##### Table of Contents

---

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



---



FORM 10-Q



(MARK ONE)

|  | 
|- | 
|x | 
|  | 
| ̈ | 



Commission file
number 000-27086



THE THAXTON GROUP, INC.

(Exact name of registrant as specified in its charter)



|SOUTH CAROLINA                                                 |  | 57-0669498                       
|-------------------------------------------------------------- |  | ---------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



1524 PAGELAND
HIGHWAY, LANCASTER, SOUTH CAROLINA 29720

(Address of principal executive offices)



803-285-4337

(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 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes x    No ̈



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



|Class        |  | Outstanding at August 8, 2003
|------------ |  | -----------------------------
|Common Stock |  | 6,867,280                    



---





---

##### Table of Contents

THE THAXTON GROUP, INC.

FORM 10-Q

June 30, 2003



TABLE OF CONTENTS





|Item No. |  |                                                                                                                             |  | Page
|-------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  | PART I Financial Information                                                                                                |  |     
|         |  |                                                                                                                             |  |     
|         |  |                                                                                                                            
|1.       |  | Financial Statements                                                                                                        |  |     
|         |  |                                                                                                                            
|         |  | Consolidated Balance Sheets at June 30, 2003 and December 31, 2002                                                          |  | 2   
|         |  |                                                                                                                            
|         |  | Consolidated Statements of Income for the three months ended June 30, 2003 and 2002                                         |  | 3   
|         |  |                                                                                                                            
|         |  | Consolidated Statements of Income for the six months ended June 30, 2003 and 2002                                           |  | 4   
|         |  |                                                                                                                            
|         |  | Consolidated Statements of Stockholders Equity for the year ended December 31, 2002 and the six months ended June 30, 2003 |  | 5   
|         |  |                                                                                                                            
|         |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002                                       |  | 6   
|         |  |                                                                                                                            
|         |  | Notes to Consolidated Financial Statements                                                                                  |  | 7   
|         |  |                                                                                                                            
|2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                       |  | 12  
|         |  |                                                                                                                            
|3.       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                  |  | 15  
|         |  |                                                                                                                            
|4.       |  | Controls and Procedures                                                                                                     |  | 16  
|         |  |                                                                                                                             |  |     
|         |  | PART II Other Information                                                                                                   |  |     
|         |  |                                                                                                                            
|6.       |  | Exhibits and Reports on Form 8-K                                                                                            |  | 16  



---

##### Table of Contents

PART I

FINANCIAL INFORMATION



Item 1: FINANCIAL STATEMENTS



THE THAXTON GROUP, INC.

Consolidated Balance Sheets

June 30, 2003 & December 31, 2002



|                                                                                                                                        |  | June 30, 2003(Unaudited) |             | December 31,2002
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------- | ----------------
|Assets                                                                                                                                  |  |                          |             |                 
|Cash                                                                                                                                    |  | $                        | 13,670,063  |                 
|Finance receivables, net                                                                                                                |  |                          | 175,787,160 |                 
|Premises and equipment, net                                                                                                             |  |                          | 4,860,866   |                 
|Accounts receivable                                                                                                                     |  |                          | 917,873     |                 
|Accounts receivable from related parties                                                                                                |  |                          | 92,669      |                 
|Repossessed automobiles and properties                                                                                                  |  |                          | 1,183,764   |                 
|Deposit                                                                                                                                 |  |                          | 11,023,497  |                 
|Goodwill and other intangible assets                                                                                                    |  |                          | 31,452,841  |                 
|Deferred tax asset, net                                                                                                                 |  |                          | 3,129,390   |                 
|Other assets                                                                                                                            |  |                          | 6,939,431   |                 
|                                                                                                                                        |  |                          |             |                 
|Total assets                                                                                                                            |  | $                        | 249,057,554 |                 
|                                                                                                                                        |  |                          |             |                 
|                                                                                                                                        |  |                         
|Liabilities and Stockholders Equity                                                                                                    |  |                          |             |                 
|                                                                                                                                        |  |                         
|Liabilities                                                                                                                             |  |                          |             |                 
|Accrued interest payable                                                                                                                |  | $                        | 2,416,082   |                 
|Notes payable                                                                                                                           |  |                          | 225,987,240 |                 
|Accounts payable                                                                                                                        |  |                          | 1,639,449   |                 
|Accounts payable to related parties                                                                                                     |  |                          | 261,064     |                 
|Employee savings plan                                                                                                                   |  |                          | 1,786,604   |                 
|Accrued salaries and bonuses                                                                                                            |  |                          | 1,455,436   |                 
|Other liabilities                                                                                                                       |  |                          | 3,287,684   |                 
|                                                                                                                                        |  |                          |             |                 
|Total liabilities                                                                                                                       |  |                          | 236,833,559 |                 
|                                                                                                                                        |  |                          |             |                 
|                                                                                                                                        |  |                         
|Stockholders Equity                                                                                                                    |  |                          |             |                 
|                                                                                                                                        |  |                         
|Preferred Stock $.01 parvalue:                                                                                                          |  |                          |             |                 
|Series A: 400,000 shares authorized; issued and outstanding 10,440 shares in 2003 and 2002; liquidation value $104,400 in 2003 and
2002 |  |                          | 104         |                 
|Series C: 50,000 shares authorized issued and outstanding in 2003 and 2002; liquidation value $500,000 in 2003 and
2002                 |  |                          | 500         |                 
|Series E: 800,000 shares authorized, issued and outstanding in 2003 and 2002; liquidation value $8,000,000 in 2003 and
2002             |  |                          | 8,000       |                 
|Series F: 100,000 shares authorized; issued and outstanding 20,000 in March 2003 and 2002; liquidation value $200,000 in 2003 and
2002  |  |                          | 200         |                 
|Common stock, $.01 par value, 50,000,000 shares authorized; issued and outstanding 6,867,280 in 2003; 6,868,940 shares in
2002          |  |                          | 68,672      |                 
|Additional paid-in-capital                                                                                                              |  |                          | 8,835,246   |                 
|Retained earnings                                                                                                                       |  |                          | 3,311,273   |                 
|                                                                                                                                        |  |                          |             |                 
|Total stockholders equity                                                                                                              |  |                          | 12,223,995  |                 
|                                                                                                                                        |  |                          |             |                 
|Total liabilities and stockholders equity                                                                                              |  | $                        | 249,057,554 |                 
|                                                                                                                                        |  |                          |             |                 

See accompanying notes to consolidated financial statements.



2



---

##### Table of Contents

THE THAXTON GROUP, INC.

Consolidated Statements of Income

Three Months Ended June 30, 2003 and 2002

(Unaudited)



|                                                      |  | June 30, 2003 |            | June 30, 2002
|----------------------------------------------------- |  | ------------- | ---------- | -------------
|Interest and fee income                               |  | $             | 19,551,465 |              
|Interest expense                                      |  |               | 3,768,607  |              
|                                                      |  |               |            |              
|Net interest income                                   |  |               | 15,782,858 |              
|Provision for credit losses                           |  |               | 5,066,660  |              
|                                                      |  |               |            |              
|Net interest income after provision for credit losses |  |               | 10,716,198 |              
|Other income:                                         |  |               |            |              
|Insurance premiums and commissions, net               |  |               | 4,645,237  |              
|Other income                                          |  |               | 597,645    |              
|                                                      |  |               |            |              
|Total other income                                    |  |               | 5,242,882  |              
|                                                      |  |               |            |              
|Operating expenses:                                   |  |               |            |              
|Compensation and employee benefits                    |  |               | 8,275,912  |              
|Telephone, computers                                  |  |               | 664,535    |              
|Net occupancy                                         |  |               | 1,723,761  |              
|Reinsurance claims expense                            |  |               | 941,446    |              
|Advertising                                           |  |               | 801,258    |              
|Collection expense                                    |  |               | 209,100    |              
|Travel                                                |  |               | 586,788    |              
|Professional fees                                     |  |               | 418,652    |              
|Office expense                                        |  |               | 619,066    |              
|Amortization expense                                  |  |               | 131,048    |              
|Other                                                 |  |               | 1,179,387  |              
|                                                      |  |               |            |              
|Total operating expenses                              |  |               | 15,550,953 |              
|                                                      |  |               |            |              
|Income before income tax expense                      |  |               | 408,127    |              
|Income tax expense                                    |  |               | 153,048    |              
|                                                      |  |               |            |              
|Net income                                            |  |               | 255,079    |              
|Dividends on preferred stock                          |  |               | 189,458    |              
|                                                      |  |               |            |              
|Net income applicable to common shareholders          |  | $             | 65,621     |              
|                                                      |  |               |            |              
|Net income per common sharebasic and diluted         |  | $             | 0.01       |              



See accompanying notes to consolidated
financial statements.



3



---

##### Table of Contents

THE THAXTON GROUP, INC.

Consolidated Statements of Income

Six Months Ended June 30, 2003 and 2002

(Unaudited)



|                                                      |  | June 30, 2003 |            | June 30, 2002
|----------------------------------------------------- |  | ------------- | ---------- | -------------
|Interest and fee income                               |  | $             | 40,746,783 |              
|Interest expense                                      |  |               | 7,473,499  |              
|                                                      |  |               |            |              
|Net interest income                                   |  |               | 33,273,284 |              
|Provision for credit losses                           |  |               | 10,252,886 |              
|                                                      |  |               |            |              
|Net interest income after provision for credit losses |  |               | 23,020,398 |              
|Other income:                                         |  |               |            |              
|Insurance premiums and commissions, net               |  |               | 7,799,982  |              
|Other income                                          |  |               | 2,842,296  |              
|                                                      |  |               |            |              
|Total other income                                    |  |               | 10,642,278 |              
|                                                      |  |               |            |              
|Operating expenses:                                   |  |               |            |              
|Compensation and employee benefits                    |  |               | 17,249,922 |              
|Telephone, computers                                  |  |               | 1,406,887  |              
|Net occupancy                                         |  |               | 3,469,347  |              
|Reinsurance claims expense                            |  |               | 1,261,020  |              
|Advertising                                           |  |               | 1,660,642  |              
|Collection expense                                    |  |               | 371,644    |              
|Travel                                                |  |               | 915,452    |              
|Professional fees                                     |  |               | 763,107    |              
|Office expense                                        |  |               | 1,265,369  |              
|Amortization expense                                  |  |               | 230,635    |              
|Other                                                 |  |               | 2,360,518  |              
|                                                      |  |               |            |              
|Total operating expenses                              |  |               | 30,954,543 |              
|                                                      |  |               |            |              
|Income before income tax expense                      |  |               | 2,708,133  |              
|Income tax expense                                    |  |               | 1,012,556  |              
|                                                      |  |               |            |              
|Net income                                            |  |               | 1,695,577  |              
|Dividends on preferred stock                          |  |               | 335,249    |              
|                                                      |  |               |            |              
|Net income applicable to common shareholders          |  | $             | 1,360,328  |              
|                                                      |  |               |            |              
|Net income per common sharebasic and diluted         |  | $             | 0.20       |              



See accompanying notes to consolidated
financial statements.





4



---

##### Table of Contents

THE THAXTON GROUP, INC.

Consolidated Statements of Stockholders Equity

Year Ended December 31, 2002 and Six Months Ended June 30, 2003

(Unaudited)



|                                                        |  | Common Stock |        |   | Preferred Stock |   | Additional Paid-in Capital |  |   | Retained Earnings |   |  | Total Stockholders Equity |           
|------------------------------------------------------- |  | ------------ | ------ | - | --------------- | - | -------------------------- |  | - | ----------------- | - |  | -------------------------- | ----------
|Balance at December 31, 2001                            |  | $            | 68,493 |   |                 | $ | 8,804                      |  | $ | 8,831,599         |   |  | $                          | (2,624,360
|                                                        |  |              |        |   |                
|Issued 22,500 shares of common stock for compensation   |  |              | 225    |   |                 |   |                           |  |   | 44,775            |   |  |                            |          
|Purchase and retirement of 2,915 shares of common stock |  |              | (29    | ) |                 |   |                           |  |   | (26,205           | ) |  |                            |          
|Dividends paid on preferred stock                       |  |              |       |   |                 |   |                           |  |   |                  |   |  |                            | (558,843  
|Net Income                                              |  |              |       |   |                 |   |                           |  |   |                  |   |  |                            | 5,134,148 
|                                                        |  |              |        |   |                 |   |                            |  |   |                   |   |  |                            |           
|Balance at December 31, 2002                            |  |              | 68,689 |   |                 |   | 8,804                      |  |   | 8,850,169         |   |  |                            | 1,950,945 
|                                                        |  |              |        |   |                
|Purchase and retirement of 1,660 shares of common stock |  |              | (17    | ) |                 |   |                            |  |   | (14,923           | ) |  |                            |           
|Dividends paid on preferred stock                       |  |              |       |   |                 |   |                           |  |   |                  |   |  |                            | (335,249  
|Net income                                              |  |              |       |   |                 |   |                           |  |   |                  |   |  |                            | 1,695,577 
|                                                        |  |              |        |   |                 |   |                            |  |   |                   |   |  |                            |           
|Balance at June 30, 2003                                |  | $            | 68,672 |   |                 | $ | 8,804                      |  | $ | 8,835,246         |   |  | $                          | 3,311,273 
|                                                        |  |              |        |   |                 |   |                            |  |   |                   |   |  |                            |           

See accompanying notes to consolidated financial statements.





5



---

##### Table of Contents

THE THAXTON GROUP, INC.

Consolidated Statements of Cash Flows

Six Months ended June 30, 2003 and 2002



|                                                                                 |  | June 30, 2003 (Unaudited) |            |   | June 30, 2002 (Unaudited) |  
|-------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ------------------------- | -
|Cash flows from operating activities:                                            |  |                           |            |   |                           |  
|Net income                                                                       |  |                           | 1,695,577  |   |                           | $
|Adjustments to reconcile net income to net cash provided by operating activities |  |                           |            |   |                           |  
|Provision for credit losses                                                      |  |                           | 10,252,886 |   |                           |  
|Depreciation and amortization                                                    |  |                           | 1,134,669  |   |                           |  
|Deferred taxes                                                                   |  |                           | (262,610   | ) |                           |  
|Decrease in accounts receivable                                                  |  |                           | 568,968    |   |                           |  
|Increase in other assets                                                         |  |                           | (650,758   | ) |                           |  
|Issuance of common stock as compensation                                         |  |                           |           |   |                           |  
|Decrease in accrued interest payable and other liabilities                       |  |                           | (394,419   | ) |                           |  
|                                                                                 |  |                           |            |   |                           |  
|Net cash used by operating activities                                            |  |                           | 12,344,313 |   |                           |  
|                                                                                 |  |                           |            |   |                           |  
|Cash flows from investing activities:                                            |  |                           |            |   |                           |  
|Net decrease in finance receivables                                              |  |                           | 2,385,848  |   |                           |  
|Net capital expenditures for premises and equipment                              |  |                           | (959,081   | ) |                           |  
|Cash paid for deposit with Voyager                                               |  |                           | (3,103,830 | ) |                           |  
|                                                                                 |  |                           |            |   |                           |  
|Net cash provided by investing activities                                        |  |                           | (1,677,063 | ) |                           |  
|                                                                                 |  |                           |            |   |                           |  
|Cash flows from financing activities:                                            |  |                           |            |   |                           |  
|Notes payable to affiliates                                                      |  |                           | (1,880,833 | ) |                           |  
|Dividends paid                                                                   |  |                           | (335,249   | ) |                           |  
|Net increase/(decrease) in notes payable                                         |  |                           | 640,416    |   |                           |  
|Repurchase of common stock                                                       |  |                           | (14,940    | ) |                           |  
|                                                                                 |  |                           |            |   |                           |  
|Net cash used in financing activities                                            |  |                           | (1,590,606 | ) |                           |  
|                                                                                 |  |                           |            |   |                           |  
|Net increase/(decrease) in cash                                                  |  |                           | 9,076,644  |   |                           |  
|Cash at beginning of period                                                      |  |                           | 4,593,419  |   |                           |  
|                                                                                 |  |                           |            |   |                           |  
|Cash at end of period                                                            |  | $                         | 13,670,063 |   |                           | $
|                                                                                 |  |                           |            |   |                           |  



See accompanying notes to consolidated
financial statements.



6



---

##### Table of Contents

THE THAXTON GROUP, INC.

Notes to Consolidated Financial Statements

June 30, 2003 and December 31, 2002

(Unaudited)



|(1) |  | Summary of Significant Accounting Policies
|--- |  | ------------------------------------------



The Thaxton Group, Inc. (the Company) is incorporated under the laws of the state of South Carolina. The Company operates consumer finance branches in 11
states, primarily under the names of TICO Credit, Southern Finance, and Covington Credit. The Company also operates insurance agency branches in South and North Carolina. The Company is a diversified financial services company that is engaged
primarily in consumer lending and consumer automobile sales financing to borrowers with limited credit histories, low incomes or past credit problems. The Company also offers insurance premium financing to such borrowers. Substantially all of the
Companys premium finance business has been derived from customers of Thaxton RBE (RBE), a related party. The Company provides reinsurance through wholly owned subsidiaries, TICO Reinsurance, Ltd. (TRL), Fitch National
Reinsurance, Ltd., and Soco Reinsurance, Inc. Through a wholly owned subsidiary, Thaxton Commercial Lending, Inc., the Company makes factoring loans and collateralized commercial loans to small and medium sized businesses. All significant
inter-company accounts and transactions have been eliminated in consolidation.



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



Information with respect to June 30, 2003 and 2002, and the periods then ended, have not been audited by the Companys independent
auditors, but in the opinion of management, reflect all adjustments (which include only normal recurring adjustments) necessary for the fair presentation of the operations of the Company. Users of financial information produced for interim periods
are encouraged to refer to the footnotes contained in the Companys Annual Report on Form 10-K when reviewing interim financial statements. The results of operations for the six months and quarter ended June 30, 2003 are not necessarily
indicative of results to be expected for the entire fiscal year.



|(2) |  | Finance Receivables
|--- |  | -------------------



Finance receivables consisted of the following at June 30, 2003 and 2002 and December 31, 2002 and 2001:



|                                           |  | June 30, 2003 |             |   | December 31,2002 |   |             | June 30, 2002 |  |   | December 31,2001 |  
|------------------------------------------ |  | ------------- | ----------- | - | ---------------- | - | ----------- | ------------- |  | - | ---------------- | -
|Direct loans                               |  | $             | 192,730,820 |   |                  | $ | 208,353,717 |               |  | $ | 185,416,695      |  
|Automobile sales contracts                 |  |               | 22,422,739  |   |                  |   | 23,436,046  |               |  |   | 21,389,986       |  
|Mortgage loans                             |  |               | 11,715,876  |   |                  |   | 13,519,222  |               |  |   | 14,046,312       |  
|Premium finance contracts                  |  |               | 4,509,290   |   |                  |   | 4,025,950   |               |  |   | 4,782,630        |  
|Commercial loans                           |  |               | 1,534,384   |   |                  |   | 1,806,263   |               |  |   | 2,103,608        |  
|                                           |  |               |             |   |                  |   |             |               |  |   |                  |  
|Total finance receivables                  |  |               | 232,913,109 |   |                  |   | 251,141,198 |               |  |   | 227,739,231      |  
|                                           |  |               |             |  
|Unearned interest                          |  |               | (33,067,313 | ) |                  |   | (39,906,714 | )             |  |   | (34,341,640      | )
|Unearned insurance premiums, net           |  |               | (1,622,788  | ) |                  |   | (1,535,772  | )             |  |   | (1,092,331       | )
|Insurance loss reserve                     |  |               | (9,105,382  | ) |                  |   | (8,109,076  | )             |  |   | (9,207,565       | )
|Dealer holdback and bulk purchase discount |  |               | (1,674,182  | ) |                  |   | (1,710,542  | )             |  |   | (2,250,005       | )
|Allowance for credit losses                |  |               | (14,171,947 | ) |                  |   | (13,963,909 | )             |  |   | (11,139,966      | )
|Deferred loan cost, net                    |  |               | 2,515,663   |   |                  |   | 2,402,641   |               |  |   | 2,512,053        |  
|                                           |  |               |             |   |                  |   |             |               |  |   |                  |  
|Finance receivables, net                   |  | $             | 175,787,160 |   |                  | $ | 188,317,826 |               |  | $ | 172,219,777      |  
|                                           |  |               |             |   |                  |   |             |               |  |   |                  |  



7



---

##### Table of Contents

Consumer loans include bulk purchases of receivables, auto dealer receivables under holdback arrangements, and small
consumer loan receivables. With bulk purchase arrangements, the Company typically purchases a group of receivables from an auto dealer or other retailer at a discount to par based on managements review and assessment of the portfolio to be
purchased. This discount amount is then maintained in an unearned income account to which losses on these loans are charged. To the extent that losses from a bulk purchase exceed the purchase discount, the allowance for credit losses will be
charged. To the extent losses experienced are less than the purchase discount, the remaining discount is accreted into income. With holdback arrangements, an automobile dealer or other retailer will assign receivables to us on a loan-by-loan basis,
typically at par. We will withhold a certain percentage of the proceeds, generally 5% to 10%, as a dealer reserve to be used to cover any losses which occur on these loans. The agreements are structured such that all or a portion of these holdback
amounts can be reclaimed by the dealer based on the performance of the receivables. To the extent that losses from these holdback receivables exceed the total remaining holdback amount for a particular dealer, the allowance for credit losses will be
charged.



At June 30, 2003, there were no significant concentrations of
receivables in any type of property or to one borrower. These receivables are pledged as collateral for a line of credit agreement (see note 5).



Changes in the allowance for credit losses for the six months ended June 30, 2003 and 2002, and the years ended December 31, 2002 and 2001, are as follows:



|                            |  | June 30, 2003 |             |   | December 31,2002 |   |             | June 30, 2002 |  |   | December 31,2001 |  
|--------------------------- |  | ------------- | ----------- | - | ---------------- | - | ----------- | ------------- |  | - | ---------------- | -
|Beginning balance           |  | $             | 13,963,909  |   |                  | $ | 12,012,169  |               |  | $ | 12,012,169       |  
|Provision for credit losses |  |               | 10,252,886  |   |                  |   | 21,285,161  |               |  |   | 8,371,672        |  
|Charge-offs                 |  |               | (10,984,599 | ) |                  |   | (21,140,964 | )             |  |   | (10,197,365      | )
|Recoveries                  |  |               | 939,751     |   |                  |   | 1,807,543   |               |  |   | 953,490          |  
|                            |  |               |             |   |                  |   |             |               |  |   |                  |  
|Net charge-offs             |  |               | (10,044,848 | ) |                  |   | (19,333,421 | )             |  |   | (9,243,875       | )
|                            |  |               |             |   |                  |   |             |               |  |   |                  |  
|Ending balance              |  | $             | 14,171,947  |   |                  | $ | 13,963,909  |               |  | $ | 11,139,966       |  
|                            |  |               |             |   |                  |   |             |               |  |   |                  |  



The Companys loan portfolio
primarily consists of short term loans, the majority of which are originated or renewed during the current year. Accordingly, the Company estimates that the fair value of the finance receivables is not materially different from carrying value.



|(3) |  | Premises and Equipment
|--- |  | ----------------------



A summary of premises and equipment at June 30, 2003 and December 31, 2002 follows:



|                              |  | June 30, 2003 |            | December 31, 2002
|----------------------------- |  | ------------- | ---------- | -----------------
|Leasehold improvements        |  | $             | 2,450,976  |                  
|Furniture and fixtures        |  |               | 3,094,310  |                  
|Equipment and automobiles     |  |               | 8,602,832  |                  
|                              |  |               |            |                  
|Total cost                    |  |               | 14,148,118 |                  
|Less accumulated depreciation |  |               | 9,287,252  |                  
|                              |  |               |            |                  
|Net premises and equipment    |  | $             | 4,860,866  |                  
|                              |  |               |            |                  



Depreciation expense was approximately
$452,000 and $904,000 for the three months and six months ended June 30, 2003, respectively, and $1,802,000 for the year ended December 31, 2002.



8



---

##### Table of Contents

|(4) |  | Intangible Assets
|--- |  | -----------------



Intangible assets consisted of the following at June 30, 2003 and December 31, 2002:



|                                  |  | June 30, 2003 |            | December 31, 2002
|--------------------------------- |  | ------------- | ---------- | -----------------
|Goodwill (not amortized)          |  | $             | 34,582,895 |                  
|Insurance expirations (6.3 years) |  |               | 2,030,601  |                  
|                                  |  |               |            |                  
|Total cost                        |  |               | 36,613,496 |                  
|Less accumulated amortization     |  |               | 5,160,655  |                  
|                                  |  |               |            |                  
|Intangible assets, net            |  | $             | 31,452,841 |                  
|                                  |  |               |            |                  



The Company acquired the majority of
the intangibles in connection with the acquisition of FirstPlus Consumer Finance. Amortization expense was approximately $131,000 and $231,000 for the 2ndquarter and six months ended June 30, 2003 and $631,000 for the year ended December 31, 2002.



|(5) |  | Notes Payable and Notes Payable to Affiliates
|--- |  | ---------------------------------------------



At June 30, 2003, and December 31, 2002, notes payable consisted of the following:



|                                                                                                           |  | June 30, 2003 |             | December 31,2002
|---------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | ----------------
|Senior Notes Payable/Lines of Credit                                                                       |  | $             | 109,611,920 |                 
|Subordinated Notes payable to individuals with varying maturity dates andrates ranging from 51⁄4% to 12%     |  |               | 114,107,582 |                 
|Other subordinated notes payable to companies with varying maturity datesand rates ranging from 41⁄4% to
10% |  |               | 2,267,738   |                 
|                                                                                                           |  |               |             |                 
|Total notes payable                                                                                        |  | $             | 225,987,240 |                 
|                                                                                                           |  |               |             |                 



The Company finances its operations
through cash flow from operations, borrowings under its credit facility with FINOVA Capital Corporation (FINOVA) and the sale to public investors of its subordinated notes.



On February 24, 2003, the Company amended its credit facility with FINOVA. The Company now only has a revolving credit line with FINOVA
which it uses to finance receivables. Advances under the revolving credit line accrue interest at the prime rate plus 1%, or 5.00% as of June 30, 2003. The prime rate is the prime rate published by Citibank, N.A., or other money center bank as
FINOVA may select. The interest rates are adjusted monthly to reflect fluctuations in this designated prime rate. Accrued interest on borrowings is payable monthly.



As of June 30, 2003 the Company had $109.6 million outstanding under the revolving credit. Principal is due in full on the maturity date and
can be prepaid without penalty. Maximum borrowings under the credit facility as of June 30, 2003 are limited to the lesser of $130.5 million, or 85% of eligible consumer finance receivables, as defined by the agreement. As of June 30, 2003 the
Company had an additional $20.9 million available to borrow against existing collateral. The Companys maximum borrowing amount decreases on a quarterly basis and will decrease $9 million during the remainder of 2003, $18 million in 2004, $18
million in 2005 and $9 million in 2006. The credit facility matures in 2006 and requires the Company to comply with restrictive covenants, including financial condition covenants such as minimums for net income, net worth, and net cash flows, as
well as a leverage ratio limit. As of June 30, 2003, the Company met all such requirements.



Substantially all of the Companys and its subsidiaries assets secure the credit facility. James D. Thaxton guarantees the repayment obligations under the credit facility.



The Company also funds its liquidity needs through the sale of subordinated notes. In
February 1998, the Company began offering subordinated notes in several states by registering $50 million of subordinated notes with the Securities and Exchange Commission (SEC). In May 2001, the Company registered an additional $75
million offering of subordinated notes with the SEC. In December



9



---

##### Table of Contents

2002, the Company registered an additional $125 million offering of subordinated notes. The notes are sold primarily to
individual investors. The maturity terms range from daily (demand) notes to sixty-month notes. Interest rates vary based on the principal amounts and maturity dates of the notes. Notes are currently being offered with interest rates ranging from
6.50% to 8.0%. The notes are unsecured and issued under an indenture which we entered into with The Bank of New York, as trustee, in February 1998. The terms of the indenture do not require the Company to comply with any financial covenants nor do
they impose any material restrictions on the operations of our business.



As of
June 30, 2003, the Company had $112.0 million of these registered subordinated notes outstanding and $2.1 million notes registered in predecessor state registrations. To date, the Company has used the proceeds from the sale of these notes to reduce,
on a temporary basis, the amount of its revolving credit facility with FINOVA. The Company intends to continue this note program by seeking to register additional offerings of subordinated notes with the SEC. The sale of subordinated notes is an
important aspect of the financing of its business. It enables the Company to reduce its overall borrowing costs, particularly during periods of increasing interest rates. In addition, it allows the Company to hedge the interest rate risk inherent in
its variable rate credit facility, and to diversify its sources of borrowed funds.



|(6) |  | Earnings Per Share Information
|--- |  | ------------------------------



The following is a summary of the earnings per share calculation for the six months and three months ended June 30, 2003 and 2002:



|                                                              |  | Six Months Ended |           | Three Months Ended
|------------------------------------------------------------- |  | ---------------- | --------- | ------------------
|                                                              |  | June 30,2003     |           | June 30, 2002     
|BASIC & DILUTED                                               |  |                  |           |                   
|Net income from continuing operations                         |  |                  | 1,695,577 |                   
|Less: Dividends on preferred stock                            |  |                  | 335,249   |                   
|                                                              |  |                  |           |                   
|Net income applicable to common shareholders (numerator)      |  |                  | 1,360,328 |                   
|                                                              |  |                  |           |                   
|Average common shares outstanding (denominator)               |  |                  | 6,867,724 |                   
|                                                              |  |                  |           |                   
|Income per share from continuing operationsbasic and diluted |  | $                | 0.20      |                   
|                                                              |  |                  |           |                   



The earnings per share calculation
does not include 10,440 shares of Preferred Series A and 50,000 shares of Preferred Series C stock, which are convertible to common shares, because the effect is anti-dilutive.



10



---

##### Table of Contents

|(7) |  | Business Divisions
|--- |  | ------------------



The Company has two primary divisions. The consumer finance division provides financing to consumers with limited credit histories, low incomes or past credit problems.
Revenues in the consumer finance business are derived primarily from interest and fees on loans, and the sale of credit related insurance products to its customers. The Companys insurance operations consist of selling, on an agency basis,
various lines of automobile, property and casualty, life and accident and health insurance. Revenue is generated through fees paid by the insurance for which business is placed.



The following table summarizes certain financial information concerning the Companys reportable operating divisions for the six months
ended June 30, 2003 and 2002, and the year ended December 31, 2002:



|June 30, 2003 Income Statement
Data     |  | ConsumerFinance |             | Insurance |   |           | Other |  |   | Total    
|--------------------------------------- |  | --------------- | ----------- | --------- | - | --------- | ----- |  | - | ---------
|                                        |  |                 |             |          
|Total Revenue                           |  | $               | 48,644,767  |           | $ | 2,463,544 |       |  | $ | 280,750  
|Net Interest Income                     |  |                 | 33,066,031  |           |   | (3,949    | )     |  |   | 211,202  
|Provision for credit losses             |  |                 | 10,224,334  |           |   | 23,355    |       |  |   | 5,197    
|Noninterest income                      |  |                 | 8,178,734   |           |   | 2,463,544 |       |  |   |         
|Insurance premiums and commissions, net |  |                 | 5,585,264   |           |   | 2,214,718 |       |  |   |         
|Noninterest expenses                    |  |                 | 28,490,281  |           |   | 2,323,324 |       |  |   | 140,938  
|Depreciation and amortization           |  |                 | 995,225     |           |   | 132,017   |       |  |   | 7,427    
|Net income                              |  |                 | 1,715,407   |           |   | (46,434   | )     |  |   | 26,604   
|                                        |  |                 |             |          
|Balance Sheet Data                      |  |                 |             |           |   |           |       |  |   |          
|Total assets                            |  |                 | 246,139,611 |           |   | 1,622,084 |       |  |   | 1,295,859
|Loans, net                              |  |                 | 174,452,776 |           |   |          |       |  |   | 1,334,384
|Allowance for credit losses             |  |                 | 13,971,947  |           |   |          |       |  |   | 200,000  
|Intangibles                             |  |                 | 30,187,305  |           |   | 1,265,536 |       |  |   |         
|                                        |  |                 |             |           |   |           |       |  |   |          
|December 31, 2002 Income
Statement Data |  | ConsumerFinance |             | Insurance |   |           | Other |  |   | Total    
|                                        |  |                 |             |          
|Total revenue                           |  | $               | 98,360,774  |           | $ | 4,176,452 |       |  | $ | 647,512  
|Net interest income                     |  |                 | 65,237,007  |           |   |          |       |  |   | 491,272  
|Provision for credit losses             |  |                 | 20,988,326  |           |   | 152,820   |       |  |   | 144,015  
|Noninterest income                      |  |                 | 20,276,467  |           |   | 4,176,452 |       |  |   |         
|Insurance premiums and commissions, net |  |                 | 15,460,245  |           |   | 3,935,906 |       |  |   |         
|Noninterest expenses                    |  |                 | 53,911,091  |           |   | 4,163,069 |       |  |   | 350,514  
|Depreciation and amortization           |  |                 | 2,151,616   |           |   | 260,778   |       |  |   | 20,579   
|Net income (loss)                       |  |                 | 5,529,167   |           |   | (333,469  | )     |  |   | (61,550  
|                                        |  |                 |             |          
|Balance Sheet Data                      |  |                 |             |           |   |           |       |  |   |          
|Total assets                            |  |                 | 246,140,243 |           |   | 2,306,479 |       |  |   | 1,573,000
|Loans, net                              |  |                 | 186,711,563 |           |   |          |       |  |   | 1,606,263
|Allowance for credit losses             |  |                 | 13,763,909  |           |   |          |       |  |   | 200,000  
|Intangibles                             |  |                 | 30,234,418  |           |   | 1,323,989 |       |  |   |         



11



---

##### Table of Contents

|June 30, 2002 Income Statement
Data     |  | ConsumerFinance |             | Insurance |   |           | Other |  | Total
|--------------------------------------- |  | --------------- | ----------- | --------- | - | --------- | ----- |  | -----
|                                        |  |                 |             |          
|Total Revenue                           |  | $               | 46,473,658  |           | $ | 2,035,965 |       |  | $    
|Net Interest Income                     |  |                 | 31,182,623  |           |   |          |       |  |      
|Provision for credit losses             |  |                 | 8,336,472   |           |   |          |       |  |      
|Noninterest income                      |  |                 | 8,217,606   |           |   | 2,035,965 |       |  |      
|Insurance premiums and commissions, net |  |                 | 5,899,464   |           |   | 1,932,448 |       |  |      
|Noninterest expenses                    |  |                 | 25,627,051  |           |   | 2,208,452 |       |  |      
|Depreciation and amortization           |  |                 | 967,413     |           |   | 129,635   |       |  |      
|Net income                              |  |                 | 3,564,130   |           |   | (113,841  | )     |  |      
|                                        |  |                 |             |          
|Balance Sheet Data                      |  |                 |             |           |   |           |       |  |      
|Total assets                            |  |                 | 229,774,606 |           |   | 2,279,914 |       |  |      
|Loans, net                              |  |                 | 170,329,576 |           |   |          |       |  |      
|Allowance for credit losses             |  |                 | 10,926,559  |           |   |          |       |  |      
|Intangibles                             |  |                 | 30,994,776  |           |   | 1,382,443 |       |  |      



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



GENERAL



The Thaxton Group, Inc. and its subsidiaries (the Company) were organized in July 1978 as C.L. Thaxton & Sons, Inc., and from that date until 1991 have been primarily engaged in making and servicing
direct consumer loans (Direct Loans) and insurance premium finance loans (Premium Finance Contracts) to persons with limited credit histories, low incomes, or past credit problems (Non-Prime Borrowers). In 1991,
we made a strategic decision to diversify our portfolio by actively seeking to finance credit-impaired borrowers purchases of used automobiles. Since 1991, we have evolved into a diversified consumer financial services company engaged in the
origination and servicing of Direct loans made to credit-impaired borrowers; used automobile lending through the purchase and servicing of used automobile sales contracts (Automobile Sales Contracts); insurance premium finance lending
through the purchase of insurance premium finance contracts (Premium Finance Contracts); and selling insurance products on an agency basis.



The Company operates its finance businesses in South Carolina, North Carolina, Georgia, Tennessee, Virginia, Kentucky, Alabama, Mississippi, Ohio, Oklahoma and Texas. It
operates its insurance businesses in South Carolina and North Carolina.



THE
INDUSTRY



The segment of the consumer finance industry in which the
Company operates, which is commonly called the non-prime credit market, provides financing to non-prime borrowers. These consumers generally do not have access to the same variety of sources of consumer credit as borrowers with long
credit histories, no defaults, and stable employment, because they do not meet the stringent objective credit standards imposed by most traditional lenders. The Company, like its competitors in the same segment of the consumer finance industry,
generally charges interest to Non-prime Borrowers at the maximum rate permitted by law or, in states such as South Carolina where there are no legal maximum rates, at competitive rates commensurate with the increased default risk and the higher cost
of servicing and administering a portfolio of loans to such borrowers. By contrast, commercial banks, captive financing subsidiaries of automobile manufacturers, and other traditional sources of consumer credit to prime borrowers typically impose
more stringent credit requirements and generally charge lower interest rates.



The premium finance industry for personal lines of insurance is also highly fragmented. Insurance companies that engage in direct writing of insurance policies generally provide financing to their customers who need the service. Numerous
small independent finance companies such as the Company are engaged in providing premium financing for personal lines of insurance purchased by Non-prime Borrowers through independent insurance agents. Because the rates they charge are highly
regulated, these companies compete primarily on the basis of efficiency in providing the financing and servicing the loans. A significant number of independent insurance agents provide premium financing to their customers either directly or through
affiliated entities. As banks are allowed to enter the insurance business, they also are increasingly engaging in the premium finance business.



12



---

##### Table of Contents

Independent insurance agencies represent numerous insurance carriers, and typically place a customers business with
the carrier whose combination of features and price best match the customers needs. In comparison, direct agents represent only one carrier. Most carriers find use of independent agencies to be a more cost effective method of selling their
products than using a direct agent force. Competition in the independent insurance agency business is intense. There are numerous other independent agencies in most of the markets where the Companys insurance offices are located. There are
also direct agents for various insurers operating in some of these markets. The Company competes primarily on the basis of service and convenience. The Company attempts to develop and maintain long-term customer relationships through low employee
turnover and responsive service representatives and offers a broad range of insurance products underwritten by reputable insurance companies.



NET INTEREST MARGIN



The following table presents important data relating to our net interest margin for the quarters and six months ended June 30, 2003 & 2002.



|                                    |  | Three Months Ended |             |   | Six Months Ended |  
|----------------------------------- |  | ------------------ | ----------- | - | ---------------- | -
|                                    |  | June 30, 2003      |             |   | June 30, 2002    |  
|Average Net Finance Receivables (1) |  | $                  | 197,848,547 |   |                  | $
|Average notes payable(1)            |  |                    | 223,408,397 |   |                  |  
|Interest and fee income             |  |                    | 19,551,465  |   |                  |  
|Interest expense                    |  |                    | 3,768,607   |   |                  |  
|                                    |  |                    |             |   |                  |  
|Net interest income                 |  |                    | 15,782,858  |   |                  |  
|Average interest rate earned        |  |                    | 39.53       | % |                  |  
|Average interest rate paid          |  |                    | 6.75        | % |                  |  
|                                    |  |                    |             |   |                  |  
|Net interest rate spread            |  |                    | 32.78       | % |                  |  
|Net interest margin(2)              |  |                    | 31.91       | % |                  |  



| | (1) |  | Averages are computed using month-end balances during the year presented and are only net of unearned interest and dealer reserves.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Net interest margin represents net interest income divided by average Net Finance Receivables.
| | --- |  | ----------------------------------------------------------------------------------------------



Results of Operations for the Three Months Ended June 30, 2003 and 2002



Our gross finance receivables increased $2,313,000 to $232,913,000 for the three months
ended June 30, 2003. Comparatively in 2002 for the same period our gross receivables increased $4,507,000 to $227,739,000. The difference in growth is due to direct loan growth is not occurring at the same rate due to overall economic conditions.



Due to the year over year increase in our receivables our interest income
increased to $19,551,000 for the current three month period from $19,116,000 for the same three month period last year. Our interest expense remained flat at $3,769,000 compared to $3,622,000 for the prior year three month period.



As to be expected with overall business growth our operating expenses also increased to
$15,551,000 in 2003 from $14,172,000 in 2002 or 9.7%. This increase is related to normal growth of our business and an increase in salaries and bonuses as well as reinsurance claims expense from the prior year.



Due to the increases in expenses for the three month period our current year pretax income
decreased to $408,000 in 2003 compared to $1,313,000 in 2002.



Results of
Operations for the Six Months Ended June 30, 2003 and 2002



For the six
months ended since December 31, 2002 we incurred the normal liquidation of the loans we added during the fourth quarter of 2002. Our gross finance receivables declined by $18,228,000 to $232,913,000 since December 31, 2002. Comparatively in 2002 for
the same period our gross receivables declined $12,794,000 to $227,739,000. This is due to our normal business activity of our customers paying off the loans they took out during the 4thquarter of the previous year. The greater decline in 2003 is attributed to a change in the mix of our portfolio to shorter term direct loans and less growth
during the 2ndquarter of 2003.



Due to the year over year increase in our receivables our interest income increased to $40,747,000 for the current six month period compared
to $38,366,000 for the same period last year. Our interest expense remained flat this year at $7,473,000 compared to $7,313,000 in the prior period.



13



---

##### Table of Contents

Our overall business growth caused our operating expenses to increase to $30,955,000 for the six months in 2003 from
$28,187,000 in 2002 or 9.8%. This increase is related to normal growth of our business and an increase in salaries and bonuses as well as reinsurance claims expense from the prior year.



Due to the increases in expenses and an increase of approximately $1.8 million in our provision for loan losses, our pretax net income for
the six months ended declined to $2,708,000 in 2003 compared to pretax income of $5,242,000 in 2002.



CREDIT LOSS EXPERIENCE



The following
table sets forth our allowance for credit losses and credit loss experience at or over the periods presented.



|                                                                                                              |  | June 30, 2003 |             |   | December 31,2002 |   |             | June 30, 2002 |  |   | December 31,2001 |  
|------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ---------------- | - | ----------- | ------------- |  | - | ---------------- | -
|Net finance receivables (1)                                                                                   |  | $             | 188,424,723 |   |                  | $ | 200,475,472 |               |  | $ | 174,618,146      |  
|Allowance for credit losses                                                                                   |  |               | 14,171,947  |   |                  |   | 13,963,909  |               |  |   | 11,139,966       |  
|Allowance for credit losses as a percentage of net finance receivables (1)                                    |  |               | 7.52        | % |                  |   | 6.97        | %             |  |   | 6.38             | %
|Dealer reserves and discounts on bulk purchases                                                               |  |               | 1,674,182   |   |                  |   | 1,710,542   |               |  |   | 2,250,005        |  
|Dealer reserves and discounts on bulk purchases as percentage of Net Automobile Sales Contracts at period end |  |               | 9.00        | % |                  |   | 9.03        | %             |  |   | 14.25            | %
|Allowance for credit losses and dealer reserves and discount on bulk purchases                                |  |               | 15,846,129  |   |                  |   | 15,674,451  |               |  |   | 13,389,971       |  
|Allowance for credit losses and dealer reserves as a percentage of finance receivables                        |  |               | 8.41        | % |                  |   | 7.82        | %             |  |   | 7.67             | %
|Provision for credit losses                                                                                   |  |               | 10,252,886  |   |                  |   | 21,285,161  |               |  |   | 8,371,672        |  
|Charge-offs (net of recoveries)                                                                               |  |               | 10,984,599  |   |                  |   | 19,333,421  |               |  |   | 9,243,875        |  
|Charge-offs (net of recoveries) as a percentage of average net finance receivables (2)                        |  |               | 11.66       | % |                  |   | 9.64        | %             |  |   | 10.58            | %



|(1) |  | Net finance receivable balances are presented net of unearned finance charges, net unearned insurance premiums, dealer holdbacks and bulk purchase discounts, deferred loan costs,
and exclude commercial finance receivables.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | June 30, 2003 and 2002 are annualized for comparison purpose.
|--- |  | -------------------------------------------------------------



The following table sets forth certain information concerning our finance receivables at the end of the periods indicated:



|                                                                                                                          |  | June 30, |             |   | December 31, |  
|------------------------------------------------------------------------------------------------------------------------- |  | -------- | ----------- | - | ------------ | -
|                                                                                                                          |  | 2003     |             |   | 2002         |  
|Direct Finance Receivables Contractually past due 90 days or more                                                         |  | $        | 11,132,161  |   |              | $
|Direct Finance Receivables outstanding                                                                                    |  |          | 162,353,198 |   |              |  
|Direct Finance Receivables Contractually past due 90 days or more as a percentage of Direct Finance receivables           |  |          | 6.86        | % |              |  
|                                                                                                                          |  |         
|Real Estate Secured Receivables Contractually past due 90 days or more                                                    |  |          | 751,520     |   |              |  
|Real Estate Secured Receivables outstanding                                                                               |  |          | 11,032,311  |   |              |  
|Real Estate Secured Receivables Contractually past due 90 days or more as a percentage of Real Estate Secured
receivables |  |          | 6.81        | % |              |  
|                                                                                                                          |  |         
|Vehicle Secured Receivables Contractually past due 60 days or more                                                        |  |          | 739,645     |   |              |  
|Vehicle Secured Receivables outstanding                                                                                   |  |          | 18,602,003  |   |              |  
|Vehicle Secured Receivables Contractually past due 60 days or more as a percentage of Vehicle Secured receivables         |  |          | 3.98        | % |              |  
|                                                                                                                          |  |         
|Premium finance contracts contractually past due 60 days or more                                                          |  |          | 199,468     |   |              |  
|Premium finance contracts outstanding                                                                                     |  |          | 4,373,372   |   |              |  
|Premium finance contracts contractually past due 60 days or more as a percentage of premium finance contracts             |  |          | 4.56        | % |              |  



Finance receivable balances are
presented net of unearned finance charges.



14



---

##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES



We finance our operations through cash flow from operations, borrowings under our credit facility with FINOVA Capital Corporation
(FINOVA) and the sale to public investors of our subordinated notes.



On February 24, 2003, we amended our credit facility with FINOVA. We now only have a revolving credit line with FINOVA which we use to finance receivables. Advances under the revolving credit line accrue interest at prime rate plus 1%, or
5.00% as of June 30, 2003. The prime rate is the prime rate published by Citibank, N.A., or other money center bank as FINOVA may select. The interest rates are adjusted monthly to reflect fluctuations in this designated prime rate. Accrued interest
on borrowings is payable monthly.



As of June 30, 2003 we had $109.6 million
outstanding under the revolving credit line. Principal is due in full on the maturity date and can be prepaid without penalty. Maximum borrowings under the credit facility as of June 30, 2003 are limited to the lesser of $130.5 million, or 85% of
eligible consumer finance receivables, as defined by the agreement. As of June 30, 2003 we had an additional $20.9 million available to borrow against existing collateral. Our maximum borrowing amount decreases on a quarterly basis and will decrease
$9 million during the remainder of 2003, $18 million in 2004, $18 million in 2005 and $9 million in 2006. The credit facility matures in 2006 and requires us to comply with restrictive covenants, including financial condition covenants such as
minimums for net income, net worth, and net cash flows, as well as a leverage ratio limit. As of June 30, 2003, we met all such requirements.



Substantially all of our and our subsidiaries assets secure the credit facility. James D. Thaxton guarantees the repayment obligations under the credit facility.



We also fund our liquidity needs through the sale of subordinated notes. In
February 1998, we began offering subordinated notes in several states by registering $50 million of subordinated notes with the Securities and Exchange Commission (SEC). In May 2001, we registered an additional $75 million offering of
subordinated notes with the SEC. In December 2002, we registered an additional $125 million offering of subordinated notes. The notes are sold primarily to individual investors. The maturity terms range from daily (demand) notes to sixty-month
notes. Interest rates vary based on the principal amounts and maturity dates of the notes. Notes are currently being offered with interest rates ranging from 6.50% to 8.0%. The notes are unsecured and issued under an indenture which we entered into
with The Bank of New York, as trustee, in February 1998. The terms of the indenture do not require us to comply with any financial covenants nor do they impose any material restrictions on the operations of our business.



As of June 30, 2003, we had $112.0 million of these registered subordinated notes outstanding
and $2.1 million notes registered in predecessor state registrations. To date, we have used the proceeds from the sale of these notes to reduce, on a temporary basis, the amount of our revolving credit facility with FINOVA. We intend to continue
this note program by seeking to register additional offerings of subordinated notes with the SEC. The sale of subordinated notes is an important aspect of the financing of our business. It enables us to reduce our overall borrowing costs,
particularly during periods of increasing interest rates. In addition, it allows us to hedge the interest rate risk inherent in our variable rate credit facility, and to diversify our sources of borrowed funds.



We plan to continue to reduce borrowings under our senior credit facility and replace those
borrowings with increasing levels of subordinated notes. We anticipate that our cash inflow from operations, borrowings under our senior credit facility, and the proceeds from the sale of subordinated notes will be more than adequate to meet our
cash outflows to fund anticipated growth in our finance receivables, operating expenses, repayment of indebtedness, and planned capital expenditures for the year ending December 31, 2003. We estimate our cash outflow to be approximately $25 million
for 2003.



ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Our outstanding debt under the revolving credit line was $109.6 million at June 30, 2003. Interest on borrowings under these facilities is based on the prime rate. Because our profitability depends on our net interest
margin, changes in the prime rate will affect on our profitability. Increases in the prime rate would adversely affect our profitability. Based on the outstanding balance at June 30, 2003, a change of 1% in the prime interest rate would cause a
change in interest expense of approximately $1.1 million on an annual basis.



Our outstanding receivables are not affected by external interest rate changes because we usually charges rates typically fixed at the maximum rate allowable by law or, in states where there are no legal maximum rates, at competitive rates
commensurate with the increased default risk and the higher cost of servicing and administering a portfolio of loans to credit impaired borrowers. This causes the interest rate risk on our outstanding receivables to be minimal.



Interest rates being charged by competitors, even those outside our markets, also influence
the interest rates we are able to charge customers. A decrease in the interest rates being charged by others in the market could impact our ability to attract new customers and/or retain the customers we currently serve. Similarly, new market
entrants and the resulting increased competition for customers in our market could adversely affect our profitability.



15



---

##### Table of Contents

Additionally, changes in the maximum interest rate allowable by law would affect our profitability. A decrease in the
maximum rate would cause the interest rates we are able to charge to be commensurately decreased and, as a result, our interest rate margin would be reduced. A legally imposed maximum interest rate adopted by a state where we operate that previously
did not have a limit could also impair our profitability because our interest rates may be reduced to fall within the legal limit.



ITEM 4: CONTROLS AND PROCEDURES



Our management,
under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date
of this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that the design and operation of our disclosure controls and procedures are effective. There were no
significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date the evaluation was completed.



PART II

OTHER INFORMATION



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------



| | 31.1 |  | Certification of James D. Thaxton pursuant to Section 302 of the Sarbanes-Oxley Act
| | ---- |  | -----------------------------------------------------------------------------------



| | 31.2 |  | Certification of Allan F. Ross pursuant to Section 302 of the Sarbanes-Oxley Act
| | ---- |  | --------------------------------------------------------------------------------



| | 32.1 |  | Certification of James D. Thaxton pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley act of 2002
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------



| | 32.2 |  | Certification of Allan F. Ross pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley act of 2002
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------



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.



THE THAXTON GROUP, INC.

(Registrant)



|Date: August 11, 2003 |  | By:  /s/ JAMES D. THAXTONJames D. Thaxton President and Chief Executive
Officer                      
|--------------------- |  | -----------------------------------------------------------------------------------------------------
|                      |  |                                                                                                      
|Date: August 11, 2003 |  | By:  /s/ ALLAN F. ROSSAllan F. Ross Vice President, Treasurer, Secretary,
and Chief Financial Officer
|                      |  |                                                                                                      
|                      |  |                                                                                                      
|                      |  |                                                                                                      





16