The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes in "Part I. Item 1. Financial Statements." This discussion contains forward-looking statements that involve risks and uncertainties such as our plans, objectives, expectations and intentions. Our actual results could differ materially from those anticipated by these forward-looking statements. Please see "Part II. Item 1A. Risk Factors" of this Quarterly Report and "Forward-Looking Statements" at the end of this section for further discussion of the uncertainties, risks and assumptions associated with these statements.

Overview

Headquartered in Spartanburg, South Carolina, we are the largest provider of cash advance services in the United States as measured by the number of centers operated. Our centers provide short-term, unsecured cash advances that are typically due on the customers' next payday. As of June 30, 2009, we operated 2,604 centers in 33 states in the United States, 21 centers in the United Kingdom, and 10 centers in Canada, and had 78 limited licensees in the United Kingdom.

Cash Advance Services

In most states where we operate, we originate cash advance services under the authority of different state-governed enabling statutes that allow for cash advances ranging from single and multiple installment closed-end terms to revolving lines of credit with open-ended terms. We refer to these products and services collectively as cash advance services. The particular cash advance services offered in any given location may change from time to time depending upon changes in state and federal law. Additionally, where permitted by applicable law, we may assume the responsibility of serving as an agent to a regulated lender. In Texas, where we operate as a credit services organization ("CSO"), we offer a fee-based credit services package to assist customers in trying to improve their credit and in obtaining an extension of consumer credit through a third-party lender. Under the terms of our agreement with this lender, we process customer applications and are contractually obligated for all losses.

We provide cash advance services as specified by the laws of the jurisdictions where we operate. Loans made by the third-party lender in Texas are governed by Texas law. Online cash advances made by a third-party lender are governed by the laws of the state where the customer resides. The permitted size of an advance varies by jurisdiction and ranges from $50 to $5,000. However, our typical cash advance will range from $50 to $1,000. The finance charges on cash advance services currently offered by us also vary by jurisdiction and range up to 22% of the amount of a cash advance.

Additional fees that we may collect include origination fees, annual participation fees, fees for returned checks, late fees, and other fees as permitted by applicable law. Presently, none of the cash advance services we offer include annual participation fees. Origination fees on services currently offered by us range from $15 to $30, but future cash advance services may have higher or lower origination fees depending on applicable state law. Fees for returned checks or electronic debits that are declined for non-sufficient funds ("NSF") vary by state but are generally in amounts up to $30. In Texas, the third-party lender charges an NSF fee and a late fee on its loans in accordance with Texas law.

A customer may obtain a cash advance in one of three ways: (1) by visiting one of our centers in-person and completing an application; (2) by visiting our website, beginning the application process online, then visiting one of our centers in-person to complete the application and receive funding; or (3) by visiting our website, completing an application online and receiving a cash advance from a third-party lender that is directly deposited in the customer's bank account. Each new customer must provide us with certain personal information such as his or her name, address, phone number, employment information or source of income, and references. This information is entered into our information system and that of the applicable lender. In order for a new customer to be approved for a cash advance, we must be able to verify his or her identification and he or she is required to have a bank account and a regular source of income, such as a job.

Except for cash advances completed by third-party lenders, we determine whether to approve a cash advance to our customers in every jurisdiction. The third-party lenders decide whether to approve the loan or cash advance and establish all of the underwriting criteria and terms, conditions, and features of the customer agreement. We require proof of identification, bank account, and income source, as described above, and we primarily consider the customer's income in determining the amount of the cash advance. We do not perform credit checks through consumer reporting agencies.

After the documents presented by the customer have been reviewed for completeness and accuracy, copied for record-keeping purposes, and the advance has been approved, the customer enters into an agreement governing the terms of

the advance. The customer then provides a personal check or an Automated Clearing House ("ACH") authorization, which enables electronic payment from the customer's account, to cover the amount of the cash advance plus charges for applicable fees and/or interest and/or the balance due under the agreement, and makes an appointment to return on a specified due date, typically his or her next payday, to repay the advance plus the applicable charges. However, in some states, customers are not required to provide us with a personal check or ACH authorization, and payment cycles may vary depending upon state law and product type. At the specified due date, the customer is required to make the applicable payment, usually payment in full of the cash advance plus fees and interest, if applicable. Payment is usually made in person in cash at the center where the cash advance was initiated or issued unless the cash advance was completed on the internet, in which case the customer makes payment by ACH authorization.

Upon payment in full, the customer's check is returned and/or his or her ACH authorization is deemed to be revoked. If the customer does not repay the outstanding advance or loan in full on or before the due date, we will seek to collect from the customer the amount of the advance or loan and any applicable fees, including late and NSF fees due, and may deposit the customer's personal check or initiate the electronic payment from the customer's bank account.

Other Products

We may offer alternative products and services to our customers where permissible under applicable law. For instance, in Ohio, we currently offer check cashing services at state authorized rates. We may also offer the products or services of a third party that we market, process and/or service at our centers pursuant to an agreement with the third party. For example, we currently offer pre-paid debit cards, money orders, and money transmission and bill payment services. During the tax return season, we also offer tax preparation services by a third party.

Our Advance America branded pre-paid Visa debit card is issued by a federally chartered bank and regulated by the Office of Thrift Supervision. The card allows a cardholder to load cash onto the card and use the card wherever VISA debit cards are accepted. We are compensated under an agreement with the bank based on a number of factors related to the bank's revenue from purchases and subsequent cardholder activity, such as charges for loads, ATM withdrawals, account maintenance/plan charges and purchases. In the third and fourth quarters of 2007, we began selling money orders, and providing money transfer services and bill payment services as an agent of a licensed third-party money transmitter. We are compensated by the money transmitter based upon the number and value of money transfers, money orders and bill payments made by our centers. Finally, in 2008, we began facilitating the offering of tax preparation services by a third-party tax preparation provider. We receive a percentage of the tax preparation provider's fees from customers related solely to tax preparation services.

Our industry has been significantly affected by increasing regulatory challenges. Legislation that negatively impacts cash advances and similar services, whether through preclusions, interest rate ceilings, fee reductions, mandatory extensions of term length, limits on the amount or term of our products and services, or limits on consumers' use of our products and services could materially and adversely affect our business. We are very active in monitoring and evaluating regulatory initiatives in all of the states and are closely involved with the efforts of the Community Financial Services Association of America ("CFSA").

Although there are numerous differences under the various enabling regulations, the application and approval process, underwriting criteria, delivery method, repayment and collection practices, customer and market characteristics, and underlying economics of our principal products and services generally are substantially similar in most jurisdictions.

Approval Process

To obtain a cash advance, a customer typically:

† completes an application and presents the required documentation:
usually proof of identification, a pay stub or other evidence of income, and a bank statement;

† enters into an agreement governing the terms of the cash advance, including the customer's agreement to repay the amount advanced in full on or before a specified due date (usually the customer's next payday), and our agreement to defer the presentment or deposit of the customer's check or ACH authorization until the due date;

† writes a personal check or provides an ACH authorization to cover the amount advanced plus charges for applicable fees and/or interest; and

† makes an appointment to return on the specified due date to repay the amount advanced plus the applicable charges and to reclaim his or her check.

We determine whether to approve a cash advance to our customers (except that the third-party lenders make this determination in Texas and for advances directly deposited to bank accounts of online customers). We require proof of identification, bank account, and income source, as described above, and we primarily consider the customer's income in determining the amount of the cash advance. In Virginia, we require the customer to grant us a security interest in a motor vehicle to qualify for an open-ended line of credit.

Repayment and Collection Process

Repayment terms vary depending upon state law, the type of cash advance services offered, and whether the cash advance was completed online or in one of our centers. Generally, as part of the closing process, we explain the customer's repayment obligations and establish the expectation that the customer will pay us in cash on or before the due date in accordance with their agreement with us. The day before the due date, we generally call the customer to confirm their payment.

If a customer does not pay the amount due, then our management has the discretion to either: (1) commence past-due collection efforts, which typically may proceed for up to 14 days in most states, or (2) deposit the customer's personal check or debit their bank account in accordance with their ACH authorization. If management decides to commence past-due collection efforts, employees typically contact the customer by telephone or in person to obtain a payment or a promise to pay, and, in cases where we hold a check, attempt to exchange the customer's check for a cashier's check, if funds are available.

If unable to meet his or her payment obligations, the customer may qualify for an extended payment plan ("Payment Plan"). In most states, the terms of our Payment Plan conform to the CFSA Best Practices for extended payment plans. Certain states have specified their own terms and eligibility requirements for Payment Plans. Generally, a customer may enter into a Payment Plan for no additional fee once every twelve months. The Payment Plan will call for scheduled payments that coincide with the customer's next four paydays. In some states, a customer may enter into a Payment Plan more frequently. We do not engage in collection efforts while a customer is enrolled in a Payment Plan, however, if a customer misses a scheduled payment under a Payment Plan we may resume normal collection procedures. We do not offer a Payment Plan for multiple installment loans or lines of credit, nor does the third-party lender in Texas offer a Payment Plan for advances to its customers. The third-party internet lender offers Payment Plans as required by state law.

If, at the end of this past-due collection period or Payment Plan, the center has been unable to collect the amount due, the customer's check is then deposited or their ACH authorization is processed. Additional collection efforts are not required if the customer's deposited check or our ACH debit clears. For the year ended December 31, 2008 and the six months ended June 30, 2009, we deposited or presented for debit approximately 5.9% and 5.7%, respectively, of all customer checks or ACH authorizations we received, and approximately 25% and 31%, respectively, of deposited customer checks or ACH debits cleared, excluding our installment loan and line of credit products. If the customer's check or the ACH debit does not clear and is returned because of non-sufficient funds in the customer's account or because of a closed account or a stop-payment order, additional collection efforts begin. These additional collection efforts are carried out by center employees and typically include contacting the customer by telephone or in person to obtain payment or a promise to pay and, in cases where we hold a check, attempting to exchange the customer's check for a cashier's check, if funds become available. We also send out a series of collection letters, which are automatically distributed from a central location based on a set of pre-determined criteria.

In the case of cash advances in the form of lines of credit, if a customer fails to make payment when due in accordance with the terms of their agreement with us, then management may close the line of credit and accelerate the maturity date or work with the customer to bring his or her payments current. If we close the line of credit and accelerate the maturity date, we stop charging interest on the outstanding amount and begin collection efforts as described above.

Selected Operating Data

The following table presents key operating data for our business:

                                              Three Months Ended            Six Months Ended
                                                   June 30,                     June 30,
                                              2008          2009          2008           2009
Number of centers open at end of period          2,856        2,635          2,856          2,635
Number of customers served-all credit
products (thousands)                               820          743          1,042            944
Number of payday cash advances
originated (thousands)                           2,864        2,553          5,645          4,975
Aggregate principal amount of payday
cash advances originated (thousands)       $ 1,045,174    $ 916,093    $ 2,065,964    $ 1,789,462
Average amount of each payday cash
advance originated                         $       365    $     359    $       366    $       360
Average charge to customers for
providing and processing a payday cash
advance                                    $        56    $      53    $        56    $        53
Average duration of a payday cash
advance (days)                                    16.7         17.5           16.7           17.4
Average number of lines of credit
outstanding during the period
(thousands) (1)                                      -           26              -             30
Average amount of aggregate principal
on lines of credit outstanding during
the period (thousands) (1)                 $         -    $  11,363    $         -    $    15,341
Average principal amount on each line
of credit outstanding during the
period (1)                                 $         -    $     421    $         -    $       497
Number of installment loans originated
(thousands) (2)                                      8            9             14             16
Aggregate principal amount of
installment loans originated
(thousands) (2)                            $     4,049    $   3,938    $     6,374    $     6,723
Average principal amount of each
installment loan originated (2)            $       482    $     436    $       460    $       431

(2) The installment loan activity reflects loans we originated as the lender in Illinois.

Revenues and Expenses

Our revenues consist of fees and/or interest paid to us directly by our customers. Our expenses relate primarily to the operation of our centers. These expenses include salaries and related payroll costs, occupancy expense related to our leased centers, center depreciation expense, advertising expense, and other center expenses that consist principally of costs related to center closings, communications, delivery, supplies, travel, bank charges, various compliance and collection costs, and costs associated with theft.

Provision for Doubtful Accounts, Allowance for Doubtful Accounts and Accrual for Third-Party Lender Losses

Our provision for doubtful accounts and accrual for third-party lender losses are primarily based upon models that analyze specific portfolio statistics and also reflect, to a lesser extent, management's judgment regarding overall accuracy. The analytical models take into account several factors including the number of transactions customers complete, and charge-off and recovery rates. Additional factors, such as changes in state laws, center closings, length of time centers have been open in a state, relative mix of new centers within a state, and other relevant factors are also evaluated to determine whether the results from the analytical models should be revised.

The provision for doubtful accounts increased to 22.0% of revenues for the three months ended June 30, 2009 versus 18.6% for the same period in 2008. During the three months ended June 30, 2009 and 2008, we received proceeds from the sale of receivables in the amount of $2.2 million and $0.5 million, respectively. We launched our line of credit product in Virginia during the fourth quarter of 2008. This product has experienced a higher loss rate than our payday and installment loan products. Excluding the sale of receivables and the applicable revenue and loss rates for the Virginia line of credit product, the provision for doubtful accounts for the three months ended June 30, 2009 and 2008 would have been 19.6% and 18.9%, respectively.

The provision for doubtful accounts increased to 17.7% of revenues for the six months ended June 30, 2009 versus 15.6% for the same period in 2008. During the six months ended June 30, 2009 and 2008, we received proceeds from the sale of receivables in the amount of $2.2 million and $0.5 million, respectively. Excluding the sale of receivables and the applicable revenue and loss rates for the Virginia line of credit product, the provision for doubtful accounts for the six months ended June 30, 2009 and 2008 would have been 16.9% and 15.7%, respectively.

Income Taxes

The effective income tax rate as a percentage of income before income taxes was 43.8% and 23.5% for the three months ended June 30, 2008 and 2009, respectively. The effective income tax rate as a percentage of income before income taxes was 42.9% and 36.7% for the six months ended June 30, 2008 and 2009, respectively. The decrease in the effective tax rate in the current period is primarily due to claims filed for recovery of taxes recognized in prior periods in the amount of $2.6 million and $3.5 million for the three and six months ended June 30, 2009, respectively. We anticipate our effective tax rate for the current year will be in the range of 40% to 42%.

Changes in Legislation

During the last few years, legislation that prohibits or severely restricts our products and services has been introduced or adopted in a number of states and at the federal level, and we expect that trend to continue in other states for the foreseeable future. Legislation was adopted in New Hampshire in 2008 that effectively prohibits us from offering cash advances to consumers in that state. As a result, in February 2009, we decided to close all of our centers in New Hampshire. In April 2009, the Governor of Virginia signed a bill into law that restricts us from offering both our cash advance product

and our open-ended line of credit product at the same center unless the line of credit is secured by a motor vehicle. This limitation could reduce our customer base and lower our revenues and profits in Virginia. In May 2009, a bill was signed into law in the State of Washington that places a number of restrictions on our cash advance product including limiting the number of cash advances a customer may take to eight advances in any one year. Once the law becomes effective on January 1, 2010, our revenues and profits in Washington will be significantly reduced. If we are unable to operate profitably in Washington, we may cease operating in that state. Further, legislation permitting cash advances in Arizona and Mississippi is scheduled to expire in 2010 and 2012, respectively. This legislation may not be renewed or could be modified in a manner that affects our operations negatively. We are regularly refining our cash advance services and developing new products and services or operations to address recent or anticipated legislative and regulatory changes. Some of these legislative and regulatory changes may result in our discontinuing operations in a state, while other changes may result in less significant short-term or long-term changes, interruptions in revenues, and lower operating margins. We generally cannot estimate what effect, if any, operational changes we make in response to legislative and regulatory changes may have on our financial results until we are able to develop legal and financially-viable alternative products and services.

Operations in Ohio

On November 24, 2008, the State of Ohio capped interest rates on cash advance loans and limited the number of cash advances a customer may take in any one year. As a result of this legislation, we began offering small loans pursuant to the Ohio Small Loan Act and check-cashing services. The small loan product generates less revenue than our former cash advance product and, as a result, we have closed some of our centers in Ohio.

During the six months ended June 30, 2009, we closed 63 centers in Ohio. The estimated cost to close these centers, including an impairment charge of approximately $0.9 million, is approximately $2.2 million, of which $1.2 million and $2.1 million was recognized in the three and six months ended June 30, 2009, respectively. For the three months ended June 30, 2009, these amounts are included in the income statement as an increase in other center expenses of $1.1 million and an increase in center salaries and related payroll costs of $0.1 million. For the six months ended June 30, 2009, these amounts are included in the income statement as an increase in other center expenses of $1.1 million, a loss on impairment of assets of $0.9 million, and an increase in center salaries and related payroll costs of $0.1 million. If our financial performance in Ohio does not improve, we may choose to close additional Ohio centers.

If it is not economically viable to continue operations in Ohio and we decide to close our remaining Ohio centers, our estimated range of closing costs, including severance, center tear-down costs, lease termination costs and the write-down of fixed assets would be approximately $5.2 million to $13.8 million, and the collectibility of advances and fees receivable in Ohio most likely would be impaired. As of June 30, 2009, the net receivable balance in Ohio was approximately $18.6 million. At this time we are not able to determine the amount of goodwill impairment, if any, that would result from the cessation of operations in Ohio.

Operations in Washington

A new Washington law will become effective on January 1, 2010, that will limit the number of cash advances a customer may take in any one year, limit the advance amount that can be taken out at any one time, and implement a statewide database to monitor the number of loans. We believe this law will negatively impact our revenue and profitability in that state. We may close or consolidate some or all of our centers in Washington.

If we decide to close our Washington centers, our estimated range of closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would be approximately $3.0 million to $7.5 million, and the collectibility of advances and fees receivable in Washington most likely would be impaired. As of June 30, 2009, the net receivable balance in Washington was approximately $8.6 million. At this time we are not able to determine the amount of goodwill impairment, if any, that would result from cessation of operations in Washington.

For the three months ended June 30, 2008 and 2009, 4.1% and 4.3%, respectively, of our total revenues were generated from our operations in Washington. For the six months ended June 30, 2008 and 2009, 3.9% and 4.2%, respectively, of our total revenues were generated from our operations in Washington. The following is a summary of financial information for our operations in Washington for the three and six months ended June 30, 2008 and 2009 (in thousands):

                               Three Months Ended       Six Months Ended
                                    June 30,                June 30,
                                2008         2009       2008        2009
Total revenues               $    6,613    $  6,396   $  12,926   $ 12,807
Total center expenses             5,418       4,867      11,099      9,671
Center gross profit (loss)   $    1,195    $  1,529   $   1,827   $  3,136

Changes in Other States

New laws in South Carolina and Kentucky, both effective on January 1, 2010, require the implementation of state databases in order to limit the number of cash advances customers may have outstanding at any one time statewide. Although we expect these changes to have a negative impact on our operations, we believe operations in these states will continue to be economically viable.

Closings

During the first quarter of 2009, the Company identified approximately 170 centers to be closed, in addition to our 24 New Hampshire centers. The impairment charge related to these 170 centers was approximately $2.2 million, . . .