UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

———————_______________

FORM 10-Q

Portfolio Recovery Associates, Inc.
———————

(888) 772-7326
(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 ___       Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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

PORTFOLIO RECOVERY ASSOCIATES, INC.

INDEX

2

PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
March 31, 2003 and December 31, 2001 and September 30, 2002
(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

3

PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OPERATIONS
For the Three and Nine Months Ended September 30, 2001March 31, 2003 and 2002
(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

4

PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the NineThree Months Ended September 30, 2001March 31, 2003 and 2002
(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

5

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.     Organization and Business:
Portfolio Recovery Associates, Inc. was formed in August 2002. On November 8, 2002, Portfolio Recovery Associates, Inc. completed its initial public offering (“IPO”) of common stock. As a result, all of the membership units and warrants of Portfolio Recovery Associates, LLC (“PRA”) were exchanged on a one to one basis for warrants and shares of a single class of common stock of Portfolio Recovery Associates, Inc. Portfolio Recovery Associates, Inc.(“PRA Inc”). PRA II, LLC, a special purpose borrowing entity (“PRA II”), was dissolved immediately prior to the IPO. PRA Inc now owns all outstanding membership units of Portfolio Recovery Associates, LLCPRA and PRA Receivables Management, LLC (d/b/a Anchor Receivables Management) (“Anchor”). Portfolio Recovery Associates, LLCPRA owns all of the membership units of PRA III, LLC, a special purpose borrowing entity (“PRA III”), PRA Funding, LLC, whose name was changed from PRA AG Funding, a special purpose borrowing entity,LLC in February 2003 (“PRA Funding”), and PRA Holding I, LLC, an entity established to hold real property. Another subsidiary, property (“PRA II, was dissolved immediately prior to the IPO. Portfolio Recovery Associates, LLC,Holding I”). PRA Inc, a Delaware limited liability company (“PRA”),corporation and its subsidiaries (collectively, the “Company”) purchase, collect, purchases, collects and managemanages portfolios of defaulted consumer receivables. The defaulted consumer receivables PRAthe Company collects are in substantially all cases either purchased from the credit originator or are collected on behalf of clients on a commission fee basis. This is primarily accomplished by maintaining a staff of highly skilled collectors whose purpose is to contact the customers and arrange payment of the debt. Secondarily, PRA has contracted with independent attorneys to allow the Company to undertake legal action to satisfy the outstanding debt.

The consolidated financial statements of the Company include the accounts of PRA, PRA II, PRA AG Funding, PRA Holding I, Anchor and PRAIII.PRA III.

The accompanying unaudited financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairlyfor a fair statement of the Company’s financial position as of DecemberMarch 31, 2001 and September 30, 2002,2003, its results of operations for the three and nine-monthmonth periods ended September 30, 2001March 31, 2003 and 2002, and its cash flows for the nine-monththree-month periods ended September 30, 2001March 31, 2003 and 2002, respectively. The results of operations of the Company for the three and nine-monththree-month periods ended September 30, 2001March 31, 2003 and 2002 may not be indicative of future results. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Registration StatementAnnual Report on Form S-110-K, as amended, and effective as of November 6,filed for the year ended December 31, 2002.

2.     Finance Receivables:
The Company accounts for its investment in finance receivables using the interest method under the guidance of Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans.” Static pools of relatively homogenous accounts are established. Once a static pool is established, the receivable accounts in the pool are not changed. Each static pool is recorded at cost, and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Income on finance receivables is accrued monthly based on each static pool’s effective interest rate. This interest rate is estimated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models. Monthly cash flows greater than the interest accrual will reduce the carrying value of the static pool. Likewise, monthly cash flows that are less than the monthly accrual will accrete the carrying balance. Each pool is reviewed monthly and compared to the Company’s models to ensure complete amortization of the carrying balance by the end of each pool’s life.

In the event that cash collections would be inadequate to amortize the carrying balance, an impairment charge would be taken with a corresponding write-off of the receivable balance. Accordingly, we do not maintain an allowance for credit losses.

The agreements to purchase the aforementioned receivables include general representations and warranties from the sellers covering account holder death or bankruptcy, and accounts settled or disputed prior to sale. The representation and warranty period permitting the return of these accounts from the Company to the seller is typically 90 to 180 days.

6

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Changes in finance receivables for the year ended December 31, 2001 and the ninethree months ended September 30,March 31, 2003 and 2002 were as follows:

At the time of acquisition, the life of each pool is generally set at between 60 and 72 months based upon the proprietary models of the Company. As of September 30, 2002March 31, 2003 the Company has $55,132,522$74,418,221 in finance receivables included in the Statement of Financial Position. Based upon current projections, cash collections applied to principal will be as follows for the twelve months in the periods ending:

7

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

3. Revolving Lines of Credit:

On September 18, 2001, PRA III arranged with a commercial lender to provide financing under a revolving line of credit of up to $40 million. The initial draw of $20agreement was amended on December 18, 2002 to reduce the available credit to $25 million, was utilized to facilitatecausing a reduction in the purchase of all finance receivable portfolios from PRAborrowing spread and PRA II. PRA then used those funds to terminate an existingincrease in the unused line fee. This line of credit agreement. An additional $5 millionis collateralized by all receivables, collections on receivables and assets of PRA III. The agreement expires September 15, 2005. Interest is variable based on LIBOR. No amount was drawn in the initial funding to purchase additional portfolios from third parties in the normal course of business.outstanding at March 31, 2003 and December 31, 2002. Restrictive covenants under this agreement include:

	•		restrictions on monthly borrowings in excess of $4 million per month and quarterly borrowings in excess of $10 million;
	•		a maximum leverage ratio, defined as total liabilities less subordinated debt divided by tangible net worth plus subordinated debt, of not greater than 4 to 1 and quarterly net income of at least $0.01, calculated on a consolidated basis;
	•		a restriction on distributions in excess of 75% of ourthe Company’s net income for any year;
	•		compliance with certain special purpose vehicle and corporate separateness covenants; and
	•		restrictions on change of control.

As of September 30, 2002 the Company is in compliance with all of the covenants of this agreement. Upon consummation of the reorganization discussed in Note 10, a waiver would have been required in order to remain in compliance with the terms of the agreement. Instead of obtaining a waiver, the indebtedness outstanding under this facility was paid off on November 14, 2002 with proceeds obtained from the Company’s IPO.

The Company has reached an agreement in principle with its lender to modify the terms of the loan agreement in keeping with the Company’s reduced borrowing needs following the IPO. Modifications include a reduction in the facility size from $40 million to $25 million, a $75,000 modification fee, a reduction in the borrowing spread, a reduction in certain monthly fees, and an increase in the facility’s non-use fee when the amount outstanding is less than $10 million.

On December 30, 1999, the Company entered into a $12.5 million credit agreement with AG PRA 1999 Funding Co., (“AG 1999”), that expired on June 30, 2002. AG 1999 is owned by affiliates of Angelo, Gordon & Co., the Company’s majority stockholder, and certain members of PRA management. Terms of the credit agreement included the possibility of AG 1999 earning contingent interest. Over the term of the agreement, the Company borrowed $6.6 million. In December 2001, the Company repaid all outstanding loans under this agreement and incurred an expense of $300,000 to extinguish the contingent interest provision. The Company incurred interest expense related to the agreement of $358,836 during the nine months ended September 30, 2001. In addition, in accordance with the agreement the management committee of PRA granted AG 1999 warrants to purchase 125,000 membership units of PRA which were immediately exercisable for $3.60 per unit. The agreement discussed above was entered into after arms’ length negotiations between the related party and the Company.

87

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

As of March 31, 2003 the Company is in compliance with all of the covenants of this agreement.

In addition, PRA AG Funding LLC maintains a $2.5 million revolving line of credit with RBC Centura Bank which extends through July 2003. The line of credit bears variable interest at a spread overbased on LIBOR. The terms of this agreement require that PRAthe Company maintain a current ratio of 1.6:1.0 or greater, the current ratio being defined to include finance receivables as a current asset and to include the credit facility outstanding balance in place as of September 30, 2002March 31, 2003 as a current liability. The agreement further requires that PRAthe Company maintain a debt to tangible net worth ratio of 1.5:1.0 or less and a minimum balance sheet cash position at month end of $2 million. Distributions are limited under the terms of the facility to 75% of net income. PRAAs of March 31, 2003, the Company is in full compliance with these covenants. This $2.5 million facility had no amounts outstanding as of September 30,March 31, 2003 or December 31, 2002.

4.     Property and Equipment:
Property and equipment, at cost, consist of the following as of the dates indicated::

5.     Hedging Activity:

During 2001, the Company entered into an interest rate swap for the purpose of managing exposure to fluctuations in interest rates related to variable rate financing. The interest rate swap effectively fixed the interest rate on $10 million of the Company’s outstanding debt. The swap required payment or receipt of the difference between a fixed rate of 5.33% and a variable rate of interest based on 1-month LIBOR. The unrealized gains and losses associated with the change in market value of the interest rate swap are recognized as other comprehensive income. This swap transaction, which was to expire in May 2004, was paid in full and terminated in September 2002.

The only expensesExpenses incurred related to the swap agreement were interest expenses of $51,981$0 and $792,047$85,845 for the ninethree months ending September 30, 2001March 31, 2003 and 2002, respectively. The interest paid in 2002 represents monthly interest plus the final extinguishment amount of $541,762. The net interest payments are a component of “Interest Expense” on the income statement and a reduction of net income in the cash flow statement.

6.     Long-Term Debt:

In July 2000, the Company purchased a building in Hutchinson, Kansas. The building was financed with a commercial loan for $550,000 with a variable interest rate based on LIBOR. This commercial loan is collateralized by the real estate in Kansas. Interest rates varied between 6.09%3.35% and 9.26%3.79% in the first ninethree months of 20012003 and 4.08%3.83% and 4.47%4.37% in the first ninethree months of 2002. Monthly principal payments on the loan are $4,583 for an amortized term of 10 years. A balloon payment of $275,000 is due July 21, 2005, which results in a five-year principal payout. The loan matures July 21, 2005.

8

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

On February 9, 2001, the Company purchased a generator for its Norfolk location. The generator was financed with a commercial loan for $107,000 with a fixed rate of 7.9%. This commercial loan is collateralized by the generator. Monthly payments on the loan are $2,170 and the loan matures on February 1, 2006.

9

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

On February 20, 2002, the Company completed the construction of a satellite parking lot at its Norfolk location. The parking lot was financed with a commercial loan for $500,000 with a fixed rate of 6.47%. The loan is collateralized by the parking lot. The loan required only interest payments during the first six months. Beginning October 1, 2002, monthly payments on the loan are $9,797 and the loan matures on September 1, 2007.

Annual payments including interest on all loans outstanding as of September 30, 2002March 31, 2003 are as follows:

Under each of the commercial loans discussed above, the Company is subject to certain covenants, the most restrictive of which include minimum net worth requirements and the maintenance of certain financial ratios. As of March 31, 2003 and December 31, 2001 and September 30, 2002, the Company was in compliance with all such debt covenants.

7.     Members’Stockholders’ Equity:

As a result of ourthe IPO on November 8, 2002, the Company issued 3,470,000 shares of common stock at a public offering price of $13.00 per share, resulting in net proceeds to us of $12.09 per share. In addition, another 1,015,000 shares were sold by a non-employee stockholder, PRA Investments, LLC, which did not result in any additional proceeds being received by the Company. Immediately following the IPO, the Company had 13,470,000 shares outstanding, not including any shares issued for reserved options or warrants. The IPO resulted in all outstanding units of Portfolio Recovery Associates, LLC,PRA, and all outstanding warrants to acquire units of Portfolio Recovery Associates, LLCPRA, being exchanged for shares and options in Portfolio Recovery Associates,PRA Inc. on a one to one basis.

Prior to the IPO, on November 8, 2002, there were two classes of members in PRA: operating members and capital members. On April 6, 1999, PRA amended and restated its limited liability company operating agreement (the “Agreement”), to authorize the issuance of 20,000,000 membership units. From December 31, 1999 until the IPO, 10,000,000 membership units were outstanding of which the capital members owned 8,797,000 (87.97%) membership units of the business, while the operating members owned the remaining 1,203,000 (12.03%) membership units. Allocations and distributions of profits and losses were based on the aforementioned percentages.

In accordance with the Agreement, the PRA management committee was authorized to issue warrants to partners, employees or vendors to purchase membership units. Generally, warrants granted had a term between 5 and 7 years and vest within 3 years. Warrants have been issued at or above the fair market value on the date of grant. Warrants vest and expire according to terms established at the grant date.

10The following summarizes all warrant and option related transactions from December 31, 1999 through March 31, 2003:

9

The following summarizes all warrant related transactions from January 1, 1999 through September 30, 2002:

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

						Weighted
						Average
		Warrants				Exercise
		Outstanding				Price
January 1, 1999			—			$	—
Granted			2,325,000				4.17
Exercised			—				—
Cancelled			—				—
December 31, 1999			2,325,000				4.17
Granted			65,000				4.20
Exercised			—				—
Cancelled			(230,000	)			4.20
December 31, 2000			2,160,000				4.17
Granted			155,000				4.20
Exercised			—				—
Cancelled			(120,000	)			4.20
December 31, 2001			2,195,000				4.17
Granted			50,000				10.00
Exercised			—				—
Cancelled			(10,000	)			4.20
September 30, 2002			2,235,000			$	4.30

At September 30, 2002,March 31, 2003, the Company had 2,961,850 warrants and options outstanding. The total outstanding was comprised of 2,155,000 warrants and 806,850 options. At March 31, 2003, 2,105,000 warrants were exercisable warrantsand none of the 806,850 options outstanding of 2,066,667.were exercisable. All but 205,000225,000 warrants and options were issued to employees and operating members of PRA.the Company. Of the 205,000225,000 warrants and options issued to non-employees, 125,000 warrants were issued to AG 1999 (see Note 3)an affiliate of Angelo, Gordon & Company, the Company’s majority stockholder, and 80,000 warrants were issued and vested to SMR Research Corporation, a vendor of the Company in connection with a business agreement to utilize certain software. Allsoftware, and 20,000 options to the Board of the warrants vest in 3 years except forDirectors. Of the 80,000 warrants granted to SMR Research Corporation in 1999, of which 20,000 vested immediately and 60,000 were vested in the following year and theyear. The 125,000 warrants granted to AG 1999 in 1999 which vested immediately. During the ninethree months ended September 30,March 31, 2003 and 2002, 50,000no warrants or options were granted which vest 15,000 in one year, 10,000 in each ofissued. Of the 3 subsequent years and 5,000 based on performance which is expected to occur in the first year. The majority ofwarrants outstanding warrants will vest at the IPO, however,50,000 have not vested.

The following information is as of March 31, 2003:

At March 31, 2003, the total number ofCompany has one stock-based employee compensation plan. Prior to November 8, 2002, the Company accounted for warrants that will not vest is 125,000; 75,000 of which were granted in 2001 and 50,000 of which were granted in 2002. For the warrants that accelerate due to the IPO discussed in Note 10, a pro forma expense of $15,000 will be incurred in fiscal 2002, instead of 2003 and 2004 which would have been prescribedissued under the normal vesting schedule in accordance with Accounting Principles Boardrecognition and measurement provisions of APB Opinion No. 25, “AccountingAccounting for Stock Issued to Employees” (“APB 25”). These accelerated warrants will be treated under APB 25 as they were granted under that accounting principle. All warrantsEmployees, and stock options issued in 2002 and later will be accounted for under SFAS No. 123, “Accounting for Stock Based Compensation”, (“SFAS 123”).related Interpretations. No stock-based employee compensation

The warrants issued to AG 1999 and SMR Research Corporation would be convertible into capital member units and all other warrants would be convertible into operating member units.

1110

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The following informationcost is as of September 30, 2002:

Prior to November 8,reflected in pro forma net income for the three months ended March 31, 2002. Effective January 1, 2002, the Company applied APB 25 in accountingadopted the fair value recognition provisions of FASB Statement No. 123 (“SFAS 123”), Accounting for stock basedStock-Based Compensation, prospectively to all employee compensation arrangements whereby no compensationawards granted, modified, or settled after January 1, 2002. Awards under the company’s plan vest over a five year period. Therefore, the cost related to stock options is deductedstock-based employee compensation included in determiningthe determination of net income for warrants granted at or above2002 is less than that which would have been recognized if the fair value to warrants issued prior to the IPO. In connection with the IPO, the Company adopted SFAS 123, and it will bebased method had been applied prospectively to all granted warrantsawards since the original effective date of SFAS 123. The following table illustrates the effect on net income and stock options. This accounting standard must be adopted as ofearnings per share if the beginning of the Company’s fiscal year, which is January 1.fair value based method had been applied to all outstanding and unvested awards in each period.

Had compensation cost for warrants granted under the Agreement been determined pursuant to SFAS 123, the Company’s net income would have decreased. Using a fair-value (minimum value calculation), the following assumptions were used:

The fair value model utilizes the risk-free interest rate at grant with an expected exercise date sometime in the future generally assuming an exercise date in the first half of 2005. In addition, warrant valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Prior to ourthe IPO, the Company’s warrants had characteristics significantly different from those of traded warrants, and changes in the subjective input assumptions can materially affect the fair value estimate. Based upon the above assumptions, the weighted average fair value of employee warrants granted during the nine monthsyears ended September 30,December 31, 2002, 2001 and 20022000 was $1.24, $0.35, and $1.24,$0.21, respectively.

For purposes of pro forma disclosures, the estimated fair value of the warrants is amortized over the warrants’ vesting period. Had the Company’s warrants been accounted for under SFAS 123, net income would have been reduced to the following pro forma amounts for the nine months ended September 30, 2001 and 2002:

Net income:			2001				2002
As reported		$	4,337,899			$	13,103,419
Pro forma		$	4,329,542			$	13,090,151

1211

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Effective December 30, 1999, PRA’s management committee issued warrants to acquire 125,000 membership units to an affiliate of Angelo, Gordon & Co. (see Note 3). The warrants immediately vested and are exercisable at $3.60 per unit. The warrants are exercisable in whole or in part and expire March 31, 2005. As these warrants are not issued as compensation to an employee or operating member of the Company, an expense of $15,362$0 and $10,241$4,267 was incurred and recognized during the ninethree months ended September 30, 2001March 31, 2003 and 2002, respectively. The value of the warrants was calculated using the fair value approach as designated by SFAS 123, which utilizes a comparison of the discounted value of the underlying units discounted using a risk-free interest rate at the date of grant.

Effective August 18, 1999, PRA’s management committee issued warrants to acquire 200,000 membership units to SMR Research Corporation. The warrants were to vest over a 60 month period and are exercisable at $4.20 per unit. The warrants vested as to 80,000 membership units and the remaining 120,000 membership units were cancelled upon the termination of an agreement between the Company and SMR Research Corporation. The value of the warrants was calculated using the intrinsic method and no expense was recognized on these warrants. The fair value approach was then applied, as designated by SFAS 123, which utilizes a comparison of the discounted value of the underlying units discounted using a risk-free interest rate at the date of grant, these warrants were shown to have a negative present value and as such no expense has been recorded.

8. Operating Member Agreement:
These operating member agreements will be terminated effective All warrants have been exercised and none are outstanding as of the date of the IPOMarch 31, 2003.

8.     Commitments and replaced with employment agreements as discussed in Note 9. Prior to the IPO, the operating member agreement detailed each operating member’s contribution to the Company. It also sets forth criteria necessary to maintain the Company’s status as a limited liability company. Additionally, it describes a special discount, which will be applied if an operating member leaves the Company within two years of the commencement date. At September 30, 2002 there were six operating members, two of whom were designated as operating managers.Contingencies:

9. Contingencies and Commitments:
Employment Agreements:
The Company has eight employment agreements with each of its operating members,executive and senior management group, the terms of which expire on DecemberMarch 31, 20022004 or December 31, 2004.2005. Such agreements provide for base salary payments as well as bonuses which are based on the attainment of specific management goals. RemainingEstimated remaining compensation under these agreements is approximately $1,753,501.$3,077,263. The agreements also contain confidentiality and non-compete provisions. Replacement employment agreements are in the process of being finalized.

Leases:
The Company is party to various operating and capital leases with respect to its facilities and equipment. Please refer to the Company’s consolidated financial statements and notes thereto in the Company’s Registration StatementAnnual Report on Form S-1,10-K, as amended as filed with the Securities and Exchange Commission for discussion of these leases. Effective November 13, 2002, the Company reached an agreement to lease a property for the opening of another call center. The terms of the lease are for seven years and four months commencing in the first quarter of 2003 with an annual escalation of 3.5% over the monthly base rent. This new call center is located in Hampton, Virginia.

Litigation:
The Company is from time to time subject to routine litigation incidental to its business. The Company believes that the results of any pending legal proceedings will not have a material adverse effect on the financial condition, results of operations or liquidity of the Company.

10. Subsequent Event:9.     Income Taxes:

Initial Public Offering:
PRA completed an offering of its common stock for sale inPrior to November 8, 2002, the Company was organized as a limited liability company, taxed as a partnership, and as such was not subject to federal or state income taxes. Immediately before the IPO, on November 8, 2002. At the completionCompany was reorganized as a corporation and became subject to income taxes.

The income tax expense recognized for 2003 is composed of the IPO, PRA is treated as a C corporation under the Internal Revenue Code and is subject to corporate income taxes. Accordingly, a pro forma income tax provision for corporate income taxes has been calculated as if PRA was taxable as a C corporation for all periods presented.following:

13

12

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

In AugustThe Company also recognized a net deferred tax liability of $367,583 as of March 31, 2003 and $286,882 as of December 31, 2002. The components of this net liability are:

A valuation allowance has not been provided at March 31, 2003 or December 31, 2002 PRA formed a new Delaware corporation, Portfolio Recovery Associates, Inc., (“PRA Inc.”). Immediately prior tosince management believes it is more likely than not that the IPO the former members of PRA exchanged their membership units of PRA for common stock of PRA Inc. and owned all of the issued and outstanding shares of PRA Inc. which owns all of the outstanding membership units of PRA, immediately prior to the IPO. Each capital or operating member unit was exchanged for one share of common stock. Prior to this exchange transaction, PRA Inc. did not conduct any business and had nodeferred tax assets or liabilities. The legal name of Portfolio Recovery Associates, Inc. has been retroactively applied to all periods presented in these financial statements.will be realized.

In connection with the IPO, the Company dissolved PRA II, LLC immediately prior to the IPO on November 7, 2002. PRA II, LLC had no assets or liabilities.

11. Pro Forma Net Income:
The Company presented pro forma tax information assuming they haveit has been a taxable corporation since inception and assuming tax rates equal to the rates that would have been in effect had theyit been required to report income tax expense in such years. TheA reconciliation of the Company’s statutory tax rates to the effective tax rates for the three months ended March 31, 2003 and the pro forma income tax expense comprisedfor the three months ended March 31, 2002, consists of the following components for the three and nine months ended September 30, 2001 and 2002:components:

Included in the pro-forma income tax expense were state tax credits actually earned by the Company in connection with our Kansas operations.

1413

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:

This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall trends, gross margin trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following:

	•		changes in the business practices of credit originators in terms of selling defaulted consumer receivables or outsourcing defaulted consumer receivables to third-party contingent fee collection agencies;
	•		changes in government regulations that affect the Company’s ability to collect sufficient amounts on its acquired or serviced receivables;
	•		the Company’s ability to employ and retain qualified employees, especially collection personnel;
	•		changes in the credit or capital markets, which affect the Company’s ability to borrow money or raise capital to purchase or service defaulted consumer receivables;
	•		the degree and nature of ourthe Company’s competition; and
	•		the risk factors listed from time to time in the Company’s filings with the Securities and Exchange Commission.

1514

Results of Operations

     The following table sets forth certain operating data in dollars and as a percentage of total revenue for the periods indicated: