UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

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

For the quarterly period ended September 30, 2008

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

For the transition period from                      to                     

Portfolio Recovery Associates, Inc.

Delaware		75-3078675
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
120 Corporate Boulevard, Norfolk, Virginia		23502
(Address of principal executive offices)		(zip code)

(888) 772-7326

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO þ

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

Class		Outstanding as of October 20, 2008
Common Stock, $0.01 par value		15,280,809

 

 

PORTFOLIO RECOVERY ASSOCIATES, INC.

INDEX

		Page(s)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) as of September 30, 2008 and December 31, 2007			3
Consolidated Income Statements (unaudited) For the three and nine months ended September 30, 2008 and 2007			4
Consolidated Statement of Changes in Stockholders’ Equity (unaudited) For the nine months ended September 30, 2008			5
Consolidated Statements of Cash Flows (unaudited) For the nine months ended September 30, 2008 and 2007			6
Notes to Consolidated Financial Statements (unaudited)			7-19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20-39
Item 3. Quantitative and Qualitative Disclosure About Market Risk			40
Item 4. Controls and Procedures			40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			40
Item 1A. Risk Factors			40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 3. Defaults Upon Senior Securities			41
Item 4. Submission of Matters to a Vote of the Security Holders			41
Item 5. Other Information			41
Item 6. Exhibits			41
SIGNATURES			42

PORTFOLIO RECOVERY ASSOCIATES, INC.

		September 30,				December 31,
		2008				2007
Assets
Cash and cash equivalents		$	28,006			$	16,730
Finance receivables, net			535,430				410,297
Income taxes receivable			3,715				3,022
Property and equipment, net			23,354				16,171
Goodwill			28,058				18,620
Intangible assets, net			13,747				5,046
Other assets			9,251				6,421
Total assets		$	641,561			$	476,307
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable		$	4,527			$	4,055
Accrued expenses			5,294				4,471
Accrued payroll and bonuses			9,605				6,819
Deferred tax liability			81,350				57,579
Line of credit			267,300				168,000
Obligations under capital lease			23				103
Total liabilities			368,099				241,027
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, par value $0.01, authorized shares, 2,000, issued and outstanding shares - 0			—				—
Common stock, par value $0.01, authorized shares, 30,000, 15,392 issued and 15,280 outstanding shares - at September 30, 2008, and 15,159 issued and outstanding at December 31, 2007			153				152
Additional paid-in capital			74,873				71,443
Retained earnings			198,436				163,685
Total stockholders’ equity			273,462				235,280
Total liabilities and stockholders’ equity		$	641,561			$	476,307

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

PORTFOLIO RECOVERY ASSOCIATES, INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Revenues:
Income recognized on finance receivables, net		$	52,738			$	46,111			$	158,412			$	137,964
Commissions			15,848				8,529				37,891				25,460
Total revenues			68,586				54,640				196,303				163,424
Operating expenses:
Compensation and employee services			22,983				17,322				64,983				50,438
Outside legal and other fees and services			16,709				11,847				46,400				34,530
Communications			2,263				2,038				7,535				5,927
Rent and occupancy			1,123				819				2,830				2,217
Other operating expenses			1,912				1,605				4,863				4,467
Depreciation and amortization			2,162				1,455				5,138				4,112
Total operating expenses			47,152				35,086				131,749				101,691
Income from operations			21,434				19,554				64,554				61,733
Other income and (expense):
Interest income			17				65				50				364
Interest expense			(3,066	)			(1,137	)			(8,215	)			(1,543	)
Income before income taxes			18,385				18,482				56,389				60,554
Provision for income taxes			6,930				6,787				21,638				22,991
Net income		$	11,455			$	11,695			$	34,751			$	37,563
Net income per common share:
Basic		$	0.75			$	0.76			$	2.28			$	2.37
Diluted		$	0.75			$	0.75			$	2.27			$	2.35
Weighted average number of shares outstanding:
Basic			15,267				15,451				15,210				15,816
Diluted			15,336				15,577				15,280				15,962

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

PORTFOLIO RECOVERY ASSOCIATES, INC.

						Additional								Total
		Common				Paid-in				Retained				Stockholders’
		Stock				Capital				Earnings				Equity
Balance at December 31, 2007		$	152			$	71,443			$	163,685			$	235,280
Net income			—				—				34,751				34,751
Exercise of stock options and vesting of nonvested shares			1				593				—				594
Issuance of common stock for acquisition			—				1,847				—				1,847
Amortization of share-based compensation			—				442				—				442
Income tax benefit from share-based compensation			—				368				—				368
Reversal of FIN 48 reserve			—				180				—				180
Balance at September 30, 2008		$	153			$	74,873			$	198,436			$	273,462

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

PORTFOLIO RECOVERY ASSOCIATES, INC.

		Nine Months Ended
		September 30,
		2008				2007
Cash flows from operating activities:
Net income		$	34,751			$	37,563
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of share-based compensation			442				2,218
Depreciation and amortization			5,138				4,112
Deferred tax expense			23,771				17,566
Changes in operating assets and liabilities:
Other assets			105				(352	)
Accounts payable			(77	)			(77	)
Income taxes			(513	)			(918	)
Accrued expenses			567				958
Accrued payroll and bonuses			1,875				200
Net cash provided by operating activities			66,059				61,270
Cash flows from investing activities:
Purchases of property and equipment			(4,041	)			(6,654	)
Acquisition of finance receivables, net of buybacks			(214,172	)			(159,131	)
Collections applied to principal on finance receivables			89,039				59,102
Company acquisitions, including acquisition costs and net of cash acquired			(25,791	)			(409	)
Net cash used in investing activities			(154,965	)			(107,092	)
Cash flows from financing activities:
Dividends paid			—				(16,070	)
Proceeds from exercise of options			594				1,461
Income tax benefit from share-based compensation			368				1,145
Proceeds from line of credit			146,300				103,000
Principal payments on line of credit			(47,000	)			(3,000	)
Repurchases of common stock			—				(50,557	)
Principal payments on long-term debt			—				(690	)
Principal payments on capital lease obligations			(80	)			(104	)
Net cash provided by financing activities			100,182				35,185
Net increase/(decrease) in cash and cash equivalents			11,276				(10,637	)
Cash and cash equivalents, beginning of period			16,730				25,101
Cash and cash equivalents, end of period		$	28,006			$	14,464
Supplemental disclosure of cash flow information:
Cash paid for interest		$	8,272			$	1,096
Cash paid for income taxes		$	3			$	5,285
Noncash investing and financing activities:
Company acquisitions — Common stock issued		$	1,847			$	50

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

PORTFOLIO RECOVERY ASSOCIATES, INC.

1. Organization and Business:

     Portfolio Recovery Associates, LLC (“PRA”) was formed on March 20, 1996. Portfolio Recovery Associates, Inc. (“PRA Inc”) was formed in August 2002. On November 8, 2002, PRA Inc completed its initial public offering (“IPO”) of common stock. As a result, all of the membership units and warrants of PRA were exchanged on a one to one basis for warrants and shares of a single class of common stock of PRA Inc. PRA Inc owns all outstanding membership units of PRA, PRA Holding I, LLC (“PRA Holding I”), PRA Holding II, LLC (“PRA Holding II”), PRA Receivables Management, LLC (which formerly d/b/a Anchor Receivables Management) (“Anchor”), PRA Location Services, LLC (d/b/a IGS Nevada) (“IGS”), PRA Government Services, LLC (d/b/a Alatax and RDS) (“RDS”) and MuniServices, LLC (“MuniServices”). PRA Inc, a Delaware corporation, and its subsidiaries (collectively, the “Company”) are full-service providers of outsourced receivables management and related services. The Company is engaged in the business of purchasing, managing and collecting portfolios of defaulted consumer receivables, as well as offering a broad range of accounts receivable management services. The majority of the Company’s business activities involve the purchase, management and collection of defaulted consumer receivables. These are purchased from sellers of finance receivables and collected by a highly skilled staff whose purpose is to locate and contact customers and arrange payment or resolution of their debts. The Company, through its Legal Recovery Department, collects accounts judicially, either by using its own attorneys, or by contracting with independent attorneys throughout the country through whom the Company takes legal action to satisfy consumer debts. The Company also services receivables on behalf of clients on either a commission or transaction-fee basis. Clients include entities in the financial services, auto, retail, utility, health care and government sectors. Services provided to these clients include standard collection services on delinquent accounts, obtaining location information for clients in support of their collection activities (known as skip tracing), and the management of both delinquent and non-delinquent tax receivables for government entities.

     The consolidated financial statements of the Company include the accounts of PRA Inc, PRA, PRA Holding I, PRA Holding II, Anchor, IGS, RDS and MuniServices.

     The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and disclosures required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated balance sheet as of September 30, 2008, its consolidated income statements for the three and nine months ended September 30, 2008 and 2007, its consolidated statement of changes in stockholders’ equity for the nine months ended September 30, 2008, and its consolidated statements of cash flows for the nine months ended September 30, 2008 and 2007.  The income statement of the Company for the three and nine months ended September 30, 2008 and 2007 may not be indicative of future results.  These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A, as filed for the year ended December 31, 2007.

2. Finance Receivables, net:

     The Company’s principal business consists of the acquisition and collection of pools of accounts that have experienced deterioration of credit quality between origination and the Company’s acquisition of the accounts. The amount paid for any pool reflects the Company’s determination that it is probable the Company will be unable to collect all amounts due according to an account’s contractual terms. At acquisition, the Company reviews the portfolio both by account and aggregate pool to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that the Company will be unable to collect all amounts due according to the account’s contractual terms. If both conditions exist, the Company determines whether each such account is to be accounted for individually or whether such accounts will be assembled into pools based on common risk characteristics. The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio and subsequently aggregates pools of accounts.

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

The Company determines the excess of the pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference) based on the Company’s proprietary acquisition models. The remaining amount, representing the excess of the account’s cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the remaining life of the account or pool (accretable yield).

     Prior to January 1, 2005, the Company accounted for its investment in finance receivables using the interest method under the guidance of Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans.” Effective January 1, 2005, the Company adopted and began to account for its investment in finance receivables using the interest method under the guidance of American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 03-3, “Accounting for Loans or Certain Securities Acquired in a Transfer.” For loans acquired in fiscal years beginning prior to December 15, 2004, Practice Bulletin 6 is still effective; however, Practice Bulletin 6 was amended by SOP 03-3 as described further in this note. For loans acquired in fiscal years beginning after December 15, 2004, SOP 03-3 is effective. Under the guidance of SOP 03-3 (and the amended Practice Bulletin 6), static pools of accounts may be established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost, which includes certain direct costs of acquisition paid to third parties, and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). SOP 03-3 (and the amended Practice Bulletin 6) requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. SOP 03-3 initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased as the basis for subsequent impairment testing. Significant increases in actual, or expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Effective for fiscal years beginning after December 15, 2004 under SOP 03-3 (and the amended Practice Bulletin 6), rather than lowering the estimated IRR if the collection estimates are not received or projected to be received, the carrying value of a pool would be written down to maintain the then current IRR and is shown as a reduction in revenue in the consolidated income statements with a corresponding valuation allowance offsetting the finance receivables, net, on the balance sheet. Income on finance receivables is accrued quarterly based on each static pool’s effective IRR. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static pool. This reduction in carrying value is defined as payments applied to principal (also referred to as finance receivable amortization). Likewise, cash flows that are less than the accrual will accrete the carrying balance. The Company generally does not allow accretion in the first six to twelve months. The IRR is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Additionally, the Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. These pools are not aggregated with other portfolios. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the interest method as described above. At September 30, 2008 and 2007, the Company had unamortized purchased principal (purchase price) in pools accounted for under the cost recovery method of $3,546,509 and $4,998,673, respectively.

     The Company establishes valuation allowances for all acquired accounts subject to SOP 03-3 to reflect only those losses incurred after acquisition (that is, the present value of cash flows initially expected at acquisition that are no longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the accounts. At September 30, 2008 and 2007, the Company had an allowance against its finance receivables of $14,755,000 and $2,935,000, respectively. Prior to January 1, 2005, in the event that a reduction of the yield to as low as zero in conjunction with estimated future cash collections that were inadequate to amortize the carrying balance, an allowance charge would be taken with a corresponding write-off of the receivable balance.

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

     The Company capitalizes certain fees paid to third parties related to the direct acquisition of a portfolio of accounts. These fees are added to the acquisition cost of the portfolio and accordingly are amortized over the life of the portfolio using the interest method. The balance of the unamortized capitalized fees at September 30, 2008 and 2007 was $3,013,671 and $2,133,480, respectively. During the three and nine months ended September 30, 2008, the Company capitalized $198,257 and $1,065,786, respectively, of these direct acquisition fees. During the three and nine months ended September 30, 2007, the Company capitalized $469,868 and $1,263,578, respectively, of these direct acquisition fees. During the three and nine months ended September 30, 2008, the Company amortized $153,391 and $487,031, respectively, of these direct acquisition fees. During the three and nine months ended September 30, 2007, the Company amortized $135,110 and $452,819, respectively, of these direct acquisition fees.

     The agreements to purchase the aforementioned receivables include general representations and warranties from the sellers covering account holder death or bankruptcy and accounts settled or disputed prior to sale. The representation and warranty period permitting the return of these accounts from the Company to the seller is typically 90 to 180 days. Any funds received from the seller of finance receivables as a return of purchase price are referred to as buybacks. Buyback funds are simply applied against the finance receivable balance received and are not included in the Company’s cash collections from operations. In some cases, the seller will replace the returned accounts with new accounts in lieu of returning the purchase price. In that case, the old account is removed from the pool and the new account is added.

     Changes in finance receivables, net for the three and nine months ended September 30, 2008 and 2007 were as follows (amounts in thousands):

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2008				September 30, 2007				September 30, 2008				September 30, 2007
Balance at beginning of period		$	515,367			$	288,648			$	410,297			$	226,447
Acquisitions of finance receivables, net of buybacks			50,333				56,868				214,172				159,131
Cash collections			(83,008	)			(65,151	)			(247,451	)			(197,066	)
Income recognized on finance receivables, net			52,738				46,111				158,412				137,964
Cash collections applied to principal			(30,270	)			(19,040	)			(89,039	)			(59,102	)
Balance at end of period		$	535,430			$	326,476			$	535,430			$	326,476

     At the time of acquisition, the life of each pool is generally estimated to be between 84 to 96 months based on projected amounts and timing of future cash receipts using the proprietary models of the Company. As of September 30, 2008, the Company had $535,430,442 in net finance receivables. Based upon current projections, cash collections applied to principal are estimated to be as follows for the twelve months in the periods ending (amounts in thousands):

September 30, 2009		$	121,285
September 30, 2010			128,292
September 30, 2011			116,936
September 30, 2012			93,134
September 30, 2013			45,751
September 30, 2014			24,338
September 30, 2015			4,818
September 30, 2016			876
		$	535,430

     During the three and nine months ended September 30, 2008, the Company purchased approximately $857.2 million and $3.28 billion, respectively, of face value of charged-off consumer receivables. During the three and nine months ended September 30, 2007, the Company purchased approximately $2.61 billion and $7.45 billion, respectively, of face value of charged-off consumer receivables.

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

At September 30, 2008, the estimated remaining collections on the receivables purchased in the three and nine months ended September 30, 2008 were $108.3 million and $399.4 million, respectively. At September 30, 2008, the estimated remaining collections on the receivables purchased in the three and nine months ended September 30, 2007 were $94.4 million and $242.6 million, respectively.

     Accretable yield represents the amount of income recognized on finance receivables the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of September 30, 2008 and 2007. Reclassifications from nonaccretable difference to accretable yield primarily result from the Company’s increase in its estimate of future cash flows. Reclassifications to nonaccretable difference from accretable yield results from allowance charges that exceed the Company’s increase in its estimate of future cash flows. Changes in accretable yield for the three and nine months ended September 30, 2008 and 2007 were as follows (amounts in thousands):

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2008				September 30, 2007				September 30, 2008				September 30, 2007
Balance at beginning of period		$	549,716			$	410,843			$	492,269			$	326,775
Income recognized on finance receivables, net			(52,738	)			(46,111	)			(158,412	)			(137,964	)
Additions			57,184				71,601				220,573				198,191
Reclassifications from/(to) nonaccretable difference			(4,592	)			10,055				(4,860	)			59,386
Balance at end of period		$	549,570			$	446,388			$	549,570			$	446,388

     During the three and nine months ended September 30, 2008, the Company recorded $3,985,000 and $10,870,000, respectively, in allowance charges on pools that had underperformed the Company’s most recent expectations as of September 30, 2008. During the three and nine months ended September 30, 2008, the Company also reversed $205,000 and $345,000, respectively, of allowance charges recorded in prior periods. During the three and nine months ended September 30, 2007, the Company recorded $1,180,000 and $1,880,000, respectively, in allowance charges on pools that had underperformed the Company’s most recent expectations as of September 30, 2007. During the three and nine months ended September 30, 2007, the Company also reversed $0 and $245,000, respectively, of allowance charges recorded in prior periods. The change in the valuation allowance for the three and nine months ended September 30, 2008 and 2007 is as follows (amounts in thousands):

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2008				September 30, 2007				September 30, 2008				September 30, 2007
Balance at beginning of period		$	10,975			$	1,755			$	4,230			$	1,300
Allowance charges recorded			3,985				1,180				10,870				1,880
Reversal of previously recorded allowance charges			(205	)			—				(345	)			(245	)
Change in allowance charge			3,780				1,180				10,525				1,635
Balance at end of period		$	14,755			$	2,935			$	14,755			$	2,935

3. Line of Credit:

     On November 29, 2005, the Company entered into a Loan and Security Agreement for a revolving line of credit jointly offered by Bank of America, N. A. and Wachovia Bank, National Association. The agreement was amended on May 9, 2006 to include RBC Centura Bank as an additional lender, again on May 4, 2007 to increase the line of credit to $150,000,000 and incorporate a $50,000,000 non-revolving fixed rate sub-limit, again on October 26, 2007 to increase the line of credit to $270,000,000, again on March 18, 2008 to increase the non-revolving fixed rate sub-limit to $100,000,000, again on May 2, 2008 to include SunTrust Bank as an additional lender and to increase the line of credit to $340,000,000 and again on September 3, 2008 to include JP Morgan Chase Bank as an additional lender and to increase the line of credit to $365,000,000. The agreement is a line of credit in an amount equal to the lesser of $365,000,000 or 30% of the Company’s estimated remaining collections of all its eligible asset pools. Borrowings under the revolving credit facility bear interest at a floating rate equal to the one month LIBOR Market Index Rate plus 1.40% and the facility expires on May 2, 2011. The loan is collateralized by substantially all the tangible and intangible assets of the Company.

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

The agreement provides as follows:

	•		monthly borrowings may not exceed 30% of estimated remaining collections;
	•		funded debt to EBITDA (defined as net income, less income or plus loss from discontinued operations and extraordinary items, plus income taxes, plus interest expense, plus depreciation, depletion, amortization (including finance receivable amortization) and other non-cash charges) ratio must be less than 2.0 to 1.0 calculated on a rolling twelve-month average;
	•		tangible net worth must be at least 100% of prior quarter tangible net worth plus 25% of cumulative positive net income since the end of such fiscal quarter, plus 100% of the net proceeds from any equity offering without giving effect to reductions in tangible net worth due to repurchases of up to $100,000,000 of the Company’s common stock; and
	•		restrictions on change of control.

     As of September 30, 2008, outstanding borrowings under the facility totaled $267,300,000, of which $50,000,000 was part of the non-revolving fixed rate sub-limit which bears interest at 6.80% and expires on May 4, 2012. As of September 30, 2008, the Company is in compliance with all of the covenants of the agreement.

4. Property and Equipment, net:

     Property and equipment, at cost, consist of the following as of the dates indicated (amounts in thousands):

		September 30,				December 31,
		2008				2007
Software		$	12,767			$	6,147
Computer equipment			7,674				6,083
Furniture and fixtures			5,150				4,758
Equipment			5,212				4,742
Leasehold improvements			3,425				2,557
Building and improvements			5,931				5,123
Land			992				939
Accumulated depreciation and amortization			(17,797	)			(14,178	)
Property and equipment, net		$	23,354			$	16,171

     Depreciation and amortization expense, relating to property and equipment, for the three and nine months ended September 30, 2008 was $1,462,637 and $3,715,492, respectively. Depreciation and amortization expense, relating to property and equipment, for the three and nine months ended September 30, 2007 was $955,293 and $2,631,211, respectively.

     Beginning in July 2006 upon initiation of certain internally developed software projects, in accordance with the provisions of SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” the Company began capitalizing qualifying computer software costs incurred during the application development stage and amortizing them over their estimated useful life of three to seven years on a straight-line basis beginning when the project is completed.  Costs associated with preliminary project stage activities, training, maintenance and all other post implementation stage activities are expensed as incurred. The Company’s policy provides for the capitalization of certain direct payroll costs for employees who are directly associated with internal use computer software projects, as well as external direct costs of services associated with developing or obtaining internal use software. Capitalizable personnel costs are limited to the time directly spent on such projects. As of September 30, 2008, the Company has incurred and capitalized $703,292 of these direct payroll costs and external direct costs related to software developed for internal use. Of these costs, $204,436 is for projects that are in the development stage and, therefore are a component of Other Assets. Once the projects are completed, the costs will be transferred to Software and amortized over their estimated useful life of three to seven years. Amortization expense for the three and nine months ended September 30, 2008 was $22,136 and $66,408, respectively. Amortization expense for the three and nine months ended September 30, 2007 was $3,313 and $9,938, respectively.

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

The remaining unamortized costs relating to internally developed software at September 30, 2008 and 2007 were $410,995 and $54,106, respectively.

5. Acquisitions:

     On July 1, 2008, the Company acquired 100% of the membership interests of MuniServices. MuniServices was founded in 1978 and is a provider of revenue enhancement and related services to state and local governments.  Although most of its clients are in California, it also serves clients in Texas, Florida, Pennsylvania, Georgia, Nevada and the District of Columbia.  MuniServices has a workforce of approximately 115 employees. The President of MuniServices and three other members of the management team have entered into long-term employment agreements. The consolidated income statement includes the results of operations of MuniServices for the period from July 1, 2008 through September 30, 2008.

     The transaction was completed at a price of $24.6 million, consisting of $22.5 million in cash and $2.1 million in PRA Inc common stock. The total purchase price could increase by a total of $4.5 million in stock through contingent payments in 2009 and 2010, related to specific operating goals. The common stock component of the purchase price resulted in the issuance of 163,622 shares of unregistered stock to the sellers of MuniServices of which 112,018 shares are being held in escrow and are subject to the earn out and target revenue provisions of the asset purchase agreement. The share count was determined by using a formula agreed to by both parties and contained within the purchase agreement.

     On August 1, 2008, the Company acquired substantially all of the assets of Broussard Partners and Associates, Inc. (“BPA”), which is operating as a part of RDS. BPA, founded in 1995, is a provider of audit services to parishes in Louisiana, with 34 of the state’s 64 parishes as clients. BPA has a workforce of approximately 25 employees. The President of BPA has entered into a long-term employment agreement with RDS. The consolidated income statement includes the results of operations of BPA for the period from August 1, 2008 through September 30, 2008.

     Both of these acquisitions provided the Company additional clients and contracts in the government sector. These clients are located in geographic regions the Company had not previously been servicing. The following is an allocation of the purchase price to the assets acquired and liabilities assumed of MuniServices and BPA:

Purchase price, including acquisition costs and net of cash received		$	27,638,003
Accounts receivable and prepaid expenses (included in other assets)			(2,935,275	)
Customer relationships			(7,497,997	)
Non-compete agreements			(526,783	)
Trademarks			(2,100,000	)
Fixed assets			(6,856,872	)
Accounts payable			549,463
Accrued expenses			256,385
Accrued payroll			911,009
Goodwill		$	9,437,933

6. Goodwill and Intangible Assets, net:

     With the acquisition of IGS on October 1, 2004, RDS on July 29, 2005, The Palmer Group on July 25, 2007, MuniServices on July 1, 2008, and BPA on August 1, 2008, the Company purchased certain tangible and intangible assets. Intangible assets purchased included client and customer relationships, non-compete agreements, trademarks and goodwill. In accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company is amortizing the IGS client relationships over seven years, The Palmer Group customer relationship over 2.42 years, and the RDS, MuniServices, and BPA customer relationships over ten years.

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

The Company is amortizing the non-compete agreements over three years for the IGS, RDS and MuniServices acquisitions and 2.42 years for the BPA acquisition. The Company is amortizing trademarks over 14 years for the MuniServices acquisition. The combined original weighted average amortization period is 8.85 years. The Company reviews these relationships at least annually for impairment. Total amortization expense was $699,598 and $1,422,938 for the three and nine months ended September 30, 2008, respectively. Total amortization expense was $499,752 and $1,480,699 for the three and nine months ended September 30, 2007, respectively. In addition, goodwill, pursuant to SFAS 142, is not amortized but rather is reviewed at least annually for impairment. During the fourth quarter of 2007, the Company underwent its annual review of goodwill. Based upon the results of this review, which was conducted as of October 1, 2007, no impairment charges to goodwill or the other intangible assets were necessary as of the date of this review. The Company believes that nothing has occurred since the review was performed through September 30, 2008 that would necessitate an impairment charge to goodwill or the other intangible assets. The Company will undergo its annual goodwill review during the fourth quarter of 2008. At September 30, 2008 and December 31, 2007, the carrying value of goodwill was $28,058,210 and $18,620,277, respectively. The $9,437,933 increase in the carrying value of goodwill during the three and nine months ended September 30, 2008 relates to the acquisition of MuniServices on July 1, 2008 and the acquisition of the assets of BPA on August 1, 2008.

7. Share-Based Compensation:

     The Company has a stock option and nonvested share plan. The Amended and Restated Portfolio Recovery Associates 2002 Stock Option Plan and 2004 Restricted Stock Plan was approved by the Company’s shareholders at its Annual Meeting of Shareholders on May 12, 2004, enabling the Company to issue to its employees and directors nonvested shares of stock, as well as stock options.

     Effective January 1, 2002, the Company adopted the fair value recognition provisions of SFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” prospectively to all employee awards granted, modified, or settled after January 1, 2002. All stock-based compensation measured under the provisions of APB 25 became fully vested during 2002. All stock-based compensation expense recognized thereafter was derived from stock-based compensation based on the fair value method prescribed in SFAS 123. Effective January 1, 2006, the Company adopted SFAS No. 123R (“SFAS 123R”), “Share-Based Payment” using the modified prospective approach. The adoption of SFAS 123R had no material impact on the Company’s Consolidated Income Statement or on previously reported interim periods. As of September 30, 2008, total future compensation costs related to nonvested awards of stock options and nonvested shares (not including nonvested shares granted under the Long-Term Incentive Program) is estimated to be $3,000 and $3.7 million, respectively, with a weighted average remaining life of 1.4 years for stock options and 3.3 years for nonvested shares (not including nonvested shares granted under the Long-Term Incentive Programs). Based upon historical data, the Company used an annual forfeiture rate of 13.72% for stock options and 15-35% for nonvested shares for most of the employee grants. Grants made to key employee hires and directors of the Company were assumed to have no forfeiture rates associated with them due to the historically low turnover among this group. In addition, commensurate with the adoption of SFAS 123R, all previous references to “restricted” stock are now referred to as “nonvested” shares.

     During the third quarter of 2008, the Company reversed all estimated compensation costs that had been accrued related to the 2007 Long Term Incentive Program because the achievement of the performance targets of the program was unlikely to be achieved. Due to this reversal of $1.4 million of compensation expense, total share-based compensation expense (credit) was ($720,587) and $442,014 for the three and nine months ended September 30, 2008, respectively. Total share-based compensation expense was $853,802 and $2,218,168 for the three and nine months ended September 30, 2007, respectively. Tax benefits resulting from tax deductions in excess of share-based compensation expense recognized under the fair value recognition provisions of SFAS 123R (windfall tax benefits) are credited to additional paid-in capital in the Company’s Consolidated Balance Sheets. Realized tax shortfalls are first offset against the cumulative balance of windfall tax benefits, if any, and then charged directly to income tax expense. The total tax benefit realized from share-based compensation was $404,965 and $857,782 for the three and nine months ended September 30, 2008, respectively. The total tax benefit realized from share-based compensation was $0.5 million and $1.8 million for the three and nine months ended September 30, 2007, respectively.

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

Stock Options

     The Company created the 2002 Stock Option Plan (the “Plan”) on November 7, 2002. The Plan was amended in 2004 (the “Amended Plan”) to enable the Company to issue nonvested shares of stock to its employees and directors. The Amended Plan was approved by the Company’s shareholders at its Annual Meeting on May 12, 2004. Up to 2,000,000 shares of common stock may be issued under the Amended Plan. The Amended Plan expires November 7, 2012. With the exception of the Long-Term Incentive Program, all options and nonvested shares issued under the Amended Plan vest ratably over five years. Granted options expire seven years from grant date. Expiration dates range between November 7, 2009 and January 16, 2011. Options granted to a single person cannot exceed 200,000 in a single year. At September 30, 2008, 895,000 options have been granted under the Amended Plan, of which 118,655 have been cancelled.

     The Company granted no options during the three or nine months ended September 30, 2008 and 2007. All of the stock options which have been granted under the Amended Plan were granted to employees of the Company except for 40,000 which were granted to non-employee directors. The total intrinsic value of options exercised during the three and nine months ended September 30, 2008 was approximately $345,000 and $895,000, respectively. The total intrinsic value of options exercised during the three and nine months ended September 30, 2007 was approximately $0.2 million and $2.8 million, respectively.

     The following summarizes all option related transactions from December 31, 2006 through September 30, 2008 (amounts in thousands except per share amounts):

						Weighted-Average				Weighted Average
		Options				Exercise Price Per				Fair Value Per
		Outstanding				Share				Share
December 31, 2006			301			$	16.43			$	3.27
Exercised			(130	)			15.95				3.33
Cancelled			(8	)			13.00				2.71
December 31, 2007			163				16.97				3.25
Exercised			(37	)			15.95				3.33
Cancelled			(2	)			22.80				4.88
September 30, 2008			124			$	17.19			$	3.20

     The following information is as of September 30, 2008 (amounts in thousands except per share amounts):

		Options Outstanding																Options Exercisable
										Weighted-Average												Weighted-Average
Exercise		Number				Average Remaining				Exercise Price Per				Aggregate				Number				Exercise Price Per				Aggregate
Prices		Outstanding				Contractual Life				Share				Intrinsic Value				Exercisable				Share				Intrinsic Value
$13.00			86				1.1			$	13.00			$	3,059				86			$	13.00			$	3,059
$16.16			5				1.1				16.16				179				5				16.16				179
$27.77 - $29.79			33				2.0				28.28				671				30				28.22				612
Total as of September 30, 2008			124				1.4			$	17.19			$	3,909				121			$	16.91			$	3,850

The Company utilizes the Black-Scholes option pricing model to calculate the value of the stock options when granted. This model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options. In addition, changes to the subjective input assumptions can result in materially different fair market value estimates. Therefore, the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options.

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

Nonvested Shares

     Prior to the approval of the Amended Plan, nonvested shares were permitted to be issued as an incentive to attract new employees and, effective commensurate with the adoption of the Amended Plan at the meeting of shareholders held on May 12, 2004, are permitted to be issued to directors and existing employees. With the exception of the awards made pursuant to the Long-Term Incentive Program, the terms of the nonvested share awards are similar to those of the stock option awards, wherein the nonvested shares vest ratably over five years and are expensed over their vesting period.

     The following summarizes all nonvested share transactions from December 31, 2006 through September 30, 2008 (amounts in thousands except per share amounts):

		Nonvested				Weighted-
		Shares				Average Price
		Outstanding				at Grant Date
December 31, 2006			171			$	40.59
Granted			9				43.42
Vested			(41	)			38.74
Cancelled			(16	)			38.23
December 31, 2007			123				41.72
Granted			19				39.34
Vested			(32	)			39.68
Cancelled			(15	)			40.19
September 30, 2008			95			$	42.16

     The total grant date fair value of shares vested during the three and nine months ended September 30, 2008 was $598,382 and $1,278,168, respectively. The total grant date fair value of shares vested during the three and nine months ended September 30, 2007 was $692,630 and $1,389,686, respectively.

Long-Term Incentive Programs

     Pursuant to the Amended Plan, on March 30, 2007 and January 4, 2008, the Compensation Committee approved the grant of 96,550 and 80,000, respectively, of performance based nonvested shares. The shares were granted to key employees of the Company. The grants are performance based and cliff vest after the requisite service period of three years if certain financial goals are met. The goals are based upon cumulative diluted earnings per share (“EPS”) totals for the 2007, 2008 and 2009 years for the 2007 grant and EPS totals for the 2008, 2009 and 2010 years for the 2008 grant, as well as the return on invested capital for the same periods. The number of shares vested can double if the financial goals are exceeded or no shares can vest if the financial goals are not met. For both the 2007 and 2008 grants, the Company is expensing the nonvested shares over the requisite service period of three years beginning January 1, 2007 and 2008, respectively. If the Company believes that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be made at that time based on the probable outcome. During the third quarter of 2008, the Company reversed all estimated compensation costs that had been accrued related to the 2007 Long Term Incentive Program because the achievement of the performance targets of the program was unlikely to be achieved. At September 30, 2008, total future compensation costs related to nonvested share awards granted under the Long-Term Incentive Programs are estimated to be approximately $1.2 million. The Company assumed a 7.5% forfeiture rate for these grants and the shares have a weighted average life of 1.71 years at September 30, 2008.

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

The following summarizes all performance based nonvested share transactions from December 31, 2006 through September 30, 2008 (amounts in thousands except per share amounts):

		Performance Based				Weighted-
		Nonvested Shares				Average Price
		Outstanding				at Grant Date
December 31, 2006			—			$	—
Granted			97				44.65
Cancelled			(2	)			44.65
December 31, 2007			95				44.65
Granted			80				36.22
Cancelled			(16	)			41.44
September 30, 2008			159			$	40.72

8. Income Taxes — FIN 48:

     On July 13, 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition: the enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

     The Company adopted the provisions of FIN 48 with respect to all of its tax positions as of January 1, 2007. Total unrecognized tax benefits at September 30, 2008 and 2007 were $0 and $180,000, respectively. Due to the approval by the Internal Revenue Service of an application for a change in accounting method with respect to one of the Company’s tax positions, the balance of unrecognized tax benefits at the date adoption was reduced from $388,000 to $180,000 at September 30, 2007. The reduction of $208,000 did not have an impact on the annual effective rate since the ultimate deductibility of these benefits was highly certain, and only the timing of deductibility was uncertain. On September 15, 2008, the 2004 tax year closed and is no longer subject to examination by major taxing jurisdictions, including the Internal Revenue Service. As a result, the remaining unrecognized tax benefits balance of $180,000 was reversed. The reversal was an adjustment to additional paid-in-capital and did not affect the annual effective tax rate.

     The Company was notified on June 21, 2007 that it is currently being examined by the Internal Revenue Service for the 2005 calendar year. At September 30, 2008, the tax years that remain subject to examination by the major taxing jurisdictions, including the Internal Revenue Service, are 2003 and 2005 and subsequent years. The 2003 tax year is still open to examination because of the net operating loss that originated in that year but was not fully utilized until the 2005 tax year.

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

     FIN 48 requires the recognition of interest, if the tax law would require interest to be paid on the underpayment of taxes, and recognition of penalties, if a tax position does not meet the minimum statutory threshold to avoid payment of penalties. Penalties and interest may be classified as either penalties and interest expense or income tax expense. Management has elected to classify accrued penalties and interest as income tax expense. Accrued penalties and interest as of January 1, 2007, in the amount of $77,000, were recorded to beginning of year retained earnings at the date of adoption. Since January 1, 2007, the Company has accrued additional interest of approximately $34,000. Due to the approved application for change in accounting method, the balance of accrued penalties and interest was reduced by $67,000 during 2007. As a result of the lapse in the statute of limitations, the 2004 tax year closed as of September 15, 2008 resulting in the reversal of the remaining $44,000 of accrued interest.

9. Earnings per Share:

     Basic EPS are computed by dividing income available to common shareholders by weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of stock options and nonvested share awards. Share-based awards that are contingent upon the attainment of performance goals are not included in the computation of diluted EPS until the performance goals have been attained. The following tables provide a reconciliation between the computation of basic EPS and diluted EPS for the three and nine months ended September 30, 2008 and 2007 (amounts in thousands except per share amounts):

		For the three months ended September 30,
						2008												2007
						Weighted Average												Weighted Average
		Net Income				Common Shares				EPS				Net Income				Common Shares				EPS
Basic EPS		$	11,455				15,267			$	0.75			$	11,695				15,451			$	0.76
Dilutive effect of stock options and nonvested share awards							69												126
Diluted EPS		$	11,455				15,336			$	0.75			$	11,695				15,577			$	0.75

		For the three months ended September 30,
						2008												2007
						Weighted Average												Weighted Average
		Net Income				Common Shares				EPS				Net Income				Common Shares				EPS
Basic EPS		$	34,751				15,210			$	2.28			$	37,563				15,816			$	2.37
Dilutive effect of stock options and nonvested share awards							70												146
Diluted EPS		$	34,751				15,280			$	2.27			$	37,563				15,962			$	2.35

     There were no antidilutive options or nonvested shares outstanding for the three or nine months ended September 30, 2008 or 2007.

10. Commitments and Contingencies:

Employment Agreements:

     The Company has employment agreements with all of its executive officers and with several members of its senior management group, most of which expire on December 31, 2008. Such agreements provide for base salary payments as well as bonus entitlement, based on the attainment of specific personal and Company goals. Estimated future compensation under these agreements is approximately $4.7 million and is expected to be paid through December 31, 2011. The agreements also contain confidentiality and non-compete provisions.

Leases:

     The Company is party to various operating and capital leases with respect to its facilities and equipment. For further discussion of these leases please refer to the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A, as filed for the year ended December 31, 2007.

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

Forward Flow Agreements:

     The Company is party to several forward flow agreements that allow for the purchase of defaulted consumer receivables at pre-established prices. The maximum remaining amount to be purchased under forward flow agreements at September 30, 2008 is approximately $71.2 million.

Litigation:

     The Company is from time to time subject to routine legal proceedings which are incidental to the ordinary course of our business. The Company initiates lawsuits against consumers and is occasionally countersued by them in such actions. Also, consumers initiate litigation against the Company, in which they allege that the Company has violated a state or federal law in the process of collecting on an account. The Company believes that the results of any pending legal proceedings will not have a material adverse effect on the financial condition, results of operations or liquidity of the Company.

11. Recent Accounting Pronouncements:

     On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS 157 was originally effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years but was amended on February 6, 2008 to defer the effective date for one year for certain nonfinancial assets and liabilities. The Company adopted SFAS 157 on January 1, 2008, which had no material impact on its consolidated financial statements.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 is effective for fiscal years beginning after November 15, 2007. SFAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. The Company adopted SFAS 159 on January 1, 2008, which had no material impact on its consolidated financial statements

     In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination, recognizing assets acquired and liabilities assumed arising from contingencies, and determining what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for acquisitions consummated in fiscal years beginning after December 15, 2008. The Company expects SFAS 141R will have an impact on its consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions that the Company consummates after the effective date.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008 with early application prohibited. The Company believes SFAS 160 will have no material impact on its consolidated financial statements.

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

     In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires expanded disclosures regarding the location and amounts of derivative instruments in an entity’s financial statements, how derivative instruments and related hedged items are accounted for under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, and how derivative instruments and related hedged items affect an entity’s financial position, operating results and cash flows. SFAS 161 is effective for periods beginning on or after November 15, 2008. The Company believes SFAS 161 will have no material impact on its consolidated financial statements.

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

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

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

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

	•		our ability to purchase defaulted consumer receivables at appropriate prices;
	•		changes in the business practices of credit originators in terms of selling defaulted consumer receivables or outsourcing defaulted consumer receivables to third-party contingent fee collection agencies;
	•		changes in government regulations that affect our ability to collect sufficient amounts on our acquired or serviced receivables;
	•		changes in income tax laws or challenges by taxing authorities could have an adverse effect on our financial condition and results of operations;
	•		changes in bankruptcy laws that could negatively affect our business;
	•		our ability to employ and retain qualified employees, especially collection and information technology personnel;
	•		changes in the credit or capital markets, which affect our ability to borrow money or raise capital to purchase or service defaulted consumer receivables;
	•		the degree and nature of our competition;
	•		our ability to comply with the provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder;
	•		our ability to secure sufficient levels of placements for our fee-for-service businesses;
	•		the sufficiency of our funds generated from operations, existing cash and available borrowings to finance our current operations; and
	•		the risk factors listed from time to time in our filings with the SEC.

     You should assume that the information appearing in this quarterly report is accurate only as of the date it was issued. Our business, financial condition, results of operations and prospects may have changed since that date.

     For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as the discussion of “Business” and “Risk Factors” described in our 2007 Annual Report on Form 10-K/A, filed on March 12, 2008.

     Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. We have no obligation to publicly update or revise our forward-looking statements after the date of this report and you should not expect us to do so.

     Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, we do not, by policy, selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst regardless of the content of the statement or report. We do not, by policy, confirm forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

Results of Operations

     The following table sets forth certain operating data as a percentage of total revenues for the periods indicated:

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Revenues:
Income recognized on finance receivables, net			76.9	%			84.4	%			80.7	%			84.4	%
Commissions			23.1	%			15.6	%			19.3	%			15.6	%
Total revenues			100.0	%			100.0	%			100.0	%			100.0	%
Operating expenses:
Compensation and employee services			33.5	%			31.7	%			33.1	%			30.9	%
Outside legal and other fees and services			24.4	%			21.7	%			23.7	%			21.1	%
Communications			3.3	%			3.7	%			3.8	%			3.6	%
Rent and occupancy			1.6	%			1.5	%			1.4	%			1.4	%
Other operating expenses			2.8	%			2.9	%			2.5	%			2.7	%
Depreciation and amortization			3.2	%			2.7	%			2.6	%			2.5	%
Total operating expenses			68.8	%			64.2	%			67.1	%			62.2	%
Income from operations			31.2	%			35.8	%			32.9	%			37.8	%
Other income and (expense):
Interest income			0.1	%			0.1	%			0.0	%			0.2	%
Interest expense			(4.5	%)			(2.1	%)			(4.2	%)			(0.9	%)
Income before income taxes			26.8	%			33.8	%			28.7	%			37.1	%
Provision for income taxes			10.1	%			12.4	%			11.0	%			14.1	%
Net income			16.7	%			21.4	%			17.7	%			23.0	%

     We use the following terminology throughout our reports: “Cash Receipts” refers to all collections of cash, regardless of the source. “Cash Collections” refers to collections on our owned portfolios only, exclusive of commission income and sales of finance receivables. “Cash Sales of Finance Receivables” refers to the sales of our owned portfolios. “Commissions” refers to fee income generated from our wholly-owned contingent fee and fee-for-service subsidiaries.

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

Revenues

     Total revenues were $68.6 million for the three months ended September 30, 2008, an increase of $14.0 million or 25.6% compared to total revenues of $54.6 million for the three months ended September 30, 2007.

Income Recognized on Finance Receivables, net

     Income recognized on finance receivables, net was $52.7 million for the three months ended September 30, 2008, an increase of $6.6 million or 14.3% compared to income recognized on finance receivables, net of $46.1 million for the three months ended September 30, 2007. The majority of the increase was due to an increase in our cash collections on our owned defaulted consumer receivables to $83.0 million from $65.2 million, an increase of 27.3%. Our finance receivables amortization rate, including the allowance charge, on our owned portfolio for the three months ended September 30, 2008 was 36.5% while for the three months ended September 30, 2007 it was 29.2%. During the three months ended September 30, 2008, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $857.2 million at a cost of $52.3 million. During the three months ended September 30, 2007, we acquired defaulted consumer receivable portfolios with an aggregate face value of $2.61 billion at a cost of $57.4 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectibility. We may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can drive pricing rates up or down in any period, irrespective of other quality fluctuations. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on our particular buying activity in that period. However, regardless of the average purchase price, we intend to target a similar internal rate of return in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to estimated profitability of a period’s buying.

     Income recognized on finance receivables, net is shown net of changes in valuation allowances recognized under SOP 03-3, which requires that a valuation allowance be taken for decreases in expected cash flows or change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the three months ended September 30, 2008, we recorded net allowance charges of $3,780,000. For the three months ended September 30, 2007, we recorded net allowance charges of $1,180,000.

Commissions

     Commissions were $15.8 million for the three months ended September 30, 2008, an increase of $7.3 million or 85.9% compared to commissions of $8.5 million for the three months ended September 30, 2007. Commissions grew as a result of the acquisition of MuniServices, LLC (“MuniServices”) on July 1, 2008, as well as increases in revenue generated by our IGS fee-for-service business and RDS government processing and collection business, partially offset by a decrease in our Anchor contingent fee business compared to the prior year period.

Operating Expenses

     Total operating expenses were $47.2 million for the three months ended September 30, 2008, an increase of $12.1 million or 34.5% compared to total operating expenses of $35.1 million for the three months ended September 30, 2007. Total operating expenses, including compensation and employee services expenses, were 47.7% of cash receipts for the three months ended September 30, 2008 compared to 47.6% for the same period in 2007.

Compensation and Employee Services

     Compensation and employee services expenses were $23.0 million for the three months ended September 30, 2008, an increase of $5.7 million or 32.9% compared to compensation and employee services expenses of $17.3 million for the three months ended September 30, 2007. This increase is mainly due to the acquisition of MuniSerivces as well as an overall increase in our owned portfolio collection staff. During the third quarter of 2008, we reversed $1.4 million of estimated share-based compensation costs that had been accrued in 2007 and 2008 related to the 2007 Long Term Incentive Program because the achievement of the performance targets of the program was unlikely to be achieved. Compensation and employee services expenses increased as total employees grew 23.5% to 1,937 as of September 30, 2008 from 1,569 as of September 30, 2007. Compensation and employee services expenses as a percentage of cash receipts decreased to 23.3% for the three months ended September 30, 2008 from 23.5% of cash receipts for the same period in 2007.

Outside Legal and Other Fees and Services

     Outside legal and other fees and services expenses were $16.7 million for the three months ended September 30, 2008, an increase of $4.9 million or 41.5% compared to outside legal and other fees and services expenses of $11.8 million for the three months ended September 30, 2007. Of the $4.9 million increase, $1.7 million was attributable to increases in agency fees mainly incurred by our IGS subsidiary, $0.3 million was attributable to an increase in corporate legal and accounting fees, $0.6 million was attributable to an increase in other outside fees and services and a $0.3 million decrease in credit bureau fees. Of the remaining $2.6 million increase, $1.3 million was attributable to incremental legal costs advanced to our third party collection attorneys. Based on an analysis of our legal accounts and their liquidation potential, it was determined that we were underinvested in terms of costs advanced to attorneys. The remaining $1.3 million was attributable to the increased legal fees and costs incurred resulting from the increased number of accounts referred to both our in house attorneys and outside independent contingent fee attorneys. Total outside legal expenses paid to independent contingent fee attorneys for the three months ended September 30, 2008 were 43.0% of legal cash collections generated by independent contingent fee attorneys compared to 33.9% for the three months ended September 30, 2007. Outside legal fees and costs paid to independent contingent fee attorneys increased from $7.2 million for the three months ended September 30, 2007 to $9.3 million, an increase of $2.1 million or 29.2%, for the three months ended September 30, 2008. Additionally, as disclosed previously, we also effectuate legal collections using our own in house attorneys. Total legal expenses incurred by our in house attorneys for the three months ended September 30, 2008 were 45.8% of legal cash collections generated by our in house attorneys compared to 32.9% for the three months ended September 30, 2007. Legal fees and costs incurred by our in house attorneys increased from $0.5 million for the three months ended September 30, 2007 to $1.0 million, an increase of $0.5 million or 100%, for the three months ended September 30, 2008.

Communications

     Communications expenses were $2.3 million for the three months ended September 30, 2008, an increase of $0.3 million or 15.0% compared to communications expenses of $2.0 million for the three months ended September 30, 2007. The increase was attributable to higher telephone expenses driven by a greater number of defaulted consumer receivables to work, as well as a significant expansion of our automated dialer seats and related calls that are generated by the dialer.

Rent and Occupancy

     Rent and occupancy expenses were $1,123,000 for the three months ended September 30, 2008, an increase of $304,000 or 37.1% compared to rent and occupancy expenses of $819,000 for the three months ended September 30, 2007. The increase was primarily due to the expansion of space in our Norfolk, Virginia administrative and executive facility and the acquisition of MuniServices, as well as increased utility charges.

Other Operating Expenses

     Other operating expenses were $1.9 million for the three months ended September 30, 2008, an increase of $0.3 million or 18.8% compared to other operating expenses of $1.6 million for the three months ended September 30, 2007. The increase was due to increases in taxes (non-income), fees and licenses, repairs and maintenance, travel and meals, insurance, and dues and subscriptions, as well as decreases in hiring, advertising and marketing and other miscellaneous expenses. Taxes (non-income), fees and licenses expenses increased by $42,000, repairs and maintenance expenses increased by $204,000, travel and meals expenses increased by $75,000, insurance expenses increased $14,000 and dues and subscriptions expenses increased by $41,000. Hiring expenses decreased by $37,000, advertising and marketing expenses decreased by $9,000 and other miscellaneous expenses decreased by $23,000.

Depreciation and Amortization

     Depreciation and amortization expenses were $2.2 million for the three months ended September 30, 2008, an increase of $0.7 million or 46.7% compared to depreciation and amortization expenses of $1.5 million for the three months ended September 30, 2007. The increase is mainly due to capital purchases in our administrative and executive facility in Norfolk, Virginia as well as additional expense incurred related to the amortization of intangible assets acquired in the acquisition of MuniServices and the acquisition of the assets of Broussard Partners and Associates, Inc. (“BPA”). Additional increases are the result of continued capital expenditures on equipment, software and computers related to our growth and systems upgrades.

Interest Income

     Interest income was $17,000 for the three months ended September 30, 2008, a decrease of $48,000 compared to interest income of $65,000 for the three months ended September 30, 2007. This decrease is the result of lower average invested cash and cash equivalents balances during the three months ended September 30, 2008 compared to the same period in 2007.

Interest Expense

     Interest expense was $3.1 million for the three months ended September 30, 2008, an increase of $2.0 million compared to interest expense of $1.1 million for the three months ended September 30, 2007. The increase is mainly due to a significant increase in outstanding borrowings on our line of credit during the three months ended September 30, 2008 compared to the same period in 2007. This increase was offset by a decrease in our weighted average interest rate which decreased to 4.57% for the three months ended September 30, 2008 as compared to 6.80% for the three months ended September 30, 2007.

Provision for Income Taxes

     Income tax expense was $6.9 million for the three months ended September 30, 2008, an increase of $0.1 million or 1.5% compared to income tax expense of $6.8 million for the three months ended September 30, 2007.

The increase is mainly due to an increase in the effective tax rate to 37.7% for the three months ended September 30, 2008, as compared to 36.7% for the three months ended September 30, 2007.

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

Revenues

     Total revenues were $196.3 million for the nine months ended September 30, 2008, an increase of $32.9 million or 20.1% compared to total revenues of $163.4 million for the nine months ended September 30, 2007.

Income Recognized on Finance Receivables, net

     Income recognized on finance receivables, net was $158.4 million for the nine months ended September 30, 2008, an increase of $20.4 million or 14.8% compared to income recognized on finance receivables, net of $138.0 million for the nine months ended September 30, 2007. The majority of the increase was due to an increase in our cash collections on our owned defaulted consumer receivables to $247.5 million from $197.1 million, an increase of 25.6%. Our finance receivables amortization rate, including the allowance charge, on our owned portfolio for the nine months ended September 30, 2008 was 36.0% while for the nine months ended September 30, 2007 it was 30.0%. During the nine months ended September 30, 2008, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $3.28 billion at a cost of $218.8 million. During the nine months ended September 30, 2007, we acquired defaulted consumer receivable portfolios with an aggregate face value of $7.45 billion at a cost of $160.4 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectibility. We may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can drive pricing rates up or down in any period, irrespective of other quality fluctuations. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on our particular buying activity in that period. However, regardless of the average purchase price, we intend to target a similar internal rate of return in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to estimated profitability of a period’s buying.

     Income recognized on finance receivables, net is shown net of valuation allowances recognized under SOP 03-3, which requires that a valuation allowance be taken for decreases in expected cash flows or change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the nine months ended September 30, 2008, we recorded net allowance charges of $10,525,000. For the nine months ended September 30, 2007, we recorded net allowance charges of $1,635,000.

Commissions

     Commissions were $37.9 million for the nine months ended September 30, 2008, an increase of $12.4 million or 48.6% compared to commissions of $25.5 million for the nine months ended September 30, 2007. Commissions grew as a result of the acquisition of MuniServices on July 1, 2008, as well as increases in revenue generated by our IGS fee-for-service business and RDS government processing and collection business, partially offset by a decrease in our Anchor contingent fee business compared to the prior year period.

Operating Expenses

     Total operating expenses were $131.7 million for the nine months ended September 30, 2008, an increase of $30.0 million or 29.5% compared to total operating expenses of $101.7 million for the nine months ended September 30, 2007. Total operating expenses, including compensation and employee services expenses, were 46.2% of cash receipts for the nine months ended September 30, 2008 compared to 45.7% for the same period in 2007.

Compensation and Employee Services

     Compensation and employee services expenses were $65.0 million for the nine months ended September 30, 2008, an increase of $14.6 million or 29.0% compared to compensation and employee services expenses of $50.4 million for the nine months ended September 30, 2007.

This increase is mainly due to the acquisition of MuniSerivces as well as an overall increase in our owned portfolio collection staff. During the third quarter of 2008, we reversed $1.4 million of estimated compensation costs that had been accrued in 2007 and 2008 related to the 2007 Long Term Incentive Program because the achievement of the performance targets of the program was unlikely to be achieved. Compensation and employee services expenses increased as total employees grew 23.5% to 1,937 as of September 30, 2008 from 1,569 as of September 30, 2007. Compensation and employee services expenses as a percentage of cash receipts increased to 22.8% for the nine months ended September 30, 2008 from 22.7% of cash receipts for the same period in 2007.

Outside Legal and Other Fees and Services

     Outside legal and other fees and services expenses were $46.4 million for the nine months ended September 30, 2008, an increase of $11.9 million or 34.5% compared to outside legal and other fees and services expenses of $34.5 million for the nine months ended September 30, 2007. Of the $11.9 million increase, $1.3 million was attributable to increases in outside fees and services, $5.3 million was attributable to increases in agency fees mainly incurred by our IGS subsidiary, $0.7 million was attributable to an increase in corporate legal and accounting fees and a $0.3 million decrease in credit bureau fees. Of the remaining $4.9 million increase, $1.3 million was attributable to incremental legal costs advanced to our third party collection attorneys. Based on an analysis of our legal accounts and their liquidation potential, it was determined that we were underinvested in terms of costs advanced to attorneys. The remaining $3.6 million was attributable to the increased legal fees and costs incurred resulting from the increased number of accounts referred to both our in house attorneys and outside independent contingent fee attorneys. Total outside legal expenses paid to independent contingent fee attorneys for the nine months ended September 30, 2008 were 38.5% of legal cash collections generated by independent contingent fee attorneys compared to 34.3% for the three months ended September 30, 2007. Outside legal fees and costs paid to independent contingent fee attorneys increased from $21.7 million for the nine months ended September 30, 2007 to $25.4 million, an increase of $3.7 million or 17.1%, for the nine months ended September 30, 2008. Additionally, as disclosed previously, we also effectuate legal collections using our own in house attorneys. Total legal expenses incurred by our in house attorneys for the nine months ended September 30, 2008 were 40.6% of legal cash collections generated by our in house attorneys compared to 28.9% for the nine months ended September 30, 2007. Legal fees and costs incurred by our in house attorneys increased from $1.2 million for the nine months ended September 30, 2007 to $2.4 million, an increase of $1.2 million or 100.0%, for the nine months ended September 30, 2008.

Communications

     Communications expenses were $7.5 million for the nine months ended September 30, 2008, an increase of $1.6 million or 27.1% compared to communications expenses of $5.9 million for the nine months ended September 30, 2007. The increase was attributable to growth in mailings and higher telephone expenses driven by a greater number of defaulted consumer receivables to work, as well as a significant expansion of our automated dialer seats and related calls that are generated by the dialer. Mailing expenses were responsible for 54.9% of this increase, while the remaining 45.1% was attributable to higher telephone expenses.

Rent and Occupancy

     Rent and occupancy expenses were $2.8 million for the nine months ended September 30, 2008, an increase of $0.6 million or 27.3% compared to rent and occupancy expenses of $2.2 million for the nine months ended September 30, 2007. The increase was primarily due to the expansion of space in our Norfolk, Virginia administrative and executive facility and the acquisition of MuniServices, as well as increased utility charges.

Other Operating Expenses

     Other operating expenses were $4.9 million for the nine months ended September 30, 2008, an increase of $0.4 million or 8.9% compared to other operating expenses of $4.5 million for the nine months ended September 30, 2007. The increase was due to increases in taxes (non-income), fees and licenses, repairs and maintenance, travel and meals, dues and subscriptions, advertising and marketing, and other miscellaneous expenses, as well as decreases in hiring and insurance. Taxes (non-income), fees and licenses expenses increased by $24,000, repairs and maintenance expenses increased by $259,000, travel and meals expenses increased by $19,000, dues and subscriptions expenses increased by $70,000, advertising and marketing expenses increased by $2,000 and other miscellaneous expenses increased by $61,000. Hiring expenses decreased by $27,000 and insurance expenses decreased by $13,000.

Depreciation and Amortization

     Depreciation and amortization expenses were $5.1 million for the nine months ended September 30, 2008, an increase of $1.0 million or 24.4% compared to depreciation and amortization expenses of $4.1 million for the nine months ended September 30, 2007. The increase is mainly due to capital purchases in our administrative and executive facility in Norfolk, Virginia as well as additional expense incurred related to the amortization of intangible assets acquired in the acquisition of MuniServices and the acquisition of the assets of BPA. Additional increases are the result of continued capital expenditures on equipment, software and computers related to our growth and systems upgrades.

Interest Income

     Interest income was $50,000 for the nine months ended September 30, 2008, a decrease of $314,000 compared to interest income of $364,000 for the nine months ended September 30, 2007. This decrease is the result of lower average invested cash and cash equivalents balances during the nine months ended September 30, 2008 compared to the same period in 2007.

Interest Expense

     Interest expense was $8.2 million for the nine months ended September 30, 2008, an increase of $6.7 million compared to interest expense of $1.5 million for the nine months ended September 30, 2007. The increase is due to a higher average outstanding balance on our line of credit during the nine months ended September 30, 2008 compared to the same period in 2007. This increase was offset by a decrease in our weighted average interest rate which decreased to 4.77% for the nine months ended September 30, 2008 as compared to 6.79% for the nine months ended September 30, 2007.

Provision for Income Taxes

     Income tax expense was $21.6 million for the nine months ended September 30, 2008, a decrease of $1.4 million or 6.1% compared to income tax expense of $23.0 million for the nine months ended September 30, 2007. The decrease is mainly due to a 6.9% decrease in pre-tax income, partially offset by a slight increase in the effective tax rate to 38.4% for the nine months ended September 30, 2008, as compared to 38.0% for the nine months ended September 30, 2007.

Supplemental Performance Data

Owned Portfolio Performance:

     The following tables show certain data related to our owned portfolio. These tables describe the purchase price, cash collections and related multiples. Further, these tables disclose our entire portfolio, the portfolio of purchased bankrupt accounts and our entire portfolio less the impact of our purchased bankrupt accounts. The accounts represented in the purchased bankruptcy tables are those portfolios of accounts that were bankrupt at the time of purchase. This contrasts with accounts that file bankruptcy after we purchase them.

Entire Portfolio ($ in thousands)

						Unamortized				Percentage				Actual Cash
						Purchase Price				of Purchase Price				Collections				Estimated								Total Estimated
Purchase		Purchase				Balance at				Remaining Unamortized				Including Cash				Remaining				Total Estimated				Collections to
Period		Price(1)				September 30, 2008 (2)				at September 30, 2008 (3)				Sales				Collections (4)				Collections (5)				Purchase Price (6)
1996		$	3,080			$	0				0	%		$	9,882			$	33			$	9,915				322	%
1997		$	7,685			$	0				0	%		$	24,626			$	175			$	24,801				323	%
1998		$	11,089			$	0				0	%		$	35,658			$	237			$	35,895				324	%
1999		$	18,898			$	0				0	%		$	64,321			$	752			$	65,073				344	%
2000		$	25,020			$	0				0	%		$	104,072			$	2,961			$	107,033				428	%
2001		$	33,481			$	216				1	%		$	155,609			$	4,930			$	160,539				479	%
2002		$	42,325			$	0				0	%		$	168,252			$	5,585			$	173,837				411	%
2003		$	61,450			$	2,539				4	%		$	215,762			$	18,514			$	234,276				381	%
2004		$	59,179			$	5,027				8	%		$	150,920			$	30,068			$	180,988				306	%
2005		$	143,216			$	55,102				38	%		$	203,376			$	117,668			$	321,044				224	%
2006		$	107,803			$	60,822				56	%		$	108,060			$	118,707			$	226,767				210	%
2007		$	258,906			$	206,588				80	%		$	132,997			$	385,961			$	518,958				200	%
YTD 2008		$	218,673			$	205,136				94	%		$	38,481			$	399,409			$	437,890				200	%

Purchased Bankruptcy Portfolio ($ in thousands)

						Unamortized				Percentage				Actual Cash
						Purchase Price				of Purchase Price				Collections				Estimated								Total Estimated
Purchase		Purchase				Balance at				Remaining Unamortized				Including Cash				Remaining				Total Estimated				Collections to
Period		Price(1)				September 30, 2008 (2)				at September 30, 2008 (3)				Sales				Collections (4)				Collections (5)				Purchase Price (6)
1996		$	0			$	0				0	%		$	0			$	0			$	0				0	%
1997		$	0			$	0				0	%		$	0			$	0			$	0				0	%
1998		$	0			$	0				0	%		$	0			$	0			$	0				0	%
1999		$	0			$	0				0	%		$	0			$	0			$	0				0	%
2000		$	0			$	0				0	%		$	0			$	0			$	0				0	%
2001		$	0			$	0				0	%		$	0			$	0			$	0				0	%
2002		$	0			$	0				0	%		$	0			$	0			$	0				0	%
2003		$	0			$	0				0	%		$	0			$	0			$	0				0	%
2004		$	7,470			$	565				8	%		$	13,232			$	1,176			$	14,408				193	%
2005		$	29,302			$	4,620				16	%		$	36,820			$	7,141			$	43,961				150	%
2006		$	17,643			$	4,118				23	%		$	20,222			$	8,078			$	28,300				160	%
2007		$	80,378			$	66,529				83	%		$	23,684			$	95,147			$	118,831				148	%
YTD 2008		$	81,536			$	78,675				96	%		$	7,110			$	131,338			$	138,448				170	%

Entire Portfolio Less Purchased Bankruptcy Portfolio ($ in thousands)

						Unamortized				Percentage				Actual Cash
						Purchase Price				of Purchase Price				Collections				Estimated								Total Estimated
Purchase		Purchase				Balance at				Remaining Unamortized				Including Cash				Remaining				Total Estimated				Collections to
Period		Price(1)				September 30, 2008 (2)				at September 30, 2008 (3)				Sales				Collections (4)				Collections (5)				Purchase Price (6)
1996		$	3,080			$	0				0	%		$	9,882			$	33			$	9,915				322	%
1997		$	7,685			$	0				0	%		$	24,626			$	175			$	24,801				323	%
1998		$	11,089			$	0				0	%		$	35,658			$	237			$	35,895				324	%
1999		$	18,898			$	0				0	%		$	64,321			$	752			$	65,073				344	%
2000		$	25,020			$	0				0	%		$	104,072			$	2,961			$	107,033				428	%
2001		$	33,481			$	216				1	%		$	155,609			$	4,930			$	160,539				479	%
2002		$	42,325			$	0				0	%		$	168,252			$	5,585			$	173,837				411	%
2003		$	61,450			$	2,539				4	%		$	215,762			$	18,514			$	234,276				381	%
2004		$	51,709			$	4,462				9	%		$	137,688			$	28,892			$	166,580				322	%
2005		$	113,914			$	50,482				44	%		$	166,556			$	110,527			$	277,083				243	%
2006		$	90,160			$	56,704				63	%		$	87,838			$	110,629			$	198,467				220	%
2007		$	178,528			$	140,059				78	%		$	109,313			$	290,814			$	400,127				224	%
YTD 2008		$	137,137			$	126,461				92	%		$	31,371			$	268,071			$	299,442				218	%

     The following graph shows the purchase price of our owned portfolios by year beginning in 1996 and includes the year to date acquisition amount for the nine months ended September 30, 2008 and 2007. The purchase price number represents the cash paid to the seller to acquire defaulted consumer receivables, plus certain capitalized costs, less the purchase price refunded by the seller due to the return of non-compliant accounts.

     We utilize a long-term approach to collecting our owned pools of receivables. This approach has historically caused us to realize significant cash collections and revenues from purchased pools of finance receivables years after they are originally acquired. As a result, we have in the past been able to reduce our level of current period acquisitions without a corresponding negative current period impact on cash collections and revenue.

     The following table, which excludes any proceeds from cash sales of finance receivables, demonstrates our ability to realize significant multi-year cash collection streams on our owned pools:

Cash Collections By Year, By Year of Purchase — Entire Portfolio

($ in thousands)
Purchase		Purchase				Cash Collection Period																																																YTD
Period		Price				1996				1997				1998				1999				2000				2001				2002				2003				2004				2005				2006				2007				2008				Total
1996		$	3,080			$	548			$	2,484			$	1,890			$	1,348			$	1,025			$	730			$	496			$	398			$	285			$	210			$	237			$	102			$	67			$	9,820
1997			7,685				—				2,507				5,215				4,069				3,347				2,630				1,829				1,324				1,022				860				597				437				285			$	24,122
1998			11,089				—				—				3,776				6,807				6,398				5,152				3,948				2,797				2,200				1,811				1,415				882				442			$	35,628
1999			18,898				—				—				—				5,138				13,069				12,090				9,598				7,336				5,615				4,352				3,032				2,243				1,155			$	63,628
2000			25,020				—				—				—				—				6,894				19,498				19,478				16,628				14,098				10,924				8,067				5,202				2,821			$	103,610
2001			33,481				—				—				—				—				—				13,048				28,831				28,003				26,717				22,639				16,048				10,011				4,821			$	150,118
2002			42,325				—				—				—				—				—				—				15,073				36,258				35,742				32,497				24,729				16,527				7,414			$	168,240
2003			61,450				—				—				—				—				—				—				—				24,308				49,706				52,640				43,728				30,695				14,685			$	215,762
2004			59,179				—				—				—				—				—				—				—				—				18,019				46,475				40,424				30,750				15,248			$	150,916
2005			143,216				—				—				—				—				—				—				—				—				—				18,968				75,145				69,862				39,401			$	203,376
2006			107,803				—				—				—				—				—				—				—				—				—				—				22,971				53,192				31,897			$	108,060
2007			258,906				—				—				—				—				—				—				—				—				—				—				—				42,263				90,734			$	132,997
YTD 2008			218,673				—				—				—				—				—				—				—				—				—				—				—				—				38,481			$	38,481
Total		$	990,805			$	548			$	4,991			$	10,881			$	17,362			$	30,733			$	53,148			$	79,253			$	117,052			$	153,404			$	191,376			$	236,393			$	262,166			$	247,451			$	1,404,758