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

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;

• 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.

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          Nine Months Ended          Three Months Ended            Nine Months Ended
                                                 September 30,              September 30,               September 30,                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

$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.

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.

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