Prospectus Supplement Dated May 14, 2007
        Filed Pursuant to Rule 424 (b) (3)


to Prospectus Dated January 30, 2006 of

Pioneer Financial Services, Inc.
        Registration Number 333-103293




UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



x
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the period ended:  March 31, 2007

OR

o
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from _____ to

Commission file number:  333-103293

Pioneer Financial Services, Inc.

(Exact name of Registrant as specified in its charter)



Missouri
        
        44-0607504(State or other jurisdiction of
        
        (I.R.S. Employerincorporation or organization)
        
        Identification No.)4700 Belleview Avenue, Suite 300, Kansas City, Missouri
        64112(Address of principal executive office)
        (Zip Code)Registrants telephone number, including area code: (816) 756-2020






(Former name, former address and former fiscal year, if

changed since last report)

Indicate by check mark whether the Registrant has (1) filed all documents and 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. YesxNo o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of  accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o  Accelerated filer o
        Non-accelerated filerx


Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes o Nox

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



Class
        
        Outstanding as of May 10, 2007Common Stock, $100 par value
        17,136 shares






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PIONEER FINANCIAL SERVICES, INC.


FORM 10-Q


March 31, 2007


TABLE OF CONTENTS




PART I


FINANCIAL INFORMATION


Item No.
        Page


1.
        Consolidated Financial Statements
        1


Consolidated Balance Sheets at March 31, 2007 and September 30, 2006
        1


Consolidated Statements of Income for the three months ended and six months ended

March 31, 2007 and 2006
        2


Consolidated Statements of Cash Flows for the six months ended March 31, 2007 and 2006
        3


Consolidated Statements of Cash Flows for the six months ended March 31, 2007 and 2006
        4


Condensed Notes to Consolidated Financial Statements
        5


2.
        Managements Discussion and Analysis of Financial Condition and Results of Operations
        6


3.
        Quantitative and Qualitative Disclosures About Market Risk.
        15


4.
        Controls and Procedures
        15


PART II


OTHER INFORMATION


1.
        Legal Proceedings
        16


1A.
        Risk Factors
        18


2.
        Unregistered Sales of Equity and Use of Proceeds
        20


3.
        Defaults upon Senior Securities
        20


4.
        Submission of Matters to a Vote of Security Holders
        20


5.
        Other Information
        20


6.
        Exhibits
        20






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PART I - FINANCIAL INFORMATION

ITEM 1.Consolidated Financial Statements

PIONEER FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS



ASSETSMarch 31,
        
        
        
        September 30,2007
        
        
        
        2006(unaudited)Cash and cash equivalents
        
        $
        5,534,063
        
        
        
        $
        1,762,526Other investments
        
        
        4,601,995
        
        
        
        
        5,420,248Finance receivables:Direct receivables
        
        
        249,411,478
        
        
        
        
        246,842,888Retail installment contracts
        
        
        20,588,044
        
        
        
        
        21,704,925Finance receivables before allowancefor credit losses
        
        
        269,999,522
        
        
        
        
        268,547,813Allowance for credit losses
        
        
        (16,834,868
        )
        
        
        
        (16,105,868
        )Net finance receivables
        
        
        253,164,654
        
        
        
        
        252,441,945Furniture and equipment, net
        
        
        1,601,557
        
        
        
        
        1,773,232Unamortized computer software
        
        
        898,022
        
        
        
        
        1,276,986Deferred income taxes
        
        
        5,468,300
        
        
        
        
        5,182,499Prepaid and other assets
        
        
        847,455
        
        
        
        
        604,818Total assets
        
        $
        272,116,046
        
        
        
        $
        268,462,254LIABILITIES AND STOCKHOLDERS EQUITYRevolving credit line - banks
        
        $
        14,067,114
        
        
        
        $
        11,836,258Revolving credit line - affiliate
        
        
        474,855
        
        
        
        
        1,448,764Accounts payable
        
        
        487,875
        
        
        
        
        752,477Accrued expenses and other liabilities
        
        
        14,435,232
        
        
        
        
        11,088,552Amortizing term notes
        
        
        172,618,961
        
        
        
        
        170,533,423Investment notes
        
        
        35,875,977
        
        
        
        
        33,792,723Total liabilities
        
        
        237,960,014
        
        
        
        
        229,452,197Stockholders equity:Common stock, $100 par value; authorized20,000 shares; issued and outstanding 17,136 shares
        
        
        1,713,600
        
        
        
        
        1,713,600Retained earnings
        
        
        32,442,432
        
        
        
        
        37,296,457Total stockholders equity
        
        
        34,156,032
        
        
        
        
        39,010,057Total liabilities and stockholders equity
        
        $
        272,116,046
        
        
        
        $
        268,462,254




See Notes to Condensed Consolidated Financial Statements



1



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PIONEER FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



Three Months Ended
        
        
        
        Six Months EndedMarch 31,
        
        
        
        March 31,2007
        
        
        
        2006
        
        
        
        2007
        
        
        
        2006RevenueFinance income
        
        $
        19,147,817
        
        
        
        $
        17,444,323
        
        
        
        $
        39,116,834
        
        
        
        $
        35,946,597Insurance premiums and commissions
        
        
        1,120,351
        
        
        
        
        852,406
        
        
        
        
        2,351,684
        
        
        
        
        1,779,006Other income, fees and commissions
        
        
        332,389
        
        
        
        
        240,708
        
        
        
        
        843,227
        
        
        
        
        503,400Total revenue
        
        
        20,600,557
        
        
        
        
        18,537,437
        
        
        
        
        42,311,745
        
        
        
        
        38,229,003Provision for credit losses
        
        
        4,864,528
        
        
        
        
        4,234,374
        
        
        
        
        10,004,654
        
        
        
        
        8,757,346Interest expense
        
        
        4,030,992
        
        
        
        
        3,510,863
        
        
        
        
        7,918,959
        
        
        
        
        6,932,203Net revenue
        
        
        11,705,037
        
        
        
        
        10,792,200
        
        
        
        
        24,388,132
        
        
        
        
        22,539,454Operating expenses:Employee costs
        
        
        4,653,370
        
        
        
        
        5,014,572
        
        
        
        
        9,820,079
        
        
        
        
        10,261,743Facilities
        
        
        1,255,915
        
        
        
        
        1,404,224
        
        
        
        
        2,688,158
        
        
        
        
        2,831,984Marketing
        
        
        570,936
        
        
        
        
        593,207
        
        
        
        
        1,232,420
        
        
        
        
        1,516,589Professional fees and other
        
        
        1,157,773
        
        
        
        
        1,012,604
        
        
        
        
        2,449,129
        
        
        
        
        2,133,406Total operating expenses
        
        
        7,637,994
        
        
        
        
        8,024,607
        
        
        
        
        16,189,786
        
        
        
        
        16,743,722Income before income taxes
        
        
        4,067,043
        
        
        
        
        2,767,593
        
        
        
        
        8,198,346
        
        
        
        
        5,795,732Provision for income taxes
        
        
        1,501,800
        
        
        
        
        863,000
        
        
        
        
        3,051,800
        
        
        
        
        1,979,000Net income
        
        $
        2,565,243
        
        
        
        $
        1,904,593
        
        
        
        $
        5,146,546
        
        
        
        $
        3,816,732Net income per share, basic and diluted
        
        $
        149.70
        
        
        
        $
        111.15
        
        
        
        $
        300.34
        
        
        
        $
        222.73














See Notes to Condensed Consolidated Financial Statements



2



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PIONEER FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



Total
        
        
        
        Common Stock
        
        
        
        RetainedEarnings
        
        
        
        AccumulatedOtherComprehensiveIncomeBalance, September 30, 2004
        
        $
        25,893,818
        
        
        
        $
        1,713,600
        
        
        
        $
        24,180,218
        
        
        
        $
        Net income
        
        
        
        
        
        
        
        
        
        
        
        
        7,167,973Accumulated othercomprehensive income -change in unrealized gainon equity securities, net ofincome taxes
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        11,250Total comprehensive income
        
        
        7,179,223Dividend paid ($58.40 per share)
        
        
        (1,000,691
        )
        
        
        
        
        
        
        
        
        (1,000,691
        )Balance, September 30, 2005
        
        
        32,072,350
        
        
        
        
        1,713,600
        
        
        
        
        30,347,500
        
        
        
        
        11,250Net income
        
        
        
        
        
        
        
        
        
        
        
        
        8,098,784Accumulated othercomprehensive income -change in unrealized gainon equity securities, net ofincome taxes
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (11,250
        )Total comprehensive income
        
        
        8,087,534Dividend paid ($67.10 per share)
        
        
        (1,149,827
        )
        
        
        
        
        
        
        
        
        (1,149,827
        )Balance, September 30, 2006
        
        
        39,010,057
        
        
        
        
        1,713,600
        
        
        
        
        37,296,457
        
        
        
        
        (Unaudited)Net income
        
        
        
        
        
        
        
        
        
        
        
        
        5,146,546Total comprehensive income
        
        
        5,146,546Dividend paid ($583.60 per share)
        
        
        (10,000,571
        )
        
        
        
        
        
        
        
        
        (10,000,571
        )Balance, March 31, 2007
        
        $
        34,156,032
        
        
        
        $
        1,713,600
        
        
        
        $
        32,442,432
        
        
        
        $
        








See Notes to Condensed Consolidated Financial Statements



3



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PIONEER FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



Six Months Ended March 31,2007
        
        
        
        2006Cash Flows from Operating Activities:Net income
        
        $
        5,146,546
        
        
        
        $
        3,816,732Items not requiring (providing) cash:Provision for credit losses onfinance receivables
        
        
        10,004,654
        
        
        
        
        8,757,346Depreciation and amortization
        
        
        716,391
        
        
        
        
        697,830Compounded interest added toinvestment notes
        
        
        713,742
        
        
        
        
        535,182Deferred income taxes
        
        
        (285,801
        )
        
        
        
        (448,384
        )Loss on disposal/donation of equipment
        
        
        105,059
        
        
        
        
        (1,098
        )Changes in:Accounts payable and accruedexpenses
        
        
        2,393,127
        
        
        
        
        (524,260
        )Prepaids and other assets
        
        
        (242,933
        )
        
        
        
        1,314,625Net cash provided by operatingactivities
        
        
        18,550,785
        
        
        
        
        14,147,973Cash Flows from Investing Activities:Loans originated
        
        
        (87,540,427
        )
        
        
        
        (88,167,732
        )Loans purchased
        
        
        (8,699,330
        )
        
        
        
        (10,276,043
        )Loans repaid
        
        
        85,512,394
        
        
        
        
        81,220,469Capital expenditures
        
        
        (279,697
        )
        
        
        
        (434,716
        )Securities purchased
        
        
        (1,507,564
        )
        
        
        
        (1,114,930
        )Securities matured
        
        
        2,335,000
        
        
        
        
        648,389Net cash used in investing activities
        
        
        (10,179,624
        )
        
        
        
        (18,124,563
        )Cash Flows from Financing Activities:Net borrowing (repayments) under linesof credit
        
        
        1,945,897
        
        
        
        
        (2,344,482
        )Proceeds from borrowings
        
        
        37,785,224
        
        
        
        
        42,440,079Repayment of borrowings
        
        
        (34,330,174
        )
        
        
        
        (33,441,331
        )Dividends paid
        
        
        (10,000,571
        )
        
        
        
        (414,690
        )Net cash (used)/provided by financing activities
        
        
        (4,599,624
        )
        
        
        
        6,239,576Net Increase in Cash
        
        
        3,771,537
        
        
        
        
        2,262,986Cash and cash equivalents, Beginning of Period
        
        
        1,762,526
        
        
        
        
        1,734,925Cash and cash equivalents, End of Period
        
        $
        5,534,063
        
        
        
        $
        3,997,911Additional Cash Flow Information:Interest paid
        
        $
        6,920,786
        
        
        
        $
        7,156,140Income taxes paid
        
        $
        1,700,000
        
        
        
        $
        2,714,825




See Notes to Condensed Consolidated Financial Statements



4



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PIONEER FINANCIAL SERVICES, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2007 and March 31, 2006

(Unaudited)

NOTE 1:  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Concentration

Pioneer Financial Services, Inc., a Missouri corporation (the Company), is a specialized financial services company which originates and services consumer loans and provides other products and financial services exclusively to active duty or retired career military personnel or U.S. Department of Defense employees. The Companys revenues are primarily earned from the making of direct loans and the purchase of retail installment contracts. The Company also earns revenues from commissions from the sale of credit-related insurance placed with non-related insurance companies and from reinsurance premiums on credit accident and health insurance. Additionally, the Company sells non-loan related products and services, including roadside assistance programs and discount cards.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Pioneer Financial Services, Inc. (a wholly-owned subsidiary of Pioneer Financial Industries, Inc.) and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated from the accompanying consolidated financial statements. Certain information and note disclosures normally included in the Companys annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Companys annual consolidated financial statements filed with the Securities and Exchange Commission.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Information with respect to March 31, 2007 and 2006, and the periods then ended, have not been audited by the Companys independent auditors, but in the opinion of management reflect all adjustments (which include only normal recurring adjustments) necessary for the fair presentation of the financial condition and operations of the Company. The results of operations for the six months ended March 31, 2007 and 2006 are not necessarily indicative of results to be expected for the entire fiscal year. The condensed consolidated balance sheet as of September 30, 2006 and statements of stockholders equity for the years ended September 30, 2006 and 2005 have been derived from the Companys audited consolidated balance sheet and statements of stockholders equity.

NOTE 2:  NET INCOME PER SHARE

Net income per share is computed based upon the weighted-average common shares outstanding of 17,136 during each period. There are no potentially dilutive securities issued and outstanding.

ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The discussion set forth below, as well as other portions of this quarterly report, contains forward-looking statements within the meaning of federal securities law. Words such as may, will, expect, anticipate, believe, estimate, continue, predict, or other similar words, identify forward-looking statements. Forward-looking statements include statements regarding our managements intent, belief or current expectation about, among other things, trends affecting the markets in which we operate our business, financial condition and growth



5



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strategies. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those predicted in the forward-looking statements as a result of various factors, including, but not limited to, those risk factors set forth in our annual report on Form 10-K for the period ended September 30, 2006 and set forth herein under Item 1ARisk Factors. Other factors not identified herein could also have such an effect. If any of these risk factors occur, they could have an adverse effect on our business, financial condition and results of operation. When considering forward-looking statements keep these risk factors in mind. These forward-looking statements are made as of the date of this filing. You should not
place undue reliance on any forward-looking statement. We are not obligated to update forward-looking statements and will not update any forward-looking statements in this Quarterly Report to reflect future events or developments.

Overview

We originate and service consumer loans and provide other financial products and services on a worldwide basis, exclusively to active duty or retired career U.S. military personnel or U.S. Department of Defense employees. We make direct loans to our customers through our network of retail sales offices and over the Internet. We also purchase retail installment sales contracts from retail merchants who sell consumer goods to active duty or retired career U.S. military personnel or U.S. Department of Defense employees. We refer to these consumer loans and retail installment contracts as finance receivables.

Our finance receivables are effectively unsecured. Our finance receivables have fixed interest rates and typically have a maturity of less than 48 months. During the first six months of fiscal 2007, the size of our average finance receivable at origination was approximately $3,518. A large portion of our customers are unable to obtain  financing from traditional sources due to factors such as their age, frequent relocations and lack of credit history, which may not allow them to build relationships with sources such as commercial banks.

Further improvement of our profitability is dependent upon the growth in our finance receivables, the maintenance of loan quality, acceptable levels of borrowing costs and operating expenses and the ongoing introduction of innovative new products and services to our customer base. Since September 30, 2001, finance receivables have increased at a 14.4% annual compounded rate from $137.3 million to $268.5 million at September 30, 2006. The aggregate finance receivable increase of 8.6% for fiscal year 2006 is attributable in part to the presence of third party marketing agreements entered into in October 2003 with companies that market and sell products over the Internet to military service members. These agreements have expanded our ability to help additional military customers who need financing to effectuate Internet purchases as well as other needs. We plan to continue
to pursue innovative and efficient methods to distribute our loans, including looking for opportunities to expand the Internet portion of our business and adding new retail offices as we evaluate new military markets and possible products.

Lending Activities

In general, our loans are under $10,000, repayable in equal monthly installments and have terms no longer than 48 months. In evaluating the creditworthiness of potential customers, we primarily examine the individuals debt to income ratio, discretionary income, military rank, time served in the military and prior credit experience. Loans are limited to amounts that the customer can reasonably be expected to repay from that discretionary income. Loan repayment terms are generally structured to repay the entire loan prior to the customers estimated separation from the military. However, because we cannot predict when or whether a customer may unexpectedly leave the military or when or whether other events could occur which result in us not being repaid prior to a customers departure from the military, we cannot implement any policy or procedure to ensure that we are repaid
prior to the time our customers leave the military.

A risk in all consumer lending and retail sales financing transactions is the customers unwillingness or inability to repay obligations. Unwillingness to repay is usually evidenced by a consumers historical credit repayment record. An inability to repay occurs after our initial credit evaluation and funding and usually results from lower income due to early separation from the military or reduction in rank, major medical expenses, or divorce. Occasionally, these types of events are so economically severe that the customer files for protection under the bankruptcy laws. We use standard underwriting guidelines at the time the customer applies for a loan to help minimize the risk of unwillingness or inability to repay. These guidelines are developed from past customer credit



6



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repayment experience and are periodically revalidated based on current portfolio performance. We use these guidelines to predict the relative likelihood of credit applicants repaying their obligation to us. We extend credit to those consumers who fit our underwriting guidelines. The amount and interest rate of the loan or retail sales finance transaction are based upon the estimated credit risk assumed.

With 20+ years experience underwriting, originating, monitoring and servicing consumer loans to the Military Market, we have developed a deep understanding of the military and the military lifestyle. Through this extensive knowledge of our customer base, we have developed a sophisticated, proprietary scoring model that focuses on the unique characteristics of the Military Market as well as traditional credit scoring variables.  This has allowed us to profitably service a market niche. We incorporated these proprietary underwriting guidelines and scoring model into our loan origination system to facilitate auto-decisioning and risk-based pricing on our loans.

All of our customers are required to complete standardized credit applications in person at one of our retail network offices or to complete an online application via the Internet. All of our retail network offices are staffed and equipped to expedite loan applications electronically to one of the lending subsidiaries for loan underwriting. Promptly, our lending subsidiary employees verify the applicants military service history and status including rank, review credit histories using major credit reporting agencies and conduct other review procedures as deemed necessary.

We believe that the development and continual reinforcement of personal relationships with customers improves our ability to monitor their creditworthiness, reduce credit risk and generate loyal repeat customers. It is not unusual for us to have made a number of loans to the same customer over the course of several years which were refinanced with a new loan after approximately one third of the scheduled payments were made. In determining whether to refinance existing loans, we typically require loans to be current on a recency basis, and customers are required to complete a new credit application. It is against our policy to grant extensions or deferments, or allow account revisions, rewriting, renewal or rescheduling to bring an otherwise delinquent account current.

As a customer service, we will consider a new loan request from an existing customer who has demonstrated a positive payment history with us, where the transaction creates an economic benefit to the customer and after fully underwriting the new loan request to ensure proper debt ratio, credit history and payment performance. No refinancing is available to cure delinquency nor for the sole purpose of creating fee income to us. Generally, we refinance existing loans when a portion of the new loan proceeds is used to repay the balance of the existing loan and the remaining portion is advanced to the customer. In fiscal 2006, approximately 45.8% of the number and 30.2% of the amount of our loan originations were refinancings of outstanding loans. If the New Lending Act for Service Members is implemented as enacted, we will no longer be able to refinance an existing loan.

To reduce our credit risk and provide better service, we do not require but a customer may elect to employ the convenience of making their monthly loan payments electronically through payroll deduction via the Government Allotment System or through an automatic debit of their bank account through the National Automated Clearinghouse Association. As of March 31, 2007, approximately 96% of our customers were utilizing these options. In addition, customers may elect to make monthly loan payments by personal check.

Sources of Income

We derive revenues and resulting income from finance income derived from direct consumer lending and retail installment contracts, commissions earned on the sale of credit insurance products, credit reinsurance premiums, and commissions earned on the sale of ancillary products and services. For purposes of the following discussion, revenues means the sum of our finance income, insurance premiums and commissions and other income.

Finance Receivables

Our finance receivables are comprised of direct loans and retail installment contracts. The following table sets forth certain information about the components of our finance receivables as of the ends of the periods presented:





7



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As of and For the SixMonths EndedMarch 31,2007
        
        
        
        2006(dollars in thousands, except for average note balance)Finance Receivables:Finance receivables balance
        
        
        
        $
        270,000
        
        
        
        $
        256,456Average note balance
        
        
        
        $
        2,603
        
        
        
        $
        2,554Total finance income
        
        
        
        $
        39,117
        
        
        
        $
        35,947Total number of notes
        
        
        
        
        103,717
        
        
        
        
        100,408Direct Loans:Finance receivables balance
        
        
        
        $
        249,412
        
        
        
        $
        233,674Percent of finance receivables
        
        
        
        
        92.38
        %
        
        
        
        91.12
        %Average note balance
        
        
        
        $
        2,700
        
        
        
        $
        2,654Number of notes
        
        
        
        
        92,384
        
        
        
        
        88,033Retail Installment Contracts:Finance receivables balance
        
        
        
        $
        20,588
        
        
        
        $
        22,782Percent of finance receivables
        
        
        
        
        7.63
        %
        
        
        
        8.88
        %Average note balance
        
        
        
        $
        1,817
        
        
        
        $
        1,841Number of notes
        
        
        
        
        11,333
        
        
        
        
        12,375




Net Interest Margin

The principal component of our profitability is our net interest margin, which is the difference between the interest we earn on finance receivables and the interest we pay on borrowed funds. Some states and federal statutes regulate the interest rates that we may charge our customers. In addition, other states competitive market conditions also impact the interest rates we may charge. Differences also exist in the interest rates we earn on the various components of our finance receivable portfolio. With respect to permissible interest rate levels which may be charged, how such rates are calculated and other restrictions regarding lender loan documents, if the New Lending Act for Service Members is implemented as enacted, it will preempt less restrictive state laws but permits states to impose lower interest rate ceilings. See Item 1A: Risk
FactorsBusinessRegulationsThe New Lending Act for Service Members.

Unlike our interest income, our interest expense is sensitive to general market interest rate fluctuations. These general market fluctuations directly impact our cost of funds. Our general inability to increase the interest rates earned on new and existing finance receivables restricts our ability to react to increases in our cost of funds. Accordingly, increases in market interest rates generally will narrow our interest rate spread and lower our profitability, while decreases in market interest rates generally will widen our interest rate spread and increase our profitability.

The following table presents important data relating to our net interest margin as of the ends of the periods presented:



As of, and For the Three
        
        
        
        As of, and For the SixMonths Ended
        
        
        
        Months EndedMarch 31,
        
        
        
        March 31,2007
        
        
        
        2006
        
        
        
        2007
        
        
        
        2006(dollars in thousands)
        
        
        
        (dollars in thousands)Finance receivables balance
        
        
        
        $
        270,000
        
        
        
        $
        256,456
        
        
        
        $
        270,000
        
        
        
        $
        256,456Average finance receivables (1)
        
        
        
        $
        273,838
        
        
        
        $
        260,559
        
        
        
        $
        275,041
        
        
        
        $
        260,478Average interest bearing liabilities (1)
        
        
        
        $
        223,606
        
        
        
        $
        212,995
        
        
        
        $
        222,924
        
        
        
        $
        213,895Total finance income
        
        
        
        $
        19,148
        
        
        
        $
        17,444
        
        
        
        $
        39,117
        
        
        
        $
        35,947Total interest expense
        
        
        
        $
        4,031
        
        
        
        $
        3,511
        
        
        
        $
        7,919
        
        
        
        $
        6,932(1)      Averages are computed using month-end balances.






8



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Results of Operations

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Finance Receivables.Our aggregate finance receivables increased 5.3% to $270.0 million on March 31, 2007 from $256.4 million on March 31, 2006. Our aggregate finance receivables decreased 3.8% during the second quarter of fiscal 2007 to $270.0 million on March 31, 2007 from $280.8 million on December 31, 2006 compared to a 3.4% decrease during the second quarter of fiscal 2006 to $256.6 million on March 31, 2006 from $265.4 million on December 31, 2005. The second quarter is typically the lowest period for loan originations and generally results in a decline in our finance receivables attributable in part to the cyclical drop in demand for new loans and a higher number of payoffs due to customers who use tax refunds to pay off our loans.

Finance Revenues.Finance revenues for the second quarter of fiscal 2007 increased to $19.1 million from $17.4 million for the second quarter of fiscal 2006, an increase of $1.7 million or 9.8%. This increase was primarily due to an increase in average finance receivables to $273.8 million in the second quarter of fiscal 2007 from $260.6 million in the second quarter fiscal 2006, an increase of 5.1%.

Provision for Credit Losses.The provision for credit losses in the second quarter of fiscal 2007 increased to $4.8 million from $4.2 million in the second quarter of fiscal 2006, an increase of $.6 million or 14.3%. This increase resulted from a combination of increases in both the allowance for loan losses due to the growth in our loan portfolio and an increase in our net charge-offs. Our loan portfolio increased by 5.3% or $13.6 million as mentioned above. In addition, our net charge-offs as a percentage of average finance receivables for the second quarter of fiscal 2007 increased to 7.1% from 6.5% for the second quarter of fiscal 2006. This increase is due to general economic factors affecting our customers ability to repay their loans, the increase in customers leaving the military prior to repaying their loan and our
continuing concern regarding the uncertainty surrounding Middle-East hostilities. If these situations were to continue to result in a protracted war, the involvement of the military personnel in armed hostilities may increase payment delinquencies and charge-offs. See Item 1A: Risk FactorsIf a customer leaves the military prior to repaying our loan, there is an increased risk that our loan will not be repaid. See also Credit Loss Experience and Provision for Credit Losses.

Interest Expense.Interest expense in the second quarter of fiscal 2007 increased to $4.0 million from $3.5 million in the second quarter of fiscal 2006, an increase of $.5 million or 14.3%. Our average interest bearing liabilities for the three months ended March 31, 2007 increased by $10.6 million or 5.0% compared to the three months ended March 31, 2006. The weighted average interest rate increased to 7.1% in the second quarter of fiscal 2007 from 6.5% in the second quarter of fiscal 2006 due to an increase in market interest rates.

Operating Expense.Operating expenses in the second quarter of fiscal 2007 decreased to $7.6 million from $8.0 million in the second quarter of fiscal 2006, a decrease of $.4 million or 5.0%. This decrease is due primarily to a decrease in employment costs resulting from more efficient use of technology and a decrease in marketing expenses with better focused digital marketing efforts.

Net Income.Income before taxes in the second quarter of fiscal 2007 was $4.1 million and net income was $2.6 million compared to income before taxes of $2.8 million and net income of $1.9 million during the second quarter of fiscal 2006.

Six Months Ended March 31, 2007 Compared to Six Months Ended March 31, 2006

Finance Receivables.Our aggregate finance receivables increased .6% during the first six months of fiscal 2007 to $270.0 million from $268.5 million on September 30, 2006, compared to a 3.8% increase during the first six months of fiscal 2006 to $256.5 million from $247.2 million on September 30, 2005. The fiscal 2006 increase was due primarily to increases in finance receivables from the Internet, which grew by more than $5.4 million or 3.3%. The Internet is a lower-cost method of loan origination and proceed distribution, and we plan to continue to increase this distribution channel in the future.

Finance Revenues.Finance revenues for the first six months of fiscal 2007 increased to $39.1 million from $35.9 million for the first six months of fiscal 2006, an increase of $3.2 million or 8.9%. This increase was primarily



9



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due to the increase in average finance receivables to $275.0 million in fiscal 2006 from $260.5 million in fiscal 2006, an increase of 5.6%.

Provision for Credit Losses.The provision for credit losses in the first six months of fiscal 2007 increased to $10.0 million from $8.8 million in the first six months of fiscal 2006, an increase of $1.2 million or 13.6%. This increase resulted from a combination of increases in both the allowance for loan losses due to the growth in our loan portfolio and an increase in our net charge-offs. While our net charge-offs of finance receivables in the first six months of fiscal 2007 increased to $9.3 million from $8.0 million in the first six months of fiscal 2007, as a percent of average finance receivables, net charge-offs increased to 6.8% during the six months ending March 31, 2007 from 6.1% during the same period last year. Our allowance for credit losses at March 31, 2007 increased to $16.8 million from $14.8 million at March 31,
2006, an increase of $2.0 million, or 13.5%. This increase is due to general economic factors affecting our customers ability to repay their loans, the increase in customers leaving the military prior to repaying their loan and our continuing concern regarding the uncertainty surrounding Middle-East hostilities. If these situations were to continue to result in a protracted war, the involvement of the military personnel in armed hostilities may increase payment delinquencies and charge-offs. See Item 1A: Risk FactorsIf a customer leaves the military prior to repaying our loan, there is an increased risk that our loan will not be repaid. See also Credit Loss Experience and Provision for Credit Losses.

Interest Expense.Interest expense in the first six months of fiscal 2007 increased to $7.9 million from $6.9 million in the first six months of fiscal 2006, an increase of $1.0 million or 14.5%. This is the result of an increase of $9.0 million in our average interest bearing liabilities for the six months ended March 31, 2007 or 4.2 % compared to the six months ended March 31, 2006. The weighted average interest rate increased to 7.1% in the first six months of fiscal 2007 from 6.5% in the first six months of fiscal 2006 due to an increase in market interest rates.

Operating Expense.Operating expenses in the first six months of fiscal 2007 decreased to $16.2 million from $16.7 in the first six months of fiscal 2006 a decrease of $.5 million or 3.0%. This decrease is due primarily to a decrease in employment costs resulting from more efficient use of technology and a decrease in marketing expenses with better focused digital marketing efforts.

Net Income.Income before taxes in the first six months of fiscal 2007 was $8.2 million and net income was $5.1 million compared to income before taxes of $5.8 million and net income of $3.8 million during the first six months of fiscal 2006.

Delinquency Experience

Our customers are required to make monthly payments of interest and principal. We analyze our delinquencies on a recency delinquency basis. A loan is delinquent under the recency method when a full payment (95% or more of the contracted payment amount) has not been received for 60 days after the last full payment. We rarely grant extensions or deferments, or allow account revision, rewriting, renewal or rescheduling in order to bring otherwise delinquent accounts current.

The following sets forth our delinquency experience for accounts for which payments are 60 days or more past due and allowance for credit losses for our finance receivables as of the ends of the periods presented:





As of the Six Months EndedMarch 31,2007
        
        2006(dollars in thousands)Finance receivables balances
        
        $
        270,000
        
        $
        256,456Finance receivables balances 60 days or more past due
        
        $
        14,808
        
        $
        13,244Finance receivables balances 60 days or more past due as a percent of finance receivables
        
        
        5.48
        %
        
        5.16
        %






10



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Credit Loss Experience and Provision for Credit Losses

General.Our provisions for credit losses are charged to income in amounts sufficient to maintain our allowance for credit losses at a level considered adequate to cover the probable losses inherent in our existing finance receivable portfolio. Historical credit loss experience, delinquency of finance receivables, the value of underlying collateral, current economic conditions, current military activities and managements judgment are factors used in assessing the overall adequacy of the allowance and corresponding provision for credit losses. Our allowance for credit losses is developed primarily for our direct finance receivable portfolio as our retail installment contracts are generally covered by dealer reserves.

Direct Loans.Our charge-off policy is based on an account-by-account review of delinquent receivables on a recency basis. Finance receivables are charged-off when management deems them to be uncollectible through our normal collection procedures or they become 270 days past due. The 270-day limit is required by our senior lending agreement. Nearly 15% of our charge-offs occur before an account is 180 days delinquent. Our primary source of charge-offs is when a customer leaves the military prior to repaying the finance receivable. We generally structure our loans so that the entire amount is repaid prior to a customers estimated separation from the military, and the number of our customers who depart from the military early has remained relatively constant over time. We, however, cannot predict when or whether a customer may depart from the military
early. Accordingly, we can not implement policies or procedures to ensure that we are repaid in full prior to our customer leaving the military.

The following table presents net charge-offs on direct loans and net charge-offs as a percentage of direct loans as of the ends of the periods presented:





As of, and For the Three
        
        
        
        As of, and For the SixMonths Ended
        
        
        
        Months EndedMarch 31,
        
        
        
        March 31,2007
        
        
        
        2006
        
        
        
        2007
        
        
        
        2006(dollars in thousands)
        
        
        
        (dollars in thousands)Direct Loans:Loans charged-off
        
        
        
        $
        5,351
        
        
        
        $
        4,585
        
        
        
        $
        10,143
        
        
        
        $
        8,584Less recoveries
        
        
        
        
        476
        
        
        
        
        333
        
        
        
        
        850
        
        
        
        
        605Net charge-offs
        
        
        
        $
        4,875
        
        
        
        $
        4,252
        
        
        
        $
        9,293
        
        
        
        $
        7,979Average monthly balance ofoutstanding (1)
        
        
        
        $
        253,079
        
        
        
        $
        237,744
        
        
        
        $
        253,956
        
        
        
        $
        237,398Percentage of net charge-offs to averagemonthly balance outstanding (2)
        
        
        
        
        7.71
        %
        
        
        
        7.15
        %
        
        
        
        7.32
        %
        
        
        
        6.72
        %(1)    Averages are computed using month-end balances.(2)    March 31, 2007 and 2006 are annualized for comparison purpose.




Retail Installment Contracts.Under our retail merchant reserve arrangements, we withhold a percentage (usually between five and ten percent) of the principal amount of the retail installment contract purchased. The amounts withheld from a particular retail merchant are recorded in a specific reserve account. Any losses incurred on the retail installment contracts purchased from that retail merchant are charged against its specific reserve account. Upon the retail merchants request, and no more often than annually, we pay the retail merchant the amount by which its specific reserve account exceeds 15% of the aggregate outstanding balance on all retail installment contracts purchased from them, less losses we have sustained, or reasonably could sustain, due to debtor defaults, collection expenses, delinquencies and breaches of our agreement with the
retail merchant. Our allowance for credit losses is charged only to the extent that the loss on a retail installment contract exceeds the originating retail merchants specific reserve account at the time of the loss.



11



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The following table presents net charge-offs on retail installment contracts and net charge-offs as a percentage of retail installment contracts as of the ends of the periods presented.



As of, and For the Three
        
        
        
        As of, and For the SixMonths Ended
        
        
        
        Months EndedMarch 31,
        
        
        
        March 31,2007
        
        
        
        2006
        
        
        
        2007
        
        
        
        2006(dollars in thousands)
        
        
        
        (dollars in thousands)Retail Installment Contracts:Contracts charged-off
        
        
        
        $
        7
        
        
        
        $
        
        
        
        
        $
        21
        
        
        
        $
        Less recoveries
        
        
        
        
        18
        
        
        
        
        18
        
        
        
        
        38
        
        
        
        
        22Net charge-offs (recoveries)
        
        
        
        $
        (11
        )
        
        
        $
        (18
        )
        
        
        $
        (17
        )
        
        
        $
        (22
        )Average monthly balance ofoutstanding (1)
        
        
        
        $
        20,759
        
        
        
        $
        27,814
        
        
        
        $
        21,085
        
        
        
        $
        23,080Percentage of net charge-offs to averagemonthly balance outstanding (2)
        
        
        
        
        -0.21
        %
        
        
        
        -0.32
        %
        
        
        
        -0.16
        %
        
        
        
        -0.19
        %(1)    Averages are computed using month-end balances.(2)    March 31, 2007 and 2006 are annualized for comparison purpose.




Allowance for Credit Losses.The following table presents our allowance for credit losses on finance receivables as of the ends of the periods presented:



As of, and For the Three
        
        
        
        As of, and For the SixMonths Ended
        
        
        
        Months EndedMarch 31,
        
        
        
        March 31,2007
        
        
        
        2006
        
        
        
        2007
        
        
        
        2006(dollars in thousands)
        
        
        
        (dollars in thousands)Average finance receivables (1)
        
        $
        273,838
        
        
        
        $
        260,559
        
        
        
        $
        275,041
        
        
        
        $
        260,478Provision for credit losses
        
        $
        4,864
        
        
        
        $
        4,234
        
        
        
        $
        10,005
        
        
        
        $
        8,757Net charge-offs
        
        $
        4,864
        
        
        
        $
        4,234
        
        
        
        $
        9,276
        
        
        
        $
        7,957Net charge-offs as a percentage ofaverage finance receivables (2)
        
        
        7.10
        %
        
        
        
        6.50
        %
        
        
        
        6.75
        %
        
        
        
        6.11
        %Allowance for credit losses
        
        $
        16,835
        
        
        
        $
        14,802
        
        
        
        $
        16,835
        
        
        
        $
        14,802Allowance as a percentage of averagefinance receivables
        
        
        6.15
        %
        
        
        
        5.68
        %
        
        
        
        6.12
        %
        
        
        
        5.68
        %(1)   Averages are computed using month-end balances.(2)   March 31, 2007 and 2006 are annualized for comparison purpose.




The allowance for credit losses is maintained at an amount which management considers sufficient to cover estimated future losses. The Company has developed policies and procedures for assessing the adequacy of the allowance for credit losses which take into consideration the historical credit loss experience of the Company, delinquency trends, current economic conditions, current or future military deployments, and the composition of the finance receivable portfolio. The Company uses various ratio analyses in evaluating prior finance receivable losses and delinquency experience. These and other analyses are used to measure historical movement of finance receivables through various levels of repayment, delinquency, and loss. These results and managements judgment are used to estimate future losses and in establishing the current provision and allowance for credit losses. These
estimates are influenced by factors outside the Companys control, such as economic conditions, current or future military deployments and completion of military service prior to repayment of loan. There is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. See Item 1A: Risk FactorsIf a customer leaves the military prior to repaying our loan, there is an increased risk our loan will not be repaid.



12



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The following table sets forth changes in the components of our allowance for credit losses on finance receivables as of the ends of the periods presented:



As of, and For the Three
        
        
        
        As of, and For the SixMonths Ended
        
        
        
        Months EndedMarch 31,
        
        
        
        March 31,2007
        
        
        
        2006
        
        
        
        2007
        
        
        
        2006(dollars in thousands)
        
        
        
        (dollars in thousands)Balance, beginning of period
        
        $
        16,835
        
        
        
        $
        14,802
        
        
        
        $
        16,106
        
        
        
        $
        14,002Charge-offs:Loans charged-off
        
        
        (5,358
        )
        
        
        
        (4,585
        )
        
        
        
        (10,164
        )
        
        
        
        (8,584
        )Recoveries
        
        
        494
        
        
        
        
        351
        
        
        
        
        888
        
        
        
        
        627Net charge-offs
        
        
        (4,864
        )
        
        
        
        (4,234
        )
        
        
        
        (9,276
        )
        
        
        
        (7,957
        )Provision for credit losses
        
        
        4,864
        
        
        
        
        4,234
        
        
        
        
        10,005
        
        
        
        
        8,757Balance, end of period
        
        $
        16,835
        
        
        
        $
        14,802
        
        
        
        $
        16,835
        
        
        
        $
        14,802




Loan Origination

Our loan origination is an important factor in determining our future revenues. Loan originations increased for the first six months of fiscal 2007 to $148.0 million from $140.6 million for the first six months of fiscal year 2006, an increase of $7.4 million or 5.3%. See Results of Operations  Six Months Ended March 31, 2007 Compared to the Six Months ended March 31, 2006  Finance Receivables. The record volume in the first six months of fiscal 2007 was achieved through an increase in loan referrals from our retail offices and the expansion of our Internet distribution channel. The increase in Internet loan production was due in part to our digital marketing efforts which increased 24% over prior year with a greater emphasis on internally directed activities.

The following table sets forth our overall loan originations and lending activities by direct loans and retail installment contracts as of the ends of the periods presented:



As of, and For the Three
        
        
        
        As of, and For the SixMonths Ended
        
        
        
        Months EndedMarch 31,
        
        
        
        March 31,2007
        
        
        
        2006
        
        
        
        2007
        
        
        
        2006(dollars in thousands, except for average note amounts)Total Loan Origination:Gross balance
        
        $
        57,373
        
        
        
        $
        51,867
        
        
        
        $
        147,984
        
        
        
        $
        140,557Number of finance receivable notes
        
        
        16,730
        
        
        
        
        15,039
        
        
        
        
        42,062
        
        
        
        
        40,720Average note amount
        
        $
        3,429
        
        
        
        $
        3,449
        
        
        
        $
        3,518
        
        
        
        $
        3,452Direct Loans:Gross balance
        
        $
        53,183
        
        
        
        $
        46,878
        
        
        
        $
        138,929
        
        
        
        $
        130,281Number of finance receivable notes
        
        
        15,288
        
        
        
        
        13,288
        
        
        
        
        38,990
        
        
        
        
        37,045Average note amount
        
        $
        3,479
        
        
        
        $
        3,528
        
        
        
        $
        3,563
        
        
        
        $
        3,517Retail Installment Contracts:Gross balance
        
        $
        4,190
        
        
        
        $
        4,989
        
        
        
        $
        9,055
        
        
        
        $
        10,276Number of finance receivable notes
        
        
        1,442
        
        
        
        
        1,751
        
        
        
        
        3,072
        
        
        
        
        3,675Average note amount
        
        $
        2,906
        
        
        
        $
        2,849
        
        
        
        $
        2,948
        
        
        
        $
        2,796






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Liquidity and Capital Resources

A relatively high ratio of borrowings to invested capital is customary in consumer finance activities due to the quality and term of the assets employed. Our principal use of cash is to make new loans and purchase retail installment contracts. We use our borrowings to fund the difference, if any, between the cash used to make new loans and purchase retail installment contracts, and the cash generated from loan repayments and operations. This amount is generally our cash used in investing activities. Cash used in investing and financing activities in the first six months of fiscal 2007 was approximately $10.2 million and $4.6 million, respectively, which was primarily funded from $18.6 million of cash from operating activities.  Cash used in investing activities in the first six months of fiscal 2006 was approximately $18.1 million, which were funded from $14.1 million of cash from operating
activities and $6.2 million from financing activities.

Financing activities primarily consist of borrowings and repayments relating to our bank debt, an unsecured revolving credit line from our parent, our investment notes and dividends. We anticipate that our cash inflow from operations and borrowings under our senior lending agreement will be adequate to meet our cash out flows to fund anticipated growth in our finance receivables, operating expenses, repayment of indebtedness, and planned capital expenditures.

On December 18, 2006, our board of directors paid a $10 million cash dividend to our parent, Pioneer Financial Industries, Inc. by borrowing said amount under our senior lending agreement thus reducing the amount of borrowing capacity we have available to us. This dividend is permitted under the indenture applicable to the investment notes, our senior bank debt agreements and our revolving note to our parent. By reducing the borrowing capacity, this dividend will reduce the amount currently available to pay interest and principal due on our senior indebtedness, trade debt and the investment notes. In addition, it will increase our interest expense therefore reducing our net income. This could have a material adverse impact on our ability to pay interest and principal on the investment notes. See Item 1A: Risk Factors - Large cash dividend declared in December 2006 to our parent.

On or before March 31st of each year, each bank that is a party to the senior lending agreement is to deliver to us a written indication of whether or not it wishes to participate in future fundings and the amounts that it expects to be willing to fund during the next 12 months. As of March 31, 2007, all the banks that are a party to our senior lending agreement have indicated in writing their willingness to participate in fundings up to an aggregate of $290 million.

Senior Indebtedness-Bank Debt.Our senior lending agreement is an uncommitted facility which provides common terms and conditions pursuant to which individual banks that are a party to this agreement may choose to make loans to us in the future. Any bank may elect not to participate in any future fundings at any time without penalty. As of March 31, 2007, we could request up to $28.8 million in additional funds and remain in compliance with the terms of our senior lending agreement. No bank, however, has any contractual obligation to lend us these additional funds. As of March 31, 2007, we were in material compliance with all loan covenants.

Senior Indebtedness-Parent Debt.We also have a revolving line of credit, payable on demand, from our parent, Pioneer Financial Industries, Inc. Interest on this facility accrues at the prime rate plus 2%. At March 31, 2007, there was $.5 million outstanding under this credit facility with an interest rate of 10.25%.

Senior Indebtedness Table.As of March 31, 2007 and 2006, the total borrowings and availability under our senior lending agreement and our revolving line of credit from our parent company consisted of the following amounts for the ends of the periods presented:



14



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As of March 31,
        
        As of September,2007
        
        2006
        
        2006(dollars in thousands)Revolving Credit Line (1):Total facility
        
        $
        54667
        
        $
        47,572
        
        $
        49,559Balance at end of period
        
        $
        14,542
        
        $
        13,333
        
        $
        13,285Maximum available credit (3)
        
        $
        40,125
        
        $
        34,239
        
        $
        36,274Term Notes (2):Total facility
        
        $
        270,000
        
        $
        207,000
        
        $
        225,000Balance at end of period
        
        $
        172,619
        
        $
        170,362
        
        $
        170,533Maximum available credit (3)
        
        $
        97,381
        
        $
        36,636
        
        $
        54,467Total Revolving and Term Notes (1)(2):Total facility
        
        $
        324,667
        
        $
        254,572
        
        $
        274,559Balance at end of period
        
        $
        187,161
        
        $
        183,697
        
        $
        183,818Maximum available credit (3)
        
        $
        137,506
        
        $
        70,875
        
        $
        90,741Credit facility available (4)
        
        $
        28,819
        
        $
        21,467
        
        $
        31,019Percent utilization of the total facility
        
        
        57.65
        %
        
        72.16
        %
        
        66.95
        %




(1)
        Includes revolving credit line from our parent.


(2)
        Includes 48-month amortizing term notes.


(3)
        Maximum available credit assuming proceeds in excess of the amounts shown below under Credit Facility Available are used to increase qualifying finance receivables and all terms of the senior lending agreement are met, including maintaining a Senior Indebtedness to Net Receivable Ratio of not more than 80.0%.


(4)
        Credit facility available based on the existing asset borrowing base and maintaining a Senior Indebtedness to Net Receivable Ratio of not more than 80.0%.




Outstanding Investment Notes.We also fund our liquidity needs through the sale of our investment notes. These notes have varying fixed interest rates and are subordinate to all senior indebtedness. We can redeem these notes at any time upon 30 days written notice. As of March 31, 2007, we had issued approximately $35.9 million of these notes at a weighted average interest rate of 9.35%.

The sale of these notes provides us with additional liquidity and capital resources. Issuing these notes increases our tangible net worth, which allows us to borrow larger amounts under our senior lending agreement. To finance growth in our finance receivables portfolio, we intend to borrow additional funds under our senior lending agreement from time to time as we sell additional investment notes.

Recent Events.On January 31, 2007, Pioneer Financial Industries, Inc., the parent and sole shareholder of Pioneer Financial Services, Inc. (the Company) signed an agreement to sell 100% of its stock in the Company to a bank holding company. The stock transaction is anticipated to close on May 31, 2007 but is subject to customary closing conditions.

Trends

As we continue to assess and align our products to the increasingly competitive market of military lending, we continue to look for ways to remain the responsible alternative. The growth of the payday or balloon loans and significant increases in credit card costs or revolving loans, suggest we fine-tune our disciplined, installment loan program. As a result, we have limited our secured lending to loans that are secured by real property and/or titled vehicles. The majority of our loans will continue to be unsecured and we will no longer accept other personal property as security for our secured loans. We anticipate this will have a slight decrease in insurance commission revenue as a result of this new focus, but our focus on helping military families eliminate the high cost of balloon and revolving loans should improve our loan originations and more than off set the
commission decrease.



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ITEM 3.Quantitative and Qualitative Disclosures About Market Risk.

Our profitability and financial performance are sensitive to changes in the U.S. Treasury yields and the spread between the effective rate of interest we receive on customer loans and the interest rates we pay on our borrowings. Our finance income is generally not sensitive to fluctuations in market interest rates. The primary exposure that we face is changes in interest rates on our borrowings. A substantial and sustained increase in market interest rates could adversely affect our growth and profitability. The overall objective of our interest rate risk management strategy is to mitigate the effects of changing interest rates on our interest expense through the utilization of short-term variable rate debt and medium and long term fixed rate debt. We have not entered into any derivative instruments to manage our interest rate risk. For more information about this item see our annual report
of Form 10-K; Item 7, Liquidity and Capital Resources-Interest Rate Risk Management.

ITEM 4.Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Companys reports under the Exchange Act is recorded, processed, summarized and reported as of the end of the period covered by this report (evaluation date), and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2007.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date the evaluation was completed.

PART II - OTHER INFORMATION

ITEM 1.Legal Proceedings

We are currently involved in various litigation matters in the ordinary course of business. Other than as described below, we are not currently involved in any litigation or other proceedings that we expect, either individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations and cash flows.

State Actions.In September 2006, we made the decision to change our business model to require our subsidiaries to become licensed or registered in each state where such lender may extend a loan to a customer located in such state at the time the loan is made even if such state is not the permanent home of record of such customer. We may decide not to extend loans in certain states where the cost of doing business is prohibitive. This change in business model will eliminate our need to rely uponPioneer Military Lending v. Manning, 2 F.3d 280 (8th Cir. 1993) (Manning),which stated that the Commerce Clause of the U.S. Constitution prevents the lending laws of the state in which a non-resident military borrower is stationed from regulating
such loan transactions. Our new practice will coincide well with the provisions of the New Lending Law for Service Members, signed on October 17, 2006 by the President of the United States, which will become effective not later than October 1, 2007 and prohibit States from waiving consumer protection laws for the benefit of residents of the state on the basis of nonresidence or military status regardless of the customers permanent home of record and thus will effectively overruleManning.

California Action.On May 19, 2006, the Department of Corporations of the State of California (Department) rescinded OP 6547CFLL, a specific ruling issued on March 26, 1996. This specific ruling held that . . . Pioneer is not engaging in the business of a Finance lender . . . as long as Pioneer followed the model of lending set forth inManningand, therefore, did not need to register under the California Finance Lenders Law (CFLL). In connection with rescission of this specific ruling, the Department demanded that two of our wholly-owned subsidiaries, Pioneer Military Lending, Inc., a Washington corporation (PMLI), and Pioneer Military Lending of Nevada, Inc., a Nevada corporation (PML-Nevada), either cease making loans to non-domiciled military
borrowers located in California or become licensed under the CFLL.



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On June 28, 2006, PMLI, joined by PML-Nevada, filed a Complaint for Declaratory Judgment, Injunctive Relief and Damages against Preston DuFauchard, Commissioner of the Department, in the United States District Court for the Eastern District of California.Pioneer Military Lending, Inc., and Pioneer Military Lending of Nevada, Inc. v. Preston DuFauchard, Case No. 2:06-CV-01445-LKK-PAN (E.D. Cal.). The Complaint seeks a determination that, among other things, we and our affiliates are not subject to California lending laws and licensing requirements.

On July 21, 2006, our motion for preliminary injunction with respect to PMLI was granted. PMLI is located in the State of Washington and makes loans exclusively to US military personnel located in California, among other states who are not residents of California. The Order granting the preliminary injunction stated,inter alia:

. . . although defendant has asserted state interests having to do with protecting borrowers and promoting sound lending practices, he fails to articulate what interest, if any, California has in protecting non-California residents from the activities of a lender regulated by another state.See Manning, 2 F.3d at 284 (citingMITE Corp., 457 U.S. at 644 (state has no interest for purposes of Commerce Clause in protecting non-residence under securities laws) (Order p. 34)

The  time for appealing of this Order expired on August 21, 2006.

With respect to PML-Nevada, the Court denied our motion and held that PML-Nevada, which makes loans solely by the Internet exclusively to US military personnel, could make no loans to persons domiciled in California regardless where located, without first becoming licensed under the CFLL. As part of its analysis, the Court discussed that while the loan to a US military personnel from PML-Nevada was entered into when the US military personnel was stationed abroad or in another state, the US military personnel had indicated on the Leave and Earnings Statement (LES) that his or her domicile (place of permanent residence) is in California. PML-Nevada has complied with the Courts ruling by ceasing to lend to any US military personnel over the Internet who has indicated on the LES that he or she is a permanent resident of California, but believes the ruling to be erroneous, in
several respects. Primary among those is that the Order is contrary to many Supreme Court cases holding that a state cannot control or regulate business transactions of residence which occur outside their state.

However, as noted above, we made the decision to change our business model to require our internet lending subsidiary and any other subsidiary making loans to persons located in a state at the time of the loan to become licensed under the state consumer lending laws. With respect to California, we have filed our application for registration of PML-Nevada and PMLI under the CFLL. We have notified the Commissioner of the Department of this action, and we believe he is supportive of our decision and we are working to resolve this matter with the Department. However, no assurance can be given that the Department will find this action sufficient to settle the matter against PML-Nevada. See Item 1A: Risk Factors We are subject to many laws and governmental regulations, and any changes in these laws or regulations may materially adversely affect our financial condition and business operations.

Florida Action.In the second quarter of fiscal year 2005, the Company became aware that the Florida Attorney General was planning to file a lawsuit against a subsidiary of the Company accusing it of violating Florida lending laws and requiring it to comply with such laws in connection with 216 loans that were made by a subsidiary of the Company during the period December 2001 to March 2003. The Company had previously closed its Florida office for other business reasons in March of 2003 well before it had any reason to believe that the Florida Attorney General had any issues with its activities in Florida.

While not obligated to do so, the Company had been cooperating fully with an investigation conducted during the past three years by the Florida Attorney General regarding the loans made from the Companys subsidiary in Georgia to non-resident U.S. military personnel stationed in Florida. In March 2005 the Companys subsidiary received another subpoena from the Attorney Generals Office, that the Company interpreted as indicating that the Florida Attorney General was planning to file a lawsuit.

On April 29, 2005, Pioneer Military Lending of Georgia, Inc. (PML-GA), a Georgia corporation and wholly-owned subsidiary of the Company, filed a Complaint for Declaratory Judgment, Injunctive Relief and Damages against Charlie Crist, the Attorney General of Florida, in the United States District Court for the Northern



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District of Florida. The complaint seeks a determination that, among other things, the Company and its affiliates are not subject to Florida lending laws and licensing requirements.

On March 29, 2006, the Motion for preliminary injunction requested by the Company was denied. In its Order denying that motion, the District Court distinguished the Manning case on the ground that Missouri law, unlike Florida law, required the Company to maintain a full-service office in Missouri. That finding is incorrect, as the District Courts opinion in the Manning case specifically recognized that Missouri law did not require an office in Missouri for a licensee. In finding that the Company failed to meet the high substantial likelihood of success on the merits standard for granting a preliminary injunction, the District Court stated that applying the Florida Consumer Protection Act to Pioneer loans is not likely to violate the Commerce Clause.  While the injunction was denied, the District Court also denied in large
part the Attorney Generals Motion to Dismiss the Companys Complaint for Declaratory Judgment and Damages against Charles Christ, Attorney General of Florida. The District Court stated, among other things, that the Companys allegation is sufficient to state a commerce clause violation.  On March 31, 2006 the Company filed an appeal of the District Courts denial of the preliminary injunction with the United States Circuit Court of Appeals, Eleventh Circuit. On March 27, 2007, the Court of Appeals affirmed the District Courts decision denying Pioneers Motion for Preliminary Injunction. The Court of Appeals chose not to address any of the merits of the case. Instead the Court of Appeals simply stated that the decision not to grant an injunction was within the District Courts discretion and that it found no abuse of that discretion in this case. The Court of Appeals specifically stated that it was not in any respect ruling on
the merits and that simply they were not inclined to reverse under the extremely deferential standard of review that applies to denials of preliminary injunctions. We intend to move forward and pursue PML-GAs complaint against the Attorney General.

ITEM 1A.Risk Factors

In our annual report on Form 10-K for the period ended September 30, 2006, we have identified important risks and uncertainties that could affect our results of operations, financial position, cash flow or business and that could cause them to differ materially from our historical results of operations, financial position, cash flow or business, or those contemplated by forward-looking statements made herein or elsewhere, by, or on behalf of, us. In this quarterly report we have identified material changes in these important risks and uncertainties which include, but are not limited to, those factors described below. These factors should be read in conjunction with the factors identified in our annual report on Form 10-K for the period ended September 30, 2006 underItem 1A. Risk Factors.

If a customer leaves the military prior to repaying our loan, there is an increased risk that our loan will not be repaid.

The terms of repayment on the loans we make are generally structured so the entire loan amount is repaid prior to the customers estimated separation from the military. If, however, a customer unexpectedly leaves the military or other events occur which result in the loan not being repaid prior to our customers departure from the military, there is an increased chance that our loan will not be repaid. Because we do not know whether or when a customer will leave the military early, we cannot institute policies or procedures to ensure that the entire loan is repaid before the customer leaves the military. As of March 31, 2007, we had approximately 5,771 customers who separated from the military prior to repaying our loan and who in the aggregate owed us approximately $12.1million. Based on historical charge-off models, management believes this could result in approximately $7.8
million in charge-offs. If that amount increases or the number of our customers who separate from the military prior to their scheduled separation date materially increases, our charge-offs may increase. This may have a materially adverse effect on cash flow, results of operations and financial conditions.

The new federal law entitled Limitations on Terms of Consumer Credit Extended to Service Members and Dependents may materially adversely affect our business operation and profitability.

On October 17, 2006, the President signed into law  Section 670 of title 10, chapter 49, of the United States Code entitled Limitations on Terms of Consumer Credit Extended To Service Members and Dependents (the New Lending Act for Service Members), which, among other things, provides limitations on the annual percentage interest rate a lender may charge borrowers and requires that the amount of all fees and charges to the borrower in connection with a credit transaction, including those for single premium credit insurance and other ancillary products sold to the borrower, be included in the calculation of the annual percentage rate. These



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reductions in the amount of interest and fees we may charge apply in all jurisdictions in which we lend as the regulations are federal. State law or market conditions may further restrict the interest rate we may charge borrowers. If states were to significantly decrease interest rates we may charge borrowers, this could unfavorably impact our profitability by reducing the interest rate spread between the rate of interest we receive on loans and interest rates we must pay under our outstanding investment notes and bank debts. In addition, the law includes limitations on refinancing with the proceeds of other credit extended by us to the same US military service member or dependent, arbitration clauses and certain penalties and fees. If implemented as enacted, we will likely be required to modify our current practices and procedures in the way we conduct business to reduce the impact of the New Lending Act for
Service Members on our business and profitability. We are subject to many laws and governmental regulations, and any changes in these laws or regulations may materially adversely affect our financial condition and business operations.

Our operations are subject to regulation by federal authorities and state banking, finance, consumer protection and insurance authorities and are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions on our operations which, among other things, require that we obtain and maintain certain licenses and qualifications, and limit the interest rates, fees and other charges we may impose. Although we believe we are in compliance in all material respects with applicable laws, rules and regulations, there can be no assurance that we are or that any change in such laws, or in the interpretations thereof, will not make our compliance therewith more difficult or expensive or otherwise adversely affect our financial condition or business operations.

We are subject to regulation by states where our lending subsidiaries are located. At this time, we are not subject to consumer lending regulation in the states in which we only have retail offices. If this were to change in the future, any resulting regulation by the states in which we only have retail offices could adversely impact our operating costs and our ability to repay the investment notes. In September 2006, in consideration of potential increased risk of heightened state regulation, management decided to begin requiring subsidiaries to become licensed in states where a majority of our customers are located at the time of making a loan for which the cost is not prohibitive.  We do not plan to extend loans in a state where the lending subsidiary is not licensed if the borrower is located in that state when the loan is made.

Large cash dividend declared in December 2006 to our parent

On December 8, 2006, our board of directors declared a $10 million cash dividend to our parent, Pioneer Financial Industries, Inc.  This dividend is permitted under the indenture applicable to the investment notes, our senior bank debt agreements and our revolving note to our parent. This dividend was paid on December 18, 2006, and reduced the amount of borrowing capacity we have available to us from $33.5 million to $23.5 million. By reducing the borrowing capacity, this dividend reduced the amount currently available to pay interest and principal due on our senior indebtedness, trade debt and the investment notes. In addition, it will increase our interest expense therefore reducing our net income. This could have a material adverse impact on our ability to pay interest and principal on the investment notes.

ITEM 2.Unregistered Sales of Equity and Use of Proceeds

On May 13, 2003, the Securities and Exchange Commission declared our registration statement on Form S-1, as amended (File No. 333-103293), effective. On January 13, 2004 the Securities and Exchange Commission declared our post effective amendment number 1 as filed on Form S-1 (File No. 333-103293), effective. On February  10, 2005, the Securities and Exchange Commission declared our post effective amendment number 2 as filed on From S-1 (File No. 333-103293), effective. On January 30, 2006 the Securities and Exchange Commission declared our post effective amendment number 3 as filed on Form S-1 (File No. 333-103293), effective. Pursuant to the registration statement, and the accompanying prospectus, we registered and offered the $25,000,000 in aggregate principal amount of our investment notes as of January 31, 2007. We have allowed our registration statement to expire and have not renewed
it. Therefore, after January 31, 2007, we have neither offered nor sold any investment notes. We commenced the offering of investment notes on May 20, 2003. From May 20, 2003 to January 31, 2007, we sold 790 notes in an approximate aggregate principal amount of $23,728,000. As of January 31, 2007, for the quarter ended March 31, 2007, we sold 17 notes in the approximate aggregate principal amount of $541,000. Costs incurred in connection with the preparation of the initial registration statement on Form S-1 were approximately $315,000. Our expenses incurred in connection with the issuance and distribution of the investment notes from the



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date our registration statement became effective, May 13, 2003, through January 31, 2007 were approximately $759,000. As of January 31, 2007, expenses incurred in the second quarter of fiscal 2007 were approximately $9,000. Net proceeds from the offering through January 31, 2007, were approximately $22,969,000.

ITEM 3.Defaults upon Senior Securities

None.

ITEM 4.Submission of Matters to a Vote of Security Holders

None.

ITEM 5.Other Information

None.

ITEM 6.Exhibits

(a)
        Exhibits




3.1
        Restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 of the Companys Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission on February 8, 2003 (Commission No. 333-103293) (the Initial Registration Statement)).3.2
        Certificate of Amendment to Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.2 of the Initial Registration Statement).3.3
        Amended and Restated By-Laws of the Company (Incorporated by reference to Exhibit 3.3 of the Initial Registration Statement).4.1
        Amended and Restated Indenture dated as of December 15, 2004 (Incorporated by reference to Exhibit 4.1 of the Post Effective Amendment No. 2 to the Registration Statement filed with the Securities and Exchange Commission dated December 17, 2004 (Commission No. 333-103293) (Post Effective Amendment No.2).4.2
        Form of investment note certificate (Incorporated by reference to Exhibit 4.2 of the Post Effective Amendment No. 2).4.3
        Form of Investment Note prior to November 1, 2002 (Incorporated by reference to Exhibit 4.3 of the Initial Registration Statement).4.7
        Form of Agreement between the Company and various banks named in Amended and Restated Senior Lending Agreement (Incorporated by reference to Exhibit 4.7 of the Initial Registration Statement).4.9
        Amended and Restated Senior Lending Agreement dated October 1, 2003 among the Company and various banks named therein (Incorporated by reference to Exhibit 4.9 of the Post Effective Amendment No. 1 to the Registration Statement filed with the Securities and Exchange Commission dated December 12, 2003 (Commission No. 333-103293) (Post Effective Amendment No.1).4.10
        Promissory Note dated October 1, 2003 between the Company and Pioneer Financial Industries, Inc. (Incorporated by reference to Exhibit 4.10 of the Post Effective Amendment No. 2)4.11
        Form of Rate Supplement (Incorporated by reference to Exhibit 4.11 of the Post Effective Amendment No. 2).4.12
        Form of IRA Application (Incorporated by reference to Exhibit 4.12 of the Post Effective Amendment No. 2).






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4.13
        Form of Offer to Purchase (Incorporated by reference to Exhibit 4.13 of the Post Effective Amendment No. 2).10.1
        Form of Readi-Loan Licensing Agreement (Incorporated by reference to Exhibit 10 of the Initial Registration Statement).10.2
        Office Building Lease dated January 31, 2001, between the Company and Belletower Partners, L.L.C. (Incorporated by reference to Exhibit 10.2 of the Initial Registration Statement).10.3
        Addendum to Office Building Lease between the Company and Belletower Partners, L.L.C. (Incorporated by reference to Exhibit 10.3 of the Initial Registration Statement).10.4
        First Amendment to Office Building Lease dated July 19, 2001, between the Company and Belletower Partners, L.L.C. (Incorporated by reference to Exhibit 10.4 of the Initial Registration Statement).10.5
        Employment Contract between the Company and Randall J. Opliger (Incorporated by reference to Exhibit 10.5 of the Initial Registration Statement).10.6
        Trademark Licensing Agreement dated October 10, 2000 between the Company and Pioneer Licensing Services, Inc. (Incorporated by reference to Exhibit 10.6 of the Initial Registration Statement).10.7
        Transfer of Shares dated as of September 30, 2003 between the Company and Pioneer Financial Industries, Inc. (Incorporated by reference to Exhibit 10.7 of the Annual Report on Form 10-K for the fiscal year ended September 30, 2003).10.8
        Capital Contribution Agreement dated as of September 30, 2003 between the Company and Pioneer Financial Industries, Inc. (Incorporated by reference to Exhibit 10.8 of the Annual Report on Form 10-K for the fiscal year ended September 30, 2003).10.9
        Stock Purchase Agreement dated October 29, 2003 between the Company and Pioneer Financial Industries, Inc. (Incorporated by reference to Exhibit 10.9 of the Annual Report on Form 10-K for the fiscal year ended September 30, 2003).10.10
        Stock Purchase Agreement dated October 29, 2003 between the Company and Pioneer Financial Industries, Inc. (Incorporated by reference to Exhibit 10.10 of the Annual Report on Form 10-K for the fiscal year ended September 30, 2003).12
        Statement regarding computation of ratios (Incorporated by reference to Exhibit 12 of Post Effective Amendment No. 2).21
        Subsidiaries of the Company (Incorporated by reference to Exhibit 21 of the Post Effective Amendment No. 1).25
        Statement of eligibility of trustee (Incorporated by reference to Exhibit 25 of the Amendment No. 1).31.1
        Certification of Chief Executive Officer pursuant to Rule 15d-15e.31.2
        Certification of Chief Financial Officer pursuant to Rule 15d-15e.32.1
        18 U.S.C. Section 1350 Certification of Chief Executive Officer.32.2
        18 U.S.C. Section 1350 Certification of Chief Financial Officer.






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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PIONEER FINANCIAL SERVICES, INC.





Name
        
        Title
        Date/s/ William D. Sullivan
        
        Chief Executive Officer
        May 14, 2007William D. Sullivan
        
        and Sole Director(Principal Executive Officer)/s/ Randall J. Opliger
        
        Chief Financial Officer,
        May 14, 2007Randall J. Opliger
        
        Treasurer and Secretary(Principal Financial Officerand Principal Accounting Officer)








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