This section should be read in conjunction with the following parts on this Form 10-K: Part II, Item 8 "Consolidated Financial Statements and Supplementary Data," Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," and Part I, Item 1 "Description of Business."

General

Meta Financial Group, Inc.®(the "Company") is a unitary savings and loan holding company whose primary subsidiary is MetaBank (the "Bank"). The Company focuses on two core businesses, its regional retail banking business and a national payments business, conducted through its Meta Payment Systems® ("MPS") division. The Company's retail bank business is focused on establishing and maintaining long-term relationships with customers, and is committed to serving the financial service needs of the communities in its market area. The retail bank's primary market area includes the following counties: Buena Vista, Dallas and Polk located in central and northwestern Iowa, and Brookings, Lincoln, and Minnehaha located in east central South Dakota. The traditional retail bank segment attracts retail deposits from the general public and uses those deposits, together with other borrowed funds, to originate and purchase residential and commercial mortgage loans, and to originate consumer, agricultural and other commercial loans.

MPS, a division of the Bank, is an industry leader in the issuance of prepaid debit cards and is also a provider of a wide range of payment-related products and services, including prepaid debit cards such as those related to gift, tax refunds, rebate, travel and payroll, ATMs, and consumer credit products. MPS pursues a strategy of working with industry-leading companies in a variety of businesses to help them introduce new payment products to their customers. In addition, MPS partners with emerging companies to develop and introduce new payment products. MPS earns revenues from fees as well as being a significant provider of low- and no-cost demand deposits related to its prepaid card business.

Overview of Corporate Developments

The MPS division continued to demonstrate significant growth on a year-over-year basis. Fiscal 2008 MPS-related card fee income grew 125% as all product lines were higher than in fiscal 2007. MPS has expanded its tax-related business and rebate business lines. During fiscal 2008 the Bank participated in a test program for tax refund anticipation loans with a major tax preparation firm. The Company took steps to manage the funding and credit risks and realized its expected return on the program. In addition, MPS provided a prepaid debit card for refunds with another major tax preparation company. The division also continued to exhibit product innovation as fifteen additional patents were filed during the fiscal 2008. The iAdvance micro lending product, which is a program designed to provide a line of credit on prepaid cards, is experiencing increasing consumer acceptance and performance and has thus far validated management's expectations. Expansion opportunities are currently being considered for this product.

The traditional bank segment is continuing to build its customer base from its previous expansion in the growing metropolitan areas of Sioux Falls, South Dakota and Des Moines, Iowa. The Bank has added seven branches in approximately the past seven years in these markets. The Bank focuses primarily on establishing lending and deposit relationships with commercial businesses and commercial real estate developers in these communities. During the second quarter of fiscal 2008, the Company sold its commercial banking subsidiary, MetaBank WC, which included three branches in rural West-Central Iowa. The transaction closed March 28, 2008. The Company is now a unitary savings and loan holding company, not a bank holding company, and is subject to the jurisdiction of the OTS. This transaction allows the Company to increase its focus on higher growth markets and business lines. The Bank now operates 13 retail banking branches: in Brookings (1) and Sioux Falls (4), South Dakota, in Des Moines (6) and Storm Lake (2), Iowa and a non-retail service branch in Memphis, Tennessee.

The Company's stock trades on the NASDAQ Global Market under the symbol "CASH."

Financial Condition

The following discussion of the Company's consolidated financial condition should be read in conjunction with the Selected Consolidated Financial Information and Consolidated Financial Statements and the related notes included in this Annual Report.

As of September 30, 2008, the Company's assets grew by $71.2 million, or 10.4%, to $757.3 million compared to $686.1 million at September 30, 2007, including the sale of approximately $35.8 million of assets as part of the MetaBank WC sale during the second quarter of fiscal 2008. See Note 2 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further discussion on discontinued operations. The increase in assets was reflected primarily in increases in the Company's securities, loan portfolios and other assets offset in part by decreases in the Company's cash, federal funds sold and assets related to discontinued operations.

Total cash and cash equivalents and federal funds sold were $8.2 million at September 30, 2008, a decrease of $78.2 million, or 90.6%, from $86.3 million at September 30, 2007. The decrease primarily was the result of the Company's loan growth and decision to purchase mortgage-backed securities during fiscal 2008. In general, the Company maintains its cash investments in interest-bearing overnight deposits with various correspondent banks. Federal funds sold deposits may be maintained at various commercial banks, including, but not limited to the following: CitiBank, JP Morgan Chase, LaSalle Bank, M&I Bank, BNP Paribas, Bank of America, and Banker's Bank, with assets in excess of $1.0 billion. At September 30, 2008 the Company held $5.2 million of federal funds sold.

Investment securities available for sale, including mortgage-backed securities, increased $45.1 million, or 28.4%, to $203.8 million at September 30, 2008, as investment purchases exceeded related maturities, sales, and principal paydowns. The Company's portfolio of investment securities available for sale consists primarily of mortgage-backed securities with balloon maturities, which have relatively short expected lives and limited maturity extension risk. During fiscal year 2008, the Company purchased $102.8 million of mortgage-backed securities with average lives of three to four years or stated finals of approximately eleven years or less and sold mortgage-backed securities in the amount of $17.0 million. See Note 4 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

The Company's portfolio of net loans receivable increased by $72.3 million, or 20.3%, to $427.9 million at September 30, 2008 from $355.6 million at September 30, 2007. The Company's loan growth primarily relates to strong demand for commercial real estate and agricultural real estate loans. All categories of loans experienced growth except for commercial and agricultural business loans, both of which decreased. See Note 5 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

The Company owns stock in the Federal Home Loan Bank ("FHLB") of Des Moines due to its membership and participation in this banking system. The Company's investment in such stock increased $4.1 million, or 101.5%, to $8.1 million at September 30, 2008 from $4.0 million at September 30, 2007. The increase was due to an increase in the level of borrowings from the FHLB, which require a calculated level of stock investment based on a formula determined by the FHLB.

Bond insurance receivable increased $6.1 million at September 30, 2008 due to the Company recording a receivable during fiscal 2008 from our insurance company related to an anticipated recovery of certificate of deposit fraud and litigation settlement of DNAG.

Assets related to discontinued operations, held for sale, decreased 100.0% or $35.8 million from the levels at September 30, 2007 due to the sale of MetaBank WC on March 28, 2008. See Note 2 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further discussion on discontinued operations.

MPS Accounts Receivable increased $48.3 million to $50.0 million at September 30, 2008 from $1.7 million at September 30, 2007. The increase was primarily related to an increase in prepaid card funding in transit items at MPS.

Total deposits increased by $23.0 million, or 4.4%, to $546.0 million at September 30, 2008 from $523.0 million at September 30, 2007. The majority of this increase related to an increase in non-interest-bearing checking deposits on prepaid cards due to growth at MPS, although non-MPS deposits grew as well.
The Company's deposit mix continues to shift away from higher costing certificates of deposit and money market deposits toward low- and no-cost checking deposits. Total checking deposits increased by $95.3 million, or 34.7%, to $370.0 million at September 30, 2008 from $274.7 million at September 30, 2007. Total savings and certificates of deposit declined $34.1 million, or 20.4%, to $132.9 million at September 30, 2008 from $167.0 million at September 30, 2007. Money market account balances also decreased during fiscal year 2008, decreasing $38.3 million, or 47.1%, to $43.0 million at September 30, 2008 from $81.3 million at September 30, 2007.

The Company's total borrowings increased $69.1 million, or 88.0%, much of which is due to a short-term borrowing need at the end of the quarter, to $147.7 million at September 30, 2008 from $78.5 million at September 30, 2007. See Notes 9, 10, and 11 to the "Notes to Consolidated Financial

Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

The Company's contingent liability for potential loss on certificates of deposit fraud increased $4.3 million for fiscal 2008 as compared to the prior year. This liability is offset by the above referenced bond insurance receivable recorded during the first quarter of fiscal 2008.

Liabilities related to discontinued operations, held for sale, decreased 100.0% or $30.9 million from the levels at September 30, 2007 due to the sale of MetaBank WC on March 28, 2008. See Note 2 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further discussion on discontinued operations.

At September 30, 2008, the Company's shareholders' equity totaled $46.8 million, down $1.3 million from $48.1 million at September 30, 2007. The decrease was related to an unfavorable change in the accumulated other comprehensive loss on the Company's available for sale portfolio and payment of dividends on the Company's common stock. The above was partially offset by an increase to additional paid in capital as a result of stock compensation payments for fiscal 2008. At September 30, 2008, MetaBank continues to meet regulatory requirements for classification as a well-capitalized institution. See Note 15 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

Results of Operations

The following discussion of the Company's Results of Operations should be read in conjunction with the Selected Consolidated Financial Information and Consolidated Financial Statements and the related notes included in this Annual Report.

The Company's Results of Operations are dependent on net interest income, non-interest income, non-interest expense, and income tax expense. Net interest income is the difference, or spread, between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread is affected by regulatory, economic, and competitive factors that influence interest rates, loan demand, and deposit flows. The Company, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets mature or reprice at different times, or on a different basis, than its interest-bearing liabilities. In fiscal 2008, the Company's net interest income after provision for loan losses and its non-interest income improved significantly from levels in fiscal 2007. Non-interest expense also increased in proportion to net interest income and non-interest income. However, other non-interest expense increased more dramatically from 2007 primarily due to litigation settlement expense. A more detailed explanation of the factors responsible for results of operations of the Company is presented below.

The Company's non-interest income is derived primarily from prepaid card and ATM fees attributable to MPS and fees charged on loans and transaction accounts. This income is offset, in part, by expenses, such as compensation and occupancy expenses associated with additional personnel and office locations as well as card processing expenses attributable to MPS. To a lesser extent, non-interest income is derived from gains or losses on the sale of securities available for sale as well as the Company's holdings of bank owned life insurance. Additionally, non-interest income has been derived from the activities of Meta Trust Company® ("Meta Trust"), a wholly-owned subsidiary of Meta Financial Group, which provides a variety of professional trust services. Non-interest expense is also impacted by occupancy and equipment expenses and legal and consulting expenses. The Company's fiscal year 2007 non-interest income was impacted by a gain on sale of four branches in the amount of $3.3 million.

Comparison of Operating Results for the Years Ended

September 30, 2008 and September 30, 2007

General. The Company's loss from continuing operations was $1.8 million, or $0.70 per diluted share, for the year ended September 30, 2008 compared to income of $1.3 million, or $0.50 per diluted share, for the year ended September 30, 2007. Including discontinued operations, the Company recorded net income of $51,000, or $0.02 per diluted share, for the year ended September 30, 2008 compared to $1.2 million, or $0.45 per diluted share, for the year ended September 30, 2007. Net earnings in fiscal 2008 were impacted by a pre-tax gain of $2.3 million resulting from the sale of the Company's commercial banking subsidiary, MetaBank WC. See Note 2 of the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further information on discontinued operations. Fiscal year 2008 income was reduced by the settlement expense for the Dan Nelson-related lawsuits as well as an increase in provision expense related to one borrower's apparently fraudulent actions against the Bank (and other banks) in obtaining several commercial real estate and commercial operating loans. Additionally, earnings were positively impacted by increased income from card fees from all of MPS' programs and services, loan growth and higher net interest income. In particular, MPS-related card fees for the fiscal 2008 grew by 125.3% over the prior fiscal year. Offsetting these factors, in part, were higher operating expenses as MPS continued to build its supporting infrastructure, operational scalability, and product development capacity. Earnings in fiscal year 2007 were impacted by a large provision for loan losses related primarily to an impairment on a commercial loan relationship of $5.0 million related to fraud by the borrower and a gain on the sale of four branches in northwest Iowa of $3.3 million.

Net Interest Income. Net interest income from continuing operations for fiscal 2008 increased by $3.2 million, or 15.4%, to $24.0 million from $20.8 million for the prior fiscal year. The increase in net interest income reflects a higher net interest margin and a larger average earning asset base. Net interest margin increased 13 basis points to 3.51% in fiscal year 2008 from 3.38% in fiscal year 2007. The improvement also resulted from the continued shift in the Company's funding mix attributable to growth in non-interest-bearing deposits and decreases in higher costing certificates and public funds deposits.

The Company's average earning assets increased $67.2 million, or 10.9%, to $683.5 million during fiscal year 2008 from $616.3 million during fiscal year 2007. The increase is primarily the result of the increase in the loan portfolio and mortgage-backed securities. The Company's yield on earning assets declined 66 basis points to 5.47% during fiscal year 2008 from 6.13% during fiscal year 2007. The decrease is the result primarily of decreasing yields on the Company's loan portfolio and other investments.

The Company's average total deposits and interest-bearing liabilities increased $76.3 million, or 12.4%, to $693.0 million during fiscal year 2008 from $616.7 million during fiscal year 2007. The increase resulted mainly from an increase in the Company's non-interest-bearing deposits and wholesale borrowings. The Company's cost of total deposits and interest-bearing liabilities declined 81 basis points to 1.94% during fiscal year 2008 from 2.75% during fiscal year 2007.

Average Balances, Interest Rates, and Yields

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments have been made. Non-Accruing loans have been included in the table as loans carrying a zero yield. Balances related to discontinued operations have been reclassified to non-interest earning assets and non-interest bearing liabilities for all periods presented.

                                             2008                                      2007                                      2006
                               Average       Interest                    Average       Interest                    Average       Interest
Year Ended September 30,     Outstanding     Earned /     Yield /      Outstanding     Earned /     Yield /      Outstanding     Earned /     Yield /
(Dollars in Thousands)         Balance         Paid         Rate         Balance         Paid         Rate         Balance         Paid         Rate

Interest-earning assets:
Loans receivable            $     413,866    $  25,909        6.26 %  $     354,465    $  25,584        7.22 %  $     390,002    $  27,948        7.17 %
Mortgage-backed
securities                        194,785        8,484        4.36 %        135,007        5,500        4.07 %        163,032        6,185        3.79 %
Other investments                  74,809        3,025        4.04 %        126,853        6,690        5.27 %         96,416        3,979        4.13 %
Total interest-earning
assets                            683,460    $  37,418        5.47 %        616,325    $  37,774        6.13 %        649,450    $  38,112        5.87 %
Non-interest-earning
assets                             66,388                                    86,502                                    99,960
Total assets                $     749,848                             $     702,827                             $     749,410

Non-interest bearing
deposits                    $     341,624    $       -        0.00 %  $     230,930    $       -        0.00 %  $     147,520    $       -        0.00 %
Interest-bearing
liabilities:
Interest-bearing
checking                           15,075          104        0.69 %         22,004          538        2.45 %         21,852          789        3.61 %
Savings                            10,072          105        1.04 %         17,586          471        2.68 %         46,822        1,388        2.96 %
Money markets                      61,592        1,478        2.40 %         67,087        2,301        3.43 %         83,486        2,354        2.82 %
Time deposits                     139,868        6,071        4.34 %        183,505        8,355        4.55 %        215,815        8,225        3.81 %
FHLB advances                     103,768        3,960        3.82 %         77,433        4,091        5.28 %        115,102        5,488        4.77 %
Other borrowings                   20,965        1,697        8.09 %         18,172        1,211        6.66 %         26,846        1,367        5.09 %
Total interest-bearing
liabilities                       351,340       13,415        3.82 %        385,787       16,967        4.40 %        509,923       19,611        3.85 %
Total deposits and
interest-bearing
liabilities                       692,964    $  13,415        1.94 %        616,717    $  16,967        2.75 %        657,443    $  19,611        2.98 %
Other non-interest
bearing liabilities                10,778                                    42,557                                    48,831
Total liabilities                 703,742                                   659,274                                   706,274
Shareholders' equity               46,106                                    43,553                                    43,136
Total liabilities and
shareholders' equity        $     749,848                             $     702,827                             $     749,410
Net interest income and
net interest rate spread
including non-interest
bearing deposits                             $  24,003        3.54 %                   $  20,807        3.38 %                   $  18,501        2.89 %

Net interest margin                                           3.51 %                                    3.38 %                                    2.85 %

Rate / Volume Analysis

The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the increase related to higher outstanding balances and that due to the levels and volatility of interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e. changes in volume multiplied by old rate) and
(ii) changes in rate (i.e. changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.

Rate / Volume



                                             2008 vs. 2007                                      2007 vs. 2006
                              Increase /        Increase /        Total          Increase /        Increase /        Total
Year Ended September 30,      (Decrease)        (Decrease)      Increase /       (Decrease)        (Decrease)      Increase /
(Dollars in Thousands)       Due to Volume     Due to Rate      (Decrease)      Due to Volume     Due to Rate      (Decrease)
Interest-earning assets
Loans receivable            $         1,573    $     (1,248 )  $        325    $        (2,567 )  $        203    $     (2,364 )
Mortgage-backed
securities                            2,570             414           2,984             (1,203 )           518            (685 )
Other investments                    (2,336 )        (1,329 )        (3,665 )            1,444           1,267           2,711
Total interest-earning
assets                      $         1,808    $     (2,164 )  $       (356 )  $        (2,326 )  $      1,988    $       (338 )

Interest-bearing
liabilities
Interest-bearing
checking                    $          (132 )  $       (302 )  $       (434 )  $             6    $       (257 )  $       (251 )
Savings                                (150 )          (216 )          (366 )             (794 )          (123 )          (917 )
Money markets                          (176 )          (647 )          (823 )              521            (574 )           (53 )
Time deposits                        (1,913 )          (371 )        (2,284 )             (433 )           563             130
FHLB advances                          (701 )           570            (131 )           (2,086 )           689          (1,397 )
Other borrowings                        203             283             486             (3,510 )         3,354            (156 )
Total interest-bearing
liabilities                 $        (2,870 )  $       (682 )  $     (3,552 )  $        (6,296 )  $      3,652    $     (2,644 )

Net effect on net
interest income             $         4,678    $     (1,482 )  $      3,196    $         3,970    $     (1,664 )  $      2,306

Provision for Loan Losses. In fiscal 2008, the Company recorded a provision for loan losses of $2.7 million, compared to $3.2 million for fiscal 2007. Due to delinquency trends in the Company's loan portfolio, the Company was able to maintain the level of loan loss allowance considered to be acceptable by the Company's management in the current year. The provision recorded in the prior fiscal year was directly related to a $5.0 million provision on a purchased participation loan relationship. See "Non-performing Assets and Allowance for Loan Losses" herein.

As disclosed in the Registrant's 10-Q for the period ending June 30, 2008, the Company had learned that a borrower of the Bank had likely participated in a fraud on the Bank and other banks. On October 8, 2008, the Bank's investigation of the fraud, loans and advances to the borrower, the collateral underlying the loan, and insurance coverage lead it to conclude that it is appropriate to establish a reserve for loan losses at September 30, 2008 of $1.8 million (approximately $1.1 million after taxes).

Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the adequacy of its allowance for loan losses. While the Company has no direct exposure to sub-prime loans, management is concerned that developments over the past 18 months in the sub-prime mortgage market may have a ripple effect on residential real estate prices. In addition, the current recessionary environment may strain the financial condition of some borrowers. Management therefore believes that future losses in the residential portfolio may be somewhat higher than historical experience. Over the past six years, loss rates in the commercial and multi-family real estate market have remained moderate. Management . . .