SECURITIES AND EXCHANGE COMMISSION

Pre-Effective

Nelnet, Inc.

121 South 13th Street, Suite 201

Terry J. Heimes

Copies to:

      Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

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CALCULATION OF REGISTRATION FEE

(1) Previously paid.

      The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

Subject to completion, dated September 30, 2003

Nelnet, Inc. is selling all of the shares of Class A common stock in this offering. This is the initial public offering of our Class A common stock. The estimated initial public offering price is between $          and $          per share.

Prior to this offering, there has been no public market for our Class A common stock. We intend to apply for the listing of shares of our Class A common stock on the New York Stock Exchange under the symbol “NNI.”

Each share of Class A common stock has one vote and each share of Class B common stock has ten votes. Following this offering, Michael S. Dunlap and Stephen F. Butterfield, our Co-Chief Executive Officers, and persons related to them will beneficially own Class A and Class B common stock representing           % of the combined voting power of our common stock, and will control substantially all matters requiring approval by our shareholders.

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 8.

We have granted the underwriters an option for a period of 30 days to purchase up to           additional shares of our Class A common stock on the same terms and conditions set forth above to cover overallotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Class A common stock to investors on                     , 2003.

Joint Book-Running Managers

                    , 2003

TABLE OF CONTENTS

      You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our Class A common stock.

      No action is being taken in any jurisdiction outside the United States to permit a public offering of the Class A common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to those jurisdictions.

      The product and service names and logos used in this prospectus are service marks/trademarks or registered service marks/trademarks of Nelnet or its affiliates. Nelnet, Nconcert, Ntrust, Ngenius, Nteract, Nservice, Nelnet Notes and @theU are service marks of Nelnet, Inc. Other products, services and company names mentioned in this prospectus are the service marks/trademarks of their respective owners.

PROSPECTUS SUMMARY

      In this prospectus, unless the context requires otherwise, “Nelnet,” “we,” “us” and “our” refer to Nelnet, Inc., a Nebraska corporation, and its subsidiaries, and not to the underwriters. A detailed description of the Federal Family Education Loan Program appears in Annex A to this prospectus.

      This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in shares of our Class A common stock. You should read this entire prospectus carefully, including “Risk Factors” and our financial statements and the related notes, before making an investment decision.

Nelnet, Inc.

      We are a vertically integrated education finance company, with over $10 billion in total assets, making us one of the leading education finance companies in the country. We are focused on providing quality products and services to participants in the education finance process. Headquartered in Lincoln, Nebraska, we originate, hold and service student loans, principally loans originated under the Federal Family Education Loan Program, which we refer to as the FFEL Program or FFELP. For 2002, we were the fourth largest holder and second largest servicer of FFELP loans. In addition, we, together with our branding partners, originated and acquired approximately $2.7 billion of FFELP loans in 2002, making us a leading originator and acquirer of FFELP loans.

      We offer a broad range of financial services and technology-based products, including student loan origination and lending, student loan and guarantee servicing and a suite of software solutions. Our products are designed to simplify the student loan process by automating financial aid delivery, loan processing and funds disbursement. Our infrastructure, technological expertise and breadth of product and service offerings connect the key constituents of the student loan process, including lenders, financial aid officers, guaranty agencies, governmental agencies, student and parent borrowers, servicers and the capital markets, thereby streamlining the education finance process.

      Our business is comprised of four primary product and service offerings:

      We originate and acquire student loans through a variety of methods, or channels, including:

      In addition, we also acquire student loans through spot purchases and whole-company acquisitions, which accounted for 18.1% of the student loans we originated and acquired in 2002.

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      Of the $2.7 billion in FFELP loans we originated and acquired in 2002, $859 million were loans consolidated through our direct channel. As of June 30, 2003, our student loan portfolio was $9.5 billion.

      We currently service $18 billion in student loans, and our software is used by third parties to service an additional $30 billion in student loans. In addition, we currently provide servicing support to guaranty agencies on a total of $18 billion of FFELP loans. Servicing support includes functions such as system software, hardware and telecommunication support, borrower and loan updates, default aversion tracking services, claim processing services and post-default collection services. We provide student loan servicing and origination functions either directly or indirectly to more than 1.7 million borrowers at hundreds of colleges and universities through our proprietary software products and outsourcing functions.

      We generate the majority of our earnings from the spread between the yield we receive on our student loan portfolio and the cost of funding these loans. While the spread may vary due to fluctuations in interest rates, government special allowance payments ensure that we receive a minimum yield on our student loans, as long as certain requirements are met. For the year ended December 31, 2002, we generated net interest income of $190.9 million, total other income, including loan servicing income, of $125.8 million and net income of $48.5 million.

      The cost of funding our student loan portfolio is determined by the costs of borrowings under our operating lines of credit, secured warehouse financings and asset-backed securitizations. We currently have $65 million in operating lines of credit and a $35 million commercial paper facility. We are also in the process of increasing our operating lines of credit by an additional $30 million. In addition, we have obtained financing through asset-backed commercial paper conduit warehouse programs and the issuance of variable-rate and fixed-rate, taxable and tax-exempt bonds, including asset-backed securities. For the majority of our long-term financing needs, we rely on asset-backed securitization transactions.

      We have entered into a series of agreements with Union Bank and Trust Company, or Union Bank, including transactions to sell interests in student loans to Union Bank in its capacity as trustee, to purchase student loans from Union Bank, to provide student loan servicing to Union Bank, to sublease real estate from Union Bank and to provide consulting services to and receive consulting services from Union Bank. Michael S. Dunlap, our Co-Chief Executive Officer, owns an indirect interest in Union Bank and serves as its non-executive chairman. In 2000, 2001, 2002 and the first six months of 2003, approximately 68%, 15%, 14% and 24%, respectively, of the principal amount of the student loans added to our portfolio were acquired from Union Bank as part of our branding partner channel, a portion of which loans were originated by Union Bank and a portion of which were originated by third parties. To the extent Union Bank were to experience problems, it could have a material adverse effect on us.

Student Loan Industry

      Since the creation of the federal student loan programs, hundreds of billions of dollars in federal student loans have financed the higher education of millions of students at thousands of schools across the United States. More students and families depend on federal student loans to cover the costs of post-secondary education than any other single source of financial aid, and the demand for student loans is expected to grow along with the cost of a college education. According to projections by the U.S. Department of Education, or DOE, annual gross federal student loan volume is expected to increase from $45.4 billion in federal fiscal year 2002 to $71.8 billion in federal fiscal year 2009, excluding consolidation loan volume.

Competitive Strengths

      The following competitive strengths distinguish us in the education finance industry:

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Strategy

      We intend to achieve our corporate objective of furthering our leadership position in the student loan industry by executing the following strategies:

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Items Which Will Affect Future Operating Results

      Our third quarter operating results will reflect compensation expense of $3.9 million related to special bonuses paid to Terry Heimes, our Chief Financial Officer, and Raymond Ciarvella, our Chief Information Officer, as described under “Management — Executive Compensation,” and to four other employees. In addition, in March 2003, we issued 331,800 shares of our Class A common stock to 35 employees for an aggregate consideration of $806,274, or $2.43 per share. In the third quarter of 2003, we will recognize a compensation charge of $           million which is equal to the difference between the initial public offering price of that number of shares and the total price paid by the employees. There will be no net effect on shareholders’ equity as a result of this transaction since additional paid-in capital will be credited by an amount equal to the compensation charge.

Risk Factors

      You should consider the risks that we face in evaluating an investment in our Class A common stock. Among these risks are:

      For additional information regarding the risks that we face, see “Risk Factors.”

      Our principal executive offices are located at 121 South 13th Street, Suite 201, Lincoln, Nebraska 68508, and our telephone number is (402) 458-2370. Our web site is www.nelnet.net. Information contained on our web site is not a part of this prospectus.

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The Offering

      Unless specifically stated otherwise, the information in this prospectus:

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Summary Consolidated Financial Data

      You should read the summary consolidated financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus. We derived the financial data as of December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000 from our audited financial statements included elsewhere in this prospectus. We derived the financial data as of December 31, 2000 from our audited financial statements not included in this prospectus. We derived the financial data as of June 30, 2003 and for the six months ended June 30, 2003 and 2002 from our unaudited financial statements included elsewhere in this prospectus. Results for interim periods are not necessarily indicative of results to be expected during the remainder of the fiscal year or for any future periods. The as adjusted balance sheet data set forth below have been adjusted to give effect to the sale of                      shares of our Class A common stock in this offering and the use of $30.0 million of the net proceeds from this offering to repay revolving credit indebtedness. See “Capitalization.”

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RISK FACTORS

      You should carefully consider the following risk factors and all other information contained in this prospectus before investing in shares of our Class A common stock. Investing in our Class A common stock involves a high degree of risk. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our Class A common stock could decline and you may lose part or all of your investment.

Risks Related to Our Business and Industry

      Our principal business is comprised of originating, acquiring, holding and servicing student loans made and guaranteed pursuant to the FFEL Program, which was created by the Higher Education Act. Most significant aspects of our lines of business are governed by the Higher Education Act. We are also subject to rules and regulations of the agencies that act as guarantors of the student loans, known as guaranty agencies. In addition, we are subject to certain federal and state banking laws, regulations and examinations.

      Our private loan portfolio is also subject to federal and state consumer protection laws and regulations, including state usury laws and related regulations and the Federal Truth in Lending Act. These laws and regulations impose substantial requirements upon lenders and servicers involved in consumer finance. Failure to comply with these laws and regulations could result in our liability to borrowers, the imposition of civil penalties and potential class action suits.

      Our failure to comply with any of the regulatory regimes described above may arise from breaches of our internal control systems, technological defects or fraud by our employees or other persons. Such failure to comply, irrespective of the reason, could subject us to loss of the federal guarantee on FFELP loans, costs of curing servicing deficiencies or remedial servicing, suspension or termination of our right to participate in the FFEL Program or to participate as a servicer, negative publicity and potential legal claims or actions brought by our servicing customers and borrowers.

      We must meet various requirements in order to maintain the federal guarantee on our FFELP loans. These requirements establish servicing requirements and procedural guidelines and specify school and borrower eligibility criteria. The federal guarantee on our FFELP loans is conditioned on compliance with origination, servicing and collection standards set by the DOE and guaranty agencies. FFELP loans that are not originated, disbursed or serviced in accordance with DOE regulations risk loss of their guarantee, in full or in part. If we experience a high rate of servicing deficiencies or costs associated with remedial servicing, and if we are unsuccessful in curing such deficiencies, the eventual losses on the loans that are not cured could be material.

      A guaranty agency may reject a loan for claim payment due to a violation of FFEL Program due diligence collection and servicing requirements. In addition, a guaranty agency may reject claims under other circumstances, including, for example, if a claim is not timely filed or adequate documentation is not maintained. Once a loan ceases to be guaranteed, it is ineligible for federal interest subsidies and special allowance payments. If a loan is rejected for claim payment by a guaranty agency, we continue to pursue the borrower for payment and/or institute a process to reinstate the guarantee.

      Rejections of claims as to portions of interest may be made by guaranty agencies for certain violations of the due diligence collection and servicing requirements, even though the remainder of a claim may be paid. Examples of errors that cause claim rejections include isolated missed collection calls or failures to send collection letters as required.

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      School eligibility requirements, which include default rate limits, have been implemented by the DOE. In order to maintain eligibility in the FFEL Program, schools must maintain default rates below specified levels, and both guaranty agencies and lenders are required to ensure that loans are made to students attending schools that meet default criteria.

      If we fail to comply with any of the above requirements, we could incur penalties or lose the federal guarantee on some or all of our FFELP loans. Our actual loss experience on denied guarantee claims historically has not been material to our operations, but the impact on us could become material if losses were to increase substantially in future periods. During the last three fiscal years, our actual loss on denied guarantee claims did not exceed 0.004%.

      The Higher Education Act generally prohibits a lender from providing inducements to educational institutions or individuals in order to secure applicants for FFELP loans. We have entered into various agreements to acquire marketing lists of prospective FFELP loan borrowers from sources such as college alumni associations. We pay to acquire these lists and for the completed applications for loans resulting therefrom. We believe that such arrangements are permissible and do not violate restrictions on inducements, as they fit within a regulatory exception recognized by the DOE for generalized marketing and advertising activities. The DOE has provided informal guidance to us that such arrangements do not raise any improper inducement issues, since such arrangements fall within the generalized marketing exception. If the DOE were to change its position, this could hurt our reputation and could potentially result in the DOE imposing sanctions on us. These sanctions could negatively impact our business.

      Pursuant to the terms of the Higher Education Act, the FFEL Program is periodically amended, and the Higher Education Act must be reauthorized by Congress every five years in order to prevent sunset of that Act. Changes in the Higher Education Act made in the two most recent reauthorizations have included reductions in student loan yields paid to lenders, increased fees paid by lenders and a decreased level of federal guarantee. Future changes could result in further negative impacts on our business. Moreover, there can be no assurance that the provisions of the Higher Education Act, which is scheduled to expire on September 30, 2004, will be reauthorized. While Congress has consistently extended the effective date of the Higher Education Act, it may elect not to reauthorize the DOE’s ability to provide interest subsidies, special allowance payments and federal guarantees for student loans. Such a failure to reauthorize would reduce the number of federally guaranteed student loans available for us to originate and/or acquire in the future and would materially adversely affect us.

      In addition, funds for payment of interest subsidies and other payments under the FFEL Program are subject to annual budgetary appropriation by Congress. In recent years, federal budget legislation has contained provisions that have restricted payments made under the FFEL Program to achieve reductions in federal spending. Future legislation may adversely affect expenditures by the DOE and the financial condition of guaranty agencies.

      Efforts are underway to pass legislation which would permit borrowers holding consolidation loans made under the Higher Education Act to refinance their loans under the FFEL Program multiple times, rather than only once, which would open approximately 39% of our student loan portfolio to further refinancing. Similar legislation may also abolish the so-called single holder rule, which restricts the ability of other lenders to consolidate student loans away from a lender that owns all of a particular borrower’s loans. This would put approximately one-third of our non-consolidated portfolio at risk of being consolidated away by our competitors. In addition, if legislation is enacted to allow variable-rate consolidation loans or to extend the term of Stafford loans, we may experience a decrease in our consolidation loan opportunities. Accordingly, any of these legislative changes could have a material adverse impact upon us. In addition, the DOE oversees and implements the Higher Education Act and

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              Market risks to which we are subject may have an adverse impact upon our business and operations.

      Our primary market risk exposure arises from fluctuations in our borrowing and lending rates, the spread between which could be impacted by shifts in market interest rates. The borrower rates on our FFELP loans are generally reset by the DOE each July 1st based on a formula determined by the date of the origination of the loan, with the exception of rates on consolidation loans which are fixed to term. The interest rate we actually receive on our FFELP loans is the greater of the borrower rate and a rate determined by a formula based on a spread to either the 91-day Treasury Bill index or the 90-day commercial paper index, depending on when the loans were originated and the current repayment status of the loans.

      We issue asset-backed securities, both fixed- and variable-rate, to fund our student loan assets. The variable-rate debt is generally indexed to 90-day LIBOR or set by auction. The income generated by our student loan assets is generally driven by different short-term indices than our liabilities, which creates interest rate risk for us. We have historically borne this risk internally through the net spread on our portfolio while continuing to monitor our interest rate risk.

      When we utilize derivative instruments, we utilize them to manage our interest rate sensitivity. Although we do not use derivative instruments for speculative purposes, our derivative instruments may not qualify for hedge accounting. The derivative instruments we use are typically in the form of interest rate swaps and interest rate caps. Interest rate swaps effectively change variable-rate debt obligations either to fixed-rate debt obligations or to variable-rate debt obligations based on a different index. Interest rate caps effectively limit the maximum interest on variable-rate debt obligations. Developing an effective strategy for dealing with movements in interest rates is complex, and no strategy can completely insulate us from risks associated with such fluctuations. In addition, a counterparty to a derivative instrument could default on its obligation thereby exposing us to credit risk. Further, we may have to repay certain costs, such as transaction fees or brokerage costs, if a derivative instrument is terminated by us. Finally, our interest rate risk management activities could expose us to substantial losses if interest rates move materially differently from our expectations. As a result, we cannot assure you that our economic hedging activities will effectively manage our interest rate sensitivity or have the desired beneficial impact on our results of operations or financial condition.

      During 2001, we entered into an interest rate swap arrangement with a notional amount of $500 million. This swap was adjusted to fair value in our statements of income, resulting in a $3.0 million loss in 2001 and a $579,000 gain in 2002. This swap expired in June 2002. We did not enter into any derivative instruments in 2002. In the third quarter of 2003, we entered into various interest rate swap agreements, a basis swap and a cap contract with an aggregate notional amount of $3.5 billion.

      We are subject to the risk that we may be unable to meet financial commitments to creditors, branding partners, forward flow lenders or borrowers when due. Our primary funding needs are those required to finance our student loan portfolio and satisfy our cash requirements for new student loan originations and acquisitions, operating expenses and technological development.

      We rely upon conduit warehouse loan financing vehicles to support our funding needs on a short-term basis. There can be no assurance that we will be able to maintain such warehouse financing in the future. We currently have four such conduit facilities in place, with various maturity dates. Currently, the aggregate short-term commitment amount from our conduit lenders is over $2 billion. There can be no assurance that we will be able to maintain such conduit facilities, find alternative funding or increase the commitment level of such facilities, if necessary. The term of each conduit facility is less than one year,

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      In addition, we rely upon securitization vehicles as our most significant source of funding for student loans on a long-term basis. The net cash flow we receive from the securitized student loans generally represents the excess amounts, if any, generated by the underlying student loans over the amounts required to be paid to the bondholders, after deducting servicing fees and any other expenses relating to the securitizations. In addition, some of the residual interests in these securitizations have been pledged to secure additional bond obligations. Our rights to cash flow from securitized student loans are subordinate to bondholder interests and these loans may fail to generate any cash flow beyond what is due to pay bondholders.

      The interest rates on certain of our asset-backed securities are set and periodically reset via a “dutch auction” utilizing remarketing agents. Investors and potential investors submit orders through a broker-dealer as to the principal amount of notes they wish to buy, hold or sell at various interest rates. The broker-dealers submit their clients’ orders to the auction agent or remarketing agent, who determines the interest rate for the upcoming period. If there are insufficient potential bid orders to purchase all of the notes offered for sale or being repriced, we could be subject to interest costs substantially above the anticipated and historical rates paid on these types of securities. A failed auction or remarketing could also reduce the investor base of our other financing and debt instruments.

      More than 99% of our student loan portfolio as of June 30, 2003 was comprised of FFELP loans. These loans benefit from a federal guarantee of between 98% and 100% of their principal balance and accrued interest. We bear full risk of losses experienced with respect to the unguaranteed portion of the student loans.

      Losses on our private loans will be borne by us, with the exception of certain privately insured loans. Privately insured loans constitute a minority of our private loan portfolio. The loan loss pattern on our private loan portfolio is not as developed as that on our FFELP loan portfolio. As of June 30, 2003, the aggregate principal balance of private loans comprised less than 1% of our entire student loan portfolio; however, it is expected to increase to between 1% and 2% over the next three years. There can be no assurance that this percentage will not further increase over the long term.

      The performance of student loans in our portfolio is affected by the economy, and a prolonged economic downturn may have an adverse effect on the credit performance of these loans. While we have provided allowances estimated to cover losses that may be experienced in both our student loans that are federally guaranteed under the FFEL Program as well as our private loan portfolio, there can be no assurance that such allowances will be sufficient to cover actual losses in the future.

      A deterioration in the financial status of a guaranty agency and its ability to honor guarantee claims on defaulted student loans could result in a failure of that guaranty agency to make its guarantee payments in a timely manner, if at all. The financial condition of a guaranty agency can be adversely affected if it submits a large number of reimbursement claims to the DOE, which results in a reduction of the amount of reimbursement that the DOE is obligated to pay the guaranty agency. The DOE may also require a guaranty agency to return its reserve funds to the DOE upon a finding that the reserves are unnecessary for the guaranty agency to pay its FFELP expenses or to serve the best interests of the FFEL Program.

      If the DOE has determined that a guaranty agency is unable to meet its guarantee obligations, the loan holder may submit claims directly to the DOE, and the DOE is required to pay the full guarantee claim. However, the DOE’s obligation to pay guarantee claims directly in this fashion is contingent upon

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      In connection with our securitizations and issuances of debt, we periodically utilize credit enhancements or other support agreements such as letters of credit, bond insurance and interest rate swap agreements. We cannot assure performance of the counterparties to these various agreements, and failure of such counterparties to perform their obligations under these agreements could impair the viability of our underlying debt or securitization structures, which in turn could adversely impact our results of operations and financial condition.

      In 1992, Congress created the William D. Ford Federal Direct Loan Program, which we refer to as the FDL Program or the FDLP. Under the FDL Program, the DOE makes loans directly to student borrowers through the educational institutions they attend. The volume of student loans made under the FFEL Program and available for us to originate or acquire may be reduced to the extent loans are made to students under the FDL Program. In addition, if the FDL Program expands, to the extent the volume of loans serviced by us is reduced, we may experience reduced economies of scale, which could adversely affect our earnings. Loan volume reductions could further reduce amounts received by the guaranty agencies available to pay claims on defaulted student loans.

      In the FFELP market, we face significant competition from SLM Corporation, the parent company of Sallie Mae. SLM Corporation services nearly half of all outstanding FFELP loans and is the largest holder of student loans, with a portfolio of approximately $70 billion. We also face intense competition from other existing lenders and servicers. As we expand our student loan origination and acquisition activities, that expansion may result in increased competition with some of our servicing customers. This has in the past resulted in servicing customers terminating their contractual relationships with us, and we could in the future lose more servicing customers as a result. As we seek to further expand our business, we will face numerous other competitors, many of which will be well established in the markets we seek to penetrate. Some of our competitors are much larger than we are, have better name recognition than we do and have greater financial and other resources than we do. In addition, several of our competitors have large market capitalizations or cash reserves and are better positioned to acquire companies or portfolios in order to gain market share than we are. Furthermore, many of the institutions with which we compete have significantly more equity relative to their asset bases than we do. Consequently, such competitors may have more flexibility to address the risks inherent in the student loan business. Finally, some of our competitors are tax-exempt organizations which do not pay federal or state income taxes and which generally receive floor income on certain tax-exempt obligations on a greater percentage of their student loan portfolio than we do because they have financed a greater percentage of their student loans with tax-exempt obligations issued prior to October 1, 1993 than we have. These factors could give our competitors a strategic advantage.

      Pursuant to the Higher Education Act, borrowers may prepay loans made under the FFEL Program at any time. Prepayments may result from consolidating student loans, which tends to occur more frequently in low interest rate environments, from borrower defaults, which will result in the receipt of a guarantee payment, and from voluntary full or partial prepayments, among other things. High prepayment rates will have the most impact on our asset-backed securitization transactions priced in relation to LIBOR. At December 31, 2002, we had two transactions outstanding totaling approximately $2.0 billion which had experienced cumulative prepayment rates of 14.3% and 15.9%, respectively. At June 30, 2003, we had three transactions outstanding totaling approximately $2.6 billion which had experienced cumulative prepayment rates of 18.3% to 19.1%, respectively. The rate of prepayments of student loans

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      Our portfolio of FFELP loans is subject to refinancing through the use of consolidation loans, which are expressly permitted by the Higher Education Act. Consolidation loan activity may result in three detrimental effects on us. First, when we consolidate loans already held by us, the new consolidation loans have a lower yield than the loans being refinanced due to the statutorily mandated consolidation loan rebate fee of 1.05% per year. Although consolidation loans generally feature higher average balances, longer average lives and slightly higher special allowance payments, such attributes may not be sufficient to counterbalance the cost of the rebate fees. Second, and more significantly, we may lose student loans in our portfolio that are consolidated away by competing lenders. In prior years, our competitors consolidated away more student loans from us than we consolidated away from our competitors. Increased consolidations of student loans away from us by our competitors may result in a negative return on loans, when considering the origination costs or acquisition premiums paid with respect to these loans. Additionally, consolidation of loans away from us can result in a decrease of our servicing portfolio, thereby decreasing fee-based servicing income. Third, increased consolidations by us of our own student loans create cash flow risk because we incur upfront consolidation costs, which are in addition to the origination or acquisition costs we incurred in connection with the underlying student loans, while extending the repayment schedule of the consolidated loans.

      Our student loan originations generally are limited to students attending eligible educational institutions in the United States. Volumes of originations are greater at some schools than others, and our ability to remain an active lender at a particular school with concentrated volumes is subject to a variety of risks, including the fact that each school has the option to remove us from its “preferred lender” list or to add other lenders to its “preferred lender” list, the risk that a school may enter the FDL Program or the risk that a school may begin making student loans itself. We acquire student loans through forward flow commitments with other student loan lenders, but each of these commitments has a finite term. There can be no assurance that these lenders will renew or extend their existing forward flow commitments on terms that are favorable to us, if at all, following their expiration.

      In addition, as of June 30, 2003, approximately 54% of the loans we serviced were owned by third parties. To the extent that our third-party servicing clients reduce the volume of student loans that we process on their behalf, our income would be reduced, and, to the extent the related costs could not be reduced correspondingly, our net income could be materially adversely affected. Such volume reductions occur for a variety of reasons, including if our third-party servicing clients commence or increase internal servicing activities, shift volume to another service provider, perhaps because such other service provider does not compete with the client in student loan originations and acquisitions or exit the FFEL Program completely.

      Student loans originated or acquired with the proceeds of tax-exempt obligations issued prior to October 1, 1993, as well as student loans acquired with the sale proceeds of those student loans, receive only a portion of the special allowance payment which they would otherwise be entitled to receive, but are guaranteed a minimum rate of return of 9.5% per year, less the applicable interest rate for the student loan.

      A portion of our student loan portfolio is comprised of loans which have been previously financed with the proceeds of tax-exempt obligations issued prior to October 1, 1993. Based upon provisions of the

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      In the current low interest rate environment, we generally receive partial special allowance payments and the minimum 9.5% rate of return with respect to our eligible student loans originated or acquired with qualifying tax-exempt proceeds. In a higher interest rate environment, however, the regular special allowance payments on loans not originated or acquired with qualifying tax-exempt proceeds may exceed the total subsidy to holders of eligible loans originated or acquired with qualifying tax-exempt proceeds. Thus, in a higher interest rate environment, these loans could have an adverse effect upon our earnings. For further information regarding special allowance payments, see “Industry Overview — Student Loan Business Model.”

      Our servicing and operating processes are highly dependent upon our information technology system infrastructure, and we face the risk of business disruption if failures in our information systems occur, which could have a material impact upon our business and operations. We depend heavily on our own computer-based data processing systems in servicing both our own student loans and those of third-party servicing customers. On January 1, 2002, we converted the great majority of the student loans we service to a computer hardware and software platform developed and maintained by an affiliated company. In November 2002, we converted our remaining approximately $3 billion of student loans to this same computer hardware and software platform. Problems or errors of which we are not currently aware may have occurred in connection with this conversion, and problems or errors may occur in the future in connection with the conversion of newly originated and acquired loans to our platform. If servicing errors do occur, they may result in a loss of the federal guarantee on the FFELP loans that we service or in a failure to collect amounts due on the student loans that we service. In addition, although we regularly back up our data and believe that we have taken sufficient precautions to protect our information systems, a major physical disaster or other calamity that causes significant damage to our offices or our systems would adversely affect our business.

      We have entered into certain contractual arrangements with entities controlled by Michael S. Dunlap, our Chairman and Co-Chief Executive Officer and one of our principal shareholders, and members of his family and, to a lesser extent, with entities in which other directors and members of management hold equity interests or board or management positions. Such arrangements constitute a significant portion of our business and include, among other things:

These arrangements may present potential conflicts of interest.

      Many of these arrangements are with Union Bank and Trust Company, or Union Bank, in which Michael S. Dunlap owns an indirect interest and of which he serves as non-executive chairman. Union Bank is a significant source of student loans to us and a significant servicing customer of ours.

      In 2002 and the first six months of 2003, approximately 14% and 24%, respectively, of the principal amount of the student loans added to our portfolio were acquired from Union Bank, a portion of which loans were originated by Union Bank and portion of which were originated by third parties. We believe that the acquisitions were made on terms similar to those made from unrelated entities. We intend to maintain our relationship with Union Bank, which we believe provides substantial benefits to us, although there can be no assurance that all transactions in which we engage with Union Bank are, or in the future

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      The ability of Union Bank to continue to do business with us will depend on the development of Union Bank’s own business, financial condition and results of operations, which will be affected by competitive and other factors beyond our control or knowledge. Because Union Bank is a privately held company, an investor in our Class A common stock might have little advance warning of problems affecting Union Bank, even though these problems could have a material adverse effect on us. For further information regarding affiliated transactions, see “Related Party Transactions.”

      A corporation is considered to be a “personal holding company” under the U.S. Internal Revenue Code of 1986, as amended, which we refer to as the Code, if at least 60% of its adjusted ordinary gross income is “personal holding company income” (generally, passive income) and at any time during the last half of the taxable year more than half, by value, of its stock is owned by five or fewer individuals, as determined under attribution rules of the Code. A personal holding company is subject to an additional tax on its undistributed personal holding company income, currently at a 15% rate. Before this offering, more than half the value of our stock was held by five or fewer individuals, and immediately after this offering, we expect that this will continue to be the case. We believe that we can avoid current personal holding company tax through intercompany distributions, and we expect to be able to manage our exposure to this tax for the next two years in this manner. However, it is possible that thereafter more than 60% of our adjusted ordinary gross income could be classified as personal holding company income. If that were to occur, and if more than half of our value continued to be held by five or fewer individuals, we could become subject to the personal holding company tax. We have submitted a request for a private letter ruling from the Internal Revenue Service seeking a determination that our interest and fee income arising from federally guaranteed student loans does not constitute personal holding company income. If the Internal Revenue Service grants our request, we expect that we will not be subject to the personal holding company tax. If the Internal Revenue Service does not grant our request, and if there is a likelihood that we would incur personal holding company tax, then we and our controlling shareholder, Michael S. Dunlap, have agreed to take such steps as are necessary to avoid imposition of the tax by ensuring that more than half the value of our stock is not owned by five or fewer individuals. These steps could include the conversion by Mr. Dunlap of shares of Class B common stock that he owns into Class A common stock, divestitures of common stock by Mr. Dunlap and public offerings of newly issued shares of common stock. If Mr. Dunlap or we were to fail to take these steps, or fail to take them in a timely manner, then we could become subject to personal holding company tax in the future.

      Our direct marketing operations are or may become subject to various federal and state “do not call” list requirements. The Federal Trade Commission has recently amended its rules to provide for a national “do not call” registry. Under these new federal regulations, which are currently being challenged in court, consumers may have their phone numbers added to the national “do not call” registry. Generally, we will be prohibited from calling anyone on that registry. In September 2003, telemarketers will have access to the registry and will be required to compare their call lists against the national “do not call” registry at least once every 90 days. We also will be required to pay a fee to access the registry on a quarterly basis. Enforcement of the “do not call” provisions will begin in the fall of 2003, and the rule provides for fines of up to $11,000 per violation and other possible penalties. This rule may restrict our ability to market effectively our products and services to new customers. Furthermore, compliance with this new rule may prove difficult, and we may incur penalties for improperly conducting our marketing activities.

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      Our inability to maintain strong relationships with significant schools, branding partners, servicing customers, guaranty agencies and software licensees could result in loss of:

Loss of a strong relationship, like those with significant branding partners such as Union Bank or with schools such as the University of Phoenix or Nova Southeastern University, could result in a material adverse effect on our business.

Risks Related to This Offering

      The market price of our Class A common stock may be volatile and subject to wide fluctuations in response to various factors, including:

      In addition, the stock markets have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to operating performance. These broad market fluctuations may seriously harm the market price of our Class A common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit brought against us could result in potential liabilities, substantial costs and diversion of our management’s attention and resources, regardless of whether we win or lose.

      Prior to this offering, there has been no public market for our Class A common stock. An active, liquid trading market for our Class A common stock may not develop or be maintained following this offering. As a result, you may not be able to sell your shares of our Class A common stock quickly or at the market price. The initial public offering price of our Class A common stock is determined by negotiation between us and the representatives of the underwriters based upon a number of factors and may not be indicative of market prices that will prevail following the completion of this offering. The market price of our Class A common stock may decline below the initial public offering price, and you may not be able to resell your shares of our Class A common stock at or above the initial public offering price.

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      The market price of our Class A common stock could decline as a result of sales of substantial amounts of our Class A common stock in the public market after this offering, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future equity offerings. There will be                    shares of our Class A common stock and 14,023,454 shares of our Class B common stock, which are convertible on a one-for-one basis into shares of Class A common stock, outstanding immediately after this offering.

      All of the shares of our Class A common stock sold in this offering will be freely transferable by persons other than our affiliates without restriction or further registration under the Securities Act of 1933. All or substantially all of the remaining shares of our Class A common stock, including shares of Class A common stock issued upon conversion of shares of Class B common stock, will be eligible for sale in the public market pursuant to Rule 144 under the Securities Act of 1933, subject to 180-day lock-up agreements with the underwriters and to our share retention policy. See “Description of Capital Stock — Share Retention Policy” and “Shares Eligible for Future Sale — Sales of Restricted Shares” and “— Lock-up Agreements.”

      We and our executive officers and directors and all of our shareholders have entered into 180-day lock-up agreements with the underwriters. The lock-up agreements prohibit each of us from selling or otherwise disposing of shares of common stock except in limited circumstances. The lock-up agreements are only contractual agreements, and J.P. Morgan Securities Inc. and Banc of America Securities LLC, at their discretion, can waive the restrictions of any lock-up agreement at an earlier time without prior notice or announcement and allow any of us to sell shares of common stock. If the restrictions in the lock-up agreement are waived, shares of our Class A common stock will be available for sale into the public market, subject to applicable securities laws and our share retention policy, which could reduce the market price for shares of our Class A common stock. Our share retention policy prevents, subject to some exceptions, our officers or the officers of any of our direct or indirect subsidiaries at or above the level of executive director, defined for purposes of this policy as Executives, from selling or otherwise disposing of a number of shares of common stock in any calendar year in excess of one-third of the number of shares of common stock beneficially owned by such Executive on the first day of the calendar year. See “Description of Capital Stock — Share Retention Policy” and “Shares Eligible for Future Sale — Sales of Restricted Shares.”

      Michael S. Dunlap, Stephen F. Butterfield and persons related to them and trusts in which they have beneficial interests have the right, subject to limitations, to make two written demands of Nelnet for registration with the Securities and Exchange Commission of all or part of their common stock. These shareholders also have piggyback registration rights for their common stock following the consummation of this offering. See “Description of Capital Stock — Registration Rights.”

      You will pay a price per share that substantially exceeds the per share value of our tangible assets after subtracting our total liabilities. As a result, if we were to distribute our net tangible assets to our shareholders immediately following this offering, you would receive less than the amount you paid for your shares of our Class A common stock. See “Dilution.”

      Immediately after this offering, our executive officers, directors and principal shareholders will beneficially own, in the aggregate,           % of our outstanding Class A common stock, and Michael S. Dunlap and Stephen F. Butterfield, our Co-Chief Executive Officers, and persons related to them will beneficially own Class A and Class B common stock representing           % of the combined voting power of our common stock. Each share of Class A common stock has one vote and each share of Class B common stock has ten votes on all matters to be voted upon by our shareholders. As a result, our executive officers,

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      As of the date of this prospectus, we cannot specify with certainty the amounts we will spend on particular uses from the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of these net proceeds, but currently intends to use them as described in “Use of Proceeds.” The failure by our management to apply these net proceeds effectively could adversely affect our ability to continue to develop our business.

      Provisions of our charter and by-laws could discourage potential acquisition proposals or make it more difficult for a third party to acquire control of us. These provisions include, among others, the authority of our board of directors to create and issue rights entitling the holders thereof to purchase our securities or the securities of any other corporation. In addition, we are subject to the provisions of the Nebraska Shareholders Protection Act, an anti-takeover law, which may also dissuade a potential acquiror of our common stock. These provisions may make it more difficult or expensive for a third party to acquire a majority of our outstanding voting stock or may delay, prevent or deter a merger, acquisition, tender offer or proxy contest, which may negatively affect our stock price. See “Description of Capital Stock — Nebraska Anti-takeover Law and Certain Charter and By-law Provisions.”

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FORWARD-LOOKING STATEMENTS

      This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential” or the negative of such terms or other similar expressions.

      The forward-looking statements reflect our current expectations and views about future events. The forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these risks and uncertainties, you should not place undue reliance on the forward-looking statements.

      You should understand that the following factors, among other things, could cause our results to differ materially from those expressed in forward-looking statements:

We discuss many of these risks and uncertainties in greater detail under the heading “Risk Factors.”

      You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is part, completely and with the understanding that our actual future results may be materially different from what we expect. We may not update the forward-looking statements, even though our situation may change in the future, unless we have obligations under the federal securities laws to update and disclose material developments related to previously disclosed information. We qualify all of the forward-looking statements by these cautionary statements.

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USE OF PROCEEDS

      Our net proceeds from this offering are estimated to be $           million, or $           million if the underwriters’ overallotment option is exercised in full, after deducting the underwriting discounts and estimated offering expenses that we will pay.

      We intend to use the net proceeds from this offering to originate and acquire student loans, to repay $30.0 million of indebtedness outstanding under our credit facility with Bank of America, N.A., an affiliate of Banc of America Securities LLC, and for general corporate purposes, including capital expenditures, working capital and possible acquisitions complementary to our business. The indebtedness to be repaid is revolving credit indebtedness that currently bears interest at an annual rate of 4.0% and matures on January 23, 2005. The proceeds of the indebtedness to be repaid were used to finance our 2001 acquisition of EFS, Inc., an Indiana student loan servicing and secondary market company. We currently have no agreements or understandings with respect to any material acquisition.

      The foregoing uses of the net proceeds from this offering represent our current intentions based upon our present plans and business condition. We retain broad discretion in the allocation and use of the net proceeds of this offering and a change in our plans or business condition could result in the application of the net proceeds from this offering in a manner other than as described in this prospectus. Pending the uses described above, we intend to invest the net proceeds from this offering in our student loan portfolio and/or short-term, investment grade securities.

DIVIDEND POLICY

      We have not declared or paid dividends on our capital stock during 2001, 2002 or 2003 and do not intend to pay any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors may deem relevant.

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CAPITALIZATION

      The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2003:

      You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus.

      In March 2003, we issued 331,800 shares of our Class A common stock to 35 employees for an aggregate consideration of $806,274. In the third quarter of 2003, we will recognize a compensation charge of $                    million, which is equal to the difference between the initial public offering price of that number of shares and the total price paid by the employees. In the table above, retained earnings has been debited by the amount of such compensation charge, and additional paid-in capital has been credited by an equal amount; consequently, this transaction will result in no net effect on shareholders’ equity.

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DILUTION

      If you invest in our Class A common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma net tangible book value per share of our common stock after this offering.

      Our net tangible book value as of June 30, 2003 was approximately $112.9 million, or $2.51 per share of common stock. Net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. After giving effect to the issuance and sale of                      shares of our Class A common stock in this offering, and after deducting the underwriting discounts and estimated offering expenses that we will pay, our pro forma net tangible book value as of June 30, 2003 would have been approximately $                    million, or $          per share of common stock. This represents an immediate increase in net tangible book value of $          per share to existing shareholders and an immediate dilution of $          per share to new investors purchasing shares of Class A common stock in this offering.

      The following table illustrates this dilution:

      The following table summarizes, as of June 30, 2003, on a pro forma basis, the total number of shares of common stock acquired from us for cash (in one case for cash and services) during the past five years by existing shareholders and the total consideration received by us and the average price per share paid by them and by new investors purchasing shares of Class A common stock in this offering, before deducting the underwriting discounts and estimated offering expenses that we will pay:

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SELECTED CONSOLIDATED FINANCIAL DATA

      You should read the selected consolidated financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus. We derived the financial data as of December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000 from our audited financial statements included elsewhere in this prospectus. We derived the financial data as of December 31, 2000, 1999 and 1998 and for the years ended December 31, 1999 and 1998 from our audited financial statements not included in this prospectus. We derived the financial data as of June 30, 2003 and for the six months ended June 30, 2003 and 2002 from our unaudited financial statements included elsewhere in this prospectus; and such unaudited interim financial statements reflect all material adjustments, consisting only of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation. Results for interim periods are not necessarily indicative of results to be expected during the remainder of the fiscal year or for any future periods.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

      You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our “Selected Consolidated Financial Data” and our financial statements and the related notes included elsewhere in this prospectus.

Overview

      We are a vertically integrated education finance company, with over $10 billion in total assets, making us one of the leading education finance companies in the country. We are focused on providing quality products and services to participants in the education finance process. Headquartered in Lincoln, Nebraska, we originate, hold and service student loans, principally loans originated under the Federal Family Education Loan Program. For 2002, we were the fourth largest holder and second largest servicer of FFELP loans. In addition, we, together with our branding partners, originated and acquired approximately $2.7 billion of FFELP loans in 2002, making us a leading originator and acquirer of FFELP loans.

      Our business is comprised of four primary product and service offerings:

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      Our student loan portfolio has grown significantly through origination and acquisition. With the development of our fully integrated platform, we are positioned for sustained organic growth. We originated and acquired $2.7 billion in student loans during 2002 through various channels, including:

      In addition, we also acquire student loans through spot purchases and whole-company acquisitions, which accounted for 18.1% of student loans that we originated and acquired in 2002. We have increased our student loan portfolio by $5.7 billion over the last two and a half years, including $2.9 billion of loans acquired in subsidiary acquisitions.

      In addition to our portfolio and asset growth, our net income has also grown significantly in recent years, increasing $41.4 million, or more than 500%, for the year ended December 31, 2002 as compared to the prior year. Our primary source of income is interest earned on our portfolio. If our portfolio continues to grow and our net interest margin remains relatively stable, we expect our net interest income and net income also to continue to increase. Interest income, and to a certain extent our net income, is also dependent upon the relative level of interest rates. While we expect our portfolio and interest earning assets to continue to grow, which should cause interest income and earnings growth, we do not expect to continue to grow at historical levels. Net income for 2002 included approximately $49.8 million of variable rate floor income. Variable rate floor income, as defined further in “Net Interest Income” below, occurs in certain declining interest rate environments, and we cannot predict whether these interest rate environments will occur in the future. We generally do not anticipate receiving or plan to receive variable rate floor income.

      We have positioned ourself for growth by building a strong foundation through mergers and acquisitions of related and unrelated entities. Although our assets and loan portfolios increased through these transactions, a key aspect of each transaction was its impact on our prospective organic growth and the development of our integrated platform of services. As a result of our rapid growth, the development of our platform and changes in operations, period-to-period comparability of our results of operations may be difficult. The following are the significant acquisitions that we have made since 2000:

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      Our earnings and earnings growth are directly affected by the size of our portfolio of student loans, the interest rate characteristics of our portfolio, the costs associated with financing and managing our portfolio and the costs associated with the origination and acquisition of the student loans in the portfolio. See “Liquidity and Capital Resources — Student Loan Portfolio.”

      We generate the majority of our earnings from the spread between the yield we receive on our portfolio of student loans and the cost of funding these loans. This spread income is reported on our income statement as net interest income. The amortization and write-offs of premiums or discounts, including capitalized costs of origination, the consolidation loan rebate fee and yield adjustments from borrower benefit programs are netted against loan interest income on our income statement. The amortization and write-offs of bond issuance costs are included in interest expense on our income statement.

      Our portfolio of FFELP loans generally earns interest at the higher of a variable rate based on the special allowance payment, or SAP, formula set by the DOE, and the borrower rate, which is fixed over a period of time. The SAP formula is based on an applicable index plus a fixed spread that is dependent upon when the loan was originated and the loan’s repayment status. Depending on the type of student loan and when the loan was originated, the borrower rate is either fixed to term or is reset to a market rate each July 1. Loans that reset annually on each July 1 can generate excess spread income as compared to the rate based on the SAP formula in certain declining interest rate environments. We refer to this additional income as variable rate floor income, and it is included in loan interest income. Variable rate floor income can occur when interest rates decline, generally by more than 50 basis points, for an extended period of time following the annual reset of the borrower rates on July 1 of each year. If interest rates decline sufficiently after the borrower rate is set, we earn interest at the fixed borrower rate through the next reset period. Since the rates are reset annually, we view these earnings as temporary. Our ability to earn variable rate floor income in future periods is dependent upon the interest rate environment following the annual reset of borrower rates and would generally only occur in a falling interest rate environment.

      On those FFELP loans with fixed to term borrower rates, primarily consolidation loans, we earn interest at the greater of the borrower rate or a variable rate based on the SAP formula. Since we finance the majority of our student loan portfolio with variable-rate debt, we may earn excess spread on these loans for an extended period of time.

      On most consolidation loans, we must pay a 1.05% per year rebate fee to the DOE. Those consolidation loans which have variable interest rates based on the SAP formula earn a yield less than that of a Stafford loan. Those consolidation loans which have fixed interest rates less than the sum of 1.05% and the variable rate based on the SAP formula also earn a yield less than that of a Stafford loan. As a result, as consolidation loans matching these criteria become a larger portion of our loan portfolio, there will be a lower yield on our loan portfolio in the short term. However, due to the extended terms of consolidation loans, we expect to earn the yield on these loans for a longer duration, making them beneficial to us in the long term.

      A portion of our FFELP loan portfolio, with an outstanding balance of $925.2 million as of June 30, 2003, is comprised of loans which were previously financed with tax-exempt obligations issued prior to October 1, 1993. Based upon provisions of the Higher Education Act and related interpretations by the DOE, we believe that we may be entitled to receive special allowance payments on these loans providing us with a 9.5% minimum rate of return. To date, we have not recognized interest income generated by these loans based on the 9.5% minimum rate of return. We have asked the DOE to confirm that we are allowed to recognize the income based on the 9.5% minimum rate of return. We have deferred recognition of this excess interest income pending satisfactory resolution of this issue. As of June 30, 2003, the amount of excess interest income deferred totaled approximately $5.9 million. Since we did not refinance loans

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      Investment interest income includes income from unrestricted interest-earning deposits and funds in our special purpose entities for our asset-backed securitizations.

      We maintain an allowance for loan losses associated with our student loan portfolio at a level that is based on the performance characteristics of the underlying loans. We analyze the allowance separately for our FFELP loans and our private loans.

      The loan loss allowance attributable to FFELP loans consists of two components: a risk sharing reserve and a reserve for rejected guaranty agency claim losses, caused mainly by servicing defects. The risk sharing reserve is an estimate based on the amount of loans subject to the 2% risk sharing and on the historical experience of losses. The rejected claim loss reserve is based on the historical trend of ultimate losses on loans initially rejected for reimbursement by guaranty agencies. FFELP loans are guaranteed as to both principal and interest and, therefore, continue to accrue interest until the time they are paid by the guaranty agency. Once a FFELP loan is rejected for claim payment, our policy is to continue to pursue recovery of principal and interest, whether by curing the reject or collecting from the borrower. We attempt to cure the rejected claims through our collection efforts. As of June 30, 2003, we had an allowance for loan losses on FFELP loans aggregating approximately $10.3 million.

      In determining the private loan loss allowance, we divide the portfolio into various categories, such as the type of program, loan status and months into repayment. We then estimate defaults based on the borrowers’ credit profiles, net of estimated recoveries. We place a private loan on non-accrual status and charge off the loan when the collection of principal and interest is 120 days past due. We utilize this data to estimate the amount of losses in the portfolio, net of subsequent collections, that are probable of occurrence. As of June 30, 2003, we had an allowance for loan losses on private loans of approximately $3.5 million.

      The evaluation of the provision for loan losses is inherently subjective, as it requires material estimates that may be subject to significant changes. The provision for loan losses reflects the activity for the applicable period and provides an allowance at a level which our management believes is adequate to cover probable losses inherent in the loan portfolio.

      We also earn fees and generate income from other sources, including principally loan servicing, guarantee servicing and licensing fees on our software products. Loan servicing fees are determined according to individual agreements with customers and are calculated based on the dollar value or number of loans or accounts serviced for each customer. Guarantee servicing fees are earned as a result of our providing system software, hardware and telecommunication support, borrower and loan updates, default aversion tracking services, claim processing services and post-default collection services to guaranty agencies. Guarantee servicing fees are calculated based on the number of loans serviced or amounts collected. Software services income includes software license and maintenance fees associated with student loan software products as well as certain loan marketing fees. We also charge borrowers fees on certain private loans, both at origination and when the loan enters repayment, which help to compensate for anticipated loan losses. In addition, we earn fee income on some of our securitization transactions through UFS Securities, LLC, or UFS Securities, our wholly owned broker-dealer, which effectively decreases our costs associated with accessing this market. UFS Securities sells certain tranches of our auction rate securities in a co-broker dealer arrangement with certain third-party broker-dealers. UFS Securities is paid the same amount of fees as the third-party broker-dealers for selling the auction rate securities. Since UFS Securities, which was acquired in August 2003, is our wholly owned subsidiary, these sales and the fees received for the sales by our wholly owned subsidiary will have the effect of reducing our overall costs on the sales of our auction rate securities.

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      As we expand our student loan origination and acquisition activities, we may face increased competition with some of our servicing customers. In the past, including in one case in 2003, servicing customers have terminated their servicing relationships with us. Furthermore, we could in the future lose more servicing customers as a result of such increased competition. However, the vast majority of our servicing agreements provide for life-of-loan servicing of the existing loans, and, as such, we do not expect this loss or the potential future loss of customers to have a material adverse effect on our results of operations for the foreseeable future.

      One of our guarantee servicing customers recently notified us of its intention not to renew its servicing contract. The loss of this customer is not expected to have a material effect on our results of operations due to the relative portion of our earnings attributable to guarantee servicing revenue and the size of the individual customer.

      The income and revenues provided through our servicing software operations have increased in recent years with the acquisitions of Idaho Financial Associates, Inc. and Charter Account Systems, Inc. To the extent that our servicing software license and maintenance revenues continue to increase, we believe that such increase will primarily come from our existing customer base.

      Operating expenses include costs incurred to manage and administer our student loan portfolio and our financing transactions, costs incurred to generate and acquire student loans and general and administrative expenses, which include corporate overhead. Operating expenses also include amortization of intangible assets related to acquisitions.

      In addition to the impact of growth of our student loan portfolio, our results of operations and financial condition may be materially affected by, among other things, changes in:

      See “Risk Factors” for more information on the impact of these factors on our results of operations and financial condition.

Results of Operations

      Net interest income. Loan interest income decreased by $37.3 million, or 16.9%, during the six months ended June 30, 2003 as compared to the comparable period in 2002. This decrease was the result of changes in the interest rate environment, in the pricing characteristics of our student loan assets and in the size of our student loan portfolio. Lower interest rates in the six months ended June 30, 2003 caused a decrease in the average net yield on our student loan portfolio to 4.01% from 5.61% for the comparable period in 2002. Variable rate floor income decreased approximately $34.4 million to approximately $12.7 million for the six months ended June 30, 2003 from approximately $47.0 million for the comparable period in 2002, due to the timing and relative change in interest rates during the periods. The weighted average interest rate on our student loan portfolio decreased during the six months ended June 30, 2003 due to the lower interest rates, together with the addition of lower yielding consolidation loans. The lower weighted average loan interest rate resulted in a reduction in loan interest income of approximately

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      Interest expense on bonds and notes payable decreased $12.7 million, or 11.1%, for the six months ended June 30, 2003 as compared to the comparable period in 2002. This decrease occurred despite a increase in average total debt of approximately $1.2 billion, specifically an increase in average variable-rate debt of $1.3 billion, which increased interest expense by approximately $9.9 million. The reduction in interest rates, specifically LIBOR and auction rates, decreased our average cost of funds to 2.02% in the six months ended June 30, 2003 from 2.57% in the six months ended June 30, 2002. As a result, interest expense decreased approximately $20.8 million for the six months ended June 30, 2003 as compared to the comparable period in 2002. We reduced average fixed-rate debt by $148.8 million during the six months ended June 30, 2003, which decreased our overall interest expense by approximately $4.5 million as compared to the comparable period in 2002. Interest expense on bonds and notes payable for the six months ended June 30, 2003 includes additional amortization and write-offs of bond issuance costs of $2.6 million incurred as a result of refinancing certain debt transactions.

      As a result of the foregoing, net interest income decreased by $24.2 million, or 20.8%, for the six months ended June 30, 2003 as compared to the comparable period in 2002. Our net interest margin decreased to 1.86% for the six months ended June 30, 2003 from 2.68% for the comparable period in 2002. Net interest income, excluding the effects of variable rate floor income of $12.7 million for the six months ended June 30, 2003 and $47.0 million for the comparable period in 2002, increased approximately $10.1 million to approximately $79.2 million for the six months ended June 30, 2003 from approximately $69.1 million for the comparable period in 2002.

      Provision for loan losses. The provision for loan losses for FFELP loans increased to $1.7 million for the six months ended June 30, 2003 from $1.5 million for the comparable period in 2002. The provision for loan losses for private loans increased to $3.2 million for the six months ended June 30, 2003 from $650,000 for the comparable period in 2002. This increase was due to a specific provision of approximately $2.2 million for an identified pool of private loans based on aging, delinquency and performance. This pool of private loans is limited to loans made to borrowers attending a single school, and, in early 2002, we ceased making private loans to borrowers attending that school. The remaining combined increase of approximately $500,000 was due to the increase in the size of our FFELP and private loan portfolios. Approximately 8.1% of our private loans was delinquent as of June 30, 2003.

      Other income. Total other income decreased $6.4 million, or 10.0%, during the six months ended June 30, 2003 as compared to the comparable period in 2002. Loan servicing and other fee income decreased $6.5 million, or 11.9%, and software services and other income increased $62,000, or 0.7%, during the six months ended June 30, 2003 as compared to the comparable period in 2002.

      Loan servicing and other fee income decreased due to the reduction in the number and dollar amount of loans we serviced for third parties. See “Business — Product and Service Offerings — Student Loan Servicing.” Total third-party loan servicing volume decreased $906.3 million, or 8.6%, during the six months ended June 30, 2003 as compared to the comparable period in 2002. This resulted in a decrease in loan servicing income of approximately $7.9 million during the six months ended June 30, 2003 as compared to the comparable period in 2002. This decrease in income was offset by an increase of $2.5 million of guarantee servicing income during the six months ended June 30, 2003 due to higher guarantee volume.

      Software services and other income increased due to the acquisitions of Charter Account Systems, Inc. in May 2002 and Idaho Financial Associates, Inc. in January 2002. The operation of these businesses

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      Operating expenses. Total operating expenses decreased $1.4 million, or 1.2%, during the six months ended June 30, 2003 as compared to the comparable period in 2002. Salaries and benefits decreased $2.3 million, or 3.9%, and total other expenses increased $988,000, or 1.7%, during the six months ended June 30, 2003 as compared to the comparable period in 2002. The decrease in salaries and benefits can be attributed to a decline in the number of employees in the six months ended June 30, 2003 compared to the comparable period in 2002.

      The net increase in total other expenses can be attributed to an increase of $1.0 million in the depreciation and amortization of furniture, equipment and leasehold improvements in the six months ended June 30, 2003 as compared to the comparable period in 2002. This increase was offset by a decrease in the amortization of intangible assets of $3.2 million due to certain intangible assets having been fully amortized in 2002. Trustee and other debt related fees increased $2.3 million, or 28.2%, during the six months ended June 30, 2003 as compared to the comparable period in 2002 as a result of a $1.2 billion increase in average total debt outstanding. Occupancy and communications expense increased $1.2 million, or 21.4%, during the six months ended June 30, 2003 as compared to the comparable period in 2002 as a result of increased telemarketing activities related to consolidation loan originations. Advertising and marketing expenses decreased $2.7 million, or 36.0%, during the six months ended June 30, 2003 as compared to the comparable period in 2002 due to $2.4 million expense incurred on a large marketing contract that was terminated in the fourth quarter of 2002. Professional services increased $1.2 million, or 37.5%, during the six months ended June 30, 2003 as compared to the comparable period in 2002 as a result of outsourcing select borrower payment processing activities in the second quarter of 2002. Consulting fees and support services to related parties decreased $500,000, or 15.6%, during the six months ended June 30, 2003 as compared to the comparable period in 2002 as a result of a $1.1 million decrease in consulting fees due to the termination of a large consulting agreement in December 2002. This decrease was offset by a $600,000 increase in consulting fees to a shareholder during the six months ended June 30, 2003 as compared to the comparable period in 2002 due to the early termination of this agreement in June 2003. Postage and distribution expenses increased $1.8 million, or 35.1%, during the six months ended June 30, 2003 as compared to the comparable period in 2002 due to an increase in mass mailings to promote origination of Stafford and consolidation loans.

      Income tax expense. Income tax expense decreased to $12.5 million for the six months ended June 30, 2003 from $24.6 million for the comparable period in 2002, due to the decrease in income before income taxes. Our effective tax rate was 41.3% for the six months ended June 30, 2003 as compared to 39.5% for the comparable period in 2002. The increase in the effective rate was a result of acquisitions that gave rise to amortization of intangible assets for financial statement purposes that was not deductible for tax purposes.

      Net income. Net income decreased to $17.9 million for the six months ended June 30, 2003 from $37.8 million for the comparable period in 2002, for the reasons discussed above.

      Net interest income. Loan interest income increased by $86.7 million, or 27.2%, for 2002 as compared to 2001. This increase was the result of changes in the interest rate environment, in the pricing characteristics of our student loan assets and in the size of our student loan portfolio. Lower interest rates in 2002 caused a decrease in the average net yield on our student loan portfolio to 4.96% in 2002 from 6.20% in 2001. Variable rate floor income increased approximately $19.9 million to approximately $49.8 million for

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      Investment interest income increased $4.0 million, or 23.6%, for 2002 as compared to 2001, due to an approximately $360.1 million increase in average investment and interest-earning deposits during 2002.

      Interest expense on bonds and notes payable increased $14.3 million, or 6.5%, for 2002 as compared to 2001. Average variable-rate debt increased $4.1 billion, which resulted in an increase in interest expense of $85.9 million. The reduction in short-term interest rates, specifically LIBOR, decreased our average cost of funds to 2.59% in 2002 from 3.95% in 2001. As a result, interest expense decreased approximately $83.1 million in 2002 as compared to 2001. We increased average fixed-rate debt by $199.9 million during 2002, which increased our overall interest expense by approximately $12.0 million as compared to 2001. In 2002, we first accessed the term securitization market. While the interest expense associated with term securitizations is less than that associated with our other debt instruments, the incremental benefit in 2002 was negligible. While we expect that we will continue to access the term securitization markets, we cannot predict whether the benefits of our accessing those markets will be material to our results of operations in future periods.

      As a result of the foregoing, net interest income increased by $76.3 million, or 66.6%, for 2002 as compared to 2001. Our net interest margin increased to 2.15% for 2002 from 2.09% for 2001. Net interest income, excluding the effects of variable rate floor income of $49.8 million for 2002 and $29.9 million for 2001, increased $56.4 million to $141.1 million for 2002 from $84.7 million for 2001.

      Provision for loan losses. The provision for loan losses for FFELP loans decreased to $3.2 million for 2002 from $3.3 million for 2001. The provision for loan losses for private loans increased to $2.4 million for 2002 from $700,000 for 2001. This increase was due to a specific provision of approximately $1.6 million for an identified pool of private loans based on aging, delinquency and performance. This pool of private loans is limited to loans made to borrowers attending a single school, and, in early 2002, we ceased making private loans to borrowers attending that school. The remaining combined increase of approximately $100,000 was due to the increase in the size of our FFELP and private loan portfolios. Approximately 14.4% of our private loans was delinquent as of December 31, 2002.

      Other income. Total other income increased $24.9 million, or 24.7%, in 2002 as compared to 2001. Loan servicing and other fee income increased $10.7 million, or 11.5%, and software services and other income increased $14.2 million, or 184.1%, in 2002 as compared to 2001.

      Loan servicing and other fee income increased due to growth in the loan servicing portfolio of $817.5 million in 2002 and the acquisition of EFS, Inc., which increased the servicing portfolio by an additional $1.0 billion in 2002. The change in the loan servicing volume resulted in an increase in loan servicing income of $1.3 million. In addition, we acquired GuaranTec, LLP in June 2001 resulting in an increase of $8.7 million in guarantee servicing income in 2002 as compared to 2001.

      Software services and other income increased due to the acquisitions of Charter Account Systems, Inc. in May 2002 and Idaho Financial Associates, Inc. in January 2002. These acquisitions resulted in an increase in income of approximately $6.2 million in 2002 compared to 2001. Additional income of $6.6 million was earned on a marketing contract in 2002 that was not in existence in 2001. Other income

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      Operating expenses. Total operating expenses increased $38.4 million, or 20.1%, in 2002 as compared to 2001. Salaries and benefits increased $29.5 million, or 38.1%, and total other expenses increased $8.9 million, or 7.8%, in 2002 as compared to 2001. The increase in salaries and benefits is due to the following: the acquisition of EFS, Inc. in December 2001, which increased salaries and benefits by $11.2 million, the acquisition of Idaho Financial Associates, Inc. in January 2002, which increased salaries and benefits by $7.9 million and the acquisition of Charter Account Systems, Inc. in May 2002, which increased salaries and benefits by $1.0 million. The remaining increase in salaries and benefits is due to an increase in support services personnel and the rising cost of employee benefits.

      The net increase in total other expenses can be attributed to an increase in depreciation and amortization of $5.4 million, or 24.8%, in 2002 as compared to 2001, which includes an increase in the amortization of intangible assets of $5.0 million due to acquisitions of EFS, Inc., Idaho Financial Associates, Inc. and Charter Account Systems, Inc. in December 2001, January 2002 and May 2002, respectively. The remaining increase in depreciation and amortization was a result of increased depreciation and amortization of furniture, equipment and leasehold improvements in 2002 as compared to 2001, due to the acquisitions previously described. Trustee and other debt related fees increased $3.8 million, or 29.5%, in 2002 as compared to 2001, as a result of the $4.3 billion increase in average total debt outstanding. Occupancy and communications expense increased $3.9 million, or 52.6%, in 2002 as compared to 2001 due to the acquisitions previously described. Advertising and marketing expenses increased $1.4 million, or 13.7%, in 2002 as compared to 2001 due to an increase in consolidation loan origination activities. Professional services increased $5.9 million, or 175.3%, in 2002 as compared to 2001 as a result of technology-related consulting in 2002 that did not exist in 2001. Consulting fees and support services to related parties decreased $16.6 million, or 56.4%, in 2002 as compared to 2001. This decrease can be attributed to a $9.7 million decrease due to the termination of the support services contract for InTuition Holdings, Inc. and GuaranTec, LLP in December 2001, a $4.8 million decrease in contracted technology services obtained from 5280 Solutions, Inc. related to the consolidation of our servicing platform in December 2001 and a $2.1 million decrease as a result of a reduction in consulting fees for services provided by related parties.

      Income tax expense. Income tax expense increased to $33.1 million for 2002 as compared to $12.3 million in 2001 due to the increase in income before income taxes in 2002. Our effective tax rate was 40.7% for 2002 as compared to 61.4% in 2001. The 2001 effective tax rate was high as a result of acquisitions that gave rise to amortization of intangible assets for financial statement purposes of $11.8 million that was not deductible for tax purposes. There was $6.0 million of deductible amortization of intangible assets in 2002 and $0 in 2001 which decreased the effective tax rate for 2002.

      Net income. Net income increased to $48.5 million for 2002 from $7.1 million for 2001, for the reasons discussed above.

      Net interest income. Loan interest income increased by $37.4 million, or 13.3%, for 2001 as compared to 2000. This increase was the result of changes in the interest rate environment, in the pricing characteristics of our student loan assets and in the size of our student loan portfolio. Lower interest rates in 2001 caused a decrease in the average net yield on our student loan portfolio to 6.20% in 2001 from 8.29% in 2000. Variable rate floor income increased approximately $29.9 million in 2001, due to the timing and relative change in interest rates during the periods. There was no variable rate floor income in 2000. The weighted average interest rate on our student loan portfolio decreased in 2001 due to the lower interest rates, together with the addition of lower yielding consolidation loans. The lower weighted average interest rate resulted in a reduction in loan interest income of approximately $75.0 million. Consolidation loan activity also increased the amortization and write-offs of acquisition costs, reducing loan interest income an additional

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      Investment interest income decreased by $1.1 million, or 6.4%, for 2001 as compared to 2000, due to the decrease in interest rates on invested funds.

      Interest expense on bonds and notes payable decreased $13.4 million, or 5.7%, for 2001 as compared to 2000. The decline in short-term interest rates, specifically LIBOR, decreased our average cost of funds to 3.95% in 2001 from 6.04% in 2000. As a result, interest expense decreased approximately $72.8 million for 2001 as compared to 2000. Additional average debt of $1.2 million issued during 2001 increased our interest expense by approximately $57.0 million for 2001 as compared to 2000.

      As a result of the foregoing, net interest income increased by $49.7 million, or 76.7%, for 2001 as compared to 2000. Our net interest margin increased to 2.09% for 2001 from 1.76% for 2000. Net interest income, excluding the effects of variable rate floor income of $29.9 million for 2001 and $0 for 2000, increased approximately $19.8 million to approximately $84.7 million for 2001 from approximately $64.9 million for 2000.

      Provision for loan losses. The provision for loan losses for FFELP loans increased to $3.3 million for 2001 from $1.4 million for 2000. The provision for loan losses for private loans increased to $700,000 for 2001 from $0 for 2000. This increase was largely due to a specific provision of approximately $400,000 for an identified pool of private loans based on aging, delinquency and performance. This pool of private loans is limited to loans made to borrowers attending a single school, and, in early 2002, we ceased making private loans to borrowers attending that school. The remaining combined increase of approximately $2.2 million was due to the increase in the size of our FFELP and private loan portfolios. Approximately 3.1% of private loans was delinquent as of December 31, 2001.

      Other Income. Total other income increased $26.4 million, or 35.5%, in 2001 as compared to 2000. Loan servicing and other fee income increased $27.2 million, or 41.1%, and software services and other income decreased $718,000, or 8.5%, in 2001 as compared to 2000.

      Loan servicing and other fee income increased due to the acquisition of InTuition Holdings, Inc. in June 2000 and UNIPAC Service Corporation in March 2000 resulting in an increase in income of $18.4 million in 2001 as compared to 2000. In addition, we acquired GuaranTec, LLP in June 2001 which resulted in an increase in guarantee servicing of $8.7 million in 2001 as compared to 2000.

      Software services and other income decreased as we recognized a cash gain on the sale of student loans to a third party of $700,000 in 2000.

      Operating expenses. Total operating expenses increased $65.0 million, or 51.4%, in 2001 as compared to 2000. Salaries and benefits increased $25.6 million, or 49.5%, and total other expenses increased $39.4 million, or 52.7% in 2001 as compared to 2000. The increase in salaries and benefits expense was due to salaries expense of $9.6 million related to the conversion of our servicing platform in December 2001. The remaining increase was due to salary and benefit increases related to the acquisitions of UNIPAC Service Corporation in March 2000, InTuition Holdings, Inc. in June 2000 and GuaranTec, LLP in June 2001.

      The net increase in total other expenses can be attributed to an increase in depreciation and amortization of $9.1 million, or 72.1%, in 2001 as compared to 2000, which included an increase in the amortization of intangible assets of $3.7 million due to acquisitions of UNIPAC Service Corporation and InTuition Holdings, Inc. in March and June 2000, respectively. The remaining increase in depreciation and amortization was the result of increased depreciation and amortization of furniture, equipment and leasehold improvements in 2001 as compared to 2000 related to the acquisitions described above. Trustee and other debt related fees increased $3.8 million, or 41.6%, in 2001 as compared to 2000 as a result of a

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      Income tax expense. Income tax expense increased to $12.3 million for 2001 as compared to $6.9 million in 2000 due to the increase in income before income taxes in 2001. Our effective tax rate was 61.4% for 2001 as compared to 60.5% for 2000. The effective tax rates were high as a result of acquisitions that gave rise to amortization of intangible assets for financial statement purposes that was not deductible for tax purposes. Such amortization was $11.8 million in 2001 and of $8.1 million in 2000.

      Net income. Net income increased to $7.1 million for 2001 from $4.5 million for 2000, for the reasons discussed above.

Financial Condition

      Total assets increased approximately $600 million, or 6.6%, from $9.8 billion at December 31, 2002 to $10.4 billion at June 30, 2003. This was due to an increase in student loans receivable of approximately $900 million, or 10.6%, from $8.6 billion at December 31, 2002 to $9.5 billion at June 30, 2003. This increase was a result of net growth in consolidation loans of approximately $650 million and Stafford loans of approximately $250 million during the six months ended June 30, 2003. The increase in student loans receivable was partially offset by a decrease in restricted cash and investments of $164 million, or 22.1%, and a decrease in restricted cash due to loan program customers of $100 million, or 75.4%. The decrease in restricted cash and investments resulted from the release of these assets under the related bond indentures, which were a source of funding for our loan growth. The decrease in restricted cash due to loan program customers is a result of the reduction of consolidation disbursements in June 2003 in anticipation of the lower interest rates effective July 1, 2003.

      Total liabilities increased approximately $600 million, or 6.5%, from $9.7 billion at December 31, 2002 to $10.3 billion at June 30, 2003. The growth in liabilities was a result of an increase in bonds and notes payable of approximately $700 million, or 7.7%, from $9.4 billion at December 31, 2002 to $10.2 billion at June 30, 2003. The increase in bonds and notes payable resulted from additional borrowings to fund our growth in student loan receivables during the six months ended June 30, 2003. The increase in bonds and notes payable was offset by a decrease of $100 million, or 75.4%, in amounts due to loan program customers due to a reduction of consolidation disbursements in June 2003 in anticipation of the lower interest rates that became effective July 1, 2003.

      Shareholders’ equity increased $18.1 million, or 16.6%, from $109.1 million at December 31, 2002 to $127.2 million at June 30, 2003 as a result of net income for the six months ended June 30, 2003.

      Total assets increased approximately $1.7 billion, or 20.1%, from $8.1 billion at December 31, 2001 to $9.8 billion at December 31, 2002. The increase in assets resulted from an increase in student loans receivable of $1.2 billion, or 15.3%, from $7.4 billion at December 31, 2001 to $8.6 billion at December 31, 2002. The increase in student loans receivable resulted from an increase in consolidation loans of approximately $1.1 billion as a result of acquisitions and origination activities. Total assets also

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      Total liabilities increased $1.6 billion, or 19.7%, from $8.1 billion at December 31, 2001 to $9.7 billion at December 31, 2002. The growth in liabilities was a result of an increase in bonds and notes payable of $1.5 billion, or 19.2%, from $7.9 billion at December 31, 2001 to $9.4 billion at December 31, 2002. The increase in bonds and notes payable was a result of additional debt financings issued to fund our growth in student loans receivable during 2002.

      Shareholders’ equity increased $45.9 million, or 72.7%, from $63.2 million at December 31, 2001 to $109.1 million at December 31, 2002 as a result of the net income for the year ended December 31, 2002 of $48.5 million, net of a $3.0 million charge in connection with a related party acquisition.

Liquidity and Capital Resources

      We finance our operations through operating cash flow, borrowings under credit facilities and secured financing transactions. Operating activities provided net cash of $64.2 million for the six months ended June 30, 2003, an increase of approximately $3.9 million from the net cash provided by operating activities of $60.3 million during the six months ended June 30, 2002. Operating activities provided net cash of $134.2 million in 2002, an increase of approximately $52.7 million from the net cash provided by operating activities of $81.5 million during 2001. Operating cash flows are driven by net income adjusted for various non-cash items such as the provision for loan losses, depreciation and amortization.

      We also use secured and unsecured operating lines of credit and financing agreements to fund operations and student loan acquisitions. Historically, a significant portion of our unsecured operating credit facilities was provided by affiliated parties. See “Related Party Transactions.” As of June 30, 2003, we had secured $30 million, and are in the process of securing an additional $100 million, of operating lines of credit and commercial paper transactions under three separate facilities from a group of six large regional and national financial institutions. The cost of funds associated with our operating lines of credit is higher than that of the secured financing transactions used to fund our student loan portfolio. Our operating lines of credit are generally priced at a spread over LIBOR ranging from 60 to 250 basis points. We believe that the expansion of our operating lines and credit facilities will provide expanded access to capital in the future. In addition to our expanded operating lines and credit facilities, we believe that the growth in our cash flow from operating activities and shareholders’ equity indicates a favorable trend in our available capital resources.

      In the second quarter of 2003, we expanded our warehousing capacity for student loan assets with the addition of a $750 million commercial paper conduit facility. In the third quarter of 2003, we further expanded this commercial paper conduit facility to $1.05 billion. This warehouse facility will allow for expansion of our liquidity and capacity and will replace a smaller facility of approximately $350 million which expired in the third quarter of 2003. We believe that the expansion of our warehousing capacity and continued access to the asset-backed securities market will provide adequate liquidity to fund our student loan operations for the foreseeable future.

      Our secured financing instruments include commercial paper lines, commercial paper conduit warehouse programs, variable-rate tax-exempt bonds, fixed-rate, tax-exempt bonds and various asset-backed securities. Of the $10.2 billion of debt outstanding as of June 30, 2003, approximately $8 billion was issued under securitization transactions. During 2002, we completed three asset-backed securities transactions totaling $2.8 billion. We anticipate continuing to access the asset-backed securities markets in 2003 and subsequent years, depending on market conditions.

      Securities issued in our securitization transactions are generally priced off a spread to LIBOR or set under an auction procedure related to the bonds and notes. The student loans financed are generally priced on a spread to commercial paper or Treasury bills.

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      The following table summarizes our bonds and notes outstanding as of June 30, 2003: