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 including private label card issuers, consumer finance companies, healthcare providers, 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 current macro-economic environment has both negative and positive impacts for us. The negative macro-economic factors include reduced availability of credit, falling real estate values, higher energy prices, increased unemployment and other factors ("macro-economic factors"). These macro-economic factors are making it more difficult to collect on the charged-off accounts receivable portfolios ("paper") we have acquired. The positive impact of macro-economic factors is that the supply of available paper is increasing and the prices have declined. A further discussion of the trends in market prices, our investment in paper, our cash collections and operating expenses follows.

Market prices for paper began to decline in the second half of 2007, and have continued declining into 2009. Lower expected liquidation of the paper by collection companies is the primary reason for the recent decline in market pricing. In addition, we believe that some competitors' ability to fund portfolio purchases has been reduced during the recent financial crisis. Finally, we believe that increases in charge-off rates being experienced by major credit grantors will lead to an increase in supply of receivables available for sale. Reduced competition and increased supply may have also contributed to improved pricing.

During the nine months ended September 30, 2009, we invested $79.1 million (net of buybacks) in charged-off consumer receivable portfolios, with an aggregate face value of $3.1 billion, or 2.57% of face value. In the nine months ended September 30, 2008, we invested $122.3 million (net of buybacks through September 30, 2009) in paper, with an aggregate face amount of $3.2 billion, or 3.85% of face value. We reduced our level of investment in paper during the first half of 2009 to save capacity to invest in paper in the second half of the year and into 2010, in anticipation of additional declines in pricing. Purchasing in the third quarter of 2009 was over 80% higher than the second quarter of 2009.

The change in average purchase price in 2009 when compared to 2008 may not be representative of the change in overall market pricing because the underlying mix of paper purchased in the two periods may not be comparable. 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. During 2009, an increasing portion of our investment in purchased receivables was from forward flow contracts. Forward flow contracts commit a debt seller to sell a steady flow of paper to us, and commit us to purchase paper for a fixed percentage of the face value. Due to the macro-economic factors, debt sellers and debt buyers alike believe that there will be continued pressure on the prices that are paid for paper. We believe debt sellers are attempting to lock in pricing when possible through forward flow contracts. For the nine months ended September 30, 2009, we acquired $44.0 million (net of buybacks) under forward flow contracts, or 55.6% of the total investment compared to $58.2 million (net of buybacks through September 30, 2009), or 47.6% of the total investment during the nine months ended September 30, 2008. Forward flow contracts may be attractive to us because they provide operational advantages from the consistent amount and type of accounts acquired.

Cash collections declined for the nine months ended September 30, 2009 when compared to the same period in 2008, reflecting a more difficult collections environment due to the macro-economic factors, particularly on our older vintages of paper. Cash collections decreased by $27.0 million or 9.4% to $259.2 million for the nine months ended September 30, 2009 compared to $286.2 million for the nine months ended September 30, 2008. Traditional call center collections declined by $18.4 million or 14.3% as account representative productivity fell by 18.9% for the nine months ended September 30, 2009 when compared to the nine months ended September 30, 2008. We continue to balance our volume of paper outsourced to our agency network with our capacity-constrained in-house collection staff. We believe that our agency network is experiencing productivity declines similar to, or greater than, our in-house traditional call center collections associates. In June of 2009 we began to aggressively increase the number of in-house account representatives. By the end of 2009, we expect to have increased our in-house traditional call center staffing levels by approximately 20% from mid-second quarter levels. This initiative may include recalling some of our accounts that are currently placed with our agency forwarding channel.

Net income for the nine months ended September 30, 2009 was $3.8 million, a decline of 68.2% from $11.9 million for the nine months ended September 30, 2008. Purchased receivable revenues declined by $25.0 million primarily because of an increase in amortization as a percentage of collections, which increased to 41.0% for the nine months ended September 30, 2009 from 37.8% for the nine months ended September 30, 2008. Included in the amortization are net impairments on purchased receivables that increased to $17.1 million for the nine months ended September 30, 2009 compared to $8.4 million for the nine months ended September 30, 2008. Impairments are generated when currently assigned yields are too high in relation to the timing and/or amount of current or future collections, which have changed because of macro-economic factors affecting the consumers' ability to repay their obligations or for other reasons. The amount of revenue recognized is a function of the yields assigned, and when collections decline a larger portion of collections are allocated to revenue and less towards amortization of portfolio balances. Portfolio balances that amortize too slowly in relation to expected collections also contribute to an increase in impairments.

We reduced our operating expenses in absolute dollars for the nine months ended September 30, 2009 compared to the same period in 2008. Total operating expenses were $140.2 million for the nine months ended September 30, 2009 a decrease of $9.7 million from $149.9 million for the nine months ended September 30, 2008. As a percentage of cash collections, operating expenses were 54.1% for the nine months ended September 30, 2009 compared with 52.4% for the nine months ended September 30, 2008. Salaries and benefits declined in the nine months ended September 30, 2009 by $6.7 million, compared to the nine months ended September 30, 2008. In the first nine months of 2009, collections expense decreased by $2.0 million versus the first nine months of 2008. Administrative expenses decreased by $1.5 million in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. The reduced salaries and benefits costs reflect our managing staffing levels for non-revenue generating positions and incentive compensation programs to the current level of collections. Our collections from third party relationships (attorneys and collection agencies) have increased to 32.5% of total cash collections for the nine months ended September 30, 2009 from 30.1% for the nine months ended September 30, 2008. Total forwarding fees on cash collections from these third party relationships have increased to $28.9 million for the nine months ended September 30, 2009 from $25.8 million for the nine months ended September 30, 2008. The remaining expenses included in collections expense declined by $5.1 million during the same period as a result of volume driven charges for data provider, lettering campaigns, telephone, process server and court costs.

We recorded a net loss for the three months ended September 30, 2009 of $1.6 million, or $0.05 per share, compared to net income of $3.0 million or $0.10 per share for the three months ended September 30, 2008. Purchased receivable revenues declined by $10.6 million primarily because of an increase in amortization as a percentage of cash collections, which increased to 39.0% for the three months ended September 30, 2009 compared to 36.0% for the three months ended September 30, 2008. Net impairments on purchased receivables increased to $6.8 million for the three months ended September 30, 2009 compared to $3.1 million for the three months ended September 30, 2008.

Total operating expenses were $48.1 million for the three months ended September 30, 2009, a decrease of $2.0 million, or 4.0%, compared to total operating expenses of $50.1 million for the three months ended September 30, 2008. Total operating expenses were 61.8% of cash collections for the three months ended September 30, 2009, compared with 55.2% for the same period in 2008. While the dollar amount of operating expenses declined, operating expenses increased as a percentage of collections because the decline in cash collections was greater than the decline in operating expenses.

Further contributing to the net loss for the quarter ended September 30, 2009 is an impairment of trademark and trade names of $1.2 million. We performed a discounted cash flow analysis of our trademark and trade names as of September 30, 2009 and determined that the carrying value exceeded the fair value. The estimates of fair value for trademark and trade names are determined using various discounted cash flow valuation methodologies, which include significant assumptions not observable in the market. Significant assumptions include estimates of discount rates and future cash flows. Discount rate assumptions are based on an assessment of the risk inherent in the intangible assets, and include estimates of the cost of debt and equity for market participants in our industry.

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, 2008 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:

• a prolonged economic recession limiting our ability to acquire and to collect on charged-off receivable portfolios;

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

• 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 if changes in debt collection laws impair our ability to collect through our traditional call center or legal channels;

• 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;

• 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;

• failure to comply with government regulation;

• 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 macro-economic conditions;

• a decline in market capitalization that triggers a goodwill impairment or other impairment of intangible asset; and

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

Results of Operations

The following table sets forth selected consolidated statements of operations
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,
                                            2009           2008        2009          2008            2009             2008        2009           2008
Revenues
Purchased receivable revenues, net            99.6 %        99.6 %       99.5 %       99.4 %           61.0 %          64.0 %       59.0 %       62.2 %
Gain on sale of purchased receivables          0.0           0.0          0.0          0.1              0.0             0.0          0.0          0.1
Other revenues, net                            0.4           0.4          0.5          0.5              0.3             0.3          0.3          0.3

Total revenues                               100.0         100.0        100.0        100.0             61.3            64.3         59.3         62.6

Expenses
Salaries and benefits                         40.1          36.1         37.3         35.7             24.6            23.2         22.1         22.3
Collections expense                           47.7          40.3         43.3         38.3             29.2            25.9         25.7         24.0
Occupancy                                      3.8           3.4          3.5          3.3              2.3             2.2          2.1          2.0
Administrative                                 4.4           4.3          4.3          4.5              2.7             2.8          2.6          2.9
Depreciation and amortization                  2.3           1.7          1.9          1.6              1.4             1.1          1.1          1.0
Impairment of assets                           2.4           0.0          0.8          0.2              1.5             0.0          0.5          0.2
Loss on disposal of equipment and other
assets                                         0.2           0.0          0.1          0.0              0.1             0.0          0.0          0.0

Total operating expenses                     100.9          85.8         91.2         83.6             61.8            55.2         54.1         52.4

(Loss) income from operations                 (0.9 )        14.2          8.8         16.4             (0.5 )           9.1          5.2         10.2
Other income (expense)
Interest income                                0.0           0.0          0.0          0.0              0.0             0.0          0.0          0.0
Interest expense                              (5.1 )        (5.7 )       (4.9 )       (5.5 )           (3.1 )          (3.6 )       (2.9 )       (3.4 )
Other                                         (0.0 )         0.0          0.0          0.0              0.0             0.0          0.0          0.0

(Loss) income before income taxes             (6.0 )         8.5          3.9         10.9             (3.6 )           5.5          2.3          6.8
Income tax (benefit) expense                  (2.6 )         3.3          1.4          4.2             (1.5 )           2.2          0.8          2.6

Net (loss) income                             (3.4 )%        5.2 %        2.5 %        6.7 %           (2.1 )%          3.3 %        1.5 %        4.2 %

Three Months Ended September 30, 2009 Compared To Three Months Ended September 30, 2008

Revenues

Total revenues were $47.7 million for the three months ended September 30, 2009, a decrease of $10.7 million, or 18.3%, from total revenues of $58.4 million for the three months ended September 30, 2008. Purchased receivable revenues were $47.5 million for the three months ended September 30, 2009, a decrease of $10.6 million, or 18.3%, from the three months ended September 30, 2008 amount of $58.1 million. Purchased receivable revenues include amortization, or the difference between cash collections and revenue, of $30.3 million and $32.7 million for the three months ended September 30, 2009 and 2008, respectively. While the amount of amortization has decreased, the amortization rate of 39.0% for the three months ended September 30, 2009 increased 3.0 percentage points from the amortization rate of 36.0% for the three months ended September 30, 2008. Purchased receivable revenues reflect net impairments recognized during the three months ended September 30, 2009 and 2008 of $6.8 million and $3.1 million, respectively. Impairments are generated when currently assigned yields are too high in relation to the timing and/or amount of current or future collections. The amount of revenue recognized is a function of the yields assigned, and when collections decline a larger portion of collections is allocated to revenue and less is allocated towards amortization of portfolio balances. Portfolio balances that amortize too slowly in relation to expected collections also contribute to an increase in impairments. Cash collections on charged-off consumer receivables decreased 14.3% to $77.8 million for the three months ended September 30, 2009 from $90.8 million for the same period in 2008. The cash collections decrease is primarily a result of macro-economic factors affecting the consumers' ability to repay their obligations. Cash collections for the three months ended September 30, 2009 and 2008 include collections from fully amortized portfolios of $14.9 million and $18.4 million, respectively, of which 100% were reported as revenue.

During the three months ended September 30, 2009, we acquired charged-off consumer receivable portfolios with an aggregate face value of $1.6 billion at a cost of $37.2 million, or 2.32% of face value, net of buybacks. Included in these purchase totals were 17

portfolios with an aggregate face value of $526.3 million at a cost of $14.1 million, or 2.67% of face value, which were acquired through five 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. Revenues on portfolios purchased from our top three sellers during vintage years 1993 through 2009 were $14.5 million and $16.6 million during the three months ended September 30, 2009 and 2008, respectively, with one of the three sellers included in the top three in both three-month periods. During the three months ended September 30, 2008, we acquired charged-off consumer receivable portfolios with an aggregate face value of $718.8 million at a cost of $35.6 million, or 4.95% of face value (adjusted for buybacks through September 30, 2009). Included in these purchase totals were 35 portfolios with an aggregated face value of $516.9 million at a cost of $27.8 million, or 5.38% of face value (adjusted for buybacks through September 30, 2009), which were acquired through 11 forward flow contracts. From period to period, we may buy charged-off receivables of varying age, types and demographics. 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 $48.1 million for the three months ended September 30, 2009, a decrease of $2.0 million, or 4.0%, compared to total operating expenses of $50.1 million for the three months ended September 30, 2008. Total operating expenses were 61.8% of cash collections for the three months ended September 30, 2009, compared with 55.2% for the same period in 2008. The majority of the decrease in operating expenses is a result of reductions in salaries and benefits, collections and administrative expenses of $2.0 million, $0.7 million and $0.4 million for the three months ended September 30, 2009, respectively, as compared to the same period in 2008. However, while the dollar amount of operating expenses declined, operating expenses increased as a percentage of collections because the decline in cash collections was greater than the decline in operating expenses.

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. Amortization rates vary 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 $19.1 million for the three months ended September 30, 2009, a decrease of $2.0 million, or 9.3%, compared to salaries and benefits expense of $21.1 million for the three months ended September 30, 2008. Salaries and benefits expense were 24.6% of cash collections for the three months ended September 30, 2009, compared with 23.2% for the same period in 2008. Salaries expense decreased because of lower cash collections, which resulted in lower variable compensation expense for revenue generating associates, and is partially offset by higher average headcount due to our recent hiring initiative. The overall decrease in our profitability also resulted in lower incentive compensation for management during the three months ended September 30, 2009 compared to the same period in 2008. Benefits expense decreased as a result of a decline in the number of participants eligible for Company sponsored benefit plans.

We recognized $0.3 million and $0.2 million of share-based compensation expense in salaries and benefits expense for the three months ended September 30, 2009 and 2008, respectively. As of September 30, 2009, there was $2.5 million of total unrecognized compensation expense related to nonvested awards of which $1.5 million is expected to vest over a weighted-average period of 2.28 years. 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 $22.8 million for the three months ended September 30, 2009, a decrease of $0.7 million, or 3.2%, compared to collections expense of $23.5 million for the three months ended September 30, 2008. Collections expense was 29.2% of cash collections during the three months ended September 30, 2009 compared with 25.9% for the same period in 2008. Collections expense decreased primarily as a result of volume driven charges for data provider, lettering campaigns, telephone, process server and court costs. These savings were realized from a combination of reduced purchasing volume earlier in the year, and better expense management.

Occupancy. Occupancy expense was $1.8 million for the three months ended September 30, 2009, a decrease of $0.2 million, or 9.5%, compared to occupancy expense of $2.0 million for the three months ended September 30 2008. Occupancy expense was 2.3%

of cash collections for the three months ended September 30, 2009 compared with 2.2% for the same period in 2008. We entered into a sublease agreement for one of our offices during 2009, and will continue to review our office capacity as part of our ongoing expense management efforts.

Administrative. Administrative expenses decreased to $2.1 million for the three months ended September 30, 2009, from $2.5 million for the three months ended September 30, 2008, reflecting a $0.4 million, or 17.6%, decrease. Administrative expenses were 2.7% of cash collections during the three months ended September 30, 2009 compared with 2.8% for the same period in 2008. Administrative expenses decreased due to improved expense management in many areas, including accounting and legal services, office supplies and travel, offset in part by higher spending for outside consultants.

Impairment of Assets. Impairment of intangible assets was $1.2 million for the three months ended September 30, 2009, as we completed our periodic valuation of our trademark and tradenames. A decline in business activity associated with this intangible asset led to a fair value that was below the carrying value. We recorded the impairment charge for the difference.

Interest Expense. Interest expense was $2.4 million for the three months ended September 30, 2009, a decrease of $0.9 million compared to interest expense of $3.3 million for the three months ended September 30, 2008. Interest expense was 3.1% of cash collections during the three months ended September 30, 2009 compared with 3.6% for the same period in 2008. The decrease in interest expense was due to lower interest rates and decreased average borrowings during the three months ended September 30, 2009 compared to the same period in 2008. Average borrowings were $145.9 million for the three months ended September 30, 2009, compared to $183.7 million for the three months ended September 30, 2008. . . .