UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number: 000-50846

Collegiate Funding Services, Inc.

(Exact name of Registrant as Specified in Charter)

10304 Spotsylvania Avenue

Suite 100

Fredericksburg, Virginia 22408

(540) 374-1600

(Name, Address, Including Zip Code and Telephone Number,

Including Area Code of Agent for Service)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $0.001 per share

      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 þ          No o

      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

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.     Yes o          No þ

      The aggregate market value of the common stock held by non-affiliates of the registrant based on a closing sale price of the registrant’s common stock on July 16, 2004 (the first date on which such common stock was publicly traded) was $230,636,261.

      30,969,048 Shares of Common Stock, par value $0.001 per share, were outstanding as of March 18, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

      Part III incorporates information by reference from the definitive proxy statement to be filed in connection with the registrant’s 2005 annual meeting of stockholders.

Table of Contents

PART I.

Cautionary Notice Regarding Forward-looking Statements

      This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, future loan originations, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information and, in particular, appear under the headings “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk.” When used in this report, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” or future or conditional verbs, such as “will,” “should,” “could” or “may,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management’s examination of historical operating trends and data are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs and projections will be achieved.

      There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this report are set forth in the section of this report entitled “Risk Factors.” All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. We undertake no obligation to update or revise forward-looking statements which may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events unless we have an obligation to do so under the federal securities laws. With respect to forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Available Information

      Our website address is www.cfsloans.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. Our Audit Committee Charter, Compensation Committee Charter, Nominating and Governance Committee Charter, Code of Business Conduct and Ethics, Code of Ethics and Whistleblower Policy are also available on our website and available in print to any shareholder who requests it.

      In this Annual Report on Form 10-K, we use the terms “Collegiate Funding Services,” “we,” “our Company,” “our” and “us” to refer to Collegiate Funding Services, Inc. and its subsidiaries. All references to years, unless otherwise noted, refer to our fiscal year, which ends on December 31.

      We are a vertically integrated education finance company that markets, originates, finances and services education loans. We market education loans through direct-to-consumer programs, which involve marketing campaigns where we acquire customers through direct contact with us, including targeted direct mail, telemarketing and the Internet, supplemented by affinity and other partnerships. Using our direct-to-consumer distribution model, our vertically integrated platform and our relationships with partners, we assist consumers in financing and refinancing the cost of undergraduate, graduate, professional, career and continuing education. We finance, retain and service a portion of the loans we originate. Our strategy is to

focus on marketing, originating, financing and servicing federally guaranteed consolidation loans and to leverage our market position and platform to build our brand and diversify our federally guaranteed and non-government guaranteed product and service offerings.

      Since our inception in 1998, we have originated or facilitated the origination of over $18 billion in education loans. We originated or facilitated the origination of $4.4 billion of education loans in 2004 and we believe we are one of the more significant originators of federal and private education loans in the United States. Of our total loan originations in 2004, $4.0 billion were federally guaranteed consolidation student loans made through the Federal Family Education Loan Program, which we refer to as the FFEL Program or FFELP. Through the FFEL Program, an eligible borrower with multiple federally guaranteed loans can consolidate his or her loans after graduation into a single loan. Beginning in May 2003, we increased our focus on private education loans and, in that year, originated or facilitated the origination of $199.6 million of these loans. In 2004, $417.1 million of these loans were originated or facilitated. Private loans, which do not have a federal guarantee, are credit-based consumer loans used to pay for or refinance education-related expenses.

      We provide high quality loan servicing for both federally issued and private loans through our wholly owned subsidiary, CFS-SunTech Servicing LLC (“SunTech”). We acquired SunTech in April 2003. Prior to the acquisition, SunTech had been servicing a significant portion of the loans we originated since our formation in 1998. Servicing loans provides us with an additional source of fee income and enables us to retain a direct customer relationship over the life of the loans, which we believe is a critical element in establishing our brand. We service substantially all the loans we hold in our portfolio as well as student loans held by third-party lenders. We generally seek to retain the servicing of a majority of the loan applications we sell, which accounts for a significant portion of our third-party servicing volume. As of December 31, 2004, we were servicing approximately $10.9 billion in student loans made to over 430,000 customers. In May 2004, SunTech received the Exceptional Performance status designation from the U.S. Department of Education and in June 2004, we received a rating of “SQ1”, the highest service quality designation by Moody’s Investors Service, Inc.

      We have adapted a direct-to-consumer marketing model developed in the consumer finance industry for use in education-based lending. We believe our targeted direct-to-consumer strategy enables us to increase consumer awareness of the products we offer and collect data useful in our product development and marketing. Using a variety of internal and external databases accumulated since our inception, we create marketing campaigns to target consumers with products based on their specific characteristics. We supplement our direct-to-consumer strategy through marketing relationships with membership organizations, alumni associations and other entities in order to reach customers and promote our products under our own label or under co-branded offerings in partnership with other lenders. We expanded our marketing channels in 2004 and currently have relationships with over 1,000 colleges, universities and other affinity partners.

      In order to originate a loan, once a borrower has been identified through our direct-to-customer or indirect channels, we work with that borrower to evaluate his or her eligibility for particular loan programs and to ensure that the loan application and all required documentation is completed properly. In the case of private in-school loans which we do not originate, we solicit borrowers and refer them directly to our counterparties to complete the qualification and application process, which we refer to as facilitating the origination of loans. Once we have originated a FFELP loan, we either fund and retain that loan in our portfolio or sell the originated loan application to a third-party lender. Once the decision is made to sell a loan, the application is forwarded to the third-party lender and a referral fee is paid. The third-party lender funds the loan. Under the loan origination process, we recognize revenue when a completed FFELP application, based on the satisfaction of criteria set by the counterparty, is sold to the buyer. We receive fees per application sold. With respect to private education loans, we either sell completed loan applications upon origination (as described above), in the case of private consolidation loans, or, in the case of private in-school loans, receive a fee for facilitating the origination of loans. Under the loan facilitation process we recognize revenue when the applicant has a completed private education loan funded by the counterparty. The revenue is a percent of the principal balance funded.

      In 2002, we launched our strategy of retaining in our portfolio a portion of the federally guaranteed loans we originate. Prior to 2002, we sold substantially all of our completed loan applications to third parties and received fees for these applications at the time of sale. We currently retain in our portfolio only loans that are federally guaranteed. As a result of this change in strategy, our net income in recent periods has been lower than it would have been had we sold a larger percentage of the FFELP loans we originate because of foregone one-time fees received for loan sales. This change in strategy contributed to our net loss in 2003. Nonetheless, we believe that our strategy of retaining in our portfolio a portion of the loans we originate and selling the remainder for a fee provides us with several advantages. Among the benefits of retaining loans is our ability to take advantage of these loans’ limited credit risk, their duration and other characteristics which allow us to realize a greater revenue stream over the life of each loan. Selling the remainder of our originated loan applications provides us more revenue derived from these loans in their years of origination and permits us to maintain a diversified source of funding for loan processing and origination and to build our relationships with the financial institutions that purchase our loans.

      We have multiple sources of revenue, as a result of this strategy, reflecting the fact that we market, originate, finance and service education loans. The sources of revenue include fee income for selling completed loan applications to third parties and facilitating the origination of loans for lenders, net interest income earned on the loans we hold in our portfolio and servicing fee income for the assets we service. Fees on loan application sales and for facilitating the origination of loans, which we refer to collectively as fees on loan sales, accounted for approximately 60.6% of our net revenue in 2004 compared to 75.7% in 2003. Net interest income after provision for loan losses, which is primarily comprised of the difference between the yield we receive on our loan portfolio and the cost of funding these loans, accounted for approximately 31.2% of our net revenue in 2004 compared to 16.6% in 2003. Servicing fees, earned since our acquisition of SunTech in April 2003, accounted for 6.5% of our net revenue in 2004 compared to 7.7% in 2003. Advertising fees, earned since our acquisition of Members Connect Inc. d/b/a Youth Media & Marketing Networks (“Y2M”) in April 2004, accounted for 1.7% of our net revenue in 2004. Over time, as we build our portfolio, we expect the percentage of our net revenue earned from net interest income to increase and the percentage of our net revenue earned from our fees on loan originations to decrease.

      We retained approximately 50% of the FFELP loans we originated in both 2004 and 2003 and our portfolio of federally guaranteed loans grew to $4.7 billion as of December 31, 2004 from $973.1 million as of December 31, 2002. We primarily finance the loans we retain in our portfolio through asset-backed securitizations, which we record as debt on our consolidated balance sheet. To date, we have completed six securitizations that contributed $5.4 billion of funding, including our most recent securitization of $1.4 billion completed in February 2005. We supplement our asset-backed securitizations with our secured warehouse financing facility, which we believe allows us to access the securitization market on a more timely and cost-effective basis. In addition, we enter into forward purchase agreements, under which several financial institutions have agreed to purchase and, in certain cases, require that we sell to them, a portion of the loan applications we originate each year.

      Our predecessor company was organized in 1998 to focus primarily on marketing federally guaranteed consolidation loans. In May 2002, Lightyear Capital, LLC, a private investment firm based in New York City, acquired Collegiate Funding Services, Inc. As an investment fund, Lightyear seeks capital appreciation through direct private equity and equity-related investments, including leveraged acquisitions, buildups, recapitalizations, restructurings, management buyouts, pre-public offering opportunities and growth equity transactions.

      We intend to seek out and make acquisitions in the education finance industry from time to time. In April 2004, we acquired Y2M, a company that provides affinity marketing of products and services, with a focus on education finance products, targeted at college students and recent college graduates. Y2M uses direct mail, the Internet and print media in its marketing efforts, which it complements by publishing online college newspapers. Y2M supplements our affinity marketing strategy through which we market and originate loans through relationships with certain alumni associations and industry groups with whom we co-brand our loan products. In the future, we will consider acquisitions of individual companies as well as

loan and servicing portfolios that we believe have the potential to enhance the value of our company, expand our product reach and/or aid in executing our growth strategy.

Product and Service Offerings

      Origination channels. We originate and acquire education loans through our direct-to-consumer distribution model, vertically integrated platform and our relationships with other partners, using a variety of methods.

      Direct-to-consumer. We believe that companies using direct marketing to consumers will continue to benefit in the education finance market. We have adapted a direct-to-consumer marketing model developed in the consumer finance industry for use in education finance. We originate education loans primarily by marketing directly to consumers using direct mail, telemarketing and the Internet. We believe our targeted direct-to-consumer marketing strategy enables us to make more consumers aware of our products. Our direct-to-consumer channel accounted for approximately 83% of the education loans we originated or facilitated the origination of in 2004.

      We view education loans as consumer loans that can be originated in any fashion convenient for the student, parent or school. A substantial portion of our direct marketing to consumers is geared towards our telemarketing customer call centers receiving calls from eligible borrowers to receive information specific to their eligibility for different loan programs. Our telemarketing center associates are extensively trained to adhere to current regulations as well as to provide timely and convenient information concerning our loan programs. They provide recent graduates, students and parents specific, concise and accurate financial aid information. One of our telemarketing center associates can typically pre-qualify a borrower over the phone for a federal consolidation, private, Stafford or PLUS loan in less than five minutes.

      Many of our customer solicitations are targeted at potential borrowers that have been prescreened for the likelihood of needing financing for their postsecondary education or refinancing of their education debt and, in the case of private loans, for creditworthiness. We use both internal and external data sources that together create a database of information used to target consumers in need of education loans. We use information received from credit bureaus and from third-party compiled and vertical mailing lists. Our campaigns consist of mail and Internet offers and telemarketing scripting delivered separately or in combination to desired customers. We track and periodically review the results of our various solicitation campaigns in a “test and learn” environment. Our direct-to-consumer marketing strategy targets products to a consumer based on his or her specific profile and uses consumer feedback and data analysis to revise and refine the products we offer. In developing our targeting strategies, we attempt to respect the privacy of our customers (and potential customers) by using customer information only in accordance with our privacy policies.

      We have the capability to originate loans over the Internet and have invested in expanding our Internet-based originations. To date, we have not generated a significant percentage of our loan originations over the Internet; however we believe the Internet will be a cost-effective and complementary alternative for loan originations in the future. We have tested several marketing programs using Internet-based advertising, as well as advertising on certain websites. We intend to continue to invest in the technology required to grow our Internet-based origination capability to make it a critical channel for the origination and facilitating the origination of loans.

      We market our products under our own brands as well as under co-branded offerings in partnership with third-party lenders. Pursuant to forward purchase agreements with these third party lenders, we are granted a limited, non-exclusive, royalty-free license to use the name and trademark of the third-party lender on marketing and promotional materials relating to our FFELP and private consolidation loan products offered in conjunction with the third-party lender. These agreements generally require the third party lenders’ consent of any co-branded marketing materials before their distribution.

      Affinity group marketing. We also market and originate loans through relationships with certain alumni and industry groups, including the American Medical Association, the American Dental Association, the American Bar Association and alumni associations, through which we are the provider of loan products sponsored by these organizations. Through the co-branding of our products, affinity groups such as these organizations, as well as E-Loan and LendingTree, aid us in reaching new customers and marketing to our current customer lists. The affinity groups generally provide us with a list of their members and permit the solicitation of their members for education loans through either direct mail or through their publications and/or websites. If a solicitation results in the submission of a completed application, then we pay the relevant affinity group a referral fee. We are not required to purchase customer lists from our affinity partners. However in the past we have purchased some customer lists. The cost of these lists has been charged to marketing expense at the time of purchase.

      School preferred lender lists. We also market and originate loans to students currently enrolled in school and recent graduates through financial aid offices. We have a national sales force of education industry professionals working with colleges and universities directly. Through these preferred lender arrangements, we typically provide a product or products chosen by the schools to qualified students and to parents of students of those schools. We mail explanatory and promotional materials concerning these products to students whose names are provided to us by the schools. The financial aid offices of such institutions usually distribute these materials as well. We do not pay any fees for applications or loans generated through this program. We are currently expanding our originations in the school channel by developing the internal capability to provide originations of Stafford and PLUS loans and private in-school loans through our servicing platform. In the past year, our products were added to 316 school preferred lender lists.

      Our national sales force of 17 professionals focuses on implementing this strategy by educating college financial aid officers about us and offering our products and services to them. This participation may drive FFELP and private in-school loan volume from the students and parents who select their lender from the school’s preferred lender list. In addition, we believe that a portion of the loans that are originated through our direct-to-consumer channel are a result of us being on schools’ preferred lender lists.

      One of the primary benefits we offer to schools is a range of loan products to student and parent borrowers. Additional services we have developed or licensed to assist schools and financial aid offices include:

      In addition, our advisory board, consisting of 10 professionals from universities, financial aid offices and national membership associations, assists us in understanding and evaluating current trends in education finance and school and student finance needs.

      Secondary market acquisitions. We acquired a portion of our portfolio of federal education loans from FFELP originators in the secondary market. Approximately 9% of the education loans we originated or facilitated the origination of in 2004 were purchased from these FFELP originators.

      Our products. The great majority of education loans we originate are federally guaranteed consolidation loans. We also originate and facilitate the origination of private loans, as well as Stafford and PLUS loans. We originated or facilitated the origination of $4.4 billion in federal and private loans in 2004 and over $18 billion in such loans since our inception in 1998. Of our total loan originations in 2004, $4.0 billion were federally guaranteed consolidation loans.

      FFELP loans. We offer FFELP consolidation loans to qualifying borrowers. FFELP consolidation loans allow borrowers with existing federal loans to combine their federal education loans into a single loan, with a fixed rate, to be repaid over a term ranging from 12 to 30 years, depending on the size of the

loan. We offer federal consolidation loans in an amount sufficient to pay the outstanding principal, unpaid interest and late charges on federally insured or reinsured education loans incurred under the FFEL Program selected by the borrower, as well as loans made pursuant to the William D. Ford Federal Direct Loan Program, which we refer to as the FDL Program or FDLP, Perkins and Health Professional Student Loan Programs.

      We also offer borrowers Stafford and PLUS loans in accordance with those FFEL programs. Subsidized Stafford loans have terms of up to 10 years after the borrower leaves school, subject to extension, and are awarded to students on the basis of financial need. Unsubsidized Stafford loans have terms of up to 10 years after the borrower leaves school, subject to extension, and are available to all students regardless of financial need. The maximum aggregate borrowing by a single borrower of unsubsidized and subsidized Stafford loans is $23,000 for a dependent undergraduate student, $46,000 for an independent undergraduate student and $138,500 for a graduate student (including undergraduate borrowings).

      Our PLUS loans have terms of up to 10 years and allow parents of dependent undergraduate students to borrow up to the total cost of attendance at a low interest rate. Unlike student borrowers, parents must pass a credit test to borrow under the PLUS program. Through this program, parents may borrow up to the cost of attendance per child, minus financial aid from other sources.

      Private consolidation loans. We offer private consolidation loans to student borrowers who have at least one eligible private loan to consolidate. Like the FFELP consolidation loan, borrowers can combine all of their private education loans up to $125,000 into one loan, with a single lower monthly payment, to be repaid over a term of up to 30 years, depending on outstanding loan amount. These loans are privately funded and guaranteed, credit-based, variable-rate loans with an origination fee based on the applicant’s credit worthiness.

      Private in-school loans. The private in-school loans we market are offered to supplement federal loans and aid available to a wide range of students and their parents, from those enrolled in kindergarten through graduate school, where the federal loans and other aid does not cover the student’s education-related expenses. These loans are privately funded, credit-based, variable-rate loans up to $30,000 per year that generally require a co-signer. The repayment term is up to 25 years depending on the amount of the loan and has an origination fee based on the creditworthiness of the student and co-signer.

      Borrower incentives. We offer borrower incentives that are designed to attract new borrowers and improve their repayment behavior. Our automated clearing house incentive program, which is offered on all of our loans, reduces a borrower’s interest rate by 0.25% per annum for so long as he or she makes scheduled monthly payments through automatic deductions from his or her checking or savings account. Approximately 31% of our borrowers currently participate in this program. In addition, we offer FFELP consolidation loan borrowers an on-time incentive program that reduces a borrower’s interest rates by 1.00% per annum for so long as he or she makes a specified number of his or her first payments on time and continues to make subsequent payments consecutively on time.

      Portfolio funding and liquidity. A key component of our business is maintaining access to diversified funding sources for our education loans, including a warehouse financing facility and securitizations. At the end of February 2005, the size of our warehouse facility was $1.0 billion. Short-term warehousing allows us to originate and fund education loans prior to transferring them into more permanent financing arrangements. We hold loans in our short-term warehousing facility for a period of time ranging from approximately one month to as many as six months. Our warehousing capacity allows us to pool education loans in order to maximize characteristics for efficient securitization financing and to time market conditions for our securitizations. We expand the availability of our warehouse facility from time to time in order to more efficiently access the securitization market.

      We rely upon securitization vehicles as our source of long-term funding for loans. Our first securitization transaction was executed in 2001, utilizing a master trust structure, and was comprised of privately placed auction-rate notes. As the size and volume of our securitizations have increased, we have

begun publicly offering asset-backed securities under shelf registration statements. During 2004, 2003 and 2002, we issued $1.1 billion, $1.9 billion and $500.0 million of asset-backed securities, respectively. We completed our sixth securitization of $1.4 billion in February 2005. We had approximately $5.1 billion in asset-backed securities outstanding as of February 28, 2005. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

      Forward purchase agreements. We currently have forward purchase agreements with third-party lenders for whom we market FFELP and private loans to potential and existing borrowers. Under these agreements, our counterparties have agreed to purchase, or require that we sell to them, a portion of the loan applications that we originate each year. The terms of the agreements generally range from one to three years with varying termination rights, although the parties generally have the right to terminate upon the occurrence of material breach of representations, warranties or covenants, default under debt agreements or material adverse change, regulatory changes, or bankruptcy. Each party has agreed to indemnify the other, subject to certain limitations. In the event we fail to deliver the minimum amount of loan applications required under a forward purchase contract, the counterparty will have the right to renegotiate the fee structure or terminate the agreement.

      We receive a fee for completed loan applications or, in the case of private loans, loan disbursements. Through these forward purchase agreements, third-party lenders are provided access to borrowers without incurring the incremental overhead costs of hiring additional sales and marketing employees. We generally seek to require these counterparties to service the loans we originate or process for origination with our servicer for a pre-determined period of time.

      We are required to represent that the completed loan applications we sell have been originated in compliance with all applicable laws and regulations and, with respect to federally guaranteed loans that the loans are in all respects eligible for federal guarantee. If any of the FFELP consolidation loan applications sold under our forward purchase agreements are deemed ineligible for federal guarantee after funding, we may be required to repurchase the loans and to pay the counterparty any damages that it would suffer as a result of the breach of representation, including any fees that either the counterparty or the Department of Education paid relating to the loans prior to their loans being determined to be ineligible. These fees could include origination fees paid to the Department of Education, special allowance payments paid by the Department of Education on the loans, and guaranty fees paid to third parties. Through December 31, 2004, we have not purchased any loans as a result of the loans being deemed ineligible for federal guarantee.

      Fees received under a forward purchase agreement with The Student Loan Corporation accounted for more than 10% of our net revenue in 2004. Any failure to maintain or replace contractual relationships with this financial institution could have a material adverse effect on our ability to sustain or increase our business.

      Marketing agreements. We have relationships with financial institutions for whom we market private in-school loans, and who agree to originate and fund the loans we market. Under these contractual relationships, we generate loan applications that are referred to the providers over a pre-determined period of time and at an agreed upon fee. Certain conditions mandate that a specific amount of marketing dollars be spent to promote one provider over a period of time. We are paid for private in-school loan referrals when a loan is funded by a lender. The parties have the right to terminate upon the occurrence of material breach or the bankruptcy of either party.

      Eligible lender. When we originate FFELP loans on our own behalf or when we acquire FFELP loans from others, we engage The Bank of New York as our “eligible lender,” as defined in the Higher Education Act, to act as our trustee to hold title to all such originated and acquired FFELP loans. This eligible lender trustee holds the legal title to our FFELP loans, and we hold 100% of the beneficial interests in those loans. We pay The Bank of New York a fee for serving as indenture trustee and eligible lender trustee equivalent to approximately 0.01% of the outstanding principal balance of the FFELP loans we originate or acquire from others.

      See note 23 of the notes to our consolidated financial statements for segment information relating to our loan origination segment.

      We specialize in the servicing of federally guaranteed and private education loans. Our servicing division offers a complete line of education loan services, including recovery of non-guaranteed loans, application processing, disbursement of funds, customer service, account maintenance, federal reporting and billing collections, payment processing, default aversion and claim filing. Our contact center staff is trained in all phases of education credit and can address most matters with respect to customers’ accounts, including the origination of new loans. SunTech, our servicer, uses an internally-developed system to manage the servicing process that provides for automated compliance with most Higher Education Act regulations.

      We acquired our wholly-owned servicer, SunTech, on April 15, 2003. SunTech began servicing education loans in 1990 and services many of the loans we have originated since our formation in 1998. Prior to 1990, SunTech was part of the Mississippi secondary market and had serviced loans in that capacity since 1984. As of December 31, 2004, SunTech serviced a portfolio of approximately 430,000 accounts with outstanding FFELP and private education loan balances of approximately $10.9 billion.

      As the primary means of communication with our customers after their loans are originated, our servicing operation is managed to provide our customers consistent and seamless service. Our quality and experience in education loan servicing is evident in the Exceptional Performance status we received from the U.S. Department of Education in May 2004 and in the historical performance of our entire pool of loan assets. As a result, for the period June 1, 2004 through May 31, 2005, subject to quarterly reviews, we will receive 100% reimbursement on principal and accrued interest of claims submitted to our guarantors and expedited claim processing. The Exceptional Performance designation is granted to lenders and servicers that maintain an overall 97% or higher compliance performance rating with respect to servicing requirements, including converting federal loans to repayment, performing collection activities and filing timely claims with guaranty agencies. We must reapply annually in order to maintain the Exceptional Performance designation.

      In June 2004, SunTech also received a rating of “SQ1”, the highest servicer quality designation assigned by Moody’s Investors Service, Inc. (“Moody’s). Moody’s SQ ratings represent its view of a loan servicer’s ability to prevent or mitigate pool losses across changing markets and Moody’s assignment of the “SQ1” rating reflects its opinion of the overall servicing quality of student loans by SunTech.

      Historically, the loan assets we service have had a very low net claim reject rate by guaranty agencies due to servicer error, which is the percentage of claims ultimately rejected by a guaranty agency due to servicer error. Servicing errors occur when loans are not serviced in accordance with the guarantor’s guidelines and can result in the loss of some or all of the insurance on the loans. In 2004, SunTech’s net claim reject rate due to servicer error was approximately 0.02% of all claims filed by SunTech. If this rate were to increase, our business could be adversely affected. In most cases, as the servicer, we would be obligated to buy the loan from the holder if servicing errors caused the loss of insurance. In 2004, we filed 12,001 claims for insurance. Of these, one was denied for servicing errors. Of the 10,497 claims for insurance submitted in 2003, two were rejected.

      We provide servicing for third parties for a monthly fee per loan. See note 23 of the notes to our consolidated financial statements for segment information relating to our loan servicing segment.

Our Competition

      We face competition from numerous competitors, including SLM Corporation, the parent company of Sallie Mae. SLM Corporation originated $18 billion of education loans through its preferred channel in 2004, services nearly half of all outstanding FFELP loans and is the largest holder of student loans, with a managed portfolio of more than $107 billion as of December 31, 2004. In 2002, Sallie Mae began actively

marketing consolidation loans and, as a result of its substantial market presence, quickly became a leading originator in the consolidation marketplace. College Loan Corporation and Nelnet, Inc., originate and retain FFELP loans and market private education loans.

      We also face competition from other education finance companies and financial institutions that market, originate or purchase guaranteed or private education loans. As we seek to further expand our business, we will face numerous other competitors, many of whom are already well established in the markets we seek to penetrate. Some of our competitors are much larger than we are, have better name recognition than we do and have greater financial and other resources than we do.

      Many banks, education finance companies and secondary market holders recently have begun to engage in consolidations to prevent loans in their respective portfolios from being consolidated by other lenders. In addition, as interest rates have fallen and the market for consolidation loans has increased, new companies have entered the business of directly marketing loans to consumers who are eligible for consolidation of their education loans.

      We also face competition from the FDL Program. Through the FDL Program, the DOE makes loans directly to students through the educational institutions they attend. The volume of student loans made under the FFEL Program and available for us to originate may be reduced to the extent that the FDL program makes loans to students. The DOE also offers consolidation loans and has marketed this product widely in prior years.

Regulatory Matters

      The Higher Education Act of 1965, and as a result the FFEL Program, is subject to comprehensive reauthorization every five years. The Higher Education Act was originally scheduled to expire on September 30, 2004. However, Congress granted a one year extension of the Higher Education Act to September 30, 2005. In 2000, Congress passed legislation to tie the yield on FFELP loans to commercial paper rates. This change has enhanced the current market stability in the education finance arena. Changes in the Higher Education Act made in the two most recent reauthorizations have included reductions in student loan yields paid to lenders, increased fees paid by lenders and a decreased level of guarantee. Some of the key issues that are being or have been considered in the reauthorization debate are:

      Historically, we did not believe the single holder rule limited the ability of a borrower to consolidate FFELP loans held by a single lender with FDLP loans. However, the U.S. Department of Education issued a letter on April 29, 2004 that limited the ability of borrowers having FFELP loans that are held by a single lender and FDLP loans to obtain a FFELP consolidation loan with any lender other than the lender holding all of the borrower’s FFELP loans. This new ruling was scheduled to go into effect in September 2004. However, on August 26, 2004, the U.S. Department of Education issued a letter stating the new ruling would not go into effect until September 2005.

      In addition, we have marketed and offered and continue to market and offer FFELP consolidation loans to borrowers seeking to refinance only their FDLP consolidation loans. In June 2004, the U.S. Department of Education’s servicers for the FDL Program informed us and, we believe, other FFELP loan originators that FFELP loans which refinance only FDLP consolidation loans would no longer be permitted. However, on August 26, 2004, the U.S. Department of Education issued a letter indicating this type of consolidation would be permitted unless reauthorization of the Higher Education Act were to change it.

      On May 5, 2004, the Chairman of the House Committee on Education and the Workforce introduced a bill containing proposals related to the reauthorization of the Higher Education Act. Although that bill lapsed at the end of 2004 when the 108^th Congress adjourned, a virtually identical bill (H.R. 609) was introduced in the 109th Congress on February 8, 2005. The bill calls for, among other things:

      As part of the upcoming federal budget reconciliation process for fiscal year 2006, proposals have been submitted which would, among other things:

      In addition, participants in the education finance market that use DTC marketing are affected by recently amended Federal Trade Commission rules and similar state regulations providing for so-called “do not call” registries. Under these rules, consumers may have their phone numbers added to a “do not call” registry, and marketers are generally prohibited from calling any such consumers to market products and services. This rule may restrict marketers’ abilities to market products and services effectively to certain new customers. Furthermore, compliance with this new rule may prove difficult and require additional expense, and marketers may incur penalties for improperly conducting our marketing activities.

      The origination of private loans is subject to federal and state consumer protection laws and regulations, including state usury and disclosure laws and related regulations, and the Federal Truth in Lending Act. These laws and regulations impose substantial requirements upon lenders and their agents and servicers involved in consumer finance.

      In addition, participants in the market for private education loans could also become subject to state licensing laws due to recent changes in existing federal and state regulations. As a result, participants in this market could be required to (1) implement additional or different programs and information technology systems, (2) meet new licensing capital and reserve requirements or (3) incur additional administrative, compliance and third-party service costs.

Seasonality

      Origination of FFELP consolidation loans is subject to seasonal changes, both due to the expiration in November and December of the six-month grace period on payment of certain loans after a borrower’s graduation, at which time we typically experience an increase in loan consolidation activity, and to the effects of the July 1 reset in borrower rates. Since we give our borrowers who complete loan applications in the second quarter the option to fund their loans either prior to or after the July 1 reset date, if the current year’s borrower rate increases over the prior year’s borrower rate, loan originations will be shifted to the second quarter; conversely, if the current year rate decreases from the prior year’s rate, originations will be shifted to the third quarter.

      Our private in-school originations are also subject to seasonal patterns. We generally experience an increase in private in-school originations in the third and fourth quarters as students obtain loans to pay their tuition.

      Certain other factors may also cause our quarterly results of operations to vary, including quarterly variations in the marketing expenses we incur, the impact of general economic conditions, changes in interest rates and the introduction of new product offerings. See “Risk Factors — Our quarterly results of operations have varied significantly in the past and are expected to continue to do so, which may cause our stock price to fluctuate.”

Employees

      As of December 31, 2004, we had 707 full-time employees and 99 part-time employees. We have 277 salaried employees and 529 hourly employees. We are not subject to any collective bargaining agreements, and we consider relations with our employees to be good.

      Our headquarters are currently located in Fredericksburg, Virginia; and we have additional offices in Pinellas Park, Florida; Ridgeland, Mississippi; Boston, Massachusetts and Washington DC.

      We lease land and buildings for our executive offices and operations. The following table summarizes information with respect to the principal facilities that we leased as of December 31, 2004:

      We are involved in litigation in the ordinary course of business, both as a defendant and as a plaintiff. While we cannot predict the outcome of any pending or future litigation, examination or investigation, we do not believe that any pending matter will have a material adverse effect on our cash flows, financial condition or results of operations.

      No matters were submitted to a vote of security holders of the Company during the fourth quarter of the year ended December 31, 2004.

PART II.

      Our common stock has been listed on the NASDAQ National Market under the symbol “CFSI” since July 16, 2004. Prior to July 16, 2004, there was no public market for our common stock.

      The following table sets forth the range of high and low sales prices for our common stock as reported by the NASDAQ National Market for the third and fourth quarters of 2004, since our shares began trading on July 16, 2004:

      As of March 18, 2005 there were 47 shareholders of record. Because many shares of the Company’s common stock are held by brokers and other institutions on behalf of shareholders, the Company is unable to estimate the total number of beneficial owners represented by these record holders.

      We have not paid and we do not currently intend to pay any cash dividends on our common stock and, instead, intend to reinvest earnings, if any, for future operation and expansion. We are not permitted to pay dividends on our common stock under the terms of our revolving line of credit. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant.

      For information regarding the Company’s equity compensation plans, see Part III, Item 12 of this Annual Report on Form 10-K.

      The following table sets forth selected consolidated financial and other operating information of the Company and its predecessor for the periods indicated. The selected financial data in the table is derived from the consolidated financial statements of the Company and its predecessor. The data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included elsewhere in this Form 10-K.

Overview

      The following discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Our results of operations, our financial condition, and the price of our common stock may be affected by many factors, some of which are outside of our control. For a discussion of these factors, see the section of this Annual Report on Form 10-K entitled “Risk Factors” and “Cautionary Notice Regarding Forward-looking Statements.”

      We are a vertically integrated education finance company that markets, originates, finances and services education loans. We originated or facilitated the origination of $4.4 billion in education loans in 2004 and we believe we are one of the more significant originators of federal and private education loans in the United States. Of our total loan originations for the years ended December 31, 2004 and 2003, $4.0 billion for each year were federally guaranteed consolidation student loans made through the FFEL Program. Beginning in May 2003, we increased our focus on private education loans and, for the years ended December 31, 2004 and 2003, we originated or facilitated the origination of $417.1 million and $209.4 million, respectively, of these loans. As of December 31, 2004, we also serviced approximately $10.9 billion in student loans made to over 430,000 customers.

      We commenced operations in 1998 through our predecessor company, Collegiate Funding Services, LLC. On May 17, 2002, certain investors led by The Lightyear Fund, L.P. and its affiliates (“Lightyear”) along with members of the management of Collegiate Funding Services, LLC through the Company acquired all of the outstanding member interests in Collegiate Funding Services, LLC for aggregate consideration of $162.6 million, consisting of $147.6 million in cash and $15.0 million in principal amount of subordinated debt. Funds for the acquisition were obtained from the issuance by us and our subsidiary of common stock and preferred stock, along with warrants to purchase common stock, convertible debt and debt securities. As a result of the acquisition, all of our assets and liabilities were recorded at their estimated fair value. The excess of the purchase price over the fair value of net assets acquired was recorded as an increase of $7.0 million to student loans, $0.9 million to debt discount and $151.6 million to goodwill. For purposes of analyzing the results of operations for the year ended December 31, 2002, we have added the applicable amount for the periods prior to, and after, the date of the acquisition by Lightyear.

      In 2002, we adopted a strategy of retaining a portion of the federally guaranteed loans we originate, which has resulted in our holding a portfolio of loans that has grown from $973.1 million at December 31, 2002 to $4.7 billion at December 31, 2004. Prior to 2002, we sold substantially all of our completed loan applications to third parties and received fees for those applications at the time of sale.

      We believe that retaining certain loans in our portfolio benefits the Company because it generally provides greater long-term value to the Company than selling these loans, although our net income in current periods has been lower than it would have been had we sold a larger percentage of the FFELP loans we originate. Among the benefits of retaining loans is our ability to take advantage of these loans’ limited credit risk, their duration and other characteristics which allow us to realize a greater revenue stream over the life of the loan. Selling the remainder of our originated loan applications permits us to maintain a diversified source of funding for loan processing and origination and build our relationships with financial institutions that purchase our loans. We have sold and may continue to sell a portion of the FFELP loan applications we originate in order to capitalize upon market opportunities, provide sources of funding for loan processing and origination expenses and generate additional operating cash flow. We do not currently fund or retain any private loans, although this may change if we believe the opportunity presents itself to enhance the value of our private loan originations by retaining them.

      The following table sets forth for the years ended December 31, 2004, 2003 and 2002 our loan applications sold and retained and the loans in our portfolio.

Loan Originations and Portfolio

      In April 2003, we acquired SunTech and began generating revenue from servicing activities. Prior to this acquisition, SunTech serviced many of the loans we originated and we paid SunTech a fee for loans in our portfolio serviced by them. We currently service substantially all the loans in our portfolio, as well as loans held by third-party lenders. We seek to obtain the servicing rights for the loan originations we sell, which accounts for a significant portion of our third-party servicing volume.

      In April 2004, we acquired Y2M, for approximately $35.9 million. Of the purchase price, $28.0 million was allocated to goodwill, $2.8 million to deferred income tax assets, $4.6 million to other intangible assets and a net of $0.5 million to other assets and payables. Y2M provides affinity marketing of products and services, with a focus on education finance products and services targeted at college students and recent college graduates. Y2M uses direct mail, the Internet and print media in its marketing efforts, which it complements by publishing online college newspapers. From the time of our acquisition of Y2M in 2004 through December 31, 2004, Y2M facilitated the origination of $358.0 million of FFELP

consolidation loans. Y2M generates revenue from the loans originated through affinity marketing agreements and advertising fees from its online college newspaper publishing operations.

      We finance the loans in our portfolio through asset-backed securitizations and a secured warehouse facility and we record the obligations related to these facilities as debt on our consolidated balance sheet. To date, we have completed six securitizations that have provided $5.4 billion of funding, including our most recent securitization of $1.4 billion completed in February 2005 We also have several forward purchase agreements, under which financial institutions have agreed to purchase, or require that we sell to them, a portion of the loans we market and originate.

      We currently operate in two reportable segments as follows:

      Loan origination. Includes marketing, origination and financing of loans, including Youth Media & Marketing Networks since its acquisition in April 2004.

      Loan servicing. Includes servicing for our portfolio of loans and third-party loans.

      Prior to our acquisition of SunTech in April 2003, we operated in a single segment, loan origination, and all loans in our portfolio were serviced by third-party servicers, one of which was SunTech. For additional information relating to our segments, see note 23 of the notes to our consolidated financial statements.

      We generate revenue primarily from four sources, which are described in greater detail below. In our loan origination segment, we generate revenue from fees we receive from the sale of originated loan applications and for marketing loans for third parties, which we refer to collectively as fees on loan sales. We also generate net interest income on our loan portfolio and cash balances in our loan origination segment. In addition, since the April 2004 acquisition of Y2M we generate advertising revenues. In our loan servicing segment, we primarily generate revenue from fees we receive for disbursement on loan applications and for servicing loans.

      Our revenue in any period is directly affected by the amount of loans we originate and service, as well as the percentage of those originated loan applications that we decide to retain. We currently plan to retain in our portfolio 50% of the FFELP loans we originate. We will periodically review our allocation of FFELP loan originations between loans we retain and loan applications we sell, and, accordingly, our allocation may change from period to period. Our reasons for altering our loan retention target may include the characteristics of the loans we originate, the interest rate environment, the status of our arrangements with financial institutions which acquire loan applications from us and the volume of loan applications originated during the period. Moreover, because we set this targeted allocation on an annual, rather than quarterly, basis, our quarterly allocations may fluctuate, sometimes significantly.

      Our fee income in any period will be directly affected by the volume of originated loan applications we are able to complete and that we elect to sell to third parties and the pricing we receive on those sales. We expect that the percentage of our net revenue earned from fees on loan sales may decrease as we continue to retain in our portfolio a significant percentage of the loans we originate.

      Our net interest income in any period will be affected by the size of our retained loan portfolio and by the extent to which the interest income we earn on our loan portfolio and cash balances exceeds our interest expense on the debt we incur to finance our portfolio of loans and operating expenses. In general, increases in interest rates will decrease our net interest income, while decreases in interest rates will increase our net interest income. More specifically, should interest rates rise, as expected in the near term, we will receive less of the additional yield on our loans which we refer to as fixed rate floor income. Fixed rate floor income is the additional net interest income we earn as a result of a decline in short-term interest rates from the rates used to fix the borrower’s rate on a consolidation loan. We have earned fixed rate floor income during the past three years. See “— Net Interest Income,” “— Net Portfolio Margin Analysis” and “— Interest Rate Risk.”

      We believe that a significant driver of the growth in consolidation loan originations during the past three years has been the increased awareness of consolidation loans on the part of many customers who

have been out of school for more than one year, as well as on the part of more recent graduates. This recent increase in awareness is a result of extensive marketing efforts by us and other lenders in this market coupled with the effects of a low interest rate environment that has heightened interest in these products among both borrowers and lenders. As an increasing percentage of borrowers who have been out of school for more than one year have consolidated their loans in the past several years, we believe that the pool of borrowers seeking to consolidate their loans will decrease. We believe our reallocation of marketing resources to other types of customers may mitigate the effects of any decrease in the consolidation loan market. We also believe that consolidation of loans by recent graduates with increased debt loads may mitigate the decline in total consolidation loan originations in the market. We believe that our recent addition of Y2M should contribute to our ability to increase our market share. We also expect that as the demand grows in financing to bridge the gap between the cost of higher education and government-backed financial aid, the amount of private loans we market or originate in the future will increase through expanded use of our direct-to-consumer marketing platform and indirect channels.

      The most significant components of our operating expenses in our loan origination segment are salaries and benefits and marketing expenses. Substantially all of our marketing expenses and a majority of our salaries and benefits in this segment are incurred in anticipation of generating loan originations. Although such expenses are variable, if our marketing campaigns are not successful, we may require one to two quarters to adjust our expenses and our results of operations will be reduced due to these expenditures.

      We increased our marketing expenses to $46.5 million in 2004 from $25.0 million in 2003. Marketing expenses were higher in 2004 as a result of our marketing of new products and our acquisition of Y2M. We expect marketing expenses to increase in 2005 from the levels for full year 2004. Other selling, general and administrative expenses also increased as a result of becoming a public company. The third quarter of 2004, the period in which we consummated our initial public offering, includes charges for bonuses paid in connection with the offering, with an aggregate value of $1.4 million, and the grant of options and restricted stock to management with an aggregate value of $8.2 million, which will be amortized over four years.

Quarterly Fluctuations

      Our quarterly results of operations have varied significantly in the past and are expected to continue to vary significantly in the future. Our quarterly results of operations in any period will be affected by the amount and timing of our loan sales. Because we target a percentage of our loan originations to be retained on an annual, rather than quarterly basis, our quarterly results of operations will fluctuate. A number of additional factors, some of which are outside of our control, will cause our quarterly results to fluctuate, including:

Components of Net Revenue

      We have two primary categories of revenue: net interest income and fee income, which since April 2003 has included servicing fee income and since April 2004 has included advertising income.

Net Interest Income

      Our net interest income is the excess of interest income we earn on our loan portfolio and cash balances over our interest expense on the debt we incur to finance our portfolio of loans and for general operating purposes. We define net portfolio margin as being equal to the weighted average yield on our loans and restricted cash less the interest expense on the debt we incur to finance our retained loans. The current and future interest rate environment can and will affect our net interest income and net portfolio margin.

      Interest income. Substantially all the loans in our portfolio are FFELP consolidation loans which bear interest at a fixed rate. In addition, in certain interest rate environments we may earn amounts on FFELP loans in excess of the fixed rate of interest due from the borrower. Specifically, the Department of Education will pay us the amount by which a federally determined floating rate exceeds the fixed borrower rate. This amount is a Special Allowance Payment, or SAP, and is based on a formula with respect to FFELP loans held in our portfolio. SAPs, with respect to our FFELP consolidation loans, are generally paid whenever the average of the 91-day financial commercial paper rate in a calendar quarter plus a spread of 2.64% exceeds the rate of interest which the borrower is obligated to pay. With respect to the Stafford loans in repayment status and PLUS loans in our portfolio, SAPs are generally paid whenever the average of the 91-day financial commercial paper rate in a calendar quarter plus a spread of 2.34% or 2.64%, respectively exceeds the borrower rate. Should interest rates rise as expected, we would receive SAPs on loans in our portfolio.

      Our interest income is presented net of amortized origination fees. SFAS No. 91 requires that we capitalize fees directly related to originating loans that we retain. Amortization of these capitalized costs impact our margins. We pay a one-time loan fee of 0.50% to the DOE on origination of consolidation, Stafford and PLUS loans, which is amortized over the expected life of the loan. This origination fee is required by the DOE to be paid by all lenders upon the origination of FFELP loans. Our interest income is also reduced by a rebate fee, which is required by the DOE to be paid to the DOE by all holders of FFELP consolidation loans on a monthly basis at a rate equal to 1.05% per annum on the FFELP consolidation loans we hold at the end of the month. Our interest income will also be reduced by incentives we offer to borrowers that are designed to attract new borrowers and reward their payment behavior. One incentive program reduces a borrower’s interest rate by 0.25% per annum for so long as the borrower makes monthly payments through automatic deductions from his or her checking or savings account. Approximately 31% of our borrowers currently participate in this program. In addition, we offer borrowers an on-time incentive program that reduces their interest rates by 1.00% per annum for so long as they make their first 36 payments on time and continue to make subsequent payments on time. Because we have implemented this program only recently, it has not resulted to date in any significant reduction in interest income. The on-time incentive program has begun to reduce the interest income we earn on our loan portfolio commencing in 2005, particularly with respect to loans of borrowers participating in the automatic deduction programs.

      We also earn interest income from unrestricted cash as well as restricted cash held in our special purpose entities for our asset-backed securitizations.

      Interest expense. We have three categories of interest expense: interest on our warehouse facility, interest on our asset-backed securitizations and interest on our other debt obligations.

      Interest on our warehouse facility is based on the amount outstanding under the facility plus a fee on unused capacity under the facility. The amount outstanding under the warehouse facility in any period is affected by the amount of loans we originate in such period and the timing of securitizations. Deferred financing costs associated with the warehouse facility are amortized using a method that approximates the effective interest method and are recorded as interest expense.

      Interest on our asset-backed securitizations is based on the principal amount of notes outstanding under the facilities as well as the method of determining the interest rate for each securitization tranche. All of our asset-backed securitizations accrue interest at a variable rate. The rate varies based upon when the notes were issued, the fixed spread above an index, the index used and, in certain cases, auction results. The notes issued are either indexed off of three-month LIBOR or at a rate determined at auction. Interest rates on the auction rate notes are generally reset every 28 days. The relative proportion of our asset-back securitizations that accrue interest based on auction rates and on fixed spreads above an index will affect our cost of funds. Broker-dealer and auction agent fees are incurred monthly at a rate per annum of approximately 0.26% in connection with the periodic auction for the auction rate notes and are reflected in interest expense. Deferred financing costs associated with issuing the asset-backed notes are amortized using the effective interest method and are recorded as interest expense.

      Interest expense on other obligations relates to interest expense on items not associated with financing our loan portfolio.

      Net portfolio margin and net interest income. In certain interest rate environments, part of our net portfolio margin includes fixed rate floor income. Fixed rate floor income is the additional net portfolio margin we receive as a result of a decline in short-term interest rates from the rates used to fix the borrower’s rate on a consolidation loan. Fixed rate floor income represents the amount by which interest income, determined at the borrower’s fixed rate, exceeds the amount determined using the DOE computed variable rate. As a result of the decline in short-term interest rates over the last three years, we have earned fixed rate floor income during the past three years. Fixed rate floor income is reduced, and can be eliminated, in a rising interest rate environment. See “— Net Portfolio Margin Analysis” and “Interest Rate Risk.”

      Provision for loan losses. We record periodic provisions for loan losses to maintain an allowance for loan losses which management believes is sufficient to cover probable losses in the portfolio. The allowance is an estimate based on the level of guarantee on our loans, the historical experience of losses and the delinquency rates on our portfolio. Moreover, since our portfolio is relatively new, we also review industry loss data in assessing probabilities of loan default.

      In May 2004, we were notified by the DOE that we had been awarded Exceptional Performance status as a servicer and thus our loss claims on loans we service at SunTech will be paid to 100% of the unpaid principal and interest for the twelve month period June 1, 2004 to May 31, 2005. Our loan loss allowance provision at December 31, 2004 reflects this status.

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

      A loan is placed on non-accrual status at the point at which its guarantee claim is more than 60 days past due or it is concluded that collection of the claim is in doubt. Through December 31, 2004, no loans had been placed on non-accrual status.

Fee Income

      Fees on loan sales. In our loan origination segment, we receive fees for selling FFELP consolidation and private consolidation loan applications to third parties and for marketing private in-school loans for third parties. We receive a fixed fee for each completed FFELP application we sell to third parties. Generally, the amount of the fee is set forth in forward purchase agreements with third parties which are negotiated for between one-year and three-year terms and apply to an aggregate number of loan applications sold during each year of the agreement. We also receive fee income from third parties to whom we sell completed private consolidation loan applications and for whom we market private in-school loans. We are paid when a private lender funds a loan that we referred to that lender or its originating partner. Generally, the fee is calculated based on a percentage of the funded amount of the loan. This rate is set forth in agreements with the third parties which have a term of one year or more and applies to an aggregate amount of loans funded each year. We recognize revenue from the loan application sales when the loans are funded.

      Fees for servicing. Since acquiring SunTech in April 2003, we have received fee income for performing loan servicing activities for third parties pursuant to servicing agreements. Servicing fees under these agreements are calculated based on the number of accounts serviced for each client and specific activities such as disbursement or filing claims with guarantee agencies. The fees are billed monthly. The terms of the agreements vary from one year to the life of the applicable loan portfolio. The intercompany servicing fees paid to our servicer for servicing our own portfolio are eliminated in our consolidated financial statements. Servicing rights recorded on our balance sheet total $0.7 million at December 31, 2004 and relate to the remaining unamortized balance recorded in connection with our acquisition of SunTech. Because we were not the owner of any loans that we currently service for third parties, and we have not paid for the right to service any other loan, we do not have any other servicing rights recorded on our balance sheet.

      Advertising income. Since acquiring Y2M in April 2004, we have received advertising income associated with its national network of college newspapers. Income is recorded as contracted with the heaviest volume occurring during the fall, as advertisers target students returning to school.

Expenses

      The majority of our operating expenses consist of salaries and related benefits and marketing expenses. Salaries and related benefits include expenses related to granting incentive stock options to our employees, which we expense in accordance with SFAS No. 123 Accounting for Stock-Based Compensation. Marketing expenses include the cost of direct mail campaigns, postage, list development, collateral printing, internet marketing, affinity partner fees and school channel expenditures. The amount of marketing expenses and a portion of the amount of salaries and benefits are directly affected by the scope of our marketing campaigns and the amount of loans we originate or facilitate for origination by other lenders. In addition, our expenses include communications and data processing expenses, professional fees, management and consulting fees, depreciation and amortization and other general and administrative expenses.

      Debt extinguishment expenses. The costs associated with obtaining financing are generally capitalized and recorded as deferred financing costs, which are amortized over the life of the related financing. If we repay the associated financing prior to its anticipated repayment schedule, we are required to write off the remaining deferred financing costs, which is recorded as debt extinguishment expenses.

      Derivatives. In connection with financing our portfolio, we enter into interest rate swap and cap agreements from time to time. Generally, these agreements have maturities of no more than 24 months. We record expenses relating to payments we make under the swaps and caps and mark-to-market gains and losses based on changes in their fair values from period to period. These expenses and gains and losses are not reflected as part of net interest income. See “— Critical Accounting Policies — Accounting for Derivatives” and note 10 to our consolidated financial statements.

Critical Accounting Policies

      This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated 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. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions.

      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 our 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 accounting for derivatives, determining the level of the allowance for loan losses, accounting for business combinations and goodwill and expense recognition for stock-based compensation.

      We account for derivative and certain financial instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded at fair value on the balance sheet as either an asset or liability.

      SFAS No. 133 requires that changes in the fair value of derivative instruments be recognized currently in earnings unless specific hedge accounting criteria as specified by SFAS No. 133 are met. We believe that our derivatives are effective economic hedges through their respective maturity dates. Other than the derivatives having shorter maturities than our floating-rate debt, the derivatives’ variable indices are the same as the debt and the notional amounts are less than the balance of the outstanding debt. We do not hedge the exposure related to all amounts of floating-rate debt outstanding. For the last four of our asset-backed securitizations that have bonds that require variable interest payments based on LIBOR, we entered into interest rate swaps with fixed-rate payments and, in turn, receive payments based on a floating rate (equal to one-month LIBOR) from an investment grade-rated counterparty. These swaps minimize the adverse impact of increased interest expense that may result from a rise in short-term interest rates during the initial months of the related securitization transaction. For an increase in LIBOR, the swaps provide a direct offset to increasing interest expense for an amount of debt equivalent to the swaps’ then-outstanding notional amounts. See “— Interest Rate Risk” for additional quantitative information related to the derivatives.

      Our derivative instruments, the swaps and one interest rate cap, do not meet the criteria to qualify for hedge accounting pursuant to SFAS No. 133, and therefore the Company records changes in their value as derivative mark-to-market (income) expense on the statement of income. The impact of the cash payments and accruals are reported as swap interest expense on the statement of income. The fair value of the derivatives that are positive is included with other assets on the balance sheet and the fair value of the derivatives that are negative is included with accrued liabilities on the balance sheet.

      The allowance for loan losses represents management’s estimate of probable losses on loans as of the reporting date. This evaluation process is conducted periodically and is subject to numerous estimates and judgments. The two primary estimates required in developing the appropriate level of the allowance are the probability of default and the loss severity of such defaults. In assessing the probability of defaults, we consider the performance of our portfolio, including delinquency and charge-off trends. We also review the published DOE statistics and the performance characteristics of other lenders. In determining the

allowance level we estimate the percentage of our portfolio that we believe would default. The primary factor impacting our severity rate is the existence of the 98% guarantee of principal and interest on our loans. Generally, our loans carry a 98% guarantee of principal and accrued interest. In May 2004, the Company was notified by the DOE that it had been awarded Exceptional Performance status as a servicer and thus its loss claims on FFELP loans it services at SunTech will be paid to 100% of the unpaid principal and interest for the twelve month period June 1, 2004 to May 31, 2005. As a result, the risk sharing estimate used in our allowance computation at December 31, 2004, was 1.66% as compared to 2.00% in prior periods. Our estimates of default probabilities are subject to more variability than our severity estimates, as the probability estimates are based on historical information and trends that may not hold true into the future. We update our default probabilities annually, or when trends in the portfolio or industry statistics indicate interim revisions are required. As we expect our student loan portfolio to continue to grow, even if our estimates do not change, we expect our allowance for loan losses to increase over time. Such increases will result from periodic loan loss provisions recorded through the income statement.

      A loan is charged off at the end of the month in which a final determination has been received from the guaranty agency, either in the form of a claim check or an incurable rejected claim request.

      Our predecessor was acquired in a business combination by CFS. We acquired SunTech in April 2003 and Youth Media and Marketing Networks in April 2004. We follow the guidance in SFAS No. 141 in accounting for business combinations. The standard requires that the purchase consideration be recorded at fair value and that the purchase price be allocated to assets and liabilities at their fair values with any unallocated purchase price attributed to goodwill. Judgments and estimates are required in these fair value determinations and the fair value determinations can affect our results of operations. For example, in the acquisition of our predecessor, a discount on the note issued to the sellers as part of the purchase consideration was recorded to recognize the liability at its fair value. Such discount is being amortized over the life of the note as an adjustment to interest expense. Similarly, in our acquisition of SunTech, we recorded fair value adjustments for certain assets acquired including servicing rights that are amortized as expense in future periods. We may make additional acquisitions in the future. The effect of the estimates of fair value in any future acquisition will be dependent upon the nature of the specific assets acquired and liabilities assumed.

      In the acquisition of our predecessor, the acquisition of SunTech and the acquisition of Y2M, a significant portion of the purchase price was allocated to goodwill. We had $188.7 million of goodwill at December 30, 2004 and $160.7 million at December 31, 2003. We follow the guidance in SFAS No. 142 in accounting for goodwill. The standard requires that we perform annual impairment tests of our goodwill. The goodwill impairment test is a two-step process. The first step is to make an estimate of the fair value of each reporting unit and to compare the valuation to the carrying value of the reporting unit including the goodwill. The result of our first step has been that the estimated fair values exceed the carrying amounts of the related reporting units indicating that no impairment exists. As a result, we have not been required to perform the second step of the impairment test to determine the amount of any impairment. We will continue to perform the impairment assessment each year. The calculation of fair value in accordance with SFAS No. 142 requires judgments and estimates, including projections of future income and cash flows, the identification of appropriate market multiples and the choice of an appropriate discount rate. Our estimates of anticipated future income and cash flows could be reduced in the future due to changes in circumstances. As a result, the carrying amount of our goodwill could be reduced through impairment charges in the future. Changes in other estimates could also affect the determination of fair value and could impact the carrying amount of our goodwill.

      The Company has a stock incentive plan to provide additional incentives to key personnel. In accordance with SFAS No. 123, we recognize the fair value of stock options and restricted stock granted

as compensation expense, allocating the expense over the vesting period. The fair value of the options is determined under the Black-Scholes option pricing model using certain subjective assumptions related to interest rates, volatility, expected life, etc.

Recent Accounting Pronouncements

      In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment. This statement is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation and establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services and for the recording of liabilities that are based on the fair-value of these equity instruments. The approach is similar to Statement 123, however the revised statement requires all share-based payments to employees be expensed based on fair value, with pro forma disclosure no longer an option. Since the Company currently expenses costs related to its options issued to employees using the fair-value method as outlined in the original FASB No. 123, the impact of the new statement is expected to be immaterial. The Company is evaluating the impact of other differences, including recording incremental compensation costs/credits related to modification of terms or conditions of awards and recording the effect of possible future forfeitures. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005.

Results of Operations

      Net revenue. Net revenue was $198.4 million for the year ended December 31, 2004, an increase of 67.9% from net revenue of $118.2 million for the year ended December 31, 2003. The increase in net revenue was primarily the result of an increase in interest income on student loans and fee income on loan originations, offset by an increase in interest expense on asset-backed securitizations.

      Interest income. Interest income increased by $77.7 million, or 125.7%, to $139.5 million for the year ended December 31, 2004 compared to $61.8 million for the year ended December 31, 2003. This increase was primarily the result of an increase in the average balance of loans in our portfolio, which grew to $3.8 billion in 2004 from $1.6 billion for 2003, as we continued to retain a significant portion of the federally guaranteed consolidation loans we originated. The amount of loan originations retained in 2004 was $2.0 billion, approximately the same as in 2003. The increase in interest income also was a result of increased short-term interest rates in 2004. The average rate on our loan portfolio increased slightly to 4.80% in 2004 from 4.77% in 2003. We received SAPs totaling $16.3 million and $0.9 million for the 2004 and 2003 periods, respectively, as a result of the increase in interest rates. We received fixed rate floor income of $22.0 million and $16.6 million in 2004 and 2003, respectively. The increase in fixed rate floor income was primarily the result of the increase in the average balance of loans in our portfolio earning fixed rate floor income. Interest income on restricted cash decreased $1.1 million to $1.8 million in 2004 compared to $2.9 million in 2003 due primarily to a decrease in the amount of restricted cash. The decline in restricted cash was the result of funds from asset-backed securitizations being more quickly invested in loans or used to pay down securitization debt. Other interest income was $0.8 million in 2004 and $0.7 million in 2003.

      Interest expense. Interest expense increased by $36.7 million, or 92.0%, to $76.6 million for the year ended December 31, 2004 from $39.9 million for 2003. Our average debt balance under our warehouse and asset-backed securitizations increased by $1.9 billion to $3.9 billion for 2004 from $2.0 billion for 2003. Interest expense on this debt increased $44.0 million to $73.7 million in 2004 compared to $29.7 million in 2003. Our average cost of funds was 1.89% for 2004 and 1.53% for 2003. Interest expense on other debt obligations decreased to $2.9 million in 2004 compared to $10.2 million in 2003, primarily as a result of a change in the composition of other debt obligations. In October 2003, we entered into a

revolving line of credit and borrowed $40.0 million which was used in combination with the issuance of common and preferred stock to repay the senior notes that had been issued to finance our acquisition by Lightyear. The new revolving line of credit was at a substantially lower interest rate than the senior notes.

      Provision for loan losses. We recorded a provision of $1.0 million for the year ended December 31, 2004 compared to a provision of $2.4 million in the year ended December 31, 2003. The reduced provision in 2004 resulted from the Company being awarded Exceptional Performance status by the DOE and claims with respect to FFELP loans being guaranteed at 100% for the period June 1, 2004 to May 31, 2005.

      Net portfolio margin and net interest income after provision for loan losses. Net portfolio margin increased to 1.67% for 2004 from 1.62% for 2003 primarily due to an increase in our average student loan balance relative to restricted cash and by a slight increase in the average yield on our student loans. A reconciliation of net portfolio margin to the most comparable information which has been prepared in accordance with GAAP is provided below. See “— Net Portfolio Margin Analysis.” As a result of the foregoing, net interest income after provision for loan losses increased by $42.4 million to $62.0 million for 2004 compared to $19.6 million for 2003.

      Fees on loan sales. Fees on loan sales increased to $120.1 million in 2004 from $89.5 million in 2003, primarily reflecting better pricing for the sale of completed loan applications under our forward purchase agreements and an increase in the amount of loans sold. The amount of loans originated that were sold to, or marketed for, third parties increased to $2.4 billion in the 2004 period from $2.2 billion for the 2003 period. Included in our fees on loan sales were fees for marketing private in-school loans, which increased to $16.0 million in 2004 from $5.3 million in 2003.

      Fees for servicing. We generated $12.9 million in loan servicing fees on a consolidated basis during 2004, compared to $9.1 million for the period from April through December 31, 2003 due to the April 2003 acquisition of SunTech. On a separate segment basis, we recorded loan servicing income for 2004 and 2003 of $18.7 million and $11.8 million, respectively, including $5.8 million and $2.7 million, respectively from the servicing of loans in our portfolio. As of December 31, 2004 SunTech serviced $10.9 billion of loans, an increase of 22.9% from the amount of loans serviced at December 31, 2003. Substantially all of the increase relates to loans in the Company’s portfolio.

      Advertising income. Fee income in 2004 included $3.4 million in advertising income associated with the online college newspaper publishing operations of Y2M, which we acquired in April 2004.

      Expenses. Total expenses increased $23.3 million, or 19.5%, to $142.9 million for the year ended December 31, 2004 compared to $119.6 million for the year ended December 31, 2003, primarily as a result of one-time charges for stock and cash compensation to management related to the completion of the initial public offering, the termination of the lease on our former headquarters and other office relocation expenses, increased marketing expenses, the April 2003 acquisition of SunTech and the April 2004 acquisition of Y2M. See note 23 to our consolidated financial statement for expenses on a segment basis.

      Salaries and benefits increased $9.4 million, or 17.2%, to $64.0 million in 2004 compared to $54.6 million in 2003. Salaries and benefits increased in our loan origination segment by $6.4 million and in our loan servicing segment by $3.0 million. Increases were due to a one-time charge of $1.4 million for management bonuses in restricted stock and cash related to the completion of the initial public offering, increased health care costs and the acquisitions of SunTech in April 2003 and Y2M in April 2004. Our salary and benefits expenses attributable to our stock incentive plan were $0.9 million for 2004 and negligible in 2003.

      Marketing expenses increased $21.5 million to $46.5 million in 2004 compared to $25.0 million in 2003, due to an increase in marketing activities across all our product lines, including an increased focus

on marketing private loans, increased direct mail and internet advertising in response to the national “do not call” list introduced in September 2003, and the acquisition of Y2M.

      Communications and data processing expense increased $0.5 million for 2004 compared to 2003 primarily due to increased telephone expenses offset in part by lower postage and delivery expenses. Management and consulting fees decreased to $2.9 million for 2004 from $3.3 million for 2003. Professional fees decreased $0.2 million, or 3.2%, to $6.1 million in 2004 compared to $6.3 million in 2003 as a result of a reduction in consultant expenses. Other general and administrative expenses increased $3.2 million, or 37.8%, in 2004 compared to 2003 as a result of increased travel, franchise taxes, bank fees, supplies, corporate insurance and $1.1 million in expenses related to moving headquarter functions between offices and the termination of the lease on our former headquarters. Depreciation and amortization increased $1.7 million to $6.0 million in 2004 compared to $4.3 million in 2003, primarily as a result of the acquisition of additional computer equipment, software and other property in 2004 and 2003.

      Derivatives. Our interest rate swaps and interest rate cap resulted in swap interest expense of $3.4 million in both 2004 and 2003 and derivative mark-to-market income of $5.4 million in 2004 versus an expense of $1.9 million in 2003. There was a one-time charge of $4.8 million related to debt extinguishment in 2003.

      Income tax provision (benefit). Income tax provision increased by $22.2 million to a $22.0 million provision for 2004 compared to a $0.2 million benefit for 2003 due to the increase in income before taxes compared to a loss in 2003 and the higher effective tax rate. Our effective tax rate in 2004 was 39.7% compared to 14.1% for 2003. Included in our net loss for 2003 were non-deductible expenses that represented a significant percentage of our pre-tax loss, which caused our 2003 effective tax rate to be at a rate below the statutory rate.

      Net income (loss). Net income (loss) increased to net income of $28.6 million in 2004 from a net loss of $7.5 million in 2003, as a result of the factors discussed above and the $1.4 million decrease in the accretion of dividends on preferred stock as a result of the payment of the liquidation preference of the preferred stock with proceeds of the initial public offering.

      Net revenue. Net revenue was $118.2 million in 2003, a decrease of 0.8% from net revenue of $119.1 million in 2002. The decrease in net revenue was primarily the result of a decrease in fees on loan sales offset by an increase in net interest income, in each case, as a result of our decision to retain more loans in our portfolio. Net revenue in 2003 also included loan servicing fees of $9.1 million, due to the acquisition of SunTech.

      Interest income. Interest income increased by $35.5 million to $61.8 million in 2003 compared to $26.3 million in 2002. This increase was the result of an increase in the average balance of loans in our portfolio, which grew to $1.6 billion in the 2003 period from $489.3 million in 2002, as we continued to retain a greater portion of the federally guaranteed consolidation loans we originated. The amount of loan originations retained increased to $2.0 billion in 2003 from $824.3 million in 2002. The impact of our increased portfolio was partially offset by changes in interest rates and in the pricing characteristics of our loan assets. The average yield on our loan portfolio decreased to 4.77% in the 2003 from 5.79% in the 2002 period due to the addition of consolidation loans originated with a fixed rate in the lower interest rate environment during 2003. We received SAPs totaling $0.9 million in 2003 and $0.1 million in 2002. We received fixed rate floor income of $16.6 in 2003 and $7.1 million in 2002, primarily as a result of the increase in the average balance of loans in our portfolio and decreases in applicable interest rates. Amortization of the fair market value adjustment of the loan portfolio from the Lightyear acquisition increased $0.4 million, or 80%, to $0.9 million in 2003 compared to $0.5 million in 2002, due to the timing of the acquisition. Interest income on restricted cash decreased $1.2 million, or 29.3%, to $2.9 million in 2003 compared to $4.1 million in 2002 due to a decrease in the amount of restricted cash and lower

interest rates. The decline in restricted cash was the result of funds from asset-backed securitizations being more quickly invested in loans or used to repay securitization debt. Other interest income increased $0.5 million to $0.7 million in 2003 compared to $0.2 million in 2002.

      Interest expense. Interest expense increased by $13.9 million, or 53.5%, to $39.9 million in 2003 from $26.0 million in 2002. Our average debt balance under our warehouse and asset-backed securitizations increased by $1.2 billion to $2.0 billion in 2003 from $758.0 million in 2002. Interest expense on this debt increased $13.1 million, or 78.9%, to $29.7 million in 2003 compared to $16.6 million in 2002. The reduction in short-term interest rates, together with a reduction in the portion of asset-backed securitizations funded with auction rate notes, decreased our average cost of funds to 1.53% in 2003 from 2.22% in 2002. Interest expense on other indebtedness increased to $10.2 million in 2003 compared to $9.4 million in 2002, primarily as a result of having higher average outstanding other debt obligations for the full year because our senior notes issued in the acquisition by Lightyear were outstanding for a longer period in 2003 as compared to 2002. In October 2003, we entered into a revolving line of credit and drew $40.0 million, which, in combination with proceeds from the issuance of common and preferred stock, was used to repay our senior notes. As a result, our outstanding other debt obligations and capital lease obligations were reduced from $108.6 million to $42.4 million in October 2003. The new revolving line of credit was at a substantially lower interest rate than the senior notes.

      Provision for loan losses. The provision for loan losses for loans in our portfolio increased $0.4 million, or 20.0%, to $2.4 million in 2003 compared to $2.0 million in 2002. The increase resulted from the increased loan balance, partially offset by a reduction in the estimated amount of loans expected to default. After giving effect to the provision of loan losses and the activity in the allowance for loan losses in 2003, our allowance for loan losses as a percentage of outstanding loans at year end decreased to 0.14% in 2003 from 0.20% in 2002. In reducing this provision for 2003, we considered the additional data on the performance of our loan portfolio during 2003, the trends in default rates reported by the U.S. Department of Education and the performance of other comparable portfolios, all of which indicated a decline in default rates. This affected our probability analysis with respect to the 2% of principal and interest in our loan portfolio that is not guaranteed. Because of the existence of the 98% guarantee of principal and interest on our loans, our provision was not affected by a change in severity.

      Net portfolio margin and net interest income (expense) after provision for loan losses. Net portfolio margin increased to 1.62% in 2003 from 1.27% in 2002 primarily due to lower rates of interest on indebtedness used to finance our portfolio, offset by a decrease in the average yield on our student loans. A reconciliation of net portfolio margin to the most comparable information which has been prepared in accordance with GAAP is provided below. See “— Net Portfolio Margin Analysis.” Net interest income after provision for loan losses increased by $21.4 million to $19.6 million in 2003 compared to net interest expense after provision for loan losses of $1.8 million in 2002, due to lower rates of interest on indebtedness used to finance our portfolio.

      Fees on loan sales. Fees on loan sales decreased to $89.5 million in 2003 from $120.8 million in 2002, primarily reflecting the lower percentage of loans originated which were sold to third parties. The amount of loans originated that were sold to, or marketed for, third parties declined to $2.2 billion in 2003 form $3.2 billion in 2002. Included in our fees on loan sales were fees for marketing private in-school loans, which increased to $5.3 million in 2003 from no such fees in 2002. This increase primarily reflected the launch in May 2003 of our program for private loan products targeted at in-school students.

      Fees for servicing. We generated $9.1 million in loan servicing fees on a consolidated basis for the period from April through December 31, 2003 compared to none in 2002, the year prior to our acquisition of SunTech. On a separate segment basis, we recorded loan servicing fees for 2003 of $11.8 million, including $2.7 million from the servicing of loans in our portfolio. As of December 31, 2003 SunTech serviced $8.9 billion of loans, an increase of 22.0% from the amount of loans serviced at the close of the transaction earlier in the year. Substantially all the increase relates to loans in the Company’s portfolio.

      Expenses. Total expenses increased $37.8 million, or 46.2%, to $119.6 million in 2003 compared to $81.8 million in 2002, primarily as a result of increased marketing expenses and the acquisition of SunTech. See note 23 to our consolidated financial statement for expenses on a segment basis.

      Salaries and benefits increased $7.2 million, or 15.2%, to $54.6 million in 2003 compared to $47.4 million in 2002, including salaries and benefits in our loan servicing segment which increased by $6.3 million, as a result of the SunTech acquisition. Salaries and benefits increased in our loan origination segment by $0.9 million as a result of the expansion of our sales force and increased health care costs, although we also had a reduction in other headcount in 2003. Our salary and benefits attributable to our stock incentive plan were negligible in 2003 and 2002.

      Marketing expenses increased $11.2 million, or 81.2%, to $25.0 million in 2003 compared to $13.8 million in 2002 due to an increase in marketing activities across all our product lines, including an increased focus on marketing private loans. In addition, in anticipation of the effects that the national “do not call” list introduced in September 2003 would have on certain of our marketing activities, we increased our marketing efforts in the second half of 2003. Fees paid to affinity partners decreased $0.12 million or 35.5% to $0.22 million for 2003 compared to $0.34 million in 2002.

      Communications and data processing expense increased $0.6 million, or 9.4%, in 2003 compared to 2002 primarily due to the acquisition of SunTech, offset in part by a reduction in rates for these services. Management and consulting fees decreased to $3.3 million in 2003 from $4.1 million in 2002 primarily as a result of the expiration of certain consulting agreements relating to the Lightyear acquisition offset by new consulting agreements relating to the SunTech acquisition. Professional fees increased $4.1 million to $6.3 million in 2003 compared to $2.2 million in 2002 as a result of the engaging consultants for projects and pursuing acquisition opportunities. Other general and administrative expenses increased $2.9 million, or 53.7%, in 2003 compared to 2002 as a result of increased travel, franchise taxes and corporate insurance. Depreciation and amortization increased $2.3 million to $4.3 million in 2003 compared to $2.0 million in 2002, primarily as a result of the acquisition of additional computer equipment, other property and software in 2003, including $0.5 million of amortization of servicing rights related to the SunTech acquisition.

      Derivatives. In 2003, in connection with the financing of our portfolio we entered into interest rate swaps and an interest rate cap that resulted in swap interest expense of $3.4 million and a derivative mark-to-market expense of $1.9 million. We had no derivatives in 2002.

      Income tax provision (benefit). Income tax provision decreased by $10.9 million to a benefit of $0.2 million in 2003 compared to a provision of $10.7 million for the nearly seven months we operated as a taxable corporation in 2002 due to the decrease in income before taxes in 2003. Our effective tax rate was 14.1% for 2003 compared to 40.8% for the nearly seven months we operated as a taxable corporation in 2002. Included in our net loss for 2003 were non-deductible expenses, which caused our 2003 effective tax rate to be at a rate below the statutory rate. Because we operated as a limited liability company prior to May 2002, we had no income tax provision for the period prior to May 17, 2002.

      Net income (loss). Net income (loss) decreased to a net loss of $7.5 million for 2003 from net income of $23.6 million for 2002. Our net loss was primarily a result of our increase in marketing expenses incurred to grow the volume of our loan originations and a decision to retain more loans in our portfolio. We retained 50% of the $4.0 billion of FFELP loans we originated in 2003 as compared to 21% in 2002. Other factors contributing to our net loss in 2003 were swap interest expense and mark-to-market adjustments on our derivatives, noncash debt extinguishment expenses in connection with the repayment of our senior notes, the accretion of dividends on our preferred stock and the change in tax status. These factors were partially offset by the addition of income from our acquisition of SunTech and the other factors described above.

Financial Condition

      Total assets increased $1.8 billion to $5.0 billion at December 31, 2004 from $3.2 billion at December 31, 2003. This was due primarily to an increase in our loan portfolio of approximately $1.8 billion, to $4.7 billion at December 31, 2004 from $2.9 billion at December 31, 2003. All of the loans in our portfolio are FFELP loans and over 99% are consolidation loans.

      Total liabilities increased $1.8 billion to $4.9 billion at December 31, 2004 from $3.1 billion at December 31, 2003. The growth in liabilities was a result of an increase in debt incurred to finance our loan portfolio.

      Preferred stock of our consolidated subsidiary was zero at December 31, 2004 compared to $89.1 million at December 31, 2003 as a result of the payment of the liquidation preference of $93.9 million in July 2004 on all shares of the preferred stock issued by our subsidiary in July 2004 from the net proceeds of the initial public. As a result, there will be no further accretion or payment of preferred dividends on the preferred stock.

      Stockholders’ equity increased $166.5 million to $191.7 million at December 31, 2004 from $25.2 million at December 31, 2003 primarily as a result of the issuance of 9,375,000 shares of common stock in the initial public offering and net income for 2004.

Liquidity and Capital Resources

      We finance our operations through operating cash flow and borrowings under a warehouse facility, asset-backed securitizations and a revolving line of credit. Operating activities provided net cash of $32.0 million in 2004, an increase of $11.2 million from the net cash provided by operating activities of $20.8 million in 2003. The primary reason for this increase was the increase in net income. Net cash used in investing activities was approximately $1.9 billion in both 2004 and 2003. Net cash provided by financing activities decreased slightly to $1.8 billion in 2004 from $1.9 billion in 2003, primarily as a result of increased payments on asset-backed notes and lines of credit and the redemption of the preferred stock. We believe that the use of our warehousing capacity, continued access to the asset-backed securitization market and forward purchase agreements will provide adequate liquidity to fund our operations, loan processing and originations and capital expenditures for the foreseeable future.

      On October 30, 2003, we obtained from two national financial institutions a three-year $45.0 million revolving credit facility, which was increased to $62.5 million pursuant to an amendment on April 21, 2004 to acquire Y2M. The revolving line of credit bears interest, payable quarterly, at LIBOR plus 3.50%. We are also required to pay a commitment fee of 0.50% on undrawn amounts under the facility. The facility is secured by substantially all of our non-student loan assets, including the outstanding capital stock or limited liability company membership interests of all of our wholly-owned operating subsidiaries other than subsidiaries that hold our loan portfolio. The credit facility contains certain mandatory prepayment and commitment reduction provisions and event of default provisions (including relating to a change of control), as well as affirmative and negative covenants, which include restrictions on the payment of dividends, incurrence of additional debt and capital expenditures. In addition, we are subject to, and in compliance with, certain financial covenants including ratios related to fixed charges coverage, interest coverage and leverage. We and certain of our subsidiaries have guaranteed all of our obligations under the credit agreement. We drew $40.0 million initially under the facility to retire a portion of the senior notes that had been issued to help finance our acquisition by Lightyear in May 2002. On April 21, 2004, we borrowed $34.0 million in order to fund the acquisition of Youth Media & Marketing Networks. Upon completion of the initial public offering, approximately $41.6 million of the net proceeds were used to repay a portion of the indebtedness outstanding under the revolving line of credit, at which time the amount of the facility was reduced to $30.0 million pursuant to a second amendment which became effective at such time. As amended pursuant to the second amendment, the facility will terminate in July 2005. As of December 31, 2004, there was no outstanding balance on this revolving line of credit.

      In July 2003, we obtained a one-year, $500.0 million conduit warehouse financing facility, through a special purpose company, to fund our loan originations. In February 2004, we requested and received a temporary increase in this facility to permit financing up to $1.0 billion allowing us to finance additional loans prior to issuing asset-backed securities in April 2004, and as of the end of April 2004 capacity under the facility returned to $500.0 million. On November 4, 2004 we increased this facility to $1.0 billion through July 2005. On December 1, 2004, we received a temporary increase in this facility to permit financing up to $1.4 billion through the end of February 2005, after which the facility returned to $1.0 billion. We use the warehouse facility to fund our loan originations until such time as we accumulate sufficient loans to effectively access the asset-backed securitization market and we may seek to expand our warehouse availability from time to time in order to continue to most efficiently access that market, although we do not have a contractual right to increase this facility at this time. We pay a fee of 0.14% per annum on the unused portion of the facility and, accordingly, have maintained availability at levels we believe are appropriate to fund our loan originations. The ability to draw on the facility expires in July 2005 unless extended. It must be repaid in full by July 2006 unless extended. The $1.0 billion warehouse facility is provided by five commercial paper conduits with liquidity support provided by two national financial institutions. The facility is secured by our portfolio of loans financed under the facility. The interest rate on funds advanced by the conduit lender is calculated based on the commercial paper rate plus a margin and for funds advanced by the liquidity provider at the Eurodollar rate plus 1.0% or the alternate base rate. The interest rate on amounts outstanding under the warehouse facility on December 31, 2004 was 2.55%. As of December 31, 2004, $1.1 billion was outstanding under our warehouse facility. The conduit facility contains certain affirmative and negative covenants as well as reporting requirements and covenants relating to loan servicing. The affirmative covenants require us to, among other things, preserve the federal guarantee on our FFELP loan portfolio. An event of default under the conduit facility will occur if, among other things, the federal guarantee on FFELP loans is reduced, the excess spread on the loans in our portfolio drops below a certain rate or the default rate of loans in our portfolio exceeds a certain percentage.

      In February 2005, April 2004 and in 2003 and 2002 we issued $1.4 billion, $1.1 billion, $1.9 billion and $500.0 million, respectively, of asset-backed notes in order to retain loans on our balance sheet. These secured financings were issued primarily in the domestic capital markets and are secured by separate pools of FFELP loans. Securities issued in our securitizations accrue interest based on a rate of a spread to LIBOR or set under an auction procedure related to the securities as more fully described below. The securitization transactions require certain levels of cash reserves and require that we distribute cash flows to the bondholders on a priority basis. Other than cash paid for servicing and administration, all of the cash flows from our securitized assets have been paid to the bondholders and, therefore, have not been available to us for business operations.

      As part of our securitization transactions, we borrowed funds in excess of the principal balance of the loans included in the applicable securitization transactions. A portion of these additional funds was used to repay our other indebtedness and fund our operations. The timing of future cash flows may be affected by the amount of loans in our portfolio in grace or deferment status or with respect to which we have granted forbearance and the level of delinquencies. In 2004 and 2003, we made $275.6 million and $45.9 million, respectively, in principal payments on our asset-backed securitizations. Our rights to cash flows from securitized loans are subordinate to noteholders interests and these loans may fail to generate any cash flows beyond what is due to pay the noteholders. We anticipate continuing to access the domestic asset-backed securitization market in 2005 and subsequent years. The timing of future issuances will depend on market conditions.

      On May 17, 2002, in connection with our acquisition by Lightyear and its affiliates, CFSL Acquisition Corp. issued a 4.47% subordinated note, due June 30, 2007, in the principal amount of $15.0 million, to the previous owners of the Company. The note may be redeemed at any time at the option of the Company, and must be redeemed in the event of a change of control of the Company.

      The following tables summarize our indebtedness and capital leases outstanding as of December 31, 2004 and December 31, 2003:

      Payments on outstanding indebtedness and capital and operating lease obligations are due after December 31, 2004 in varying amounts as follows:

      In addition, we have forward purchase agreements under which we are obligated to sell a minimum amount of FFELP loan applications, refer private education loan applications and sell all of the funded private consolidation loan applications we originate. These commitments generally run for between one and three years. As of December 31, 2004 and December 31, 2003, we were obligated to sell approximately one-third of calendar year 2005 FFELP consolidation volume and $1.2 billion, respectively, in loan applications at contractual rates under various agreements through December 31, 2005. See “Business — Product and Service Offerings.”

Off Balance Sheet Arrangements

      We do not have any off balance sheet arrangements. As described above, all of our asset-backed securitizations are treated as indebtedness on our balance sheet.

Loan Portfolio

      The table below describes the components of our loan portfolio as of December 31, 2004 and December 31, 2003:

      The table below shows the repayment status of loans and delinquency amounts as of December 31, 2004 and December 31, 2003. Delinquencies have the potential to adversely impact our earnings through increased servicing and collection costs and write-offs. Forbearance adversely affects cash flow in the securitizations.

      The following table summarizes our loan portfolio by interest rate ranges as of December 31, 2004:

Net Portfolio Margin Analysis

      The following table sets forth the net portfolio margin on average student loans and restricted cash for the periods indicated. We define net portfolio margin as being equal to the weighted average yield on our loans and restricted cash after amortization of capitalized origination costs and purchase accounting adjustments, less the weighted average interest expense on the debt we incur to finance our loans. Management believes that net portfolio margin provides investors with information that is useful in evaluating the earnings performance of our loan portfolio.

      The following table sets forth, for the periods indicated, information regarding the total amounts and rates of interest income from interest-earning assets and interest expense from interest-bearing liabilities. This table also provides a reconciliation of net portfolio margin to net interest income, which has been prepared using the interest income and interest expense amounts included in the Company’s historical income statements.

Interest Rate Risk

      Because we expect to generate a significant portion of our earnings from the difference, or spread, between the yield we receive on our loan portfolio of student loans and the cost of financing these loans, our results of operations are sensitive to interest rates. We fund our loan portfolio with variable-rate debt. In the current low interest rate environment, our loan portfolio is yielding excess net interest income, which is referred to as fixed rate floor income, as a result of a decline in short-term rates from the rates used to fix the borrower’s rate on a portion of the consolidation loans in our portfolio. See the section of this Annual Report on Form 10-K entitled, “Risk Factors.”

      Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Our net interest income is affected by changes in various interest rates, including LIBOR and the commercial paper rate. In higher interest rate environments, an increasing portion of the FFELP consolidation loans in our portfolio will earn interest at a variable rate. Loans in our portfolio earn interest at a variable rate when the floating rate based on the special allowance payment formula exceeds the fixed borrower rate. At this time, the loans will be effectively matched with variable-rate debt, and the impact of interest rate fluctuations will be substantially reduced.

      We have earned fixed rate floor income during the past three years. Fixed rate floor income is reduced and can be eliminated in a rising interest rate environment. For example, for the year ended December 31, 2004, our student loan portfolio had a weighted average interest rate of 4.28%.

      One objective when financing our loan portfolio is to manage interest rate risk through match-funding of loan assets with associated secured borrowings and utilizing interest rate swaps and other derivative instruments (described below) to minimize the adverse effect of interest rate fluctuations in the near term.

      During 2003 and 2004, we entered into certain derivative instrument contracts to help manage our interest rate risk. The table below summarizes the derivative instruments to which we were a party at December 31, 2004: