NELNET EDUCATION LOAN FUNDING INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K

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

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003

OR

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

For the transition period from .............. to ..............

Commission file number 333-104736

NELNET EDUCATION LOAN FUNDING, INC.
(Exact name of registrant as specified in its charter)

Nebraska 47-0809600
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)

121 South 13th Street, Suite 201
Lincoln, Nebraska 68508
(Address of principal executive offices) (Zip Code)

(402) 458-2370
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

None

INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO ___

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

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN EXCHANGE ACT RULE 12B-2).
YES ___ NO X

THE AGGREGATE MARKET VALUE OF THE COMMON EQUITY HELD BY NON-AFFILIATES OF THE
REGISTRANT ON JUNE 30, 2003:
NONE

THE NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK AS OF MARCH 26,
2004 WAS 111.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I 1(A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.

TABLE OF CONTENTS

Page
PART I.........................................................................2
ITEM 1. BUSINESS.....................................................2
ITEM 2. PROPERTIES...................................................8
ITEM 3. LEGAL PROCEEDINGS............................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........8
PART II........................................................................9
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES........9
ITEM 6. SELECTED FINANCIAL DATA......................................9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK....................................................18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................18
ITEM 9A. CONTROLS AND PROCEDURES.....................................19
PART III......................................................................19
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........19
ITEM 11. EXECUTIVE COMPENSATION......................................19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..........................................19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............19
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES......................19
PART IV ......................................................................20
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.............................................20
SIGNATURES....................................................................23

i

PART I
------

This report contains forward-looking statements and information that are
based on management's current expectations as of the date of this document. When
used in this report, the words "anticipate," "believe," "estimate," "intend" and
"expect" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are subject to risks,
uncertainties, assumptions and other factors that may cause the actual results
to be materially different from those reflected in such forward-looking
statements. These factors include, among others, changes in the terms of student
loans and the educational credit marketplace arising from the implementation of
applicable laws and regulations and from changes in these laws and regulations,
which may reduce the volume, average term and costs of yields on student loans
under the Federal Family Education Loan Program ("FFELP" or "FFEL Program") or
result in loans being originated or refinanced under non-FFELP programs or may
affect the terms upon which banks and others agree to sell FFELP loans to the
Company. The Company could also be affected by changes in the demand for
educational financing or in financing preferences of lenders, educational
institutions, students and their families; changes in the general interest rate
environment and in the securitization markets for education loans, which may
increase the costs or limit the availability of financings necessary to
initiate, purchase or carry education loans; losses from loan defaults; and
changes in prepayment rates and credit spreads.

ITEM 1. BUSINESS

THE COMPANY

Nelnet Education Loan Funding, Inc. (the "Company") is a bankruptcy remote,
special purpose corporation formed under the laws of the State of Nebraska. The
Company was organized in 1998 to acquire the student loan assets and liabilities
of Nebraska Higher Education Loan Program, Inc., a non-profit corporation that
had previously operated as a qualified scholarship funding corporation under
Section 150(d) of the Internal Revenue Code. In connection with that
transaction, the Company assumed the obligations of Nebraska Higher Education
Loan Program, Inc. to pay the principal and interest due on its outstanding
student loan revenue bonds. When those obligations were assumed, the Company
also received from Nebraska Higher Education Loan Program, Inc., an assignment
of all of the student loans and other assets that had been pledged to secure
their repayment, and certain other related assets. Since completing that
transaction, the Company has issued additional series of student loan
asset-backed notes and used the proceeds of those notes to finance additional
portfolios of student loans.

The Company is a wholly owned subsidiary of National Education Loan Network,
Inc. ("NELN"), which is a wholly owned subsidiary of Nelnet, Inc. ("Nelnet"), a
reporting company under the Securities Exchange Act of 1934. Prior to April 21,
2003, Nelnet Education Loan Funding, Inc. was named NEBHELP, INC.

GENERAL DESCRIPTION OF THE BUSINESS OF THE COMPANY

The Company is a special purpose corporation formed to engage in the business
of originating, purchasing, financing, holding and selling guaranteed education
loans made to students and to parents of students under the Higher Education Act
of 1965, as amended (the "Higher Education Act"). As a special purpose
corporation, the Company may not engage in any activity other than:

o originating, acquiring, financing, holding and managing student loans
and the other related assets, and the proceeds there from;

o issuing notes; and

o engaging in other activities related to the activities listed above.

As of December 31, 2003, the Company held a student loan portfolio of $3.2
billion, consisting entirely of loans originated under the FFEL Program. As of
December 31, 2003, the Company had issued and outstanding $3.4 billion of debt
obligations, the proceeds of which were used to finance its student loan
portfolio. The Company's student loans, and certain other assets, are pledged to
secure payment of its debt obligation under various indentures of trust.

2

The Company generates the majority of its earnings from the spread between
the yield earned on its student loan portfolio and the cost of funding those
loans. The Company's earnings are directly affected by the size of its portfolio
of student loans, the interest rate characteristics of the loan portfolio, the
costs associated with financing and managing the loan portfolio and the costs
associated with origination and acquisition of the student loans in the
portfolio. While the spread between the yield the Company receives on its
student loan portfolio and the cost of funding those loans may vary due to
fluctuations in interest rates, special allowance payments from the federal
government ensure that the Company receives a minimum yield on its student
loans, so long as certain requirements are met. For the year ended December 31,
2003, the Company generated net interest income of $44.6 million and net income
of $9.3 million. In 2002, the Company generated net interest income of $30.0
million and net income of $6.7 million.

The Company originates new student loans for its portfolio and purchases
student loans from other holders, including affiliated companies. In 2003, the
Company originated $2.1 billion of student loans, all of which were originated
by the Company through consolidation loans, the proceeds of which were used to
consolidate outstanding loans of the borrowers. In addition, the Company
purchased $1.7 billion of student loans from other holders, including $1.2
billion from affiliated companies, and sold $1.4 billion to affiliated
companies.

When the Company originates student loans or when it acquires student loans
from other holders, the Company engages one or more "eligible lenders," as
defined in the Higher Education Act, to act as trustees to hold title to all
such originated and acquired student loans. These eligible lender trustees hold
the legal title to the student loans, and the Company holds 100% of the
beneficial interests in those loans.

INFORMATION ON THE NOTES AND WAREHOUSE FACILITIES

REGISTRATION AND ISSUANCE OF SERIES 2003-1 NOTES. A registration statement on
Form S-3, Registration No. 333-104736 (the "Registration Statement"), was filed
with the Securities and Exchange Commission (the "SEC") by the Company under the
Securities Act of 1933, as amended (the "Securities Act"), for $2 billion of
notes, and was declared effective by order SEC in June 2003. The Company
currently has $970 million of student loan asset-backed notes left available for
issuance under its shelf registration.

On July 10, 2003 and October 9, 2003, the Company issued its Student Loan
Asset-Backed Auction Rate Notes, Series 2003-1 (the "Series 2003-1 Notes") in
the aggregate principal amount of $1,030,000,000, pursuant to its registration
statement. The Series 2003-1 Notes consisted of (i) Senior Class 2003-1 A-1
through Senior Class 2003-1 A-12 auction rate notes, and (ii) Subordinate Class
2003-1 B-1 and Class 2003-1 B-2 auction rate notes.

NOTES ISSUED. The table on the following page describes the various series
and classes of the Company's bonds and notes issued and outstanding at
December 31, 2003.

3

BONDS AND NOTES ISSUED AND OUTSTANDING
As of December 31, 2003
(dollars in thousands)

FINAL ORIGINAL PRINCIPAL
MATURITY PRINCIPAL AMOUNT
SERIES CLASS DATE ISSUED DATES AMOUNT OUTSTANDING
------ ----- ----------- ----- ------ -----------
1985 bonds A-E 12/12/1985 12/01/2015 $ 143,035 $ 143,035
1986 bonds A-D 12/23/1986 12/01/2016 103,500 103,500
1988 bonds C 07/29/1988 08/01/2018 40,000 40,000
1993 bonds A1-A6 06/10/1993 06/01/2018 550,400 311,530
1993 bonds B 09/23/1993 06/01/2028 50,000 43,875
1998 SLIMS -- 06/23/1998 07/01/2016 45,000 20,201
RBC warehouse line -- 02/01/2002 06/01/2005 450,000 434,809
BOA warehouse line -- 05/16/2003 05/14/2004 1,800,000 1,286,250
Series 2003-1 notes A-1 07/10/2003 07/01/2043 100,000 64,850
Series 2003-1 notes A-2 07/10/2003 07/01/2043 100,000 100,000
Series 2003-1 notes A-3 07/10/2003 07/01/2043 100,000 100,000
Series 2003-1 notes A-4 07/10/2003 07/01/2043 100,000 100,000
Series 2003-1 notes A-5 07/10/2003 07/01/2043 75,000 75,000
Series 2003-1 notes A-6 07/10/2003 07/01/2043 75,000 75,000
Series 2003-1 notes A-7 07/10/2003 07/01/2043 75,000 75,000
Series 2003-1 notes A-8 07/10/2003 07/01/2043 75,000 75,000
Series 2003-1 notes A-9 07/10/2003 07/01/2043 75,000 75,000
Series 2003-1 notes A-10 07/10/2003 07/01/2043 75,000 75,000
Series 2003-1 notes A-11 10/09/2003 07/01/2043 75,000 75,000
Series 2003-1 notes A-12 10/09/2003 07/01/2043 75,000 75,000
Series 2003-1 notes B-1 07/10/2003 07/01/2043 15,000 15,000
Series 2003-1 notes B-2 07/10/2003 07/01/2043 15,000 15,000
---------- ----------
$4,211,935 $3,378,050
========== ==========

RECENT ISSUANCE OF SERIES 2004-1 NOTES. On January 30, 2004, the Company
issued its Student Loan Asset-Backed Notes, Series 2004-1 (the "Series 2004-1
Notes") in the aggregate principal amount of $1,010,000,000. The Series 2004-1
Notes were not registered under the Securities Act and were offered only to
qualified institutional buyers as defined in Rule 144A under the Securities Act
or to persons outside of the United States of America pursuant to Regulation S
under the Securities Act. The Series 2004-1 Notes consisted of Class A-1A, Class
A-1B, Class A-2 and Class A-3 notes that bear interest based upon 3-month LIBOR,
and Class B-1 and Class B-2 notes that bear interest at a rate determined by
auction procedures. The proceeds of the Series 2004-1 Notes were used to finance
portfolios of student loans originated under the FFEL Program.

LOAN WAREHOUSE CAPACITY. The Company has a warehousing capacity of $2.25
billion through 364-day commercial paper conduit programs with Bank of America
and Royal Bank of Canada. These programs were entered into in 2003 and replaced
a commercial paper program the Company had with SLM Corporation, or SLMA, which
was terminated in June 2003. These transactions provide short-term financing for
the purchase of student loan portfolios. The financings are constructed to offer
short-term capital and are annually renewable. Short-term warehousing allows the
Company to originate or buy and manage student loans prior to transferring them
into more permanent financing arrangements. The large warehousing capacity
allows the Company to pool student loans in order to maximize loan portfolio
characteristics for efficient financing and to properly time market conditions.
The Company holds loans in short-term warehousing for a period of time ranging
from approximately one month to as many as 18 months, at which point these loans
are transferred into a long-term securitization. Because transferring those
loans to a long-term securitization includes certain fixed administrative costs,
the Company maximizes economies of scale by executing large transactions.

PLEDGE OF ASSETS FOR PAYMENT OF OBLIGATIONS. Each series of the Company's
notes are issued pursuant to an indenture of trust and its repayment obligations
under its warehouse facilities are governed by loan and security agreements.
Specific portfolios of the Company's student loans, and certain other assets,
are pledged to provide for payment of each series of the notes and each
warehouse facility pursuant to the respective indenture of trust or other
governing documents. The notes and warehouse facilities are payable solely from
the assets pledged under the governing documents. The student loans and other
assets pledged to pay one series of the Company's notes or one of the warehouse
facilities are not available for payment of notes of another series or another
warehouse obligation. Under the terms of the indentures of the documents
governing the notes and the warehouse facilities, the trustee and noteholders
are prohibited from initiating bankruptcy or insolvency proceedings against the
Company, and agree to subordinate any claim they may have against the Company to
the pledge of the Company's other assets to secure its other obligations. Funds
may be released from the trust estate securing a series of the notes when the
ratio of the value of the assets pledged to secure the notes to the outstanding
principal balance of the notes exceeds a percentage specified in the governing
trust indenture.

4

Information concerning the value of the assets pledged to secure each series
of the Company's obligations at December 31, 2003 is set forth in the table
below.

ASSETS PLEDGED TO SECURE BONDS AND NOTES
As of December 31, 2003
(dollars in thousands)

BONDS AND NOTES CARRYING
PAYABLE VALUE OF
SERIES OUTSTANDING TRUST ESTATE
--------------- ------------
1985 bonds $ 143,035 $ 148,568
1986 bonds 103,500 109,931
1988 bonds 40,000 41,902
1993A bonds 311,530 324,431
1993B bonds 43,875 45,456
1998 SLIMS 20,201 9,150
RBC warehouse line 434,809 443,786
BOA warehouse line 1,286,250 1,312,389
Series 2003-1 notes 994,850 1,003,162
---------- ---------
$3,378,050 $3,438,775
========== =========

INFORMATION ON THE STUDENT LOAN PORTFOLIO.

Set forth in the tables below are certain characteristics of the Company's
student loans held as of December 31, 2003. Although the unaudited information
set forth below has not been independently verified by third parties, the
Company believes it to be accurate to the best of its knowledge. The information
provided below relates to the Company's aggregate student loan portfolio and may
not accurately describe the characteristics of the student loans pledged to
secure a particular series of the Company's obligations.

COMPOSITION OF THE STUDENT LOANS
(As of December 31, 2003)
(loan balances in thousands)

Aggregate outstanding principal balance..............................$3,177,800
Number of borrowers.................................................. 209,233
Average outstanding principal balance per borrower...................$ 15,187
Number of loans...................................................... 456,502
Average outstanding principal balance per loan.......................$ 6,961
Approximate weighted average remaining term (months)................. 219
Weighted average borrower interest rate.............................. 3.99%

DISTRIBUTION OF THE ELIGIBLE LOANS BY LOAN TYPE
(As of December 31, 2003)
(loan balances in thousands)

Outstanding Percent of loans
Number of principal by outstanding
Loan types loans balance balance
---------- ----- ------- -------

Consolidated 174,174 $2,428,500 76.4%
PLUS 6,323 24,230 0.7
SLS 798 2,933 0.1
Stafford-Subsidized 186,183 453,012 14.3
Stafford-Unsubsidized 89,024 269,125 8.5
------- ---------- ------

Total 456,502 $3,177,800 100.0%
======= ========== ======

5

DISTRIBUTION OF THE ELIGIBLE LOANS BY INTEREST RATE
(As of December 31, 2003)
(loan balances in thousands)

Outstanding Percent of loans
Number of principal by outstanding
Interest rate range loans balance balance
------------------- ----- ------- -------

Less than 4.00% 268,292 $1,712,850 53.9%
4.00% to 4.99% 163,301 1,155,609 36.4
5.00% to 5.99% 7,687 124,060 3.9
6.00% to 6.99% 3,657 82,662 2.6
7.00% to 7.99% 3,283 45,055 1.4
8.00% to 8.99% 7,887 38,292 1.2
9.00% or greater 2,395 19,272 0.6
-------- ---------- ------

Total 456,502 $3,177,800 100.0%
======== ========== ======

DISTRIBUTION OF THE ELIGIBLE LOANS BY SCHOOL TYPES
(As of December 31, 2003)
(loan balances in thousands)

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

2-Year 49,737 $ 94,862 3.0%
4-Year 200,879 565,741 17.8
Proprietary 31,082 66,818 2.1
Consolidations 174,174 2,449,030 77.1
Unknown 630 1,349 --
------- ---------- ------

Total 456,502 $ 3,177,800 100.0%
========== =========== ======

INTEREST RATE RISK

Since the Company generates the majority of its earnings from the spread
between the yield received on its portfolio of student loans and the cost of
financing those loans, the interest rate sensitivity of the Company's balance
sheet could have a material effect on its operations. Although the majority of
the Company's student loans have variable-rate characteristics, in interest rate
environments when the formula for special allowance payments on FFELP loans by
the U. S. Department of Education (the "Department") exceeds the borrower rate,
some of the Company's student loans, primarily consolidation loans, have
fixed-rate characteristics to them.

The Company attempts to match the interest rate characteristics of pools of
loan assets with debt instruments of substantially similar characteristics,
particularly in rising interest rate markets. Due to the variability in duration
of its assets and varying market conditions, the Company does not attempt to
perfectly match the interest rate characteristics of the entire loan portfolio
with the underlying debt instruments. To date, the Company has financed the
majority of its student loan portfolio with variable-rate debt.

In the current low interest rate environment, the Company's student loan
portfolio is yielding higher income due to the reduction in the interest rates
on the variable-rate liabilities financing student loans at a fixed borrower
rate. In higher interest rate environments, where the interest rate rises above
the borrower rate and fixed-rate loans become variable, the impact of the rate
fluctuations is substantially reduced. For further information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Interest Rate Risk."

6

SERVICING OF STUDENT LOAN PORTFOLIO

The Company is required under the Higher Education Act, the rules and
regulations of the guaranty agencies and the trust indentures to use due
diligence in the servicing and collection of student loans and to use collection
practices no less extensive and forceful than those generally in use among
financial institutions with respect to other consumer debt.

The Company has entered into master servicing agreements with NELN for the
student loans financed with the proceeds of the Company's Series 2003-1 and
Series 2004-1 Notes. As master servicer, NELN arranges for and oversees the
performance of a subservicer of its servicing obligations with respect to the
student loans financed with the proceeds of the Series 2003-1 and Series 2004-1
Notes. The Company pays a servicing fee to the master servicer from funds in the
trust estate securing those notes. NELN has entered into subservicing agreements
with Nelnet under which Nelnet assumes all the duties of the master servicer
under the master servicing agreements. Nelnet receives payments from NELN for
the services it provides under the subservicing agreements.

The Company has entered into loan servicing agreements with Nelnet to provide
loan servicing for the remainder of its portfolio of student loans. The Company
pays monthly servicing fees to Nelnet from funds in the trust estates pledged to
secure payment of the Company's notes.

Under the servicing and subservicing agreements, Nelnet provides data
processing and other assistance in connection with the servicing of the student
loans as required by the Higher Education Act and the guaranty agencies. Nelnet
may be obligated to pay to the trust estate for a series of notes an amount
equal to the outstanding principal balance plus all accrued interest and other
fees due to the date of purchase of a student loan if it causes the loan to be
denied the benefit of any applicable guarantee and is unable to cause the
reinstatement of the guarantee within twelve months of denial by the applicable
guaranty agency. Upon payment, the loan will be subrogated to Nelnet. In the
event Nelnet cures any student loan, the indenture trustee will repurchase the
loan in an amount equal to the then outstanding principal balance plus all
accrued interest due on the student loan, less the amount subject to the risk
sharing provisions in the Higher Education Act, whereupon the subrogation rights
of Nelnet will terminate.

The servicing agreements provide that it is the intent of the parties that
the student loans will remain with the servicer for servicing for the life of
the loan. In the event the Company desires to sell the student loans, it must
first attempt to sell the loans to an eligible lender that maintains an
agreement with the servicer so that the sale does not cause a disruption in loan
servicing.

ADMINISTRATION OF THE COMPANY'S STUDENT LOAN PROGRAM

The Company has entered into administrative services agreements with NELN
under which NELN agreed to provide various notices and to perform other
administrative obligations required by the trust indentures for the Company's
notes and by related agreements. These services include, but are not limited to
maintaining financial records, directing the indenture trustee to make the
required distributions from the funds established under the trust indentures on
a monthly basis and on each distribution date, and preparing, based on periodic
data received from the servicer, and providing quarterly and annual distribution
statements to the indenture trustees and any related federal income tax
reporting information. NELN receives compensation for those services ranging
from 0.18% to 0.63% per annum of the average outstanding principal balance of
the student loans.

THE FEDERAL FAMILY EDUCATION LOAN PROGRAM

The Higher Education Act provides for a program of direct federal insurance
of student loans and reinsurance of student loans guaranteed or insured by a
state agency or private non-profit corporation. Several types of loans are
currently authorized pursuant to the FFEL Program. These include: (a) loans to
students with respect to which the federal government makes interest payments
available to reduce student interest cost during periods of enrollment
("Subsidized Federal Stafford Loans"); (b) loans to students with respect to
which the federal government does not make such interest payments ("Unsubsidized
Federal Stafford Loans" and, collectively with Subsidized Federal Stafford
Loans, "Federal Stafford Loans"); (c) supplemental loans to parents of dependent
students ("Federal PLUS Loans"); and (d) loans to fund payment and consolidation
of certain of the borrower's obligations ("Federal Consolidation Loans"). Prior
to July 1, 1994, the FFEL Program also included a separate type of loan to
graduate and professional students and independent undergraduate students and,
under certain circumstances, dependent undergraduate students, to supplement
their Stafford Loans.

7

All of the student loans in the Company's portfolio as of December 31, 2003
were FFELP loans. At least 98% of the principal and accrued interest of FFELP
loans is guaranteed by the federal government, either directly or through a
reinsurance agreement with a guaranty agency described below, provided that the
Company meets certain procedures and standards specified in the Higher Education
Act. The Company believes it is in material compliance with the procedures and
standards as required in the Higher Education Act. FFELP loans originated prior
to October 1, 1993 carry a 100% guarantee on the principal amount and accrued
interest, and FFELP loans originated after that date are guaranteed for 98% of
the principal amount and accrued interest. As a result, holders of FFELP loan
portfolios historically have experienced minimal losses net of the guarantee.
The Company's net loan losses on FFELP loans in 2003 were approximately
$233,000, or less than 0.012% of its average FFELP loan portfolio, compared to
$519,000 of net loan losses in 2002, or less than 0.065% of its average FFELP
loan portfolio.

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

ITEM 2. PROPERTIES

The Company has no physical properties.

ITEM 3. LEGAL PROCEEDINGS

None

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

None

8

PART II
-------

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

The Company is a wholly owned subsidiary of NELN, which is a wholly owned
subsidiary of Nelnet. There is no market for the Company's common stock.

The Company registered $2,000,000,000 of student loan asset-backed notes
pursuant to a registration statement on Form S-3, Registration No. 333-104736.
On July 10, 2003 and October 9, 2003, the Company issued Series 2003-1 Notes
pursuant to its registration statement. On July 10, 2003, the Company issued
$880,000,000 of its student loan asset-backed auction rate notes (the "Initial
Issuance") and on October 9, 2003, the Company issued $150,000,000 of its
student loan asset-backed auction rate notes (the "Second Issuance"). The
Company may issue $970,000,000 of additional student loan asset-backed notes in
subsequent offerings under the registration statement.

Banc of America Securities LLC and Deutsche Bank Securities acted as managing
underwriters for the Initial Issuance and the Second Issuance. Approximately
$1,370,500 of the proceeds of the Initial Issuance was used to pay the costs of
issuing the notes, exclusive of underwriters' discounts of $2,214,500.
Approximately $2,200,000 of the proceeds of the Initial Issuance and
approximately $375,000 of the proceeds of the Second Issuance was deposited to a
reserve fund created under the indenture of trust governing the notes. The
remaining proceeds of the notes (approximately $875,908,000 of the Initial
Issuance and approximately $149,302,500 of the Second Issuance) were used to
finance portfolios of student loans.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable under General Instruction I 2.

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

This report contains forward-looking statements and information that are
based on management's current expectations as of the date of this document. When
used in this report, the words "anticipate," "believe," "estimate," "intend" and
"expect" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are subject to risks,
uncertainties, assumptions and other factors that may cause the actual results
to be materially different from those reflected in such forward-looking
statements. These factors include, among others, changes in the terms of student
loans and the educational credit marketplace arising from the implementation of
applicable laws and regulations and from changes in these laws and regulations,
which may reduce the volume, average term and costs of yields on student loans
under the Federal Family Education Loan Program ("FFELP" or "FFEL Program") or
result in loans being originated or refinanced under non-FFELP programs or may
affect the terms upon which banks and others agree to sell FFELP loans to the
Company. The Company could also be affected by changes in the demand for
educational financing or in financing preferences of lenders, educational
institutions, students and their families; changes in the general interest rate
environment and in the securitization markets for education loans, which may
increase the costs or limit the availability of financings necessary to
initiate, purchase or carry education loans; losses from loan defaults; and
changes in prepayment rates and credit spreads.

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS BY MANAGEMENT OF THE
COMPANY OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY IN
CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED
ELSEWHERE IN THIS REPORT.

OVERVIEW

The Company's student loan portfolio has grown significantly through
origination and acquisition. In 2003, the Company originated $2.1 billion of
student loans, all of which were originated by the Company through consolidation
loans, the proceeds of which were used to consolidate outstanding loans of the
borrowers. In addition, the Company purchased $1.7 billion of student loans from
other holders, including $1.2 billion from affiliated companies, and sold $1.4
billion to affiliated companies.

9

The Company's primary source of income is interest earned on its student loan
portfolio. If the Company's student loan portfolio continues to grow and net
interest margins remain relatively stable, the Company expects its net interest
income to increase after adjusting for any variable-rate floor income. Interest
income, and to a certain extent net income, is also dependent upon the relative
level of interest rates. Net interest income, excluding the effects of variable
rate floor income, increased approximately $19.0 million, or 78.9%, in 2003 as
compared to 2002. This increase in net interest income, excluding variable-rate
floor income, has resulted from the portfolio growth previously discussed.
Variable-rate floor income occurs in certain declining interest rate
environments, and the Company cannot predict whether these interest rate
environments will occur in the future. The Company generally does not anticipate
receiving or plan to receive variable-rate floor income.

SIGNIFICANT DRIVERS AND TRENDS

The Company's earnings and earnings growth are directly affected by the size
of its portfolio of student loans, the interest rate characteristics of the loan
portfolio, the costs associated with financing and managing the loan portfolio
and the costs associated with the origination and acquisition of the student
loans in the portfolio.

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

o applicable laws and regulations that may affect the volume or terms of
education loans;

o demand for education financing and competition within the student loan
industry;

o the interest rate environment, funding spreads on the Company's
financing programs and access to capital markets;

o prepayment rates on student loans, including prepayments relating to
loan consolidation; and

o acquisition costs of student loan assets.

NET INTEREST INCOME

The Company generates the majority of its earnings from the spread between
the yield the Company receives on its portfolio of student loans and the cost of
funding these loans. This spread income is reported on the Company's 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 the Company's income statement. The amortization
and write-offs of bond issuance costs are included in interest expense on the
Company's income statement.

The Company's 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 Department, 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. The Company refers to this additional income as variable-rate
floor income and it is included in loan interest income as described further in
"-- Results of Operations" below. Historically, the Company has earned excess
spread, or variable-rate floor income, in declining interest rate environments
as recently as the Company's most recent fiscal year. Since the rates are reset
annually, the Company views these earnings as temporary and not necessarily
sustainable. The Company's ability to earn variable-rate floor income in the
future periods is dependent upon the interest rate environment following the
annual reset of borrower rates, and the Company cannot assure that such
environment will exist in the future.

10

The table below sets forth the weighted average borrower interest rate and
weighted average lender interest rate for all variable-rate student loan assets
for the period indicated.

AS OF DECEMBER 31,
------------------
2003 2002
-------- --------
Weighted average borrower
interest rate......... 3.76% 4.97%
Weighted average lender
interest rate......... 3.49% 4.27%

Because the Company generates the majority of its earnings from the spread
between the yield the Company receives on its portfolio of student loans and the
cost of financing these loans, the interest rate sensitivity of the Company's
balance sheet is very important to its operations. The current and future
interest rate environment can and will affect the Company's interest earnings,
net interest income and net income. The effects of changing interest rate
environments are further outlined in "-- Interest Rate Risk" below.

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

On consolidation loans originated after October 1, 1993, the Company must pay
a 1.05% per year rebate fee to the Department. 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 the
Company's loan portfolio, there will be a lower yield on the Company's loan
portfolio in the short term. However, due to the extended terms of consolidation
loans, the Company expects to earn the yield on these loans for a longer
duration, making them beneficial to us in the long term.

A portion of the Company's student loan portfolio, with an outstanding
balance of $2.6 billion as of December 31, 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 Department, the Company believes that it may be entitled
to receive special allowance payments on these loans providing the Company with
a 9.5% minimum rate of return. To date, the Company has not recognized interest
income generated by these loans based on the 9.5% minimum rate of return. The
Company has asked the Department to confirm that it is allowed to recognize the
income based on the 9.5% minimum rate of return. The Company has deferred
recognition of this excess interest income pending satisfactory resolution of
this issue. As of December 31, 2003, the amount of excess interest income
deferred totaled approximately $42.9 million, which is included in other
liabilities on the Company's balance sheet. Since the Company did not refinance
loans with the aforementioned tax-exempt obligations until 2003, all of this
deferred income was recorded this year. Legislation has been proposed to
eliminate variable rate floor income as well as the 9.5% floor interest rate on
loans financed with funds from pre-1993 tax-exempt financings. The enactment of
this legislation might prospectively eliminate floor income on pre-1993
tax-exempt financings and allow the Company to recognize its deferred excess
interest income. Conversely, the Company cannot be assured that any such
legislation, if enacted, will only prospectively eliminate this floor income. At
this time, the Company cannot predict how any such potential legislation will
affect its operations in the future.

In declining interest rate environments, the Company can earn significant
amounts of variable-rate floor income. The more drastic the reduction in rates
subsequent to the July 1 annual borrower interest rate reset date, the greater
the Company's opportunity to earn such income. Conversely, as the decline in
rates abates, or in environments where interest rates are rising, the Company's
opportunity to earn variable-rate floor income can be reduced, in some cases
substantially. Although the Company has been in a historically low interest rate
environment, interest rates on which its assets are indexed have been rising
since the second quarter of 2003. As interest rates increase, the Company incurs
greater financing costs on its variable-rate financings. An increase in the
Company's financing costs, in turn, decreases the spread between the rate of its
student loans (which reset annually) and the rate of its financings, ultimately
causing a decrease in variable-rate floor income.

11

Investment interest income includes the income from unrestricted
interest-earning deposits and funds for the Company's financings.

OTHER INCOME

The Company also earns income from restricted cash and investments.
Investment interest income includes income from unrestricted interest-earning
deposits and funds pledged to secure repayment of the bonds and notes payable.

PROVISION FOR LOAN LOSSES

The Company maintains an allowance for loan losses associated with its
student loan portfolio at a level that is based on the performance
characteristics of the underlying loans. The loan loss allowance 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 student loan is rejected for
claim payment, the Company's policy is to continue to pursue recovery of
principal and interest, whether by curing the reject or collecting from the
borrower. The Company attempts to cure the rejected claims through its
collection efforts. As of December 31, 2003, the Company had an allowance for
loan losses on its student loans of $2.6 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 management believes is adequate to cover
probable losses inherent in the loan portfolio.

OPERATING EXPENSES

Operating expenses include costs incurred to manage and administer the
Company's student loan portfolio and its financing transactions, costs incurred
to generate and acquire student loans and general and administrative expenses.
The Company does not believe inflation has a significant effect on its
operations.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

NET INTEREST INCOME. The table below shows the Company's components of net
interest income for the years ended December 31, 2003 and 2002.

2003 2002 $ CHANGE % CHANGE
----------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Loan interest.................. $ 74,396 $ 51,916 $ 22,480 43.3%
Investment interest............ 3,436 3,615 (179) (5.0)
---------- ---------- -----------
Total interest income........ 77,832 55,531 22,301 40.2
Interest on bonds and
notes payable.................. (33,218) (25,487) (7,731) (30.3)
----------- ----------- -----------
Net interest income.......... 44,614 30,044 14,570 48.5
Less provision for loan losses. (1,600) (403) (1,197) (297.0)
----------- ----------- -----------
Net interest income after
provision for loan losses.... $ 43,014 $ 29,641 $ 13,373 45.1%
=========== =========== ===========

12

Loan interest income increased as a result of changes in the interest rate
environment, in the pricing characteristics of the Company's student loan assets
and in the size of the Company's student loan portfolio. Lower interest rates in
2003 caused a decrease in the average net yield on the Company's student loan
portfolio to 3.97% from 6.50% in 2002. Variable-rate floor income decreased
approximately $4.5 million to approximately $1.4 million in 2003 from
approximately $5.9 million in 2002, due to the timing and relative change in
interest rates during the periods. Essentially, prevailing interest rates
declined drastically subsequent to the July 1, 2002 annual borrower interest
rate reset date compared to their less substantial decline following the reset
of rates on July 1, 2003. Consequently, the Company realized significantly less
variable-rate floor income during 2003 than the Company did in 2002. The
weighted average interest rate on the Company's student loan portfolio decreased
in 2003 due to lower interest rates, together with the increase in the number of
lower yielding consolidation loans. The lower weighted average loan interest
rate resulted in a reduction in loan interest income of approximately $14.5
million. Consolidation loan activity also increased the amortization and
write-offs of acquisition costs and increased the consolidation rebate fee,
reducing loan interest income an additional approximately $12.0 million in 2003.
The reduction in loan interest income resulting from the decline in interest
rates and reduction in variable-rate floor income was offset by an increase in
the Company's portfolio of student loans. The average student loan portfolio
increased by $1.1 billion, or 134.5%, in 2003 to $1.9 billion as compared to
$798.4 million in 2002, which increased loan interest income by approximately
$53.0 million in 2003 as compared to 2002.

Interest expense on bonds and notes payable increased as average
variable-rate debt increased $1.2 billion, which resulted in an increase in
interest expense by approximately $13.0 million. The reduction in interest
rates, specifically LIBOR and auction rates, decreased the Company's average
cost of funds to 1.57% in 2003 from 2.68% in 2002. As a result, interest expense
decreased approximately $4.2 million in 2003 as compared to 2002. The Company
reduced average fixed-rate debt by $12.4 million in 2003, which increased the
Company's overall interest expense by approximately $0.8 million as compared to
2002.

As a result of the foregoing, net interest income increased in 2003 as
compared to 2002. The Company's net interest margin decreased to 2.13% in 2003
from 3.18% in 2002. Net interest income, excluding the effects of variable-rate
floor income of $1.4 million in 2003 and $5.9 million in 2002, increased
approximately $19.0 million, or 78.9%, to approximately $43.2 million in 2003
from approximately $24.1 million in 2002.

PROVISION FOR LOAN LOSSES. The provision for loan losses for the Company's
student loans increased due to the increase in the size of its student loan
portfolio as discussed above.

OPERATING EXPENSES. The table below shows the Company's components of
operating expenses for the years ended December 31, 2003 and 2002.

2003 2002 $ CHANGE % CHANGE
----------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Trustee and other debt related
fees......................... $ 6,284 $ 3,563 $ 2,721 76.4%
Loan servicing fees to related
parties..................... 15,454 9,346 6,108 65.4
Loan servicing fees......... 401 447 (46) (10.3)
Administrative fees to parent 5,997 5,427 570 10.5
Professional services....... 163 111 52 46.8
Other expenses.............. 439 298 141 47.3
---------- ---------- ----------
Total operating expenses.. $ 28,738 $ 19,192 $ 9,546 49.7%
========== ========== ==========

Total operating expenses increased in 2003 as compared to 2002 as a result of
the growth in the Company's assets and liabilities. Trustee and other
debt-related fees increased as a result of a $1.2 billion increase in average
total debt outstanding. Loan servicing fees to related parties and
administrative fees to parent increased as a result of the increase in average
student loans outstanding as previously described.

INCOME TAX EXPENSE. Income tax expense increased $1.2 million, or 32.0%, in
2003 compared to 2002, due to the increase in income before income taxes. The
Company's effective tax rate was 34.8% in 2003 as compared to 36.0% in 2002.

NET INCOME. Net income increased to $9.3 million in 2003 from $6.7 million in
2002, for the reasons discussed above.

13

STUDENT LOAN PORTFOLIO

The table below describes the components of the Company's loan portfolio:

AS OF DECEMBER 31,
----------------------------------------
2003 2002
------------------- -------------------
PERCENT OF PERCENT OF
DOLLARS TOTAL DOLLARS TOTAL
--------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Student loans:
Stafford......... $ 722,137 22.5% $ 505,350 55.7%
PLUS/SLS (a)..... 27,163 0.8 20,465 2.2
Consolidation.... 2,428,500 75.6 368,890 40.7
---------- ------ --------- ------
Total......... 3,177,800 98.9 894,705 98.6
Unamortized premiums 38,434 1.2 13,280 1.5
Allowance for loan
losses............. (2,574) (0.1) (962) (0.1)
---------- ------ --------- ------
Net........... $3,213,660 100.0% $ 907,023 100.0%
========== ====== ========= ======
- -----------------

(a) Supplemental Loans for Students, or SLS, are the predecessor to unsubsidized
Stafford loans.

ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES

The provision for loan losses represents the periodic expense of maintaining
an allowance sufficient to absorb losses, net of recoveries, inherent in the
portfolio of student loans. An analysis of the Company's allowance for loan
losses is presented in the following table:

YEAR ENDED DECEMBER 31,
-----------------------
2003 2002
---------- ----------
(DOLLARS IN THOUSANDS)
Balance at beginning of year... $ 962 $ 955
Provision for loan losses...... 1,600 403
Transfer of allowance from 245 123
acquisitions...................
Charge-offs, net of recoveries. (233) (519)
---------- ----------
Balance at end of period....... $ 2,574 $ 962
========= ==========
Net charge-offs as a percentage
of average student loans....... 0.012% 0.065%
Total allowance as a percentage
of average student loans....... 0.137% 0.121%
Total allowance as a percentage
of the ending balance of
student loans.................. 0.081% 0.108%
Average student loans.......... $1,872,582 $ 798,405
Ending balance of student loans $3,177,800 $ 894,705

The table below shows the student loan delinquency amounts as of December 31,
2003 and 2002. Delinquencies have the potential to adversely impact the
Company's earnings through increased servicing and collection costs and account
charge-offs.

DECEMBER 31,
-------------------------------------
2003 2002
------------------ -----------------
BALANCE PERCENT BALANCE PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
STUDENT LOAN
PORTFOLIO:
Loans in school/
grace/deferment(1........ $573,399 $170,594
Loans in forbearance(2).. 331,981 113,105
Loans in repayment
status:
Loans current.......... 2,133,724 93.9% 555,263 90.9%
Loans delinquent
31-60 days(3)........ 67,179 2.9 23,216 3.8
Loans delinquent
61-90 days........... 30,758 1.4 13,131 2.1
Loans delinquent
91 days
or greater(4)........ 40,759 1.8 19,396 3.2
--------- ------ -------- ------
Total loans in
repayment.............. 2,272,420 100.0% 611,006 100.0%
========= ====== ======== ======
Total student loan
portfolio............ $3,177,800 $894,705
========== ========

14

- ----------

(1) Loans for borrowers who still may be attending school or engaging in other
permitted educational activities and are not yet required to make payments
on the loans, E.G., residency periods for medical students or a grace period
for bar exam preparation.

(2) Loans for borrowers who have temporarily ceased making full payments due to
hardship or other factors, according to a schedule approved by the servicer
consistent with the established loan program servicing procedures and
policies.

(3) The period of delinquency is based on the number of days scheduled payments
are contractually past due and relate to repayment loans, that is,
receivables not charged off, and not in school, grace, deferment or
forbearance.

(4) Loans delinquent 91 days or greater include loans in claim status, which are
loans which have gone into default and have been submitted to the guaranty
agency to process the claim for payment.

STUDENT LOAN SPREAD ANALYSIS

The following table analyzes the student loan spread on the Company's
portfolio of student loans in 2003 and 2002. This table represents the spread on
assets earned in conjunction with the liabilities used to fund the assets.
Maintenance of the spread on assets is a key factor in maintaining and growing
the Company's income.

YEAR ENDED DECEMBER 31,
-----------------------
2003 2002
---------- ----------
Student loan yield.......... 4.93% 7.30%
Consolidation rebate fees... (0.62) (0.19)
Premium amortization........ (0.34) (0.61)
---------- ----------
Student loan net yield 3.97 6.50
Student loan cost offunds... (1.57) (2.68)
Student loan spread, ---------- ----------
including variable-rate
floor income............... 2.40 3.82
Variable-rate floor income.. (0.08) (0.74)
Student loan spread, ----------- ----------
excluding variable-rate
floor income............... 2.32% 3.08%
=========== ==========
Average balance of student
loans (in thousands)...... $1,872,582 $ 798,405

INTEREST RATE RISK

Because the Company generates its earnings from the spread between the yield
the Company receives on the Company's portfolio of student loans and the cost of
funding these loans, the interest sensitivity of its balance sheet is a key
profitability driver. The majority of student loans have variable-rate
characteristics in certain interest rate environments. Certain of the Company's
student loans include fixed-rate components depending upon the rate reset
provisions, or, in the case of consolidation loans, are fixed at the weighted
average interest rate of the underlying loans at the time of consolidation. The
table below sets forth the Company's loan assets and debt instruments by rate
characteristics.

AS OF DECEMBER 31,
---------------------------------------------
2003 PERCENT 2002 PERCENT
------------ -------- ------------- ---------
(DOLLARS IN THOUSANDS)
Fixed-rate loan
assets(a)...... $ 2,961,801 93.2% $ 731,899 81.8
Variable-rate loan
assets......... 215,999 6.8 162,806 18.2
----------- ------- ---------- -------
$ 3,177,800 100.0% $ 894,705 100.0%
=========== ======= ========== =======
Fixed-rate debt
instruments.... $ 173,306 5.1% $ 185,632 17.7%
Variable-rate debt
instruments.... 3,204,744 94.9 863,647 82.3
----------- ------- ---------- -------
$ 3,378,050 100.0% $1,049,279 100.0%
=========== ======= ========== =======
- ----------
(a) Includes approximately $543 million and $360 million of variable-rate loan
assets, which are classified as fixed-rate loan assets as a result of being
financed by variable-rate, tax-exempt bonds subject to a 9.5% minimum yield
as of December 31, 2003 and 2002.

Historically, the Company followed a policy of funding the majority of its
student loan portfolio with variable-rate debt. In the current low interest rate
environment, the Company's student loan portfolio is yielding excess income
primarily due to the reduction in interest rates on the variable-rate
liabilities funding student loans at the fixed borrower rate and due to

15

consolidation loans earning interest at a fixed rate to the borrower. Therefore,
absent utilizing derivative instruments, in a low interest rate environment, a
rise in interest rates will have an adverse effect on earnings and fair values.
In higher interest rate environments, where the interest rate rises above the
borrower rate and the fixed-rate loans become variable rate and are effectively
matched with variable-rate debt, the impact of rate fluctuations is
substantially reduced.

The Company attempts to match the interest rate characteristics of pools of
loan assets with debt instruments of substantially similar characteristics,
particularly in rising interest rate markets. Due to the variability in duration
of the Company's assets and varying market conditions, the Company does not
attempt to perfectly match the interest rate characteristics of the entire loan
portfolio with the underlying debt instruments.

The following tables summarize the effect on the Company's earnings for the
years ended December 31, 2003 and 2002, based upon a sensitivity analysis
performed by the Company assuming a hypothetical increase and decrease in
interest rates of 100 basis points and an increase in interest rates of 200
basis points while funding spreads remain constant. The effect on earnings was
performed on the Company's variable-rate assets and liabilities.

YEAR ENDED DECEMBER 31, 2003
------------------------------------------------------------------
CHANGE FROM DECREASE CHANGE FROM INCREASE CHANGE FROM INCREASE
OF 100 BASIS POINTS OF 100 BASIS POINTS OF 200 BASIS POINTS
---------------------- --------------------- --------------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
(DOLLARS IN THOUSANDS)

Effect on earnings:
Increase (decrease) in
pre-tax income....... $ 19,168 134.2% $(9,385) (65.7)% $(11,741) (82.2)%
========== ======== ========= ======== ========== ========

YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------------------
CHANGE FROM DECREASE CHANGE FROM INCREASE CHANGE FROM INCREASE
OF 100 BASIS POINTS OF 100 BASIS POINTS OF 200 BASIS POINTS
----------------------- --------------------- --------------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
(DOLLARS IN THOUSANDS)
Effect on earnings:
Increase (decrease) in
pre-tax income....... $ 2,233 21.4% $(1,058) (10.1)% $ (896) (8.6)%
=========== ========= ======== ======== ======== ========

The tables below set forth the Company's variable-rate assets and liabilities
categorized by the reset date of the underlying index. Fixed-rate assets and
liabilities are categorized based on their maturity dates. An interest rate gap
is the difference between volumes of assets and volumes of liabilities maturing
or repricing during specific future time intervals. The following gap analysis
reflects the Company's interest rate-sensitive positions as of December 31, 2003
and 2002 and is not necessarily reflective of the positions that existed
throughout the period.

AS OF DECEMBER 31, 2003
INTEREST RATE SENSITIVITY PERIOD
------------------------------------------------------------------
3 MONTHS 3 MONTHS 6 MONTHS 1 TO 2 2 TO 5 OVER 5
OR LESS TO 6 MONTHS TO 1 YEAR YEARS YEARS YEARS
----------- -------------------------------- ---------- --------
(DOLLARS IN THOUSANDS)

Interest-sensitive
assets:
Student loans..... $3,213,660 $ -- $ -- $ -- $ -- $ --
Cash and
investments....... 173,552 -- -- -- -- --
--------- --------- -------- --------- --------- ---------
Total
interest-
sensitive
assets....... 3,387,212 -- -- -- -- --
--------- --------- -------- --------- --------- ---------
Interest-sensitive
liabilities:
Short-term
borrowings...... 3,204,744 -- -- -- -- --
Long-term notes... 2,175 2,915 5,137 9,299 22,328 131,452
Total --------- --------- -------- --------- --------- ---------
interest-sensitive
liabilities.... 3,206,919 2,915 5,137 9,299 22,328 131,452
--------- --------- -------- --------- --------- ---------
Period gap.......... 180,293 (2,915) (5,137) (9,299) (22,328) (131,452)
Cumulative gap...... 180,293 177,378 172,241 162,942 140,614 9,162
Ratio of
interest-sensitive
assets to interest-
sensitive
liabilities....... 105.6% --% --% --% --% --%
========== ========== ========= ========= ========= =========
Ratio of cumulative
gap to total
interest-
sensitive
assets.......... 5.3% 5.2% 5.1% 4.8% 4.2% 0.3%
========== ========== ========== ========= ========= =========

16

AS OF DECEMBER 31, 2002
INTEREST RATE SENSITIVITY PERIOD
-----------------------------------------------------------------
3 MONTHS 3 MONTHS 6 MONTHS 1 TO 2 2 TO 5 OVER 5
OR LESS TO 6 MONTHS TO 1 YEAR YEARS YEARS YEARS
----------- -------------------------------- ---------- --------
(DOLLARS IN THOUSANDS)

Interest-sensitive
assets:
Student loans..... $ 907,023 $ -- $ -- $ -- $ -- $ --
Cash and
investments....... 152,632 -- -- -- -- --
--------- --------- -------- --------- --------- ---------
Total
interest-
sensitive
assets....... 1,059,655 -- -- -- -- --
---------- --------- -------- --------- --------- ---------
Interest-sensitive
liabilities:
Short-term
borrowings........ 863,647 -- -- -- -- --
Long-term notes... 3,391 3,000 5,935 10,227 18,622 144,457
--------- --------- -------- --------- --------- ---------
Total
interest-sensitive
liabilities.... 867,038 3,000 5,935 10,227 18,622 144,457
--------- --------- -------- --------- --------- ---------
Period gap.......... 192,617 (3,000) (5,935) (10,227) (18,622) (144,457)
Cumulative gap...... 192,617 189,617 183,682 173,455 154,833 10,376
Ratio of
interest-sensitive
assets to
interest-sensitive
liabilities....... 122.2% --% --% --% --% --%
========== ========== ========= ========= ========== =========
Ratio of cumulative
gap to total
interest-sensitive
assets............ 18.2% 17.9% 17.3% 16.4% 14.6% 1.0%
========== ========== ======== ========= ========= =========

REAUTHORIZATION OF THE HIGHER EDUCATION ACT

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 the 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 the Company's 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 Department'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 the Company to originate and/or acquire in the future. In
addition, introduced legislation proposing a number of initiatives aimed at
supporting the Federal Direct Loan ("FDL") Program could be a detriment to the
FDL Program and may adversely affect the Company.

In addition, the Department oversees and implements the Higher Education Act
and periodically issues regulations and interpretations of that Act. Changes in
such regulations and interpretations could negatively impact the Company's
business.

CRITICAL ACCOUNTING POLICIES

This Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America, or GAAP. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of income and
expenses during the reporting periods. The Company bases its estimates and
judgments on historical experience and on various other factors that the Company
believes are reasonable under the circumstances. Actual results may differ from
these estimates under varying assumptions or conditions. Note 1 of the notes to
the financial statements includes a summary of the significant accounting
policies and methods used in the preparation of the Company's financial
statements.

On an on-going basis, management evaluates its estimates and judgments,
particularly as they relate to accounting policies that management believes are
most "critical" -- that is, they are most important to the portrayal of the
Company's financial condition and results of operations and they require
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. These accounting policies include securitization accounting and
determining the level of the allowance for loan losses.

17

SECURITIZATION ACCOUNTING

The Company uses the issuance of asset-backed securities, commonly called
securitization transactions, as a key component of the Company's financing
strategy. In conjunction with these transactions, the Company pledges student
loans to a trust estate that secures repayment of a particular series of the
Company's notes. The Company's securitization transactions do not qualify for
sale treatment under Statement of Financial Accounting Standards ("SFAS") No.
140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES-A REPLACEMENT OF SFAS NO. 125, as the loans in
the trust estate continue to be under the Company's effective control and as
such the Company does not record or recognize gain on sale in conjunction with
the transaction, but rather treat the transfers as secured borrowings. All of
the financial activities and related assets and liabilities, including debt, of
the securitizations are reflected and consolidated in the Company's financial
statements.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents management's estimate of probable
losses on student loans. This evaluation process is subject to numerous
estimates and judgments. In making such estimates and judgments, management
considers such things as the value and character of loans outstanding, past loan
loss experience and general economic conditions. Historical delinquencies and
credit loss experience are also considered when reviewing the current aging of
the portfolio, together with analyses that reflect current trends and
conditions.

When the Company determines the allowance for its student loan portfolio, the
Company considers trends in student loan claims rejected for payment by guaranty
agencies and the amount of student loans subject to the 2% risk sharing. The
allowance is based on periodic evaluations of the Company's loan portfolio
considering past experience, changes to federal student loan programs, current
economic conditions and other relevant factors. The allowance is maintained at a
level management believes is adequate to provide for estimated probable credit
losses inherent in the loan portfolio. This evaluation is inherently subjective,
as it requires estimates that may be susceptible to significant changes.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Interest Rate Risk" above.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary financial data required by this
ITEM 8 are set forth in ITEM 15 of this Form 10-K. All information, which has
been omitted, is either inapplicable or not required.

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

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

The accounting firm of KPMG LLP was engaged to perform the annual audit of
the Company for the year ended December 31, 2003.

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

18

ITEM 9A. CONTROLS AND PROCEDURES

An evaluation was performed by the officers of the Company, including the
principal executive officer and principal financial officer, of the
effectiveness and design of the Company's disclosure controls and procedures as
of the end of its fiscal year. Based on that evaluation, the Company's principal
executive officer and principal financial officer concluded that the Company's
disclosure controls and procedures were reasonably designed and effectively
operate so as to ensure that material information relating to the Company is
made known to management of the Company, including the principal executive
officer and principal financial officer. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect those controls subsequent to the date of the evaluation and until the
filing of this report, including any corrective actions with regard to
significant deficiencies and material weaknesses.

The effectiveness of the Company's or any system of disclosure controls and
procedures is subject to certain limitations, including the exercise of judgment
in designing, implementing and evaluating the controls and procedures, the
assumptions used in identifying the likelihood of future events, and the
inability to eliminate misconduct completely. As a result, there can be no
assurance that the Company's disclosure controls and procedures will prevent all
errors or fraud or ensure that all material information will be made known to
appropriate management in a timely fashion. By their nature, the Company's or
any system of disclosure controls and procedures can provide only reasonable
assurance regarding management's control objectives.

PART III
--------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Not applicable under General Instruction I 2.

ITEM 11. EXECUTIVE COMPENSATION

Not applicable under General Instruction I 2.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Not applicable under General Instruction I 2.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable under General Instruction I 2.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table presents fees for professional audit and other services
rendered by KPMG LLP.

YEAR ENDED DECEMBER 31,
-----------------------
2003 2002
--------- ---------
Audit fees (a)................. $ 15,500 $ 14,350
Tax fees (b)................... -- 845
--------- ---------
Total fees.................. $ 15,500 $ 15,195
========= =========
- ----------

(a) Audit fees were for professional services rendered issuance of consents,
attest services, assistance with SEC filings, and quarterly reviews. No
audit fees are charged to the Company for the annual audit of the financial
statements as the administrative fees paid to NELN are used to cover the
annual audit fees.

(b) Tax fees consisted of fees for tax compliance services.

The Company has not paid any other fees to KPMG LLP. The Board of Directors
must approve the engagement of KPMG LLP to provide audit services and any
non-audit services.

19

PART IV
-------

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

FINANCIAL STATEMENTS

The financial statements and financial statement information and schedules
required by this Item are included in this report commencing on page F-1. The
Independent Accountants' Report appears on page F-2 of this report.

EXHIBITS

The following is a complete list of exhibits filed as part of and this Form
10-K. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601
of Regulation S-K. Certain exhibits have been previously filed and are
incorporated herein by reference under Rule 12b-32 of the Securities Exchange
Act of 1934.

Exhibit No. Description
- ----------- -----------

3.1 Amended Articles of Incorporation of the Company are
incorporated by reference to the Company's registration
statement on Form S-3 (File No. 333-104736).

3.2 Bylaws of the Company are incorporated by reference to the
Company's registration statement on Form S-3 (File No.
333-104736).

4.1 Indenture of Trust by and among Nelnet Education Loan Funding,
Inc., Wells Fargo Bank Minnesota, National Association, as
Indenture Trustee, and Wells Fargo Bank Minnesota, National
Association, as Eligible Lender Trustee, dated as of June 1,
2003 is incorporated by reference to Exhibit 4.7 to the
registration statement of Nelnet, Inc. (File No. 333-108070).

4.2 Series 2003-1 Supplemental Indenture of Trust by and between
Nelnet Education Loan Funding, Inc. and Wells Fargo Bank
Minnesota, National Association, as Indenture Trustee,
authorizing the issuance of $1,030,000,000 Nelnet Education Loan
Funding, Inc. Student Loan Asset-Backed Notes Series 2003-1,
dated as of June 1, 2003 is incorporated by reference to Exhibit
4.8 to the registration statement of Nelnet, Inc. (File No.
333-108070).

4.3 Indenture of Trust among Nelnet Education Loan Funding, Inc. and
Wells Fargo Bank Minnesota, National Association, as Indenture
Trustee and Eligible Lender Trustee, is incorporated by
reference to Exhibit 4.11 to the Annual Report on Form 10-K of
Nelnet, Inc. for the year ended December 31, 2003. Instruments
with respect to other long-term debt of Nelnet Education Loan
Funding, Inc. are omitted pursuant to Item 601(b)(4)(iii) of
Regulation S-K since the amount of debt authorized under each
such omitted instrument does not exceed 10% of the total assets
of Nelnet Education Loan Funding, Inc. Nelnet Education Loan
Funding, Inc. hereby agrees to furnish a copy of such
instruments to the Securities and Exchange Commission upon
request.

10.1 Amended and Restated Warehouse Loan and Security Agreement among
Nelnet Education Loan Funding, Inc., as Borrower, Wells Fargo
Bank Minnesota, National Association, as Eligible Lender
Trustee, Zions First National Bank, as Trustee, Thunder Bay
Funding Inc., as Lender, and Royal Bank of Canada, as Facility
Agent and Alternate Lender, dated as of April 28, 2003 is
incorporated by reference to Exhibit 10.15 to the registration
statement of Nelnet, Inc. (File No. 333-108070).

20

10.2 Warehouse Note Purchase and Security Agreement among Nelnet
Education Loan Funding, as Borrower, Wells Fargo Bank Minnesota,
National Association, as Trustee, Wells Fargo Bank Minnesota,
National Association, as Eligible Lender Trustee, Quincy Capital
Corporation, as Bank of America Conduit Lender, Bank of America,
N.A., as Bank of America Alternate Lender, Bank of America,
N.A., as Bank of America Facility Agent, Gemini Securitization
Corp., as Deutsche Bank Conduit Lender, Deutsche Bank AG, New
York Branch, as Deutsche Bank Alternate Lender, Deutsche Bank
AG, New York Branch, as Deutsche Bank Facility Agent, Barton
Capital Corporation, as Societe Generale Conduit Lender, Societe
Generale, as Societe Generale Alternate Lender, Societe
Generale, as Societe Generale Facility Agent, and Bank of
America, N.A., as Administrative Agent, dated as of May 1, 2003
is incorporated by reference to Exhibit 10.16 to the
registration statement of Nelnet, Inc. (File No. 333-108070).

10.5 Letter Agreement by and between Nelnet Education Loan Funding,
Inc. and Bank of America, N.A., dated as of June 25, 2003,
relating to the increase of the Warehouse Note Purchase and
Security Agreement dated as of May 1, 2003 is incorporated by
reference to Exhibit 10.90 to the registration statement of
Nelnet, Inc. (File No. 333-108070).

10.6 Letter Agreement by and between Nelnet Education Loan Funding,
Inc. and Deutsche Bank AG, New York Branch, dated as of June 25,
2003, relating to the increase of the Warehouse Note Purchase
and Security Agreement dated as of May 1, 2003 is incorporated
by reference to Exhibit 10.91 to the registration statement of
Nelnet, Inc. (File No. 333-108070).

10.7 Letter Agreement by and between Nelnet Education Loan Funding,
Inc. and Societe Generale, dated as of June 25, 2003, relating
to the increase of the Warehouse Note Purchase and Security
Agreement dated as of May 1, 2003 is incorporated by reference
to Exhibit 10.92 to the registration statement of Nelnet, Inc.
(File No. 333-108070).

10.8 Amendment to Application and Agreement for Standby Letter of
Credit, Loan Purchase Agreements and Standby Student Loan
Purchase Agreements, dated effective October 21, 2003, by and
among National Education Loan Network, Inc., Nelnet, Inc.,
Nelnet Education Loan Funding, Inc., Union Bank and Trust
Company and Bank of America, N.A. is incorporated by reference
to Exhibit 10.94 to the registration statement of Nelnet, Inc.
(File No. 333-108070).

10.9 Letter Agreement between Nelnet Education Loan Funding, Inc. and
Deutsche Bank AG, dated as of February 20, 2004 is incorporated
herein by reference to Exhibit 10.56 of the Annual Report on
Form 10-K of Nelnet, Inc. for the year ended December 31, 2003.

10.10 Letter Agreement between Nelnet Education Loan Funding, Inc. and
Bank of America, N.A., dated as of February 20, 2004 is
incorporated herein by reference to Exhibit 10.57 of the Annual
Report on Form 10-K of Nelnet, Inc. for the year ended December
31, 2003.

10.11 Letter Agreement between Nelnet Education Loan Funding, Inc. and
Societe Generale, dated as of February 20, 2004 is incorporated
herein by reference to Exhibit 10.58 of the Annual Report on
Form 10-K of Nelnet, Inc. for the year ended December 31, 2003.

23.1 Consent of KPMG LLP, Independent Auditors is filed herewith.

31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 of Principal Executive Officer is filed herewith.

31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 of Principal Executive Officer is filed herewith.

32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Principal Executive Officer.

32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Principal Financial Officer.

REPORTS ON FORM 8-K

The Company filed a current report on Form 8-K on December 10,
2003, reporting the pool of student loans held to secure the Series 2003-1
notes.

21

SIGNATURES

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

NELNET EDUCATION LOAN FUNDING, INC.

By: /s/ Terry Heimes
---------------------------------
Terry Heimes
(Principal Executive Officer)

By: /s/ Jim Kruger
-----------------------------------
Jim Kruger
(Principal Financial and Accounting
Officer)

Date: March 26, 2004

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

Signature Title Date
--------- ----- ----

By: /s/ Terry Heimes President March 26, 2004
------------------------- (Principal Executive
Terry Heimes Officer)

By: /s/ Jim Kruger Secretary, Treasurer and March 26, 2004
------------------------- Director (Principal
Jim Kruger Financial and Accounting
Officer)

By: /s/ William Cintani Director March 26, 2004
-------------------------
William Cintani

By: /s/ Thomas Freimoth Director March 26, 2004
-------------------------
Thomas Freimoth

By: /s/ Mark Portz Director March 26, 2004
-------------------------
Mark Portz

22

EXHIBIT INDEX

23.1 Consent of KPMG LLP
31.1 Rule 15d-14(a) Certification of Principal Executive Officer.
31.2 Rule 15d-14(a) Certification of Principal Financial Officer.
32.1 Section 1350 Certification of Principal Executive Officer.
32.2 Section 1350 Certification of Principal Financial Officer.

23

NELNET EDUCATION LOAN FUNDING, INC.

INDEX TO FINANCIAL STATEMENTS

Independent Auditors' Report.............................................. F-2

Balance Sheets as of December 31, 2003 and 2002 .......................... F-3

Statements of Income for the years ended December 31, 2003, 2002
and 2001............................................................... F-4

Statement of Stockholder's Equity for the years ended December 31, 2003,
2002 and 2001.......................................................... F-5

Statement of Cash Flows for the years ended December 31, 2003, 2002
and 2001............................................................... F-6

Notes to Financial Statements............................................. F-7

F-1

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Nelnet Education Loan Funding, Inc.:

We have audited the accompanying balance sheets of Nelnet Education Loan
Funding, Inc. (a wholly owned subsidiary of National Education Loan Network,
Inc.) as of December 31, 2003 and 2002, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three-year
period ended December 31, 2003. These financial statements are the
responsibility of Nelnet Education Loan Funding, Inc. management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nelnet Education Loan Funding,
Inc. as of December 31, 2003 and 2002 and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.

/s/ KPMG LLP

Lincoln, Nebraska
February 27, 2004

F-2

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)
Balance Sheets
December 31, 2003 and 2002

ASSETS 2003 2002
------------ -----------
(Dollars in thousands)

Student loans receivable, net of allowance of $2,574 in 2003
and $962 in 2002 $ 3,213,660 907,023
Cash and cash equivalents:
Cash and cash equivalents - not held at a related party 9,150 9,090
Cash and cash equivalents - held at a related party -- 204
------------ -----------
Total cash and cash equivalents 9,150 9,294
Restricted cash - held by trustee 90,726 45,097
Restricted investments - held by trustee 73,676 98,241
Accrued interest receivable 58,091 18,251
Other assets 6,722 860
------------ -----------
Total assets $ 3,452,025 1,078,766
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Bonds and notes payable $ 3,378,050 1,049,279
Accrued interest payable 3,790 2,407
Other liabilities, including deferred taxes 54,207 8,518
Income taxes payable to parent 259 3,689
------------ -----------
Total liabilities 3,436,306 1,063,893
------------ -----------
Stockholder's equity:
Common stock, $100 par value. Authorized 1,000 shares;
issued and outstanding 111 shares in 2003 and in 2002 11 11
Additional paid-in capital 5,652 1,467
Retained earnings 10,056 13,395
------------ -----------
Total stockholder's equity 15,719 14,873
Commitments and contingencies
------------ -----------
Total liabilities and stockholder's equity $ 3,452,025 1,078,766
============ ===========

See accompanying notes to financial statements.

F-3

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)
Statements of Income
Years ended December 31, 2003, 2002 and 2001

2003 2002 2001
--------- -------- --------
(Dollars in thousands)

Interest income:
Loan interest $ 74,396 51,916 63,688
Investment interest 3,436 3,615 4,769
--------- -------- --------
Total interest income 77,832 55,531 68,457
Interest expense:
Interest on bonds and notes payable 33,218 25,487 38,109
--------- -------- --------
Net interest income 44,614 30,044 30,348
Less provision for loan losses 1,600 403 575
--------- -------- --------
Net interest income after provision for
loan losses 43,014 29,641 29,773
--------- -------- --------

Other income 2 3 15
--------- -------- --------
Operating expenses:
Trustee and other debt related fees 6,284 3,563 3,899
Loan servicing fees to related parties 15,454 9,346 8,354
Loan servicing fees 401 447 378
Administrative fees to parent 5,997 5,427 5,438
Professional services 163 111 85
Other 439 298 376
--------- -------- --------
Total operating expenses 28,738 19,192 18,530
--------- -------- --------
Income before income tax expense 14,278 10,452 11,258
Income tax expense 4,967 3,763 4,053
--------- -------- --------
Net income $ 9,311 6,689 7,205
========= ======== ========

See accompanying notes to financial statements.

F-4

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)
Statements of Stockholder's Equity
Years ended December 31, 2003, 2002 and 2001

ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
-------- --------- --------- ------------
(Dollars in thousands)

Balance at December 31, 2000 $ 1 -- 4,001 4,002
Net income -- -- 7,205 7,205
Capital contributions from parent 10 5,815 -- 5,825
Dividends paid to parent -- -- (2,500) (2,500)
-------- --------- --------- ----------
Balance at December 31, 2001 11 5,815 8,706 14,532
Net income -- -- 6,689 6,689
Capital contributions from parent -- 18,610 -- 18,610
Return of capital to parent -- (22,958) -- (22,958)
Dividends paid to parent -- -- (2,000) (2,000)
-------- --------- --------- ----------
Balance at December 31, 2002 11 1,467 13,395 14,873
Net income -- -- 9,311 9,311
Capital contributions from parent -- 25,515 -- 25,515
Return of capital to parent -- (21,330) -- (21,330)
Dividends paid to parent -- -- (12,650) (12,650)
-------- --------- --------- ----------
Balance at December 31, 2003 $ 11 5,652 10,056 15,719
======== ========= ========= ==========

See accompanying notes to financial statements.

F-5

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)
Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------ ----------- ----------
(Dollars in thousands)

Net income $ 9,311 6,689 7,205
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization, including premiums 6,825 5,227 2,536
Deferred income tax expense (benefit) (1,277) 74 (677)
Excess arbitrage expense (1,100) 1,100 --
Provision for loan losses 1,600 403 575
Decrease (increase) in accrued interest receivable (39,840) 3,999 (1,100)
Decrease (increase) in other assets (1,685) 319 297
Increase (decrease) in accrued interest payable 1,383 (915) (2,196)
Increase in other liabilities 48,066 806 2,768
Increase (decrease) in income taxes payable to parent (3,430) 1,324 2,362
------------ ----------- ----------
Net cash provided by operating activities 19,853 19,026 11,770
------------ ----------- ----------
Cash flows from investing activities:
Originations, purchases and consolidations of student loans,
including premiums (3,822,404) (1,260,570) (820,366)
Net proceeds from student loan principal payments and
loan consolidations 143,318 498,323 114,175
Proceeds from sales of student loans to affiliates 1,433,454 732,595 575,187
(Payments) proceeds on loan participations (68,883) (31,453) 35,203
(Increase) decrease in restricted cash - held by trustee (45,629) (27,015) 29,394
Purchases of restricted investments - held by trustee (324,863) (217,200) (215,565)
Proceeds from maturities of restricted investments - held by
trustee 349,428 187,490 213,035
------------ ----------- ----------
Net cash used in investing activities (2,335,579) (117,830) (68,937)
------------ ----------- ----------
Cash flows from financing activities:
Payments on bonds and notes payable (422,288) (11,576) (10,983)
Proceeds from issuance of bonds and notes payable 2,751,059 116,072 66,459
Payment for debt issuance costs (4,724) (173) (280)
Proceeds from capital contributions from parent 25,515 18,610 5,825
Payments for return of capital to parent (21,330) (22,958) --
Dividends paid to parent (12,650) (2,000) (2,500)
------------ ----------- ----------
Net cash provided by financing activities 2,315,582 97,975 58,521
------------ ----------- ----------
Net increase (decrease) in cash and cash equivalents (144) (829) 1,354
Cash and cash equivalents, beginning of year 9,294 10,123 8,769
------------ ----------- ----------
Cash and cash equivalents, end of year $ 9,150 9,294 10,123
============ =========== ==========
Supplemental disclosures of cash flow information:
Interest paid $ 31,288 25,364 39,593
============ =========== ==========
Income taxes paid to parent $ 8,117 2,364 --
============ =========== ==========
See accompanying notes to financial statements.

F-6

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)

Notes to Financial Statements

December 31, 2003, 2002 and 2001

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) ORGANIZATION

Nelnet Education Loan Funding ("NELF", formerly NEBHELP, Inc.), a
wholly owned subsidiary of National Education Loan Network, Inc.
("NELN" or "Parent", formerly Nelnet, Inc.), was organized as a
special-purpose bankruptcy remote corporation to provide a
secondary market for loans made under the insured student loan
program provided for by the Higher Education Act of 1965, as
amended (the "Act"). NELF acquires loans provided for under the
Act through purchase, consolidation or other financing
arrangements. Student loans beneficially owned by NELF include,
but are not necessarily limited to, those originated under the
Federal Family Education Loan Program ("FFELP" or "FFEL program"),
including the Stafford Loan Program ("SLP"), formerly the
Guaranteed Student Loan Program, the Parent Loan Program for
Undergraduate Students ("PLUS") program, the Supplemental Loans
for Students ("SLS") program and loans to fund payment and
consolidation of certain borrower obligations ("Consolidation").
Title to the loans is held by an eligible lender trustee under the
Act for the benefit of NELF. The transfers of student loans to the
eligible lender trust do not qualify as sales under the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 140,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES, as the trust continues to be under
the effective control of NELF. The financed eligible loan
borrowers are geographically located throughout the United States.
The bonds and notes outstanding are payable primarily from
interest and principal payments on the student loans receivable as
specified in the resolutions authorizing the sale of the bonds and
notes.

The Parent is a holding company organized for the purpose of
establishing and owning the stock of corporations like NELF
engaged in the securitization of financial assets. The Parent also
provides managerial and administrative support to NELF.

(b) FINANCIAL STATEMENT FORMAT AND PRESENTATION

In accordance with the bond and note resolutions, separate
accounting records have been established to account for all
transactions of each bond and note series. Presentation of the
various indentures in total on the accompanying balance sheets
does not indicate that combined assets or liabilities and
stockholder's equity are available in any manner other than that
described in the trust indentures. The majority of administrative
and general expenses are paid from the unrestricted cash and then
reimbursed by the various bond and note series in accordance with
provisions and restrictions in the related indentures. Obligations
arising between financings and the unrestricted cash for operating
activities are recorded as due to (from) other funds and are
cleared in the ordinary course of business.

(c) CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, NELF considers all
investments with original maturities of three months or less to be
cash equivalents.

(d) STUDENT LOANS RECEIVABLE

Investments in student loans, including premiums and direct
origination and acquisition costs, are recorded at cost, net of
premium amortization and the allowance for loan losses. Student
loans consist of federally insured student loans and student loan
participations.

F-7

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)

Notes to Financial Statements - (Continued)

(e) ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is estimated and established through
a provision charged to expense. Losses are charged against the
allowance when management believes the collectibility of the loan
principal is unlikely. Recovery of amounts previously charged off
is credited to the allowance for loan losses.

NELF considers trends in student loan claims rejected for payment
by guarantors and the amount of loans subject to the 2% risk
sharing. The allowance is based on periodic evaluations of NELF's
loan portfolio considering past experience, changes to federal
student loan programs, current economic conditions and other
relevant factors. 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. The allowance is
maintained at a level management believes is adequate to provide
for estimated probable credit losses inherent in the loan
portfolio. This evaluation is inherently subjective as it requires
estimates that may be susceptible to significant changes.

Management believes that the allowance for loan losses is
adequate. While management uses available information to recognize
probable loan losses, future additions to the allowance for loan
losses may be necessary based on changes in economic and other
conditions.

(f) RESTRICTED CASH AND RESTRICTED INVESTMENTS - HELD BY TRUSTEE

NELF's restricted cash and restricted investments, consisting
primarily of U.S. Government money market funds and guaranteed
investment contracts, are held by the trustee in several accounts
and are subject to restrictions imposed by the trust indenture.
NELF recognizes all restricted cash and restricted investments
held by trustees on the balance sheets.

(g) OTHER ASSETS

Other assets are recorded at cost or amortized cost and consist
primarily of prepaid bond insurance and debt issuance costs.
Prepaid bond insurance and debt issuance costs are amortized using
the straight-line method and effective interest methods,
respectively, over the estimated lives of the bonds and notes
payable.

(h) STUDENT LOAN INCOME

NELF recognizes student loan income using the interest method, net
of amortization of premiums and capitalized direct origination and
acquisition costs. Loan income is recognized based on the expected
yield of the loan after giving effect to borrower utilization of
incentives for timely payment (borrower benefits) and other yield
adjustments. The effect of the borrower benefits on student loan
yield are based on borrowers who are eligible for the incentives.
The interest is paid by the U.S. Department of Education (the
"Department") or the borrower, depending on the status of the loan
at the time of accrual. In addition, the Department makes
quarterly interest subsidy payments on certain qualified FFELP
loans until the student is required under the provisions of the
Act to begin repayment. Repayment of FFELP loans normally begins
within six months after completion of the loan holders course of
study, leaving school or ceasing to carry at least one-half the
normal full-time academic load as determined by the educational
institution. Repayment of PLUS loans normally begins within 60
days from the date of loan disbursement, and repayment of SLS
loans begins within one month after completion of course of study,
leaving school or ceasing to carry at least the normal full-time
academic load as determined by the educational institution.

The Department provides a special allowance to lenders
participating in the FFEL program. The special allowance is
accrued using the interest method based upon the average rate
established in the auction of 13-week Treasury Bills in the
previous quarter relative to the yield of the student loan. Under
certain circumstances, the special allowance is reduced by
approximately one-half for loans which were originated or
purchased from funds obtained from issuance of tax-exempt
obligations, depending upon the issuance date of the obligation.

F-8

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)

Notes to Financial Statements - (Continued)

Premiums and capitalized direct origination and acquisition costs
are amortized over the estimated lives of the related loans in
accordance with SFAS No. 91, ACCOUNTING FOR NON-REFUNDABLE FEES
AND COSTS ASSOCIATED WITH ORIGINATING AND ACQUIRING LOANS AND
INITIAL DIRECT COSTS OF LEASES. NELF periodically evaluates the
assumptions used to estimate the life of the loans. NELF also pays
an annual 105 basis point rebate fee on Consolidation loans to the
Department. The amortization and fees are netted against student
loan income.

(i) INCOME TAXES

NELF files a consolidated Federal income tax return with Nelnet,
Inc. ("Nelnet"), the legal parent of NELN. The financial
statements reflect income taxes computed as if NELF filed a
separate tax return. Current income tax liabilities are recorded
by NELF to its parent as if NELF were a separate tax-paying
entity.

Income taxes are accounted for under the asset and liability
method. Deferred income tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective income tax basis.
Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered
or settled. The effect on deferred income tax assets and
liabilities of a change in income tax rates is recognized in
income in the accounting period that includes the enactment date.

(j) USE OF ESTIMATES

The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make a number of estimates and
assumptions that affect the reported amounts of assets and
liabilities, reported amounts of revenues and expenses and other
disclosures. Actual results could differ from those estimates. The
most significant estimate made by management relates to the
adequacy of the allowance for loan losses.

(k) COMPREHENSIVE INCOME

NELF has no sources of other comprehensive income. Therefore,
NELF's comprehensive income consists solely of its net income.

(l) RECLASSIFICATION

Certain amounts in 2002 have been reclassified to conform to the
2003 financial statement presentation.

(2) RESTRICTED INVESTMENTS - HELD BY TRUSTEE

NELF's restricted investments are held by the trustees in various
accounts subject to use restrictions and consist of guaranteed investment
contracts which are classified as held-to-maturity. Due to the
characteristics of the investments, there is no available or active
market for these types of financial instruments. The investments are
guaranteed and are purchased and redeemed at par value, which equals
their cost at December 31, 2003 and 2002. The contractual maturity for
the guaranteed investment contracts are greater than ten years.

F-9

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)

Notes to Financial Statements - (Continued)

(3) STUDENT LOANS RECEIVABLE AND CONCENTRATION OF CREDIT RISK

FFELP loans may be made under the FFEL program by certain lenders as
defined by the Act. These loans, including related accrued interest, are
guaranteed at their maximum level permitted under the Act by an
authorized guaranty agency which has a contract of reinsurance with the
Department. The terms of the loans, which vary on an individual basis,
generally provide for repayment in monthly installments of principal and
interest over a period of up to 20 years. Interest rates on some loans
will vary based on the average of the 91-day U.S. Treasury bill rate.
Interest rates on student loans, including SLP, PLUS, SLS and
Consolidation loans range from 2.8% to 12.0% (the weighted average rate
was 4.0% and 4.7% at December 31, 2003 and 2002, respectively), dependent
upon type, terms of loan agreements and date of origination. NELF has
entered into trust agreements in which unrelated financial institutions
serve as the eligible lender trustees. As eligible lender trustees, the
financial institutions act as the eligible lenders in acquiring certain
eligible student loans as an accommodation to NELF, which holds a
beneficial interest in the student loan assets as the beneficiary of such
trusts.

Substantially all FFELP loan principal and related accrued interest is
guaranteed as defined by the Act. These guarantees are made subject to
the performance of certain loan servicing procedures stipulated by
applicable regulations. If these procedures are not met, affected student
loans may not be covered by the guarantees should the borrower default.
NELF retains and enforces recourse provisions against servicers and
lenders under certain circumstances. Such student loans are subject to
"cure" procedures and reinstatement of the guarantee under certain
circumstances. Also, in accordance with the Student Loan Reform Act of
1993, student loans disbursed prior to October 1, 1993 are fully insured,
and loans disbursed subsequent to October 1, 1993 (approximately 98% and
93%, respectively, of the student loans at December 31, 2003 and 2002)
are insured up to 98% of their principal amount and accrued interest.

NELF has provided for an allowance for loan losses related to those loans
only guaranteed up to 98% for principal and interest. Activity in the
allowance for loan losses for the years ended December 31, 2003 and 2002
is shown below:

2003 2002 2001
------ ------ ------
(Dollars in thousands)
Beginning balance $ 962 955 618
Provision for loan losses 1,600 403 575
Transfer of allowance for purchase of student
loans receivable from affiliate 245 123 --
Loans charged off, net of recoveries (233) (519) (238)
------- ------ ------
Ending balance $2,574 962 955
======= ====== ======

NELF will periodically enter into various other financing arrangements,
including participation agreements, collateralized or secured by student
loans to provide additional capacity or liquidity. Net student loans
receivable have been increased (reduced) due to participation agreements
with NELN and its affiliates at December 31, 2003 and 2002 of
approximately $24 million and $(44) million, respectively.

F-10

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)

Notes to Financial Statements - (Continued)

(4) GUARANTY AGENCIES

At December 31, 2003 and 2002, Nebraska Student Loan Program, Inc.,
Tennessee Student Assistance Corporation, Colorado Student Loan Program,
Florida Department of Education Office of Student Financial Assistance
and Great Lakes Higher Education Guaranty Corporation were the primary
guarantors, guaranteeing approximately 94% and 86%, respectively, of the
total student loans beneficially owned by NELF. Management periodically
reviews the financial position of its guarantors and does not believe the
level of concentration creates an unusual or unanticipated credit risk.
In addition, management believes that based on amendments to the Act as a
result of reauthorization, the security for and payment of any of NELF's
obligations would not be materially adversely affected as a result of
legislative action or other failure to perform on its obligations on the
part of any guaranty agency. NELF, however, offers no absolute assurances
to that effect.

(5) BONDS AND NOTES PAYABLE

NELF periodically issues bonds, commercial paper, short-term variable
auction rate notes, taxable student loan asset-backed notes and other
credit facilities to finance the acquisition of student loans or to
refinance existing debt. Most of the bonds and notes payable are
primarily secured by the student loans receivable, related accrued
interest and by the amounts on deposit in the accounts established under
the respective bond resolutions or financing agreements.

The table below summarizes outstanding bonds and notes payable at
December 31, 2003 and 2002 by type of instrument.

2003 2002
--------------------------- ---------------------------
Carrying Interest rate Carrying Interest rate
amount range amount range
------------ -------------- ------------ --------------
(Dollars in thousands)

Commercial paper $ 1,721,059 1.12% - 1.15% $ 320,212 1.36% - 1.39%
Variable-rate notes 1,197,150 1.15% - 1.27% 256,900 1.45% - 2.05%
Variable-rate bonds 286,535 1.20% - 1.25% 286,535 1.60%
Fixed-rate bonds 153,105 6.20% - 6.45% 159,090 5.65% - 6.45%
SLIMS 20,201 6.68% 26,542 6.68%
------------ ------------
$ 3,378,050 $ 1,049,279
============ ============

Variable-rate notes include the senior notes issued under the 1993 Series
A financing and the Senior and Subordinate 2003-1 Student Loan
Asset-Backed notes with interest rate reset dates varying from 7 to 91
days. Variable-rate bonds are long-term bonds with weekly interest rate
reset dates.

In June 1998, NELF issued student loan interest margin securities (SLIMS)
of $45 million, which are secured by the rights to residual cash flows
from the 1985, 1986, 1988 and 1993 Series A bonds.

F-11

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)

Notes to Financial Statements - (Continued)

The table below summarizes outstanding bonds and notes payable at
December 31, 2003 and 2002 by issue.

2003
-------------------------------------------------------------------
FIXED-
VARIABLE- VARIABLE- RATE BONDS
FINAL COMMERCIAL RATE RATE AND
MATURITY PAPER NOTES BONDS SLIMS TOTAL
--------- ---------- ---------- ---------- ----------- ----------
(Dollars in thousands)

1985 bonds 12/1/15 $ -- -- 143,035 -- 143,035
1986 bonds 12/1/16 -- -- 103,500 -- 103,500
1988 bonds 8/1/18 -- -- 40,000 -- 40,000
1993 Series A bonds 6/1/18 -- 202,300 -- 109,230 311,530
1993 Series B bonds 6/1/28 -- -- -- 43,875 43,875
1998 SLIMS 7/1/16 -- -- -- 20,201 20,201
RBC warehouse line 6/1/05 434,809 -- -- -- 434,809
BOA warehouse line 5/14/04 1,286,250 -- -- -- 1,286,250
Series 2003-1 notes 7/1/43 -- 994,850 -- -- 994,850
----------- ---------- ---------- ----------- ----------
$1,721,059 1,197,150 286,535 173,306 3,378,050
=========== ========== ========== =========== ==========

2002
-----------------------------------------------------------------
FIXED-
VARIABLE- VARIABLE- RATE BONDS
FINAL COMMERCIAL RATE RATE AND
MATURITY PAPER NOTES BONDS SLIMS TOTAL
--------- ----------- ---------- --------- ---------- ----------
(Dollars in thousands)
1985 bonds 12/1/15 $ -- -- 143,035 -- $ 143,035
1986 bonds 12/1/16 -- -- 103,500 -- 103,500
1988 bonds 8/1/18 -- -- 40,000 -- 40,000
1993 Series A bonds 6/1/18 -- 256,900 -- 113,800 370,700
1993 Series B bonds 6/1/28 -- -- -- 45,290 45,290
1997 SLMA commercial paper 5/1/03 320,212 -- -- -- 320,212
1998 SLIMS 7/1/16 -- -- -- 26,542 26,542
----------- ---------- --------- --------- -----------
$ 320,212 256,900 286,535 185,632 $1,049,279
=========== ========== ========== ========= ===========

The 1985 bonds, the 1986 bonds, the 1988 bonds and the 1993 Series A and
B bonds are secured by financial guaranty insurance policies issued by
Municipal Bond Investors Assurance Corporation (MBIA) and a pledge of the
trust estate.

At December 31, 2003, NELF had commercial paper and warehouse agreements
with a maximum aggregate stated amount of $2.25 billion, of which
approximately $1.72 billion was outstanding at December 31, 2003. At
December 31, 2002, NELF had a commercial paper program with Student Loan
Marketing Association ("SLMA") with a maximum aggregate stated amount of
$350 million, of which approximately $320 million was outstanding at
December 31, 2002. Effective June 30, 2003, the commercial paper program
with SLMA was terminated.

F-12

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)

Notes to Financial Statements - (Continued)

The 1993 Series A and B bonds and the SLIMS have stated principal
maturities due in the next five years. The warehouse lines are assumed to
renew automatically; therefore, the maturities on the warehouse lines are
deemed to be greater than five years. At December 31, 2003, bonds and
notes are due (based on final maturities) in varying amounts as shown
below (dollars in thousands):

2004 $ 10,227
2005 9,299
2006 9,323
2007 8,940
2008 8,325
2009 and thereafter 3,331,936
-----------
$ 3,378,050
===========

Generally, bonds bearing interest at variable rates can be redeemed on
any interest payment date at par plus accrued interest. Subject to
conversion provisions, all bonds and notes are subject to redemption
prior to maturity at the option of NELF. These provisions include price,
conditions precedent, and limitations.

NELF irrevocably escrowed funds in 1995 to make the remaining principal
and interest payments on previously issued bonds and notes. Accordingly,
these obligations are not included on the accompanying balance sheets. At
December 31, 2003 and 2002, approximately $22.2 million and $20.6
million, respectively, of defeased debt remained outstanding.

Certain bond resolutions contain, among other requirements, covenants
relating to restrictions on additional indebtedness, limits as to direct
and indirect administrative expenses and maintaining certain financial
ratios. Management believes NELF is in compliance with all covenants of
the bond indentures and related credit agreements. NELF is limited in the
amount of funds that can be transferred to NELN or Nelnet through
intercompany loans, advances or cash dividends. These limitations result
from the restrictions contained in the trust indentures.

(6) ARBITRAGE EARNINGS REBATABLE

The 1985 bonds, the 1986 bonds, the 1988 bonds and the 1993 Series A and
B bonds issued by NELF are subject to Internal Revenue Service
regulations which limit the amount of income which may be earned on
certain investments acquired with bond proceeds of which limit the income
available to NELF to an amount not greater than that which would have
been earned had the funds been invested at the yield of the bonds. Any
excess earnings are to be rebated to the federal government. In the event
any of the series of bonds are refinanced, payment to the federal
government would be accelerated and the rebate would be due upon
retirement of the outstanding bonds. NELF has no amount due at December
31, 2003 and $1.1 million due at December 31, 2002, included in other
liabilities in the accompanying balance sheets.

F-13

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)

Notes to Financial Statements - (Continued)

(7) DEFERRED INCOME

A portion of the student loan portfolio, with an outstanding balance of
$2.6 billion as of December 31, 2003, is comprised of loans which were
previously financed with tax-exempt obligations issued prior to October
1, 1993. Based upon provisions of the Act and related interpretations by
the Department, NELF believes that it may be entitled to receive special
allowance payments on these loans providing a 9.5% minimum rate of
return. NELF has not recognized interest income generated by these loans
based on the 9.5% minimum rate of return. NELF has asked the Department
to confirm that it is allowed to recognize the income based on the 9.5%
minimum rate of return. NELF has deferred recognition of this excess
interest income pending satisfactory resolution of this issue. At
December 31, 2003, the amount of excess interest income deferred totaled
approximately $42.9 million, which is included in other liabilities on
the accompanying balance sheets. Since NELF did not refinance loans with
the aforementioned tax-exempt obligations until 2003, all of this
deferred income was recorded in 2003.

(8) INCOME TAXES

Income tax expense for the years ended December 31, 2003, 2002 and 2001
consists of the following components:

2003 2002 2001
-------- -------- --------
(Dollars in thousands)
Current:
Federal $ 5,748 3,389 4,321
State 496 300 409
-------- -------- --------
6,244 3,689 4,730
-------- -------- --------
Deferred:
Federal (1,210) 60 (606)
State (67) 14 (71)
-------- -------- --------
(1,277) 74 (677)
-------- -------- --------
$ 4,967 3,763 4,053
======== ======== ========

The actual income tax expense differs from the "expected" income tax
expense, computed by applying the Federal statutory corporate tax rates
to income before income tax expense for the years ended December 31,
2003, 2002 and 2001, as shown below:

2003 2002 2001
--------- -------- --------
(Dollars in thousands)
Computed "expected" income tax expense $ 4,997 3,554 3,828
Increase in income tax expense resulting from:
State taxes, net of Federal income
tax benefit 278 207 223
Premium amortization (337) -- --
Other 29 2 2
--------- -------- --------
$ 4,967 3,763 4,053
========= ======== ========

F-14

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)

Notes to Financial Statements - (Continued)

NELF's deferred income tax assets and liabilities, which are included in
other liabilities as of December 31, 2003 and 2002, consists of the
following components:

2003 2002
--------- --------
(Dollars in thousands)
Deferred tax asset, allowance for loan losses $ (1,039) (356)
Deferred tax liability, primarily basis differences
in student loans 4,159 4,753
--------- --------
Net deferred tax liability $ 3,120 4,397
========= ========

No valuation allowance was considered necessary for the deferred tax
assets at December 31, 2003 and 2002. In assessing the realizability of
NELF's deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will
be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the period in which
those temporary differences become deductible. Management considers the
scheduled reversals of deferred tax liabilities, projected taxable
income, carryback opportunities and tax planning strategies in making the
assessment of the amount of the valuation allowance.

(9) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

CASH AND CASH EQUIVALENTS, RESTRICTED CASH - HELD BY TRUSTEE, AND
ACCRUED INTEREST RECEIVABLE/PAYABLE

The carrying amount approximates fair value due to the variable
rate of interest and/or the short maturities of these instruments.

STUDENT LOANS RECEIVABLE

The fair value of student loans receivable is estimated at amounts
recently paid by NELN or its subsidiaries to acquire loans in the
market. The fair value of the student loans receivable at December
31, 2003 and 2002 is approximately $3.28 billion and $0.92
billion, respectively.

RESTRICTED INVESTMENTS - HELD BY TRUSTEE

Due to the characteristics of the investments, there is no
available or active market for these types of financial
instruments. The investments are guaranteed and are purchased and
redeemed at par value, which equals their cost.

BONDS AND NOTES PAYABLE

The fair value of the bonds and notes payable is based on market
prices for securities that possess similar credit risk and
interest rate risk at or near December 31, 2003 and 2002. The
estimated fair value of the bonds and notes payable at December
31, 2003 and 2002 is approximately $3.40 billion and $1.06
billion, respectively.

F-15

NELNET EDUCATION LOAN FUNDING, INC.
(A Wholly Owned Subsidiary of National Education Loan Network, Inc.)

Notes to Financial Statements - (Continued)

LIMITATIONS

The fair value of a financial instrument is the current amount
that would be exchanged between willing parties, other than in a
forced liquidation. Fair value is best determined based upon
quoted market prices. However, in many instances, there are no
quoted market prices for NELF's various financial instruments. In
cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of
future cash flows. Accordingly, the fair value estimates may not
be realized in an immediate settlement of the instrument. SFAS No.
107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements.

(10) RELATED PARTY TRANSACTIONS

NELF contracts for loan servicing with Nelnet and Great Lakes Higher
Education Corporation. Under the terms of an agreement, NELF contracts
the majority of the loan servicing through Nelnet. Fees paid to Nelnet
are calculated using an annual asset-based charge ranging from 0.60% to
1.69% of the student loan principal balance, calculated monthly, or using
a fixed monthly fee ranging from $1.28 to $3.77 per account serviced.
During 2003, 2002 and 2001, the fees incurred to Nelnet were
approximately $15.5 million, $9.3 million and $8.4 million, respectively.
At December 31, 2003 and 2002, approximately $4.9 million and $2.3
million, respectively, were payable to Nelnet for loan servicing and are
included in other liabilities in the accompanying balance sheets.

NELF incurred fees to NELN for managerial and administrative support for
the operations of NELF, based on service agreements that require an
annual fee ranging from 18 basis points to 63 basis points of the average
outstanding loan balance to be paid monthly. These fees amounted to
approximately $6.0 million, $5.4 million and $5.4 million in 2003, 2002
and 2001, respectively.

During 2003 and 2002, NELF purchased student loans from wholly owned
subsidiaries of NELN for approximately $1.2 billion and $89.7 million,
respectively. Premiums paid on these loans totaled approximately $19.3
million and $2.7 million in 2003 and 2002, respectively.

During 2003 and 2002, NELF sold student loans, including unamortized
premiums, to wholly owned subsidiaries of NELN for approximately $1.4
billion and $0.7 billion, respectively. No gains or losses were
recognized, as sales between wholly owned subsidiaries of NELN are at
amortized cost, which approximates fair value.

Certain owners of NELN are also officers and directors of Union Bank &
Trust Company (UB&T). During 2003 and 2002, NELF purchased student loans
of approximately $274.0 million and $62.4 million, respectively, from
UB&T. Premiums paid on these loans totaled approximately $3.3 million and
$0.9 million in 2003 and 2002, respectively.

NELF participates in the Short-Term Federal Investment Trust (STFIT) of
the Student Loan Trust Division of UB&T. The STFIT balances at December
31, 2003 and 2002 were approximately $1,300,000 and $200,000,
respectively, and are included in restricted cash - held by trustee in
2003 and in cash and cash equivalents - held at a related party in 2002
in the accompanying balance sheets. NELF's participation in the STFIT had
similar terms and investment yields as those prevailing for nonaffiliated
companies. Interest income earned on these accounts for the years ended
December 31, 2003 and 2002 was approximately $8,000 and $94,000,
respectively.

F-16