Asset Acceptance Capital (AACC)

Company Overview

We have been purchasing and collecting 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 purchase them at a substantial discount. Over the last ten years, we purchased 1,090 consumer debt portfolios, with an original charged-off face value of $40.4 billion for an aggregate purchase price of $998.0 million, or 2.47% of face value, net of buybacks. 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.

Macro-economic factors over the past year have influenced us both positively and negatively. Macro-economic factors such as reduced availability of credit for consumers, falling residential real estate values, elevated unemployment rates, low consumer confidence and other factors have had a negative impact on us by making it more difficult to collect from consumers on the charged-off accounts receivable portfolios (“paper”) we have acquired. Conversely, as a result of these negative macro-economic factors, the supply of available paper has increased while prices we pay for that paper have declined.

Total cash collections during 2009 did not meet our expectations, particularly on our older vintages of paper and were below cash collections in 2007 and 2008. We believe the decline in cash collections was caused by negative macro-economic factors and amplified by our strategy to decrease purchasing in the first half of 2009 to save resources and build capacity to purchase paper in the second half of the year. We reduced purchasing in the first half of 2009 in anticipation of increased supply and therefore lower prices in the second half of the year which we expected to generate better returns than if we had invested the same amounts earlier. However, by following this strategy, we generated lower cash collections on 2009 investments in purchased receivables than if we had invested more in paper earlier in the year. The economy is not expected to dramatically improve in the near term; as a result we expect the collections environment to continue to be difficult in 2010.

We generally account for our revenues on our purchased receivables by using the interest method of accounting (“Interest Method”) in accordance with U.S. generally accepted accounting principles, which requires us to make reasonable estimates of the timing and amount of future cash collections. We use the cost recovery method when collections on a particular portfolio cannot be reasonably predicted. The estimates used in the Interest Method to calculate the projected internal rate of return (“IRR”) on our portfolios are primarily based on historical cash collections and payer dynamics. We recognized a significant loss in the fourth quarter and for the full year 2009. The loss resulted primarily from the recognition of significant impairments on our purchased receivables. Impairments are generated when yields assigned to portfolios under the Interest Method of accounting are too high in relation to the timing and/or amount of current or estimated future collections. The difficult macro-economic environment has resulted in reduced cash collections particularly on the 2006 and older

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vintages of paper, relative to our collection forecasts used for revenue recognition purposes. Collection expectations on these older vintages were set and sometimes increased while operating in a better economic environment. In the fourth quarter of 2009, in connection with the preparation of our financial statements for the quarter and year ended December 31, 2009, we observed a significant difference between our estimated and actual cash collections, which caused us to perform a more in-depth review of our portfolios and their expected future performance. Since we expect continued pressure on cash collections relative to expectations given the challenging macro-economic environment and the age of this paper, we discounted our expectation of future cash collections on the 2004-2007 vintages of paper by $101.2 million and recognized significant impairments to the carrying value as a result of this change in estimate. The discounted collections forecast, along with other impairments, resulted in the recognition of net impairments of $32.4 million and $49.5 million during the fourth quarter and full year of 2009, respectively.

We amended our credit agreement during the fourth quarter of 2009. The amendment included an increase in average interest rates and adjustments to the financial covenants, which we expected to provide additional borrowing capacity compared to the previous terms of the agreement. However, with the significant net loss recognized in the fourth quarter and for the full year of 2009 we will have limited borrowing capacity under the adjusted financial covenants. We believe however, that we have sufficient capacity in our credit agreement when combined with anticipated cash flows from operations to fund investments in purchased receivables at or above historical levels. Net losses in future periods however, could further limit our ability to borrow against the revolving credit facility. As of December 31, 2009, the most restrictive financial covenant is the Ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth, as defined, which restricts additional borrowings on the revolving credit facility to approximately an additional $25.9 million.

Our results are influenced by certain industry and economic trends, including:

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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.

Market prices for charged-off accounts receivable portfolios (“paper”) have continued to fall in 2009 as they have over the last several quarters beginning in the second half of 2007. Lower expected liquidation of the paper by collection companies because of macro-economic factors is the primary reason for the recent decline in market pricing. 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’ 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 is leading to an increase in supply of receivables available for sale. Reduced competition and increased supply may have also contributed to improved pricing.

During the three months ended March 31, 2009, we invested $22.1 million (net of buybacks) in charged-off consumer receivable portfolios, with an aggregate face value of $747.8 million, or 2.95% of face value. In the three months ended March 31, 2008, we invested $22.0 million (net of buybacks through March 31, 2009) in paper, with an aggregate face amount of $542.8 million, or 4.06% of face value. Our level of investment in paper during the first quarter of 2009 reflects our strategy to slow our purchasing in the first half of 2009 to build up capital so we are able to purchase at what we believe will be more advantageous prices in the second half of 2009 and into 2010.

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 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 the first quarter of 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 downward 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 three months ended March 31, 2009, we acquired $15.5 million (net of buybacks) under forward flow contracts compared to $10.8 million (net of buybacks through March 31, 2009) during the three months ended March 31, 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 three months ended March 31, 2009 when compared to the same period in 2008 reflecting a more difficult collections environment due to macro-economic factors. Cash collections decreased by $6.2 million or 6.1% to $94.1 million for the three months ended March 31, 2009 compared to $100.3 million for the three months ended March 31, 2008. Traditional call center collections declined by $6.5 million or 13.7% as account representative productivity fell by 20.3% in the three months ended March 31, 2009 when compared to the three months ended March 31, 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. We expect to continue to increase our in-house staffing levels during 2009 in order to maximize overall cash collections.

Net income for the three months ended March 31, 2009 was $4.6 million, a decline of 32.1% from $6.8 million for the three months ended March 31, 2008. Contributing to our decline in net income was higher amortization of purchased receivables in determining purchased receivable revenues. Purchased receivable revenues declined by $7.0 million because of a combination of a $6.2 million decrease in cash collections and increased purchased receivable amortization of $0.8 million. Amortization of purchased

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receivables, the difference between cash collections and purchased receivable revenues, increased to 39.7% of cash collections for the three months ended March 31, 2009 versus 36.4% in the three months ended March 31, 2008. The increased purchased receivables amortization rate was primarily the result of lower multiples of purchase price expected to be collected and an increase in net impairments of purchased receivables to $3.4 million in the first quarter of 2009 from $0.4 million in the first quarter of 2008. As prices for paper rose through mid-2007, our expected collection multiple of purchase price was reduced from prior levels. 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 continues to decline. The lower multiple of purchase price expected to be collected generally results in a lower yield 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. Impairments are generated when currently assigned yields are too high in relation to collection expectations, which have declined because of macro-economic factors affecting the consumers’ ability to repay their obligations or for other reasons.

We reduced our operating expenses in absolute dollars for the three months ended March 31, 2009 compared to the same period in 2008. Total operating expenses were $47.0 million for the three months ended March 31, 2009 a decrease of $3.1 million from $50.1 million in the three months ended March 31, 2008. As a percentage of cash collections, operating expenses were 50.0% for both of the three months ended March 31, 2009 and 2008. Salaries and benefits declined in the three months ended March 31, 2009 by $2.3 million, compared to the three months ended March 31, 2008. In the first quarter of 2009, collections expense increased by $0.2 million versus the first quarter of 2008. All other operating expense categories decreased individually, including occupancy, administrative, depreciation and amortization and impairment of assets by a total of $1.1 million in the three months ended March 31, 2009 compared to March 31, 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 31.8% of total cash collections for the three months ended March 31, 2009 from 28.9% for the three months ended March 31, 2008. Total forwarding fees on cash collections from these third party relationships have increased to $10.3 million in the three months ended March 31, 2009 versus $8.4 million in the three months ended March 31, 2008. The remaining expenses included in collections expense declined by $1.8 million during the same period. The $1.8 million decline in the three months ended March 31, 2009 primarily reflected reduced data provider, letter and mailing, telephone and legal costs.

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 afford us the best opportunity to use long-term strategies to maximize our profits.

Market prices for charged-off accounts receivable portfolios (“paper”) had steadily increased from 2002 through mid-2007. However, during the latter half of 2007 and continuing through 2008, the market prices for comparable paper declined. We believe macro-economic factors caused by the recent financial crisis have resulted in a reduced expectation of consumers’ ability to repay their current and past due debts. The lower expected liquidation of the paper by collection companies is the primary reason for the decline in market pricing. 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’ 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 is leading to an increase in supply of receivables available for sale. Reduced competition and increased supply may have also contributed to improved pricing.

During the twelve months ended December 31, 2008, we invested $155.2 million (net of buybacks) in paper, with an aggregate face value of $3.8 billion, or 4.05% of face value. In the twelve months ended December 31, 2007, we invested $169.5 million (net of buybacks through December 31, 2008) in paper, with an aggregate face amount of $5.2 billion, or 3.26% 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 period to period. The increase in blended rate was the result of the higher quality of paper we purchased during 2008 versus 2007. In 2008, 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 downward pressure on the prices that are paid for paper. However, we believe debt sellers are attempting to lock in pricing when possible through forward flow contracts. For the twelve months ended December 31, 2008, we acquired $90.8 million (net of buybacks) under forward flow contracts compared to $24.2 million (net of buybacks through December 31, 2008) during the twelve months ended December 31, 2007. 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 slightly in 2008 when compared to 2007, despite continued investments in purchased receivables. Cash collections decreased by $1.6 million or 0.4% to $369.6 million for the twelve

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months ended December 31, 2008 compared to $371.2 million for the twelve months ended December 31, 2007. We believe that the reduction 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 liquidation of all vintages and types of paper. We believe liquidation rates (cash collections relative to face amount of paper) declined throughout 2008. 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 purchasing activity has outpaced our staffing of account representatives to collect on our inventory of 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 the number of account representatives with our inventory of paper.

Net income for the twelve months ended December 31, 2008 was $15.7 million, a decline of 23.0% from $20.4 million for the twelve months ended December 31, 2007. Contributing to our decline in net income was higher amortization of purchased receivables (including net impairment charges) in determining purchased receivable revenues and increased interest expense that we incurred subsequent to the recapitalization transaction, which was funded in June 2007. Purchased receivable revenues declined by $12.8 million because of a combination of a $1.6 million decrease in cash collections and increased purchased receivable amortization of $11.2 million in 2008 when compared to 2007. Amortization of purchased receivables, the difference between cash collections and purchased receivable revenues, increased to 37.0% of cash collections for the twelve months ended December 31, 2008 versus 33.8% for the twelve months ended December 31, 2007. Included in amortization of purchased receivables were net impairments of $13.0 million and $24.4 million for the twelve months ended December 31, 2008 and 2007, respectively. The increased purchased receivables amortization rate was primarily a result of lower multiples of purchase price expected to be collected in addition to placing the first quarter of 2005 aggregate and all healthcare portfolios on the cost recovery method. As prices for paper rose through mid-2007, our expected collection multiple of purchase price was reduced from prior levels. 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 yield 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 purchased receivable revenues. Impairments are generated when currently assigned yields are too high in relation to collection expectations which may have declined because of macro-economic factors affecting the consumers’ ability to repay their obligations or for other reasons.

Average borrowings on our credit facilities were $177.7 million for the twelve months ended December 31, 2008, compared to $93.6 million for the twelve months ended December 31, 2007. The increased average borrowings are primarily the result of $150.0 million borrowed on our term loan, which was outstanding for all of 2008 versus approximately seven months in 2007. The term loan was initially funded in June 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 $4.9 million to $13.0 million in the twelve months ended December 31, 2008 compared to $8.1 million in the twelve months ended December 31, 2007.

We reduced our operating expenses both in absolute dollars and in relation to cash collections in 2008 versus 2007. Total operating expenses were $195.8 million for the twelve months ended December 31, 2008, a decrease of $11.8 million from $207.6 million in the twelve months ended December 31, 2007. As a percentage of cash collections, operating expenses were 53.0% and 55.9% for the twelve months ended December 31, 2008 and 2007, respectively. The majority of the decrease in operating expense was a result of reductions in collections expense, occupancy expense and restructuring charges of $9.4 million, $1.4 million and $0.9 million, respectively, as compared to December 31, 2007. Our collections from third party relationships (attorneys and collection agencies) increased to 30.9% of total cash collections for the twelve months ended December 31, 2008 from 26.8% for the twelve months ended December 31, 2007. Total forwarding fees paid on cash collections from these third party relationships increased to $34.9 million in the twelve months ended December 31, 2008

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from $29.2 million in the twelve months ended December 31, 2007. The remaining expenses included in collections expense declined by $15.1 million in the twelve months ended December 31, 2008 and primarily reflected reduced legal collection costs. The reduction in legal collection costs included a $7.0 million savings in court costs associated with our legal forwarding collections as a result of a new third party relationship that allows us to better match these costs with the associated collections. The savings were partially offset by an increased contingency rate under this relationship, which resulted in an increase in forwarding fees paid of $1.7 million. The remaining savings were realized from a combination of reduced spending on in-house collection efforts, lower data provider costs and better expense management. Occupancy expenses declined by $1.4 million in the twelve months ended December 31, 2008 versus the twelve months ended December 31, 2007 resulting primarily from the consolidation of two call centers during 2007. There were no restructuring charges in 2008.

We adopted Statement of Financial Accounting Standards (“SFAS”) No. 157 as of January 1, 2008 as it applies to financial assets and liabilities. Adoption of SFAS 157 did not have a material impact on our consolidated statements of financial position, operations or cash flows. According to Financial Accounting Standards Board (“FASB”) Staff Position No. FAS 157-2, the application of SFAS 157 to certain non-financial assets and liabilities, including goodwill and other indefinite-lived intangible assets, was deferred to fiscal years beginning after November 15, 2008. Our goodwill and other intangible assets are tested for impairment on a recurring basis and the deferral of SFAS 157 applies to these items. We have chosen not to adopt SFAS No. 159, “Fair Value Option”.

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”.

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 charged-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 six months ended June 30, 2008, we invested $87.6 million (net of buybacks) in paper, with an aggregate face value of $2.5 billion, or 3.53% of face value. In the six months ended June 30, 2007, we invested $73.8 million (net of buybacks through June 30, 2008) in paper, with an aggregate face amount of $1.9 billion, or 3.94% 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.

During the second quarter of 2008, our cash collections declined by $0.2 million from the year ago period to $95.2 million. This is our first year over year decline in quarterly cash collections since we went public in 2004. The second quarter 2008 decline in cash collections when compared to the same period of 2007 follows growth in cash collections during the first quarter of 2008 of 4.6% compared to the first quarter 2007 and growth for the full year 2007 of 8.9% when compared to the full year 2006. We believe that the decline 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 addressing our collection tactics and operations to deal with 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. We increased the volume of accounts being forwarded in the second quarter of 2008 and expect additional cash collections to be generated from this initiative in the second half of 2008. The increased forwarding activities may result in lower productivity of our in-house collections staff, but improve overall collections. Over the long term, we expect to increase our in-house staffing to better align with our inventory of paper.

Net income for the six months ended June 30, 2008 was $8.9 million, a decline of 50.9% from $18.1 million for the six months ended June 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. Cash collections increased by $4.2 million or 2.2% to $195.5 million for the six months ended June 30, 2008 compared to $191.3 million for the six months ended June 30, 2007. Despite the $4.2 million increase in cash collections, purchased receivable revenues declined by $12.4 million because amortization increased by $16.5 million. Amortization of purchased receivables, the difference between cash collections and purchased receivable revenues, increased to 38.6% of cash collections for the six months ended June 30, 2008 versus 30.8% in the six months ended June 30, 2007. Included in amortization of purchased receivables are net impairments of $5.4 million and $9.6 million for the six months ended June 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’ financial well-being is 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.

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Average borrowings on our Amended New Credit Facilities in 2008 were $171.6 million for the six months ended June 30, 2008, but only $43.1 million for the six months ended June 30, 2007. The increased borrowings are primarily the result of the $150.0 million borrowed to fund the return of capital to shareholders in June and July of 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 $5.2 million to $6.6 million in the six months ended June 30, 2008 compared to $1.4 million in the six months ended June 30, 2007.

Total operating expenses were $99.8 million for the six months ended June 30, 2008 a decrease of $3.2 million from $103.0 million in the six months ended June 30, 2007. As a percentage of cash collections, operating expenses were 51.0% and 53.8% for the six months ended June 30, 2008 and 2007, respectively. Salaries and benefits, collections expense and occupancy costs declined compared to the six months ended June 30, 2007, by $0.7 million, $1.6 million and $0.7 million, respectively. Administrative expenses increased by $0.1 million to $5.6 million in the six months ended June 30, 2008 compared to $5.5 million in the six months ended June 30, 2007. Other operating expenses, including depreciation and amortization, restructuring charges and impairment of intangible assets decreased by $0.2 million in the six months ended June 30, 2008 compared to June 30, 2007. The reduced salaries and benefits costs reflect an increasing portion of our cash collections coming from outside attorneys and agencies. Our collections from third party relationships (attorneys and collection agencies) have increased to 28.9% of total cash collections for the six months ended June 30, 2008 from 24.4% for the six months ended June 30, 2007. Total forwarding fees paid on cash collections from these third party relationships have increased to $16.6 million from $13.7 million in the six months ended June 30, 2008 versus the six months ended June 30, 2007. The remaining expenses included in collections expense declined by $4.5 million during the same period. The $4.5 million decline in the six months ended June 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 $0.7 million in the six months ended June 30, 2008 versus the six months ended June 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”.