UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A
Amendment No. 1

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

For the fiscal year ended December 31, 2007

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)

Registrant’s telephone number, including area code: (888) 772-7326

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. YES o NO þ

     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 and 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. 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		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

     The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2007 was $939,454,107 based on the $60.02 closing price as reported on the NASDAQ Global Stock Market.

     The number of shares of the registrant’s Common Stock outstanding as of February 14, 2008 was 15,163,056.

     Documents incorporated by reference: Portions of the Proxy Statement to be filed by April 30, 2008 for our 2008 Annual Meeting of Stockholders are incorporated by reference into Items 11, 12 and 13 of Part III of this Form 10-K.

 

 

Table of Contents

Part I
Item 1. Business			4
Item 1A. Risk Factors			17
Item 1B. Unresolved Staff Comments			24
Item 2. Properties			24
Item 3. Legal Proceedings			25
Item 4. Submission of Matters to a Vote of Securityholders			25
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			25
Item 6. Selected Financial Data			27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 7A. Quantitative and Qualitative Disclosure about Market Risk			46
Item 8. Financial Statements and Supplementary Data			47
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			73
Item 9A. Controls and Procedures			73
Item 9B. Other Information			73
Part III
Item 10. Directors and Executive Officers of the Registrant			74
Item 11. Executive Compensation			76
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			76
Item 13. Certain Relationships and Related Transactions			76
Item 14. Principal Accountant Fees and Services			77
Part IV
Item 15. Exhibits and Financial Statement Schedules			78
Signatures			80
Exhibit List

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, 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 bankruptcy laws that could negatively affect our business;
	•		our ability to employ and retain qualified employees, especially collection 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 Securities and Exchange Commission (the “SEC”).

     You should assume that the information appearing in this annual 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 “ Risk Factors” described beginning on page 17, as well as “Business” beginning on page 4 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 29.

     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 annual 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.

PART I

Item 1. Business.

General

     We are a full-service provider of outsourced receivables management and related services. Our primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. These are the unpaid obligations of individuals to credit originators, which include banks, credit unions, consumer and auto finance companies and retail merchants. We also provide a broad range of contingent and fee-based services, including collateral-location services for credit originators via PRA Location Services, LLC (“IGS”), fee-based collections through Anchor Receivables Management (“ARM”) and revenue administration, audit and debt discovery/recovery services for government entities through PRA Government Services, LLC (“RDS”). We believe that the strengths of our business are our sophisticated approach to portfolio pricing and servicing, our emphasis on developing and retaining our collection personnel, our sophisticated collections systems and procedures and our relationships with many of the largest consumer lenders in the United States. Our proven ability to service defaulted consumer receivables allows us to offer debt owners a complete outsourced solution to address their defaulted consumer receivables. The defaulted consumer receivables we collect are generally either purchased from sellers of defaulted consumer debt or are collected on behalf of debt owners on a commission fee basis. We intend to continue to build on our strengths and grow our business through the disciplined approach that has contributed to our success to date.

     We use the following terminology throughout our reports: “Cash Receipts” refers to collections on our owned portfolios together with commission income and sales of finance receivables. “Cash Collections” refers to collections on our owned portfolios only, exclusive of commission income and sales of finance receivables. “Amortization Rate” refers to cash collections applied to principal as a percentage of total cash collections. “Income Recognized on Finance Receivables” refers to income derived from our owned debt portfolios and is shown net of valuation allowances. “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.

     We specialize in receivables that have been charged-off by the credit originator. Because the credit originator and/or other debt servicing companies have unsuccessfully attempted to collect these receivables, we are able to purchase them at a substantial discount to their face value. From our 1996 inception through December 31, 2007, we acquired 1,030 portfolios with a face value of $35.3 billion for $791.6 million, representing more than 16.7 million customer accounts. The success of our business depends on our ability to purchase portfolios of defaulted consumer receivables at appropriate valuations and to collect on those receivables effectively and efficiently. Since inception, we have been able to collect at an average rate of 2.5 to 3.0 times our purchase price for defaulted consumer receivables portfolios, as measured over a five to twelve year period, which has enabled us to generate increasing profits and positive operational cash flow.

     We have achieved strong financial results since our formation, with cash collections growing from $10.9 million in 1998 to $262.2 million in 2007. Total revenue has grown from $6.8 million in 1998 to $220.7 million in 2007, a compound annual growth rate of 47%. Similarly, pro forma net income has grown from $402,000 in 1998 to net income of $48.2 million in 2007.

     We were initially formed as Portfolio Recovery Associates, L.L.C., a Delaware limited liability company, on March 20, 1996. Prior to the formation of Portfolio Recovery Associates, Inc., members of our current management team played key roles in the development of a defaulted consumer receivables acquisition and divestiture operation for Household Recovery Services, a subsidiary of Household International, now owned by HSBC. In connection with our 2002 initial public offering (our “IPO”), all of the membership units of Portfolio Recovery Associates, L.L.C. were exchanged, simultaneously with the effectiveness of our registration statement, for a single class of the common stock of Portfolio Recovery Associates, Inc., a new Delaware corporation formed on August 7, 2002. Accordingly, the members of Portfolio Recovery Associates, L.L.C. became the common stockholders of Portfolio Recovery Associates, Inc., which became the parent company of Portfolio Recovery Associates, L.L.C. and its subsidiaries.

     The Company maintains an Internet website at the following address: www.portfoliorecovery.com.

     We make available on or through our website certain reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with or furnish it to the SEC. The information that is filed with the SEC may be read or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. In addition, information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at: www.sec.gov.

     Reports filed with or furnished to the SEC are also available free of charge upon request by contacting our corporate office at:

Portfolio Recovery Associates, Inc.
Attn: Investor Relations
120 Corporate Boulevard, Suite 100
Norfolk, Virginia 23502

Competitive Strengths

Complete Outsourced Solution for Debt Owners

     We offer debt owners a complete outsourced solution to address their defaulted consumer receivables. Depending on a debt owner’s timing and needs, we can either purchase their defaulted consumer receivables, providing immediate cash, or service those receivables on their behalf for either a fee-for-service or a commission fee, based on a percentage of our collections. We can purchase or service receivables throughout the entire delinquency cycle, from receivables that have only been processed for collection internally by the debt owner to receivables that have been subject to multiple internal and external collection efforts. This flexibility helps us meet the needs of debt owners and allows us to become a trusted resource. Furthermore, our strength across multiple transaction and asset types provides the opportunity to cross-sell our services to debt owners, building on successful engagements. Through our RDS business, we have the ability to provide these services to local and state governments.

Disciplined and Proprietary Underwriting Process

     One of the key components of our growth has been our ability to price portfolio acquisitions at levels that have generated profitable returns on investment. Since inception, we have been able to collect at an average rate of 2.5 to 3.0 times our purchase price for defaulted consumer receivables portfolios, as measured over a five to twelve year period, which has enabled us to generate increasing profits and operational cash flow. In order to price portfolios and forecast the targeted collection results for a portfolio, we use two separate internally developed statistical models and one externally developed model, which we may supplement with on-site due diligence and data obtained from the debt owner’s collection process and loan files. One model analyzes the portfolio as one unit based on demographic comparisons, while the second model analyzes each account in a portfolio using variables in a regression analysis. As we collect on our portfolios, the results are input back into the models in an ongoing process which we believe increases their accuracy. Through December 31, 2007, we have acquired 1,030 portfolios with a face value of $35.3 billion.

Ability to Hire, Develop and Retain Productive Collectors

     We place considerable focus on our ability to hire, develop and retain effective collectors who are key to our continued growth and profitability. Several large military bases and numerous telemarketing, customer service and reservation phone centers are located near our headquarters and regional offices in Virginia, providing access to a

large pool of eligible personnel. The Hutchinson, Kansas, Las Vegas, Nevada, Birmingham, Alabama and Jackson, Tennessee areas also provide a sufficient potential workforce of eligible personnel. We have found that tenure is a primary driver of our collector effectiveness. We offer our collectors a competitive wage with the opportunity to receive unlimited incentive compensation based on performance, as well as an attractive benefits package, a comfortable working environment and the ability to work on a flexible schedule. Stock options were awarded to many of our collectors at the time of our IPO, and many tenured collectors were awarded nonvested shares in 2004, 2005 and 2006. We have a comprehensive six week training program for new owned portfolio collectors and provide continuing advanced training classes which are conducted in our four training centers. Recognizing the demands of the job, our management team has endeavored to create a professional and supportive environment for all of our employees.

Established Systems and Infrastructure

     We have devoted significant effort to developing our systems, including statistical models, databases and reporting packages, to optimize our portfolio purchases and collection efforts. In addition, we believe that our technology infrastructure is flexible, secure, reliable and redundant, to ensure the protection of our sensitive data and to mitigate exposure to systems failure or unauthorized access. We believe that our systems and infrastructure give us meaningful advantages over our competitors. We have developed financial models and systems for pricing portfolio acquisitions, managing the collections process and monitoring operating results. We perform a static pool analysis monthly on each of our portfolios, inputting actual results back into our acquisition models, to enhance their accuracy. We monitor collection results continuously, seeking to identify and resolve negative trends immediately. Our comprehensive management reporting package is designed to fully inform our management team so that they may make timely operating decisions. This combination of hardware, software and proprietary modeling and systems has been developed by our management team through years of experience in this industry and we believe provides us with an important competitive advantage from the acquisition process all the way through collection operations.

Strong Relationships with Major Credit Originators

     We have done business with most of the top consumer lenders in the United States. We maintain an extensive marketing effort and our senior management team is in contact on a regular basis with known and prospective credit originators. We believe that we have earned a reputation as a reliable purchaser of defaulted consumer receivables portfolios and as responsible collectors. Furthermore, from the perspective of the selling credit originator, the failure to close on a negotiated sale of a portfolio consumes valuable time and expense and can have an adverse effect on pricing when the portfolio is re-marketed. We have never been unable to close on a transaction. Similarly, if a credit originator sells a portfolio to a debt buyer which has a reputation for violating industry standard collecting practices, it can taint the reputation of the credit originator. We go to great lengths to collect from consumers in a responsible, professional and legally compliant manner. We believe our strong relationships with major credit originators provide us with access to quality opportunities for portfolio purchases and contingent fee collection placements.

Experienced Management Team

     We have an experienced management team with considerable expertise in the accounts receivable management industry. Prior to our formation, our founders played key roles in the development and management of a consumer receivables acquisition and divestiture operation of Household Recovery Services, a subsidiary of Household International, now owned by HSBC. As we have grown, the original management team has been expanded to include a group of experienced, seasoned executives.

Portfolio Acquisitions

     Our portfolio of defaulted consumer receivables includes a diverse set of accounts that can be categorized by asset type, age and size of account, level of previous collection efforts and geography. To identify attractive buying opportunities, we maintain an extensive marketing effort with our senior officers contacting known and prospective sellers of defaulted consumer receivables. We acquire receivables of Visa^®, MasterCard^® and Discover^® credit cards, private label credit cards, installment loans, lines of credit, bankrupt accounts, deficiency balances of various types, legal judgments, and trade payables, all from a variety of debt owners. These debt

owners include major banks, credit unions, consumer finance companies, telecommunication providers, retailers, utilities, insurance companies, medical groups/hospitals, other debt buyers and auto finance companies. In addition, we exhibit at trade shows, advertise in a variety of trade publications and attend industry events in an effort to develop account purchase opportunities. We also maintain active relationships with brokers of defaulted consumer receivables.

     The following chart categorizes our life to date owned portfolios as of December 31, 2007 into the major asset types represented.

										Life to Date Purchased Face
		No. of								Value of Defaulted Consumer
Asset Type		Accounts				%				Receivables (1)				%
Visa/MasterCard/Discover			9,493,347				56.8	%		$	25,864,304,255				73.2	%
Consumer Finance			4,170,594				24.9	%			3,674,355,405				10.4	%
Private Label Credit Cards			2,632,051				15.7	%			3,192,876,381				9.0	%
Auto Deficiency			430,855				2.6	%			2,601,308,663				7.4	%
Total:			16,726,847				100.0	%		$	35,332,844,704				100.0	%

(1)		The “Life to Date Purchased Face Value of Defaulted Consumer Receivables” represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks (“buybacks” are defined as purchase price refunded by the seller due to the return of non-compliant accounts).

     We have done business with most of the largest consumer lenders in the United States. Since our formation, we have purchased accounts from approximately 140 debt owners.

     We have acquired portfolios at various price levels, depending on the age of the portfolio, its geographic distribution, our historical experience with a certain asset type or credit originator and similar factors. A typical defaulted consumer receivables portfolio ranges from $1 million to $150 million in face value and contains defaulted consumer receivables from diverse geographic locations with average initial individual account balances of $400 to $7,000.

     The age of a defaulted consumer receivables portfolio (the time since an account has been charged-off) is an important factor in determining the price at which we will purchase a receivables portfolio. Generally, there is an inverse relationship between the age of a portfolio and the price at which we will purchase the portfolio. This relationship is due to the fact that older receivables typically are more difficult to collect. The accounts receivables management industry places receivables into categories depending on the number of collection agencies that have previously attempted to collect on the receivables. Fresh accounts are typically past due 120 to 270 days and charged-off by the credit originator, that are either being sold prior to any post-charge-off collection activity or are placed with a third-party for the first time. These accounts typically sell for the highest purchase price. Primary accounts are typically 360 to 450 days past due and charged-off, have been previously placed with one contingent fee servicer and receive a lower purchase price. Secondary and tertiary accounts are typically more than 660 days past due and charged-off, have been placed with two or three contingent fee servicers and receive even lower purchase prices. We also purchase accounts previously worked by four or more agencies and these are typically 1,260 days or more past due and receive an even lower price.

     As shown in the following chart, as of December 31, 2007, we purchase or service accounts at any point in the delinquency cycle.

										Life to Date Purchased Face
		No. of								Value of Defaulted
Account Type		Accounts				%				Consumer Receivables(1)				%
Fresh			437,054				2.6	%		$	1,837,133,694				5.2	%
Primary			1,751,591				10.5	%			3,411,142,798				9.7	%
Secondary			2,606,072				15.6	%			4,496,690,016				12.7	%
Tertiary			3,402,180				20.3	%			4,297,282,044				12.2	%
BK Trustees			1,819,365				10.9	%			7,510,751,231				21.3	%
Other			6,710,585				40.1	%			13,779,844,921				38.9	%
Total:			16,726,847				100.0	%		$	35,332,844,704				100.0	%

(1)		The “Life to Date Purchased Face Value of Defaulted Consumer Receivables” represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks.

     We also review the geographic distribution of accounts within a portfolio because we have found that certain states have more debtor-friendly laws than others and, therefore, are less desirable from a collectibility perspective. In addition, economic factors and bankruptcy trends vary regionally and are factored into our maximum purchase price equation.

     The following chart sets forth our overall life to date portfolio of defaulted consumer receivables geographically as of December 31, 2007:

										Life to Date Purchased Face								Original Purchase Price of
Geographic		No. of								Value of Defaulted								Defaulted Consumer
Distribution		Accounts				%				Consumer Receivables (1)				%				Receivables(2)				%
Texas			2,985,339				18	%		$	4,572,650,090				13	%		$	91,113,655				12	%
California			1,670,186				10	%			4,287,048,493				12	%			79,953,070				10	%
Florida			1,291,026				8	%			3,443,924,244				10	%			67,166,072				8	%
New York			975,063				6	%			2,394,086,021				7	%			53,037,698				7	%
Pennsylvania			584,555				3	%			1,409,982,169				4	%			34,734,815				4	%
Illinois			645,103				4	%			1,181,261,995				3	%			29,909,745				4	%
North Carolina			563,082				3	%			1,213,756,630				3	%			28,573,672				4	%
New Jersey			389,348				2	%			1,091,712,754				3	%			23,826,008				3	%
Ohio			523,074				3	%			1,095,906,170				3	%			29,930,960				4	%
Georgia			497,371				3	%			1,068,311,899				3	%			29,803,024				4	%
Michigan			438,014				3	%			868,856,012				2	%			23,644,643				3	%
Massachusetts			319,863				2	%			738,152,928				2	%			15,678,219				2	%
Arizona			257,320				2	%			656,116,498				2	%			12,783,899				2	%
Virginia			324,516				2	%			673,479,899				2	%			17,505,830				2	%
South Carolina			298,489				2	%			657,881,226				2	%			15,002,918				2	%
Tennessee			329,601				2	%			707,781,156				2	%			19,927,659				3	%
Other (3)			4,634,897				27	%			9,271,936,520				27	%			219,034,475				26	%
Total:			16,726,847				100	%		$	35,332,844,704				100	%		$	791,626,362				100	%

(1)		The “Life to Date Purchased Face Value of Defaulted Consumer Receivables” represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks.
(2)		The “Original Purchase Price of Defaulted Consumer Receivables” represents the cash paid to sellers to acquire portfolios of defaulted consumer receivables.
(3)		Each state included in “Other” represents less than 2% of the face value of total defaulted consumer receivables.

Purchasing Process

     We acquire portfolios from debt owners through auctions and negotiated sales. In an auction process, the seller will assemble a portfolio of receivables and will either broadly offer the portfolio to the market or seek purchase prices from specifically invited potential purchasers. In a privately negotiated sale process, the debt owner will contact known, reputable purchasers directly, take bids and negotiate the terms of sale. We also acquire accounts in forward flow contracts. Under a forward flow contract, we agree to purchase defaulted consumer receivables from a debt owner on a periodic basis, at a set percentage of face value of the receivables over a specified time period. These agreements typically have a provision requiring that the attributes of the receivables to be sold will not significantly change each month and that the debt owner efforts to collect these receivables will not change. If this provision is not adhered to, the contract will allow for the early termination of the forward flow contract by the purchaser or call for a price renegotiation. Forward flow contracts are a consistent source of defaulted consumer receivables for accounts receivables management providers and provide the debt owner with a reliable source of revenue and a professional resolution of defaulted consumer receivables.

     In a typical sale transaction, a debt owner distributes a computer data file containing ten to fifteen basic data fields on each receivables account in the portfolio offered for sale. Such fields typically include the consumer’s name, address, outstanding balance, date of charge-off, date of last payment and the date the account was opened. We perform our initial due diligence on the portfolio by electronically cross-checking the data fields on the computer disk or data tape against the accounts in our owned portfolios and against national demographic and credit databases. We compile a variety of portfolio level reports examining all demographic data available. When valuing pools of bankrupt consumer receivables, we seek to access information on the status of each account’s bankruptcy case.

     In order to determine a purchase price for a portfolio, we use two separate internally developed computer models and one externally developed model, which we may supplement with on-site due diligence of the seller’s collection operation and/or a review of their loan origination files, collection notes and work processes. We analyze the portfolio using our proprietary multiple regression model, which analyzes each account of the portfolio using variables in the regression model. In addition, we analyze the portfolio as a whole using an adjustment model, which uses an appropriate cash flow model depending upon whether it is a purchase of fresh, primary, secondary or tertiary accounts. Then, adjustments can be made to the cash flow model to compensate for demographic attributes supported by a detailed analysis of demographic data. Finally, we use a model that creates statistically similar portfolios from our existing accounts and develops collection curves for them that are used in our price modeling. From these models we derive our quantitative purchasing analysis which is used to help price transactions. The multiple regression model is also used to prioritize collection work efforts subsequent to purchase. With respect to prospective forward flow contracts and other long-term relationships, in addition to the procedures outlined above, as we receive new flows under the aforementioned contract we may obtain a representative test portfolio to evaluate and compare the performance of the portfolio to the projections we developed in our purchasing analysis. In addition, when purchasing bankrupt consumer receivables, we utilize a specifically designed pricing model.

     Our due diligence and portfolio review results in a comprehensive analysis of the proposed portfolio. This analysis compares defaulted consumer receivables in the prospective portfolio with our collection history in similar portfolios. We then use our multiple regression model to value each account. Finally, we use the statistically similar portfolio analysis model to refine our curves. Using the three valuation approaches, we determine cash collections over the life of the portfolio. We then summarize all anticipated cash collections and associated direct expenses and project a collectibility value expressed both in dollars and liquidation percentage and a detailed expense projection over the portfolio’s estimated six to ten year economic life. We use the total projected collectibility value and expenses to determine an appropriate purchase price.

     We maintain a detailed static pool analysis on each portfolio that we have acquired, capturing all demographic data and revenue and expense items for further analysis. We use the static pool analysis to refine the underwriting models that we use to price future portfolio purchases. The results of the static pool analysis are input back into our models, increasing the accuracy of the models as the data set increases with every portfolio purchase and each day’s collection efforts.

     The quantitative and qualitative data derived in our due diligence is evaluated together with our knowledge of the current defaulted consumer receivables market and any subjective factors about the portfolio or the debt owner of which management may be aware. A portfolio acquisition approval memorandum is prepared for each prospective portfolio before a purchase price is submitted to the debt owner. This approval memorandum, which outlines the portfolio’s anticipated collectibility and purchase structure, is distributed to members of our Investment Committee. The approval by the Committee sets a maximum purchase price for the portfolio. The Investment Committee is currently comprised of Steve Fredrickson, Chief Executive Officer and President, Kevin Stevenson, Chief Financial and Administrative Officer and Craig Grube, Executive Vice President — Acquisitions.

     Once a portfolio purchase has been approved by our investment committee and the terms of the sale have been agreed to with the debt owner, the acquisition is documented in an agreement that contains customary terms and conditions. Provisions are typically incorporated for bankrupt, disputed, fraudulent or deceased accounts and typically, the debt owner either agrees to repurchase these accounts or replace them with acceptable replacement accounts within certain time frames.

Owned Collection Operations

     Our work flow management system places, recalls and prioritizes accounts in collectors’ work queues, based on our analyses of our accounts and other demographic, credit and prior work collection attributes. We use this process to focus our work effort on those consumers most likely to pay on their accounts and to rotate to other collectors the non-paying but most likely to pay accounts from which other collectors have been unsuccessful in receiving payment. The majority of our collections occur as a result of telephone contact with consumers.

     The collectibility forecast for a newly acquired portfolio will help determine collection strategy. Accounts which are determined to have the highest predicted collection probability may be sent immediately to collectors’ work queues. Less collectible accounts may be set aside as house accounts to be collected using a predictive dialer or another passive, low cost method. Some accounts may be worked using a letter and/or settlement strategy. We may obtain credit reports for various accounts after the collection process begins. When a collector establishes contact with a consumer, the account information is placed automatically in the collector’s work queue.

     Our computer system allows each collector to view all the scanned documents relating to the consumer’s account, which can include the original account application and payment checks. A typical collector work queue may include 650 to 1,000 accounts or more, depending on the skill level and tenure of the collector. The work queue is depleted and replenished automatically by our computerized work flow system.

     On the initial contact call, the consumer is given a standardized presentation regarding the benefits of resolving his or her account with us. Emphasis is placed on determining the reason for the consumer’s default in order to better assess the consumer’s situation and create a plan for repayment. The collector is incentivized to have the consumer pay the full balance of the account. If the collector cannot obtain payment of the full balance, the collector will suggest a repayment plan which generally includes an approximate 20% down payment with the balance to be repaid over an agreed upon period. At times, when determined to be appropriate, and in many cases with management approval, a reduced lump-sum settlement may be agreed upon. If the consumer elects to utilize an installment plan, we have developed a system which enables us to make withdrawals from a consumer’s bank account, in accordance with the directions of the customer.

     If a collector is unable to establish contact with a consumer based on information received, the collector must undertake skip tracing procedures to develop important account information. Skip tracing is the process of developing new phone, address, job or asset information on a consumer, or verifying the accuracy of such information. Each collector does his or her own skip tracing using a number of computer applications available at his or her workstation, as well as a series of automated skip tracing procedures implemented by us on a regular basis.

     Accounts for which the consumer has the likely ability, but not the willingness, to resolve their obligations are reviewed for legal action. Depending on the balance of the defaulted consumer receivable and the applicable state collection laws, we determine whether to commence legal action to judicially collect on the receivable. The legal process can take an extended period of time, but it also generates cash collections that likely would not have been realized otherwise.

     Our legal recovery department oversees our internal legal collections and coordinates an independent nationwide collections attorney network which is responsible for the preparation and filing of judicial collection proceedings in multiple jurisdictions, determining the suit criteria, coordinating sales of property and instituting wage garnishments to satisfy judgments. This network consists of approximately 70 independent law firms who work on a flat fee or contingent fee basis. Legal cash collections currently constitute approximately 32% of our total cash collections. As our portfolio matures, a larger number of accounts will be directed to our legal recovery department for judicial collection; consequently, we anticipate that legal cash collections will grow commensurately and comprise a larger percentage of our total cash collections. During 2004, we began using a combination of internal staff (attorney and support), as well as external attorneys, to pursue legal collections in certain states and under certain circumstances.  This has grown to over 40 states, utilizing the lower courts, in which we initiate law suits in amounts up to the jurisdictional limits of the respective courts. This distribution channel allows us to work accounts that we would not normally pursue through the use of contingent fee collection attorneys because of cost. Our legal recovery department also collects claims against estates in cases involving deceased debtors having assets at the time of death.

     Our bankruptcy department files proofs of claim (“POCs”) and performs all administrative functions and tracking on accounts that are included in consumer bankruptcies filed under Chapter 13 of the U.S. Bankruptcy Code in order to substantiate our claims and ensure that we participate in any distributions to creditors. 

Fee-for-Service Businesses

     In order to provide debt owners with alternative collection solutions and to capitalize on common competencies between a fee-for-service collections operation and an acquired receivables portfolio business, we commenced our ARM third-party contingent fee collections operation in March 2001. In a contingent fee arrangement, debt owners typically place defaulted receivables with a third party collection agency once they have ceased their recovery efforts. The debt owners then pay the third-party agency a commission fee based upon the amount actually collected from the consumer. A contingent fee placement of defaulted consumer receivables is usually for a fixed time frame, typically four to six months, or as long as twelve months. At the end of this fixed period, the third-party agency will return the uncollected defaulted consumer receivables to the debt owner, which may then place the defaulted consumer receivables with another collection agency or sell the portfolio of receivables.

     The determination of the commission fee to be paid for third-party collections is generally based upon the age and potential collectibility of the defaulted consumer receivables being assigned for placement. For example, if there has been no prior third-party collection activity with respect to the defaulted consumer receivables, the commission fee would be lower than if there had been one or more previous collection agencies attempting to collect on the receivables. The earlier the placement of defaulted consumer receivables in the collection process, the higher the probability of receiving a cash collection and, therefore, the lower the cost to collect and the lower the commission fee. Other factors, such as the location of the consumers, the size of the defaulted consumer receivables, competition among third party agencies, and the clients’ collection procedures and work standards also contribute to establishing a commission fee.

     Revenues from IGS are accounted for as commission revenue. IGS performs national skip tracing, asset location and collateral recovery services, principally for auto finance companies, for a fee. The amount of fee earned is generally dependent on several different outcomes: whether the debtor was found and a resolution on the account occurred, if the collateral was repossessed or if payment was made by the debtor to the debt owner. For example, if the debtor is not found, our fee is less than if the debtor is found and we are able to create a positive resolution on the account.

     RDS computes revenue using both of the aforementioned approaches. RDS collects delinquent taxes and earns a contingent fee. This fee can vary based on the age of the debt being collected.   RDS also processes tax payments for taxing authorities.   For this work, we are paid a fee for each transaction.  RDS also performs tax audit services, for which we are paid either an hourly rate or a contingency fee as well as unclaimed property audits for which we are paid a contingency fee.  RDS provides local and state governments with a range of revenue enhancement services including revenue administration, revenue discovery and recovery, aged receivables management and compliance auditing.

Competition

     We face competition in both of the markets we serve — owned portfolio and fee-for-service accounts receivable management — from new and existing providers of outsourced receivables management services, including other purchasers of defaulted consumer receivables portfolios, third-party contingent fee collection agencies and debt owners that manage their own defaulted consumer receivables rather than outsourcing them. The accounts receivable management industry (owned portfolio and contingent fee) is highly fragmented and competitive, consisting of approximately 6,000 consumer and commercial agencies. We estimate that more than 90% of these agencies compete in the contingent fee market. There are few significant barriers for entry to new providers of contingent fee receivables management services and, consequently, the number of agencies serving the contingent fee market may continue to grow. Greater capital needs and the need for portfolio evaluation expertise sufficient to price portfolios effectively constitute significant barriers for entry to new providers of owned portfolio receivables management services.

     We face bidding competition in our acquisition of defaulted consumer receivables and in obtaining placement of fee-for-service receivables. We also compete on the basis of reputation, industry experience and performance. Among the positive factors which we believe influence our ability to compete effectively in this market are our ability to bid on portfolios at appropriate prices, our reputation from previous transactions regarding our ability to close transactions in a timely fashion, our relationships with originators of defaulted consumer receivables, our team of well-trained collectors who provide quality customer service and compliance with applicable collections laws, our ability to collect on various asset types and our ability to provide both purchased and contingent fee solutions to debt owners. Among the negative factors which we believe could influence our ability to compete effectively in this market are that some of our current competitors and possible new competitors may have substantially greater financial, personnel and other resources, greater adaptability to changing market needs, longer operating histories and more established relationships in our industry than we currently have.

Information Technology

Technology Operating Systems and Server Platform

     The scalability of our systems provides us with a technology system that is flexible, secure, reliable and redundant to ensure the protection of our sensitive data.  We utilize Intel-based servers running industry standard open systems coupled with Microsoft Windows 2000/2003 and NT Server operating systems.  In addition, we utilize a blend of purchased and proprietary software systems tailored to the needs of our business.  These systems are designed to eliminate inefficiencies in our collections, continue to meet business objectives in a changing environment and meet compliance obligations with regulatory entities. Our proprietary hardware and software systems are being leveraged to manage location information, phone and operational applications for IGS and RDS. We believe our custom solutions will enhance the overall investigative capabilities of this business while meeting compliance obligations with regulatory entities.

Network Technology

     To provide delivery of our applications, we utilize Intel-based workstations across our entire business operations.  The environment is configured to provide speeds of 100 megabytes to the desktops of our collections and administration staff.  Our one gigabyte server network architecture supports high-speed data transport.  Our network system is designed to be scalable and meet expansion and inter-building bandwidth and quality of service demands.

Database and Software Systems

     The ability to access and utilize data is essential to us being able to operate nationwide in a cost-effective manner.  Our centralized computer-based information systems support the core processing functions of our business under a set of integrated databases and are designed to be both replicable and scalable to accommodate our internal growth.  This integrated approach helps to assure that consistent sources are processed efficiently. 

     We use these systems for portfolio and client management, skip tracing, check taking, financial and management accounting, reporting, and planning and analysis.  The systems also support our consumers, including on-line access to account information, account status and payment entry.  We use a combination of Microsoft, Oracle and Cache database software to manage our portfolios, financial, customer and sales data, and we believe these systems will be sufficient for our needs for the foreseeable future.  RDS maintains a unique, proprietary software system that manages the movement of data, accounts and information throughout the unit. We believe this system will be sufficient for our needs in the foreseeable future. Our contingent fee collections operations database incorporates an integrated and proprietary predictive dialing platform used with our predictive dialer discussed below. 

Redundancy, System Backup, Security and Disaster Recovery

     Our data centers provide the infrastructure for innovative collection services and uninterrupted support of hardware and server management, server co-location and an all-inclusive server administration for our business. We believe our facilities and operations include sufficient redundancy, file back-up and security to ensure minimal exposure to systems failure or unauthorized access.  The preparations in this area include the use of call centers in Virginia, Kansas, Alabama and Tennessee in order to help provide redundancy for data and processes should one site be completely disabled.  We have a disaster recovery plan covering our business that is tested on a periodic basis.  The combination of our locally distributed call control systems provides enterprise-wide call and data distribution between our call centers for efficient portfolio collection and business operations.  In addition to data replication between the sites, incremental backups of both software and databases are performed on a daily basis and a full system backup is performed weekly.  Backup data tapes are stored at an offsite location along with copies of schedules and production control procedures, procedures for recovery using an off-site data center, documentation and other critical information necessary for recovery and continued operation.  Our Virginia headquarters has two separate power and telecommunications feeds, an uninterruptible power supply and a diesel-generator power plant, all of which provide a level of redundancy should a power outage or interruption occur. We also have generators installed at our Hampton, Kansas, Tennessee and Alabama locations.  We also employ rigorous physical and electronic security to protect our data.  Our call centers have restricted card key access and appropriate additional physical security measures.  Electronic protections include data encryption, firewalls and multi-level access controls.  The facilities which currently house IGS and RDS feature uninterruptible power supply units and electronic protections. Full-scale site power, telecommunication and all of the other systems abilities of our other sites will be installed at IGS at a later time.

Plasma Displays for Real Time Data Utilization

     We utilize plasma displays at our main facility to aid in recovery of portfolios.  The displays provide real-time business-critical information to our collection personnel for efficient collection efforts such as telephone, production, employee status, goal trending, training and corporate information.

Predictive Dialer Technology

     The Avaya Proactive Contact Dialer ensures that our collection staff focuses on certain defaulted consumer receivables according to our specifications.  Our predictive dialer takes account of all campaign and dialing parameters and is able to automatically adjust its dialing pace to match changes in campaign conditions and provide the lowest possible wait times and abandon rates.  In addition, the dialer allows our collectors to only handle live voice calls by leaving automated messages on all calls where answering machines are detected.  This feature allows our representatives to speak with more debtors per agent hour, and also increases our inbound call volume.

Employees

     We employed 1,677 persons on a full-time basis, including the following number of front line operations employees by business: 1,240 on our owned portfolios, 67 working in our ARM contingent fee collections operations, 130 working in our IGS operations and 41 working in our RDS government collections operation, as of December 31, 2007. None of our employees are represented by a union or covered by a collective bargaining agreement. We believe that our relations with our employees are good.

Hiring

     We recognize that our collectors are critical to the success of our business as a majority of our collection efforts occur as a result of telephone contact with consumers. We have found that the tenure and productivity of our collectors are directly related. Therefore, attracting, hiring, training, retaining and motivating our collection personnel is a major focus for us. We pay our collectors competitive wages and offer employees a full benefits program which includes comprehensive medical coverage, short and long term disability, life insurance, dental and vision coverage, pre-paid legal plan, an employee assistance program, supplemental indemnity, cancer, hospitalization, accident insurance, a flexible spending account for child care and a matching 401(k) program. In addition to a base wage, we provide collectors with the opportunity to receive unlimited compensation through an incentive compensation program that pays bonuses above a set monthly base, based upon each collector’s collection results. This program is designed to ensure that employees are paid based not only on performance, but also on consistency. We have awarded stock based compensation to many of our tenured collectors. We believe that these practices have helped us achieve an annual post-training turnover rate of 54% in 2007.

     A large number of telemarketing, customer-service and reservation phone centers are located near our Virginia headquarters. We believe that we offer a competitive and, in many cases, a higher base wage than many local employers and therefore have access to a large number of eligible personnel. In addition, there are several military bases in the area. We employ numerous military spouses and retirees and find them to be an excellent source of employees. We have also found the Las Vegas, Nevada, Hutchinson, Kansas, Birmingham, Alabama and Jackson, Tennessee areas to provide a large potential workforce of eligible personnel.

Training

     We provide a comprehensive six week training program for all new owned portfolio collectors. The first three weeks of the training program is comprised of lectures to learn collection techniques, state and federal collection laws, systems, negotiation skills, skip tracing and telephone use. These sessions are then followed by an additional three weeks of practical experience conducting live calls with additional managerial supervision in order to provide employees with confidence and guidance while still contributing to our profitability. Each trainee must successfully pass a comprehensive examination before being assigned to the collection floor, as well as once a year thereafter. In addition, we conduct continuing advanced classes in our four training centers. Our technology and systems allow us to monitor individual employees and then offer additional training in areas of deficiency to increase productivity and ensure compliance.

Outsourced Collections Department

Legal Recovery

     An important component of our collections effort involves our outsourced collections department and the judicial collection of accounts of customers who have the ability, but not the willingness, to resolve their obligations. Accounts for which the consumer is not cooperative and for which we can establish a garnishable job or attachable asset are reviewed for legal action. Additionally, we periodically review accounts using a proprietary scoring model and select those accounts reflecting a high propensity to pay in a legal environment. Depending on the balance of the defaulted consumer receivable and the applicable state collection laws, we determine whether to commence legal action to collect on the receivable. The legal process can take an extended period of time, but it also generates cash collections that likely would not have been realized otherwise. Our legal recovery department oversees internal legal collections and coordinates an independent nationwide attorney network which is responsible for the preparation and filing of judicial collection proceedings in multiple jurisdictions, determining the suit criteria, coordinating sales of property and instituting wage garnishments to satisfy judgments. This nationwide collections attorney network consists of approximately 70 independent law firms, all of which work on a contingent fee basis. Legal cash collections currently constitute approximately 32% of our total collections. As our portfolio matures, a larger number of accounts will be directed to our outsourced collections department for judicial collection; consequently, we anticipate that legal collections will grow commensurately and comprise a larger percentage of our total cash collections. During 2004, we began using a combination of internal staff (attorney and support), as well as external attorneys, to pursue legal collections in certain states and under certain circumstances.  This has grown to 40 states, utilizing the lower courts, in which we initiate law suits in amounts up to the jurisdictional limits of the respective courts. This distribution channel allows us to work accounts that we would not normally pursue through the use of contingent fee collection attorneys because of cost. Our legal recovery department also collects claims against estates in cases involving deceased debtors having assets at the time of death.

Bankruptcy

     Our bankruptcy department files proofs of claim (“POCs”) and performs all administrative functions and tracking on accounts that are included in consumer bankruptcies filed under Chapter 13 of the U.S. Bankruptcy Code in order to substantiate our claims and ensure that we participate in any distributions to creditors.

Corporate Legal Department

           Our corporate legal department manages general corporate governance, litigation management, insurance management and risk assessment, corporate transactions, intellectual property, contract and document preparation and review, including real estate purchase and lease agreements and portfolio purchase documents, federal securities law and other regulatory and statutory compliance, obtaining and maintaining multi-state licensing, bonding and insurance and dispute and complaint resolution. As a part of its compliance functions, our corporate legal department works with our internal auditor and the Audit Committee of our Board of Directors in the implementation of our Code of Ethics. In that connection, we have implemented company wide ethics training and mandatory ethics quizzes and have established a confidential telephone hotline to report suspected policy violations, fraud, embezzlement, deception in record keeping and reporting, accounting, auditing matters and other acts which are inappropriate, criminal and/or unethical. Our Code of Ethics Policy is available at the Investor Relations page of our website. Our corporate legal department also provides guidance to our quality control department and assists with training our staff in relevant areas including extensive training on the Fair Debt Collection Practices Act and other relevant laws and regulations. Our corporate legal department distributes guidelines and procedures for collection personnel to follow when communicating with customers, customer’s agents, attorneys and other parties during our recovery efforts. This includes overseeing the letter process and approving all written communications to account debtors. In addition, our corporate legal department regularly researches, and provides collections personnel and our training department with summaries and updates of changes in, federal and state statutes and relevant case law, so that they are aware of and in compliance with changing laws and judicial decisions when skip-tracing or collecting accounts.

Regulation

     Federal and state statutes establish specific guidelines and procedures which debt collectors must follow when collecting consumer accounts. It is our policy to comply with the provisions of all applicable federal laws and comparable state statutes in all of our recovery activities, even in circumstances in which we may not be specifically subject to these laws. Our failure to comply with these laws could have a material adverse effect on us in the event and to the extent that they apply to some or all of our recovery activities. Federal and state consumer protection, privacy and related laws and regulations extensively regulate the relationship between debt collectors and debtors, and the relationship between customers and credit card issuers. Significant federal laws and regulations applicable to our business as a debt collector include the following:

     •  Fair Debt Collection Practices Act. This act imposes certain obligations and restrictions on the practices of debt collectors, including specific restrictions regarding communications with consumer customers, including the time, place and manner of the communications. This act also gives consumers certain rights, including the right to dispute the validity of their obligations and a right to sue debt collectors who fail to comply with its provisions, including the right to recover their attorney fees.

     •  Fair Credit Reporting Act. This act places certain requirements on credit information providers regarding verification of the accuracy of information provided to credit reporting agencies and investigating consumer disputes concerning the accuracy of such information. We provide information concerning our accounts to the three major credit reporting agencies, and it is our practice to correctly report this information and to investigate credit reporting disputes. The Fair and Accurate Credit Transactions Act amended the Fair Credit Reporting Act to include additional duties applicable to data furnishers with respect to information in the consumer’s credit file that the consumer identifies as resulting from identity theft, and requires that data furnishers have procedures in place to prevent such information from being furnished to credit reporting agencies.

     •  Gramm-Leach-Bliley Act. This act requires that certain financial institutions, including collection agencies, develop policies to protect the privacy of consumers’ private financial information and provide notices to consumers advising them of their privacy policies. This act also requires that if private personal information concerning a consumer is shared with another unrelated institution, the consumer must be given an opportunity to opt out of having such information shared. Since we do not share consumer information with non-related entities, except as required by law, or except as needed to collect on the receivables, our consumers are not entitled to any opt-out rights under this act. This act is enforced by the Federal Trade Commission, which has retained exclusive jurisdiction over its enforcement, and does not afford a private cause of action to consumers who may wish to pursue legal action against a financial institution for violations of this act.

     •  Electronic Funds Transfer Act. This act regulates the use of the Automated Clearing House (“ACH”) system to make electronic funds transfers. All ACH transactions must comply with the rules of the National Automated Check Clearing House Association (“NACHA”) and Uniform Commercial Code § 3-402. This act, the NACHA regulations and the Uniform Commercial Code give the consumer, among other things, certain privacy rights with respect to the transactions, the right to stop payments on a pre-approved fund transfer, and the right to receive certain documentation of the transaction. This act also gives consumers a right to sue institutions which cause financial damages as a result of their failure to comply with its provisions.

     •  Telephone Consumer Protection Act. In the process of collecting accounts, we use automated predictive dialers to place calls to consumers. This act and similar state laws place certain restrictions on telemarketers and users of automated dialing equipment who place telephone calls to consumers.

     •  Servicemembers Civil Relief Act. The Soldiers’ and Sailors’ Civil Relief Act of 1940 was amended in December 2003 as the Servicemembers Civil Relief Act (“SCRA”). The SCRA gives U.S. military service personnel relief from credit obligations they may have incurred prior to entering military service, and may also apply in certain circumstances to obligations and liabilities incurred by a servicemember while serving on active duty. The SCRA prohibits creditors from taking specified actions to collect the defaulted accounts of servicemembers. The SCRA impacts many different types of credit obligations, including installment contracts and court proceedings, and tolls the statute of limitations during the time that the servicemember is engaged in active military service. The SCRA also places a cap on interest bearing obligations of servicemembers to an amount not greater than 6% per year, inclusive of all related charges and fees.

     •  Health Insurance Portability and Accountability Act. The Health Insurance Portability and Accountability Act (“HIPAA”) provides standards to protect the confidentiality of patients’ personal healthcare and financial information. Pursuant to HIPAA, business associates of health care providers, such as agencies which collect healthcare receivables, must comply with certain privacy and security standards established by HIPAA to ensure that the information provided will be safeguarded from misuse. This act is enforced by the Department of Health and Human Services and does not afford a private cause of action to consumers who may wish to pursue legal action against an institution for violations of this act.

     •  U.S. Bankruptcy Code. In order to prevent any collection activity with bankrupt debtors by creditors and collection agencies, the U.S. Bankruptcy Code provides for an automatic stay, which prohibits certain contacts with consumers after the filing of bankruptcy petitions.

     Additionally, there are some states statutes and regulations comparable to the above federal laws, and specific licensing requirements which affect our operations. State laws may also limit credit account interest rates and the fees, as well as limit the time frame in which judicial actions may be initiated to enforce the collection of consumer accounts.

     Although we are not a credit originator, some of these laws directed toward credit originators may occasionally affect our operations because our receivables were originated through credit transactions, such as the following laws, which apply principally to credit originators:

	•		Truth in Lending Act;
	•		Fair Credit Billing Act; and
	•		Equal Credit Opportunity Act.

     Federal laws which regulate credit originators require, among other things, that credit card issuers disclose to consumers the interest rates, fees, grace periods and balance calculation methods associated with their credit card accounts. Consumers are entitled under current laws to have payments and credits applied to their accounts promptly, to receive prescribed notices and to require billing errors to be resolved promptly. Some laws prohibit discriminatory practices in connection with the extension of credit. Federal statutes further provide that, in some cases, consumers cannot be held liable for, or their liability is limited with respect to, charges to the credit card account that were a result of an unauthorized use of the credit card. These laws, among others, may give consumers a legal cause of action against us, or may limit our ability to recover amounts owing with respect to the receivables, whether or not we committed any wrongful act or omission in connection with the account. If the credit originator fails to comply with applicable statutes, rules and regulations, it could create claims and rights for consumers that could reduce or eliminate their obligations to repay the account and have a possible material adverse effect on us.

     Accordingly, when we acquire defaulted consumer receivables, we contractually require credit originators to indemnify us against any losses caused by their failure to comply with applicable statutes, rules and regulations relating to the receivables before they are sold to us.

     The U.S. Congress and several states have enacted legislation concerning identity theft. Additional consumer protection and privacy protection laws may be enacted that would impose additional requirements on the enforcement of and recovery on consumer credit card or installment accounts. Any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to recover the receivables. In addition, our failure to comply with these requirements could adversely affect our ability to enforce the receivables.

     We cannot assure you that some of the receivables were not established as a result of identity theft or unauthorized use of a credit card and, accordingly, we could not recover the amount of the defaulted consumer receivables. As a purchaser of defaulted consumer receivables, we may acquire receivables subject to legitimate defenses on the part of the consumer. Our account purchase contracts allow us to return to the debt owners certain defaulted consumer receivables that may not be collectible, due to these and other circumstances. Upon return, the debt owners are required to replace the receivables with similar receivables or repurchase the receivables. These provisions limit to some extent our losses on such accounts.

Item 1A. Risk Factors.

     To the extent not described elsewhere in this Annual Report, the following are risks related to our business.

We may not be able to purchase defaulted consumer receivables at appropriate prices, and a decrease in our ability to purchase portfolios of receivables could adversely affect our ability to generate revenue

     If we are unable to purchase defaulted receivables from debt owners at appropriate prices, or one or more debt owners stop selling defaulted receivables to us, we could lose a potential source of income and our business may be harmed.

     The availability of receivables portfolios at prices which generate an appropriate return on our investment depends on a number of factors both within and outside of our control, including the following:

	•		the continuation of current growth trends in the levels of consumer obligations;
	•		sales of receivables portfolios by debt owners; and
	•		competitive factors affecting potential purchasers and credit originators of receivables.

     Because of the length of time involved in collecting defaulted consumer receivables on acquired portfolios and the volatility in the timing of our collections, we may not be able to identify trends and make changes in our purchasing strategies in a timely manner.

We may be unable to obtain account documents for some of the accounts that we purchase.  Our inability to provide account documents on accounts that are subject to judicial collections may negatively impact the liquidation rate on these accounts. 

     When we collect accounts judicially, courts in certain jurisdictions require that a copy of the account statements or applications be attached to the pleadings in order to obtain a judgment against the account debtors.  If we are unable to produce account documents, these courts will deny our claims. 

We may not be able to collect sufficient amounts on our defaulted consumer receivables to fund our operations

     Our business primarily consists of acquiring and servicing receivables that consumers have failed to pay and that the credit originator has deemed uncollectible and has generally charged-off. The debt owners generally make numerous attempts to recover on their defaulted consumer receivables, often using a combination of in-house recovery efforts and third-party collection agencies. These defaulted consumer receivables are difficult to collect and we may not collect a sufficient amount to cover our investment associated with purchasing the defaulted consumer receivables and the costs of running our business.

We experience high employee turnover rates and we may not be able to hire and retain enough sufficiently trained employees to support our operations

     The accounts receivables management industry is very labor intensive and, similar to other companies in our industry, we typically experience a high rate of employee turnover. Our annual turnover rate, excluding those employees that do not complete our six week training program, was 54% in 2007. We compete for qualified personnel with companies in our industry and in other industries. Our growth requires that we continually hire and train new collectors. A higher turnover rate among our collectors will increase our recruiting and training costs and limit the number of experienced collection personnel available to service our defaulted consumer receivables. If this were to occur, we would not be able to service our defaulted consumer receivables effectively and this would reduce our ability to continue our growth and operate profitability.

We serve markets that are highly competitive, and we may be unable to compete with businesses that may have greater resources than we have

     We face competition in both of the markets we serve — owned portfolio and fee based accounts receivable management — from new and existing providers of outsourced receivables management services, including other purchasers of defaulted consumer receivables portfolios, third-party contingent fee collection agencies and debt owners that manage their own defaulted consumer receivables rather than outsourcing them. The accounts receivable management industry is highly fragmented and competitive, consisting of approximately 6,000 consumer and commercial agencies, most of which compete in the contingent fee business.

     We face bidding competition in our acquisition of defaulted consumer receivables and in our placement of fee based receivables, and we also compete on the basis of reputation, industry experience and performance. Some of our current competitors and possible new competitors may have substantially greater financial, personnel and other resources, greater adaptability to changing market needs, longer operating histories and more established relationships in our industry than we currently have. In the future, we may not have the resources or ability to compete successfully. As there are few significant barriers for entry to new providers of fee based receivables management services, there can be no assurance that additional competitors with greater resources than ours will not enter the market. Moreover, there can be no assurance that our existing or potential clients will continue to outsource their defaulted consumer receivables at recent levels or at all, or that we may continue to offer competitive bids for defaulted consumer receivables portfolios. If we are unable to develop and expand our business or adapt to changing market needs as well as our current or future competitors are able to do, we may experience reduced access to defaulted consumer receivables portfolios at appropriate prices and reduced profitability.

We may not be successful at acquiring receivables of new asset types or in implementing a new pricing structure

     We may pursue the acquisition of receivables portfolios of asset types in which we have little current experience. We may not be successful in completing any acquisitions of receivables of these asset types and our limited experience in these asset types may impair our ability to collect on these receivables. This may cause us to pay too much for these receivables and consequently, we may not generate a profit from these receivables portfolio acquisitions.

     In addition, we may in the future provide a service to debt owners in which debt owners will place consumer receivables with us for a specific period of time for a flat fee. This fee may be based on the number of collectors assigned to the collection of these receivables, the amount of receivables placed or other bases. We may not be successful in determining and implementing the appropriate pricing for this pricing structure, which may cause us to be unable to generate a profit from this business.

Our collections may decrease if certain types of bankruptcy filings involving liquidations increase

     Various economic trends may contribute to an increase in the amount of personal bankruptcy filings. Under certain bankruptcy filings a debtor’s assets may be sold to repay creditors, but since the defaulted consumer receivables we service are generally unsecured we often would not be able to collect on those receivables. We cannot ensure that our collection experience would not decline with an increase in personal bankruptcy filings or a change in bankruptcy regulations or practices. If our actual collection experience with respect to a defaulted bankrupt consumer receivables portfolio is significantly lower than we projected when we purchased the portfolio, our financial condition and results of operations could deteriorate.

We may make acquisitions that prove unsuccessful or strain or divert our resources

     We intend to consider acquisitions of other companies in our industry that could complement our business, including the acquisition of entities offering greater access and expertise in other asset types and markets that are related but that we do not currently serve. If we do acquire other businesses, we may not be able to successfully integrate these businesses with our own and we may be unable to maintain our standards, controls and policies. Further, acquisitions may place additional constraints on our resources by diverting the attention of our management from other business concerns. Through acquisitions, we may enter markets in which we have no or limited experience. Moreover, any acquisition may result in a potentially dilutive issuance of equity securities, the incurrence of additional debt and amortization expenses of related intangible assets, all of which could reduce our profitability and harm our business.

The loss of IGS customers could negatively affect our operations

     In October 2004 we acquired substantially all of the assets of IGS Nevada, Inc. A significant portion of the valuation was tied to existing client relationships. Our customers, in general, may terminate their relationship with us on 90 days’ prior notice. In the event a customer or customers terminate or significantly cut back any relationship with us, it could reduce our profitability and harm our business and could potentially give rise to an impairment charge related to an intangible asset specifically ascribed to existing client relationships.

We may not be able to continually replace our defaulted consumer receivables with additional receivables portfolios sufficient to operate efficiently and profitably

     To operate profitably, we must continually acquire and service a sufficient amount of defaulted consumer receivables to generate revenue that exceeds our expenses. Fixed costs such as salaries and lease or other facility costs constitute a significant portion of our overhead and, if we do not continually replace the defaulted consumer receivables portfolios we service with additional portfolios, we may have to reduce the number of our collection personnel. We would then have to rehire collection staff as we obtain additional defaulted consumer receivables portfolios. These practices could lead to:

	•		low employee morale;
	•		fewer experienced employees;
	•		higher training costs;
	•		disruptions in our operations;
	•		loss of efficiency; and
	•		excess costs associated with unused space in our facilities.

     Furthermore, heightened regulation of the credit card and consumer lending industry or changing credit origination strategies may result in decreased availability of credit to consumers, potentially leading to a future reduction in defaulted consumer receivables available for purchase from debt owners. We cannot predict how our ability to identify and purchase receivables and the quality of those receivables would be affected if there is a shift in consumer lending practices, whether caused by changes in the regulations or accounting practices applicable to debt owners, a sustained economic downturn or otherwise.

We may not be able to manage our growth effectively

     We have expanded significantly since our formation and we intend to maintain our growth focus. However, our growth will place additional demands on our resources and we cannot ensure that we will be able to manage our growth effectively. In order to successfully manage our growth, we may need to:

	•		expand and enhance our administrative infrastructure;
	•		continue to improve our management, financial and information systems and controls; and
	•		recruit, train, manage and retain our employees effectively.

     Continued growth could place a strain on our management, operations and financial resources. We cannot ensure that our infrastructure, facilities and personnel will be adequate to support our future operations or to effectively adapt to future growth. If we cannot manage our growth effectively, our results of operations may be adversely affected.

Our operations could suffer from telecommunications or technology downtime or increased costs

     Our success depends in large part on sophisticated telecommunications and computer systems. The temporary or permanent loss of our computer and telecommunications equipment and software systems, through casualty or operating malfunction, could disrupt our operations. In the normal course of our business, we must record and process significant amounts of data quickly and accurately to access, maintain and expand the databases we use for our collection activities. Any failure of our information systems or software and our backup systems would interrupt our business operations and harm our business. Our headquarters are located in a region that is susceptible to hurricane damage, which may increase the risk of disruption of information systems and telephone service for sustained periods.

     Further, our business depends heavily on services provided by various local and long distance telephone companies. A significant increase in telephone service costs or any significant interruption in telephone services could reduce our profitability or disrupt our operations and harm our business.

We may not be able to successfully anticipate, manage or adopt technological advances within our industry

     Our business relies on computer and telecommunications technologies and our ability to integrate these technologies into our business is essential to our competitive position and our success. Computer and telecommunications technologies are evolving rapidly and are characterized by short product life cycles. We may not be successful in anticipating, managing or adopting technological changes on a timely basis.

     While we believe that our existing information systems are sufficient to meet our current demands and continued expansion, our future growth may require additional investment in these systems. We depend on having the capital resources necessary to invest in new technologies to acquire and service defaulted consumer receivables. We cannot ensure that adequate capital resources will be available to us at the appropriate time.

Our senior management team is important to our continued success and the loss of one or more members of senior management could negatively affect our operations

     The loss of the services of one or more of our key executive officers or key employees could disrupt our operations. We have employment agreements with Steve Fredrickson, our president, chief executive officer and chairman of our board of directors, Kevin Stevenson, our executive vice president and chief financial and administrative officer, Craig Grube, our executive vice president of portfolio acquisitions, and most of our other senior executives. The current agreements contain non-compete provisions that survive termination of employment. However, these agreements do not and will not assure the continued services of these officers and we cannot ensure that the non-compete provisions will be enforceable. Our success depends on the continued service and performance of our key executive officers, and we cannot guarantee that we will be able to retain those individuals. The loss of the services of Mr. Fredrickson, Mr. Stevenson, Mr. Grube or other key executive officers could seriously impair our ability to continue to acquire or collect on defaulted consumer receivables and to manage and expand our business. Under one of our credit agreements, if both Mr. Fredrickson and Mr. Stevenson cease to be president and chief financial and administrative officer, respectively, it would constitute a default.

Our ability to recover and enforce our defaulted consumer receivables may be limited under federal and state laws

     Federal and state laws may limit our ability to recover and enforce our defaulted consumer receivables regardless of any act or omission on our part. Some laws and regulations applicable to credit issuers may preclude us from collecting on defaulted consumer receivables we purchase if the credit issuer previously failed to comply with applicable laws in generating or servicing those receivables. Collection laws and regulations also directly apply to our business. Additional consumer protection and privacy protection laws may be enacted that would impose additional requirements on the enforcement of and collection on consumer credit receivables. Any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to collect on our defaulted consumer receivables and may harm our business. In addition, federal and state governmental bodies are considering, and may consider in the future, legislative proposals that would regulate the collection of our defaulted consumer receivables. Additionally, the Bankruptcy Reform Act is expected to temporarily disrupt our historical bankruptcy collection curves, making it more difficult to accurately price bankrupt accounts that filed bankruptcy on or after October 17, 2005, the effective date of the Bankruptcy Reform Act. Further, new tax law changes such as Internal Revenue Code Section 6050P (requiring 1099-C returns to be filed on discharge of indebtedness in excess of $600) could negatively impact our ability to collect or cause us to incur additional expenses. Although we cannot predict if or how any future legislation would impact our business, our failure to comply with any current or future laws or regulations applicable to us could limit our ability to collect on our defaulted consumer receivables, which could reduce our profitability and harm our business. Our ability to recover on portfolios of bankrupt consumer receivables may be impacted by changes in federal laws or the change in administrative practices of the various bankruptcy courts.

Our ability to recover on portfolios of bankrupt consumer receivables may be impacted by changes in federal laws or the change in administrative practices of the various bankruptcy courts

     We recover on consumer receivables that have filed for bankruptcy protection under available U.S. bankruptcy legislation. We recover on consumer receivables that have filed for bankruptcy protection after we acquired them, and we also purchase accounts that are currently in bankruptcy proceedings. Changes in bankruptcy laws may affect the process in which the various bankruptcy courts administer bankruptcy plans as well as our ability to recover on bankrupt consumer receivables.

We utilize the interest method of revenue recognition for determining our income recognized on finance receivables, which is based on an analysis of projected cash flows that may prove to be less than anticipated and could lead to reductions in future revenues or impairment charges

     We utilize the interest method to determine income recognized on finance receivables. Under this method, static pools of receivables we acquire are modeled upon their projected cash flows. A yield is then established which, when applied to the unamortized purchase price of the receivables, results in the recognition of income at a constant yield relative to the remaining balance in the pool of defaulted consumer receivables. Each static pool is analyzed monthly to assess the actual performance compared to that expected by the model. If the accuracy of the modeling process deteriorates or there is a decline in anticipated cash flows, we would suffer reductions in future revenues or a decline in the carrying value of our receivables portfolios or impairment charges, which in any case would result in lower earnings in future periods and could negatively impact our stock price.

We may be required to incur impairment charges as a result of the application of American Institute of Certified Public Accountants Statement of Position 03-3

     In October 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 03-3 (“SOP 03-3”), “Accounting for Loans or Certain Securities Acquired in a Transfer.” SOP 03-3 provides guidance on accounting for differences between contractual and expected cash flows from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004 and amends Practice Bulletin 6 which remains in effect for loans acquired prior to the SOP 03-3 effective date. SOP 03-3 limits the revenue that may be accrued to the excess of the estimate of expected future cash flows over a portfolio’s initial cost of accounts receivable acquired. SOP 03-3 requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue, expense, or on the balance sheet. SOP 03-3 initially freezes the internal rate of return, referred to as IRR, originally estimated when the accounts receivable are purchased for subsequent impairment testing. Rather than lower the estimated IRR if the original collection estimates are not received, effective January 1, 2005, the carrying value of a portfolio will be written down to maintain the then-current IRR. SOP 03-3 also amends Practice Bulletin 6 in a similar manner and applies to all loans acquired prior to January 1, 2005. Increases in expected future cash flows can be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increased yield then becomes the new benchmark for impairment testing. SOP 03-3 provides that previously issued annual financial statements would not need to be restated. Historically, as we have applied the guidance of Practice Bulletin 6, we have moved yields upward and downward as appropriate under that guidance. However, since SOP 03-3 guidance does not permit yields to be lowered, under either the revised Practice Bulletin 6 or SOP 03-3, it will increase the probability of us having to incur impairment charges in the future, which could reduce our profitability in a given period and could negatively impact our stock price.

We incur increased costs as a result of enacted and proposed changes in laws and regulations

     Enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the SEC and by the NASDAQ Global Stock Market, have resulted in increased costs to us as we implement their requirements. These rules may affect the cost of certain types of insurance, including director and officer liability insurance, or force us to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We continue to evaluate and monitor developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we will incur or the timing of such costs.

The future impact on us of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder is unclear

     As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report by management on the company’s internal control over financial reporting in our annual reports on Form 10-K. This report is required to contain an assessment by management of the effectiveness of such company’s internal controls over financial reporting. In addition, the public accounting firm auditing a public company’s financial statements must report on the effectiveness of the company’s internal controls over financial reporting. In the future, if we are unable to comply with the requirements of Section 404 in a timely manner, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our internal controls over financial reporting, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations.

The market price of our shares of common stock could fluctuate significantly

     Wide fluctuations in the trading price or volume of our shares of common stock could be caused by many factors, including factors relating to our company or to investor perception of our company (including changes in financial estimates and recommendations by research analysts), but also factors relating to (or relating to investor perception of) the accounts receivable management industry or the economy in general.

We may not be able to retain, renegotiate or replace our existing credit facility

     If we are unable to retain, renegotiate or replace such facility, our growth could be adversely affected, which could negatively impact our business operations and the price of our common stock.

Decreases in collections due to the economic condition in the United States may have an adverse effect on the company’s results of operations, revenue and stock price

     Due to the economic condition in the United States, possible high interest rates and unemployment and personal bankruptcy filings, the ability of consumers to pay their debts could be adversely affected. This may in turn adversely impact our results of operations, revenue and stock price.

Terrorist attacks, war and threats of attacks and war may adversely impact results of operations, revenue, and stock price

     Terrorist attacks, war and the outcome of war and threats of attacks may adversely affect our results of operations, revenue and stock price. Any or all of these occurrences could have a material adverse effect on our results of operations, revenue and stock price.

Failure to comply with government regulation of the collections industry could result in the suspension or termination of our ability to conduct its business

     The collections industry is governed by various US federal and state laws and regulations. Many states require us to be a licensed debt collector. The Federal Trade Commission has the authority to investigate consumer complaints against debt collection companies and to recommend enforcement actions and seek monetary penalties. If we fail to comply with applicable laws and regulations, it could result in the suspension, or termination of our ability to conduct collections which would materially adversely affect us. In addition, new federal and state laws or regulations or changes in the ways these rules or laws are interpreted or enforced could limit our activities in the future or significantly increase the cost of compliance.

Our certificate of incorporation, by-laws and Delaware law contain provisions that may prevent or delay a change of control or that may otherwise be in the best interest of our stockholders
     

     Our certificate of incorporation and by-laws contain provisions that may make it more difficult, expensive or otherwise discourage a tender offer or a change in control or takeover attempt by a third-party, even if such a transaction would be beneficial to our stockholders. The existence of these provisions may have a negative impact on the price of our common stock by discouraging third-party investors from purchasing our common stock. In particular, our certificate of incorporation and by-laws include provisions that:

	•		classify our board of directors into three groups, each of which will serve for staggered three-year terms;
	•		permit a majority of the stockholders to remove our directors only for cause;
	•		permit our directors, and not our stockholders, to fill vacancies on our board of directors;
	•		require stockholders to give us advance notice to nominate candidates for election to our board of directors or to make stockholder proposals at a stockholders’ meeting;

	•		permit a special meeting of our stockholders be called only by approval of a majority of the directors, the chairman of the board of directors, the chief executive officer, the president or the written request of holders owning at least 30% of our common stock;
	•		permit our board of directors to issue, without approval of our stockholders, preferred stock with such terms as our board of directors may determine;
	•		permit the authorized number of directors to be changed only by a resolution of the board of directors; and
	•		require the vote of the holders of a majority of our voting shares for stockholder amendments to our by-laws.

     In addition, we are subject to Section 203 of the Delaware General Corporation Law which provides certain restrictions on business combinations between us and any party acquiring a 15% or greater interest in our voting stock other than in a transaction approved by our board of directors and, in certain cases, by our stockholders. These provisions of our certificate of incorporation and by-laws and Delaware law could delay or prevent a change in control, even if our stockholders support such proposals. Moreover, these provisions could diminish the opportunities for stockholders to participate in certain tender offers, including tender offers at prices above the then-current market value of our common stock, and may also inhibit increases in the trading price of our common stock that could result from takeover attempts or speculation.

Item 1B. Unresolved Staff Comments.

     None.

Item 2. Properties.

     Our principal executive offices and primary operations facility are located in approximately 100,000 square feet of leased space in three adjacent buildings in Norfolk, Virginia. This site can currently accommodate approximately 900 employees. We own a two-acre parcel of land across from our headquarters which we developed into a parking lot for use by our employees.

     We own an approximately 22,000 square foot facility in Hutchinson, Kansas, and contiguous parcels of land which are used primarily for employee parking. The Hutchinson site can currently accommodate approximately 250 employees. In conjunction with a recent expansion, we acquired and remodeled an additional 4,000 square foot building and 35,000 square feet of adjacent land in order to secure parking for the expanded facility. In February 2008, we acquired an additional .25 acres of land in Hutchinson, Kansas, along with three small buildings on the property.

     We also lease a facility located in approximately 23,000 square feet of space in Hampton, Virginia which can accommodate approximately 300 employees.

     We also lease a 13,500 square-foot call center in Las Vegas, Nevada which can accommodate approximately 150 employees.

     We also lease a 15,000 square-foot facility in Birmingham, Alabama which can accommodate approximately 160 employees and approximately 400 square feet of space in Montgomery, Alabama.

     We own a 34,000 square foot building and a nine-acre parcel of land in Jackson, Tennessee which can accommodate approximately 400 employees.

     We do not consider any specific leased or owned facility to be material to our operations. We believe that equally suitable alternative facilities are available in all areas where we currently do business.

Item 3. Legal Proceedings.

     From time to time, we are involved in various legal proceedings which are incidental to the ordinary course of our business. We regularly initiate lawsuits against consumers and are occasionally countersued by them in such actions. Also, consumers occasionally initiate litigation against us, in which they allege that we have violated a state or federal law in the process of collecting on an account. We do not believe that these routine matters represent a substantial volume of our accounts or that, individually or in the aggregate, they are material to our business or financial condition.

     We are not a party to any material legal proceedings and we are unaware of any contemplated material actions against us.

Item 4. Submission of Matters to a Vote of Securityholders.

     None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Price Range of Common Stock

     Our common stock (“Common Stock”) began trading on the NASDAQ Global Stock Market under the symbol “PRAA” on November 8, 2002. Prior to that time there was no public trading market for our common stock. The following table sets forth the high and low sales price for the Common Stock, as reported by the NASDAQ Global Stock Market, for the periods indicated.

		High				Low
2006
Quarter ended March 31, 2006		$	51.77			$	43.89
Quarter ended June 30, 2006		$	52.98			$	43.91
Quarter ended September 30, 2006		$	46.81			$	38.23
Quarter ended December 31, 2006		$	47.97			$	41.11
2007
Quarter ended March 31, 2007		$	49.20			$	41.63
Quarter ended June 30, 2007		$	62.61			$	43.50
Quarter ended September 30, 2007		$	65.66			$	44.26
Quarter ended December 31, 2007		$	54.89			$	36.28

     As of January 31, 2008, there were 28 holders of record of the Common Stock. Based on information provided by our transfer agent and registrar, we believe that there are 30,875 beneficial owners of the Common Stock.

Stock Performance

     The following graph compares, from November 8, 2002, the date of the Company’s initial public offering, to December 31, 2007, the cumulative stockholder returns assuming an initial investment of $100 on November 8, 2002 in the Company’s Common Stock, the stocks comprising the NASDAQ Global Market Composite Index, the NASDAQ Market Index (U.S.) and the stocks comprising a peer group index consisting of six peers.

						Nov. 8, 2002				Dec. 31, 2002				Dec. 31, 2003				Dec. 31, 2004					Dec. 31, 2005					Dec. 31, 2006					Dec. 31, 2007
	PRAA					$	100			$	118			$	172			$	267				$	301				$	302				$	262
	NASDAQ Global Market Composite Index					$	100			$	98			$	147			$	160				$	162				$	178				$	185
	NASDAQ Market Index (U.S.)					$	100			$	101			$	153			$	167				$	173				$	194				$	213
	Peer Group Index					$	100			$	108			$	161			$	182				$	227				$	222				$	208

     The comparisons of stock performance shown above are not intended to forecast or be indicative of possible future performance of the Company’s common stock. The Company does not make or endorse any predictions as to its future stock performance.

Equity Incentives

     The table below provides information with respect to securities authorized for issuance under our equity compensation plans as of December 31, 2007:

Number of Securities

Number of Securities to be Issued

Weighted-average

Remaining Available for

Authorized for

Upon Exercise of Outstanding

Exercise Price of

Future Issuance Under

Issuance Under the

Options or Nonvested Shares Under

Outstanding Options and

the Equity Compensation

Plan Category

Plan

the Plan

Nonvested Shares(1)

Plan(2)

Equity Compensation plans approved by security holders

2,000,000

380,344

$

7.28

916,255

Equity Compensation plans not approved by security holders

None

None

N/A

None

Total

2,000,000

380,344

$

7.28

916,255

     

(1)		Includes grants of nonvested shares, for which there is no exercise price, but with respect to which shares are awarded without cost when the restrictions have been realized. Excluding the impact of the nonvested shares, the weighted average exercise price of outstanding options, warrants and rights is $16.97.
(2)		Excludes 703,401 exercised options and vested shares, which are not available for re-issuance.

Dividend Policy

     Our board of directors sets our dividend policy. We do not currently pay regular dividends on our Common Stock; however, our board of directors may determine in the future to declare or pay dividends on our Common Stock. On April 23, 2007, the Company’s Board of Directors authorized a special one-time cash dividend of $1.00 per share with a record date of May 9, 2007. The cash dividends were paid on June 8, 2007 and totaled $16,069,694. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors may consider relevant.

Item 6. Selected Financial Data.

The following selected financial data should be read in conjunction with the audited consolidated financial statements.

		Years Ended December 31,
		2007				2006				2005				2004				2003
(Dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Revenues:
Income recognized on finance receivables, net		$	184,705			$	163,357			$	134,674			$	106,254			$	81,796
Commissions			36,043				24,965				13,851				7,142				3,131
Total revenues			220,748				188,322				148,525				113,396				84,927
Operating expenses:
Compensation and employee services			69,021				58,142				44,332				36,620				28,987
Outside legal and other fees and services			47,474				40,139				29,965				21,408				14,147
Communications			8,531				5,876				4,424				3,638				2,772
Rent and occupancy			3,106				2,276				2,101				1,745				1,189
Other operating expenses			5,915				4,758				3,424				2,712				1,932
Depreciation and amortization			5,517				5,131				4,679				2,383				1,445
Total operating expenses			139,564				116,322				88,925				68,506				50,472
Income from operations			81,184				72,000				59,600				44,890				34,455
Net interest income/(expenses)			(3,285	)			206				331				(51	)			(542	)
Income before income taxes			77,899				72,206				59,931				44,839				33,913
Provision for income taxes			29,658				27,716				23,159				17,388				13,199
Net income		$	48,241			$	44,490			$	36,772			$	27,451			$	20,714
Net income per share
Basic		$	3.08			$	2.80			$	2.35			$	1.79			$	1.42
Diluted		$	3.06			$	2.77			$	2.28			$	1.73			$	1.32
Weighted average shares
Basic			15,646				15,911				15,642				15,357				14,546
Diluted			15,779				16,082				16,149				15,853				15,712
OPERATING AND OTHER FINANCIAL DATA:
Cash collections and commissions (1)		$	298,209			$	261,357			$	205,226			$	160,546			$	120,183
Operating expenses to cash collections and commissions			47	%			45	%			43	%			43	%			42	%
Return on equity (2)			20	%			20	%			21	%			20	%			20	%
Acquisitions of finance receivables, at cost (3)		$	263,809			$	112,406			$	149,645			$	61,165			$	61,815
Acquisitions of finance receivables, at face value		$	11,113,830			$	7,788,158			$	5,307,918			$	3,340,434			$	2,229,682
Employees at period end:
Total employees			1,677				1,291				1,110				948				798
Ratio of collection personnel to total employees (4)			88	%			88	%			88	%			89	%			90	%

     

(1)		Includes both cash collected on finance receivables and commission fees received during the relevant period.
(2)		Calculated by dividing net income for each year by average monthly stockholders’ equity for the same year.
(3)		Represents cash paid for finance receivables. It does not include certain capitalized costs or purchase price refunded by the seller due to the return of non-compliant accounts (also defined as buybacks). Non-compliant refers to the contractual representations and warranties provided for in the purchase and sale contract between the seller and us. These representations and warranties from the sellers generally cover account holders’ death or bankruptcy and accounts settled or disputed prior to sale. The seller can replace or repurchase these accounts.
(4)		Includes all collectors and all first-line collection supervisors at December 31.

     Below is listed certain key balance sheet data for the periods presented:

		As of December 31,
(Dollars in thousands)		2007				2006				2005				2004				2003
BALANCE SHEET DATA:
Cash and cash equivalents		$	16,730			$	25,101			$	15,985			$	24,513			$	24,912
Investments			—				—				—				23,950				—
Finance receivables, net			410,297				226,447				193,645				105,189				92,569
Total assets			476,307				293,378				247,772				175,176				126,394
Long-term debt			—				690				1,152				1,924				1,657
Total debt, including obligations under capital lease and line of credit			168,103				932				16,535				2,501				2,208
Total stockholders’ equity			235,280				247,278				195,322				151,389				119,148

     Below is listed the quarterly consolidated income statements for the years ended December 31, 2007 and 2006:

		For the Quarter Ended
		Dec. 31,				Sept. 30,				June 30,				Mar. 31,				Dec. 31,				Sept. 30,				June 30,				Mar. 31,
(Dollars in thousands, except per share data)		2007				2007				2007				2007				2006				2006				2006				2006
INCOME STATEMENT DATA:
Revenues:
Income recognized on finance receivables, net		$	46,741			$	46,111			$	46,387			$	45,466			$	41,830			$	41,760			$	40,394			$	39,373
Commissions			10,584				8,529				8,389				8,542				7,129				6,076				5,791				5,968
Total revenues			57,325				54,640				54,776				54,008				48,959				47,836				46,185				45,341
Operating expenses:
Compensation and employee services			18,584				17,322				16,681				16,435				15,160				14,550				14,335				14,096
Outside legal and other fees and services			12,944				11,847				11,246				11,437				10,757				10,582				9,740				9,060
Communications			2,603				2,039				2,005				1,884				1,483				1,475				1,304				1,614
Rent and occupancy			888				819				739				659				583				573				560				561
Other operating expenses			1,449				1,605				1,478				1,383				1,264				1,212				1,205				1,076
Depreciation and amortization			1,405				1,455				1,362				1,295				1,360				1,279				1,239				1,253
Total operating expenses			37,873				35,087				33,511				33,093				30,607				29,671				28,383				27,660
Income from operations			19,452				19,553				21,265				20,915				18,352				18,165				17,802				17,681
Net interest income (expense)			(2,106	)			(1,073	)			(218	)			112				100				105				96				(95	)
Income before income taxes			17,346				18,480				21,047				21,027				18,452				18,270				17,898				17,586
Provision for income taxes			6,668				6,787				8,058				8,146				7,038				7,027				6,795				6,856
Net income		$	10,678			$	11,693			$	12,989			$	12,881			$	11,414			$	11,243			$	11,103			$	10,730
Net income per share
Basic		$	0.71			$	0.76			$	0.81			$	0.81			$	0.72			$	0.71			$	0.70			$	0.68
Diluted		$	0.70			$	0.75			$	0.80			$	0.80			$	0.71			$	0.70			$	0.69			$	0.67
Weighted average shares
Basic			15,136				15,451				16,005				15,993				15,960				15,915				15,897				15,872
Diluted			15,230				15,777				16,168				16,140				16,106				16,071				16,085				16,065
Below is listed the quarterly consolidated balance sheets for the years ended December 31, 2007 and 2006:
		Quarter Ended
		Dec. 31,				Sept. 30,				June 30,				Mar. 31,				Dec. 31,				Sept. 30,				June 30,				Mar. 31,
(Dollars in thousands)		2007				2007				2007				2007				2006				2006				2006				2006
BALANCE SHEET DATA:
Assets
Cash and cash equivalents		$	16,730			$	14,464			$	15,042			$	27,883			$	25,101			$	26,662			$	25,205			$	23,352
Finance receivables, net			410,297				326,476				288,648				243,568				226,447				211,763				197,438				189,847
Property and equipment, net			16,171				15,217				13,510				12,201				11,193				7,730				7,289				7,569
Income taxes receivable			3,022				2,621				2,424				—				1,513				662				—				—
Goodwill			18,620				18,620				18,287				18,288				18,287				18,287				18,287				18,287
Intangible assets, net			5,046				5,399				5,773				6,263				6,754				7,321				7,888				8,456
Other assets			6,422				4,435				4,354				4,614				4,083				2,845				3,009				3,748
Total assets		$	476,308			$	387,232			$	348,038			$	312,817			$	293,378			$	275,270			$	259,116			$	251,259
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable		$	4,055			$	2,815			$	2,456			$	4,220			$	2,891			$	2,763			$	1,536			$	3,624
Accrued expenses			4,471				3,614				3,477				3,063				2,579				2,639				4,420				4,516
Income taxes payable			—				—				—				1,765				—				—				929				5,009
Accrued payroll and bonuses			6,820				6,445				4,327				4,203				6,245				6,091				4,039				3,657
Deferred tax liability			57,579				51,018				43,970				37,849				33,453				28,971				25,119				23,378
Line of credit			168,000				100,000				38,000				—				—				—				—				—
Long-term debt			—				—				19				572				690				807				922				1,035
Obligations under capital lease			103				138				174				208				242				276				310				345
Total liabilities			241,028				164,030				92,423				51,880				46,100				41,547				37,275				41,564
Stockholders’ equity
Common stock			152				151				160				160				160				159				159				159
Additional paid in capital			71,443				70,044				114,142				116,383				115,528				113,387				112,749				111,706
Retained earnings			163,685				153,007				141,313				144,394				131,590				120,177				108,933				97,830
Total stockholders’ equity			235,280				223,202				255,615				260,937				247,278				233,723				221,841				209,695
Total liabilities and stockholders’ equity		$	476,308			$	387,232			$	348,038			$	312,817			$	293,378			$	275,270			$	259,116			$	251,259

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

     The following table sets forth certain operating data in dollars and as a percentage of total revenues for the years ended December 31, 2007, 2006 and 2005:

		2007								2006								2005
Revenues:
Income recognized on finance receivables, net		$	184,704,891				83.7	%		$	163,357,323				86.7	%		$	134,674,344				90.7	%
Commissions			36,043,320				16.3				24,964,444				13.3				13,850,805				9.3
Total revenues			220,748,211				100.0				188,321,767				100.0				148,525,149				100.0
Operating expenses:
Compensation and employee services			69,022,177				31.3				58,141,684				30.9				44,332,298				29.8
Outside legal and other fees and services			47,473,920				21.5				40,139,272				21.3				29,964,999				20.2
Communications			8,530,651				3.9				5,875,815				3.1				4,424,080				3.0
Rent and occupancy			3,105,601				1.4				2,276,140				1.2				2,100,914				1.4
Other operating expenses			5,914,580				2.6				4,758,157				2.6				3,423,791				2.3
Depreciation and amortization			5,517,090				2.5				5,130,628				2.7				4,678,598				3.2
Total operating expenses			139,564,019				63.2				116,321,696				61.8				88,924,680				59.9
Income from operations			81,184,192				36.8				72,000,071				38.2				59,600,469				40.1
Interest income			419,284				0.2				584,092				0.3				611,490				0.4
Interest expense			(3,704,263	)			(1.7	)			(378,546	)			(0.2	)			(280,503	)			(0.2	)
Income before income taxes			77,899,213				35.3				72,205,617				38.3				59,931,456				40.4
Provision for income taxes			29,658,015				13.4				27,715,801				14.7				23,159,461				15.6
Net income		$	48,241,198				21.9	%		$	44,489,816				23.6	%		$	36,771,995				24.8	%

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Revenues

     Total revenues were $220.7 million for the year ended December 31, 2007, an increase of $32.4 million or 17.2% compared to total revenues of $188.3 million for the year ended December 31, 2006.

Income Recognized on Finance Receivables, net

     Income recognized on finance receivables, net was $184.7 million for the year ended December 31, 2007, an increase of $21.3 million or 13.0% compared to $163.4 million for the year ended December 31, 2006. The majority of the increase was due to an increase in our cash collections on our owned defaulted consumer receivables to $262.2 million from $236.4 million, an increase of $25.8 million or 10.9%. Our amortization rate on owned portfolios for the year ended December 31, 2007 was 29.6% while for the year ended December 31, 2006 it was 30.9%. During the year ended December 31, 2007, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $11.1 billion at an original purchase price of $263.8 million. During the year ended December 31, 2006, we acquired defaulted consumer receivable portfolios with an aggregate face value of $7.8 billion at an original purchase price of $112.4 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. 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 (after direct expenses) 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 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 years ended December 31, 2007 and 2006, we recorded net allowance charges of $2.9 million and $1.1 million, respectively.

Commissions

     Commissions were $36.0 million for the year ended December 31, 2007, an increase of $11.0 million or 44.0% compared to commissions of $25.0 million for the year ended December 31, 2006. Commissions grew as a result of increases in revenue generated by our IGS fee-for-service business and RDS government processing and collection business offset by a decrease in our ARM contingent fee business compared to the prior year period.

Operating Expenses

     Total operating expenses were $139.6 million for the year ended December 31, 2007, an increase of $23.3 million or 20.0% compared to total operating expenses of $116.3 million for the year ended December 31, 2006. Total operating expenses were 46.8% of cash receipts for the year ended December 31, 2007 compared with 44.5% for the same period in 2006.

Compensation and Employee Services

     Compensation and employee services expenses were $69.0 million for the year ended December 31, 2007, an increase of $10.9 million or 18.8% compared to compensation and employee services expenses of $58.1 million for the year ended December 31, 2006. Compensation and employee services expenses increased as total employees grew from 1,291 at December 31, 2006 to 1,677 at December 31, 2007, primarily to accommodate our owned portfolio purchasing growth. Additionally, existing employees received normal salary increases. Compensation and employee services expenses as a percentage of cash receipts increased to 23.2% for the year ended December 31, 2007 from 22.3% of cash receipts for the same period in 2006, mainly due to a significant increase in employee staffing, especially in our newer Jackson, Tennessee call center, with a corresponding decrease in collector productivity caused mostly by the addition of this less tenured collection staff.

Outside Legal and Other Fees and Services

     Outside legal and other fees and services expenses were $47.5 million for the year ended December 31, 2007, an increase of $7.4 million or 18.5% compared to outside legal and other fees and services expenses of $40.1 million for the year ended December 31, 2006. Of the $7.4 million increase, $0.4 million was attributable to increases in outside fees and services, $4.6 million was attributable to increases in agency fees mainly incurred by our IGS subsidiary, and $0.2 million was attributable to increases in credit bureau fees. This was offset by a $0.1 million decrease in corporate legal expenses. Legal fees and costs increased from $28.4 million for the year ended December 31, 2006 to $30.7 million, an increase of $2.3 million or 8.1%, when compared to the same period in 2007. This increase was attributable to the increased cash collections resulting from the increased number of accounts referred to independent contingent fee attorneys. This increase is consistent with the growth we experienced in our portfolio of defaulted consumer receivables and a portfolio management strategy implemented in mid-2002. This strategy resulted in us referring to the legal suit process more unsuccessfully liquidated accounts that have an identified means of repayment but that are nearing their legal statute of limitations, than had been referred historically. Legal cash collections represented 32.0% of total cash collections for the year ended December 31, 2007, compared to 32.2% for the year ended December 31, 2006. Total legal expenses for the year ended December 31, 2007 were 36.6% of legal cash collections compared to 37.4% for the year ended December 31, 2006.

Communications

     Communications expenses were $8.5 million for the year ended December 31, 2007, an increase of $2.6 million or 44.1% compared to communications expenses of $5.9 million for the year ended December 31, 2006. The increase was attributable to growth in mailings and higher telephone expenses incurred to collect on a greater number of defaulted consumer receivables owned and serviced as well as the addition of our new call center in Jackson, Tennessee. Mailings were responsible for 53.8% or $1.4 million of this increase, while the remaining 46.2% or $1.2 million was attributable to increased call volumes.

Rent and Occupancy

     Rent and occupancy expenses were $3.1 million for the year ended December 31, 2007, an increase of $0.8 million or 34.8% compared to rent and occupancy expenses of $2.3 million for the year ended December 31, 2006. The increase was primarily due to the addition of our new RDS facility, the addition of our new Norfolk, Virginia administrative and executive facility as well as increased utility charges. Of the $0.8 million increase in 2007, the new RDS location accounted for $123,000 of the increase, the new Norfolk, Virginia administrative and executive facility accounted for $391,000 of the increase and utility and other occupancy charges accounted for $233,000 of the increase. In addition, there was an increase of $83,000 in storage and other facility charges.

Other Operating Expenses

     Other operating expenses were $5.9 million for the year ended December 31, 2007, an increase of $1.2 million or 22.9% compared to other operating expenses of $4.8 million for the year ended December 31, 2006. The increase was due to increases in travel and meals, miscellaneous expenses, repairs and maintenance, taxes (non-income), fees and licenses and other expenses. Travel and meals increased by $317,000, miscellaneous expenses increased by $465,000, repairs and maintenance increased by $114,000, taxes (non-income), fees and licenses increased by $231,000 and other expenses increased by $30,000.

Depreciation and Amortization

     Depreciation and amortization expenses were $5.5 million for the year ended December 31, 2007, an increase of $0.4 million or 7.8% compared to depreciation and amortization expenses of $5.1 million for the year ended December 31, 2006. The increase is mainly due to capital purchases for our new call center in Jackson, Tennessee, as well as capital purchases for the addition of our new RDS facility, our new administrative and executive facility in Norfolk, Virginia and our expanded call center in Hutchinson, Kansas. These increases were offset by a decrease in the amortization expense on intangible assets of $0.4 million for the year ended December 31, 2007, when compared to the prior year period.

Interest Income

     Interest income was $419,000 for the year ended December 31, 2007, a decrease of $165,000 or 28.3% compared to interest income of $584,000 for the year ended December 31, 2006. This decrease is the result of lower average invested cash and cash equivalents balances during the year ended December 31, 2007 compared to the same period in 2006.

Interest Expense

     Interest expense was $3,704,000 for the year ended December 31, 2007, an increase of $3,325,000 compared to interest expense of $379,000 for the year ended December 31, 2006. The increase is mainly due to a significant increase in outstanding borrowings on our lines of credit during the year ended December 31, 2007 compared to the same period in 2006.

Provision for Income Taxes

     Income tax expense was $29.7 million for the year ended December 31, 2007, an increase of $2.0 million or 7.2% compared to income tax expense of $27.7 million for the year ended December 31, 2006. The increase is mainly due to a 7.9% increase in pre-tax income, up from $72.2 million in 2006, to $77.9 million in 2007, offset by a slight reduction in the effective tax rate from 38.4% for year ended December 31, 2006 versus 38.1% for the year ended December 31, 2007. The lower effective tax rate was due mainly to state tax credits.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Revenues

     Total revenues were $188.3 million for the year ended December 31, 2006, an increase of $39.8 million or 26.8% compared to total revenues of $148.5 million for the year ended December 31, 2005.

Income Recognized on Finance Receivables, net

     Income recognized on finance receivables, net was $163.4 million for the year ended December 31, 2006, an increase of $28.7 million or 21.3% compared to $134.7 million for the year ended December 31, 2005. The majority of the increase was due to an increase in our cash collections on our owned defaulted consumer receivables to $236.4 million from $191.4 million, an increase of $45.0 million or 23.5%. Our amortization rate on owned portfolios for the year ended December 31, 2006 was 30.9% while for the year ended December 31, 2005 it was 29.6%. During the year ended December 31, 2006, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $7.8 billion at an original purchase price of $112.4 million. During the year ended December 31, 2005, we acquired defaulted consumer receivable portfolios with an aggregate face value of $5.3 billion at an original purchase price of $149.6 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. 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 (after direct expenses) 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 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. For the year ended December 31, 2006 and 2005 we booked net allowance charges of $1.1 million and $0.2 million, respectively.

Commissions

     Commissions were $25.0 million for the year ended December 31, 2006, an increase of $11.1 million or 79.9% compared to commissions of $13.9 million for the year ended December 31, 2005. Commissions increased as a result of the addition of our RDS government processing and collection business in the third quarter of 2005 as well as increases in revenue in both our IGS fee-for-service business and our ARM contingent fee business compared to the prior year period.

Operating Expenses

     Total operating expenses were $116.3 million for the year ended December 31, 2006, an increase of $27.4 million or 30.8% compared to total operating expenses of $88.9 million for the year ended December 31, 2005. Total operating expenses were 44.5% of cash receipts for the year ended December 31, 2006 compared with 43.3% for the same period in 2005.

Compensation and Employee Services

     Compensation and employee services expenses were $58.1 million for the year ended December 31, 2006, an increase of $13.8 million or 31.2% compared to compensation and employee services expenses of $44.3 million for the year ended December 31, 2005. Compensation and employee services expenses increased as total employees grew from 1,110 at December 31, 2005 to 1,291 at December 31, 2006. Additionally, existing employees received normal salary increases. Compensation and employee services expenses as a percentage of cash receipts excluding sales increased to 22.3% for the year ended December 31, 2006 from 21.6% of cash receipts excluding sales for the same period in 2005 as a result of increased collector headcount as well as increases in salaries related to the hiring of non-collection personnel including several key new employees in our information technology department.

Outside Legal and Other Fees and Services

     Outside legal and other fees and services expenses were $40.1 million for the year ended December 31, 2006, an increase of $10.1 million or 33.7% compared to outside legal and other fees and services expenses of $30.0 million for the year ended December 31, 2005. Of the $10.1 million increase, $1.0 million was attributable to increases in outside fees and services, $1.8 million was attributable to increases in agency fees mainly incurred by our IGS subsidiary, $0.5 million was attributable to increases in credit bureau fees and $0.7 million was attributable in increases in corporate legal expenses which included legal fees incurred as a result of the investigation requested by the audit committee that occurred during the third quarter of 2006. The remaining $6.1 million of the increase was attributable to the increased cash collections resulting from the increased number of accounts referred to independent contingent fee attorneys. This increase is consistent with the growth we experienced in our portfolio of defaulted consumer receivables and a portfolio management strategy implemented in mid-2002. This strategy resulted in us referring to the legal suit process more unsuccessfully liquidated accounts that have an identified means of repayment but that are nearing their legal statute of limitations, than had been referred historically. Legal cash collections represented 32.2% of total cash collections for the year ended December 31, 2006, compared to 33.1% for the year ended December 31, 2005. Total legal expenses for the year ended December 31, 2006 were 37.4% of legal cash collections compared to 35.1% for the year ended December 31, 2005.

Communications

     Communications expenses were $5.9 million for the year ended December 31, 2006, an increase of $1.5 million or 34.1% compared to communications expenses of $4.4 million for the year ended December 31, 2005. The increase was attributable to growth in mailings and higher telephone expenses incurred to collect on a greater number of defaulted consumer receivables owned and serviced. Mailings were responsible for 80.0% or $1.2 million of this increase, while the remaining 20.0% or $0.3 million was attributable to higher phone charges.

Rent and Occupancy

     Rent and occupancy expenses were $2.3 million for the year ended December 31, 2006, an increase of $175,000 or 8.3% compared to rent and occupancy expenses of $2.1 million for the year ended December 31, 2005. The increases were mainly attributable to the commencement of our RDS business, the opening of our new IGS location which opened in April 2005 and higher utility and other occupancy charges generally. Of the $175,000 increase in 2006, the new RDS location accounted for $89,000 of the increase, the new IGS space accounted for $42,000 of the increase and utility and other occupancy charges accounted for $64,000 of the increase. This was partially offset by a $20,000 decrease in storage and other facility charges.

Other Operating Expenses

     Other operating expenses were $4.8 million for the year ended December 31, 2006, an increase of $1.4 million or 41.2% compared to other operating expenses of $3.4 million for the year ended December 31, 2005. The increase was due to increases in travel and meals, miscellaneous expenses, hiring expenses, repairs and maintenance, taxes fees and licenses and other expenses. Travel and meals increased by $456,000, miscellaneous expenses increased by $368,000, hiring expenses increased by $226,000, repairs and maintenance increased by $148,000, taxes, fees and licenses increased by $111,000 and other expenses increased by $82,000.

Depreciation and Amortization

     Depreciation and amortization expenses were $5.1 million for the year ended December 31, 2006, an increase of $0.4 million or 8.5% compared to depreciation and amortization expenses of $4.7 million for the year ended December 31, 2005. The increase was attributable to expenditures for the RDS expansion and the new Jackson, Tennessee facility in 2006, as well as continued capital expenditures on equipment, software and computers related to our growth and systems upgrades.

Interest Income

     Interest income was $584,000 for the year ended December 31, 2006, a decrease of $27,000 or 4.4% compared to interest income of $611,000 for the year ended December 31, 2005. This decrease is the result of the investment of larger balances in higher yielding auction rate certificates and tax exempt money market accounts in 2005 than in 2006.

Interest Expense

     Interest expense was $379,000 for the year ended December 31, 2006, an increase of $98,000 or 34.9% compared to interest expense of $281,000 for the year ended December 31, 2005. The increase is due to a higher unused line fee under the new revolving credit arrangement offset by a decrease due to lower balances on our long-term debt and obligations under capital leases.

Provision for Income Taxes

     Income tax expense was $27.7 million for the year ended December 31, 2006, an increase of $4.5 million or 19.4% compared to income tax expense of $23.2 million for the year ended December 31, 2005. The increase is mainly due to a 20.5% increase in pre-tax income, up from $59.9 million in 2005, to $72.2 million in 2006, offset by a slight reduction in the effective tax rate from 38.6% for year ended December 31, 2005 versus 38.4% for the year ended December 31, 2006. The lower effective tax rate was due mainly to state tax credits.

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 only and our entire portfolio less the impact of our purchased bankrupt accounts. The accounts represented in the purchased bankruptcy tables are those accounts that were bankrupt at the time of purchase. This contrasts with accounts that file bankruptcy after we purchase them.

     ($ in thousands)

Entire Portfolio

						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)				December 31, 2007(2)				at December 31, 2007(3)				Sales				Collections(4)				Collections(5)				Purchase Price(6)
1996		$	3,080			$	0				0	%		$	9,815			$	33			$	9,848				320	%
1997		$	7,685			$	0				0	%		$	24,339			$	119			$	24,458				318	%
1998		$	11,089			$	0				0	%		$	35,219			$	336			$	35,555				321	%
1999		$	18,898			$	0				0	%		$	63,165			$	933			$	64,098				339	%
2000		$	25,020			$	0				0	%		$	101,251			$	5,003			$	106,254				425	%
2001		$	33,479			$	398				1	%		$	150,788			$	8,963			$	159,751				477	%
2002		$	42,324			$	0				0	%		$	160,838			$	8,940			$	169,778				401	%
2003		$	61,456			$	4,594				7	%		$	201,077			$	29,548			$	230,625				375	%
2004		$	59,309			$	8,755				15	%		$	135,675			$	44,132			$	179,807				303	%
2005		$	143,249			$	70,279				49	%		$	163,974			$	156,074			$	320,048				223	%
2006		$	107,854			$	76,471				71	%		$	76,162			$	155,444			$	231,606				215	%
2007		$	263.277			$	249,799				95	%		$	42,262			$	493,040			$	535,302				203	%

Purchased Bankruptcy only Portfolio

						Unamortized				Percentage				Actual Cash
						Purchase Price				of Purchase Price				Collections				Estimated								Total Estimated
Purchase		Purchase				Balance at				Remaining Unamortized				Including Cash				Remaining				Total Estimated				Collection to
Period		Price(1)				December 31, 2007(2)				at December 31, 2007(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		$	7,472			$	1,726				23	%		$	12,030			$	3,429			$	15,459				207	%
2005		$	29,325			$	7,895				27	%		$	31,211			$	12,986			$	44,197				151	%
2006		$	17,671			$	7,457				42	%		$	15,063			$	13,529			$	28,592				162	%
2007		$	81,834			$	80,620				99	%		$	2,850			$	119,830			$	122,680				150	%