a material
       adverse effect on the Company and its operations.  These factors include,
       but are not limited to, the  reduction of the interest  rates  payable by
       student loan borrowers,  the increase of loan  origination fees and other
       provisions included in the pending legislation.


 (9)   PURCHASE COMMITMENTS

       The Company has entered into a put option  agreement  with Union Bank and
       Trust  Company  (UB&T) to purchase  up to $3 million of eligible  student
       loans at 101% of the principal  amount.  These eligible loans may consist
       of loans owned by UB&T in its  individual  capacity or in its capacity as
       trustee of certain  grantor  trusts in its trust  department.  No amounts
       were purchased under this agreement in 1997 and 1996.

                                      F-11
<PAGE>


(10)   RELATED PARTIES

       Certain  owners  and  directors  of the  Company  are also  officers  and
       directors  of  UB&T  which  owns  80.5%  of  UNIPAC  Service  Corporation
       (UNIPAC). All loans currently held were purchased from UB&T.

       Under the terms of an agreement, the Company contracts all loan servicing
       through UB&T.  UNIPAC has been  contracted as the  sub-servicer  by UB&T.
       Fees  paid to UB&T are  calculated  using an  annual  asset-based  charge
       ranging  from  .60% to  1.25%  of the  student  loan  principal  balance,
       calculated   monthly.  At  December  31,  1997  and  1996,  $867,066  and
       $1,011,488,  respectively,  was payable to UB&T for loan servicing and is
       included in other liabilities.

       The Company incurred fees to its parent for managerial and administrative
       support for the  operations of the Company  based on a service  agreement
       that requires  .015% of the average  outstanding  loan balance to be paid
       monthly.  These fees amounted to  approximately  $911,000 and $216,000 in
       1997 and 1996,  respectively.  In 1997 and 1996,  the  Company  also paid
       approximately  $423,000 and $1,919,000,  respectively,  to its parent for
       services  provided  in  connection  with  the  Company's  debt  financing
       transactions.

                                      F-12
<PAGE>




                                   SIGNATURES
               Pursuant  to the  requirements  of  Section  13 or  15(d)  of the
Securities  Exchange Act of 1934,  the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.


                               UNION FINANCIAL SERVICES-1, INC.



                               By: /s/ MICHAEL S. DUNLAP
                                -------------------------
                               Michael S. Dunlap, Chairman of the Board
                               (Principal Executive Officer)



                               By: /s/ RONALD W. PAGE
                               -----------------------
                               Ronald W. Page, Vice President (Principal
                               Financial and Accounting Officer)


                             Date: March 30, 1998

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

            Signature                  Title                          Date

By:  /s/ MICHAEL S. DUNLAP         Chairman of the Board          March 30, 1998
     ---------------------
     Michael S. Dunlap             (Principal Executive Officer)

By:  /s/ STEPHEN F. BUTTERFIELD    President and Director         March 30, 1998
     --------------------------
     Stephen F. Butterfield

By:  /s/ RONALD W. PAGE            Vice-President, Secretary,     March 30, 1998
     ------------------
     Ronald W. Page                Treasurer and Director
                                   (Principal Financial and
                                   Accounting Officer)

By:  /s/ ROSS WILCOX               Director                       March 30, 1998
     ---------------
     Ross Wilcox

By:  /s/ DR. PAUL HOFF             Director                       March 30, 1998
     -----------------
     Dr. Paul Hoff




<PAGE>