UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2006

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

For the transition period from ___to ___

Commission File Number: 000-50058

Portfolio Recovery Associates, Inc.

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

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

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

YES þ            NO ¨

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨

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

YES ¨            NO þ

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

Class		Outstanding as of April 19, 2006
Common Stock, $0.01 par value		15,894,763

 

 

PORTFOLIO RECOVERY ASSOCIATES, INC.

				Page(s)
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets (unaudited)			3
		as of March 31, 2006 and December 31, 2005
		Consolidated Income Statements (unaudited)			4
		For the three months ended March 31, 2006 and 2005
		Consolidated Statements of Changes in Stockholders’ Equity (unaudited)			5
		For the three months ended March 31, 2006
		Consolidated Statements of Cash Flows (unaudited)			6
		For the three months ended March 31, 2006 and 2005
		Notes to Consolidated Financial Statements (unaudited)			7-16
Item 2.		Management’s Discussion and Analysis of Financial			17-31
		Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosure About Market Risk			32
Item 4.		Controls and Procedures			32
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			33
Item 1A.		Risk Factors			33
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3.		Defaults Upon Senior Securities			33
Item 4.		Submission of Matters to a Vote of the Security Holders			33
Item 5.		Other Information			33
Item 6.		Exhibits			33
SIGNATURES					34

PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2006 and December 31, 2005
(unaudited)

		March 31,				December 31,
		2006				2005
Assets
Cash and cash equivalents		$	23,351,708			$	15,984,855
Finance receivables, net			189,847,379				193,644,670
Property and equipment, net			7,569,227				7,186,418
Goodwill			18,287,511				18,287,511
Intangible assets, net			8,455,503				9,022,666
Other assets			3,747,692				3,646,126
Total assets		$	251,259,020			$	247,772,246
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable		$	3,623,858			$	2,332,685
Accrued expenses			4,515,535				2,239,267
Income taxes payable			5,008,999				3,054,883
Accrued payroll and bonuses			3,657,249				5,942,618
Deferred tax liability			23,378,354				22,345,995
Revolving lines of credit			—				15,000,000
Long-term debt			1,035,361				1,151,965
Obligations under capital lease			344,541				382,658
Total liabilities			41,563,897				52,450,071
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, par value $0.01, authorized shares, 2,000,000, issued and outstanding shares - 0			—				—
Common stock, par value $0.01, authorized shares, 30,000,000, issued and outstanding shares - 15,879,763 at March 31, 2006, and 15,767,443 at December 31, 2005			158,798				157,674
Additional paid in capital			111,705,706				108,063,899
Retained earnings			97,830,619				87,100,602
Total stockholders’ equity			209,695,123				195,322,175
Total liabilities and stockholders’ equity		$	251,259,020			$	247,772,246

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

PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED INCOME STATEMENTS
For the Three Months Ended March 31, 2006 and 2005
(unaudited)

		Three Months				Three Months
		Ended				Ended
		March 31,				March 31,
		2006				2005
Revenues:
Income recognized on finance receivables		$	39,373,409			$	32,249,670
Commissions			5,967,868				3,528,698
Total revenue			45,341,277				35,778,368
Operating expenses:
Compensation and employee services			14,096,577				10,860,931
Outside legal and other fees and services			9,060,279				7,161,783
Communications			1,613,952				1,057,899
Rent and occupancy			560,568				475,765
Other operating expenses			1,076,456				752,854
Depreciation and amortization			1,252,640				940,721
Total operating expenses			27,660,472				21,249,953
Income from operations			17,680,805				14,528,415
Other income and (expense):
Interest income			72,894				95,612
Interest expense			(167,946	)			(63,894	)
Income before income taxes			17,585,753				14,560,133
Provision for income taxes			6,855,736				5,640,301
Net income		$	10,730,017			$	8,919,832
Net income per common share
Basic		$	0.68			$	0.57
Diluted		$	0.67			$	0.55
Weighted average number of shares outstanding
Basic			15,871,563				15,531,779
Diluted			16,064,968				16,152,162

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

PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three Months Ended March 31, 2006
(unaudited)

						Additional								Total
		Common				Paid in				Retained				Stockholders’
		Stock				Capital				Earnings				Equity
Balance at December 31, 2005		$	157,674			$	108,063,899			$	87,100,602			$	195,322,175
Net income			—				—				10,730,017				10,730,017
Exercise of stock options, warrants and vesting of restricted shares			1,124				1,417,777				—				1,418,901
Amortization of stock-based compensation			—				431,817				—				431,817
FAS123R adoption reclass of payroll liability to additional paid in capital			—				426,752				—				426,752
Income tax benefit from share based compensation			—				1,365,461				—				1,365,461
Balance at March 31, 2006		$	158,798			$	111,705,706			$	97,830,619			$	209,695,123

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

PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2006 and 2005
(unaudited)

		Three Months				Three Months
		Ended				Ended
		March 31,				March 31,
		2006				2005
Operating activities:
Net income		$	10,730,017			$	8,919,832
Adjustments to reconcile net income to cash provided by operating activities:
Increase in equity from options and restricted shares			431,817				133,038
Income tax benefit from share based compensation			—				777,137
Depreciation and amortization			1,252,640				940,721
Deferred tax expense			1,032,359				2,025,515
Changes in operating assets and liabilities:
Other assets			(101,566	)			339,086
Accounts payable			1,291,173				339,766
Income taxes			1,954,116				2,583,455
Accrued expenses			2,276,268				139,757
Accrued payroll and bonuses			(1,858,619	)			(1,347,656	)
Net cash provided by operating activities			17,008,205				14,850,651
Cash flows from investing activities:
Purchases of property and equipment			(1,068,284	)			(800,109	)
Acquisition of finance receivables, net of buybacks			(15,318,806	)			(17,735,629	)
Collections applied to principal on finance receivables			19,116,097				15,580,134
Purchase of auction rate certificates			—				(7,000,000	)
Sales of auction rate certificates			—				30,950,000
Net cash provided by investing activities			2,729,007				20,994,396
Cash flows from financing activities:
Proceeds from exercise of options and warrants			1,418,901				913,191
Income tax benefit from share based compensation			1,365,461				—
Payments on lines of credit			(15,000,000	)			—
Payments on long-term debt			(116,604	)			(127,019	)
Payments on capital lease obligations			(38,117	)			(50,356	)
Net cash (used in) provided by financing activities			(12,370,359	)			735,816
Net increase in cash and cash equivalents			7,366,853				36,580,863
Cash and cash equivalents, beginning of period			15,984,855				24,512,575
Cash and cash equivalents, end of period		$	23,351,708			$	61,093,438
Supplemental disclosure of cash flow information:
Cash paid for interest		$	200,776			$	63,894
Cash paid for income taxes		$	2,503,800			$	254,950
Noncash investing activities:
FAS 123R adoption reclass of payroll liability to additional paid in capital		$	426,752			$	—

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

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

1. Organization and Business:

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

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

     The accompanying unaudited financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and, therefore, do not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s balance sheet as of March 31, 2006, its income statements for the three month periods ended March 31, 2006 and 2005, its statements of changes in stockholders’ equity for the three month period ended March 31, 2006 and its statements of cash flows for the three month periods ended March 31, 2006 and 2005, respectively. The income statements of the Company for the three month periods ended March 31, 2006 and 2005 may not be indicative of future results. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as filed for the year ended December 31, 2005.

2. Finance Receivables, net:

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

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

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

     Prior to January 1, 2005, the Company accounted for its investment in finance receivables using the interest method under the guidance of Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans.” Effective January 1, 2005, the Company adopted and began to account for its investment in finance receivables using the interest method under the guidance of American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 03-3, “Accounting for Loans or Certain Securities Acquired in a Transfer.” For loans acquired in fiscal years beginning prior to December 15, 2004, Practice Bulletin 6 is still effective; however, Practice Bulletin 6 was amended by SOP 03-3 as described further in this note. For loans acquired in fiscal years beginning after December 15, 2004, SOP 03-3 is effective. Under the guidance of SOP 03-3 (and the amended Practice Bulletin 6), static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost, which includes certain direct costs of acquisition paid to third parties, and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). SOP 03-3 (and the amended Practice Bulletin 6) requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. The SOP initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased as the basis for subsequent impairment testing. Significant increases in actual, or expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Effective for fiscal years beginning after December 15, 2004 under SOP 03-3 and the amended Practice Bulletin 6, rather than lowering the estimated IRR if the collection estimates are not received or projected to be received, the carrying value of a pool would be written down to maintain the then current IRR. Income on finance receivables is accrued quarterly based on each static pool’s effective IRR. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static pool. Likewise, cash flows that are less than the accrual will accrete the carrying balance. The IRR is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Additionally, the Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the interest method as described above. At March 31, 2006 and 2005, the Company had unamortized purchased principal (purchase price) in pools accounted for under the cost recovery method of $3,093,322 and $2,563,884, respectively.

     The Company establishes valuation allowances for all acquired accounts subject to SOP 03-3 to reflect only those losses incurred after acquisition (that is, the present value of cash flows initially expected at acquisition that are no longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the accounts. At March 31, 2006 and 2005, the Company had an allowance against its finance receivables of $375,000 and $0, respectively. Prior to January 1, 2005, in the event that estimated future cash collections would be inadequate to amortize the carrying balance, an impairment charge would be taken with a corresponding write-off of the receivable balance.

     The Company capitalizes certain fees paid to third parties related to the direct acquisition of a portfolio of accounts. These fees are added to the acquisition cost of the portfolio and accordingly are amortized over the life of the portfolio using the interest method. The balance of the unamortized capitalized fees at March 31, 2006 and 2005 was $979,426 and $1,017,052, respectively. During the three months ended March 31, 2006 and 2005 the Company capitalized $98,043 and $85,536, respectively, of these direct acquisition fees. During the three months ended

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

March 31, 2006 and 2005 the Company amortized $146,686 and $167,000, respectively, of these direct acquisition fees.

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

     As of March 31, 2006 and 2005, the Company had $189,847,379 and $107,344,401, respectively, remaining of finance receivables. Changes in finance receivables at March 31, 2006 and 2005 were as follows:

		Three Months				Three Months
		Ended				Ended
		March 31,				March 31,
		2006				2005
Balance at beginning of period		$	193,644,670			$	105,188,906
Acquisitions of finance receivables, net of buybacks			15,318,806				17,735,629
Cash collections			(58,489,506	)			(47,829,804	)
Income recognized on finance receivables			39,373,409				32,249,670
Cash collections applied to principal			(19,116,097	)			(15,580,134	)
Balance at end of period		$	189,847,379			$	107,344,401

     As of March 31, 2006 the Company had $189,847,379 in finance receivables. Based upon current projections, cash collections applied to principal is estimated to be as follows for the twelve months in the periods ending:

March 31, 2007		$	44,479,002
March 31, 2008			48,608,065
March 31, 2009			38,368,720
March 31, 2010			27,337,665
March 31, 2011			23,457,279
March 31, 2012			7,585,414
March 31, 2013			11,234
		$	189,847,379

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

     Accretable yield represents the amount of income the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of March 31, 2006 and 2005. Reclassifications from nonaccretable difference to accretable yield primarily result from the Company’s increase in its estimate of future cash flows. Changes in accretable yield at March 31, 2006 and 2005 were as follows:

		Three Months				Three Months
		Ended				Ended
		March 31,				March 31,
		2006				2005
Balance at beginning of period		$	299,280,328			$	202,841,339
Income recognized on finance receivables			(39,373,409	)			(32,249,670	)
Additions			16,016,515				12,960,224
Reclassifications from nonaccretable difference			12,537,509				22,959,045
Balance at end of period		$	288,460,943			$	206,510,938

     During the three month period ended March 31, 2006, the Company recorded a $175,000 allowance charge on two pools that had recently underperformed expectations. There was no allowance charge during the three months ended March 31, 2005. The change in the valuation allowance for the quarter ended March 31, 2006 is as follows:

Balance at December 31, 2005		$	200,000
Allowance charge			175,000
Balance at March 31, 2006		$	375,000

     During the three months ended March 31, 2006 and 2005, the Company purchased $3.87 billion and $659.9 million of face value of charged-off consumer receivables. At March 31, 2006, the estimated remaining collections on the receivables purchased in the three months ended March 31, 2006 and 2005 is $29,574,397 and $18,874,295, respectively.

3. Investments:

     The Company accounts for its investments under the guidance of SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company typically invests in variable rate auction rate certificates and variable rate demand notes which it classifies as available-for-sale securities. At March 31, 2006 and 2005, the Company did not have any investments on the Balance Sheet however it did purchase investments during the three month period ended March 31, 2005. These securities are recorded at cost, which approximates fair market value due to their variable interest rates, which typically reset every 7 to 35 days, and, despite the long term nature of their stated contractual maturities, the Company has the ability to quickly liquidate these investments. As a result, the Company had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these investments and all income generated was recorded as interest income. The Company may continue to invest in these types of securities within a given reporting period.

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

4. Revolving Lines of Credit:

     The Company maintained a $25.0 million revolving line of credit pursuant to an agreement entered into with RBC Centura Bank on November 28, 2003 and amended on November 22, 2004. This facility was terminated on November 28, 2005. The credit facility bore interest at a spread of 2.50% over LIBOR and extended through November 28, 2006. The agreement called for:

	•		restrictions on monthly borrowings are limited to 20% of estimated remaining collections;
	•		a debt coverage ratio of at least 8.0 to 1.0, calculated on a rolling twelve-month average;
	•		a debt to tangible net worth ratio of less than 0.40 to 1.00;
	•		net income per quarter of at least $1.00, calculated on a consolidated basis; and
	•		restrictions on change of control.

     This facility had no amounts outstanding during 2005 through the time of its termination.

     On November 29, 2005, the Company entered into a Loan and Security Agreement for a revolving line of credit jointly offered by Bank of America, N. A. and Wachovia Bank, National Association. The agreement is a revolving line of credit in an amount equal to the lesser of $75,000,000 or twenty percent of the Company’s estimated remaining collections of all its eligible asset pools. Borrowings under the new revolving credit facility will bear interest at a floating rate equal to the LIBOR Market Index Rate plus 1.75% and expires on November 29, 2008. The loan is collateralized by substantially all the tangible and intangible assets of the Company. The agreement provides for:

	•		restrictions on monthly borrowings are limited to 20% of estimated remaining collections;
	•		a funded debt to EBITDA ratio of less than 1.0 to 1.0 calculated on a rolling twelve-month average;
	•		tangible net worth of at least 100% of prior quarter tangible net worth plus 25% of cumulative positive net income since the end of such fiscal quarter, plus 100% of the net proceeds from any equity offering; and
	•		restrictions on change of control.

     This facility had no amounts outstanding at March 31, 2006. As of March 31, 2006, the Company is in compliance with all of the covenants of this agreement.

5. Long-Term Debt:

     In July 2000, the Company purchased a building in Hutchinson, Kansas. The building was financed with a commercial loan for $550,000 with a variable interest rate based on LIBOR. This commercial loan is collateralized by the real estate in Kansas. Monthly principal payments on the loan are $4,583 for an amortized term of 10 years. A balloon payment of $275,000 was made on July 21, 2005 to pay this loan in full.

     On February 9, 2001, the Company purchased a generator for its Norfolk location. The generator was financed with a commercial loan for $107,000 with a fixed rate of 7.9%. This commercial loan is collateralized by the generator. Monthly payments on the loan are $2,170 and the loan matured on February 1, 2006. The loan was paid in full at its maturity date of February 1, 2006.

     On February 20, 2002, the Company completed the construction of a satellite parking lot at its Norfolk location. The parking lot was financed with a commercial loan for $500,000 with a fixed rate of 6.47%. The loan is collateralized by the parking lot. The loan required only interest payments during the first six months. Beginning October 1, 2002, monthly payments on the loan are $9,797 and the loan matures on September 1, 2007.

     On May 1, 2003, the Company secured financing for its computer equipment purchases related to the Hampton, Virginia office opening. The computer equipment was financed with a commercial loan for $975,000 with a fixed rate of 4.25%. This loan is collateralized by computer equipment. Monthly payments are $18,096 and the loan matures on May 1, 2008.

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

     On January 9, 2004, the Company entered into a commercial loan agreement in the amount of $750,000 to finance equipment purchases at its newly leased Norfolk facility. This loan bears interest at a fixed rate of 4.45% and is collateralized by the purchased equipment. Monthly payments are $13,975 and the loan matures on January 1, 2009.

     The three outstanding loans are collateralized by the related asset and are subject to the following covenants:

	•		net worth greater than $20,000,000, and;
	•		a cash flow coverage ratio of at least 1.5 to 1 calculated on a rolling twelve-month average.

6. Property and Equipment:

     Property and equipment, at cost, consist of the following as of the dates indicated:

		March 31,				December 31,
		2006				2005
Software		$	3,910,208			$	3,253,454
Computer equipment			3,927,759				3,626,353
Furniture and fixtures			2,204,839				2,182,388
Equipment			2,811,478				2,743,966
Leasehold improvements			1,660,887				1,644,566
Building and improvements			1,718,195				1,714,353
Land			150,922				150,922
Less accumulated depreciation			(8,815,061	)			(8,129,584	)
Property and equipment, net		$	7,569,227			$	7,186,418

     Depreciation expense for the three months ended March 31, 2006 and 2005 was $685,477 and $495,863, respectively.

7. Intangible Assets:

     With the acquisition of IGS on October 1, 2004 and RDS on July 29, 2005, the Company purchased certain tangible and intangible assets. Intangible assets purchased included client and customer relationships, non-compete agreements and goodwill. In accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company is amortizing the IGS client relationships over seven years, the RDS customer relationships over ten years and the non-compete agreements over three years for both the IGS and RDS acquisitions. The Company reviews them at least annually for impairment. Total amortization expense was $567,163 and $444,858 for the three months ended March 31, 2006 and 2005, respectively. In addition, goodwill, pursuant to SFAS 142, is not amortized but rather is reviewed at least annually for impairment.

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

8. Stock-Based Compensation:

     The Company has a stock option and nonvested share plan. The Amended and Restated Portfolio Recovery Associates 2002 Stock Option Plan and 2004 Restricted Stock Plan was approved by the Company’s shareholders at its Annual Meeting of Shareholders on May 12, 2004, enabling the Company to issue to its employees and directors nonvested shares of stock, as well as stock options. Also, in connection with the IPO, all existing PRA warrants that were owned by certain individuals and entities were exchanged for an equal number of PRA Inc warrants. Prior to 2002, the Company accounted for stock compensation issued under the recognition and measurement provisions of APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and related Interpretations.

     Effective January 1, 2002, the Company adopted the fair value recognition provisions of FASB Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” prospectively to all employee awards granted, modified, or settled after January 1, 2002. All stock-based compensation measured under the provisions of APB 25 became fully vested during 2002. All stock-based compensation expense recognized thereafter was derived from stock-based compensation based on the fair value method prescribed in SFAS 123. Effective January 1, 2006, the Company adopted FASB Statement No. 123R (“SFAS 123R”), “Share-Based Payment” using the modified prospective approach. The adoption of this statement increased cash flows from financing activities and decreased cash flows from operating activities by $1,365,461 relating to income tax benefits from share based compensation and increased equity by $426,752 for the three months ended March 31, 2006. The adoption of SFAS 123R had no material impact on the Company’s Income Statement. The adoption of SFAS 123R had no impact on previously reported interim periods. As of March 31, 2006, total future compensation costs related to nonvested awards of stock options and nonvested shares are $5,393,319 with a weighted average remaining life of 3.7 years for stock options and 3.9 years for nonvested shares. Based upon historical data, the Company used an annual forfeiture rate of 3.38% for stock options and 2.90% for nonvested shares for most of the employee grants. Grants made to key employee hires and directors of the Company were assumed to have no forfeiture rates associated with them due to the low turnover among this group. In addition, commensurate with the adoption of this statement, all previous references to “restricted” stock are now referred to as “nonvested” shares.

     Total equity-based compensation expense was $431,817 and $229,853 for the three months ended March 31, 2006 and 2005, respectively.

Stock Warrants

     Prior to the IPO, the PRA management committee was authorized to issue warrants to partners, employees or vendors to purchase membership units. Generally, warrants granted had a term between 5 and 7 years and vested within 3 years. Warrants had been issued at or above the fair market value on the date of grant. Warrants vest and expire according to terms established at the grant date. All warrants became fully vested at the Company’s IPO in 2002. During the three months ended March 31, 2006 and 2005, no warrants were issued.

     The following summarizes all warrant related transactions from December 31, 2002 through March 31, 2006:

		Warrants				Weighted Average
		Outstanding				Exercise Price
December 31, 2002			2,185,000			$	4.30
Exercised			(2,026,000	)			4.17
Cancelled			(51,500	)			9.72
December 31, 2003			107,500				4.20
Exercised			(67,500	)			4.20
December 31, 2004			40,000				4.20
Exercised			(36,250	)			4.20
December 31, 2005			3,750				4.20
Exercised			(3,750	)			4.20
March 31, 2006			—			$	—

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

     As of March 31, 2006, all warrants have been exercised and/or cancelled and there are no warrants outstanding.

Stock Options

     The Company created the 2002 Stock Option Plan (the “Plan”) on November 7, 2002. The Plan was amended in 2004 (the “Amended Plan”) to enable the Company to issue nonvested shares of stock to its employees and directors. The Amended Plan was approved by the Company’s shareholders at its Annual Meeting on May 12, 2004. Up to 2,000,000 shares of common stock may be issued under the Amended Plan. The Amended Plan expires November 7, 2012. All options and nonvested shares issued under the Amended Plan vest ratably over five years. Granted options expire seven years from grant date. Expiration dates range between November 7, 2009 and January 16, 2011. Options granted to a single person cannot exceed 200,000 in a single year. As of March 31, 2006, 895,000 options have been granted under the Amended Plan, of which 94,155 have been cancelled.

     Prior to January 1, 2006, options were expensed under SFAS 123 and are included in operating expenses as a component of compensation. Effective January 1, 2006, the Company adopted and began expensing options under SFAS 123R. The expense is included in operating expenses as a component of compensation. The Company issued no options during the three months ended March 31, 2006 and 2005. All of the stock options which have been issued under the Amended Plan were issued to employees of the Company except for 40,000 which were issued to non-employee directors.

     The following summarizes all option related transactions from December 31, 2002 through March 31, 2006:

		Options				Weighted Average
		Outstanding				Exercise Price
December 31, 2002			807,850			$	13.06
Granted			55,000				27.88
Exercised			(50,915	)			13.00
Cancelled			(14,025	)			13.00
December 31, 2003			797,910				14.09
Granted			20,000				28.79
Exercised			(63,511	)			13.30
Cancelled			(47,940	)			13.00
December 31, 2004			706,459				14.65
Exercised			(181,910	)			13.22
Cancelled			(20,040	)			15.63
December 31, 2005			504,509				15.12
Exercised			(107,570	)			13.04
March 31, 2006			396,939			$	15.68

     The following information is as of March 31, 2006:

		Options Outstanding												Options Exercisable
						Weighted-
						Remaining				Weighted-								Weighted-
						Average				Average								Average
Exercise		Number				Contractual				Exercise				Number				Exercise
Prices		Outstanding				Life				Price				Exercisable				Price
$13.00			320,439				3.6			$	13.00				44,979			$	13.00
$16.16			7,500				3.6				16.16				3,500				16.16
$27.77 - $29.79			69,000				4.4				28.09				27,000				28.07
Total at March 31, 2006			396,939				3.7			$	15.68				75,479			$	18.54

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

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

Options issue year:		2004
Weighted average fair value of options granted		$2.85
Expected volatility		13.26% - 13.55%
Risk-free interest rate		3.16% - 3.37%
Expected dividend yield		0.00%
Expected life (in years)		5.00

     Utilizing these assumptions, each non-employee director stock option granted in 2004 was valued between $2.62 and $2.92. There were no options granted during 2005 or during the three months ending March 31, 2006.

Nonvested Shares

     Prior to the approval of the Amended Plan, nonvested shares were permitted to be issued as an incentive to attract new employees and, effective commensurate with the adoption of the Amended Plan at the meeting of shareholders held on May 12, 2004, are permitted to be issued to directors and existing employees. The terms of the nonvested share awards are similar to those of the stock option awards, wherein the shares are issued at or above market values and vest ratably over five years. Nonvested share grants are expensed over their vesting period.

     The following summarizes all nonvested stock transactions from December 31, 2002 through March 31, 2006:

						Weighted
		Nonvested				Average
		Shares				Price at
		Outstanding				Grant Date
December 31, 2002			—			$	—
Granted			13,045				27.57
December 31, 2003			13,045				27.57
Granted			84,350				26.94
Vested			(2,609	)			27.57
Cancelled			(4,900	)			26.08
December 31, 2004			89,886				27.06
Granted			74,600				41.92
Vested			(17,389	)			27.10
Cancelled			(11,760	)			30.40
December 31, 2005			135,337				34.96
Granted			12,500				46.44
Vested			(1,000	)			24.40
Cancelled			(6,665	)			35.38
March 31, 2006			140,172			$	36.04

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

9. Earnings per Share:

     Basic earnings per share (“EPS”) are computed by dividing income available to common shareholders by weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of stock warrants, stock options and nonvested stock awards. The following tables provide a reconciliation between the computation of basic EPS and diluted EPS for the three months ended March 31, 2006 and 2005:

		For the three months ended March 31,
						2006												2005
						Weighted Average												Weighted Average
		Net Income				Common Shares				EPS				Net Income				Common Shares				EPS
Basic EPS		$	10,730,017				15,871,563			$	0.68			$	8,919,832				15,531,779			$	0.57
Dilutive effect of stock warrants, options and restricted stock awards							193,405												620,383
Diluted EPS		$	10,730,017				16,064,968			$	0.67			$	8,919,832				16,152,162			$	0.55

     There were no antidilutive options outstanding as of March 31, 2006 or 2005.

10. Commitments and Contingencies:

Employment Agreements:

     The Company has employment agreements with all of its executive officers and with several members of its senior management group, the terms of which expire on December 31, 2008. Such agreements provide for base salary payments as well as bonus entitlement, based on the attainment of specific personal and Company goals. Estimated future compensation under these agreements is approximately $12,166,938 and is expected to be paid through December 31, 2008. The agreements also contain confidentiality and non-compete provisions.

Leases:

     The Company is party to various operating and capital leases with respect to its facilities and equipment. Please refer to the Company’s consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission for discussion of these leases.

Litigation:

     The Company is from time to time subject to routine litigation incidental to its business. The Company believes that the results of any pending legal proceedings will not have a material adverse effect on the financial condition, results of operations or liquidity of the Company.

11. Recent Accounting Pronouncements:

     On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB statement No. 123(R), “Share-Based Payment,” (“SFAS 123R”). SFAS 123R revises FASB statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. In addition to revising SFAS 123, SFAS 123R supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and amends FASB Statement No. 95, “Statement of Cash Flows.” SFAS 123R applies to all stock-based compensation transactions in which a company acquires services by (1) issuing its stock or other equity instruments, except through arrangements resulting from employee stock-ownership plans (ESOPs) or (2) incurring liabilities that are based on the company’s stock price. SFAS 123R is effective for annual periods that begin after June 15, 2005; however, early adoption is encouraged. The Company has determined that all of its existing stock-based awards are equity instruments. The Company previously adopted SFAS 123 on January 1, 2002 and has been expensing equity based compensation since that time. The Company adopted SFAS 123R on January 1, 2006. The adoption of SFAS 123R had no material impact on its financial statements.

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

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

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

	•		our ability to purchase defaulted consumer receivables at appropriate prices;
	•		changes in the business practices of credit originators in terms of selling defaulted consumer receivables or outsourcing defaulted consumer receivables to third-party contingent fee collection agencies;
	•		changes in government regulations that affect our ability to collect sufficient amounts on our acquired or serviced receivables;
	•		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 future ability to comply with the provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder;
	•		our ability to successfully integrate IGS and RDS into our business operations;
	•		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.

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

     For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as the discussion of “Risk Factors” beginning on page 33 and described in our Annual Report on Form 10-K, filed on March 3, 2006.

     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.

Results of Operations

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

		For the Three Months
		Ended March 31,
		2006				2005
Revenues:
Income recognized on finance receivables			86.8	%			90.1	%
Commissions			13.2	%			9.9	%
Total revenue			100.0	%			100.0	%
Operating expenses:
Compensation and employee services			31.1	%			30.4	%
Outside legal and other fees and services			20.0	%			20.0	%
Communications			3.6	%			3.0	%
Rent and occupancy			1.2	%			1.3	%
Other operating expenses			2.4	%			2.1	%
Depreciation and amortization			2.7	%			2.6	%
Total operating expenses			61.0	%			59.4	%
Income from operations			39.0	%			40.6	%
Other income and (expense):
Interest income			0.2	%			0.3	%
Interest expense			(0.4	%)			(0.2	%)
Income before income taxes			38.8	%			40.7	%
Provision for income taxes			15.1	%			15.8	%
Net income			23.7	%			24.9	%

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

Three Months Ended March 31, 2006 Compared To Three Months Ended March 31, 2005

Revenue

     Total revenue was $45.3 million for the three months ended March 31, 2006, an increase of $9.5 million or 26.5% compared to total revenue of $35.8 million for the three months ended March 31, 2005.

Income Recognized on Finance Receivables

     Income recognized on finance receivables was $39.4 million for the three months ended March 31, 2006, an increase of $7.2 million or 22.4% compared to income recognized on finance receivables of $32.2 million for the three months ended March 31, 2005. The majority of the increase was due to an increase in our cash collections on our owned defaulted consumer receivables to $58.5 million from $47.8 million, an increase of 22.4%. Our amortization rate, including the allowance charge, on our owned portfolio for the three months ended March 31, 2006 was 32.7% while for the three months ended March 31, 2005 it was 32.6%. During the three months ended March 31, 2006, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of

$3.87 billion at a cost of $16.2 million. During the three months ended March 31, 2005, we acquired defaulted consumer receivable portfolios with an aggregate face value of $659.9 million at a cost of $17.8 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectibility. We may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can drive pricing rates up or down in any period, irrespective of other quality fluctuations. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on our particular buying activity in that period. However, regardless of the average purchase price, we intend to target a similar internal rate of return in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to estimated profitability of a period’s buying.

     Income recognized on finance receivables is shown net of valuation allowances recognized under SOP 03-3, which requires that a valuation allowance be taken for decreases in expected cash flows. For the three months ended March 31, 2006 we recorded an allowance charge of $175,000. No allowance charge was recorded during the three months ended March 31, 2005.

Commissions

     Commissions were $6.0 million for the three months ended March 31, 2006, an increase of $2.5 million or 71.4% compared to commissions of $3.5 million for the three months ended March 31, 2005. Commissions increased as a result of the addition of our RDS government processing and collection business, as well as an increase in revenue generated by our Anchor contingent fee business compared to the prior year period.

Operating Expenses

     Total operating expenses were $27.7 million for the three months ended March 31, 2006, an increase of $6.5 million or 30.7% compared to total operating expenses of $21.2 million for the three months ended March 31, 2005. Total operating expenses, including compensation and employee services expenses, were 42.9% of cash receipts excluding sales for the three months ended March 31, 2006 compared to 41.4% for the same period in 2005.

Compensation and Employee Services

     Compensation and employee services expenses were $14.1 million for the three months ended March 31, 2006, an increase of $3.2 million or 29.4% compared to compensation and employee services expenses of $10.9 million for the three months ended March 31, 2005. Compensation and employee services expenses increased as total employees grew to 1,158 at March 31, 2006 from 978 at March 31, 2005. Compensation and employee services expenses as a percentage of cash receipts excluding sales increased to 21.9% for the three months ended March 31, 2006 from 21.2% of cash receipts excluding sales for the same period in 2005 as a result of increased collector headcount and a shift in portfolio mix.

Outside Legal and Other Fees and Services

     Outside legal and other fees and services expenses were $9.1 million for the three months ended March 31, 2006, an increase of $1.9 million or 26.4% compared to outside legal and other fees and services expenses of $7.2 million for the three months ended March 31, 2005. Of the $1.9 million increase, $0.4 million was attributable to increases in other fees and services. The remaining $1.5 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 shift implemented in mid-2002. This strategy resulted in us referring to the legal suit process more previously 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 27.3% of total cash receipts for the three months ended March 31, 2006 compared to 27.4% for the three months ended March 31, 2005. Total legal expenses for the three months ended March 31, 2006 were 36.2% of legal cash collections compared to 34.4% for the three months ended March 31, 2005. Legal fees and costs increased from $4.8 million for the three months ended March 31, 2005 to $6.4 million, or an increase of 33.3%, for the three months ended March 31, 2006.

Communications

     Communications expenses were $1.6 million for the three months ended March 31, 2006, an increase of $500,000 or 45.5% compared to communications expenses of $1.1 million for the three months ended March 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. Telephone expenses were responsible for 13.1% of this increase, while the remaining 86.9% was attributable to higher mailing expenses.

Rent and Occupancy

     Rent and occupancy expenses were $561,000 for the three months ended March 31, 2006, an increase of $85,000 or 17.9% compared to rent and occupancy expenses of $476,000 for the three months ended March 31, 2005. Our new IGS and RDS facilities accounted for $69,000 of the increase. The remaining increase was attributable to rent escalations at our Norfolk locations as well as increased utility charges generally.

Other Operating Expenses

     Other operating expenses were $1,076,000 for the three months ended March 31, 2006, an increase of $323,000 or 42.9% compared to other operating expenses of $753,000 for the three months ended March 31, 2005. The increase was due to changes in repairs and maintenance, travel and meals, hiring expenses, and miscellaneous expenses. Repairs and maintenance expenses increased by $48,000, travel and meals expenses increased by $105,000, hiring expenses increased by $70,000, and miscellaneous expenses increased by $100,000.

Depreciation and Amortization

     Depreciation and amortization expenses were $1,253,000 for the three months ended March 31, 2006, an increase of $312,000 or 33.2% compared to depreciation expenses of $941,000 for the three months ended March 31, 2005. The increase was attributable to the depreciation and amortization of the acquired assets of RDS and the continued capital expenditures on equipment, software and computers related to our growth and systems upgrades. The amortization of the IGS and RDS intangible assets accounted for $122,000 of the increase. The remaining increase of $190,000 resulted from new capital expenditures on equipment, software and computers.

Interest Income

     Interest income was $73,000 for the three months ended March 31, 2006, a decrease of $23,000 compared to interest income of $96,000 for the three months ended March 31, 2005. This decrease is the result of reduced cash balances in the 2006 quarter versus the same period in 2005.

Interest Expense

     Interest expense was $168,000 for the three months ended March 31, 2006, an increase of $104,000 compared to interest expense of $64,000 for the three months ended March 31, 2005. The increase is due to an outstanding balance on our revolving line of credit during the quarter versus no outstanding line of credit balances in the comparative period in 2005.

Supplemental Performance Data

Owned Portfolio Performance:

     The following table shows our portfolio buying activity by year, setting forth, among other things, the purchase price, unamortized purchase price (finance receivables, net), actual cash collections and estimated remaining cash collections as of March 31, 2006.

($ in thousands)

						Unamortized				Percentage				Actual Cash																Total Estimated
						Purchase Price				of Purchase Price				Collections				Estimated								Total Estimated				Collections to
Purchase		Purchase				Balance at				Remaining Unamortized				Including Cash				Remaining				Total Estimated				Collections to				Purchase Price
Period		Price(1)				March 31, 2006(2)				at March 31, 2006(3)				Sales				Collections(4)				Collections(5)				Purchase Price(6)				Adjusted(7)
1996		$	3,080			$	0				0	%		$	9,552			$	71			$	9,623				312	%			312	%
1997		$	7,685			$	0				0	%		$	23,486			$	255			$	23,741				309	%			309	%
1998		$	11,089			$	0				0	%		$	33,396			$	533			$	33,929				306	%			306	%
1999		$	18,898			$	0				0	%		$	58,851			$	1,799			$	60,650				321	%			321	%
2000		$	25,015			$	0				0	%		$	90,380			$	5,032			$	95,412				381	%			381	%
2001		$	33,468			$	1,235				4	%		$	129,587			$	18,486			$	148,073				442	%			442	%
2002		$	42,277			$	4,673				11	%		$	126,467			$	26,851			$	153,318				363	%			363	%
2003		$	61,466			$	13,374				22	%		$	139,324			$	55,473			$	194,797				317	%			317	%
2004		$	59,355			$	24,026				40	%		$	75,793			$	74,223			$	150,016				253	%			260	%
2005		$	146,312			$	130,784				89	%		$	36,928			$	266,011			$	302,939				207	%			224	%
YTD 2006		$	16,240			$	15,755				97	%		$	732			$	29,574			$	30,306				187	%			231	%

     The following graph shows the purchase price of our owned portfolios by year beginning in 1996 and includes the year to date acquisition amount for the quarters ended March 31, 2006 and 2005. The purchase price number represents the cash paid to the seller to acquire defaulted consumer receivables, plus certain capitalized costs, less the purchase price refunded by the seller due to the return of non-compliant accounts.

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

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

										Cash Collections By Year, By Year of Purchase
($ in thousands)
Purchase		Purchase				Cash Collection Period																																								YTD
Period		Price				1996				1997				1998				1999				2000				2001				2002				2003				2004				2005				2006				Total
1996		$	3,080			$	548			$	2,484			$	1,890			$	1,348			$	1,025			$	730			$	496			$	398			$	285			$	210			$	77			$	9,491
1997			7,685				—				2,507				5,215				4,069				3,347				2,630				1,829				1,324				1,022				860				192			$	22,995
1998			11,089				—				—				3,776				6,807				6,398				5,152				3,948				2,797				2,200				1,811				463			$	33,352
1999			18,898				—				—				—				5,138				13,069				12,090				9,598				7,336				5,615				4,352				960			$	58,158
2000			25,015				—				—				—				—				6,894				19,498				19,478				16,628				14,098				10,924				2,398			$	89,918
2001			33,468				—				—				—				—				—				13,048				28,831				28,003				26,717				22,639				4,859			$	124,097
2002			42,277				—				—				—				—				—				—				15,073				36,258				35,742				32,497				6,885			$	126,455
2003			61,466				—				—				—				—				—				—				—				24,308				49,706				52,640				12,670			$	139,324
2004			59,355				—				—				—				—				—				—				—				—				18,019				46,475				11,294			$	75,788
2005			146,312				—				—				—				—				—				—				—				—				—				18,968				17,960			$	36,928
YTD 2006			16,240				—				—				—				—				—				—				—				—				—				—				732			$	732
Total		$	424,887			$	548			$	4,991			$	10,881			$	17,362			$	30,733			$	53,148			$	79,253			$	117,052			$	153,404			$	191,376			$	58,490			$	717,238

     When we acquire a new pool of finance receivables, our estimates typically result in a 72 - 84 month projection of cash collections. The following chart shows our historical cash collections (including cash sales of finance receivables) in relation to the aggregate of the total estimated collection projections made at the time of each respective pool purchase, adjusted for buybacks.

Owned Portfolio Personnel Performance:

     We measure the productivity of each collector each month, breaking results into groups of similarly tenured collectors. The following three tables display various productivity measures that we track.

Collector by Tenure

Collector FTE at:		12/31/02				12/31/03				12/31/04				12/31/05				03/31/05				03/31/06
One year + 1			210				241				298				327				319				331
Less than one year 2			223				338				349				364				345				360
Total 2			433				579				647				691				664				691

Monthly Cash Collections by Tenure ¹

Average performance YTD		12/31/02				12/31/03				12/31/04				12/31/05				03/31/05				03/31/06
One year + 2		$	16,927			$	18,158			$	17,129			$	16,694			$	17,846			$	19,287
Less than one year 3		$	8,689			$	8,303			$	9,363			$	8,491			$	9,363			$	10,056

YTD Cash Collections per Hour Paid ¹

Average performance YTD		12/31/02				12/31/03				12/31/04				12/31/05				03/31/05				03/31/06
Total cash collections		$	96.37			$	108.27			$	117.59			$	133.39			$	135.62			$	151.60
Non-legal cash collections		$	77.72			$	80.10			$	82.06			$	89.25			$	95.71			$	105.97

     Cash collections have substantially exceeded revenue in each quarter since our formation. The following chart illustrates the consistent excess of our cash collections on our owned portfolios over the income recognized on finance receivables on a quarterly basis. The difference between cash collections and income recognized is referred to as payments applied to principal. It is also referred to as amortization. This amortization is the portion of cash collections that is used to recover the cost of the portfolio investment represented on the balance sheet.

Seasonality

     We depend on the ability to collect on our owned and serviced defaulted consumer receivables. Collections tend to be higher in the first and second quarters of the year and lower in the third and fourth quarters of the year, due to consumer payment patterns in connection with seasonal employment trends, income tax refunds, and holiday spending habits. Due to our historical quarterly increases in cash collections, our growth has partially masked the impact of this seasonality.

     The following table shows the changes in finance receivables, including the amounts paid to acquire new portfolios.

		Three Months				Three Months
		Ended				Ended
		March 31,				March 31,
		2006				2005
Balance at beginning of period		$	193,644,670			$	105,188,906
Acquisitions of finance receivables, net of buybacks (1)			15,318,806				17,735,629
Cash collections applied to principal on finance receivables (2)			(19,116,097	)			(15,580,134	)
Balance at end of period		$	189,847,379			$	107,344,401
Estimated Remaining Collections (“ERC”)(3)		$	478,308,322			$	313,855,339

     The following tables categorize our owned portfolios as of March 31, 2006 into the major asset types and account types represented, respectively:

										Life to Date Purchased Face
		No. of								Value of Defaulted Consumer
Asset Type		Accounts				%				Receivables(1)				%
Visa/MasterCard/Discover			4,702,806				49.7	%		$	14,326,384,476				70.6	%
Consumer Finance			2,928,309				31.0	%			2,548,075,027				12.5	%
Private Label Credit Cards			1,610,499				17.0	%			2,129,500,771				10.5	%
Auto Deficiency			215,596				2.3	%			1,301,757,641				6.4	%
Total:			9,457,210				100.0	%		$	20,305,717,915				100.0	%

     The following chart shows details of our life to date buying activity as of March 31, 2006. We actively seek to purchase both bankrupt and non-bankrupt accounts at any point in the delinquency cycle

										Life to Date Purchased Face
										Value of Defaulted Consumer
Account Type		No. of Accounts				%				Receivables(1)				%
Fresh			201,476				2.1	%		$	645,897,478				3.2	%
Primary			1,062,969				11.2	%			2,592,961,243				12.8	%
Secondary			1,903,013				20.1	%			3,767,365,777				18.6	%
Tertiary			2,930,313				31.0	%			3,568,911,720				17.6	%
BK Trustees			1,506,912				15.9	%			5,681,196,172				28.0	%
Other			1,852,527				19.7	%			4,049,385,525				19.8	%
Total:			9,457,210				100.0	%		$	20,305,717,915				100.0	%

     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. These facts are considered in our pricing analysis. In addition, historical payment patterns due to economic factors and bankruptcy trends vary regionally and are also 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 March 31, 2006:

										Life to Date Purchased Face								Original Purchase Price of
		No. of								Value of Defaulted Consumer								Defaulted Consumer
Geographic Distribution		Accounts				%				Receivables(1)				%				Receivables(2)				%
Texas			1,928,985				20	%		$	2,502,462,654				12	%		$	53,372,962				12	%
California			902,229				10	%			2,468,096,397				12	%			46,802,949				11	%
Florida			706,564				7	%			2,068,148,804				10	%			41,269,141				10	%
New York			554,235				6	%			1,481,961,856				7	%			31,587,865				7	%
Pennsylvania			265,711				3	%			734,652,739				4	%			17,295,622				4	%
Illinois			316,499				3	%			682,486,441				3	%			14,777,713				3	%
Ohio			310,767				3	%			678,192,732				3	%			14,380,007				3	%
North Carolina			248,594				3	%			611,407,125				3	%			14,421,246				3	%
New Jersey			196,852				2	%			597,582,635				3	%			13,750,657				3	%
Georgia			235,569				2	%			555,736,835				3	%			14,197,450				3	%
Michigan			269,159				3	%			519,422,044				3	%			12,089,778				3	%
Massachusetts			207,434				2	%			481,781,593				2	%			9,272,465				2	%
Virginia			170,141				2	%			382,285,080				2	%			9,090,184				2	%
Missouri			289,934				3	%			378,587,614				2	%			7,938,115				2	%
Arizona			136,105				1	%			364,563,053				2	%			7,277,520				2	%
Tennessee			149,952				2	%			360,245,736				2	%			8,960,899				2	%
Other(3)			2,568,480				28	%			5,438,104,577				27	%			115,082,068				28	%
Total:			9,457,210				100	%		$	20,305,717,915				100	%		$	431,566,641				100	%