U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-QSB/A
(Amendment No. 1)

(Mark One)

x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended March 31, 2003.

OR

o

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number: 000-29995

EDUCATION LENDING GROUP, INC.

(Exact name of small business issuer as specified in its charter)

Delaware
(State or other jurisdiction of incorporation
or organization)
33-0851387
(IRS employer identification number)

12760 High Bluff Drive, Suite 210, San Diego, California 92130
(Address of principal executive offices)

(858) 617-6080
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: Shares of Common Stock, $0.001 par value, outstanding on March 31, 2003: 11,351,250, including treasury shares.

Transitional Small Business Format: Yes o No x

EXPLANATION OF AMENDMENT

            As announced in a press release dated February 26, 2004, as the result of a $468,000 computational error, Education Lending Group, Inc. is restating its consolidated results for the first, second and third quarters of 2003. Loan servicing set-up fees should have been written off against the "gain on sale" instead of continuing to be amortized when the related consolidated loans were sold. We are filing this Form 10-QSB/A to report the results for the first quarter of 2003, as restated and as discussed in Note 3 to the Consolidated Financial Statements. Other than as set forth below, the restatement does not impact any of the financial or other information set forth in the original filing of our Form 10-QSB for the period ended March 31, 2003. Effective as of December 31, 2003, Education Lending Group, Inc. is no longer a small business issuer. In the future, we will report our quarterly results on Form 10-Q and our annual results on Form 10-K.

TABLE OF CONTENTS

			Page
PART I.	FINANCIAL INFORMATION		3
	Item 1.	Financial Statements	3
		Consolidated Balance Sheets	3
		Consolidated Statements of Operations	4
		Consolidated Statement of Stockholders’ (Deficit)	5
		Consolidated Statements of Cash Flows	6
		Consolidated Notes to Financial Statements	7
		Report of Independent Accountants	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
	Item 3.	Controls and Procedures	10
PART II.	OTHER INFORMATION
	Item 6.	Exhibits and Reports on Form8-K	10

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PART I.FINANCIAL INFORMATION

Item 1.

Financial Statements

EDUCATION LENDING GROUP, INC.
CONSOLIDATED BALANCE SHEETS

	March 31, 2003			December 31, 2002
	(restated)
	(Unaudited)
ASSETS
Student loans, net of loan loss reserve	$	840,801,450		$	401,839,983
Student loans, net of loan loss reserve (securitized)		952,763,683			947,213,769
Restricted cash and investments		83,881,811			113,995,355
Cash and cash equivalents		5,647,439			2,042,527
Interest & other receivables		13,671,735			9,306,708
Property and equipment, net		1,394,166			1,313,182
Deferred financing costs		4,824,796			4,306,537
Other		484,092			813,209
Total Assets	$	1,903,469,172		$	1,480,831,270
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
Accounts payable	$	4,079,521		$	699,893
Government payable		6,031,086			4,976,425
Accrued expenses and other liabilities		7,408,940			7,746,605
Series 2002 notes		1,013,000,000			1,023,000,000
Warehouse loan facility		900,001,221			470,038,915
Total Liabilities		1,930,520,768			1,506,461,838
Preferred stock - $0.001 par value, 10,000,000 shares authorized
Common stock - $0.001 par value, 40,000,000 shares authorized, 11,351,250 and 11,189,084 shares issued and outstanding, respectively		11,351			11,189
Additional paid in capital		8,393,332			8,219,678
Accumulated deficit		(35,456,279	)		(33,861,435	)
Total Stockholders’ (Deficit)		(27,051,596	)		(25,630,568	)
Total Liabilities and Stockholders’ (Deficit)	$	1,903,469,172		$	1,480,831,270

See accompanying notes

3

EDUCATION LENDING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2003 and 2002
(Unaudited)

	2003			2002
	(restated)
Interest income:
Student loans, net	$	14,712,652		$	1,250,260
Investments		190,905			25,653
		14,903,557			1,275,913
Cost of interest income
Interest related expenses		8,607,003			670,941
Valuation of interest rate swap		912,702			—
Loan servicing and other fees		733,977			280,294
Total cost of interest income		10,253,682			951,235
Net interest income		4,649,875			324,678
Less: provision for loan losses		548,262			162,895
Net interest income/(expense) after provision for loan losses		4,101,613			161,783
Other income
Gain on sale of student loans		7,741,418			4,076
Other		7,045			212
Total other income		7,748,463			4,288
Operating expenses:
General and administrative		2,562,113			1,493,952
Sales & marketing		10,846,751			3,503,001
Total operating expenses		13,408,864			4,996,953
Loss before income tax provision		(1,558,788	)		(4,830,882	)
Income tax provision		36,056			0
Net loss	$	(1,594,844	)	$	(4,830,882	)
Net loss per share:
Basic & Diluted	$	(0.14	)	$	(0.51	)
Weighted average common shares outstanding:
Basic & Diluted		11,311,164			9,406,417

See accompanying notes

4

EDUCATION LENDING GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT)
For the Three Months Ended March 31, 2003
(Unaudited)

	Common Stock
	Number of Shares	Amount		Additional Paid in Capital		Accumulated Deficit			Total
Balance, December 31, 2002	11,189,084	$	11,189	$	8,219,678	$	(33,861,435	)	$	(25,630,568	)
Issuance of common stock	162,166		162		173,654					173,816
Net loss, March 31, 2003 (restated)							(1,594,844	)		(1,594,844	)
Balance at March 31, 2003 (restated)	11,351,250	$	11,351	$	8,393,332	$	(35,456,279	)	$	(27,051,596	)

See accompanying notes

5

EDUCATION LENDING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2003 and 2002
(Unaudited)

	2003			2002
	(restated)
Cash Flows From Operating Activities:
Net loss	$	(1,594,844	)	$	(4,830,882	)
Adjustments to reconcile net loss to net cash used by operations:
Depreciation and amortization		294,230			66,326
Provision for loan losses		548,262			162,895
Valuation of interest rate swap		912,702			—
(Increase) decrease in assets:
Interest and other receivables		(4,365,026	)		(823,425	)
Other assets		329,118			(46,718	)
Increase (decrease) in liabilities:
Accounts payable		3,379,628			502,950
Government payable		1,054,661			901,819
Accrued expenses		(1,250,367	)		1,799,895
Net cash (used in) operating activities		(691,636	)		(2,267,140	)
Cash flows from investing activities:
Origination/Purchase of student loans		(445,194,159	)		(136,728,116	)
Acquisition of property and equipment		(176,717	)		(630,810	)
Net cash (used in) investing activities		(445,370,876	)		(137,358,926	)
Cash flows from financing activities:
Net proceeds from credit facility		471,601,403			138,196,307
Net payments on Series 2002 Notes		(21,525,554	)		—
Payment of loan fees		(582,241	)		(50,000	)
Proceeds from issuance of stock		173,816			470,000
Net cash provided by financing activities		449,667,424			138,616,307
Net increase (decrease) in cash		3,604,912			(1,009,759	)
Cash and cash equivalents at beginning of period		2,042,527			1,705,113
Cash and cash equivalents at end of period	$	5,647,439		$	695,354

See accompanying notes

6

Education Lending Group, Inc.
(Formerly Direct III Marketing, Inc.)
Consolidated Notes to Financial Statements
March 31
(Unaudited)

Note 1 – Statement of Accounting Principles

New Accounting Pronouncements

SFAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123.” SFAS 148 addresses transition provisions for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the Statement amends the disclosure requirements of Statement 123. The Company has determined that SFAS 148 will not have a significant impact on its consolidated financial statements. The Company continues to account for its incentive based compensation using the intrinsic value method under APB 25. Had compensation cost for the Company’s stock options been recognized based upon the estimated fair value on the grant date under the fair value methodology prescribed by SFAS 123 as amended by SFAS 148, the Company’s net earnings and earnings per share would have been as follows:

	March 31, 2003 (restated)			March 31, 2002
Net loss, as reported	$	(1,594,844	)	$	(4,830,882	)
Deduct, total stock-based compensation expense determined under fair value based method, net of tax effects		(207,748	)		(218,363	)
Pro forma net loss	$	(1,802,592	)	$	(5,049,245	)
Loss per share:
Basic & Diluted as Reported		(0.14	)		($0.51	)
Basic & Diluted pro forma		(0.16	)		($0.54	)

As required by SFAS 123, the Company provides the following disclosure of hypothetical values for the net options issued during 2003. The net stock options granted during the quarter ended March 31, 2003 are valued at $4.04. These values were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the quarter ended March 31, 2003: expected volatility of 92%, risk free interest rate of 3.91% and expected life of 9.33 years.

Note 3-Restatement of Quarterly Results

During our review of our 2003 year-end financial statements we discovered a computational error related to the sale of consolidation loans during the first and second quarters of 2003. Loan servicing set-up fees should have been written off against the “gain on sale” instead of continuing to be amortized when the related consolidation loans were sold.  We have restated our consolidated financial statements to reflect the changes related to this adjustment.  Following is a summary of the changes to our consolidated balance sheet at March 31, 2003, and for our consolidated statement of income and our consolidated statement of cash flows for the three months ended March 31, 2003.

Consolidated Balance Sheet as of March 31, 2003	As previously reported			As restated
Student loans, net of loan loss reserve (securitized)	$	953,159,016		$	952,763,683
Total assets		1,903,864,505			1,903,469,172
Accumulated deficit		(35,060,946	)		(35,456,279	)
Total stockholders' deficit		(26,656,263	)		(27,051,596	)

Consolidated Statement of Operations for the three months ended March 31, 2003		As previously reported			As restated
Loan servicing and other fees	$	739,414		$	733,977
Gain on sale of student loans		8,142,188			7,741,418
Net loss		(1,199,511	)		(1,594,844	)
Net loss per share		(0.11	)		(0.14	)

Weighted average common shares outstanding
Basic & Diluted		11,311,164			11,311,164
Consolidated Statement of Cash Flows for the three months ended March 31, 2003		As previously reported			As restated
Net Loss	$	(1,199,511	)	$	(1,594,844	)
Net cash used in operating activities		(296,303	)		(691,636	)
Origination/purchase of student loans		(445,589,492	)		(445,194,159	)
Net cash used in investing activities		(445,766,209	)		(445,370,876	)

7

Report of Independent Accountants

To the Board of Directors and Stockholders
of Education Lending Group, Inc.:

We have reviewed the accompanying consolidated balance sheet of Education Lending Group, Inc. and its subsidiaries (the “Company”) as of March 31, 2003 and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the three-month period ended March 31, 2003. These interim financial statements are the responsibility of the Company’s management. The consolidated statements of operations, changes in stockholders’ deficit and cash flows for the three-month period ended March 31, 2002 were reviewed by other independent accountants.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, after the restatement described in Note 3, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the year then ended (not presented herein), and in our report dated February 27, 2003 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of March 31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

PricewaterhouseCoopers LLP
Los Angeles, CA
May 12, 2003, except for Note 3, as to which the date is February 19, 2004

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

            As announced in a press release dated February 26, 2004, as the result of a $468,000 computational error, Education Lending Group, Inc. is restating its consolidated results for the first, second and third quarters of 2003. Loan servicing set-up fees should have been written off against the “gain on sale” instead of continuing to be amortized when the related consolidated loans were sold. We are filing this Form 10-QSB/A to report the results for the first quarter of 2003, as restated and as discussed in Note 3 to the Consolidated Financial Statements. Other than as set forth below, the restatement does not impact any of the financial or other information set forth in the original filing of our Form 10-QSB for the period ended March 31, 2003. Effective as of December 31, 2003, Education Lending Group, Inc. is no longer a small business issuer. In the future, we will report our quarterly results on Form 10-Q and our annual results on Form 10-K. Amounts impacted by the restatement referred to in Management’s Discussion and Analysis of Financial Condition and Results of Operations that were impacted by the restatement are restated below.

RESULTS OF OPERATIONS

For the three months ended March 31, 2003 and 2002

Earnings Summary

For the three months ended March 31, 2003, the Company’s net loss calculated was $(1.6) million, or $(0.14) per share, compared to a net loss of $(4.8) million, or $(0.51) per share for the three months ended March 31, 2002. The decreased loss for the period is attributable mostly to the sale of approximately $206 million of consolidation loans (the Company sold the consolidation loans during the period to raise cash for operations) which resulted in gain on sale of roughly $6.8 million. The Company expenses during the period included the payments made to marketing partners who advertise, identify and attract potential borrowers for the Company. As the loan volume for a particular period increases, marketing partner fees increase. These marketing partner fees are a significant portion of the Company’s expenses. During the quarter, these marketing partner fees represented 58% of the total operating expenses of the Company. Additionally, the Company increased its student loan asset base during the quarter by roughly $445,000,000 to approximately $1,794,000,000. Since the Company only earns an interest spread on the loans added to its balance sheet, the marketing partner fee expense along with other sales and marketing expenses results in significant losses until such time as a significant scale of student loan assets is reached on the balance sheet.

Net Interest Income

Net interest income is derived largely from the Company’s portfolio of student loans that remain on the balance sheet and is the spread between interest earned on student loans and the Company’s cost of generating that interest income. All servicing of the Company’s student loans is outsourced to third party servicers. For the three months ended March 31, 2003, loan servicing and other fees were approximately $734,000 compared to approximately $280,000 for the three months ended March 31, 2002. The cost of interest income on the income statement consists of the costs paid to a third party servicer to service the loans, interest expense on the warehouse facility and permanent financings, amortization of the Department of Education fees, and amortization of premiums paid to acquire student loans. Net interest income during the three months ended March 31, 2003 was $4,600,000. This was comprised of gross interest income of approximately $14,900,000 less interest costs (including the mark to the market adjustment of $912,702 for the interest rate swap entered into during the fourth quarter of 2002) of approximately $10,300,000. Net interest income after the provision for loan losses was approximately $4,100,000. Net interest income during the three months ended March 31, 2002 was $325,000. This was comprised of gross interest income of approximately $1,276,000 less interest costs of approximately $951,000. Net interest income after the provision for loan losses was approximately $162,000. The increase in the net interest income earned by the Company during the quarter is a direct result of the increase in the student loan assets held by the Company.

Gain on Sale of Student Loans

In general, the Company currently sells the majority of loans it originates in the traditional “lender-list” marketing channel, Student Loan Xpress, Inc. (SLX), while retaining loans originated in the consolidation marketing channel. The SLX business is rather seasonal as the majority of the loans are originated in the August/September/October and January/February/March time frame which corresponds to the college disbursement calendar. For the three months ended March 31, 2003 approximately $939,000 was booked as gain on the sale of student loans from this entity compared with $4,000 during the three months ended March 31, 2002. The increase from the first quarter of 2002 to the first quarter 2003 is attributable to having a full year of operations leading into the quarter whereas the first quarter of 2002 was the first months’ of operations for SLX.

In addition to the sale of loans generated in the SLX business during the quarter, the Company also chose to sell approximately $206,000,000 of consolidation loans. This resulted in additional gain on sale of approximately $6,800,000 for the three months ended March 31, 2002 compared to no sales from this source in the first quarter of 2002. As a result, the Company had total gain on sale during the three months ended March 31, 2003 of roughly $7,700,000 compared to $4,000 during the same period in 2002.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, the Company had operating cash and cash equivalents of approximately $5,600,000, (excluding restricted cash and investments). Since inception the Company has financed its operations from debt and equity financings. During the three months ended March 31, 2003, the Company used cash of approximately $692,000 to fund its operations. During the three months ended March 31, 2003, the Company acquired property and equipment of approximately $200,000. For the three months ended March 31, 2003, the Company has been advanced $900,001,221 ($471,601,403 of this amount was advanced in the first quarter of 2003) from the warehouse loan facilities and holds $1,013,000,000 from the Auction Rate Education Loan Backed Notes (“Series 2002 Notes”) at March 31, 2003. During the three months ended March 31, 2003, the Company had funded approximately $445,000,000 in student loans. During the three months ended March 31, 2003, the Company received proceeds of $173,816, net of issuance costs, related to

 9

the purchase of 162,166 shares of common stock in connection with the exercise of warrants and employee stock options.

Item 3.

Controls and Procedures

Based on their most recent evaluation, which was completed within 90 days of the filing of this Form 10-QSB/A, our principal executive officer and principal financial officer believe our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) require specific modifications to insure that all financial reporting and disclosures are accurate. We are in the process of developing improved internal control processes and expect to implement them during the first quarter of 2004.  We believe these changes will enhance the accuracy of all future financial reports.

PART II.OTHER INFORMATION

Item 6.

Exhibits and Reports on Form 8-K

(a)

Exhibits.

The exhibits listed below are filed as part of this document.

Exhibit Number	Description
31.1	CEO Certification under Sarbanes-Oxley Act (Section 302)
31.2	CFO Certification under Sarbanes-Oxley Act (Section 302)
32.1	CEO Certification under Sarbanes-Oxley Act (Section 906)
32.2	CFO Certification under Sarbanes-Oxley Act (Section 906)

(b)

Form 8-K.

Not Applicable.

 10

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 27, 2004	EDUCATION LENDING GROUP, INC.
	By:	/s/ JAMES G. CLARK
	Name:	James G. Clark
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)

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