Forward-Looking Information

This report on Form 10-Q contains various statements, other than those concerning historical information, that are based on management's beliefs and assumptions, as well as information currently available to management, and should be considered forward-looking statements. This notice is intended to take advantage of the safe harbor provided by the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. When used in this document, the words "anticipate", "estimate", "expect", and similar expressions are intended to identify forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or expected. Among the key factors that may have a direct bearing on the Company's operating results are fluctuations in the economy, the degree and nature of competition, demand for consumer financing in the markets served by the Company, the Company's products and services, increases in the default rates experienced on Contracts, adverse regulatory changes in the Company's existing and future markets, the Company's ability to expand its business, including its ability to complete acquisitions and integrate the operations of acquired businesses, to recruit and retain qualified employees, to expand into new markets and to maintain profit margins in the face of increased pricing competition. All forward looking statements included in this report are based on information available to the Company on the date hereof, and the Company assumes no obligations to update any such forward looking statement. You should also consult factors described from time to time in the Company's filings made with the Securities and Exchange Commission, including its reports on Form 10-K, 10-Q, 8-K and annual reports to shareholders.

Critical Accounting Policy

The Company's critical accounting policy relates to the allowance for credit losses. It is based on management's opinion of an amount that is adequate to absorb losses in the existing portfolio. The allowance for credit losses is established through allocations of dealer discount and a provision for loss based on management's evaluation of the risk inherent in the loan portfolio, the composition of the portfolio, specific impaired loans and current economic conditions. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, management's estimate of probable credit losses and other factors that warrant recognition in providing for an adequate credit loss allowance.

Because of the nature of the customers under the Company's Contracts and its direct loan program, the Company considers the establishment of adequate reserves for credit losses to be imperative. The Company segregates its Contracts into static pools for purposes of establishing reserves for losses. All Contracts purchased by a branch during a fiscal quarter comprise a static pool. The Company pools Contracts according to branch location because the branches purchase Contracts in different geographic markets. This method of pooling by branch and quarter allows the Company to evaluate the different markets where the branches operate. The pools also allow the Company to evaluate the different levels of customer income, stability, credit history, and the types of vehicles purchased in each market. Each such static pool consists of the Contracts purchased by a branch office during the fiscal quarter.

Contracts are purchased from many different dealers and are all purchased on an individual Contract by Contract basis. Individual Contract pricing is determined by the automobile dealerships and is generally the lesser of state maximum interest rates or the maximum interest rate at which the customer will accept. In certain markets, competitive forces will drive down Contract rates from the maximum rate to a level where an individual competitor is willing to buy an individual Contract. The Company only buys Contracts on an individual basis and never purchases Contracts in batches, although the Company does consider portfolio acquisitions as part of its growth strategy.

The Company has detailed underwriting guidelines it utilizes to determine which Contracts to purchase. These guidelines are specific and are designed to cause all of the Contracts that the Company purchases to have common risk characteristics. The Company utilizes its District Managers to evaluate their respective branch locations for adherence to these underwriting guidelines. The Company also utilizes a loss recovery department to assure adherence to its underwriting guidelines. The Company utilizes the branch model, which allows for Contract purchasing to be done on the branch level. Each Branch Manager may interpret the guidelines differently, and as a result, the common risk characteristics tend to be the same on an individual branch level but not necessarily compared to another branch.

A dealer discount represents the difference between the finance receivable, net of unearned interest, of a Contract, and the amount of money the Company actually pays for the Contract. The discount negotiated by the Company is a function of the credit quality of the customer and the wholesale value of the vehicle. The automotive dealer accepts these terms by executing a dealer agreement with the Company. The entire amount of discount is related to credit quality and is considered to be part of the allowance for credit losses. The Company utilizes a static pool approach to track portfolio performance. A static pool retains an amount equal to 100% of the discount as a reserve for credit losses.

Subsequent to the purchase, if the reserve for credit losses is determined to be inadequate for a static pool, which is not fully liquidated, then an additional charge to income through the provision is used to reestablish adequate reserves. For static pools not fully liquidated that are deemed to have excess reserves, such amounts are then considered when calculating the provision for credit losses on specific pools. If a static pool is fully liquidated and has any remaining reserves, these excess reserves are immediately reversed during the period.

In analyzing a static pool, the Company considers the performance of prior static pools originated by the branch office, the performance of prior Contracts purchased from the dealers whose Contracts are included in the current static pool, the credit rating of the customers under the Contracts in the static pool, and current market and economic conditions. Each static pool is analyzed monthly to determine if the loss reserves are adequate and adjustments are made if they are determined to be necessary.

Introduction

Consolidated net income decreased to approximately $792,000 for the three-month period ended September 30, 2008 as compared to $2.6 million for the corresponding period ended September 30, 2007. Consolidated net income decreased to $2.3 million for the six-month period ended September 30, 2008 as compared to $5.4 million for the corresponding period ended September 30, 2007. Earnings were negatively impacted primarily by an increase in the provision for credit losses which was driven by increased charge-off rates and to a lesser extent an increase in operating expenses as a percentage of average finance receivables, net of unearned interest. The Company's software subsidiary, Nicholas Data Services ("NDS"), did not contribute significantly to consolidated operations in the three or six months ended September 30, 2008 or 2007, respectively.

                                             Three months ended                     Six months ended
                                               September 30,                         September 30,
Portfolio Summary                         2008               2007               2008               2007
Average finance receivables, net
of unearned interest (1)              $ 208,674,423      $ 189,954,242      $ 206,001,623      $ 188,223,821

Average indebtedness (2)              $ 105,150,419      $  95,625,225      $ 103,503,324      $  94,815,680

Finance revenue (3)                   $  13,487,161      $  12,559,769      $  26,591,127      $  24,708,258
Interest expense                          1,431,677          1,643,262          2,841,013          3,231,870

Net finance revenue                   $  12,055,484      $  10,916,507      $  23,750,114      $  21,476,388

Weighted average contractual rate
(4)                                           24.15 %            24.34 %            24.16 %            24.26 %

Average cost of borrowed funds (2)             5.45 %             6.87 %             5.49 %             6.82 %

Gross portfolio yield (5)                     25.85 %            26.45 %            25.82 %            26.25 %
Interest expense as a percentage
of average finance receivables,
net of unearned interest                       2.74 %             3.46 %             2.76 %             3.43 %
Provision for credit losses as a
percentage of average finance
receivables, net of unearned
interest                                       9.86 %             3.35 %             8.30 %             2.94 %

Net portfolio yield (5)                       13.25 %            19.64 %            14.76 %            19.88 %
Operating expenses as a percentage
of average finance receivables,
net of unearned interest (6)                  10.75 %            10.70 %            10.89 %            10.56 %

Pre-tax yield as a percentage of
average finance receivables, net
of unearned interest (7)                       2.50 %             8.94 %             3.87 %             9.32 %

Write-off to liquidation (8)                  12.97 %             8.70 %            12.09 %             7.95 %
Net charge-off percentage (9)                 10.25 %             7.79 %             9.82 %             7.20 %

Note: All three and six month key performance indicators expressed as percentages have been annualized.

(1) Average finance receivables, net of unearned interest, represents the average of gross finance receivables, less unearned interest throughout the period.

(2) Average indebtedness represents the average outstanding borrowings under the Line. Average cost of borrowed funds represents interest expense as a percentage of average indebtedness.

(3) Finance revenue is interest and fee income on finance receivables and does not include sales revenue generated by NDS.

(4) Weighted average contractual rate represents the weighted average annual percentage rate ("APR") of all Contracts purchased and direct loans originated during the period.

(5) Gross portfolio yield represents finance revenue as a percentage of average finance receivables, net of unearned interest. Net portfolio yield represents finance revenue minus (a) interest expense and (b) the provision for credit losses as a percentage of average finance receivables, net of unearned interest.

(6) Operating expenses represent total expenses, less interest expense, the provision for credit losses and operating costs associated with NDS.

(7) Pre-tax yield represents net portfolio yield minus operating expenses as a percentage of average finance receivables, net of unearned interest.

(8) Write-off to liquidation percentage is defined as net charge-offs divided by liquidation. Liquidation is defined as beginning receivable balance plus current period purchases minus voids and refinances minus ending receivable balance.

(9) Net charge-off percentage represents net charge-offs divided by average finance receivables, net of unearned interest, outstanding during the period.

Three months ended September 30, 2008 compared to three months ended September 30, 2007

Interest Income and Loan Portfolio

Interest income on finance receivables, predominately finance charge income, increased 7% to approximately $13.5 million for the three-month period ended September 30, 2008, from $12.6 million for the corresponding period ended September 30, 2007. Average finance receivables, net of unearned interest equaled approximately $208.7 million for the three-month period ended September 30, 2008, an increase of 10% from $190.0 million for the corresponding period ended September 30, 2007. The primary reason average finance receivables, net of unearned interest, increased was the increase in the receivable base of several existing branches in younger markets. The gross finance receivable balance increased 10% to approximately $295.7 million as of September 30, 2008 from $268.6 million as of September 30, 2007. The primary reason interest income increased was the increase in the outstanding loan portfolio. The gross portfolio yield decreased from 26.45% for the three-month period ended September 30, 2007 to 25.85% for the three-month period ended September 30, 2008. The net portfolio yield decreased from 19.64% for the three-month period ended September 30, 2007 to 13.25% for the corresponding period ended September 30, 2008. The gross portfolio yield decreased due to reduced accretion of discounts as compared to the prior year (see discussion under "Analysis of Credit Losses" below). The net portfolio yield decreased due to the above factor plus the effect of additional provision in response to increased charge-off rates.

Operating Expenses

Operating expenses, excluding provision for credit losses, interest expense, and costs associated with NDS, increased to approximately $5.6 million for the three-month period ended September 30, 2008 from $5.1 million for the corresponding period ended September 30, 2007. This increase of 10% was primarily attributable to the additional staffing of several existing branches in younger markets and increased general operating expenses. Operating expenses as a percentage of finance receivables, net of unearned interest, increased to 10.75% for the three-month period ended September 30, 2008 from 10.70% for the three-month period ended September 30, 2007.

Interest Expense

Interest expense decreased to approximately $1.4 million for the three-month period ended September 30, 2008 from $1.6 million for the three-month period ended September 30, 2007. The average indebtedness for the three-month period ended September 30, 2008 increased to approximately $105.2 million as compared to $95.6 million for the corresponding period ended September 30, 2007. The Company's average cost of borrowed funds decreased to 5.45% for the three-month period ended September 30, 2008 as compared to 6.87% for the corresponding period ended September 30, 2007. The primary reason the Company's average cost of funds decreased is the weighted-average 30-day LIBOR rate decreased from 7.20% for the three months ended September 30, 2007 as compared to 4.10% for the three months ended September 30, 2008. The reduction in 30-day LIBOR rates was offset in part by the Company's interest rate swap agreements, which convert a portion of the Company's floating rate debt to fixed rate debt. For further discussions regarding the Company's cost of funds and the effect of interest rate swap agreements see "Footnote 6 - Derivatives and Hedging Activities".

Six months ended September 30, 2008 compared to six months ended September 30, 2007

Interest Income and Loan Portfolio

Interest income on finance receivables, predominately finance charge income, increased 8% to approximately $26.6 million for the six-month period ended September 30, 2008, from $24.7 million for the corresponding period ended September 30, 2007. Average finance receivables, net of unearned interest equaled approximately $206.0 million for the six-month period ended September 30, 2008, an increase of 9% from $188.2 million for the corresponding period ended September 30, 2007. The primary reason average finance receivables, net of unearned interest, increased was the increase in the receivable base of several existing branches in younger markets. The gross finance receivable balance increased 10% to approximately $295.7 million as of September 30, 2008 from $268.6 million as of September 30, 2007. The primary reason interest income increased was the increase in the outstanding loan portfolio. The gross portfolio yield decreased from 26.25% for the six-month period ended September 30, 2007 to 25.82% for the six-month period ended September 30, 2008. The net portfolio yield decreased from 19.88% for the six-month period ended September 30, 2007 to 14.76% for the corresponding period ended September 30, 2008. The gross portfolio yield decreased due to reduced accretion of discounts as compared to the prior year (see discussion under "Analysis of Credit Losses" below). The net portfolio yield decreased due to the above factor plus the effect of additional provision in response to increased charge-off rates.

Operating Expenses

Operating expenses, excluding provision for credit losses, interest expense, and costs associated with NDS, increased to approximately $11.4 million for the six-month period ended September 30, 2008 from $10.0 million for the corresponding period ended September 30, 2007. This increase of 14% was primarily attributable to the additional staffing of several existing branches in younger markets and increased general operating expenses. Operating expenses as a percentage of finance receivables, net of unearned interest, increased to 10.89% for the six-month period ended September 30, 2008 from 10.56% for the six-month period ended September 30, 2007.

Interest Expense

Interest expense decreased to approximately $2.8 million for the six-month period ended September 30, 2008 from $3.2 million for the six-month period ended September 30, 2007. The average indebtedness for the six-month period ended September 30, 2008 increased to approximately $103.5 million as compared to $94.8 million for the corresponding period ended September 30, 2007. The Company's average cost of borrowed funds decreased to 5.49% for the six-month period ended September 30, 2008 as compared to 6.82% for the corresponding period ended September 30, 2007. The primary reason the Company's average cost of funds decreased is the weighted-average 30-day LIBOR rate decreased from 7.14% for the six months ended September 30, 2007 as compared to 4.19% for the six months ended September 30, 2008. The reduction in 30-day LIBOR rates was offset in part by the Company's interest rate swap agreements, which convert a portion of the Company's floating rate debt to fixed rate debt. For further discussions regarding the Company's cost of funds and the effect of interest rate swap agreements see "Footnote 6 - Derivatives and Hedging Activities".

Contract Procurement

The Company purchases Contracts in the twelve states listed in the table below. The Contracts purchased by the Company are predominately for used vehicles; for the three and six-month periods ended September 30, 2008 and 2007, less than 3% were for new vehicles. As of September 30, 2008, the average model year of vehicles collateralizing the portfolio was a 2002 vehicle.

The following tables present selected information on Contracts purchased by the Company, net of unearned interest.

                         Three months ended             Six months ended
                            September 30,                 September 30,
             State       2008           2007           2008           2007
             FL      $ 10,067,166   $ 12,928,867   $ 23,667,921   $ 25,374,183
             GA         2,505,658      3,407,153      5,922,477      6,973,698
             NC         2,990,283      3,613,965      6,331,883      6,273,786
             SC           618,337      1,061,489      1,289,162      2,232,312
             OH         3,987,642      3,768,332      8,372,575      6,658,753
             MI           816,741        496,990      1,354,399        892,424
             VA         1,272,657        790,834      2,803,933      1,725,693
             IN         1,896,940        898,712      3,565,340      1,722,352
             KY         1,448,986      1,370,291      3,226,898      2,533,294
             MD           715,885        999,779      1,353,666      2,319,542
             AL           767,292        725,149      1,890,225      1,323,027
             TN           575,231             -       1,208,790             -

             Total   $ 27,662,818   $ 30,061,561   $ 60,987,269   $ 58,029,064

                                         Three months ended                     Six months ended
                                            September 30,                         September 30,
Contracts                              2008               2007               2008               2007
Purchases                          $ 27,662,818       $ 30,061,561       $ 60,987,269       $ 58,029,064

Weighted APR                              24.15 %            24.25 %            24.16 %            24.16 %

Average discount                           9.06 %             8.04 %             8.95 %             8.12 %

Weighted average term (months)               48                 48                 48                 48

Average loan                       $      9,400       $      9,483       $      9,483       $      9,393

Number of Contracts                       2,943              3,170              6,431              6,178

Loan Origination

The following table presents selected information on direct loans originated by
the Company, net of unearned interest.



                                      Three months ended               Six months ended
                                         September 30,                   September 30,
 Direct Loans Originated             2008            2007            2008            2007
 Originations                     $ 1,146,702     $ 2,324,524     $ 2,374,951     $ 4,532,297

 Weighted APR                           27.36 %         25.49 %         27.08 %         25.51 %

 Weighted average term (months)            23              29              25              30

 Average loan                     $     2,461     $     3,335     $     2,613     $     3,423

 Number of loans                          466             697             909           1,324

Analysis of Credit Losses

As of September 30, 2008, the Company had 878 active static pools. The average pool upon inception consisted of 69 Contracts with aggregate finance receivables, net of unearned interest, of approximately $637,000.

The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts.

                                          Three months ended                   Six months ended
                                            September 30,                        September 30,
                                        2008              2007              2008               2007
Balance at beginning of period      $ 21,200,672      $ 20,271,815      $  20,112,260      $ 20,638,912
Discounts acquired on new volume       2,484,783         2,366,969          5,378,928         4,627,982
Losses absorbed                       (5,694,539 )      (4,175,005 )      (10,788,417 )      (7,692,033 )
Current period provision               4,953,258         1,506,858          8,094,549         2,625,579
Recoveries                               449,779           491,996            873,936           950,332
Discounts accreted                      (209,976 )        (562,727 )         (487,279 )      (1,250,866 )

Balance at end of period            $ 23,183,977      $ 19,899,906      $  23,183,977      $ 19,899,906

The following table sets forth a reconciliation of the changes in the allowance for credit losses on direct loans.

                                       Three months ended            Six months ended
                                         September 30,                 September 30,
                                       2008          2007           2008           2007
   Balance at beginning of period   $  446,495     $ 316,753     $  335,057     $  324,687
   Current period provision            191,692        83,939        452,855        140,807
   Losses absorbed                    (162,918 )     (89,118 )     (332,974 )     (162,486 )
   Recoveries                            7,905         7,634         28,236         16,200

   Balance at end of period         $  483,174     $ 319,208     $  483,174     $  319,208

Reserves accreted into income for the three months ended September 30, 2008 and 2007, were approximately $210,000 and $563,000, respectively. Reserves accreted into income for the six months ended September 30, 2008 and 2007, were approximately $487,000 and $1.3 million, respectively. The Company has seen deterioration in the performance of its Contract portfolio, more specifically, static pools originated since June 30, 2006 have seen an increase in the default rate when compared to the preceding years pool performance during their same liquidation cycle. The Company attributes this increase to weakness in the consumer credit cycle and weakness in employment and believes this trend will continue for the remainder of its fiscal year. The Company experienced a higher net charge-off percentage of 10.25% during the three-month period ended September 30, 2008 as compared to 7.79% for the three-month period ended September 30, 2007. The Company experienced a higher net charge-off percentage of 9.82% during the six-month period ended September 30, 2008 as compared to 7.20% for the six-month period ended September 30, 2007.

The average dealer discount associated with new volume for the three months ended September 30, 2008 and 2007 were 9.06% and 8.04%, respectively. The average dealer discount associated with new volume for the six months ended September 30, 2008 and 2007 were 8.95% and 8.12%, respectively. The Company believes the increase in the average dealer discount was the result of less competition in the markets the Company is currently operating in. The Company intends to remain focused on maintaining these increased discount levels to help off-set the rising loss rates it has been experiencing.

The provision for credit losses increased from approximately $1.6 million for the three-month period ended September 30, 2007, to $5.1 million for the three-month period ended September 30, 2008. The provision for credit losses increased from approximately $2.8 million for the six-month period ended September 30, 2007, to $8.5 million for the six-month period ended September 30, . . .