**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-Q**




x
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31,
                2005**











**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: 0-26680**





**NICHOLAS
      FINANCIAL, INC.**


(Exact
      Name of Registrant as Specified in its Charter)





**British
                Columbia, Canada**
            **8736-3354**(State
                or Other Jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or Organization)
            Identification
                No.)**2454
                McMullen Booth Road, Building C****Clearwater,
                Florida**
            **33759**(Address
                of Principal Executive Offices)
            (Zip
                Code)





**(727)
      726-0763**


(Registrant's
      telephone number, including area code)





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





Indicate
      by checkmark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act)


Yes
o
      No x





Indicate
      by checkmark whether the registrant is a shell company (as defined in Rule
      12b-2
      of the Exchange Act)


Yes
o
      No x





As
      of
      January 31, 2006, the registrant had 9,879,631 shares of common stock
      outstanding.











**NICHOLAS
      FINANCIAL, INC.**


**FORM
      10-Q**


**Table
      of Contents**





**Part
              I. Financial
              Information**
            **Page**Item
                1.
            Financial
                Statements (Unaudited)Condensed
                Consolidated Balance Sheets as of December 31, 2005 and as of March
                31,
                2005
            2Condensed
                Consolidated Statements of Income for the three and nine months ended
                December 31, 2005 and 2004
            3Condensed
                Consolidated Statements of Cash Flows for the nine months ended December
                31, 2005 and 2004
            4Notes
                to the Condensed Consolidated Financial Statements
            5Item
                2.
            Management’s
                Discussion and Analysis of FinancialCondition
                and Results of Operations
            10Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            22Item
                4.
            Controls
                and Procedures
            22**Part
                II. Other Information**Item
                6.
            Exhibits
            23





1


**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**




Nicholas
      Financial, Inc. and Subsidiaries


Condensed
      Consolidated Balance Sheets





**December
                31,**
            
            **March
                31,****2005**
            
            **2005****(Unaudited)****Assets**Cash
            
            $
            1,670,913
            
            $
            853,494Finance
                receivables, net
            
            
            133,038,643
            
            
            113,708,122Accounts
                receivable
            
            
            8,284
            
            
            12,849Assets
                held for resale
            
            
            899,877
            
            
            530,230Prepaid
                expenses and other assets
            
            
            563,900
            
            
            507,952Property
                and equipment, net
            
            
            840,583
            
            
            763,247Derivatives
            
            
            1,134,571
            
            
            740,223Deferred
                income taxes
            
            
            3,825,097
            
            
            3,699,324Total
                assets
            
            $
            141,981,868
            
            $
            120,815,441**Liabilities**Line
                of credit
            
            $
            78,396,965
            
            $
            65,330,897Drafts
                payable
            
            
            934,611
            
            
            973,268Notes
                payable - related party
            
            
            600,000
            
            
            1,000,000Accounts
                payable and accrued expenses
            
            
            5,576,824
            
            
            4,852,787Income
                taxes payable
            
            
            67,577
            
            
            540,899Deferred
                revenues
            
            
            1,563,323
            
            
            1,359,696Total
                liabilities
            
            
            87,139,300
            
            
            74,057,547**Shareholders'
                equity**Preferred
                stock, no par: 5,000,000 shares authorized;
              none
                issued and outstanding
            
            
            -
            
            
            -Common
                stock, no par: 50,000,000 shares authorized; 9,879,631 and 9,840,531
                shares issued and outstanding, respectively
            
            
            15,346,777
            
            
            15,127,922Accumulated
                other comprehensive income
            
            
            703,434
            
            
            458,949Retained
                earnings
            
            
            38,792,357
            
            
            31,171,023Total
                shareholders’ equity
            
            
            54,842,568
            
            
            46,757,894Total
                liabilities and shareholders' equity
            
            $
            141,981,868
            
            $
            120,815,441




*See
      accompanying notes.*


2


Nicholas
      Financial, Inc. and Subsidiaries


Condensed
      Consolidated Statements of Income


(Unaudited)





**Three
                months ended**
            
            **Nine
                months ended****December
                31,**
            
            **December
                31,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Revenue:Interest
                income on finance receivables
            
            $
            11,065,071
            
            $
            8,484,354
            
            $
            30,372,675
            
            $
            23,495,609Sales
            
            
            42,177
            
            
            56,357
            
            
            133,684
            
            
            155,42211,107,248
            
            
            8,540,711
            
            
            30,506,359
            
            
            23,651,031Expenses:Cost
                of sales
            
            
            15,123
            
            
            17,043
            
            
            37,407
            
            
            45,904Marketing
            
            
            345,277
            
            
            227,009
            
            
            890,126
            
            
            642,697Salaries
                and employee benefits
            
            
            2,916,558
            
            
            2,261,867
            
            
            8,229,528
            
            
            6,495,515Administrative
            
            
            1,061,235
            
            
            941,466
            
            
            3,215,706
            
            
            2,583,715Provision
                for credit losses
            
            
            1,172,108
            
            
            565,758
            
            
            2,432,142
            
            
            1,806,203Depreciation
            
            
            86,342
            
            
            58,147
            
            
            242,601
            
            
            162,973Interest
                expense
            
            
            1,122,358
            
            
            909,468
            
            
            3,161,390
            
            
            2,719,5516,719,001
            
            
            4,980,758
            
            
            18,208,900
            
            
            14,456,558Operating
                income before income taxes
            
            
            4,388,247
            
            
            3,559,953
            
            
            12,297,459
            
            
            9,194,473Income
                tax expense:Current
            
            
            1,771,348
            
            
            1,640,355
            
            
            4,951,761
            
            
            4,532,854Deferred
            
            
            (101,431
            )
            
            (294,049
            )
            
            (275,636
            )
            
            (1,050,092
            )1,669,917
            
            
            1,346,306
            
            
            4,676,125
            
            
            3,482,762Net
                Income
            
            $
            2,718,330
            
            $
            2,213,647
            
            $
            7,621,334
            
            $
            5,711,711Earnings
                per share:Basic
            
            $
            0.28
            
            $
            0.23
            
            $
            0.77
            
            $
            0.61Diluted
            
            $
            0.26
            
            $
            0.21
            
            $
            0.73
            
            $
            0.57Dividends
                declared per share
            
            
            -
            
            
            -
            
            
            -
            
            $
            0.07




*See
        accompanying notes.*
 3


Nicholas
      Financial, Inc. and Subsidiaries


Condensed
      Consolidated Statements of Cash Flows


(Unaudited)





**Nine
                months ended**
              **December
                31,****2005**
            
            **2004****Cash
                flows from operating activities**Net
                income
            
            $
            7,621,334
            
            $
            5,711,711Adjustments
                to reconcile net income to net cash providedby
                operating activities:Depreciation
            
            
            242,601
            
            
            162,973Gain
                on sale of property and equipment
            
            
            (14,366
            )
            
            -Provision
                for credit losses
            
            
            2,432,142
            
            
            1,806,203Deferred
                income taxes
            
            
            (275,636
            )
            
            (1,050,092
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            4,565
            
            
            1,207Prepaid
                expenses, other assets and assets held for resale
            
            
            (425,595
            )
            
            (144,357
            )Accounts
                payable and accrued expenses
            
            
            724,037
            
            
            379,745Income
                taxes payable
            
            
            (473,322
            )
            
            470,277Deferred
                revenues
            
            
            203,627
            
            
            259,057Net
                cash provided by operating activities
            
            
            10,039,387
            
            
            7,596,724**Cash
                flows from investing activities**Purchase
                and origination of finance contracts
            
            
            (75,321,061
            )
            
            (58,189,372
            )Principal
                payments received
            
            
            53,558,398
            
            
            46,630,886Purchase
                of property and equipment
            
            
            (319,937
            )
            
            (243,160
            )Proceeds
                from sale of property and equipment
            
            
            14,366
            
            
            -Net
                cash used in investing activities
            
            
            (22,068,234
            )
            
            (11,801,646
            )**Cash
                flows from financing activities**(Repayment)
                issuance of notes payable - related party
            
            
            (400,000
            )
            
            318,470Net
                proceeds from (repayment of) line of credit
            
            
            13,066,068
            
            
            (5,302,619
            )Payment
                of dividend
            
            
            -
            
            
            (324,915
            )Decrease
                in drafts payable
            
            
            (38,657
            )
            
            (358,797
            )Proceeds
                from exercise of stock options and income tax benefit
              related
                thereto
            
            
            218,855
            
            
            377,652Proceeds
                from the issuance of common stock
            
            
            -
            
            
            10,416,000Payment
                of offering costs
            
            
            -
            
            
            (384,470
            )Net
                cash provided by financing activities
            
            
            12,846,266
            
            
            4,741,321Net
                increase in cash
            
            
            817,419
            
            
            536,399Cash,
                beginning of period
            
            
            853,494
            
            
            957,684Cash,
                end of period
            
            $
            1,670,913
            
            $
            1,494,083




*See
        accompanying notes.*
 4





Nicholas
      Financial, Inc. and Subsidiaries


Notes
      to
      the Condensed Consolidated Financial Statements


(Unaudited)





**1.
      Basis of Presentation**





The
      accompanying condensed consolidated balance sheet as of March 31, 2005, which
      has been derived from audited financial statements, and the accompanying
      unaudited interim condensed consolidated financial statements of Nicholas
      Financial, Inc. (including its subsidiaries, the “Company”) have been prepared
      in accordance with accounting principles generally accepted in the United States
      for interim financial information and with the instructions to Form 10-Q
      pursuant to the Securities and Exchange Act of 1934, as amended in Article
      10 of
      Regulation S-X. Accordingly, they do not include all of the information and
      footnotes required by accounting principles generally accepted in the United
      States for complete financial statements. In the opinion of management, all
      adjustments (consisting of normal recurring accruals) considered necessary
      for a
      fair presentation have been included. Operating results for interim periods
      are
      not necessarily indicative of the results that may be expected for the year
      ending March 31, 2006. For further information, refer to the consolidated
      financial statements and accompanying notes thereto included in the Company's
      Annual Report on Form 10-KSB for the year ended March 31, 2005 as filed with
      the
      Securities and Exchange Commission on June 29, 2005.





On
      May
      12, 2005, the Board of Directors declared a three-for-two stock split, payable
      in the form of a 50% stock dividend on June 17, 2005 to shareholders of record
      on June 3, 2005. All references in the condensed consolidated financial
      statements and accompanying notes to the number of shares outstanding, and
      per
      share amounts of the Company’s common shares have been restated to reflect the
      effect of the stock split for all periods presented.





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States requires management to make
      estimates and assumptions that affect the amounts reported in the consolidated
      financial statements and accompanying notes. Actual results could differ from
      those estimates.




**2.
      Revenue Recognition**





The
      Company is principally a specialized consumer finance company engaged primarily
      in acquiring and servicing retail installment sales Contracts (“Contracts”) for
      purchases of new and used automobiles and light trucks. To a lesser extent,
      the
      Company also makes direct loans and sells consumer-finance related
      products.





Interest
      income on finance receivables is recognized using the interest method. Accrual
      of interest income on finance receivables is suspended when a loan is
      contractually delinquent for 60 days or more or the collateral is repossessed,
      whichever is earlier.





A
      d ealer
      discount represents the difference between the finance receivable, net of
      unearned interest, of a Contract and the amount of money the Company actually
      pays for the Contract. The entire amount of discount is related to credit
      quality and is considered to be part of the credit loss reserve. The Company
      receives a commission for selling add-on services to consumer borrowers and
      amortizes the commission, net of the related costs, over the term of the loan
      using the interest method. The Company’s net fees charged for processing a loan
      are recognized as an adjustment to the yield and are amortized over the life
      of
      the loan using the interest method.





The
      amount of future unearned income is computed as the product of the Contract
      rate, the Contract term, and the Contract amount. The Company aggregates the
      Contracts purchased during a three-month period for each of its branch
      locations. After the analysis of purchase date accounting is complete, any
      uncollectable amounts would be contemplated in the allowance for credit
      losses.





5





Nicholas
      Financial, Inc. and Subsidiaries


Notes
      to
      the Condensed Consolidated Financial Statements


(Unaudited)




**3.
      Earnings Per Share**





Basic
      earnings per share is calculated by dividing the reported net income for the
      period by the weighted average number of shares of common stock outstanding.
      Diluted earnings per share includes the effect of dilutive options. Basic and
      diluted earnings per share have been computed as follows:





**Three
                months ended**
            
            **Nine
                months ended****December
                31,**
            
            **December
                31,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Numerator
                for earnings per share - net income
            
            $
            2,718,330
            
            $
            2,213,647
            
            $
            7,621,334
            
            $
            5,711,711Denominator:Denominator
                for basic earnings per share -
              weighted
                average shares
            
            
            9,875,864
            
            
            9,771,950
            
            
            9,866,288
            
            
            9,340,694Effect
                of dilutive securities:
              Stock
                options
            
            
            585,756
            
            
            622,929
            
            
            604,094
            
            
            603,901Denominator
                for diluted earnings per share
            
            
            10,461,620
            
            
            10,394,879
            
            
            10,470,382
            
            
            9,944,595Earnings
                per share - basic
            
            $
            0.28
            
            $
            0.23
            
            $
            0.77
            
            $
            0.61Earnings
                per share - diluted
            
            $
            0.26
            
            $
            0.21
            
            $
            0.73
            
            $
            0.57





6





Nicholas
      Financial, Inc. and Subsidiaries


Notes
      to
      the Condensed Consolidated Financial Statements


(Unaudited)





**4.
      Finance Receivables**





Finance
      receivables consist of automobile finance installment Contracts and direct
      consumer loans and are detailed as follows:




**December
                31,**
            
            **March
                31,****2005**
            
            **2005**Finance
                receivables, gross Contract
            
            $
            211,198,167
            
            $
            182,386,735Unearned
                interest
            
            
            (55,402,704
            )
            
            (43,432,023
            )Finance
                receivables, net of unearned interest
            
            
            155,795,463
            
            
            138,954,712Dealer
                discounts
            
            
            (14,758,242
            )
            
            (18,598,147
            )Allowance
                for credit losses
            
            
            (7,998,578
            )
            
            (6,648,443
            )Finance
                receivables, net
            
            $
            133,038,643
            
            $
            113,708,122





The
      terms
      of the receivables range from 12 to 72 months and bear a weighted average
      interest rate of 24% for the three and nine months ended December 31,
      2005.





**5.
      Line of Credit**





At
      December 31, 2005 the Company had an $85.0 million line of credit facility
      (the
      Line) expiring on November 30, 2008. The Company may borrow the lesser of
      $85.0 million or amounts based upon formulas principally related to a percentage
      of eligible finance receivables, as defined. See note 9 regarding subsequent
      amendment to the Line. For the three months ended December 31, 2005, $78.0
      million of borrowings under the Line used LIBOR plus 175.0 basis points pricing
      options. The remainder of the borrowings under the Line used the prime rate
      plus
      37.5 basis points pricing option. The prime rate based borrowings are generally
      less than $5.0 million. The Company’s cost of borrowed funds based upon the
      interest rates charged under the Line, related party debt and the effect of
      the
      swaps (see note 7) amounted to 5.85% and 5.90% for the three and nine months
      ended December 31, 2005, respectively, as compared to 5.69% and 5.70% for the
      three and nine-month period
      ended December
      31, 2004 ,
      respectively. Pledged as collateral for this credit facility are all of the
      assets of the Company’s subsidiary, Nicholas Financial, Inc. As of December 31,
      2005, the amount outstanding under the Line was approximately $78.4 million
      and
      the amount available under the Line was approximately $6.6 million. The facility
      requires compliance with certain financial ratios and covenants and satisfaction
      of specified financial tests, including maintenance of asset quality and
      performance tests. Dividends require consent in writing by the agent and
      majority lenders under the facility. As of December 31, 2005, the Company was
      in
      full compliance with all debt covenants.





**6.
      Notes Payable - Related Party**





The
      Company has unsecured notes payable to the President and Chief Executive Officer
      totaling $600,000 and $1,000,000 at December 31, 2005 and March 31, 2005,
      respectively. For the three and nine months ended December 31, 2005 and for
      fiscal year 2005, the notes bore a variable interest rate equal to the average
      cost of borrowed funds for the Company plus 25.0 basis points (6.15% at December
      31, 2005 and 5.94% at March 31, 2005). The interest rate is recalculated every
      three months. The notes are due upon thirty-day demand. The Company incurred
      interest expense on the above notes of approximately $9,400 and $16,500 for
      the
      three months ended December 31, 2005 and 2004, respectively. **** The
      Company incurred interest expense on the above notes of approximately $29,800
      and $45,300 for the nine months ended December 31, 2005 and 2004,
      respectively. ****




7


Nicholas
      Financial, Inc. and Subsidiaries


Notes
      to
      the Condensed Consolidated Financial Statements


(Unaudited)





**7.
      Derivatives and Hedging**





The
      Company is party to interest rate swap agreements which are derivative
      instruments. For derivative instruments that are designated and qualify as
      a
      cash flow hedge (i.e., hedging the exposure to variability in expected future
      cash flows that is attributable to a particular risk, such as interest rate
      risk), the effective portion of the gain or loss on the derivative instrument
      is
      reported as a component of comprehensive income and reclassified into earnings
      in the same period or periods during which the hedged transaction affects
      earnings. The remaining gain or loss on the derivative instrument in excess
      of
      the cumulative change in the present value of the future cash flows of the
      hedged item, if any, is recognized in current earnings during the period of
      change.





At
      December 31, 2005, $60.0 million of the Company’s borrowings were designated as
      hedged items to interest rate swap agreements. Under the swap agreements, the
      Company received an average variable rate of 4.08% and 2.06% for the three
      months ended December 31, 2005 and 2004, respectively. During the same period
      the Company paid an average fixed rate of 3.82% and 3.59%, respectively. Under
      the swap agreements, the Company received an average variable rate of 3.58%
      and
      1.55% for the nine months ended December 31, 2005 and 2004, respectively. During
      the same period the Company paid an average fixed rate of 3.72% and 3.75%,
      respectively. A gain of $1,134,571 related to the fair value of the swaps at
      December 31, 2005 has been recorded in the caption derivatives on the balance
      sheet. Accumulated other comprehensive income at December 31, 2005, in the
      amount of $703,434 represents the after-tax effect of the derivative income.
      Amounts of net income or losses on derivative instruments expected to be
      reclassified from comprehensive income to earnings in the next 12 months are
      not
      expected to be material. The following table summarizes the interest rate swap
      agreements.





Date
                Entered
            Effective
                Date
            Notional
                Amount
            Fixed
                Rate
              Of
                Interest
            Maturity
                DateJanuary
                6, 2003
            April
                2, 2003
            $10,000,000
            3.350%
            April
                2, 2007January
                31, 2003
            August
                1, 2003
            $10,000,000
            3.200%
            August
                2, 2006February
                26, 2003
            May
                17, 2004
            $10,000,000
            3.910%
            May
                19, 2008March
                11, 2004
            October
                5, 2004
            $10,000,000
            3.640%
            October
                5, 2009January
                18, 2005
            July
                2, 2005
            $10,000,000
            4.380%
            July
                2, 2010September
                9, 2005
            September
                13, 2005
            $10,000,000
            4.458%
            September
                2, 2010





The
      Company utilizes the above noted interest rate swaps to manage its interest
      rate
      exposure. The swaps effectively convert a portion of the Company’s floating rate
      debt to a fixed rate, more closely matching the interest rate characteristics
      of
      the Company’s finance receivables. There has historically been no
      ineffectiveness associated with the Company’s hedges.





The
      following table reconciles net income with comprehensive income.





**Three
                months ended**
              **December
                31,**
            
            **Nine
                months ended**
              **December
                31,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Net
                Income
            
            $
            2,718,330
            
            $
            2,213,647
            
            $
            7,621,334
            
            $
            5,711,711Mark
                to market interest rate swaps(net
                of tax)
            
            
            188,393
            
            
            263,808
            
            
            244,485
            
            
            1,026,737Comprehensive
                income
            
            $
            2,906,723
            
            $
            2,477,455
            
            $
            7,865,819
            
            $
            6,738,448





8


Nicholas
      Financial, Inc. and Subsidiaries


Notes
      to
      the Condensed Consolidated Financial Statements


(Unaudited)




**8.
      Stock Options**





The
      Company has an employee stock incentive plans (the SIP) for officers, directors
      and key employees. The Company is authorized to grant options for up to
      1,410,000 common shares under the SIP, of which 265,300 shares were remaining
      available for future grants as of December 31, 2005. Of the 265,300 shares
      remaining available for future grants 250,000 shares are available for directors
      and 15,300 shares are available for employees. Options currently granted by
      the
      Company generally vest over a five-year period.





As
      permitted under Statement of Financial Accounting Standards (SFAS) No. 148,
      "Accounting for Stock-Based Compensation - Transaction and Disclosure", which
      amended SFAS No. 123, "Accounting for Stock-Based Compensation", the Company
      has
      elected to continue to follow the intrinsic value method in accounting for
      its
      stock-based employee compensation arrangements as defined by Accounting
      Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
      Employees", and related interpretations including FASB Interpretation No. 44,
      "Accounting for Certain Transactions Involving Stock Compensation", an
      interpretation of APB No. 25. No stock-based employee compensation cost is
      reflected in operations, as all options granted under those plans have an
      exercise price equal to or above the market value of the underlying common
      stock
      on the date of grant.





The
      fair
      value method uses the Black-Scholes option-pricing model to determine
      compensation expense associated with the Company’s options. The
      following table illustrates the effect on net income and net income per share
      if
      the Company had applied the fair value recognition provisions of SFAS No.123
      to
      stock-based employee compensation:





**Three
                months ended**
            
            **Nine
                months ended****December
                31,**
            
            **December
                31,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Reported
                net income
            
            $
            2,718,330
            
            $
            2,213,647
            
            $
            7,621,334
            
            $
            5,711,711Stock
                based employee compensation cost
              under
                the fair value method, net of tax
            
            
            13,183
            
            
            11,759
            
            
            40,369
            
            
            35,149Pro
                forma net income
            
            $
            2,705,147
            
            $
            2,201,888
            
            $
            7,580,965
            
            $
            5,676,562Reported
                basic earnings per share
            
            $
            0.28
            
            $
            0.23
            
            $
            0.77
            
            $
            0.61Pro
                forma basic earnings per share
            
            $
            0.27
            
            $
            0.23
            
            $
            0.77
            
            $
            0.61Reported
                diluted earnings per share
            
            $
            0.26
            
            $
            0.21
            
            $
            0.73
            
            $
            0.57Pro
                forma diluted earnings per share
            
            $
            0.26
            
            $
            0.21
            
            $
            0.72
            
            $
            0.57





**9.
      Subsequent Events**





On
      February 1, 2006 the Company executed Amendment No. 7 to its Line increasing
      the
      total Line from $85.0 million to $100.0 million. All other terms and conditions
      of Amendment No. 6, dated September 14, 2005 remain in effect.




9





**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF
      OPERATIONS**




**Forward-Looking
      Information**





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





**Critical
      Accounting Policy**





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





**Introduction**





Consolidated
      net income increased to $2.7 million for the three-month period ended December
      31, 2005 as compared to $2.2 million for the three-month period ended December
      31, 2004 .
      Consolidated net income increased to $7.6 million for the nine-month period
      ended December 31, 2005 as compared to $5.7 million for the nine-month period
      ended December
      31, 2004 .
      Earnings were favorably impacted by an increase in the outstanding loan
      portfolio and a reduction in the charge-off rate. The Company’s software
      subsidiary, Nicholas Data Services (NDS), did not contribute significantly
      to
      consolidated operations in the three or nine-month periods ended December 31,
      2005 or 2004.





10


**Portfolio
                Summary**
            
            **Three
                months ended**
              **December
                31,**
            
            **Nine
                months ended**
              **December
                31,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Average
                finance receivables, net of unearned interest (1)
            
            $
            153,011,496
            
            $
            130,157,442
            
            $
            146,526,954
            
            $
            127,149,953Average
                indebtedness (2)
            
            $
            76,791,186
            
            $
            63,908,352
            
            $
            71,499,601
            
            $
            63,564,709Finance
                revenue (3)
            
            $
            11,065,071
            
            $
            8,484,354
            
            $
            30,372,375
            
            $
            23,495,609Interest
                expense
            
            
            1,122,358
            
            
            909,468
            
            
            3,161,390
            
            
            2,719,551Net
                finance revenue
            
            $
            9,942,713
            
            $
            7,574,886
            
            $
            27,210,985
            
            $
            20,776,058Weighted
                average contractual rate (4)
            
            
            23.99
            %
            
            23.80
            %
            
            24.01
            %
            
            24.03
            %Average
                cost of borrowed funds (2)
            
            
            5.85
            %
            
            5.69
            %
            
            5.90
            %
            
            5.70
            %Gross
                portfolio yield (5)
            
            
            28.93
            %
            
            26.07
            %
            
            27.64
            %
            
            24.63
            %Interest
                expense as a percentage of average finance receivables, net of unearned
                interest
            
            
            2.93
            %
            
            2.79
            %
            
            2.88
            %
            
            2.85
            %Provision
                for credit losses as a percentage of average finance receivables,
                net of
                unearned interest
            
            
            3.06
            %
            
            1.74
            %
            
            2.21
            %
            
            1.89
            %Net
                portfolio yield (5)
            
            
            22.94
            %
            
            21.54
            %
            
            22.55
            %
            
            19.89
            %Operating
                expenses as a percentage of average finance receivables, net of unearned
                interest (6)
            
            
            11.41
            %
            
            10.54
            %
            
            11.27
            %
            
            10.18
            %Pre-tax
                yield as a percentage of average finance receivables, net of unearned
                interest (7)
            
            
            11.53
            %
            
            11.00
            %
            
            11.28
            %
            
            9.71
            %Write-off
                to liquidation (8)
            
            
            6.19
            %
            
            7.45
            %
            
            5.92
            %
            
            6.99
            %Net
                charge-off percentage (9)
            
            
            5.47
            %
            
            6.52
            %
            
            5.28
            %
            
            6.03
            %





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





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





(2)
            
            Average
                indebtedness represents the average outstanding borrowings under
                the Line
                and notes payable-related party. Average cost of borrowed funds represents
                interest expense as a percentage of average
                indebtedness.





(3)
            Finance
                revenue does not include revenue generated by NDS. See pages 12 and
                13 for
                details on NDS revenue during the
                period.





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





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





(6)
            
            Operating
                expenses represent total expenses, less interest expense, the provision
                for credit losses and operating costs associated with NDS. See pages
                12
                and 13 for details on NDS operating expenses during the
                period.





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





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





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





11





**Three
      months ended December 31, 2005 compared to three months ended December 31,
      2004**





**Interest
      Income and Loan Portfolio**





Interest
      income on finance receivables, predominately finance charge income, increased
      30% to $11.1 million for the three-month period ended December 31, 2005, from
      $8.5 million for the corresponding period ended December 31, 2004. Average
      finance receivables, net of unearned interest equaled $153.0 million for the
      three-month period ended December 31, 2005, an increase of 18% from $130.2
      million for the corresponding period ended December 31, 2004. The primary reason
      average finance receivables, net of unearned interest increased was the increase
      in the receivable base of several existing branches and the opening of
      additional branch locations. The gross finance receivable balance increased
      23%
      to $211.2 million at December 31, 2005 from $171.2 million at December 31,
      2004.
      The primary reason interest income increased was the increase in the outstanding
      loan portfolio. The gross portfolio yield increased from 26.07% for the
      three-month period ended December 31, 2004 to 28.93% for the three-month period
      ended December 31, 2005. The net portfolio yield increased from 21.54% for
      the
      three-month period ended December 31, 2004 to 22.94% for the corresponding
      period ended December 31, 2005. The primary reason for the increase in the
      net
      portfolio yield was a decrease in charge-offs for the period ended December
      31,
      2005. Reserves
      accreted into income for the three months ended December 31, 2005 were
      approximately $2,091,000 as compared to $1,557,000 for the three months ended
      December 31, 2004. There were no provisions reversed for the three months ended
      December 31, 2005 or December 31, 2004. The primary reasons for the increase
      in
      reserves accreted during the three months ended December 31, 2005 as compared
      to
      the three months ended December 31, 2004 was a decrease in the net charge-off
      percentage from 6.52% to 5.47% and an increase in the size of the
      portfolio.





**Computer
      Software Business**





Sales
      for
      the three-month period ended December 31, 2005 were approximately $42,000 as
      compared to $56,000 for the corresponding period ended December 31, 2004, a
      decrease of 25%. This decrease was primarily due to lower revenue from the
      existing customer base during the period ended December 31, 2005. Cost of sales
      and operating expenses decreased from approximately $77,000 for the three-month
      period ended December 31, 2004 to $61,000 for the corresponding period ended
      December 31, 2005. The primary reason for the decrease was a reduction in
      personnel associated with NDS.





**Operating
      Expenses**





Operating
      expenses, excluding provision for credit losses and interest expense and costs
      associated with NDS, increased to $4.4 million for the three-month period ended
      December 31, 2005 from $3.4 million for the corresponding period ended December
      31, 2004. This increase of 27% was primarily attributable to the additional
      staffing of several existing branches, increased general operating expenses
      and
      the opening of additional branch offices. Operating expenses as a percentage
      of
      finance receivables, net of unearned interest increased from 10.54% for the
      three-month period ended December 31, 2004 to 11.41% for the corresponding
      period ended December 31, 2005.





**Interest
      Expense**





Interest
      expense increased from approximately $909,000 for the three-month period ended
      December 31, 2004 to $1,122,000 for the corresponding period ended December
      31,
      2005. The average indebtedness for the three-month period ended December 31,
      2005 increased to $76.8 million as compared to $63.9 million for the
      corresponding period ended December 31, 2004. The Company’s average cost of
      borrowed funds increased to 5.85% for the three months ended December 31, 2005
      as compared to 5.69% for the corresponding period ended December 31, 2004.




12





**Nine
      months** **ended December 31, 2005 compared to nine months ended December 31,
      2004**





**Interest
      Income and Loan Portfolio**





Interest
      income on finance receivables, predominately finance charge income, increased
      29% to $30.4 million for the nine-month period ended December 31, 2005, from
      $23.5 million for the corresponding period ended December 31, 2004. Average
      finance receivables, net of unearned interest equaled $146.5 million for the
      nine-month period ended December 31, 2005, an increase of 15% from $127.1
      million for the corresponding period ended December 31, 2004. The primary reason
      average finance receivables, net of unearned interest increased was the increase
      in the receivable base of several existing branches and the opening of
      additional branch locations. The gross finance receivable balance increased
      23%
      to $211.2 million at December 31, 2005 from $171.2 million at December 31,
      2004.
      The primary reason interest income increased was the increase in the outstanding
      loan portfolio. The gross portfolio yield increased from 24.63% for the
      nine-month period ended December 31, 2004 to 27.64% for the nine-month period
      ended December 31, 2005. The net portfolio yield increased from 19.89% for
      the
      nine-month period ended December 31, 2004 to 22.55% for the corresponding period
      ended December 31, 2005. The primary reason for the increase in the net
      portfolio yield was a decrease in charge-offs for the period ended December
      31,
      2005. Reserves
      accreted into income for the nine months ended December 31, 2005 were
      approximately $5,651,000 as compared to $3,498,000 for the nine months ended
      December 31, 2004. There were no provisions reversed for the nine months ended
      December 31, 2005 or December 31, 2004. The primary reasons for the increase
      in
      reserves accreted during the nine months ended December 31, 2005 as compared
      to
      the nine months ended December 31, 2004 was a decrease in the net charge-off
      percentage from 6.03% to 5.28% and an increase in the size of the
      portfolio.





**Computer
      Software Business**





Sales
      for
      the nine-month period ended December 31, 2005 were approximately $134,000 as
      compared to $155,000 for the corresponding period ended December 31, 2004,
      a
      decrease of 14%. This decrease was primarily due to lower revenue from the
      existing customer base during the nine-months ended December 31, 2005. Cost
      of
      sales and operating expenses increased from approximately $221,000 for the
      nine-month period ended December 31, 2004 to $231,000 for the corresponding
      period ended December 31, 2005.





**Operating
      Expenses**





Operating
      expenses, excluding provision for credit losses and interest expense and costs
      associated with NDS, increased to $12.4 million for the nine-month period ended
      December 31, 2005 from $9.7 million for the corresponding period ended December
      31, 2004. This increase of 28% was primarily attributable to the additional
      staffing of several existing branches, increased general operating expenses
      and
      the opening of additional branch offices. Operating expenses as a percentage
      of
      finance receivables, net of unearned interest increased from 10.18% for the
      nine-month period ended December 31, 2004 to 11.27% for the corresponding period
      ended December 31, 2005.





**Interest
      Expense**





Interest
      expense increased from approximately $2,720,000 for the nine-month period ended
      December 31, 2004 to $3,161,000 for the corresponding period ended December
      31,
      2005. The average indebtedness for the nine-month period ended December 31,
      2005
      increased to $71.5 million as compared to $63.6 million for the corresponding
      period ended December 31, 2004. The Company’s average cost of borrowed funds
      increased to 5.90% for the nine
      months ended
      December 31, 2005 as compared to 5.70% for the corresponding period ended
      December 31, 2004.





13


**Contract
      Procurement**





The
      Company purchases Contracts in the ten states listed in the table below. The
      Company has been expanding its Contract procurement in Kentucky, Maryland,
      Virginia and Indiana. See “Future Expansion” below. The Contracts purchased by
      the Company are predominately for used vehicles; for the three and nine-month
      periods ended December 31, 2005 and 2004, less than 3% were new. As of December
      31, 2005, the average model year of vehicles collateralizing the portfolio
      was
      2000.





The
      amounts shown in the tables below represent information on finance receivables,
      net of unearned interest of Contracts purchased.


**Three
                months ended**
              **December
                31,**
            
            **Nine
                months ended**
              **December
                31,****State**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004**FL
            
            $
            11,691,315
            
            $
            10,121,741
            
            $
            36,522,349
            
            $
            30,643,243GA
            
            
            2,500,377
            
            
            1,238,711
            
            
            7,252,928
            
            
            5,547,869NC
            
            
            3,069,148
            
            
            2,081,482
            
            
            8,971,810
            
            
            6,577,416SC
            
            
            957,810
            
            
            781,675
            
            
            2,823,183
            
            
            2,847,066OH
            
            
            3,195,775
            
            
            2,064,868
            
            
            9,642,396
            
            
            8,635,938MI
            
            
            727,318
            
            
            412,137
            
            
            1,727,396
            
            
            2,225,223VA
            
            
            1,793,698
            
            
            1,400,228
            
            
            5,463,363
            
            
            4,270,114IN
            
            
            774,614
            
            
            -
            
            
            2,026,819
            
            
            -KY
            
            
            1,162,032
            
            
            234,820
            
            
            2,278,537
            
            
            234,820MD
            
            
            826,508
            
            
            414,908
            
            
            1,477,224
            
            
            414,908Total
            
            $
            26,698,595
            
            $
            18,750,570
            
            $
            78,186,005
            
            $
            61,396,597





**Three
                months ended**
              **December
                31,**
            
            **Nine
                months ended**
              **December
                31,****Contracts**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004**Purchases
            
            $
            26,698,595
            
            $
            18,750,570
            
            $
            78,186,005
            
            $
            61,396,597Weighted
                APR
            
            
            23.86
            %
            
            23.65
            %
            
            23.88
            %
            
            23.90
            %Average
                discount
            
            
            8.90
            %
            
            8.73
            %
            
            8.72
            %
            
            8.72
            %Weighted
                average
              term
                (months)
            
            
            45
            
            
            45
            
            
            45
            
            
            44Average
                loan
            
            $
            8,829
            
            $
            8,504
            
            $
            8,811
            
            $
            8,382Number
                of Contracts
            
            
            3,024
            
            
            2,205
            
            
            8,874
            
            
            7,325





**Loan
      Origination**





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





**Direct
                Loans**
            
            **Three
                months ended**
              **December
                31,**
            
            **Nine
                months ended**
              **December
                31,****Originated**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004**Originations
            
            $
            2,206,382
            
            $
            1,446,259
            
            $
            5,958,249
            
            $
            3,910,700Weighted
                APR
            
            
            25.57
            %
            
            25.80
            %
            
            25.77
            %
            
            26.01
            %Weighted
                average
              term
                (months)
            
            
            28
            
            
            26
            
            
            28
            
            
            26Average
                loan
            
            $
            3,274
            
            $
            3,158
            
            $
            3,319
            
            $
            3,065Number
                of loans
            
            
            674
            
            
            458
            
            
            1,795
            
            
            1,276





14





**Analysis
      of Credit Losses**





Because
      of the nature of the customers under the Company’s Contracts, the Company
      considers the establishment of adequate reserves for credit losses to be
      imperative. The Company segregates its Contracts into static pools for purposes
      of establishing reserves for losses. All Contracts purchased by a branch during
      a fiscal quarter comprise a static pool. The
      Company pools Contracts according to branch location because the branches
      purchase Contracts in different geographic markets . This
      method of pooling by branch and quarter allows the Company to evaluate the
      different markets where the branches operate. The pools also allow the Company
      to evaluate the different levels of customer income, stability, credit history,
      and the types of vehicles purchased in each market. Each
      such
      static pool consists of the Contracts purchased by a Company branch office
      during a fiscal quarter. As of December 31, 2005, the Company had 658 active
      static pools. The average pool upon inception consisted of 72 Contracts with
      aggregate finance receivables, net of unearned interest, of approximately
      $611,000.





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





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





Prior
      to
      the April 1, 2005 in situations where, at the date of purchase, the dealer
      discount was determined to be insufficient to absorb all potential credit losses
      associated with a static pool, a portion of unearned income associated with
      the
      static pool was allocated to the reserve for dealer discounts. For loans
      purchased prior to April 1, 2005 the Company recognized revenue on the basis
      of
      interest expected to be collected, which was the gross contractual interest
      less
      amounts allocated to the reserve for dealer discounts.





Effective
      with loans purchased after March 31, 2005, the Company discontinued the practice
      of allocating a portion of unearned income to the reserve for dealer discounts.
      This change was made to reflect the predominate practice in the industry and
      improve comparability with other companies within the finance industry.
      Effective with loans purchased after March 31, 2005 the Company began
      recognizing interest income based upon the contractual rate of the loan. In
      situations where, at the date of purchase, the discount is determined to be
      insufficient to absorb all potential losses associated with the static pool,
      a
      charge to income is calculated and amortized into provision for credit losses
      over the life of the pool.





The
      change in the practice of allocating a portion of the unearned income to
      reserves for dealer discounts did not have a significant effect on the periodic
      net operating results, but rather resulted in differences in the classification
      of amounts within the statement of income. Both interest income and provisions
      for credit losses were higher for those pools acquired during the nine-month
      period ended December 31, 2005 than those pools acquired prior to such period.
      In addition, while this change has not significantly changed the net finance
      receivables as reported, the components of net finance receivables have changed
      as unearned interest as a percentage of gross Contracts has increased as a
      result of the change and will be followed in subsequent periods by increases
      in
      the allowance for credit losses.





15





Certain
      tabular information and the discussions pertaining to credit losses presented
      herein address the change in the methodology. The table below, which is
      reflective of the change in allocation, presents net finance receivables as
      a
      percentage of gross Contracts as of December 31, 2005 and 2004.








**December
                31, 2005**
            
            **December
                31, 2004****%
                of Gross**
            
            
            
            **%
                of Gross****Amount**
            
            **Contracts**
            
            **Amount**
            
            **Contracts**Finance
                receivables, gross Contract
            
            $
            211,198,167
            
            
            100.00
            
            $
            171,166,964
            
            
            100.00Unearned
                interest
            
            
            (55,402,704
            )
            
            (26.23
            )
            
            (40,310,612
            )
            
            (23.55
            )Finance
                receivables, net of unearned interest
            
            
            155,795,463
            
            
            73.77
            
            
            130,856,352
            
            
            76.45Dealer
                discounts
            
            
            (14,758,242
            )
            
            (6.99
            )
            
            (17,306,489
            )
            
            (10.11
            )Allowance
                for credit losses
            
            
            (7,998,578
            )
            
            (3.79
            )
            
            (6,561,064
            )
            
            (3.83
            )Finance
                receivables, net
            
            $
            133,038,643
            
            
            62.99
            
            $
            106,988,799
            
            
            62.51





Subsequent
      to the purchase, if the reserve for credit losses is determined to be inadequate
      for a static pool which is not fully liquidated, then an additional charge
      to
      income through the provision is used to reestablish adequate reserves. If a
      static pool is fully liquidated and has any remaining reserves, the excess
      discounts are immediately recognized into income and the excess provision is
      immediately reversed during the period. For static pools not fully liquidated
      that are determined to have excess discounts, such excess amounts are accreted
      into income over the remaining life of the static pool. For static pools not
      fully liquidated that are deemed to have excess reserves, such excess amounts
      are reversed against provision for credit losses during the period. Reserves
      accreted into income for the three months ended December 31, 2005 were
      approximately $2,091,000 as compared to $1,557,000 for the three months ended
      December 31, 2004. Reserves accreted into income for the nine-months ended
      December 31, 2005 were approximately $5,651,000 as compared to $3,498,000 for
      the nine-months ended December 31, 2004. There were no provisions reversed
      for
      the three and nine months ended December 31, 2005 or December 31, 2004. The
      primary reasons for the increase in reserves accreted during the nine months
      ended December 31, 2005 as compared to the nine months ended December 31, 2004
      was a decrease in the net charge-off percentage from 6.03% to 5.28% and an
      increase in the size of the portfolio.





The
      Company experienced a lower net charge-off percentage during the nine
      months ended
      December 31, 2005 as compared to the nine
      months ended
      December 31, 2004. This resulted in static pools having reserves in excess
      of
      estimates currently needed to liquidate these pools. The Company is in the
      process of accreting these excess reserves from these more mature static pools
      over their remaining life. Static pools originated during the fiscal year ended
      March 31, 2005 have seen losses lower than their most recent predecessors;
      however, there can be no assurances that this trend will continue.





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





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





16





The
      following table sets forth a reconciliation of the changes in dealer discount
      on
      Contracts.





**Three
                months ended**
            
            **Nine
                months ended****December
                31,**
            
            **December
                31,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Balance
                at beginning of period
            
            $
            16,355,319
            
            $
            17,432,841
            
            $
            18,598,147
            
            $
            15,377,582Discounts
                acquired on new volume
            
            
            2,356,995
            
            
            3,101,373
            
            
            6,741,659
            
            
            10,132,595Losses
                absorbed
            
            
            (2,215,649
            )
            
            (1,976,361
            )
            
            (5,966,904
            )
            
            (5,644,300
            )Recoveries
            
            
            353,071
            
            
            305,387
            
            
            1,036,325
            
            
            938,337Discounts
                accreted
            
            
            (2,091,494
            )
            
            (1,556,751
            )
            
            (5,650,985
            )
            
            (3,497,725
            )Balance
                at end of period
            
            $
            14,758,242
            
            $
            17,306,489
            
            $
            14,758,242
            
            $
            17,306,489Dealer
                discounts as a percent ofgross
                indirect Contracts
            
            
            7.26
            %
            
            10.45
            %
            
            7.26
            %
            
            10.45
            %





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





**Three
                months ended**
            
            **Nine
                months ended****December
                31,**
            
            **December
                31,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Balance
                at beginning of period
            
            $
            6,914,361
            
            $
            6,312,213
            
            $
            6,448,790
            
            $
            5,787,764Current
                period provision
            
            
            1,106,958
            
            
            514,119
            
            
            2,259,590
            
            
            1,680,596Losses
                absorbed
            
            
            (275,901
            )
            
            (467,770
            )
            
            (962,962
            )
            
            (1,109,798
            )Balance
                at end of period
            
            $
            7,745,418
            
            $
            6,358,562
            
            $
            7,745,418
            
            $
            6,358,562Allowance
                as a percent of grossindirect
                Contracts
            
            
            3.81
            %
            
            3.84
            %
            
            3.81
            %
            
            3.84
            %




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





**Three
                months ended**
            
            **Nine
                months ended****December
                31,**
            
            **December
                31,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Balance
                at beginning of period
            
            $
            227,225
            
            $
            180,239
            
            $
            199,653
            
            $
            184,334Current
                period provision
            
            
            53,532
            
            
            41,476
            
            
            142,340
            
            
            94,258Losses
                absorbed
            
            
            (36,685
            )
            
            (24,744
            )
            
            (113,047
            )
            
            (98,939
            )Recoveries
            
            
            9,088
            
            
            5,531
            
            
            24,214
            
            
            22,849Balance
                at end of period
            
            $
            253,160
            
            $
            202,502
            
            $
            253,160
            
            $
            202,502Allowance
                as a percent of grossdirect
                loan receivables
            
            
            3.20
            %
            
            3.63
            %
            
            3.20
            %
            
            3.63
            %





The
      average dealer discount associated with new volume for the three months ended
      December 31, 2005 and 2004 were 8.90% and 8.73%, respectively. The average
      dealer discount associated with new volume for the nine months ended December
      31, 2005 and 2004 were 8.72% and 8.72%, respectively. The Company believes
      the
      average dealer discount may decrease in future pools as the result of
      competition in the markets the Company is currently operating in.




17





The
      provision for credit losses increased from approximately $566,000 for the three
      months ended December 31, 2004 to $1,172,000 for the three months ended December
      31, 2005. The provision for credit losses increased from approximately
      $1,806,000 for the nine months ended December 31, 2004 to $2,432,000 for the
      nine months ended December 31, 2005. The Company’s losses as a percentage of
      liquidation decreased from 7.45% for the three months ended December 31, 2004
      to
      6.19% for the three months ended December 31, 2005. The Company’s losses as a
      percentage of liquidation decreased from 6.99% for the nine months ended
      December 31, 2004 to 5.92% for the nine months ended December 31, 2005. The
      Company anticipates losses as a percentage of liquidation will be in the 5-7%
      range during the remainder of the current fiscal year. The longer term outlook
      for portfolio performance will depend on the overall economic conditions, the
      unemployment rate and the Company’s ability to monitor, manage and implement its
      underwriting philosophy in additional geographic areas as it strives to continue
      its expansion. The Company does not believe there have been any significant
      changes in loan concentrations, terms or quality of Contracts purchased during
      the nine months ended December 31, 2005 that would have contributed to the
      decrease in losses.





Recoveries
      as a percentage of charge-offs were 17.3% and 14.1% for the three months ended
      December 31, 2005 and 2004, respectively. Recoveries as a percentage of
      charge-offs were 17.7% and 16.1% for the nine months ended December 31, 2005
      and
      2004, respectively. The Company believes that as it continues to expand its
      operations, it will become more difficult to implement its loss recovery model
      in geographic areas further away from its Corporate headquarters, and as a
      result, the Company will likely experience declining recovery rates over the
      long term.





Reserves
      accreted into income for the three months ended December 31, 2005 and 2004
      were
      approximately $2,091,000 and $1,557,000, respectively.  Reserves
      accreted into income for the nine months ended December 31, 2005 and 2004 were
      approximately $5,651,000 and $3,498,000, respectively. The amount and timing
      of
      reserves accreted into income is a function of individual static pool
      performance. The Company has seen improvement in the performance of its Contract
      portfolio, more specifically, newer static pools have seen a slight decrease
      in
      the default rate when compared to the preceding year pool performance during
      their same liquidation cycle. The Company attributes this decrease to an
      improvement in overall general economic conditions.





The
      Company believes there is a correlation between the unemployment rate and future
      portfolio performance. The Company does not expect the U.S. unemployment rate
      to
      rise or fall significantly in the foreseeable future. Therefore the Company
      does
      not plan on increasing or decreasing reserves based on the current U.S.
      unemployment rate. The Company believes its percentage of voluntary
      repossessions will stabilize in the current fiscal year, and as a result,
      management believes that the Company’s current reserve levels are adequate for
      the foreseeable future. The number of bankruptcy filings by customers increased
      slightly during the three and nine months ended December 31, 2005 as compared
      to
      the corresponding period last year. However, the Company believes the percentage
      of bankruptcy filings as a percentage of active receivables will stabilize
      in
      the current fiscal year, and as a result, management believes that the Company’s
      current reserve levels are adequate for the foreseeable future.





18





The
      following tables present certain information regarding the delinquency rates
      experienced by the Company with respect to Contracts and under its direct
      consumer loan program:




**At
                December 31, 2005**
            
            **At
                December 31, 2004****Contracts**Gross
                balance outstanding
            
            $
            203,293,741
            
            
            
            
            $
            165,583,890Delinquencies30
                to 59 days
            
            $
            3,438,414
            
            
            1.70
            %
            $
            3,056,372
            
            
            1.85
            %60
                to 89 days
            
            
            1,144,851
            
            
            0.56
            %
            
            706,221
            
            
            0.43
            %90
                + days
            
            
            409,335
            
            
            0.20
            %
            
            327,077
            
            
            0.19
            %Total
                delinquencies
            
            $
            4,992,600
            
            
            2.46
            %
            $
            4,089,670
            
            
            2.47
            %**Direct
                Loans**Gross
                balance outstanding
            
            $
            7,904,426
            
            
            
            
            $
            5,583,074Delinquencies30
                to 59 days
            
            $
            89,224
            
            
            1.13
            %
            $
            61,980
            
            
            1.11
            %60
                to 89 days
            
            
            35,969
            
            
            0.46
            %
            
            16,758
            
            
            0.30
            %90
                + days
            
            
            28,087
            
            
            0.35
            %
            
            27,475
            
            
            0.49
            %Total
                delinquencies
            
            $
            153,280
            
            
            1.94
            %
            $
            106,213
            
            
            1.90
            %





The
      delinquency percentage for Contracts more than thirty days past at December
      31,
      2005 was 2.46% as compared to 2.47% at December 31, 2004. The delinquency
      percentage for direct loans more than thirty days past due at December 31,
      2005
      was 1.94% as compared to 1.90% at December 31, 2004.




The
      Company does not give significant consideration to short-term trends in
      delinquency percentages when evaluating reserve levels. Delinquency percentages
      tend to be very volatile and often are not necessarily an indication of future
      losses. The Company estimates future portfolio performance by considering
      various factors, the most significant of which are described as follows. The
      Company analyzes historical static pool performance for each branch location
      when determining appropriate reserve levels. The Company utilizes internal
      branch audits as an indication of future static pool performance. The Company
      also considers such things as the current unemployment rate in markets the
      Company operates in, the percentage of voluntary repossessions as compared
      to
      prior periods, the percentage of bankruptcy filings as compared to prior periods
      and other leading economic indicators.





**Income
      Taxes**





The
      provision for income taxes increased 24% to approximately $1,670,000 for the
      three months ended December 31, 2005 from $1,346,000 for the three months ended
      December 31, 2004, primarily as a result of higher pre-tax income. The provision
      for income taxes increased 34% to approximately $4,676,000 for the nine months
      ended December 31, 2005 from $3,483,000 for the nine months ended December
      31,
      2004, primarily as a result of higher pre-tax income. The Company's effective
      tax rate increased from 37.82% for the three months ended December 31, 2004
      to
      38.05% for the three months ended December 31, 2005.  The
      Company's effective tax rate increased from 37.88% for the nine months ended
      December 31, 2004 to 38.03% for the nine months ended December 31, 2005.




19


**Liquidity
      and Capital Resources**





The
      Company's cash flows are summarized as follows:




**Nine
                months ended December 31,****2005**
            
            **2004**Cash
                provided by (used in):Operating
                activities -
            
            $
            10,039,387
            
            $
            7,596,724Investing
                activities -(primarily
                purchase of Contracts)
            
            
            (22,068,234
            )
            
            (11,801,646
            )Financing
                activities
            
            
            12,846,266
            
            
            4,741,321Net
                increase in cash
            
            $
            817,419
            
            $
            536,399




The
      Company's primary use of working capital for the nine months ended December
      31,
      2005 was the funding of the purchase of Contracts. The Contracts were financed
      substantially through borrowings under the Company’s $85.0 million Line. The
      Line is secured by all of the assets of the Company’s Nicholas Financial, Inc.
      subsidiary. At December 31, 2005 the Company could borrow
      the lesser of $85.0 million or amounts based upon formulas principally related
      to a percentage of eligible finance receivables, as defined. Borrowings under
      the Line may be under various LIBOR pricing options plus 175.0 basis points
      or
      at the prime rate plus 37.5 basis points. Prime rate
      based borrowings are generally less than $1.0 million. As of December 31, 2005,
      the amount outstanding under the L ine was
      approximately $78.4 million and the amount available under the Line was
      approximately $6.6 million.





On
      February 1, 2006 the Company executed Amendment No. 7 to its Line increasing
      the
      total Line from $85.0 million to $100.0 million. All other terms and conditions
      of Amendment No. 6, dated September 14, 2005 remain in effect.





The
      Company has entered into interest rate swap agreements, each of which
      effectively converts a portion of the Company’s floating-rate debt to a
      fixed-rate, thus reducing the impact of interest rate change on the Company’s
      interest expense. At December 31, 2005, approximately 77% of the Company’s
      borrowings under the Line were subject to interest rate swap agreements. These
      swap agreements have maturities ranging from August 2, 2006 through September
      2,
      2010.





The
      self-liquidating nature of Contracts and other loans enables the Company to
      assume a higher debt-to-equity ratio than in most businesses. The amount of
      debt
      the Company incurs from time to time under these financing mechanisms depends
      on
      the Company’s need for cash and ability to borrow under the terms of the Line.
      The Company believes that borrowings available under the Line as well as cash
      flow from operations will be sufficient to meet its short-term funding
      needs.





20


**Future
      Expansion**





The
      Company currently operates a total of forty-two branch locations in ten states,
      including seventeen in Florida, five in Ohio, five in North Carolina, four
      in
      Georgia, three in Virginia, three in Kentucky, two in South Carolina and one
      in
      each of Michigan, Maryland and Indiana. Each office is budgeted (size of branch,
      number of employees and location) to handle up to 1,000 accounts and up to
      $7.5
      million in outstanding finance receivables, net of unearned interest. To date
      none of our branches has reached this capacity.





The
      Company currently intends to continue its expansion through the purchase of
      additional Contracts and the expansion of its direct consumer loan program.
      In
      order to increase the size of the Company’s portfolio of Contracts, it will be
      necessary for the Company to open additional branch offices and increase the
      size of its Line, either with its current lender or another lender. The Company,
      from time to time, has and will meet with investment bankers and financial
      institutions discussing various strategies to meet the future needs of the
      Company. The Company believes opportunities for growth continue to exist in
      states where it currently operates branches and plans to continue its expansion
      activities in those states. No assurances can be given, however, that the
      Company will be able to continue to expand or, if it does continue to expand,
      that it will be able to do so profitably. The Company is also analyzing other
      markets in states the Company does not currently operate in, however, no
      assurance can be given that any expansion will occur in these new
      markets.





**Recently
      Issued Accounting Standards**





In
      October 2003, the AICPA issued Statement of Position (SOP) No. 03-3 ,
      “Accounting for Loans or Certain Debt Securities Acquired in a
      Transfer.” ** SOP
      No.
      03-3 applies to a loan with evidence of deterioration in credit quality
      subsequent to its origination that is acquired by completion of a transfer
      (as
      defined in SOP No. 03-3), for which it is probable at acquisition of such loan,
      that the acquirer will be unable to collect all contractually required payments
      receivable. The Company’s finance receivables are acquired shortly after
      origination and there is no credit deterioration during the time between
      origination of the finance receivable and the purchase by the Company. As
      a
      result, the Company does not expect any impact on the Company’s consolidated
      financial statements.





In
      December 2004, the FASB issued SFAS No. 123(R), “Accounting for Stock-Based
      Compensation.” SFAS No. 123(R) establishes standards for the accounting for a
      wide range of share-based compensation arrangements including share options,
      restricted share plans, performance-based awards, share appreciation rights,
      and
      employee share purchases plans. SFAS No. 123(R) replaces SFAS No. 123,
“Accounting for Stock-Based Compensation,” and supersedes Accounting Principles
      Board Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R)
      will be applicable for the quarter ending June 30, 2006. Thus, the Company’s
      consolidated financial statements will reflect an expense for (1) all
      share-based compensation arrangements granted after March 31, 2006 and for
      any
      such arrangements modified, cancelled, or repurchased after that date, and
      (2)
      the portion of previous share-based awards for which the requisite service
      has
      not been rendered as of that date, based on the grant-date estimated fair value
      of those awards. Prior to SFAS No. 123(R), only certain pro forma disclosures
      of
      the fair-value method were required and the Company was allowed to continue
      using the intrinsic-value-based model of Opinion 25. The Company does not
      believe the adoption of this statement will have a material impact on the
      Company’s consolidated financial statements.





Other
      recent accounting pronouncements issued by the FASB (including its Emerging
      Issues Task Force), the AICPA, and the SEC did not and are not believed by
      the
      Company to have a material impact on the Company’s present or future
      consolidated financial statements.




21





**Item
      3. Quantitative And Qualitative Disclosures About Market
      Risk**





Note :
      Pursuant to Instruction 1 to Paragraph (c) of Item 305 of Regulation S-K,
      information is not required under Item 305(c) of Regulation S-K until after
      the
      first fiscal year end in which Item 305 is applicable, which for the Company
      will be the fiscal year ending March 31, 2006.





**Item
      4. Controls and Procedures**





Evaluation
      of disclosure controls and procedures .
      In
      accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
      “Exchange Act”), as of the end of the period covered by this Quarterly Report on
      Form 10-Q, the Company’s management evaluated, with the participation of the
      Company’s President and Chief Executive Officer and Senior Vice
      President-Finance and Chief Financial Officer, the effectiveness of the design
      and operation of the Company’s disclosure controls and procedures (as defined in
      Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these
      disclosure controls and procedures, the President and Chief Executive Officer
      and the Senior Vice President-Finance and Chief Financial Officer have concluded
      that the disclosure controls and procedures were effective as of the date of
      such evaluation to ensure that material information relating to the Company,
      including its consolidated subsidiaries, was made known to them by others within
      those entities, particularly during the period in which this Quarterly Report
      on
      Form 10-Q was being prepared.





Changes
      in internal controls .
      There
      was no change in the Company’s internal control over financial reporting that
      occurred during the Company’s last fiscal quarter that has materially affected,
      or is reasonably likely to materially affect, the Company’s internal control
      over financial reporting.




22


**PART
      II - OTHER INFORMATION**





**ITEM
      6. EXHIBITS**




See
      exhibit index following the signature page.





23





**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.





**NICHOLAS
      FINANCIAL, INC.**


(Registrant)


Date:
              February 14, 2006
            
            /s/
              Peter L. VosotasPeter
              L. VosotasChairman
                of the Board, President,
              Chief
                Executive Officer and Director Date:
              February 14, 2006
            
            /s/
              Ralph T. FinkenbrinkRalph
              T. FinkenbrinkSr.
                Vice President -Finance
              Chief
                Financial Officer and
                Director


24





**EXHIBIT
      INDEX**




**Exhibit
                No.**
            **Description**31.1
            Certification
                of President and Chief Executive Officer Pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 200231.2
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200232.1
            Written
                Statement of the Chief Executive Officer Pursuant to 18 U.S.C. §
                135032.2
            Written
                Statement of the Chief Financial Officer Pursuant to 18 U.S.C. §
                1350