Asset Acceptance Capital (AACC) 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

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

For the transition period from            to            

Commission file number: 000-50552

ASSET ACCEPTANCE CAPITAL CORP.

(Exact name of registrant as specified in its charter)

Delaware	80-0076779
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

28405 Van Dyke Avenue

Warren, Michigan 48093

(Address of principal executive offices)

Registrant’s telephone number, including area code: (586) 939-9600

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 by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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

As of October 22, 2008, 30,542,927 shares of the Registrant’s common stock were outstanding.

ASSET ACCEPTANCE CAPITAL CORP.

Quarterly Report on Form 10-Q

TABLE OF CONTENTS

		Page
	PART I – Financial Information
Item 1.	Consolidated Financial Statements (unaudited)	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4.	Controls and Procedures	37
	PART II – Other Information
Item 1.	Legal Proceedings	37
Item 6.	Exhibits	38
Signatures		39
Exhibits:	31.1 Rule 13a-14(a) Certification of Chief Executive Officer	40
	31.2 Rule 13a-14(a) Certification of Chief Financial Officer	41
	32.1 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer	42

Quarterly Report on Form 10-Q

This Form 10-Q and all other Company filings with the Securities and Exchange Commission are also accessible at no charge on the Company’s website atwww.assetacceptance.com as soon as reasonably practicable after filing with the Commission.

2

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Financial Position

	September 30, 2008			December 31, 2007
	(Unaudited)
ASSETS
Cash	$	8,771,227		$	10,474,479
Purchased receivables, net		358,557,240			346,198,900
Income taxes receivable		1,309,308			3,424,788
Property and equipment, net		13,342,208			11,006,658
Goodwill and other intangible assets		16,828,330			17,464,688
Other assets		7,245,578			6,083,211
Total assets	$	406,053,891		$	394,652,724
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Accounts payable	$	3,998,017		$	3,377,068
Accrued liabilities		17,156,287			17,423,378
Notes payable		189,125,000			191,250,000
Deferred tax liability, net		60,526,015			60,164,784
Capital lease obligations		2,256			18,242
Total liabilities	$	270,807,575		$	272,233,472
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $0.01 par value, 100,000,000 shares authorized; issued shares — 33,119,597 at September 30, 2008 and December 31, 2007, respectively		331,196			331,196
Additional paid in capital		146,620,181			145,610,742
Retained earnings		31,407,079			19,465,118
Accumulated other comprehensive loss, net of tax		(2,136,211	)		(2,012,127	)
Common stock in treasury; at cost, 2,576,670 and 2,551,556 shares at September 30, 2008 and December 31, 2007, respectively		(40,975,929	)		(40,975,677	)
Total stockholders’ equity		135,246,316			122,419,252
Total liabilities and stockholders’ equity	$	406,053,891		$	394,652,724

See accompanying notes.

3

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Operations

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
Revenues
Purchased receivable revenues, net	$	58,115,432		$	52,034,534		$	178,046,799		$	184,331,466
Gain on sale of purchased receivables		—			262,706			165,040			262,706
Other revenues, net		238,331			290,257			976,153			1,165,226
Total revenues		58,353,763			52,587,497			179,187,992			185,759,398
Expenses
Salaries and benefits		20,913,727			20,046,294			63,580,622			63,447,328
Collections expense		23,661,598			26,229,213			68,892,170			73,008,203
Occupancy		1,976,845			2,380,040			5,833,162			7,027,068
Administrative		2,529,639			2,355,442			8,148,610			7,849,901
Restructuring charges		—			87,178			—			564,214
Depreciation and amortization		1,000,728			1,073,957			2,950,502			3,242,223
Impairment of intangible assets		—			—			445,651			—
Loss on disposal of equipment		2,280			2,854			11,763			4,153
Total operating expenses		50,084,817			52,174,978			149,862,480			155,143,090
Income from operations		8,268,946			412,519			29,325,512			30,616,308
Other income (expense)
Interest income		1,766			193,832			31,795			415,956
Interest expense		(3,300,691	)		(3,357,264	)		(9,895,351	)		(4,759,644	)
Other		(1,711	)		29,240			14,622			51,705
Income (loss) before income taxes		4,968,310			(2,721,673	)		19,476,578			26,324,325
Income taxes (benefits)		1,928,331			(1,046,174	)		7,534,617			9,869,406
Net income (loss)	$	3,039,979		$	(1,675,499	)	$	11,941,961		$	16,454,919
Weighted-average number of shares:
Basic		30,570,423			30,568,041			30,561,653			33,173,613
Diluted		30,614,701			30,568,041			30,595,802			33,222,500
Earnings per common share outstanding:
Basic	$	0.10		$	(0.05	)	$	0.39		$	0.50
Diluted	$	0.10		$	(0.05	)	$	0.39		$	0.50
Dividends per common share	$	—		$	2.45		$	—		$	2.45

See accompanying notes.

4

ASSET ACCEPTANCE CAPITAL CORP.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine months ended September 30,
	2008			2007
Cash flows from operating activities
Net income	$	11,941,961		$	16,454,919
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,950,502			3,242,223
Deferred income taxes		428,242			(1,544,037	)
Share-based compensation expense		1,009,187			1,203,717
Net impairment of purchased receivables		8,438,250			23,457,200
Non-cash revenue		(447,645	)		(709,161	)
Loss on disposal of equipment		11,763			4,153
Gain on sale of purchased receivables		(165,040	)		(262,706	)
Impairment of intangible assets		445,651			—
Changes in assets and liabilities:
Increase in accounts payable and accrued liabilities		162,763			3,679,496
Increase in other assets		(501,792	)		(386,369	)
Decrease (increase) in income taxes receivable		2,115,480			(272,826	)
Net cash provided by operating activities		26,389,322			44,866,609
Cash flows from investing activities
Investment in purchased receivables, net of buy backs		(120,546,458	)		(108,329,242	)
Principal collected on purchased receivables		100,195,148			74,954,308
Proceeds from the sale of purchased receivables		167,405			262,706
Purchase of property and equipment		(5,109,623	)		(2,052,351	)
Proceeds from the sale of property and equipment		2,515			274,397
Net cash used in investing activities		(25,291,013	)		(34,890,182	)
Cash flows from financing activities
Borrowings under notes payable		91,500,000			216,000,000
Repayment of notes payable		(93,625,000	)		(70,375,000	)
Payment of deferred financing costs		(660,575	)		(2,315,088	)
Repayment of capital lease obligations		(15,986	)		(49,602	)
Repurchase of common stock		—			(78,717,201	)
Cash dividends paid		—			(74,891,700	)
Net cash used in financing activities		(2,801,561	)		(10,348,591	)
Net decrease in cash		(1,703,252	)		(372,164	)
Cash at beginning of period		10,474,479			11,307,451
Cash at end of period	$	8,771,227		$	10,935,287
Supplemental disclosure of cash flow information
Cash paid for interest	$	9,873,833		$	3,500,176
Cash paid for income taxes		5,020,725			11,705,290
Non-cash investing and financing activities:
Change in fair value of swap liability		191,095			801,193
Change in unrealized loss on cash flow hedge		(124,084	)		(501,547	)

See accompanying notes.

5

ASSET ACCEPTANCE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Nature of Operations

Asset Acceptance Capital Corp. and its subsidiaries (collectively referred to as the “Company”) are engaged in the purchase and collection of defaulted and charged-off accounts receivable portfolios. These receivables are acquired from consumer credit originators, primarily credit card issuers, consumer finance companies, healthcare providers, retail merchants, telecommunications and other utility providers as well as from resellers and other holders of consumer debt. The Company periodically sells receivables from these portfolios to unaffiliated companies.

In addition, the Company finances the sales of consumer product retailers.

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, income and cash flows in conformity with U.S. generally accepted accounting principles. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the Company’s financial position as of September 30, 2008 and its income for the three and nine months ended September 30, 2008 and 2007 and cash flows for the nine months ended September 30, 2008 and 2007, and all adjustments were of a normal recurring nature. The income of the Company for the three and nine months ended September 30, 2008 and 2007 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 Annual Report on Form 10-K for the year ended December 31, 2007.

Reporting Entity

The consolidated financial statements include the accounts of Asset Acceptance Capital Corp. consisting of direct and indirect subsidiaries AAC Investors, Inc., RBR Holding Corp., Asset Acceptance Holdings, LLC, Asset Acceptance, LLC, Consumer Credit, LLC and Premium Asset Recovery Corporation. All significant intercompany balances and transactions have been eliminated in consolidation. The Company currently has two operating segments, one for purchased receivables and one for finance contract receivables. The finance contract receivables operating segment is not material and therefore is not disclosed separately from the purchased receivables segment.

Purchased Receivables Portfolios and Revenue Recognition

Purchased receivables are receivables that have been charged-off as uncollectible by the originating organization and typically have been subject to previous collection efforts. The Company acquires the rights to the unrecovered balances owed by individual debtors through such purchases. The receivable portfolios are purchased at a substantial discount (generally more than 90%) from their face values and are initially recorded at the Company’s acquisition cost, which equals fair value at the acquisition date. Financing for the purchases is primarily provided by the Company’s cash generated from operations and the Company’s revolving credit facility.

The Company accounts for its investment in purchased receivables using the guidance provided by the Accounting Standards Executive Committee Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”). The provisions of SOP 03-3 were adopted by the Company effective January 2005 and apply to purchased receivables acquired after December 31, 2004. The provisions of SOP 03-3 that relate to decreases in expected cash flows amend previously followed guidance, the Accounting Standards Executive Committee Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans”, for consistent treatment and apply prospectively to purchased receivables acquired before January 1, 2005. The Company purchases pools of homogenous accounts receivable. Pools purchased after 2004 may be aggregated into one or more static pools within each quarter, based on common risk

6

characteristics. Risk characteristics of purchased receivables are generally considered to be similar since purchased receivables are usually in the late stages of the post charged-off collection cycle. The Company therefore aggregates most pools purchased within each quarter. Pools purchased before 2005 may not be aggregated with other pool purchases. Each static pool, either aggregated or non-aggregated, retains its own identity and does not change over the remainder of its life. Each static pool is accounted for as a single unit for recognition of revenue, principal payments and impairments.

Collections on each static pool are allocated to revenue and principal reduction based on the estimated internal rate of return (“IRR”). The IRR is the rate of return that each static pool requires to amortize the cost or carrying value of the pool to zero over its estimated life. Each pool’s IRR is determined by estimating future cash flows, which are based on historical collection data for pools with similar characteristics. The actual life of each pool may vary, but pools generally amortize between 36 and 84 months depending on the expected collection period. Monthly cash flows greater than revenue recognized will reduce the carrying value of each static pool and monthly cash flows lower than revenue recognized will increase the carrying value of the static pool. Each pool is reviewed at least quarterly and compared to historical trends to determine whether it is performing as expected. This comparison is used to determine future estimated cash flows. If the revised cash flow estimates are greater than the original estimates, the IRR is adjusted prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool. If the revised cash flow estimates are less than the original estimates, the IRR remains unchanged and an impairment is recognized. If the cash flow estimates increase subsequent to recording an impairment, reversal of the previously recognized impairment is made prior to any increases to the IRR.

The cost recovery method prescribed by SOP 03-3 is used when collections on a particular portfolio cannot be reasonably predicted. When appropriate, the cost recovery method may be used for pools that previously had a yield assigned to them. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio. As of September 30, 2008, the Company had 79 unamortized pools on the cost recovery method, including all healthcare pools, with an aggregate carrying value of $13,013,433 or about 3.6% of the total carrying value of all purchased receivables. The Company had 51 unamortized pools on the cost recovery method with an aggregate carrying value of $26,939,749, or about 7.8% of the total carrying value of all purchased receivables as of December 31, 2007.

The agreements to purchase receivables typically include general representations and warranties from the sellers covering account holder death, bankruptcy, fraud and settled or paid accounts prior to sale. These representations and warranties permit the return of certain ineligible accounts from the Company back to the seller. The general time frame to return accounts is within 90 to 240 days from the date of the purchase agreement. Proceeds from returns, also referred to as buybacks, are applied against the carrying value of the static pool.

Periodically the Company will sell, on a non-recourse basis, all or a portion of a pool to third parties. The Company does not have any significant continuing involvement with the sold pools subsequent to sale. Proceeds of these sales are compared to the carrying value of the accounts and a gain or loss is recognized on the difference between proceeds received and carrying value, in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of SFAS 125”, as amended. The agreements to sell receivables typically include general representations and warranties. Any accounts returned to the Company under these representations and warranties, and during the negotiated time frame, are netted against any “gains on sale of purchased receivables” or if they exceed the total reported gains for the period as a “loss on sale of purchased receivables”, which would be accrued for if material to the consolidated financial statements.

Changes in purchased receivable portfolios for the three and nine months ended September 30, 2008 and 2007 were as follows:

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
Beginning balance	$	355,647,646		$	315,364,014		$	346,198,900		$	300,840,508
Investment in purchased receivables, net of buybacks		35,569,690			34,817,297			120,546,458			108,329,242
Cost of sale of purchased receivables, net of returns		—			—			(2,365	)		—
Cash collections		(90,775,528	)		(90,748,442	)		(286,232,552	)		(282,033,813	)
Purchased receivable revenues		58,115,432			52,034,534			178,046,799			184,331,466
Ending balance	$	358,557,240		$	311,467,403		$	358,557,240		$	311,467,403

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Accretable yield represents the amount of revenue the Company can expect over the remaining life of the existing portfolios. Nonaccretable yield represents the difference between the remaining expected cash flows and the total contractual obligation outstanding (face value) of the purchased receivables. Changes in accretable yield for the three and nine months ended September 30, 2008 and 2007 were as follows:

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
Beginning balance (1)	$	562,821,458		$	396,778,648		$	559,605,071		$	417,690,314
Revenue recognized on purchased receivables		(58,115,432	)		(52,034,534	)		(178,046,799	)		(184,331,466	)
Additions due to purchases during the period		35,934,408			49,565,388			150,835,775			131,758,776
Reclassifications from nonaccretable yield		3,816,760			141,112,260			12,063,147			170,304,138
Ending balance (2)	$	544,457,194		$	535,421,762		$	544,457,194		$	535,421,762

(1) The balances are based on the estimated remaining collections, which refers to the sum of all future projected cash collections on our owned portfolios. The January 1, 2008 beginning balance reflects the extension of certain portfolios’ lives from 60 to 84 months during 2007.

(2) Accretable yields are a function of estimated remaining cash flows and are based on historical cash collections. Please refer to Forward-Looking Statements on page 20 and Critical Accounting Policies on page 36 for further information regarding these estimates.

Cash collections for the three months and nine months ended September 30, 2008 and 2007 include collections from fully amortized pools of which 100% of the collections were reported as revenue. Cash collections from fully amortized pools were as follows:

	Three months ended September 30,				Nine months ended September 30,
Cash collections from fully amortized pools:	2008		2007		2008		2007
Amortizing before the end of their expected life	$	7,236,572	$	7,474,034	$	23,427,569	$	17,365,306
Amortizing after their expected life		9,735,140		12,538,588		33,510,040		40,018,626
Accounted under the cost recovery method		1,382,600		1,280,587		3,963,033		4,211,722
Total cash collections from fully amortized pools	$	18,354,312	$	21,293,209	$	60,900,642	$	61,595,654

Changes in purchased receivables portfolios under the cost recovery method for the three months and nine months ended September 30, 2008 and 2007 were as follows:

	Three months ended September 30,						Nine months ended September 30,
Portfolios under the cost recovery method:	2008 (1)			2007			2008 (1)			2007
Beginning balance	$	17,845,691		$	7,568,575		$	26,991,102		$	7,246,315
Addition of portfolios (2)		98,229			10,807,275			5,199,208			14,422,756
Buybacks, impairments and resales adjustments		(588,385	)		(166,063	)		(1,647,942	)		(968,785	)
Cash collections on all portfolios under the cost recovery method until fully amortized		(4,342,102	)		(3,237,485	)		(17,528,935	)		(5,727,984	)
Ending balance	$	13,013,433		$	14,972,302		$	13,013,433		$	14,972,302

(1) The 2008 beginning and ending balances include the first quarter of 2005 aggregate and all healthcare portfolios. The carrying values of the first quarter of 2005 aggregate and all healthcare portfolios were $5,060,631 and $5,987,725, respectively, of the total carrying value of purchased receivables as of September 30, 2008. The carrying values of the first quarter of 2005 aggregate and all healthcare portfolios were $11,969,159 and $8,642,919, respectively, of the total carrying value of purchased receivables as of December 31, 2007.

(2) The addition of portfolios for the three and nine months ended September 30, 2007 includes healthcare portfolios not previously on the cost recovery method.

8

During the three and nine months ended September 30, 2008, the Company recorded net impairments of $3,084,800 and $8,438,250, respectively, related to its purchased receivables. The Company recorded net impairments of $13,841,000 and $23,457,200 during the three and nine months ended September 30, 2007, respectively. The net impairments reduced revenue and the carrying value of the purchased receivable portfolios. Changes in the purchased receivables valuation allowance for the three and nine months ended September 30, 2008 and 2007 were as follows:

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
Beginning balance	$	66,185,655		$	48,415,655		$	62,091,755		$	39,714,055
Impairments		3,544,000			14,216,000			11,149,950			24,250,000
Reversal of impairments		(459,200	)		(375,000	)		(2,711,700	)		(792,800	)
Deductions (1)		(378,000	)		—			(1,637,550	)		(914,600	)
Ending balance	$	68,892,455		$	62,256,655		$	68,892,455		$	62,256,655

(1) Deductions represent impairments on purchased receivable portfolios that became fully amortized during the period and, therefore, the allowance is eliminated because it can no longer be reversed.

Seasonality

Collections within portfolios tend to be seasonally higher in the first and second quarters of the year due to consumers’ receipt of tax refunds and other factors. Conversely, collections within portfolios tend to be lower in the third and fourth quarters of the year due to consumers’ spending in connection with summer vacations, the holiday season and other factors. However, revenue recognized is relatively level, excluding the impact of impairments, due to the application of the provisions prescribed by SOP 03-3. In addition, the Company’s operating results may be affected to a lesser extent by the timing of purchases of charged-off consumer receivables due to the initial costs associated with purchasing and loading these receivables into the Company’s systems. Consequently, income and margins may fluctuate from quarter to quarter.

Collections from Third Parties

The Company regularly utilizes unaffiliated third parties, primarily attorneys and other contingent collection agencies, to collect certain account balances on behalf of the Company in exchange for a percentage of balances collected by the third party. The Company includes the reimbursement of certain legal and other costs as cash collections, thereby recording the gross proceeds received by the unaffiliated third parties as cash collections. The Company records the percentage of the gross cash collections paid to the third parties as a component of collections expense. The percent of gross cash collections from such third party relationships were 32.7% and 28.6% for the three months ended September 30, 2008 and 2007, respectively, and 30.1% and 25.8% for the nine months ended September 30, 2008 and 2007, respectively.

Accrued Liabilities

As of September 30, 2008 and December 31, 2007, the totals of accrued liabilities were $17,156,287 and $17,423,378, respectively. The details of the balances are identified in the following table.

	September 30, 2008		December 31, 2007
Accrued payroll, benefits and bonuses	$	7,274,101	$	7,271,593
Deferred rent		3,489,264		3,754,365
Fair value of derivative instruments		3,317,098		3,126,003
Accrued general and administrative expenses		2,059,231		2,003,463
Accrued interest expense		609,092		974,900
Other accrued expenses		407,501		293,054
Total accrued liabilities	$	17,156,287	$	17,423,378

Concentration of Risk

For the three and nine months ended September 30, 2008, the Company invested 77.9% and 50.9%, respectively, in purchased receivables from its top three sellers. For the three and nine months ended September 30, 2007, the Company invested 58.0% and 42.0%, respectively, in purchased receivables from its top three sellers. Two sellers in common are included in the top three in both the three-month and nine-month periods.

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Interest Expense

Interest expense included interest on the Company’s credit facilities, unused facility fees and amortization of deferred financing costs. Interest expense of $27,202 and $67,472 related to software development for internal use was capitalized in the three and nine months ended September 2008, respectively. There was no interest expense related to software development for internal use capitalized during the three and nine months ended September 2007.

Earnings Per Share

Earnings per share reflect net income (loss) divided by the weighted-average number of shares outstanding. Diluted weighted-average shares outstanding for the three months ended September 30, 2008 included 44,278 dilutive shares related to outstanding options, deferred stock units, restricted shares and restricted share units (the “Share-Based Awards”). Diluted weighted-average shares outstanding equals basic weighted-average shares outstanding as inclusion of the dilutive weighted average shares would have resulted in an anti-dilutive loss per share for the three months ended September 30, 2007. Diluted weighted-average shares outstanding for the nine months ended September 30, 2008 and 2007 included 34,149 and 48,887 dilutive shares, respectively, related to the Share-Based Awards. There were 715,491 and 409,495 outstanding Share-Based Awards that were not included within the diluted weighted-average shares as their fair value exceeded the market price of the Company’s stock at September 30, 2008 and 2007, respectively. As such, they were anti-dilutive.

Goodwill and Other Intangible Assets

Intangible assets with finite lives arising from business combinations are amortized over their estimated useful lives, ranging from five to seven years, using the straight-line and double-declining methods. As prescribed by SFAS 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill and trademark and trade names with indefinite lives are not amortized. Goodwill and other intangible assets are reviewed annually to assess recoverability or more frequently if impairment indicators are present, in accordance with SFAS 142. Impairment charges are recorded for intangible assets when the estimated fair value is less than the carrying value of that asset. During the quarter ended March 31, 2008, the Company decided to no longer service medical receivables on a contingent fee basis. As a result, the Company recognized an impairment charge of $445,651, the net carrying value of intangible assets for customer contracts and relationships associated with the contingent collection business. This impairment is recorded in “Impairment of intangible assets” in the consolidated statements of operations.

Comprehensive Income

Components of comprehensive income are changes in equity other than those resulting from investments by owners and distributions to owners. Net income is the primary component of comprehensive income. The Company’s only component of comprehensive income other than net income is the change in unrealized gain or loss on derivatives qualifying as cash flow hedges, net of income taxes. The aggregate amount of such changes to equity that have not yet been recognized in net income are reported in the equity portion of the accompanying consolidated statements of financial position as accumulated other comprehensive loss, net of income taxes. The accumulated other comprehensive income (loss) is presented in the following table:

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
Opening balance	$	(2,069,444	)	$	—		$	(2,012,127	)	$	—
Change		(66,767	)		(501,547	)		(124,084	)		(501,547	)
Ending balance	$	(2,136,211	)	$	(501,547	)	$	(2,136,211	)	$	(501,547	)

Reclassifications

Certain amounts in the prior periods presented have been reclassified to conform to the current period financial statement presentation. These reclassifications have no effect on previously reported net income.

Recently Issued Accounting Pronouncements

SFAS No. 141 (R), “Business Combinations” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, (“SFAS 141(R)”), and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”,

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(“SFAS 160”). These pronouncements are required to be adopted concurrently and are effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited, thus the provisions of these pronouncements will be effective for the Company in fiscal year 2009. The Company is currently evaluating the potential impact of SFAS 141(R) and SFAS 160 on its consolidated statements of financial position, income and cash flows.

SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities”

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires expanded disclosures regarding the location and amounts of derivative instruments in an entity’s financial statements, how derivative instruments and related hedged items are accounted for under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, and how derivative instruments and related hedged items affect an entity’s financial position, operating results and cash flows. SFAS 161 is effective for periods beginning on or after November 15, 2008. The Company is currently evaluating what impact SFAS 161 will have on its consolidated statements of financial position, income and cash flows.

FASB Staff Position 142-3 “Determination of the Useful Life of Intangible Assets”

In April 2008, the FASB issued Staff Position (“FSP”) 142-3, “Determination of the Useful Life of Intangible Assets”, (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating what impact FSP 142-3 will have on its consolidated statements of financial position, income and cash flows.

SFAS No. 162,” The Hierarchy of Generally Accepted Accounting Principles”

In May 2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles generally accepted in the United States. SFAS 162 is effective November 15, 2008. The adoption of SFAS 162 is not expected to have a material impact on the Company’s consolidated statements of financial position, income or cash flows.

2. Recapitalization

On April 24, 2007, the Company announced a recapitalization plan (the “Recapitalization Plan”) to return $150,000,000 to the Company’s shareholders. Pursuant to the Recapitalization Plan, on June 12, 2007, the Company completed a modified “Dutch auction” tender offer, resulting in the repurchase of approximately 1,982,250 of the Company’s common shares for an aggregate purchase price of $37,167,188, or $18.75 per share.

On June 28, 2007, under a repurchase agreement announced on April 24, 2007, the Company purchased shares from (i) its largest shareholder, (ii) its Chairman, President and Chief Executive Officer, and (iii) its Senior Vice President and Chief Financial Officer. These shareholders elected not to tender any shares in the tender offer and the repurchase agreement allowed them to maintain their pro rata beneficial ownership interest in the Company after giving effect to the tender offer and purchases under the repurchase agreement. The Company repurchased 2,017,750 common shares from these shareholders for an aggregate price of $37,832,813, or $18.75 per share.

On June 18, 2007, the Company’s Board of Directors declared a special one-time cash dividend of $2.45 per share, or $74,891,700 in aggregate, which was paid on July 31, 2007 to holders of record on July 19, 2007.

In order to fund these transactions, the Company obtained a $150,000,000 term loan through a new credit agreement, (the “New Credit Agreement”) aggregating $250,000,000, which was funded on June 12, 2007, and terminated its former credit agreement. Refer to Note 3, “Notes Payable” for further information.

As a result of the payment of the special one-time cash dividend, the Company adjusted the number of deferred stock units, as well as the exercise price and number of outstanding stock options issued under the 2004 stock incentive plan, as amended, in order to avoid dilution to holders of the deferred stock units and outstanding stock options. Refer to Note 6, “Share-Based Compensation” for further information.

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During the nine months ended September 30, 2007, the Company incurred $1,100,085 in transaction costs associated with the Dutch auction tender offer and recorded these costs as a reduction in stockholders’ equity. In addition, the Company incurred $2,315,088 in fees, which were recorded as a deferred financing cost and included in other assets in the consolidated statements of financial position.

During the three and nine months ended September 30, 2008, the Company recorded interest expense of $3,173,430 and $9,523,022, respectively, in connection with borrowings under the New Credit Agreement. In addition, the Company amortized $154,401 and $439,336 in deferred financing costs for the three and nine months ended September 30, 2008, respectively. During the three and nine months ended September 30, 2007, the Company recorded interest expense of $3,237,548 and $4,275,242, respectively, in connection with borrowings under the New Credit Agreement and former credit agreement. The Company also amortized $119,874 and $482,306 in deferred financing costs for the three and nine months ended September 30, 2007, respectively.

3. Notes Payable

The New Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders named therein, that originated on June 5, 2007 was amended on March 10, 2008 (the “Amended New Credit Agreement”). Under the terms of the Amended New Credit Agreement, the Company has a five-year $100,000,000 revolving credit facility (the “Revolving Credit Facility”) and a six-year $150,000,000 term loan facility (the “Term Loan Facility” and, together with the Revolving Credit Facility, the “Amended New Credit Facilities”). The Amended New Credit Facilities bear interest at prime or up to 125 basis points over prime depending upon the Company’s liquidity, as defined in the Amended New Credit Agreement. Alternately, at the Company’s discretion, the Company may borrow by entering into one, two, three, six or twelve-month contracts based on the London Inter Bank Offer Rate (“LIBOR”) at rates between 150 to 250 basis points over the respective LIBOR rates, depending on the Company’s liquidity. The Company’s Revolving Credit Facility includes an accordion loan feature that allows it to request a $25,000,000 increase as well as sublimits for $10,000,000 of letters of credit and for $10,000,000 of swingline loans. The Amended New Credit Agreement is secured by a first priority lien on all of the Company’s assets. The Amended New Credit Agreement also contains certain covenants and restrictions that the Company must comply with, which, as of September 30, 2008 were:

• Leverage Ratio (as defined) cannot exceed (i) 1.25 to 1.0 at any time on or before June 29, 2009, (ii) 1.125 to 1.0 at any time on or after June 30, 2009 and on or before December 30, 2010 or (iii) 1.0 to 1.0 at any time thereafter;

• Ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth cannot exceed (i) 2.75 to 1.0 at any time on or after September 30, 2008 and on or before December 30, 2008, (ii) 2.5 to 1.0 at any time on or after December 31, 2008 and on or before December 30, 2009, (iii) 2.25 to 1.0 at any time on or after December 31, 2009 and on or before December 30, 2010, (iv) 2.0 to 1.0 at any time on or after December 31, 2010 and on or before December 30, 2011 or (v) 1.5 to 1.0 to any time thereafter; and

• Consolidated Tangible Net Worth must equal or exceed $80,000,000 plus 50% of positive consolidated net income for three consecutive fiscal quarters ending December 31, 2007 and for each fiscal year ending thereafter, such amount to be added as of December 31, 2007 and as of the end of each such fiscal year thereafter.

The Amended New Credit Agreement contains a provision that requires the Company to repay Excess Cash Flow, as defined, to reduce the indebtedness outstanding under its Amended New Credit Agreement. The annual repayment of the Company’s Excess Cash Flow is effective with the issuance of our audited consolidated financial statements for fiscal year 2008. The repayment provisions are:

• 50% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was greater than 1.0 to 1.0 as of the end of such fiscal year;

• 25% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was less than or equal to 1.0 to 1.0 but greater than 0.875 to 1.0 as of the end of such fiscal year; or

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• 0% if the Leverage Ratio is less than or equal to 0.875 to 1.0 as of the end of such fiscal year.

Commitment fees on the unused portion of the Revolving Credit Facility are paid quarterly, in arrears, and are calculated as an amount equal to a margin of 0.25% to 0.50%, depending on the Company’s liquidity, on the average amount available on the Revolving Credit Facility.

The Amended New Credit Agreement requires the Company to effectively cap, collar or exchange interest rates on a notional amount of at least 25% of the outstanding principal amount of the Term Loan Facility. Refer to Note 4, “Derivative Financial Instruments” for additional information.

The Company had $189,125,000 and $191,250,000 principal balance outstanding on its Amended New Credit Facilities at September 30, 2008 and December 31, 2007, respectively, of which $148,125,000 and $149,250,000 was part of the Term Loan Facility at September 30, 2008 and December 31, 2007, respectively, and $41,000,000 and $42,000,000 was part of the Revolving Credit Facility, respectively. The Term Loan Facility requires quarterly repayments totaling $1,500,000 annually until March 2013 with the remaining balance due in June 2013.

The Company believes it is in compliance with all terms of the Amended New Credit Agreement as of September 30, 2008.

4. Derivative Financial Instruments

The Company may periodically enter into derivative financial instruments, typically interest rate swap agreements, to reduce its exposure to fluctuations in interest rates on variable-rate debt and their impact on earnings and cash flows. The Company does not utilize derivative financial instruments with a level of complexity or with a risk greater than the exposure to be managed nor does it enter into or hold derivatives for trading or speculative purposes. The Company periodically reviews the creditworthiness of the swap counterparty to assess the counterparty’s ability to honor its obligation.

Based on the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended and interpreted, the Company records derivative financial instruments at fair value. Refer to Note 9, “Fair Value” for additional information.

In September 2007, the Company entered into an amortizing interest rate swap agreement whereby, on a quarterly basis, it swaps variable rates under its Term Loan Facility for fixed rates. At inception and for the first year, the notional amount of the swap was $125,000,000. Every year thereafter, on the anniversary of the swap agreement the notional amount will decrease by $25,000,000. As of September 30, 2008, the notional amount is $100,000,000. This swap agreement expires on September 13, 2012.

The Company’s financial derivative instrument is designated and qualifies as a cash flow hedge, and the effective portion of the gain or loss on such hedge is reported as a component of other comprehensive income in the consolidated financial statements. To the extent that the hedging relationship is not effective, the ineffective portion of the change in fair value of the derivative is recorded in other income (expense). For the three and nine months ended September 30, 2008, the ineffective portion of the change in fair value of the derivative recorded in earnings was $316 and $1,725, respectively. Hedges that receive designated hedge accounting treatment are evaluated for effectiveness at the time that they are designated as well as through the hedging period.

The fair value of the Company’s cash flow hedge has been recorded as a liability and is included with accrued liabilities in the consolidated statements of financial position. The fair value of the liability was $3,317,098 and $3,126,003 at September 30, 2008 and December 31, 2007, respectively. Changes in fair value were recorded as an adjustment to other comprehensive income, net of tax, of $2,136,211 and $2,012,127 at September 30, 2008 and December 31, 2007, respectively. Amounts in other comprehensive income will be reclassified into earnings under certain situations; for example, if the occurrence of the transaction is no longer probable or no longer qualifies for hedge accounting. The Company does not expect to reclassify any amount currently included in other comprehensive income into earnings within the next 12 months.

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5. Property and Equipment

Property and equipment, having estimated useful lives ranging from three to ten years, consisted of the following:

	September 30, 2008			December 31, 2007
Computers and software	$	17,372,560		$	12,838,395
Furniture and fixtures		10,446,783			10,074,927
Leasehold improvements		2,293,699			2,156,864
Equipment under capital lease		61,528			133,063
Automobiles		51,709			51,709
Total property and equipment, cost		30,226,279			25,254,958
Less accumulated depreciation		(16,884,071	)		(14,248,300	)
Property and equipment, net	$	13,342,208		$	11,006,658

6. Share-Based Compensation

The Company adopted a stock incentive plan (the “Stock Incentive Plan”) during February 2004 that authorizes the use of stock options, stock appreciation rights, restricted stock grants and units, performance share awards and annual incentive awards to eligible key associates, non-associate directors and consultants. The Company has reserved 3,700,000 shares of common stock for issuance in conjunction with all options and other stock-based awards to be granted under the plan. The purpose of the plan is (1) to promote the best interests of the Company and its stockholders by encouraging associates and other participants to acquire an ownership interest in the Company, thus aligning their interests with those of stockholders and (2) to enhance the ability of the Company to attract and retain qualified associates, non-associate directors and consultants. No participant may be granted options during any one fiscal year to purchase more than 500,000 shares of common stock. The Company records share-based compensation in accordance with SFAS No. 123(R), “Share-Based Payment”, a revision of SFAS 123, “Accounting for Stock-Based Compensation”.

The Company amended its Stock Incentive Plan in May 2007 to expand an anti-dilution provision of the plan. The additional compensation expense resulting from the amendment to the Stock Incentive Plan for the three months ended September 30, 2008 and 2007 was $2,790 and $28,486, respectively, and was $6,594 and $520,411 for the nine months ended September 30, 2008 and 2007, respectively.

As discussed in Note 2, “Recapitalization”, the Company commenced a recapitalization transaction, including payment of a special one-time cash dividend, in the quarter ended September 30, 2007. The payment of the special one-time cash dividend resulted in an increase in the number of deferred stock units outstanding and a change to the exercise price and number of outstanding stock options under the anti-dilution provisions of the Stock Incentive Plan. The methodology used to adjust the awards was consistent with Internal Revenue Code Section 409A and 424 and the proposed regulations promulgated thereunder compliance with which was necessary to avoid adverse tax issues for the holders of awards. Such methodology also results in the fair value of the adjusted awards post-dividend to be equal to that of the unadjusted awards pre-dividend, with the result that there is no additional compensation expense in accordance with accounting for modifications to awards under SFAS 123(R).

Based on historical experience, the Company used an annual forfeiture rate of 15% for associate grants. Grants made to non-associate directors have no forfeiture rates associated with them due to immediate vesting of grants to this group.

The Company’s share-based compensation arrangements are described below.

Stock Options

The Company utilizes the Whaley Quadratic approximation model, an intrinsic value method, to calculate the fair value of the stock awards on the date of grant using the assumptions noted in the following table. In addition, changes to the subjective input assumptions can result in different fair market value estimates. With regard to the Company’s assumptions stated below, the expected volatility is based on the historical volatility of the Company’s stock and management’s estimate of the volatility over the contractual term of the options. The expected term of the option is based on management’s estimate of the period of time for which the options are expected to be outstanding. The risk-free rate is derived from the five-year U.S. Treasury yield curve on the date of grant.

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Options issue year:	Nine Months Ended September 30, 2008	Twelve Months Ended December 31, 2007
Expected volatility	46.50%	45.30%
Expected dividends	0.00%	0.00%
Expected term	5 Years	5 Years
Risk-free rate	3.09%	4.60% - 4.98%

As of September 30, 2008, the Company had options outstanding for 712,991 shares of its common stock under the 2004 stock incentive plan. These options have been granted to key associates and non-associate directors of the Company. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant and have 10-year contractual terms. The options granted to key associates generally vest between one and five years from the grant date, whereas the options granted to non-associate directors generally vest immediately. The fair values of the stock options are expensed on a straight-line basis over the requisite service period. The related expense for the three months ended September 30, 2008 included $93,526 in salaries and benefits for associates. The related expense for the three months ended September 30, 2007 included $107,796 in salaries and benefits for associates. The related expense for the nine months ended September 30, 2008 included $205,044 in administrative expenses for non-associates directors and $218,272 in salaries and benefits for associates. The related expense for the nine months ended September 30, 2007 included $1,060,330 in administrative expenses for non-associate directors and $145,458 in salaries and benefits for associates. The total tax benefit recognized in the consolidated statements of operations was $163,823 and $452,170 for the nine months ended September 30, 2008 and 2007, respectively. The following summarizes all stock option related transactions from January 1, 2008 through September 30, 2008.

	Options Outstanding		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
January 1, 2008	691,599		$	14.03
Granted	42,500			13.21
Forfeited	(21,108	)		17.13
Outstanding at September 30, 2008	712,991			13.89	7.75	$	247,275
Exercisable at September 30, 2008	513,658		$	15.34	7.34	$	61,819

The weighted-average fair value of the options granted during the nine months ended September 30, 2008 and 2007 was $5.86 and $4.91 (as adjusted to reflect the impact of the special one-time cash dividend paid on July 31, 2007), respectively. No options were exercised during the nine months ended September 30, 2008 and 2007.

As of September 30, 2008, there was $909,918 of total unrecognized compensation expense related to nonvested stock options granted under the stock incentive plan. The unrecognized compensation expense is comprised of $808,310 for options expected to vest and $101,608 for options not expected to vest. The unrecognized compensation expense for options expected to vest is expected to be recognized over a weighted-average period of 2.93 years.

Deferred Stock Units

As of September 30, 2008, the Company had granted 17,431 deferred stock units (“DSUs”) to non-associate directors under the Company’s 2004 Stock Incentive Plan. DSUs represent the Company’s obligation to deliver one share of common stock for each unit at a later date elected by the Director, such as when the Director’s service on the Board ends. DSUs have no vesting provisions and are not subject to forfeiture. DSUs do not have voting rights but would receive common stock dividend equivalents in the form of additional DSUs. The value of each DSU is equal to the market price of the Company’s stock at the date of grant.

The fair value of the DSUs granted during the nine months ended September 30, 2008 were expensed immediately to correspond with the vesting schedule. The related expense for the three months ended September 30, 2008 and 2007 included $31,255 and $25,030 in administrative expenses, respectively. The related expense for the nine months ended September 30, 2008 and 2007 included $93,768 and $81,284 in administrative expenses, respectively.

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The following summarizes all DSU related transactions from January 1, 2008 through September 30, 2008.

	DSUs	Weighted-Average Grant-Date Fair Value
January 1, 2008	8,965	$	13.44
Granted	8,466		11.08
September 30, 2008	17,431	$	12.29

As of September 30, 2008, there was no unrecognized expense related to nonvested DSUs.

Restricted Shares

The Company grants restricted shares and restricted share units (restricted shares and restricted share units are referred to as “RSUs”) to key associates and non-associate directors under the Stock Incentive Plan. Each RSU is equal to one share of the Company’s common stock. As of September 30, 2008, the Company had RSUs outstanding for 274,565 shares of its common stock. The value of the RSUs is equal to the market price of the Company’s stock at the date of grant. The RSUs granted to associates generally vest over two to four years, based upon service or performance conditions. RSUs granted to non-associate directors generally vest when the non-associate director terminates his or her board service.

The fair value of the RSUs is expensed on a straight-line basis over the requisite service period based on the number of RSUs that are expected to vest. For RSUs with performance conditions, if goals are not expected to be met, the compensation expense previously recognized is reversed. The related expense for associates for the three months ended September 30, 2008 included $146,508 in salaries and benefits. The related amount for associates for the three months ended September 30, 2007 includes $36,561 in salaries and benefits. The related expense for the nine months ended September 30, 2008 included $154,147 in administrative expenses for non-associate directors and $337,956 in salaries and benefits for associates, which included a reversal of $99,240 for RSUs not expected to vest. The related amount for the nine months ended September 30, 2007 included a net reversal of previously recognized salaries and benefits expense for associates of $83,355 because some of the RSUs were not expected to vest.

The following summarizes all RSU related transactions from January 1, 2008 through September 30, 2008.

Nonvested RSUs	RSUs		Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2008	290,760		$	11.12
Granted	14,169			13.21
Forfeited	(30,364	)		18.88
Nonvested at September 30, 2008	274,565		$	10.37

As of September 30, 2008, there was $2,179,258 of total unrecognized expense related to nonvested RSU’s. The total unrecognized expense is comprised of $1,109,142 for RSUs expected to vest and $1,070,116 for shares not expected to vest. The unrecognized compensation expense for RSU’s expected to vest is expected to be recognized over a period of 2.48 years. There were 11,669 nonvested RSUs included in administrative expenses as of September 30, 2008 since the requisite service had been rendered.

7. Contingencies and Commitments

Litigation Contingencies

The Company is involved in certain legal matters that management considers incidental to its business. The Company recognizes liabilities for contingencies and commitments when a loss is probable and estimable. The company recognizes expense for defense costs when incurred.

Management has evaluated pending and threatened litigation against the Company as of September 30, 2008 and does not believe its exposure to be material.

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Other Contingencies

During the first quarter of 2008, the Company entered into an agreement with a third party collecting on its behalf. Under this agreement, the Company will receive a total cash advance of $7,000,000, in varying installments, through November 2009. The Company incurred $5,087,591 in court cost expenses, which were offset against the $3,500,000 cash advance received through September 30, 2008. An asset equal to the court costs paid in excess of the cash advance received is included in other assets in the consolidated statements of financial position.

The agreement contains performance conditions for both parties and the Company may be required to refund a portion of the cash advance in certain situations.

8. Income Taxes

The Company recorded an income tax provision of $1,928,331 and an income tax benefit of $1,046,174 for the three months ended September 30, 2008 and 2007, respectively and $7,534,617 and $9,869,406 for the nine months ended September 30, 2008 and 2007, respectively. The provision for income tax expense reflects an effective income tax rate of 38.8% and 38.4% for the three months ended September 30, 2008 and 2007, respectively and 38.7% and 37.5% for the nine months ended September 30, 2008 and 2007, respectively.

The Company records interest and penalties related to unrecognized tax benefits as interest expense and administrative expense, respectively. Interest and penalties related to the Company’s uncertain tax positions at January 1, 2008 were not significant.

The Federal income tax returns of the Company for 2005, 2006, and 2007 are subject to examination by the IRS, generally for three years after the latter of their extended due date or when they are filed. The significant state income tax returns of the Company are subject to examination by the state taxing authorities, for various periods generally up to four years.

9. Fair Value

The Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) as of January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies where other accounting pronouncements require or permit fair value measurements; it does not require any new fair value measurements. According to FASB Staff Position No. FAS 157-2, the application of SFAS 157 to certain non-financial assets and liabilities is deferred to fiscal years beginning after November 15, 2008. The Company’s goodwill and other indefinite-lived intangible assets are measured at fair value on a recurring basis for impairment assessment. The deferral of SFAS 157 applies to these items.

The adoption of SFAS 157 did not have a material impact on the Company’s consolidated statements of financial position, income or cash flows. The Company has chosen not to adopt SFAS No. 159, “Fair Value Option” (“SFAS” 159). SFAS 159 allows entities to choose to measure eligible financial instruments and certain other items at fair value, that are not otherwise required to be measured at fair value.

As required under SFAS 157, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.

The Company uses the following methods and assumptions to estimate the fair value of financial instruments.

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Interest Rate Swap Agreement

The fair value of the interest rate swap agreement represents the amount the Company would receive or pay to terminate or otherwise settle the contract at the consolidated statements of financial position date, taking into consideration current unearned gains and losses. The interest rate swap agreement was valued using Level 2 inputs, which are inputs other than quoted prices that are observable, either directly or indirectly. The fair value was determined using a market approach, and is based on the three-month LIBOR curve for the remaining term of the swap agreement. Refer to Note 4, “Derivative Financial Instruments”, for additional information about the fair value of the interest rate swap.

Purchased Receivables

The Company initially records purchased receivables at cost, which is discounted from the contractual receivable balance. The ending balance of the purchased receivables is reduced as cash is received based upon the guidance of PB6 and SOP 03-3. The carrying value of receivables was $358,557,240 and $346,198,900 at September 30, 2008 and December 31, 2007, respectively. The Company computes fair value of these receivables by discounting the future cash flows generated by its forecasting model using an adjusted weighted average cost of capital, reflective of other market participants cost of capital. The fair value of the purchased receivables approximated carrying value at both September 30, 2008 and December 31, 2007.

Credit Facilities

The Company’s Amended New Credit Facilities had carrying amounts of $189,125,000 and $191,250,000 as of September 30, 2008 and December 31, 2007, respectively. The Company computed the approximate fair value of the Amended New Credit Facilities to be $161,108,511 and $158,652,946 as of September 30, 2008 and December 31, 2007, respectively. The fair value of the Company’s Amended New Credit Facilities is based on borrowing rates currently available to the Company and similar market participants.

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

Company Overview

We have been purchasing and collecting defaulted or charged-off accounts receivable portfolios from consumer credit originators since the formation of our predecessor company in 1962. Charged-off receivables are the unpaid obligations of individuals to credit originators, such as credit card issuers, consumer finance companies, healthcare providers, retail merchants, telecommunications and utility providers. Since these receivables are delinquent or past due, we are able to purchase them at a substantial discount. We purchase and collect charged-off consumer receivable portfolios for our own account as we believe this affords us the best opportunity to use long-term strategies to maximize our profits.

The prices we paid for charged-off accounts receivable portfolios (“paper”) had steadily increased from 2002 through mid-2007. During the latter half of 2007, the prices we paid for comparable paper began to decline. This decline continued into 2008, but prices remain at elevated levels compared to historical low prices that existed from 2000 to 2002. We believe the primary reason for the continued decline in pricing is largely a result of macro-economic factors resulting from the expectation of a decline in the consumers’ ability to repay their current obligations as well as their past due debts. Macro-economic factors include reduced availability of credit, falling real estate values, higher food and energy prices, increased unemployment and other factors (“macro-economic factors”). In addition, we believe that some competitors are experiencing their own liquidity crises as their ability to fund portfolio purchases has been reduced when compared to much of the time since our initial public offering in 2004. We believe that increases in charge-off rates being experienced by major credit card issuers is leading to an increase in supply of receivables available for sale. Reduced competition and increased supply may contribute to reduced pricing.

During the nine months ended September 30, 2008, we invested $123.2 million (net of buybacks) in paper, with an aggregate face value of $3.2 billion, or 3.84% of face value. In the nine months ended September 30, 2007, we invested $108.9 million (net of buybacks through September 30, 2008) in paper, with an aggregate face amount of $3.7 billion, or 2.92% of face value. Our debt purchasing metrics (dollars invested, face amount, average purchase price, types of paper and sources of paper) may vary significantly from quarter to quarter. In 2008, an increasing portion of our investment in purchased receivables has come in the form of forward flow contracts. Due to the macro-economic factors, debt sellers and debt buyers alike believe that there will be continued downward pressure on the prices that are paid for paper. However, we believe debt sellers are attempting to lock in higher pricing when possible through forward flow contracts. Forward flow contracts commit a debt seller to sell a steady flow of charged-off receivables to us, and commit us to purchase receivables for a fixed percentage of the face value. For the nine months ended September 30, 2008, we acquired $58.8 million (net of buybacks) under forward flow contracts compared to $13.1 million (net of buybacks through September 30, 2008) during the nine months ended September 30, 2007. Forward flow contracts are attractive to us because they provide operational advantages from the consistent amount and type of accounts acquired.

Cash collections growth has slowed during 2008, despite increased investments in purchased receivables. Cash collections increased by $4.2 million or 1.5% to $286.2 million for the nine months ended September 30, 2008 compared to $282.0 million for the nine months ended September 30, 2007. For the full year 2007, cash collections growth was 8.9% compared to the full year 2006. We believe that the reduced growth in cash collections is primarily a result of two factors. First, a more difficult collection environment attributable to macro-economic factors is leading to reduced collection results on all vintages and types of paper. We expect this more difficult collections environment to continue and are adapting our collection tactics and operations to the current economic environment. Second, we believe our robust purchasing activity since the fourth quarter of 2006 has outpaced our staffing of account representatives to collect on this newly acquired paper, which may be leading to reduced collection results particularly on older vintages of paper. We are addressing what we believe to be a capacity constraint on collections by forwarding more accounts to our agency network for collection on our behalf. Over the long term, we expect to increase our in-house staffing to better align with our inventory of paper.

Net income for the nine months ended September 30, 2008 was $11.9 million, a decline of 27.4% from $16.5 million for the nine months ended September 30, 2007. Contributing to our decline in net income was higher amortization of purchased receivables in determining purchased receivable revenues and increased interest expense that we incurred subsequent to the recapitalization transaction completed in July 2007. Despite the $4.2 million increase in cash collections year to date in 2008 compared to 2007, purchased receivable revenues declined by $6.3 million because amortization increased by $10.5 million. Amortization of purchased receivables, the difference between cash collections and purchased receivable revenues, increased to 37.8% of cash collections for the nine months ended September 30, 2008 versus 34.6% for the nine months

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ended September 30, 2007. Included in amortization of purchased receivables are net impairments of $8.4 million and $23.5 million for the nine months ended September 30, 2008 and 2007, respectively. The increased purchased receivables amortization rate is primarily a result of the elevating pricing environment that we have experienced over the last several years in addition to placing the first quarter of 2005 aggregate and all healthcare portfolios on the cost recovery method. As prices have risen, our expected collection multiple of purchase price has come down. Macro-economic factors negatively affecting consumers are also a factor in the lower multiples of purchase price expected to be collected, even as pricing for paper falls. The lower multiple of purchase price expected to be collected generally results in a lower IRR to be assigned for revenue recognition purposes. When lower yields are assigned, a larger proportion of our cash collections are treated as purchased receivable amortization instead of purchase receivable revenues.

Average borrowings on our Amended New Credit Facilities in 2008 were $175.6 million for the nine months ended September 30, 2008, but only $64.0 million for the nine months ended September 30, 2007. The increased borrowings are primarily the result of the $150.0 million borrowed to fund the return of capital to shareholders in mid 2007. Additionally, we have borrowed to fund our purchase of paper since late 2006. As a result of these two factors, interest expense increased by $5.1 million to $9.9 million in the nine months ended September 30, 2008 compared to $4.8 million in the nine months ended September 30, 2007.

Total operating expenses were $149.9 million for the nine months ended September 30, 2008 a decrease of $5.2 million from $155.1 million in the nine months ended September 30, 2007. As a percentage of cash collections, operating expenses were 52.4% and 55.0% for the nine months ended September 30, 2008 and 2007, respectively. Collections expense and occupancy costs declined compared to the nine months ended September 30, 2007, by $4.1 million and $1.2 million, respectively. Salaries and benefits and administrative expenses increased by $0.2 million and $0.3 million, respectively. Other operating expenses, including depreciation and amortization, restructuring charges and impairment of intangible assets decreased by $0.4 million in the nine months ended September 30, 2008 compared to September 30, 2007. Our collections from third party relationships (attorneys and collection agencies) have increased to 30.1% of total cash collections for the nine months ended September 30, 2008 from 25.8% for the nine months ended September 30, 2007. Total forwarding fees paid on cash collections from these third party relationships have increased to $25.8 million in the nine months ended September 30, 2008 from $21.2 million in the nine months ended September 30, 2007. The remaining expenses included in collections expense declined by $8.7 million during the same period. The $8.7 million decline in the nine months ended September 30, 2008 primarily reflected reduced legal collection costs. These savings were realized from a combination of reduced in-house collections, better expense management and our efforts to better match legal cash collections with legal collection expenses. Occupancy expenses declined by $1.2 million in the nine months ended September 30, 2008 versus the nine months ended September 30, 2007 resulting primarily from the consolidation of two call centers during 2007.

We adopted SFAS No. 157 as of January 1, 2008. According to FASB Staff Position No. FAS 157-2, the application of SFAS 157 to certain non-financial assets and liabilities is deferred to fiscal years beginning after November 15, 2008. Our goodwill and other intangible assets are measured at fair value on a recurring basis for impairment assessment. The deferral of SFAS 157 applies to these items. Adoption of SFAS 157 did not have a material impact on our consolidated statements of financial position, income or cash flows. We have chosen not to adopt SFAS No. 159, “Fair Value Option”.

Forward-Looking Statements

This report contains forward-looking statements that involve risks and uncertainties and that are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements about future events or our future financial performance. In some cases, forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “potential” or “continue”, the negative of these terms or other comparable terminology. These statements involve a number of risks and uncertainties. Actual events or results may differ materially from any forward-looking statement as a result of various factors, including those we discuss in our annual report on Form 10-K for the year ended December 31, 2007 in the section titled “Risk Factors” and elsewhere in this report.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations. Factors that could affect our results and cause them to materially differ from those contained in the forward-looking statements include the following:

• our ability to purchase charged-off receivable portfolios on acceptable terms and in sufficient amounts;

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• our ability to recover sufficient amounts on our charged-off receivable portfolios;

• our ability to hire and retain qualified personnel;

• a decrease in collections if bankruptcy filings increase or if bankruptcy laws or other debt collection laws change;

• a decrease in collections as a result of negative attention or news regarding the debt collection industry and debtor’s willingness to pay the debt we acquire;

• our ability to make reasonable estimates of the timing and amount of future cash receipts and values and assumptions underlying the calculation of the net impairment charges for purposes of recording purchased receivable revenues in accordance with Accounting Standards Executive Committee Statement of Position 03-3 as well as the Accounting Standards Executive Committee Practice Bulletin 6;

• our ability to acquire and to collect on charged-off receivable portfolios in industries in which we have little or no experience;

• our ability to maintain existing, and secure additional financing on acceptable terms;

• the loss of any of our executive officers or other key personnel;

• the costs, uncertainties and other effects of legal and administrative proceedings;

• our ability to effectively manage excess capacity, reduce workforce or close remote call center locations;

• the temporary or permanent loss of our computer or telecommunications systems, as well as our ability to respond to changes in technology and increased competition;

• changes in our overall performance based upon significant macroeconomic conditions;

• changes in interest rates could adversely affect earnings or cash flows;

• our ability to substantiate our application of tax rules against examinations and challenges made by tax authorities; and

• other unanticipated events and conditions that may hinder our ability to compete.

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Results of Operations

The following table sets forth selected consolidated statement of income data expressed as a percentage of total revenues and as a percentage of cash collections for the periods indicated.

	Percent of Total Revenues								Percent of Cash Collections
	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007		2008		2007		2008		2007
Revenues
Purchased receivable revenues, net	99.6	%	98.9	%	99.4	%	99.2	%	64.0	%	57.3	%	62.2	%	65.4	%
Gain on sale of purchased receivables	0.0		0.5		0.1		0.2		0.0		0.3		0.1		0.1
Other revenues, net	0.4		0.6		0.5		0.6		0.3		0.3		0.3		0.4
Total revenues	100.0		100.0		100.0		100.0		64.3		57.9		62.6		65.9
Expenses
Salaries and benefits	35.8		38.1		35.5		34.2		23.0		22.1		22.2		22.5
Collections expense	40.6		49.9		38.5		39.3		26.1		28.9		24.1		25.9
Occupancy	3.4		4.5		3.3		3.8		2.2		2.6		2.0		2.5
Administrative	4.3		4.5		4.5		4.2		2.8		2.6		2.9		2.8
Restructuring charges	0.0		0.2		0.0		0.3		0.0		0.1		0.0		0.2
Depreciation and amortization	1.7		2.0		1.6		1.7		1.1		1.1		1.0		1.1
Impairment of intangible assets	0.0		0.0		0.2		0.0		0.0		0.0		0.2		0.0
Loss on disposal of equipment	0.0		0.0		0.0		0.0		0.0		0.0		0.0		0.0
Total operating expenses	85.8		99.2		83.6		83.5		55.2		57.4		52.4		55.0
Income from operations	14.2		0.8		16.4		16.5		9.1		0.5		10.2		10.9
Other income (expense)
Interest income	0.0		0.4		0.0		0.2		0.0		0.2		0.0		0.1
Interest expense	(5.7	)	(6.4	)	(5.5	)	(2.5	)	(3.6	)	(3.7	)	(3.4	)	(1.7	)
Other	0.0		0.0		0.0		0.0		0.0		0.0		0.0		0.0
Income (loss) before income taxes	8.5		(5.2	)	10.9		14.2		5.5		(3.0	)	6.8		9.3
Income taxes (benefits)	3.3		(2.0	)	4.2		5.3		2.1		(1.2	)	2.6		3.5
Net income (loss)	5.2	%	(3.2	)%	6.7	%	8.9	%	3.4	%	(1.8	)%	4.2	%	5.8	%

Three Months Ended September 30, 2008 Compared To Three Months Ended September 30, 2007

Revenue

Total revenues were $58.4 million for the three months ended September 30, 2008, an increase of $5.8 million, or 11.0%, from total revenues of $52.6 million for the three months ended September 30, 2007. Purchased receivable revenues were $58.1 million for the three months ended September 30, 2008, an increase of $6.1 million, or 11.7%, from the three months ended September 30, 2007 amount of $52.0 million. Purchased receivable revenues reflect an amortization rate, or the difference between cash collections and revenue, of 36.0%, a decrease of 6.7%, from the amortization rate of 42.7% for the three months ended September 30, 2007. The decreased amortization rate is primarily due to lower net impairments, which were partially offset by increased amortization due to lower average internal rates of return assigned to recent years’ purchases. Purchased receivable revenues reflect net impairments recognized during the three months ended September 30, 2008 and 2007 of $3.1 million and $13.8 million, respectively. Cash collections on charged-off consumer receivables of $90.8 million for the three months ended September 30, 2008 were comparable to $90.7 million for the same period in 2007. Cash collections for the three months ended September 30, 2008 and 2007 include collections from fully amortized portfolios of $18.4 million and $21.3 million, respectively, of which 100% were reported as revenue.

During the three months ended September 30, 2008, we acquired charged-off consumer receivable portfolios with an aggregate face value of $725.8 million at a cost of $36.0 million, or 4.96% of face value, net of buybacks. Included in these purchase totals were 35 portfolios with an aggregate face value of $522.5 million at a cost of $28.1 million, or 5.38% of face value, which were acquired through 11 forward flow contracts. Revenues on portfolios purchased from our top three sellers during vintage years 1997 through 2008 were $16.6 million and $16.9 million during the three months ended September 30, 2008 and 2007, respectively, with the same sellers included in the top three in both three-month periods. During the three months ended September 30, 2007, we acquired charged-off consumer receivable portfolios with an aggregate face value of

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$1.9 billion at a cost of $35.1 million, or 1.89% of face value (adjusted for buybacks through September 30, 2008). Included in these purchase totals were 21 portfolios with an aggregated face value of $108.2 million at a cost of $5.4 million, or 5.02% of face value (adjusted for buybacks through September 30, 2008), which were acquired through eight forward flow contracts. From period to period, we may buy charged-off receivables of varying age, types and cost. As a result, the cost of our purchases, as a percent of face value, may fluctuate from one period to the next.

Operating Expenses

Total operating expenses were $50.1 million for the three months ended September 30, 2008, a decrease of $2.1 million, or 4.0%, compared to total operating expenses of $52.2 million for the three months ended September 30, 2007. Total operating expenses were 55.2% of cash collections for the three months ended September 30, 2008, compared with 57.4% for the same period in 2007. Operating expenses are traditionally measured in relation to revenues. However, we measure operating expenses in relation to cash collections. We believe this is appropriate because of varying amortization rates, which is the difference between cash collections and revenues recognized, from period to period, due to seasonality of collections and other factors that can distort the analysis of operating expenses when measured against revenues. Additionally, we believe that the majority of our operating expenses are variable in relation to cash collections.

Salaries and Benefits.Salaries and benefits expense were $20.9 million for the three months ended September 30, 2008, an increase of $0.9 million, or 4.3%, compared to salaries and benefits expense of $20.0 million for the three months ended September 30, 2007. Salaries and benefits expense were 23.0% of cash collections for the three months ended September 30, 2008, compared with 22.1% for the same period in 2007. Salaries and benefits expense increased primarily due to increased levels of full time equivalent traditional call center account representatives and higher associate benefit expenses. Lower performance incentives resulting from decreased productivity by our traditional call center account representatives partially offset these increases.

Collections Expense.Collections expense was $23.7 million for the three months ended September 30, 2008, a decrease of $2.5 million, or 9.8%, compared to collections expense of $26.2 million for the three months ended September 30, 2007. Collections expense was 26.1% of cash collections during the three months ended September 30, 2008 compared with 28.9% for the same period in 2007. The collections expense decreased primarily due to a $4.2 million decline in variable costs associated with reduced in-house collections, lower data provider costs and better expense management. This decrease was partially offset by increased forwarding fees of $1.7 million paid on cash collections from third party relationships (attorneys and collection agencies) as a result of an increase in our collections from third party relationships to 32.7% of total cash collections for the three months ended September 30, 2008, from 28.6% for the three months ended September 30, 2007.

Occupancy.Occupancy expense was $2.0 million for the three months ended September 30, 2008, a decrease of $0.4 million, or 16.9%, compared to occupancy expense of $2.4 million for the three months ended September 30, 2007. Occupancy expense was 2.2% of cash collections for the three months ended September 30, 2008 compared with 2.6% for the same period in 2007. Occupancy expense decreased primarily due to the consolidation of two call centers during 2007.

Administrative.Administrative expenses increased to $2.5 million for the three months ended September 30, 2008, from $2.4 million for the three months ended September 30, 2007, reflecting a $0.1 million, or 7.4%, increase. Administrative expenses were 2.8% of cash collections during the three months ended September 30, 2008 compared with 2.6% for the same period in 2007. Administrative expenses increased as a percentage of cash collections primarily due to additional fees incurred for outside consultants.

Restructuring Charges.Pre-tax restructuring charges were $0.1 million for the three months ended September 30, 2007 as a result of the sale of our White Marsh, Maryland office and our plans to close the Wixom, Michigan offices during 2007. Expenses of $0.4 million were primarily related to associate one-time termination benefits and changes to the service life of certain long-lived assets, which were partially offset by $0.3 million proceeds received from the sale of the tangible assets located in the White Marsh, Maryland office.

Depreciation and Amortization.Depreciation and amortization expense was $1.0 million for the three months ended September 30, 2008, a decrease of $0.1 million or 6.8% compared to depreciation and amortization expense of $1.1 million for the three months ended September 30, 2007. Depreciation and amortization expense was 1.1% of cash collections for each of the three months ended September 30, 2008 and 2007.

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Interest Income. Interest income was $1,766 for the three months ended September 30, 2008, a decrease of $192,066 compared to $193,832 for the three months ended September 30, 2007. Interest income is expected to remain nominal over the next 12 months.

Interest Expense.Interest expense was $3.3 million for the three months ended September 30, 2008, a decrease of $0.1 million compared to interest expense of $3.4 million for the three months ended September 30, 2007. Interest expense was 3.6% of cash collections during the three months ended September 30, 2008 compared with 3.7% for the same period in 2007. The decrease in interest expense was due to lower effective interest rates on our credit facilities, which were offset by higher average borrowings during the three months ended September 30, 2008 compared to the same period in 2007.

Income Taxes.Income tax expense of $1.9 million reflects a federal tax rate of 35.0% and a state tax rate of 3.8% (net of federal tax benefit) for the three months ended September 30, 2008. For the three months ended September 30, 2007, an income tax benefit of $1.0 million reflected a federal tax rate of 36.0% and state tax rate of 2.4% (net of federal tax benefit). The increase in income tax expense was due to an increase in pre-tax financial statement income, which was $5.0 million for the three months ended September 30, 2008, compared to a pre-tax financial statement loss of $2.7 million for the same period in 2007.

Nine Months Ended September 30, 2008 Compared To Nine Months Ended September 30, 2007

Revenue

Total revenues were $179.2 million for the nine months ended September 30, 2008, a decrease of $6.6 million, or 3.5%, from total revenues of $185.8 million for the nine months ended September 30, 2007. Purchased receivable revenues were $178.0 million for the nine months ended September 30, 2008, a decrease of $6.3 million, or 3.4%, from the nine months ended September 30, 2007 amount of $184.3 million. Purchased receivable revenues reflect an amortization rate, or the difference between cash collections and revenue, of 37.8%, an increase of 3.2%, from the amortization rate of 34.6% for the nine months ended September 30, 2007. The increased amortization rate is primarily due to lower average internal rates of return assigned to recent years’ purchases as well as placing the first quarter of 2005 aggregate and all healthcare portfolios on the cost recovery method. Purchased receivable revenues reflect net impairments recognized during the nine months ended September 30, 2008 and 2007 of $8.4 million and $23.5 million, respectively. Cash collections on charged-off consumer receivables increased 1.5% to $286.2 million for the nine months ended September 30, 2008 from $282.0 million for the same period in 2007. Cash collections for the nine months ended September 30, 2008 and 2007 include collections from fully amortized portfolios of $60.9 million and $61.6 million, respectively, of which 100% were reported as revenue.

During the nine months ended September 30, 2008, we acquired charged-off consumer receivable portfolios with an aggregate face value of $3.2 billion at a cost of $123.2 million, or 3.84% of face value, net of buybacks. Included in these purchase totals were 101 portfolios with an aggregate face value of $1.0 billion at a cost of $58.8 million, or 5.68% of face value, which were acquired through 13 forward flow contracts. Revenues on portfolios purchased from our top three sellers during vintage years 1997 through 2008 were $49.3 million and $53.5 million during the nine months ended September 30, 2008, and 2007, respectively, with the same sellers included in the top three in both nine-month periods. During the nine months ended September 30, 2007, we acquired charged-off consumer receivable portfolios with an aggregate face value of $3.7 billion at a cost of $108.9 million, or 2.92% of face value (adjusted for buybacks through September 30, 2008). Included in these purchase totals were 55 portfolios with an aggregate face value of $256.3 million at a cost of $13.1 million, or 5.11% of face value (adjusted for buybacks through September 30, 2008), which were acquired through eight forward flow contracts. From period to period, we may buy charged-off receivables of varying age, types and cost. As a result, the cost of our purchases, as a percent of face value, may fluctuate from one period to the next.

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Operating Expenses

Total operating expenses were $149.9 million for the nine months ended September 30, 2008, a decrease of $5.2 million, or 3.4%, compared to total operating expenses of $155.1 million for the nine months ended September 30, 2007. Total operating expenses were 52.4% of cash collections for the nine months ended September 30, 2008, compared with 55.0% for the same period in 2007. The reduction as a percent of cash collections was due to decreases in collections expense, salaries and benefits and occupancy, and was partially offset by an increase in administrative expense. Operating expenses are traditionally measured in relation to revenues. However, we measure operating expenses in relation to cash collections. We believe this is appropriate because of varying amortization rates, which is the difference between cash collections and revenues recognized, from period to period, due to seasonality of collections and other factors that can distort the analysis of operating expenses when measured against revenues. Additionally, we believe that the majority of our operating expenses are variable in relation to cash collections.

Salaries and Benefits.Salaries and benefits expense were $63.6 million for the nine months ended September 30, 2008, an increase of $0.2 million, or 0.2%, compared to salaries and benefits expense of $63.4 million for the nine months ended September 30, 2007. Salaries and benefits expense increased primarily due to greater equity compensation expense and associate benefits expense. Lower performance incentives resulting from decreased productivity by our traditional call center account representatives partially offset these increases. However, the increase in cash collections was greater than the increase in salaries and benefits expense resulting in salaries and benefits expense of 22.2% of cash collections for the nine months ended September 30, 2008, compared with 22.5% for the same period in 2007.

Before 2007, we had granted equity compensation only to certain key associates and non-associate directors. During 2007, we began issuing equity awards to a broader group of management associates and expanded the use of performance conditions relating to some equity grants for senior executives. We recognized $0.6 million of compensation expense in salary and benefit expenses for the nine months ended September 30, 2008 as it related to stock-based compensation awards granted to associates. We recognized a reversal of $0.1 million for shares not expected to vest in salary and benefit expenses for the nine months ended September 30, 2007, as it related to stock-based compensation awards granted to associates. As of September 30, 2008, there was $3.1 million of total unrecognized compensation expense related to nonvested awards of which $1.9 million was expected to vest over a weighted average period of 2.67 years.

Collections Expense.Collections expense was $68.9 million for the nine months ended September 30, 2008, a decrease of $4.1 million, or 5.6%, compared to collections expense of $73.0 million for the nine months ended September 30, 2007. Collections expense was 24.1% of cash collections during the nine months ended September 30, 2008 compared with 25.9% for the same period in 2007. The collections expense decreased primarily due to an $8.7 million decline in variable costs associated with reduced in-house collections, lower data provider costs, better expense management and our efforts to better match legal cash collections with legal collection expenses. This decrease was partially offset by increased forwarding fees of $4.6 million paid on cash collections from third party relationships (attorneys and collection agencies) as a result of an increase in our collections from third party relationships to 30.1% of total cash collections for the nine months ended September 30, 2008, from 25.8% for the nine months ended September 30, 2007.

Occupancy.Occupancy expense was $5.8 million for the nine months ended September 30, 2008, a decrease of $1.2 million, or 17.0%, compared to occupancy expense of $7.0 million for the nine months ended September 30, 2007. Occupancy expense was 2.0% of cash collections for the nine months ended September 30, 2008 compared with 2.5% for the same period in 2007. Occupancy expense decreased primarily due to the consolidation of two call centers during 2007.

Administrative.Administrative expenses increased to $8.1 million for the nine months ended September 30, 2008, from $7.8 million for the nine months ended September 30, 2007, reflecting a $0.3 million, or 3.8%, increase. Administrative expenses were 2.9% of cash collections for the nine months ended September 30, 2008 compared with 2.8% for the same period in 2007. Administrative expenses for the nine months ended September 30, 2008 increased primarily due to additional fees incurred for outside advisors and consultants. Administrative expenses for the nine months ended September 30, 2007 include $0.5 million in share-based compensation expense relating to an amendment to our Stock Incentive Plan to add an anti-dilution provision.

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Restructuring Charges.Pre-tax restructuring charges were $0.6 million for the nine months ended September 30, 2007 as a result of the sale of our White Marsh, Maryland office and our plans to close the Wixom, Michigan offices during 2007. Charges were primarily related to associate one-time termination benefits and changes to the service life of certain long-lived assets off set by sales proceeds received of $0.3 million for the White Marsh, Maryland office.

Depreciation and Amortization.Depreciation and amortization expense was $3.0 million for the nine months ended September 30, 2008, a decrease of $0.2 million or 9.0% compared to depreciation and amortization expense of $3.2 million for the nine months ended September 30, 2007. Depreciation and amortization expense was 1.0% of cash collections during the nine months ended September 30, 2008 compared with 1.1% for the same period in 2007.

Impairment of Intangible Assets.Impairment of intangible assets was $0.4 million for the nine months ended September 30, 2008 as we decided to discontinue the medical contingent collection business. As a result, we recognized an impairment charge of the net carrying value of intangible assets for customer contracts and relationships associated with the contingent collection business.

Interest Income.Interest income was $31,795 for the nine months ended September 30, 2008, a decrease of $384,161 compared to $415,956 for the nine months ended September 30, 2007. Interest income is expected to be nominal over the next 12 months.

Interest Expense.Interest expense was $9.9 million for the nine months ended September 30, 2008, an increase of $5.1 million compared to interest expense of $4.8 million for the nine months ended September 30, 2007. Interest expense was 3.4% of cash collections during the nine months ended September 30, 2008 compared with 1.7 % for the same period in 2007. The increase in interest expense was due to increased average borrowings during the nine months ended September 30, 2008 compared to the same period in 2007. Average borrowings during the nine months ended September 30, 2008 reflect the new $150.0 million Term Loan Facility that was funded on June 12, 2007 to finance our recapitalization and special one-time cash dividend. Interest expense also includes the amortization of deferred financing costs of $0.4 million and $0.5 million for the nine months ended September 30, 2008 and 2007, respectively.

Income Taxes. Income tax expense of $7.5 million reflects a federal tax rate of 35.2% and a state tax rate of 3.5% (net of federal tax benefit) for the nine months ended September 30, 2008. For the nine months ended September 30, 2007, income tax expense was $9.9 million and reflected a federal tax rate of 35.1% and state tax rate of 2.4% (net of federal tax benefit including utilization of state net operating losses). Income tax expense decreased $2.4 million, or 23.7% from income tax expense of $9.9 million for the nine months ended September 30, 2007. The decrease in tax expense was due to a decrease in pre-tax financial statement income, which was $19.5 million for the nine months ended September 30, 2008, compared to $26.3 million for the same period in 2007.

26

Supplemental Performance Data

Portfolio Performance

The following table summarizes our historical portfolio purchase price and cash collections on an annual vintage basis from January 1, 2002 through September 30, 2008.

Purchase Period	Number of Portfolios	Purchase Price (1)		Cash Collections		Estimated Remaining Collections (2,3,4)		Total Estimated Collections		Total Estimated Collections as a Percentage of Purchase Price
	(dollars in thousands)
2002	94	$	72,255	$	347,572	$	4,834	$	352,406	488	%
2003	76		87,152		393,847		46,459		440,306	505
2004	106		86,547		228,478		63,179		291,657	337
2005	104		100,766		163,312		67,517		230,829	229
2006 (4)	154		142,265		198,493		204,204		402,697	283
2007	158		169,735		109,716		257,657		367,373	216
2008 (5)	141		123,242		24,170		259,164		283,334	230
Total	833	$	781,962	$	1,465,588	$	903,014	$	2,368,602	303	%

(1) Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase price refunded by a seller due to the return of non-compliant accounts (also referred to as buybacks) less the purchase price for accounts that were sold at the time of purchase to another debt purchaser.

(2) Estimated remaining collections are based on historical cash collections. Please refer to Forward-Looking Statements on page 20 and Critical Accounting Policies on page 36 for further information regarding these estimates.

(3) Estimated remaining collections refers to the sum of all future projected cash collections on our owned portfolios using up to an 84 month collection forecast from the date of purchase.

(4) Includes 62 portfolios from the acquisition of PARC on April 28, 2006 that were allocated a purchase price value of $8.3 million.

(5) Includes only nine months of activity through September 30, 2008.

The following tables summarize the remaining unamortized balances of our purchased receivable portfolios by year of purchase as of September 30, 2008.

Purchase Period	Unamortized Balance as of September 30, 2008		Purchase Price (1)		Unamortized Balance as a Percentage of Purchase Price		Unamortized Balance as a Percentage of Total
	(dollars in thousands)
2002	$	5	$	72,255	0.0	%	0.0	%
2003		7,322		87,152	8.4		2.1
2004		24,137		86,547	27.9		6.7
2005		32,772		100,766	32.5		9.1
2006 (2)		72,455		142,265	50.9		20.2
2007		111,687		169,735	65.8		31.2
2008 (3)		110,179		123,242	89.4		30.7
Total	$	358,557	$	781,962	45.9	%	100.0	%

(1) Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase price for accounts that were sold at the time of purchase to another debt purchaser.

(2) Includes $8.3 million of portfolios acquired from the acquisition of PARC on April 28, 2006.

(3) Includes only nine months of activity through September 30, 2008.

27

The following table summarizes the purchased receivable revenues and amortization rates by year of purchase for the three and nine months ended September 30, 2008 and 2007, respectively.

	Three months ended September 30, 2008
Year of Purchase	Collections		Revenue		Amortization Rate	Monthly Yield (1)		Net Impairments			Zero Basis Collections
2002 and prior	$	11,088,771	$	10,470,757	N/M%	N/M	%	$	—		$	10,139,534
2003		8,756,051		8,133,560	7.1	34.78			(293,200	)		5,392,539
2004		7,477,697		5,214,842	30.3	6.90			1,121,000			857,394
2005		8,067,921		2,718,048	66.3	2.54			1,757,000			12,306
2006		17,983,016		13,561,339	24.6	6.01			12,000			1,909,125
2007		21,783,298		10,476,335	51.9	2.93			488,000			43,414
2008		15,618,774		7,540,551	51.7	2.74			—			—
Totals	$	90,775,528	$	58,115,432	36.0	5.45		$	3,084,800		$	18,354,312

	Three months ended September 30, 2007
Year of Purchase	Collections		Revenue			Amortization Rate	Monthly Yield (1)		Net Impairments			Zero Basis Collections
2001 and prior	$	8,393,785	$	8,394,658		N/M%	N/M	%	$	—		$	8,393,785
2002		9,216,465		7,307,752		20.7	56.31			(46,600	)		5,979,626
2003		13,745,208		9,309,806		32.3	18.08			159,300			3,703,211
2004		11,542,711		6,251,686		45.8	5.48			2,599,000			701,046
2005		11,977,322		(1,942,723	)	116.2	(1.07	)		11,124,000			25,775
2006		25,166,089		17,032,010		32.3	5.22			5,300			2,489,766
2007		10,706,862		5,681,345		46.9	2.30			—			—
Totals	$	90,748,442	$	52,034,534		42.7	5.57		$	13,841,000		$	21,293,209

	Nine months ended September 30, 2008
Year of Purchase	Collections		Revenue		Amortization Rate	Monthly Yield (1)		Net Impairments			Zero Basis Collections
2002 and prior	$	38,448,367	$	36,759,752	N/M%	N/M	%	$	(550,000	)	$	34,828,065
2003		31,199,446		27,553,337	11.7	33.70			(1,311,400	)		17,491,792
2004		25,992,434		18,034,090	30.6	7.16			2,808,664			2,651,637
2005		28,762,384		11,025,465	61.7	2.90			4,362,986			56,605
2006		64,213,311		40,767,563	36.5	5.42			2,460,000			5,766,090
2007		73,446,469		32,799,249	55.3	2.73			668,000			78,674
2008		24,170,141		11,107,343	54.0	2.69			—			27,779
Totals	$	286,232,552	$	178,046,799	37.8	5.76		$	8,438,250		$	60,900,642

	Nine months ended September 30, 2007
Year of Purchase	Collections		Revenue		Amortization Rate	Monthly Yield (1)		Net Impairments		Zero Basis Collections
2001 and prior	$	29,075,495	$	29,086,944	N/M%	N/M	%	$	—	$	28,909,608
2002		31,648,465		22,868,712	27.7	35.62			162,500		15,835,814
2003		46,176,202		31,082,260	32.7	15.54			1,783,600		9,739,777
2004		38,397,854		22,901,860	40.4	5.90			7,074,800		2,320,943
2005		40,451,980		17,445,342	56.9	2.79			13,803,000		56,005
2006		77,889,306		51,034,709	34.5	4.79			633,300		4,733,507
2007		18,394,511		9,911,639	46.1	2.33			—		—
Totals	$	282,033,813	$	184,331,466	34.6	6.66		$	23,457,200	$	61,595,654

(1) The monthly yield is the weighted-average yield determined by dividing purchased receivable revenues recognized in the period by the average of the beginning monthly carrying values of the purchased receivables for the period presented.

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Account Representative Productivity

We measure traditional call center account representative tenure by two major categories, those with less than one year of experience and those with one or more years of experience. The following table displays our results.

Account Representatives by Experience

	Three months ended September 30,		Nine months ended September 30,		Year ended December 31,
Number of account representatives:	2008	2007 (3)	2008	2007 (3)	2007 (3)	2006 (4)
One year or more (1)	521	547	504	575	558	573
Less than one year (2)	445	369	431	337	356	399
Total account representatives	966	916	935	912	914	972

(1) Based on number of average traditional call center Full Time Equivalent (“FTE”) account representatives and supervisors with one or more years of service.

(2) Based on number of average traditional call center FTE account representatives and supervisors with less than one year of service, including new associates in training.

(3) Certain account representatives have been reclassified to make the 2007 disclosures comparable to the 2008 disclosures.

(4) Excludes PARC’s FTE account representatives for periods prior to January 1, 2007.

The following table displays our account representative productivity.

Collection Averages by Experience (1)

	Three months ended September 30,				Nine months ended September 30,				Year ended December 31,
Collection averages:	2008		2007 (2)		2008		2007 (2)		2007 (2)		2006 (3)
Overall average	$	39,866	$	45,549	$	138,816	$	148,620	$	193,000	$	164,932

(1) Overall collection averages are not available by account representatives.

(2) The overall collection average has been reclassified to make the 2007 disclosure comparable to the 2008 disclosure.

(3) Excludes PARC’s FTE account representatives for periods prior to January 1, 2007.

29

Cash Collections

The following tables provide further detailed vintage collection analysis on an annual and a cumulative basis.

Historical Collections (1)

Purchase Period	Purchase Price (3)		Year Ended December 31,																														Nine Months Ended September 30, 2008
			1998			1999			2000			2001			2002			2003			2004			2005			2006			2007
	(dollars in thousands)
Pre-1998			$	10,603		$	10,066		$	8,734		$	6,170		$	4,544		$	3,390		$	2,808		$	2,612		$	2,008		$	1,586		$	989
1998	$	16,411		4,835			15,220			15,045			12,962			11,021			7,987			5,583			4,653			3,352			2,619			1,524
1999		12,924		—			3,761			11,331			10,862			9,750			8,278			6,675			5,022			3,935			2,949			1,630
2000		20,592		—			—			8,896			23,444			22,559			20,318			17,196			14,062			10,603			7,410			4,135
2001		43,030		—			—			—			17,630			50,327			50,967			45,713			39,865			30,472			21,714			10,635
2002		72,255		—			—			—			—			22,339			70,813			72,024			67,649			55,373			39,839			19,535
2003		87,152		—			—			—			—			—			36,067			94,564			94,234			79,423			58,359			31,200
2004		86,547		—			—			—			—			—			—			23,365			68,354			62,673			48,093			25,993
2005		100,766		—			—			—			—			—			—			—			23,459			60,280			50,811			28,762
2006 (2)		142,265		—			—			—			—			—			—			—			—			32,751			101,529			64,213
2007		169,735		—			—			—			—			—			—			—			—			—			36,269			73,447
2008		123,242		—			—			—			—			—			—			—			—			—			—			24,170
Total			$	15,438		$	29,047		$	44,006		$	71,068		$	120,540		$	197,820		$	267,928		$	319,910		$	340,870		$	371,178		$	286,233
Cumulative Collections (1)
Purchase Period	Purchase Price (3)		Total Through December 31,																														Total Through September 30, 2008
			1998			1999			2000			2001			2002			2003			2004			2005			2006			2007
	(dollars in thousands)
1998	$	16,411	$	4,835		$	20,055		$	35,100		$	48,062		$	59,083		$	67,070		$	72,653		$	77,306		$	80,658		$	83,277		$	84,801
1999		12,924		—			3,761			15,092			25,954			35,704			43,982			50,657			55,679			59,614			62,563			64,193
2000		20,592		—			—			8,896			32,340			54,899			75,217			92,413			106,475			117,078			124,488			128,623
2001		43,030		—			—			—			17,630			67,957			118,924			164,637			204,502			234,974			256,688			267,323
2002		72,255		—			—			—			—			22,339			93,152			165,176			232,825			288,198			328,037			347,572
2003		87,152		—			—			—			—			—			36,067			130,631			224,865			304,288			362,647			393,847
2004		86,547		—			—			—			—			—			—			23,365			91,719			154,392			202,485			228,478
2005		100,766		—			—			—			—			—			—			—			23,459			83,739			134,550			163,312
2006 (2)		142,265		—			—			—			—			—			—			—			—			32,751			134,280			198,493
2007		169,735		—			—			—			—			—			—			—			—			—			36,269			109,716
2008		123,242		—			—			—			—			—			—			—			—			—			—			24,170
Cumulative Collections as Percentage of Purchase Price (1)
Purchase Period	Purchase Price (3)		Total Through December 31,																														Total Through September 30, 2008
			1998			1999			2000			2001			2002			2003			2004			2005			2006			2007
1998	$	16,411		29	%		122	%		214	%		293	%		360	%		409	%		443	%		471	%		491	%		507	%		517	%
1999		12,924		—			29			117			201			276			340			392			431			461			484			497
2000		20,592		—			—			43			157			267			365			449			517			569			605			625
2001		43,030		—			—			—			41			158			276			383			475			546			597			621
2002		72,255		—			—			—			—			31			129			229			322			399			454			481
2003		87,152		—			—			—			—			—			41			150			258			349			416			452
2004		86,547		—			—			—			—			—			—			27			106			178			234			264
2005		100,766		—			—			—			—			—			—			—			23			83			134			162
2006 (2)		142,265		—			—			—			—			—			—			—			—			23			94			140
2007		169,735		—			—			—			—			—			—			—			—			—			21			65
2008		123,242		—			—			—			—			—			—			—			—			—			—			20

(1) Does not include proceeds from sales of any receivables.

(2) Includes $8.3 million of portfolios acquired from the acquisition of PARC on April 28, 2006.

(3) Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase price refunded by a seller due to the return of non-compliant accounts (also referred to as buybacks) less the purchase price for accounts that were sold at the time of purchase to another debt purchaser.

30

Seasonality

The success of our business depends on our ability to collect on our purchased portfolios of charged-off consumer receivables. Collections within portfolios tend to be seasonally higher in the first and second quarters of the year due to consumers’ receipt of tax refunds and other factors. Conversely, collections within portfolios tend to be lower in the third and fourth quarters of the year due to consumers’ spending in connection with summer vacations, the holiday season and other factors. However, revenue recognized is relatively level, excluding the impact of impairments, due to the application of the provisions prescribed by SOP 03-3. In addition, our operating results may be affected to a lesser extent by the timing of purchases of charged-off consumer receivables due to the initial costs associated with purchasing and integrating these receivables into our system. Consequently, income and margins may fluctuate from quarter to quarter.

Below is a table that illustrates our quarterly cash collections from January 1, 2004 through September 30, 2008:

Cash Collections

Quarter	2008		2007		2006		2005		2004
First	$	100,264,281	$	95,853,350	$	89,389,858	$	80,397,640	$	65,196,055
Second		95,192,743		95,432,021		89,609,982		84,862,856		67,566,031
Third		90,775,528		90,748,442		80,914,791		78,159,364		66,825,822
Fourth		—		89,144,650		80,955,115		76,490,350		68,339,797
Total cash collections	$	286,232,552	$	371,178,463	$	340,869,746	$	319,910,210	$	267,927,705

Below is a table that illustrates the cash collections percentages by source of our total cash collections:

	For the three months ended September 30,								For the nine months ended September 30,
	2008				2007 (1)				2008				2007 (1)
	$		%		$		%		$		%		$		%
Traditional collections	$	38,386,629	42.3	%	$	41,029,522	45.2	%	$	128,146,968	44.8	%	$	134,334,568	47.6	%
Legal collections		38,067,946	41.9			36,634,628	40.4			116,118,956	40.6			110,355,371	39.1
Other collections		14,320,953	15.8			13,084,292	14.4			41,966,628	14.6			37,343,874	13.3
Total cash collections	$	90,775,528	100.0	%	$	90,748,442	100.0	%	$	286,232,552	100.0	%	$	282,033,813	100.0	%

(1) Certain cash collections have been reclassified to make the 2007 disclosures comparable to the 2008 disclosures.

The following chart categorizes our purchased receivable portfolios acquired during January 1, 1998 through September 30, 2008 and into major asset types, as of September 30, 2008:

Asset Type	Face Value of Charged-off Receivables (2)		%		No. of Accounts	%
	(in thousands)
Visa®/MasterCard®/Discover®	$	17,297,686	49.2	%	7,782	24.9	%
Private Label Credit Cards		4,817,754	13.8		6,731	21.5
Telecommunications/Utility/Gas		3,007,893	8.5		7,781	24.9
Health Club		1,891,514	5.4		1,787	5.7
Auto Deficiency		1,355,983	3.9		241	0.8
Installment Loans		1,239,580	3.5		359	1.1
Wireless Telecommunications		719,156	2.0		1,727	5.5
Other (1)		4,852,181	13.7		4,894	15.6
Total	$	35,181,747	100.0	%	31,302	100.0	%

(1) “Other” includes charged-off receivables of several debt types, including student loan, mobile home deficiency and retail mail order. This excludes the purchase of a single portfolio in June 2002 with a face value of $1.2 billion at a cost of $1.2 million (or 0.1% of face value) and consisting of approximately 3.8 million accounts.

(2) Face value of charged-off receivables represents the cumulative amount of purchases net of buybacks. The amount is not adjusted for payments received, settlements or additional accrued interest on any accounts in such portfolios after the date we purchased the applicable portfolio.

31

The age of a charged-off consumer receivables portfolio, or the time since an account has been charged-off, is an important factor in determining the price at which we will offer to purchase a receivables portfolio. Generally, there is an inverse relationship between the age of a portfolio and the price at which we will purchase the portfolio. This relationship is due to the fact that older receivables are typically more difficult to collect. The accounts receivable management industry places receivables into the following categories depending on the number of collection agencies that have previously attempted to collect on the receivables and the age of the receivables:

• Fresh accounts are typically 120 to 270 days past due, have been charged-off by the credit originator and are either being sold prior to any post charged-off collection activity or are placed with a third party collector for the first time. These accounts typically sell for the highest purchase price.

• Primary accounts are typically 270 to 360 days past due, have been previously placed with one-third party collector and typically receive a lower purchase price.

• Secondary and tertiary accounts are typically more than 360 days past due, have been placed with two or three third party collectors and receive even lower purchase prices.

We specialize in the primary, secondary and tertiary markets, but we will purchase accounts at any point in the delinquency cycle. We deploy our capital within these markets based upon the relative values of the available debt portfolios.

The following chart categorizes our purchased receivable portfolios acquired during January 1, 1998 through September 30, 2008 into major account types as of September 30, 2008:

Account Type	Face Value of Charged-off Receivables (2)		%		No. of Accounts	%
	(in thousands)
Fresh	$	2,355,643	6.7	%	1,455	4.6	%
Primary		4,871,103	13.8		4,806	15.4
Secondary		7,238,460	20.6		7,028	22.5
Tertiary (1)		16,318,323	46.4		14,883	47.5
Other		4,398,218	12.5		3,130	10.0
Total	$	35,181,747	100.0	%	31,302	100.0	%

(1) Excluding the purchase of a single portfolio in June 2002 with a face value of $1.2 billion at a cost of $1.2 million (or 0.1% of face value), and consisting of approximately 3.8 million accounts.

(2) Face value of charged-off receivables represents the cumulative amount of purchases net of buybacks. The amount is not adjusted for payments received, settlements or additional accrued interest on any accounts in such portfolios after the date we purchased the applicable portfolio.

32

We also review the geographic distribution of accounts within a portfolio because collection laws differ from state to state. The following chart illustrates our purchased receivable portfolios acquired during January 1, 1998 through September 30, 2008 based on geographic location of debtor, as of September 30, 2008:

Geographic Location	Face Value of Charged-off Receivables (3)(4)		%		No. of Accounts	%
	(in thousands)
Texas (1)	$	5,133,107	14.6	%	4,894	15.6	%
California		3,996,826	11.4		3,626	11.6
Florida (1)		3,500,995	10.0		2,274	7.3
Michigan (1)		2,088,925	5.9		2,587	8.3
New York		2,051,669	5.7		1,327	4.2
Ohio (1)		1,864,532	5.3		2,395	7.7
Illinois (1)		1,460,001	4.2		1,717	5.5
Pennsylvania		1,262,376	3.6		970	3.1
New Jersey (1)		1,155,854	3.3		957	3.0
North Carolina		1,023,395	2.9		704	2.2
Georgia		970,256	2.8		811	2.6
Other (2)		10,673,811	30.3		9,040	28.9
Total	$	35,181,747	100.0	%	31,302	100.0	%

(1) Collection site(s) located in this state.

(2) Each state included in “Other” represents under 2.0% individually of the face value of total charged-off consumer receivables.

(3) Face value of charged-off receivables represents the cumulative amount of purchases net of buybacks. The amount is not adjusted for payments received, settlements or additional accrued interest on any accounts in such portfolios after the date we purchased the applicable portfolio.

(4) Excluding the purchase of a single portfolio in June 2002 with a face value of $1.2 billion at a cost of $1.2 million (or 0.1% of face value) and consisting of approximately 3.8 million accounts.

Liquidity and Capital Resources

Historically, our primary sources of cash have been from operations and bank borrowings. We have traditionally used cash for acquisitions of purchased receivables, repayment of bank borrowings, purchasing property and equipment and working capital to support growth. During the nine months ended September 30, 2008, we had repayments of $93.6 million to reduce our outstanding Revolving Credit Facility and Term Loan Facility balances while having $91.5 million in borrowings against our Revolving Credit Facility. In addition, we entered into a new agreement with a third party collecting on our behalf. Under this agreement, we will receive a total cash advance of $7.0 million through November 2009. The Company received $3.5 million through September 30, 2008, and incurred $5.1 million in court cost expenses, which were offset against the cash advance. An asset equal to the court cost expense in excess of the cash advance received is included in other assets in the consolidated statements of financial position. The agreement contains performance conditions for both parties and we may be required to refund a portion of the cash advance in certain situations.

Borrowings

We maintain a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders named therein, that originated on June 5, 2007 and was amended on March 10, 2008. Under the terms of the Amended New Credit Agreement, we have a five-year $100 million Revolving Credit Facility and a six-year $150 million Term Loan Facility. The Amended New Credit Facilities bear interest at prime or up to 125 basis points over prime depending upon our liquidity, as defined in the Amended New Credit Agreement. Alternately, at our discretion, we may borrow by entering into one, two, three, six or twelve-month LIBOR contracts at rates between 150 to 250 basis points over the respective LIBOR rates, depending on our liquidity. Our Revolving Credit Facility includes an accordion loan feature that allows us to request a $25.0 million increase as well as sublimits for $10.0 million of letters of credit and for $10.0 million of swingline loans. The Amended New Credit Agreement is secured by a first priority lien on all of our assets. The Amended New Credit Agreement also contains certain covenants and restrictions that we must comply with, which as of September 30, 2008 were:

• Leverage Ratio (as defined) cannot exceed (i) 1.25 to 1.0 at any time on or before June 29, 2009, (ii) 1.125 to 1.0 at any time on or after June 30, 2009 and on or before December 30, 2010 or (iii) 1.0 to 1.0 at any time thereafter;

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• Ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth cannot exceed (i) 2.75 to 1.0 at any time on or after September 30, 2008 and on or before December 30, 2008, (ii) 2.5 to 1.0 at any time on or after December 31, 2008 and on or before December 30, 2009, (iii) 2.25 to 1.0 at any time on or after December 31, 2009 and on or before December 30, 2010, (iv) 2.0 to 1.0 at any time on or after December 31, 2010 and on or before December 30, 2011 or (v) 1.5 to 1.0 to any time thereafter; and

• Consolidated Tangible Net Worth must equal or exceed $80.0 million plus 50% of positive consolidated net income for three consecutive fiscal quarters ending December 31, 2007 and for each fiscal year ending thereafter, such amount to be added as of December 31, 2007 and as of the end of each such fiscal year thereafter.

The Amended New Credit Agreement contains a provision that requires us to repay Excess Cash Flow, as defined, to reduce the indebtedness outstanding under our Amended New Credit Agreement. The annual repayment of our Excess Cash Flow is effective with the issuance of our audited consolidated financial statements for fiscal year 2008. The repayment provisions are:

• 50% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was greater than 1.0 to 1.0 as of the end of such fiscal year;

• 25% of the Excess Cash Flow for such fiscal year if the Leverage Ratio was less than or equal to 1.0 to 1.0 but greater than 0.875 to 1.0 as of the end of such fiscal year; or

• 0% if the Leverage Ratio is less than or equal to 0.875 to 1.0 as of the end of such fiscal year.

Commitment fees on the unused portion of the New Revolving Credit Facility are paid quarterly, in arrears, and are calculated as an amount equal to a margin of 0.25% to 0.50%, depending on our liquidity, on the average amount available on the New Revolving Credit Facility.

The Amended New Credit Agreement requires us to effectively cap, collar or exchange interest rates on a notional amount of at least 25% of the outstanding principal amount of the Term Loan.

We had $189.1 million principal balance outstanding on our Amended New Credit Facilities at September 30, 2008. We have an interest rate swap agreement that hedges a portion of the interest rate expense on the Term Loan Facility. We believe we are in compliance with all terms of the Amended New Credit Agreement as of September 30, 2008.

Cash Flows

For the nine months ended September 30, 2008, we invested $120.5 million in purchased receivables, net of buybacks, funded by internal cash flow. Our cash balance decreased from $10.5 million at December 31, 2007 to $8.8 million as of September 30, 2008.

Our operating activities provided cash of $26.4 million and $44.9 million for the nine months ended September 30, 2008 and 2007, respectively. Cash provided by operating activities for the nine months ended September 30, 2008 and 2007 was generated primarily from net income earned through cash collections as adjusted for the timing of payments in income taxes, accounts payable and accrued liabilities as of September 30, 2008 and 2007 compared to December 31, 2007 and 2006, respectively.

Investing activities used cash of $25.3 million and $34.9 million for the nine months ended September 30, 2008 and 2007, respectively. Cash used by investing activities was primarily due to acquisitions of purchased receivables, net of cash collections applied to principal.

Financing activities used cash of $2.8 million and $10.3 million for the nine months ended September 30, 2008 and 2007, respectively. Cash used by financing activities for the nine months ended September of 2008 was primarily due to repayments on our Revolving Credit Facility and Term Loan Facility of $93.6 million net of borrowings under the Revolving Credit Facility of $91.5 million. In addition, cash used by financing activities for the nine months ended September of 2008 was due to payment of deferred financing costs of $0.7 million associated with the amendment of the New

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Credit Agreement. Cash used by financing activities for the first nine months of 2007 was primarily due to borrowings of $216.0 million under our New Credit Facilities and former credit agreement to fund the recapitalization transactions and investments in purchased receivables for $150.0 million and $66.0 million, respectively. Cash used in financing activities included repayments of $70.4 million on our former credit agreement, $2.4 million in payment of deferred financing costs and capital lease obligations as well as payments of $75.0 million for our repurchase of 4,000,000 shares in accordance with the Recapitalization Plan. Furthermore, our Board of Directors declared a special one-time cash dividend of $2.45 per share, or $74.9 million in aggregate, which was paid on July 31, 2007 to holders of record on July 19, 2007. In addition, we exercised our right to buy our shares from former associates for $15.00 per share, or $2.0 million.

We believe that cash generated from operations combined with borrowing available under our Amended New Credit Facilities, will be sufficient to fund our operations for the next twelve months, although no assurance can be given in this regard. In the future, if we need additional capital for investment in purchased receivables, working capital or to grow our business or acquire other businesses, we may seek to sell additional equity or debt securities or we may seek to increase the availability under our Revolving Credit Facility.

Future Contractual Cash Obligations

The following table summarizes our future contractual cash obligations as of September 30, 2008:

	Year Ending December 31,
	2008(3)		2009		2010		2011		2012		Thereafter
Capital lease obligations	$	2,256	$	—	$	—	$	—	$	—	$	—
Operating lease obligations		1,470,067		5,310,016		4,104,686		3,838,341		3,511,471		10,852,626
Purchase commitment (1)		462,000		462,000		—		—		—		—
Purchased receivables (2)		30,818,440		5,574,290		—		—		—		—
Revolving credit (3)		—		—		—		—		41,000,000		—
Term loan (4)		375,000		1,500,000		1,500,000		1,500,000		1,500,000		141,750,000
Contractual interest on derivative instruments		1,252,514		4,696,927		3,444,413		2,198,781		946,267		—
Total	$	34,380,277	$	17,543,233	$	9,049,099	$	7,537,122	$	46,957,738	$	152,602,626

(1) In 2007, we signed an agreement with a software provider and initiated a project to install a new collection platform. We have a contractual commitment to purchase $0.9 million in additional software. In addition, we expect to spend approximately $3.3 million over the next two years to fully implement this software. Costs will be capitalized in accordance with the guidance in SOP 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”. This project is funded with cash from operations and borrowings on our Revolving Credit Facility.

(2) We have ten forward flow contracts that have terms beyond September 30, 2008 with the last contract expiring in April 2009. In addition to the ten forward flow contracts, we have two on-going forward flow contracts that have estimated monthly purchases of approximately $12,600.

(3) To the extent that a balance is outstanding on our Revolving Credit Facility, it would be due in June 2012 or earlier as defined in the Amended New Credit Agreement. Interest on our Revolving Credit Facility is variable and is not included within the amount outstanding as of September 30, 2008.

(4) To the extent that a balance is outstanding on our Term Loan Facility, it would be due in June 2013. The variable interest is not included within the amount outstanding as of September 30, 2008.

Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements.

Recently Issued Accounting Pronouncements

Refer to Note 1 to Consolidated Financial Statements entitled “Basis of Presentation and Summary of Significant Accounting Policies” for a discussion of recent accounting pronouncements and their impact on our Consolidated Financial Statements.

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Critical Accounting Policies

Revenue Recognition

We utilize the interest method of accounting for our purchased receivables because we believe that the amounts and timing of cash collections for our purchased receivables can be reasonably estimated. This belief is predicated on our historical results and our knowledge of the industry. The interest method is prescribed by SOP 03-3.

We adopted the provisions of SOP 03-3 in January 2005 and apply SOP 03-3 to purchased receivables acquired after December 31, 2004. The provisions of SOP 03-3 that relate to decreases in expected cash flows amend previously followed guidance, the Accounting Standards Executive Committee Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans”, for consistent treatment and apply prospectively to purchased receivables acquired before January 1, 2005. We purchase pools of homogenous accounts receivable and record each pool at its acquisition cost. Pools purchased after 2004 may be aggregated into one or more static pools within each quarter, based on common risk characteristics. Risk characteristics of purchased receivables are assumed to be similar since purchased receivables are usually in the late stages of the post charged-off collection cycle. We therefore aggregate most pools purchased within each quarter. Pools purchased before 2005 may not be aggregated with other pool purchases. Each static pool, either aggregated or non-aggregated, retains its own identity and does not change over the remainder of its life. Each static pool is accounted for as a single unit for recognition of revenue, principal payments and impairments.

Each static pool of receivables is statistically modeled to determine its projected cash flows based on historical cash collections for pools with similar characteristics. An internal rate of return (“IRR”) is calculated for each static pool of receivables based on the projected cash flows. The IRR is applied to the remaining balance of each static pool of accounts to determine the revenue recognized. Each static pool is analyzed at least quarterly to assess the actual performance compared to the expected performance. To the extent there are differences in actual performance versus expected performance, the IRR is adjusted prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool. Effective January 2005, under SOP 03-3, if the revised cash flow estimates are less than the original estimates, the IRR remains unchanged and an impairment is recognized. If cash flow estimates increase subsequent to recording an impairment, reversal of the previously recognized impairment is made prior to any increases to the IRR.

The cost recovery method prescribed by SOP 03-3 is used when collections on a particular portfolio cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until we have fully collected the cost of the portfolio.

Application of the interest method of accounting requires the use of estimates, primarily estimated remaining collections, to calculate a projected IRR for each pool. These estimates are primarily based on historical cash collections. If future cash collections are materially different in amount or timing than the remaining collections estimate, earnings could be affected, either positively or negatively. Higher collection amounts or cash collections that occur sooner than projected will have a favorable impact on yields and revenues. Lower collection amounts or cash collections that occur later than projected will have an unfavorable impact and may result in an impairment being recorded.

Income Taxes

We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with SFAS No. 109, “Accounting for Income Taxes,” (“SFAS 109”) the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.

We believe it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax assets. In the event that all or part of the deferred tax assets are determined not to be realizable in the future, a valuation allowance would be established and charged to earnings in the period such determination is made.

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Similarly, if we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings or a decrease in goodwill in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial position.

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of SFAS No. 109” (“FIN 48”), clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted the provisions of FIN 48 on January 1, 2007.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk relates to the interest rate risk with our Amended New Credit Facilities. We may periodically enter into interest rate swap agreements to modify the interest rate exposure associated with our outstanding debt. The outstanding borrowings on our Amended New Credit Facilities were $189.1 million and $191.3 million as of September 30, 2008 and December 31, 2007, respectively. In September 2007, we entered into an amortizing interest rate swap agreement whereby, on a quarterly basis, we swap variable rates equal to three-month LIBOR for fixed rates on the notional amount of $125 million. Every year thereafter, on the anniversary of the swap agreement the notional amount will decrease by $25 million. The hedged borrowings on our Amended New Credit Facilities were $100.0 million at September 30, 2008. The outstanding unhedged borrowings on our Amended New Credit Facilities were $89.1 million as of September 30, 2008, consisting of $41.0 million outstanding on the Revolving Credit Facility and $48.1 million outstanding on the term loan facility. Interest rates on unhedged borrowings may be based on the Prime rate or LIBOR, at our discretion. Assuming a 200 basis point increase in interest rates, interest expense would have increased approximately $0.8 million on the unhedged borrowings for the nine months ended September 30, 2008.

For the nine months ended September 30, 2008, the swap was determined to be highly effective in hedging against fluctuations in variable interest rates associated with the underlying debt. Interest rates have decreased since we entered into our swap agreement, reducing the fair value and resulting in a liability balance. Additional declines in interest rates will further reduce the fair value, while increasing interest rates will increase the fair value.

Interest rate fluctuations do not have a material impact on interest income.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to cause material information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

We implemented a new proprietary revenue recognition system that we believe has improved our internal control over financial reporting during our fiscal quarter ended September 30, 2008.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of our business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits, using both our in-house attorneys and our network of third party law firms, against consumers and are occasionally

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countersued by them in such actions. Also, consumers initiate litigation against us, in which they allege that we have violated a federal or state law in the process of collecting on their account. It is not unusual for us to be named in a class action lawsuit relating to these allegations, with these lawsuits routinely settling for immaterial amounts. We do not believe that these ordinary course matters, individually or in the aggregate, are material to our business or financial condition. However, there can be no assurance that a class action lawsuit would not, if decided against us, have a material and adverse effect on our financial condition.

We are not a party to any material legal proceedings. However, we expect to continue to initiate collection lawsuits as a part of the ordinary course of our business (resulting occasionally in countersuits against us) and we may, from time to time, become a party to various other legal proceedings arising in the ordinary course of business.

Item 6. Exhibits

Exhibit Number	Description
31.1*	Rule 13a-14(a) Certification of Chief Executive Officer
31.2*	Rule 13a-14(a) Certification of Chief Financial Officer
32.1*	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

* Filed herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on November 6, 2008.

	ASSET ACCEPTANCE CAPITAL CORP.
Date: November 6, 2008
	By:	/s/ Nathaniel F. Bradley IV
		Nathaniel F. Bradley IV
		Chairman of the Board, President and Chief Executive Officer
		(Principal Executive Officer)
Date: November 6, 2008	By:	/s/ Mark A. Redman
		Mark A. Redman
		Senior Vice President – Finance and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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