##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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For the quarterly period ended June 30, 2006

of



|                        |  |     
|----------------------- |  | ----
|COMPUCREDIT CORPORATION |  | LOGO

a Georgia Corporation



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IRS Employer Identification
No. 58-2336689

SEC File Number 0-25751

245 Perimeter Center Parkway, Suite 600

Atlanta, Georgia 30346

(770) 206-6200



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CompuCredit has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act (the
Act) during the preceding 12 months and has been subject to such filing requirements for the past 90 days.

CompuCredit is
an accelerated filer and is not a shell company (as defined in Rule 12b-2 of the Act).

As of July 28, 2006, 49,349,446 shares of
Common Stock, no par value, of CompuCredit were outstanding. (This excludes 5,677,950 loaned shares to be returned.)



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##### Table of Contents

COMPUCREDIT CORPORATION

FORM 10-Q

TABLE OF CONTENTS



|         |  |                       |  |                                                                                       |  |     
|-------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|         |  |                       |  |                                                                                       |  | Page
|PART I.  |  | FINANCIAL INFORMATION |  |                                                                                      
|         |  | Item 1.               |  | Financial Statements (Unaudited)                                                      |  |     
|         |  |                       |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|         |  |                       |  | Condensed Consolidated Statements of Operations                                       |  | 4   
|         |  |                       |  | Condensed Consolidated Statement of Shareholders Equity                              |  | 5   
|         |  |                       |  | Condensed Consolidated Statements of Cash Flows                                       |  | 6   
|         |  |                       |  | Notes to Condensed Consolidated Financial Statements                                  |  | 7   
|         |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 22  
|         |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 40  
|         |  | Item 4.               |  | Controls and Procedures                                                               |  | 41  
|PART II. |  | OTHER INFORMATION     |  |                                                                                      
|         |  | Item 1.               |  | Legal Proceedings                                                                     |  | 42  
|         |  | Item 1A.              |  | Risk Factors                                                                          |  | 42  
|         |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 52  
|         |  | Item 3.               |  | Defaults Upon Senior Securities                                                       |  | 52  
|         |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                   |  | 52  
|         |  | Item 5.               |  | Other Information                                                                     |  | 52  
|         |  | Item 6.               |  | Exhibits                                                                              |  | 53  
|         |  |                       |  | Signatures                                                                            |  | 54  



2



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##### Table of Contents

CompuCredit Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Dollars in thousands)



|                                                                                                                                                                                                                                                                                                                                  |  |              |           |   |                   |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                                                                                                                                                                                                  |  | June 30,2006 |           |   | December 31, 2005 |  
|                                                                                                                                                                                                                                                                                                                                  |  | (Unaudited)  |           |   |                   |  
|Assets                                                                                                                                                                                                                                                                                                                            |  |              |           |   |                   |   |           |  
|Cash and cash equivalents (including restricted cash of $17,848 at June 30, 2006 and $12,427 at December 31, 2005)                                                                                                                                                                                                                |  | $            | 145,973   |   |                   | $ | 240,655   |  
|Securitized earning assets                                                                                                                                                                                                                                                                                                        |  |              | 870,817   |   |                   |   | 786,983   |  
|Non-securitized earning assets, net                                                                                                                                                                                                                                                                                               |  |              | 566,651   |   |                   |   | 468,311   |  
|Deferred costs, net                                                                                                                                                                                                                                                                                                               |  |              | 27,149    |   |                   |   | 31,012    |  
|Software, furniture, fixtures and equipment, net                                                                                                                                                                                                                                                                                  |  |              | 64,320    |   |                   |   | 48,383    |  
|Investments in equity-method investees                                                                                                                                                                                                                                                                                            |  |              | 76,733    |   |                   |   | 69,343    |  
|Intangibles, net                                                                                                                                                                                                                                                                                                                  |  |              | 10,981    |   |                   |   | 13,749    |  
|Goodwill                                                                                                                                                                                                                                                                                                                          |  |              | 120,254   |   |                   |   | 130,800   |  
|Prepaid expenses and other assets                                                                                                                                                                                                                                                                                                 |  |              | 31,340    |   |                   |   | 31,954    |  
|                                                                                                                                                                                                                                                                                                                                  |  |              |           |   |                   |   |           |  
|Total assets                                                                                                                                                                                                                                                                                                                      |  | $            | 1,914,218 |   |                   | $ | 1,821,190 |  
|                                                                                                                                                                                                                                                                                                                                  |  |              |           |   |                   |   |           |  
|Liabilities                                                                                                                                                                                                                                                                                                                       |  |              |           |   |                   |   |           |  
|Accounts payable and accrued expenses                                                                                                                                                                                                                                                                                             |  | $            | 104,269   |   |                   | $ | 96,483    |  
|Notes payable                                                                                                                                                                                                                                                                                                                     |  |              | 240,146   |   |                   |   | 165,186   |  
|Convertible senior notes                                                                                                                                                                                                                                                                                                          |  |              | 550,000   |   |                   |   | 550,000   |  
|Deferred revenue                                                                                                                                                                                                                                                                                                                  |  |              | 64,282    |   |                   |   | 67,585    |  
|Current and deferred income tax liabilities                                                                                                                                                                                                                                                                                       |  |              | 85,961    |   |                   |   | 129,283   |  
|                                                                                                                                                                                                                                                                                                                                  |  |              |           |   |                   |   |           |  
|Total liabilities                                                                                                                                                                                                                                                                                                                 |  |              | 1,044,658 |   |                   |   | 1,008,537 |  
|                                                                                                                                                                                                                                                                                                                                  |  |             
|Minority interests                                                                                                                                                                                                                                                                                                                |  |              | 39,679    |   |                   |   | 45,442    |  
|                                                                                                                                                                                                                                                                                                                                  |  |             
|Commitments and contingencies (Note 9)                                                                                                                                                                                                                                                                                            |  |              |           |   |                   |   |           |  
|                                                                                                                                                                                                                                                                                                                                  |  |             
|Shareholders equity                                                                                                                                                                                                                                                                                                              |  |              |           |   |                   |   |           |  
|Common stock, no par value, 150,000,000 shares authorized: 59,435,911 shares issued and 55,027,396 shares outstanding at June 30, 2006
(including 5,677,950 loaned shares to be returned); and 59,080,610 shares issued and 54,628,020 shares outstanding at December 31, 2005 (including 5,677,950 loaned shares to be returned) |  |              |          |   |                   |   |          |  
|Additional paid-in capital                                                                                                                                                                                                                                                                                                        |  |              | 316,107   |   |                   |   | 312,752   |  
|Treasury stock, at cost, 4,408,515 and 4,452,590 shares at June 30, 2006 and December 31, 2005, respectively                                                                                                                                                                                                                      |  |              | (124,713  | ) |                   |   | (125,068  | )
|Warrants                                                                                                                                                                                                                                                                                                                          |  |              | 25,610    |   |                   |   | 25,610    |  
|Retained earnings                                                                                                                                                                                                                                                                                                                 |  |              | 612,877   |   |                   |   | 553,917   |  
|                                                                                                                                                                                                                                                                                                                                  |  |              |           |   |                   |   |           |  
|Total shareholders equity                                                                                                                                                                                                                                                                                                        |  |              | 829,881   |   |                   |   | 767,211   |  
|                                                                                                                                                                                                                                                                                                                                  |  |              |           |   |                   |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                                                                                                                                                        |  | $            | 1,914,218 |   |                   | $ | 1,821,190 |  
|                                                                                                                                                                                                                                                                                                                                  |  |              |           |   |                   |   |           |  

See accompanying notes.



3



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##### Table of Contents

CompuCredit Corporation and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)



|                                                                                                                 |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | -------- | - | -------------------------------- | - | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                                                                                                 |  | For the three months endedJune 30, |          |   | For the six months endedJune 30, |  
|                                                                                                                 |  | 2006                               |          |   | 2005                             |   |         | 2006 |  |   | 2005     |  
|Interest income:                                                                                                 |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|Consumer loans, including past due fees                                                                          |  | $                                  | 65,804   |   |                                  | $ | 28,053  |      |  | $ | 118,779  |   |  | $ | 39,311  |  
|Other                                                                                                            |  |                                    | 4,380    |   |                                  |   | 3,649   |      |  |   | 8,955    |   |  |   | 5,644   |  
|                                                                                                                 |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|Total interest income                                                                                            |  |                                    | 70,184   |   |                                  |   | 31,702  |      |  |   | 127,734  |   |  |   | 44,955  |  
|Interest expense                                                                                                 |  |                                    | (12,921  | ) |                                  |   | (16,373 | )    |  |   | (24,371  | ) |  |   | (18,795 | )
|                                                                                                                 |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|Net interest income before fees and other income on non-securitized earning assets and provision for loan losses |  |                                    | 57,263   |   |                                  |   | 15,329  |      |  |   | 103,363  |   |  |   | 26,160  |  
|Fees and other income on non-securitized earning assets                                                          |  |                                    | 144,369  |   |                                  |   | 170,104 |      |  |   | 264,139  |   |  |   | 269,446 |  
|Provision for loan losses                                                                                        |  |                                    | (127,933 | ) |                                  |   | (34,414 | )    |  |   | (205,762 | ) |  |   | (48,518 | )
|                                                                                                                 |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|Net interest income, fees and other income on non-securitized earning assets                                     |  |                                    | 73,699   |   |                                  |   | 151,019 |      |  |   | 161,740  |   |  |   | 247,088 |  
|Other operating income:                                                                                          |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|Fees and other income on securitized earning assets                                                              |  |                                    | 45,140   |   |                                  |   | 22,489  |      |  |   | 95,609   |   |  |   | 59,981  |  
|Servicing income                                                                                                 |  |                                    | 23,571   |   |                                  |   | 37,693  |      |  |   | 51,381   |   |  |   | 74,152  |  
|Ancillary and interchange revenues                                                                               |  |                                    | 11,044   |   |                                  |   | 6,469   |      |  |   | 19,238   |   |  |   | 12,002  |  
|Equity in income of equity-method investees                                                                      |  |                                    | 25,882   |   |                                  |   | 7,362   |      |  |   | 51,547   |   |  |   | 26,181  |  
|                                                                                                                 |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|Total other operating income                                                                                     |  |                                    | 105,637  |   |                                  |   | 74,013  |      |  |   | 217,775  |   |  |   | 172,316 |  
|Other operating expense:                                                                                         |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|Salaries and benefits                                                                                            |  |                                    | 11,377   |   |                                  |   | 7,882   |      |  |   | 23,022   |   |  |   | 14,989  |  
|Card and loan servicing                                                                                          |  |                                    | 62,794   |   |                                  |   | 63,173  |      |  |   | 126,451  |   |  |   | 122,508 |  
|Marketing and solicitation                                                                                       |  |                                    | 24,647   |   |                                  |   | 20,156  |      |  |   | 50,726   |   |  |   | 38,206  |  
|Depreciation                                                                                                     |  |                                    | 7,240    |   |                                  |   | 4,346   |      |  |   | 14,874   |   |  |   | 8,559   |  
|Goodwill impairment                                                                                              |  |                                    |         |   |                                  |   |        |      |  |   | 10,546   |   |  |   |        |  
|Other                                                                                                            |  |                                    | 26,993   |   |                                  |   | 21,858  |      |  |   | 56,304   |   |  |   | 40,916  |  
|                                                                                                                 |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|Total other operating expense                                                                                    |  |                                    | 133,051  |   |                                  |   | 117,415 |      |  |   | 281,923  |   |  |   | 225,178 |  
|                                                                                                                 |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|Income before minority interests and income taxes                                                                |  |                                    | 46,285   |   |                                  |   | 107,617 |      |  |   | 97,592   |   |  |   | 194,226 |  
|Minority interests                                                                                               |  |                                    | (2,061   | ) |                                  |   | (2,842  | )    |  |   | (5,466   | ) |  |   | (12,003 | )
|                                                                                                                 |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|Income before income taxes                                                                                       |  |                                    | 44,224   |   |                                  |   | 104,775 |      |  |   | 92,126   |   |  |   | 182,223 |  
|Income taxes                                                                                                     |  |                                    | (15,922  | ) |                                  |   | (38,243 | )    |  |   | (33,166  | ) |  |   | (66,511 | )
|                                                                                                                 |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|Net income                                                                                                       |  | $                                  | 28,302   |   |                                  | $ | 66,532  |      |  | $ | 58,960   |   |  | $ | 115,712 |  
|                                                                                                                 |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|Net income per common sharebasic                                                                                |  | $                                  | 0.58     |   |                                  | $ | 1.33    |      |  | $ | 1.21     |   |  | $ | 2.28    |  
|                                                                                                                 |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  
|Net income per common sharediluted                                                                              |  | $                                  | 0.56     |   |                                  | $ | 1.29    |      |  | $ | 1.17     |   |  | $ | 2.23    |  
|                                                                                                                 |  |                                    |          |   |                                  |   |         |      |  |   |          |   |  |   |         |  

See accompanying notes.



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##### Table of Contents

CompuCredit Corporation and Subsidiaries

Condensed Consolidated Statement of Shareholders Equity
(Unaudited)

For the Six Months Ended June 30, 2006

(Dollars in thousands)



|                                                         |  |               |   |                            |        |   |                |   |         |          |  |                   |          |                            |  |   |        |  |   |         |  |   |         |  
|-------------------------------------------------------- |  | ------------- | - | -------------------------- | ------ | - | -------------- | - | ------- | -------- |  | ----------------- | -------- | -------------------------- |  | - | ------ |  | - | ------- |  | - | ------- | -
|                                                         |  | Common Stock  |   | Additional Paid-In Capital |        |   | Treasury Stock |   |         | Warrants |  | Retained Earnings |          | Total Shareholders Equity | 
|                                                         |  | Shares Issued |   |                            | Amount |   |                |   |         |         
|Balance at December 31, 2005                             |  | 59,080,610    |   |                            | $      |  |                | $ | 312,752 |          |  | $                 | (125,068 | )                          |  | $ | 25,610 |  | $ | 553,917 |  | $ | 767,211 |  
|Proceeds from stock options exercises                    |  | 36,565        |   |                            |        |  |                |   | 360     |          |  |                   |         |                            |  |   |       |  |   |        |  |   | 360     |  
|Use of treasury stock for stock-based compensation plans |  | (44,075       | ) |                            |        |  |                |   | (466    | )        |  |                   | 355      |                            |  |   |       |  |   |        |  |   | (111    | )
|Issuance of restricted stock                             |  | 362,811       |   |                            |        |  |                |   |        |          |  |                   |         |                            |  |   |       |  |   |        |  |   |        |  
|Amortization of deferred stock-based compensation costs  |  |              |   |                            |        |  |                |   | 3,309   |          |  |                   |         |                            |  |   |       |  |   |        |  |   | 3,309   |  
|Tax benefit related to stock-based compensation plans    |  |               |   |                            |        |   |                |   | 152     |          |  |                   |          |                            |  |   |        |  |   |         |  |   | 152     |  
|Net income                                               |  |              |   |                            |        |  |                |   |        |          |  |                   |         |                            |  |   |       |  |   | 58,960  |  |   | 58,960  |  
|                                                         |  |               |   |                            |        |   |                |   |         |          |  |                   |          |                            |  |   |        |  |   |         |  |   |         |  
|Balance at June 30, 2006                                 |  | 59,435,911    |   |                            | $      |  |                | $ | 316,107 |          |  | $                 | (124,713 | )                          |  | $ | 25,610 |  | $ | 612,877 |  | $ | 829,881 |  
|                                                         |  |               |   |                            |        |   |                |   |         |          |  |                   |          |                            |  |   |        |  |   |         |  |   |         |  

See accompanying notes.



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##### Table of Contents

CompuCredit Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)



|                                                                                  |  |                                   |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | --------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | For the six months ended June 30, |         
|                                                                                  |  | 2006                              |          |   | 2005 |  
|Operating activities                                                              |  |                                   |          |   |      |   |          |  
|Net income                                                                        |  | $                                 | 58,960   |   |      | $ | 115,712  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                   |          |   |      |   |          |  
|Depreciation expense                                                              |  |                                   | 14,874   |   |      |   | 8,559    |  
|Impairment of goodwill                                                            |  |                                   | 10,546   |   |      |   |         |  
|Provision for loan losses                                                         |  |                                   | 205,762  |   |      |   | 48,518   |  
|Amortization of intangibles                                                       |  |                                   | 2,779    |   |      |   | 1,601    |  
|Accretion of deferred revenue                                                     |  |                                   | (6,195   | ) |      |   | (9,934   | )
|Stock-based compensation expense                                                  |  |                                   | 3,309    |   |      |   | 1,345    |  
|Minority interest                                                                 |  |                                   | 5,466    |   |      |   | 12,003   |  
|Retained interests income adjustment, net                                         |  |                                   | 11,503   |   |      |   | (590     | )
|Gain on bulk sale of receivables                                                  |  |                                   |         |   |      |   | (69,559  | )
|Income in excess of distributions from equity-method investments                  |  |                                   | (9,830   | ) |      |   | (15,608  | )
|Changes in assets and liabilities, exclusive of business acquisitions:            |  |                                   |          |   |      |   |          |  
|Increase in deferred costs                                                        |  |                                   | 3,863    |   |      |   | 10,435   |  
|Decrease in current and deferred tax liability                                    |  |                                   | (43,171  | ) |      |   | (10,254  | )
|Increase in uncollected fees on non-securitized earning assets                    |  |                                   | (71,443  | ) |      |   | (27,024  | )
|Increase in deferred revenue                                                      |  |                                   | 2,892    |   |      |   | 68,058   |  
|Other                                                                             |  |                                   | 15,692   |   |      |   | 20,407   |  
|                                                                                  |  |                                   |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                                   | 205,007  |   |      |   | 153,669  |  
|                                                                                  |  |                                   |          |   |      |   |          |  
|Investing activities                                                              |  |                                   |          |   |      |   |          |  
|Investments in equity-method investees                                            |  |                                   |         |   |      |   | (25,285  | )
|Proceeds from equity-method investees                                             |  |                                   | 2,440    |   |      |   | 8,674    |  
|Investments in securitized earning assets                                         |  |                                   | (743,738 | ) |      |   | (562,505 | )
|Proceeds from securitized earning assets                                          |  |                                   | 648,402  |   |      |   | 513,046  |  
|Investments in non-securitized earning assets                                     |  |                                   | (981,930 | ) |      |   | (399,936 | )
|Proceeds from non-securitized earning assets                                      |  |                                   | 717,831  |   |      |   | 412,981  |  
|Acquisition of sub-prime lenders assets                                          |  |                                   |         |   |      |   | (133,956 | )
|Purchases of and development of software, furniture, fixtures and equipment       |  |                                   | (20,719  | ) |      |   | (9,493   | )
|                                                                                  |  |                                   |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                                   | (377,714 | ) |      |   | (196,474 | )
|                                                                                  |  |                                   |          |   |      |   |          |  
|Financing activities                                                              |  |                                   |          |   |      |   |          |  
|Minority interests distribution, net                                              |  |                                   | (11,229  | ) |      |   | (13,124  | )
|Proceeds from exercise of stock options                                           |  |                                   | 360      |   |      |   | 1,752    |  
|Purchase of treasury stock                                                        |  |                                   |         |   |      |   | (100,134 | )
|Proceeds from the issuance of convertible senior notes                            |  |                                   |         |   |      |   | 250,000  |  
|Debt issuance costs                                                               |  |                                   |         |   |      |   | (10,645  | )
|Proceeds from borrowings                                                          |  |                                   | 161,000  |   |      |   | 111,340  |  
|Repayment of borrowings                                                           |  |                                   | (72,106  | ) |      |   | (48,152  | )
|                                                                                  |  |                                   |          |   |      |   |          |  
|Net cash provided by financing activities                                         |  |                                   | 78,025   |   |      |   | 191,037  |  
|                                                                                  |  |                                   |          |   |      |   |          |  
|Net (decrease) increase in cash                                                   |  |                                   | (94,682  | ) |      |   | 148,232  |  
|Cash and cash equivalents at beginning of period                                  |  |                                   | 240,655  |   |      |   | 68,240   |  
|                                                                                  |  |                                   |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                                 | 145,973  |   |      | $ | 216,472  |  
|                                                                                  |  |                                   |          |   |      |   |          |  
|Supplemental cash flow information                                                |  |                                   |          |   |      |   |          |  
|Cash paid for interest                                                            |  | $                                 | 18,041   |   |      | $ | 16,814   |  
|                                                                                  |  |                                   |          |   |      |   |          |  
|Cash paid for income taxes                                                        |  | $                                 | 76,336   |   |      | $ | 74,985   |  
|                                                                                  |  |                                   |          |   |      |   |          |  
|Supplemental non-cash information                                                 |  |                                   |          |   |      |   |          |  
|Notes payable associated with capital leases                                      |  | $                                 | 12,172   |   |      | $ | 3,357    |  
|                                                                                  |  |                                   |          |   |      |   |          |  
|Notes payable associated with bond investments                                    |  | $                                 | 637      |   |      | $ | 4,422    |  
|                                                                                  |  |                                   |          |   |      |   |          |  
|Issuance of restricted stock and stock options                                    |  | $                                 | 23,040   |   |      | $ | 6,828    |  
|                                                                                  |  |                                   |          |   |      |   |          |  

See accompanying notes.



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##### Table of Contents

CompuCredit Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2006

1. Basis of
Presentation

We have prepared our condensed consolidated financial statements in accordance with accounting principles generally
accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (SEC) Regulation S-X. Accordingly,
they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all normal recurring adjustments considered necessary to fairly state the results for the interim
periods presented have been included. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain estimates, such
as credit losses, payment rates, discount rates and the yield earned on securitized receivables, significantly affect our reported gains on securitizations and income from retained interests in credit card receivables securitized (both of which are
components of fees and other income on securitized earning assets on our condensed consolidated statements of operations) and our reported value of securitized earning assets on our condensed consolidated balance sheets. Additionally, estimates of
future credit losses on our non-securitized loans and fees receivable have a significant impact on the provision for loan losses within our condensed consolidated statements of operations and loans and fees receivable, net, which is a component of
non-securitized earning assets, net on our condensed consolidated balance sheets. Operating results for the three and six months ended June 30, 2006 are not necessarily indicative of what our results will be for the year ending
December 31, 2006. Our unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements for our year ended December 31, 2005
contained in our Annual Report on Form 10-K filed with the SEC.

We have reclassified certain amounts in the prior period financial
statements to conform to current period presentation, and we have eliminated all significant intercompany balances and transactions for financial reporting purposes.

2. Summary of Significant Accounting Policies and Condensed Consolidated Financial Statement Components

The following is a summary of significant accounting policies we followed in preparing our condensed consolidated financial statements, as well as a description of the significant components of our condensed consolidated financial
statements.

Non-Securitized Earning Assets, Net

Non-securitized earning assets, net on our condensed consolidated balance sheets include loans and fees receivable, net, investments in previously charged-off receivables and investments in securities, each of which
we discuss separately below. Details of non-securitized earning assets, net (in thousands) are as follows:



|                                                  |  |                         |         |                             |   |        
|------------------------------------------------- |  | ----------------------- | ------- | --------------------------- | - | -------
|                                                  |  | Balance atJune, 30 2006 |         | Balance atDecember 31, 2005
|Loans and fees receivable, net                    |  | $                       | 489,452 |                             | $ | 375,919
|Investments in previously charged-off receivables |  |                         | 13,242  |                             |   | 16,993 
|Investments in securities                         |  |                         | 63,957  |                             |   | 75,399 
|                                                  |  |                         |         |                             |   |        
|Non-securitized earning assets, net               |  | $                       | 566,651 |                             | $ | 468,311
|                                                  |  |                         |         |                             |   |        

Loans and Fees Receivable, Net. Loans and fees receivable, net consist
principally of receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range, micro-loan activities and auto finance business, none of which we have securitized in off-balance-sheet
securitizations. We show these receivables net of an allowance for uncollectible loans and fees. We also present loans and fees receivable net of unearned fees (or deferred revenue) in accordance with Statement of Financial Accounting
Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Receivables and Initial Direct Costs of Leases.

The loans and fees receivable associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range consist of finance charges and fees (both billed and accrued) and
principal balances. The fees associated with this product offering include activation, annual, monthly maintenance, over-limit, cash advance and returned check fees. We recognize both activation and annual fees over a twelve-month period (i.e., the
year to which they apply), while we recognize all other fees when assessed to the cardholders. The loans and fees receivable associated with our micro-



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loan activities include principal balances and associated fees due from customers, such fees being recognized as
earnedgenerally over a two-week period. Loans and fees receivable associated with our auto finance business include principal balances and associated fees and interest, net of the unearned portion of loan discounts due from customers, which we
recognize over the life of each loan.

We provide an allowance for uncollectible loans and fees for the portion of the loans and fees
receivable we believe we ultimately will not collect. Loans and fees receivable, gross and the allowance for uncollectible loans and fees exclude, however, any finance charges and fees that were billed on late-stage delinquent receivables (i.e.,
those more than 90 days delinquent) for which we concluded at the time of billing that collections were unlikely; all such amounts are not accrued into income or the underlying loans and fees receivable, gross balances. The components of loans and
fees receivable, net (in millions) are as follows:



|                                           |  |                             |        |   |           |   |         |              |  |   |                         |   |  |   |        |  
|------------------------------------------ |  | --------------------------- | ------ | - | --------- | - | ------- | ------------ |  | - | ----------------------- | - |  | - | ------ | -
|                                           |  | Balance atDecember 31, 2005 |        |   | Additions |   |         | Subtractions |  |   | Balance atJune 30, 2006 |  
|Loans and fees receivable, gross           |  | $                           | 530.6  |   |           | $ | 1,178.8 |              |  | $ | (950.4                  | ) |  | $ | 759.0  |  
|Deferred revenue                           |  |                             | (100.4 | ) |           |   | (94.7   | )            |  |   | 85.0                    |   |  |   | (110.1 | )
|Allowance for uncollectible loans and fees |  |                             | (54.3  | ) |           |   | (205.8  | )            |  |   | 100.7                   |   |  |   | (159.4 | )
|                                           |  |                             |        |   |           |   |         |              |  |   |                         |   |  |   |        |  
|Loans and fees receivable, net             |  | $                           | 375.9  |   |           | $ | 878.3   |              |  | $ | (764.7                  | ) |  | $ | 489.5  |  
|                                           |  |                             |        |   |           |   |         |              |  |   |                         |   |  |   |        |  

We include interest income associated with these loans and fees receivable in interest income
under the consumer loans, including past due fees category on our accompanying condensed consolidated statements of operations. Additionally, we reflect $135.9 million, $245.4 million, $56.3 million and $103.9 million of fee income associated with
these loans and fees receivable for the three and six months ended June 30, 2006 and 2005, respectively, in fees and other income from non-securitized earning assets on our condensed consolidated statements of operations. As of June 30,
2006, the weighted-average remaining accretion period for the $110.1 million of deferred revenue reflected in the above table was 9.05 months; deferred revenue associated with any accounts that may charge off in the future is not accreted into
revenue after the charge-off date.

Investments in Previously Charged-off Receivables. The following table shows (in
thousands) a roll-forward of our investments in previously charged-off receivables activities:



|                                                                                                                                                                                          |  |                   |         |   |                 |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | --------------- | - | ------- | -
|                                                                                                                                                                                          |  | Three MonthsEnded |         |   | Six MonthsEnded |  
|Unrecovered balance at beginning of period                                                                                                                                                |  | $                 | 14,120  |   |                 | $ | 16,993  |  
|Acquisitions of defaulted accounts                                                                                                                                                        |  |                   | 7,979   |   |                 |   | 15,376  |  
|Cash collections                                                                                                                                                                          |  |                   | (17,346 | ) |                 |   | (35,018 | )
|Accretion of deferred revenue associated with forward flow contract                                                                                                                       |  |                   | (2,572  | ) |                 |   | (4,467  | )
|Cost-recovery method income recognized on defaulted accounts (included in fees and other income on non-securitized earning assets on our
condensed consolidated statements of operations) |  |                   | 11,061  |   |                 |   | 20,358  |  
|                                                                                                                                                                                          |  |                   |         |   |                 |   |         |  
|Balance at June 30, 2006                                                                                                                                                                  |  | $                 | 13,242  |   |                 | $ | 13,242  |  
|                                                                                                                                                                                          |  |                   |         |   |                 |   |         |  
|Estimated remaining collections (ERC)                                                                                                                                                   |  | $                 | 59,307  |   |                 | $ | 59,307  |  
|                                                                                                                                                                                          |  |                   |         |   |                 |   |         |  

In June 2005, our debt collections business sold a significant pool of its previously
charged-off receivables. Remaining after this sale are the subsidiarys pools of previously charged-off receivables primarily associated with accounts for which the debtors have filed for bankruptcy protection under Chapter 13 of the United
States Bankruptcy Code (Chapter 13 Bankruptcies) and accounts participating in or acquired in connection with the subsidiarys balance transfer program. Additionally, we expect our debt collections business to continue to acquire
for resale under a forward flow contract certain previously charged-off receivables from trusts, the receivables of which are serviced by us, and certain previously charged-off receivables associated with our largely fee-based credit card offering
to consumers at the lower end of the FICO scoring range.

We estimate the life of each pool of previously charged-off receivables acquired
by us generally to be between 24 and 36 months for normal delinquency charged-off accounts and approximately 60 months for Chapter 13 Bankruptcies, which constitute the majority of accounts retained after sales under the forward flow contract.
We anticipate collecting approximately 40.3% of the ERC of the existing accounts over the next twelve months, with the balance to be collected thereafter.



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Investments in Securities. We periodically invest through the open market in debt and
equity securities we believe will provide us with an adequate return. Generally, we purchase these debt and equity securities outright or we partially fund the purchases using existing margin accounts; see Note 7, Notes Payable and
Convertible Senior Notes. We generally classify our purchased debt and equity securities as trading securities. Additionally, we occasionally have received distributions of debt securities from our equity-method investees, and we have
classified such distributed debt securities as held to maturity.

Fees and Other Income on Securitized Earning Assets

Fees and other income on securitized earning assets include (1) annual membership, over-limit, cash advance, returned check and other fees associated
with our securitized credit card receivables, (2) securitization gains and (3) income from retained interests in credit card receivables securitized, each of which is detailed (in thousands) in the following table.



|                                                                      |  |                                    |        |                                  |   |        |  |      |        |  |   |       
|--------------------------------------------------------------------- |  | ---------------------------------- | ------ | -------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                                      |  | For the three monthsended June 30, |        | For the six monthsended June 30,
|                                                                      |  | 2006                               |        | 2005                             |   | 2006   |  | 2005
|Securitization gains                                                  |  | $                                  | 3,541  |                                  | $ | 1,192  |  | $    | 4,404  |  | $ | 2,779 
|Income from retained interests in credit card receivables securitized |  |                                    | 23,103 |                                  |   | 6,276  |  |      | 56,307 |  |   | 26,145
|Fees on securitized receivables                                       |  |                                    | 18,496 |                                  |   | 15,021 |  |      | 34,898 |  |   | 31,057
|                                                                      |  |                                    |        |                                  |   |        |  |      |        |  |   |       
|Total fees and other income on securitized earning assets             |  | $                                  | 45,140 |                                  | $ | 22,489 |  | $    | 95,609 |  | $ | 59,981
|                                                                      |  |                                    |        |                                  |   |        |  |      |        |  |   |       

We assess fees on credit card accounts underlying our securitized receivables according to the
terms of the related cardholder agreements and, except for annual membership fees, we recognize these fees as revenue when charged to the cardholders account. We accrete annual membership fees associated with our securitized credit card
receivables into revenue on a straight-line basis over the cardholder privilege period, which is twelve months. We amortize direct receivables origination costs against fee income. See Note 6, Off-Balance-Sheet Arrangements, for further
discussion on securitization gains and income from retained interests in credit card receivables (including the effects of changes in retained interest valuations).

Fees and Other Income on Non-Securitized Earning Assets

Fees and other income on
non-securitized earning assets include: (1) lending fees associated with our retail and Internet-based micro-loan activities; (2) fees associated with our largely fee-based credit card offering to consumers at the lower end of the FICO
scoring range; (3) income associated with our Fingerhut receivables during periods in which we held them on balance sheet; (4) income associated with our investments in previously charged-off receivables; (5) gain associated with
our bulk sale of previously charged-off receivables; (6) transaction and other fees associated with our stored-value card offering; and (7) gains and losses associated with our investments in securities.

The components (in thousands) of our fees and other income on non-securitized earning assets are as follows:



|                                                        |  |                                     |         |                                   |      |   |         |  |      |         |  |   |        
|------------------------------------------------------- |  | ----------------------------------- | ------- | --------------------------------- | ---- | - | ------- |  | ---- | ------- |  | - | -------
|                                                        |  | For the three months ended June 30, |         | For the six months ended June 30,
|                                                        |  | 2006                                |         |                                   | 2005 |   | 2006    |  | 2005
|Retail micro-loan fees                                  |  | $                                   | 21,504  |                                   |      | $ | 18,327  |  | $    | 42,443  |  | $ | 36,204 
|Fees on non-securitized credit card receivables         |  |                                     | 113,772 |                                   |      |   | 36,613  |  |      | 201,123 |  |   | 64,917 
|Fingerhut receivables while on balance sheet            |  |                                     |        |                                   |      |   | 23,412  |  |      |        |  |   | 56,144 
|Investments in previously charged-off receivables       |  |                                     | 11,061  |                                   |      |   | 17,484  |  |      | 20,358  |  |   | 34,992 
|Gain on bulk sale of previously charged-off receivables |  |                                     |        |                                   |      |   | 69,559  |  |      |        |  |   | 69,559 
|Other                                                   |  |                                     | (1,968  | )                                 |      |   | 4,709   |  |      | 215     |  |   | 7,630  
|                                                        |  |                                     |         |                                   |      |   |         |  |      |         |  |   |        
|Total                                                   |  | $                                   | 144,369 |                                   |      | $ | 170,104 |  | $    | 264,139 |  | $ | 269,446
|                                                        |  |                                     |         |                                   |      |   |         |  |      |         |  |   |        



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Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 155,
Accounting for Certain Hybrid Financial Instruments  an amendment of FASB Statements No. 133 and 140, (Statement No. 155). Statement No. 155 amends Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, (Statement No. 133) and Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, (Statement No. 140). Statement No. 155 resolves issues addressed in Statement No. 133 Implementation Issue No. D1, Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets. Among other provisions, the new rule (a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require
bifurcation, (b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement No. 133, (c) establishes a requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (d) clarifies that concentrations of credit risk in the form of subordination are not embedded
derivatives, and (e) amends Statement No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial
instrument. Statement No. 155 is effective for fiscal years beginning after September 15, 2006 and is required to be adopted by us beginning January 1, 2007. We currently are evaluating the effects that the adoption of Statement
No. 155 could have on our consolidated results of operations, financial position and cash flows, although we do not expect any material effects associated with its adoption. Nevertheless, the standard could affect future income recognition for
securitized financial assets because there may be more embedded derivatives identified for which changes in fair value will be recognized in computing net income.

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets  an amendment of FASB Statement No. 140,
(Statement No. 156). Statement No. 156 amends Statement No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities and requires all separately recognized servicing assets
and servicing liabilities to be initially measured at fair value, if practicable. The standard permits an entity to subsequently measure each class of servicing assets or servicing liabilities at fair value and report changes in fair value in the
statement of income in the accounting period in which the changes occur. Statement No. 156 is effective for fiscal years beginning after September 15, 2006 and is required to be adopted by us beginning January 1, 2007. We currently
are evaluating the effects that the adoption of Statement No. 156 could have on our consolidated results of operations, financial position and cash flows, although we do not expect any material effects associated with its adoption.

In June 2006, the FASB issued Interpretation Number 48, Accounting for Uncertainty in Income Taxes, (Interpretation
No. 48). Interpretation No. 48 requires companies to assess the probability that a tax position taken may not ultimately be sustained. For those positions that do not meet the more-likely-than-not recognition threshold required under
Interpretation No. 48, no benefit may be recognized. We will adopt Interpretation No. 48 by adjusting our tax liabilities and retained earnings as of our required January 1, 2007 adoption date. Although not reasonably estimable at
this time, we currently are assessing the impact of this Interpretation on our current and future tax positions.

3. Segment Reporting

We operate primarily within one industry consisting of five reportable segments by which we manage our business. Our five reportable segments are:
Credit Cards; Investments in Previously Charged-off Receivables; Retail Micro-Loans; Auto Finance; and Other.



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We measure the profitability of our reportable segments based on their income after allocation of
specific costs and corporate overhead. Overhead costs are allocated based on headcounts and other applicable measures to better align costs with the associated revenues. Summary operating segment information (in thousands) is as follows:



|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|----------------------------------------------------------------------------------- |  | ------------ | --------- | -------------------------------------------------- | - | ----------------- |  | - | ------------ | - | ----- | - | ------- | ----- | - | ------- | - |  | - | ---------
|Three months ended June 30, 2006                                                    |  | Credit Cards |           | Investments inPreviouslyCharged-OffReceivables     |   | RetailMicro-Loans |  |   | Auto Finance |   | Other |   |         | Total
|Net interest income, fees and other income (loss) on non-securitized earning assets |  | $            | 35,499    |                                                    | $ | 10,855            |  | $ | 19,060       |   |       | $ | 10,031  |       | $ | (1,746  | ) |  | $ | 73,699   
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Total other operating income                                                        |  | $            | 103,502   |                                                    | $ | 108               |  | $ | 1,780        |   |       | $ | 247     |       | $ |        |   |  | $ | 105,637  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Income (loss) before income taxes                                                   |  | $            | 44,106    |                                                    | $ | 6,617             |  | $ | (725         | ) |       | $ | 3,187   |       | $ | (8,961  | ) |  | $ | 44,224   
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Loans and fees receivable, gross                                                    |  | $            | 532,216   |                                                    | $ |                  |  | $ | 69,494       |   |       | $ | 147,041 |       | $ | 10,201  |   |  | $ | 758,952  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Loans and fees receivable, net                                                      |  | $            | 301,562   |                                                    | $ |                  |  | $ | 59,553       |   |       | $ | 120,233 |       | $ | 8,104   |   |  | $ | 489,452  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Total assets                                                                        |  | $            | 1,500,978 |                                                    | $ | 29,932            |  | $ | 197,176      |   |       | $ | 160,394 |       | $ | 25,738  |   |  | $ | 1,914,218
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|                                                                                    |  |              |           |                                                    |   |                  
|Six months ended June 30, 2006                                                      |  | Credit Cards |           | Investments inPreviouslyCharged-OffReceivables     |   | RetailMicro-Loans |  |   | Auto Finance |   | Other |   |         | Total
|Net interest income, fees and other income (loss) on non-securitized earning assets |  | $            | 92,805    |                                                    | $ | 20,333            |  | $ | 31,957       |   |       | $ | 17,883  |       | $ | (1,238  | ) |  | $ | 161,740  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Total other operating income                                                        |  | $            | 211,655   |                                                    | $ | 169               |  | $ | 5,515        |   |       | $ | 411     |       | $ | 25      |   |  | $ | 217,775  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Income (loss) before income taxes                                                   |  | $            | 113,835   |                                                    | $ | 11,841            |  | $ | (17,764      | ) |       | $ | 4,034   |       | $ | (19,820 | ) |  | $ | 92,126   
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Loans and fees receivable, gross                                                    |  | $            | 532,216   |                                                    | $ |                  |  | $ | 69,494       |   |       | $ | 147,041 |       | $ | 10,201  |   |  | $ | 758,952  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Loans and fees receivable, net                                                      |  | $            | 301,562   |                                                    | $ |                  |  | $ | 59,553       |   |       | $ | 120,233 |       | $ | 8,104   |   |  | $ | 489,452  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Total assets                                                                        |  | $            | 1,500,978 |                                                    | $ | 29,932            |  | $ | 197,176      |   |       | $ | 160,394 |       | $ | 25,738  |   |  | $ | 1,914,218
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|                                                                                    |  |              |           |                                                    |   |                  
|Three months ended June 30, 2005                                                    |  | Credit Cards |           | Investments inPreviouslyCharged-OffReceivables (1) |   | RetailMicro-Loans |  |   | Auto Finance |   | Other |   |         | Total
|Net interest income, fees and other income on non-securitized earning assets        |  | $            | 38,757    |                                                    | $ | 87,043            |  | $ | 14,697       |   |       | $ | 9,553   |       | $ | 969     |   |  | $ | 151,019  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Total other operating income                                                        |  | $            | 66,490    |                                                    | $ | 595               |  | $ | 6,928        |   |       | $ |        |       | $ |        |   |  | $ | 74,013   
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Income (loss) before income taxes                                                   |  | $            | 29,030    |                                                    | $ | 77,587            |  | $ | 2,717        |   |       | $ | 2,973   |       | $ | (7,532  | ) |  | $ | 104,775  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Loans and fees receivable, gross                                                    |  | $            | 165,553   |                                                    | $ |                  |  | $ | 31,880       |   |       | $ | 151,937 |       | $ | 2,472   |   |  | $ | 351,842  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Loans and fees receivable, net                                                      |  | $            | 100,641   |                                                    | $ |                  |  | $ | 26,596       |   |       | $ | 127,304 |       | $ | 1,665   |   |  | $ | 256,206  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Total assets                                                                        |  | $            | 917,569   |                                                    | $ | 157,699           |  | $ | 165,780      |   |       | $ | 172,319 |       | $ | 11,810  |   |  | $ | 1,425,177
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|                                                                                    |  |              |           |                                                    |   |                  
|Six months ended June 30, 2005                                                      |  | Credit Cards |           | Investments inPreviouslyCharged-OffReceivables (1) |   | RetailMicro-Loans |  |   | Auto Finance |   | Other |   |         | Total
|Net interest income, fees and other income on non-securitized earning assets        |  | $            | 102,767   |                                                    | $ | 104,551           |  | $ | 29,012       |   |       | $ | 9,553   |       | $ | 1,205   |   |  | $ | 247,088  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Total other operating income                                                        |  | $            | 157,917   |                                                    | $ | 2,036             |  | $ | 12,363       |   |       | $ |        |       | $ |        |   |  | $ | 172,316  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Income (loss) before income taxes                                                   |  | $            | 104,293   |                                                    | $ | 84,658            |  | $ | 3,607        |   |       | $ | 2,973   |       | $ | (13,308 | ) |  | $ | 182,223  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Loans and fees receivable, gross                                                    |  | $            | 165,553   |                                                    | $ |                  |  | $ | 31,880       |   |       | $ | 151,937 |       | $ | 2,472   |   |  | $ | 351,842  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Loans and fees receivable, net                                                      |  | $            | 100,641   |                                                    | $ |                  |  | $ | 26,596       |   |       | $ | 127,304 |       | $ | 1,665   |   |  | $ | 256,206  
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          
|Total assets                                                                        |  | $            | 917,569   |                                                    | $ | 157,699           |  | $ | 165,780      |   |       | $ | 172,319 |       | $ | 11,810  |   |  | $ | 1,425,177
|                                                                                    |  |              |           |                                                    |   |                   |  |   |              |   |       |   |         |       |   |         |   |  |   |          

---

|(1) | Net interest income, fees and other income on non-securitized earning assets includes $69.6 million of gain on the bulk sale of previously charged off receivables.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



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4. Treasury Stock

In May 2006, our Board of Directors authorized a new program to repurchase up to an additional 10 million shares of our outstanding common stock. Under the plan, we can repurchase shares of our common stock from
time to time, through June 30, 2008, either on the open market or through privately negotiated transactions in compliance with SEC guidelines. As of June 30, 2006, we are authorized to purchase 4,736,105 more shares under a pre-existing
plan, which expires in August 2006, and 10 million more shares under the new plan.

At our discretion, we use treasury shares to
satisfy option exercises and restricted stock grants, and we use the cost approach when accounting for the repurchase and reissuance of our treasury stock. During the three and six months ended June 30, 2006, we reissued 23,454 and 44,075
treasury shares at an approximate cost of $408,000 and $466,000, respectively, in satisfaction of option exercises and share vestings under our restricted stock plan.

5. Investments in Equity-Method Investees

As of June 30, 2006, we held a 47.5% interest in a
joint venture in which we invested in 2005, a 33.3% interest in each of Transistor Holdings, LLC (Transistor) and Capacitor Holdings, LLC (Capacitor) in which we invested in 2004, and a 50.0% interest in a limited liability
company in which we invested in 2002. We account for our investment interest in these entities using the equity method of accounting, and these investments are included in investments in equity-method investees on our condensed consolidated balance
sheets.

In the following tables, we summarize (in thousands) combined balance sheet and results of operations data for our equity-method
investees:



|                                    |  |                    |         |                        |   |        
|----------------------------------- |  | ------------------ | ------- | ---------------------- | - | -------
|                                    |  | As of June 30,2006 |         | As of December 31,2005
|Securitized earning assets          |  | $                  | 81,425  |                        | $ | 73,020 
|                                    |  |                    |         |                        |   |        
|Non-securitized earning assets, net |  | $                  | 506,334 |                        | $ | 556,930
|                                    |  |                    |         |                        |   |        
|Total assets                        |  | $                  | 595,015 |                        | $ | 651,402
|                                    |  |                    |         |                        |   |        
|Total liabilities                   |  | $                  | 397,053 |                        | $ | 474,509
|                                    |  |                    |         |                        |   |        
|Members capital                    |  | $                  | 197,962 |                        | $ | 176,893
|                                    |  |                    |         |                        |   |        



|                                                                             |  |                                    |        |                                  |   |        |  |      |         |  |   |       
|---------------------------------------------------------------------------- |  | ---------------------------------- | ------ | -------------------------------- | - | ------ |  | ---- | ------- |  | - | ------
|                                                                             |  | For the three monthsended June 30, |        | For the six monthsended June 30,
|                                                                             |  | 2006                               |        | 2005                             |   | 2006   |  | 2005
|Net interest income, fees and other income on non-securitized earning assets |  | $                                  | 35,608 |                                  | $ | 10,802 |  | $    | 75,786  |  | $ | 29,438
|                                                                             |  |                                    |        |                                  |   |        |  |      |         |  |   |       
|Fees and other income on securitized earning assets                          |  | $                                  | 28,448 |                                  | $ | 11,652 |  | $    | 51,685  |  | $ | 43,060
|                                                                             |  |                                    |        |                                  |   |        |  |      |         |  |   |       
|All other operating income                                                   |  | $                                  | 32,607 |                                  | $ | 18,721 |  | $    | 60,273  |  | $ | 53,396
|                                                                             |  |                                    |        |                                  |   |        |  |      |         |  |   |       
|Net income                                                                   |  | $                                  | 61,321 |                                  | $ | 17,359 |  | $    | 121,641 |  | $ | 63,209
|                                                                             |  |                                    |        |                                  |   |        |  |      |         |  |   |       

6. Off-Balance-Sheet Arrangements

We securitize all of our credit card receivables originated on a daily basis under our primary third-party financial institution relationship (the
originated portfolio), except for those credit card receivables underlying our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range. We transfer the securitized credit card receivables to a
master trust, which issues notes representing undivided ownership interests in the assets of the master trust. Additionally, in various prior year transactions, the latest of which was during the first quarter of 2005, we have acquired receivables
from third parties and subsequently securitized them.

Securitization trusts hold all of our credit card receivables, except for those
receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range and accounts participating in or acquired



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in connection with our debt collection subsidiarys balance transfer program. Our only interest in these securitized
receivables is in the form of retained interests. GAAP requires us to treat our transfers to the securitization trusts as sales and to remove the receivables from our condensed consolidated balance sheets. Under Statement No. 140, an entity
recognizes the assets it controls and liabilities it has incurred, and derecognizes the financial assets for which control has been surrendered and all liabilities that have been extinguished. An entity is considered to have surrendered control over
the transferred assets and, therefore, to have sold the assets if the following conditions are met:



| | 1. | The transferred assets have been isolated from the transferor and put presumptively beyond the reach of the transferor and its creditors.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Each transferee has the right to pledge or exchange the assets it has received, and no condition both constrains the transferee from taking advantage of its right to pledge or
exchange and provides more than a trivial benefit to the transferor.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | The transferor does not maintain effective control over the transferred assets through either (i) an agreement that both entitles and obligates the transferor to repurchase or
redeem them before their maturity, or (ii) the ability to unilaterally cause the holder to return specific assets, other than through a clean-up call.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our securitization transactions do not affect the relationship we have with our customers, and we continue to service the securitized credit card receivables.

The table below summarizes (in thousands) our securitization activity for the periods presented. As with other tables included herein, it does not
include the securitization activities of our equity-method investees:



|                                                                         |  |                                     |           |                                   |   |           |  |      |           |  |   |          
|------------------------------------------------------------------------ |  | ----------------------------------- | --------- | --------------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                                                         |  | For the three months ended June 30, |           | For the six months ended June 30,
|                                                                         |  | 2006                                |           | 2005                              |   | 2006      |  | 2005
|Gross amount of receivables securitized at period end                    |  | $                                   | 1,681,651 |                                   | $ | 1,583,807 |  | $    | 1,681,651 |  | $ | 1,583,807
|                                                                         |  |                                     |           |                                   |   |           |  |      |           |  |   |          
|Proceeds from collections reinvested in revolving-period securitizations |  | $                                   | 299,010   |                                   | $ | 256,346   |  | $    | 602,732   |  | $ | 504,644  
|                                                                         |  |                                     |           |                                   |   |           |  |      |           |  |   |          
|Excess cash flows generated on securitized receivables                   |  | $                                   | 65,598    |                                   | $ | 55,840    |  | $    | 136,582   |  | $ | 121,706  
|                                                                         |  |                                     |           |                                   |   |           |  |      |           |  |   |          
|Securitization gains                                                     |  | $                                   | 3,541     |                                   | $ | 1,192     |  | $    | 4,404     |  | $ | 2,779    
|Income from retained interests in credit card receivables securitized    |  |                                     | 23,103    |                                   |   | 6,276     |  |      | 56,307    |  |   | 26,145   
|Fees on securitized receivables                                          |  |                                     | 18,496    |                                   |   | 15,021    |  |      | 34,898    |  |   | 31,057   
|                                                                         |  |                                     |           |                                   |   |           |  |      |           |  |   |          
|Total fees and other income on securitized earning assets                |  | $                                   | 45,140    |                                   | $ | 22,489    |  | $    | 95,609    |  | $ | 59,981   
|                                                                         |  |                                     |           |                                   |   |           |  |      |           |  |   |          

The investors in our securitization transactions have no recourse against us for our
customers failure to pay their credit card receivables. However, most of our retained interests are subordinated to the investors interests until the investors have been fully paid.

Generally, we include all collections received from the cardholders underlying each securitization in the securitization cash flows. This includes
collections from the cardholders for interest, fees and other charges on the accounts and collections from the cardholders repaying the principal portion of their account balances. In general, the cash flows are then distributed to us as servicer in
the amounts of our contractually negotiated servicing fees, to the investors as interest on their outstanding notes, to the investors to repay any portion of their outstanding notes that become due and payable and to us as the seller to fund new
purchases. Any collections from cardholders remaining each month after making the various payments noted above generally are paid to us on our retained interests.

We carry the retained interests associated with the credit card receivables we have securitized at estimated fair market value within the securitized earning assets category on the condensed consolidated balance
sheet, and because we classify them as trading securities, we include any changes in fair value in income. Because quoted market prices for our retained interests generally are not available, we estimate fair value based on the estimated present
value of future cash flows using our best estimates of key assumptions.

The measurements of retained interests associated with our
securitizations are dependent upon our estimate of future cash flows using the cash-out method. Using the cash-out method, we record the future cash flows (including the release of any cash related to credit enhancements) at a discounted value. We
discount the cash flows based on the timing of when we expect to receive the cash flows. We base the discount rates on our estimates of returns that would be required by investors in investments with similar terms and credit quality. We estimate
yields on the credit card receivables based on the stated annual percentage rates in the credit card agreements, and we base estimated default and payment rates on historical results, adjusted for expected changes based on our credit risk models. We
typically charge off credit card receivables when the receivables become 180 days past due, although earlier charge offs may occur specifically related to accounts of bankrupt or deceased customers. We generally charge off bankrupt and deceased
customers accounts within 30 days of verification.



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Our retained interests in credit card receivables securitized (labeled as securitized earning assets on
our condensed consolidated balance sheets) include the following (in thousands):



|                                 |  |               |         |   |                   |   |         |  
|-------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                 |  | June 30, 2006 |         |   | December 31, 2005 |  
|Interest only (I/O) strip      |  | $             | 92,464  |   |                   | $ | 70,843  |  
|Accrued interest and fees        |  |               | 12,931  |   |                   |   | 13,412  |  
|Servicing liability              |  |               | (9,187  | ) |                   |   | (583    | )
|Amounts due from securitization  |  |               | 10,133  |   |                   |   | 8,965   |  
|Fair value of retained interests |  |               | 764,476 |   |                   |   | 694,346 |  
|                                 |  |               |         |   |                   |   |         |  
|Securitized earning assets       |  | $             | 870,817 |   |                   | $ | 786,983 |  
|                                 |  |               |         |   |                   |   |         |  

The I/O strip reflects the fair value of our rights to future income from securitizations arranged
by us and includes certain credit enhancements. Accrued interest and fees represent the estimated collectible portion of fees earned but not billed to the cardholders underlying the credit card receivables portfolios we have securitized. The
servicing liability reflects, for those securitization structures for which servicing compensation is not adequate, the fair value of the costs to service the receivables above and beyond the servicing income we expect to receive from the
securitizations. Amounts due from securitization represent cash flows that are distributable to us from the prior months cash flows within each securitization trust; we generally expect to receive these amounts within 30 days from the close of
each respective month. Lastly, we measure retained interests at fair value as set forth within the fair value of retained interests category in the above table.

Changes in any of the assumptions used to value our retained interests in our securitizations could impact our fair value estimates. The weighted-average key assumptions we used to estimate the fair value of our
retained interests in the receivables we have securitized are presented below:



|                                       |  |               |   |  |                   |   |  |               |  
|-------------------------------------- |  | ------------- | - |  | ----------------- | - |  | ------------- | -
|                                       |  | June 30, 2006 |   |  | December 31, 2005 |   |  | June 30, 2005 |  
|Yield (annualized)                     |  | 29.9          | % |  | 29.8              | % |  | 29.7          | %
|Payment rate (monthly)                 |  | 7.0           |   |  | 6.7               |   |  | 6.4           |  
|Expected credit loss rate (annualized) |  | 14.2          |   |  | 14.2              |   |  | 13.1          |  
|Residual cash flows discount rate      |  | 14.3          |   |  | 13.6              |   |  | 15.7          |  
|Servicing liability discount rate      |  | 14.0          |   |  | 14.0              |   |  | 14.0          |  

The decrease in the June 30, 2006 residual cash flows discount rates relative to the 15.7%
rate at June 30, 2005 corresponds with our use of other forms of liquidity throughout the last several quarters to fund cardholder purchases, which has had the effect of further increasing our collateral enhancement levels within our originated
portfolio master trust. Our Statement No. 140 models recognize in computing the residual cash flows discount rate that variations in collateral enhancement levels affect the returns that investors require on residual interests within
securitization structures. Accordingly, because our collateral enhancement levels have increased somewhat relative to June 30, 2005 levels and because we are now intentionally and significantly over collateralized, our residual cash flows
discount rate has dropped; investors would require a much reduced investment return on the retained interests within our originated portfolio master trust because of its currently over collateralized position.



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The following illustrates the hypothetical effect on the June 30, 2006 value of our retained
interests in credit card receivables securitized (dollars in thousands) of an adverse 10 and 20 percent change in our key valuation assumptions:



|                                           |  |                         |         |  
|------------------------------------------ |  | ----------------------- | ------- | -
|                                           |  | Credit Card Receivables |        
|Yield (annualized)                         |  |                         | 29.9    | %
|Impact on fair value of 10% adverse change |  | $                       | (32,378 | )
|Impact on fair value of 20% adverse change |  | $                       | (64,756 | )
|Payment rate (monthly)                     |  |                         | 7.0     | %
|Impact on fair value of 10% adverse change |  | $                       | (3,436  | )
|Impact on fair value of 20% adverse change |  | $                       | (6,610  | )
|Expected credit loss rate (annualized)     |  |                         | 14.2    | %
|Impact on fair value of 10% adverse change |  | $                       | (15,210 | )
|Impact on fair value of 20% adverse change |  | $                       | (30,420 | )
|Residual cash flows discount rate          |  |                         | 14.3    | %
|Impact on fair value of 10% adverse change |  | $                       | (5,925  | )
|Impact on fair value of 20% adverse change |  | $                       | (11,753 | )
|Servicing liability discount rate          |  |                         | 14.0    | %
|Impact on fair value of 10% adverse change |  | $                       | (52     | )
|Impact on fair value of 20% adverse change |  | $                       | (104    | )

These sensitivities are hypothetical and should be used with caution. As the figures indicate,
changes in fair value based on a 10% and a 20% variation in assumptions generally cannot be extrapolated because the relationship of a change in assumption to the change in fair value of our retained interests in credit card receivables securitized
may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumptions; in reality, changes in one assumption may result in changes
in another. For example, increases in market interest rates may result in lower prepayments and increased credit losses, which could magnify or counteract the sensitivities.

Our managed receivables portfolio underlying our securitizations (including only those of our consolidated subsidiaries) is comprised of our retained
interests in the credit card receivables we have securitized and other investors shares of these securitized receivables. The investors shares of securitized credit card receivables are not assets of ours. The following table summarizes
(in thousands) the balances included within, and certain operating statistics associated with, our managed receivables portfolio underlying both the outside investors shares of and our retained interests in credit card receivables
securitizations.



|                                           |  |               |           |                   |   |          
|------------------------------------------ |  | ------------- | --------- | ----------------- | - | ---------
|                                           |  | June 30, 2006 |           | December 31, 2005
|Total managed principal balance            |  | $             | 1,528,925 |                   | $ | 1,522,285
|Total managed finance charge balance       |  |               | 152,726   |                   |   | 145,737  
|                                           |  |               |           |                   |   |          
|Total managed receivables                  |  | $             | 1,681,651 |                   | $ | 1,668,022
|                                           |  |               |           |                   |   |          
|Receivables delinquent  60 or more days   |  | $             | 126,437   |                   | $ | 128,706  
|                                           |  |               |           |                   |   |          
|Net charge offs for the three months ended |  | $             | 33,916    |                   | $ | 59,522   
|                                           |  |               |           |                   |   |          

7. Notes Payable and Convertible Senior Notes

As of June 30, 2006, we had notes payable of $240.1 million and Convertible Senior debt of $550.0 million, compared to $165.2 million and $550.0
million, respectively, at December 31, 2005. As of June 30, 2006, our notes payable balances included:



| |  | $150.0 million related to a structured financing within our Credit Cards segment (at an interest rate of 7.21% as of June 30, 2006) that is secured by substantially all of the
credit card receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range and is recourse only to the underlying credit card receivables that serve as security for the facility;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | $72.3 million related to a structured financing within our Auto Finance segment (at an interest rate of 9.2% as of June 30, 2006) that is recourse only to the Auto Finance
segments assets that have been pledged to the lender;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | $12.2 million associated with certain vendor-financed acquisitions of software and equipment (at various interest rates ranging from 2% to 7% as of June 30, 2006);
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a $5.0 million seller note outstanding (at an interest rate of 10% as of June 30, 2006) associated with one of our Retail Micro-Loans segment acquisitions; and
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | $0.6 million related to callable margin borrowings underlying our investments in debt securities (at an interest rate of 7.25% as of June 30, 2006).
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

In April 2006, our Retail Micro-Loans segment paid off $40.0 million of term loans and a $10.0 million revolving credit
facility. In conjunction with this transaction, we recorded in the second quarter of 2006 a pre-tax charge of $791,000 for prepayment penalties and the write-off of deferred debt issuance costs.

We are in compliance with the covenants underlying all of our various notes payable and debt facilities.

8. Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets
acquired and accounted for under the purchase method. Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, (Statement No. 142) requires that entities assess the fair value of
all acquisition-related goodwill on a reporting unit basis. We review the recorded value of goodwill for impairment at least annually at the beginning of the fourth quarter of each year, or earlier if events or changes in circumstances indicate that
the carrying amount may exceed fair value.

During February 2006, we learned from our principal Retail Micro-Loans segment bank partner
that the FDIC had effectively asked insured financial institutions to cease deferred-presentment and installment micro-loan activities conducted through processing and servicing agents. Cessation of these activities directly affected our micro-loan
subsidiaries ability to continue operating as a processing and servicing agent in four states. In response to the FDICs actions, our subsidiaries began, in February, to evaluate strategic alternatives within theses states, including the
possibility of switching to a direct lending model in compliance with the regulatory frameworks within each of the four states, or, alternatively, closing the branch locations within the four affected states. In addition, effective March 11,
2006, our North Carolina retail micro-loan subsidiary agreed with the Attorney General of the State of North Carolina to cease its traditional marketing and servicing of deferred-presentment and installment micro-loans in North Carolina. As a result
of this agreement, our North Carolina retail micro-loan subsidiary began pursuing a direct lending model in North Carolina in compliance with existing regulatory frameworks, as well as closing several existing North Carolina locations in the
near-term. As of June 30, 2006, our North Carolina subsidiary had closed 14 branch locations in response to these events. As a result of these events, we conducted an assessment of the fair value of our Retail Micro-Loans segment using, in
accordance with Statement No. 142, a combination of the expected present value of future cash flows associated with the business and prices of comparable businesses. Based on this assessment, we recorded during the first quarter of 2006 a
goodwill impairment charge of $10.5 million to properly report goodwill at its fair value.

Changes in the carrying amount (in thousands)
of goodwill by reportable segment for the six months ended June 30, 2005 and 2006 are as follows:



|                                  |  |                     |         |   |              |   |              |  |   |         |  
|--------------------------------- |  | ------------------- | ------- | - | ------------ | - | ------------ |  | - | ------- | -
|                                  |  | Retail Micro- Loans |         |   | Auto Finance |   | Consolidated | 
|Balance as of December 31, 2004   |  | $                   | 100,552 |   |              | $ |             |  | $ | 100,552 |  
|Goodwill acquired during the year |  |                     | 8,088   |   |              |   | 22,503       |  |   | 30,591  |  
|                                  |  |                     |         |   |              |   |              |  |   |         |  
|Balance as of June 30, 2005       |  | $                   | 108,640 |   |              | $ | 22,503       |  | $ | 131,143 |  
|                                  |  |                     |         |   |              |   |              |  |   |         |  
|Balance as of December 31, 2005   |  | $                   | 108,640 |   |              | $ | 22,160       |  | $ | 130,800 |  
|Impairment loss                   |  |                     | (10,546 | ) |              |   |             |  |   | (10,546 | )
|                                  |  |                     |         |   |              |   |              |  |   |         |  
|Balance as of June 30, 2006       |  | $                   | 98,094  |   |              | $ | 22,160       |  | $ | 120,254 |  
|                                  |  |                     |         |   |              |   |              |  |   |         |  

Intangible Assets

As of June 30, 2006, we had $3.2 million of intangible assets that we determined had an indefinite benefit period, compared to $4.1 million as of December 31, 2005. During the second quarter of 2006, we
wrote off approximately $819,000 of impaired intangible assets that were originally determined to have an indefinite benefit period. The net unamortized



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carrying amount of intangible assets subject to amortization was $7.8 million as of June 30, 2006 and $9.6 million
as of December 31, 2005. Intangible asset-related amortization expense, including the approximately $819,000 impairment charge, was $1.9 million and $887,000 for the three months ended June 30, 2006 and 2005, respectively, and $2.8 million
and $1.6 million for the six months ended June 30, 2006 and 2005, respectively.

9. Commitments and Contingencies

In the normal course of business through the origination of unsecured credit card receivables, we incur off-balance-sheet risks. These risks include our
commitments of $2.1 billion at June 30, 2006 to purchase receivables associated with cardholders who have the right to borrow in excess of their current balances up to the maximum credit limit on their credit card accounts. These commitments
involve, to varying degrees, elements of credit risks in excess of the amounts we have securitized. We have not experienced the situation in which all of our customers have exercised their entire available line of credit at any given point in time,
nor do we anticipate that this will ever occur in the future. We also have the effective right to reduce or cancel these available lines of credit at any time.

For various receivables portfolio investments we have made through majority-owned subsidiaries and equity-method investees, we entered into guarantee agreements whereby we have agreed to guarantee the purchase of
additional interests in portfolios of credit card receivables owned by trusts, the retained interests in which are owned by our majority-owned subsidiaries and equity-method investees, should there be net new growth in the receivables or should
collections not be available to fund new cardholder purchases. As of June 30, 2006, none of our majority-owned subsidiaries or equity-method investees had purchased nor were they required to purchase any additional notes under the note purchase
agreements. Our guarantee is limited to our respective ownership percentages in the various majority-owned subsidiaries and equity-method investees multiplied by the total amount of the notes that each of the majority-owned subsidiaries and
equity-method investees could be required to purchase. As of June 30, 2006, the maximum amount of our collective guarantees related to all of these majority-owned subsidiaries and equity-method investees was $397.4 million. In general,
this aggregate contingency amount will decline as the amounts of credit available to cardholders for future purchases declines. The portfolios of all these majority-owned subsidiaries and equity-method investees have declined and we expect them to
continue to decline as we expect payments to exceed new purchases each month. We currently do not have any liability recorded with respect to these guarantees, but we will record one if events occur that make payment probable under the guarantees.
The fair value of these guarantees is not material.

Our agreements with our third-party originating financial institutions require us to
purchase on a daily basis the credit card receivables that are originated in the accounts maintained for our benefit. To secure this obligation for our principal third-party originating financial institution, we have provided the financial
institution a $10.0 million standby letter of credit and have pledged retained interests carried at $88.3 million. Our arrangements with our principal third-party originating financial institution expire in March 2009. If we were to
terminate a sub-service agreement under which this institution also provides certain services for us, we would incur penalties of $13.8 million as of June 30, 2006.

Under the agreements with our third-party originating financial institutions, we have agreed to indemnify the financial institutions for certain costs
associated with the financial institutions card issuance and other lending activities on our behalf. Our indemnification obligations generally are limited to instances in which we either (1) have been afforded the opportunity to defend
against any potentially indemnifiable claims, or (2) have reached agreement with the financial institutions regarding settlement of potentially indemnifiable claims.

In June 2006, we entered into an assurance agreement with the New York Attorney General in order to resolve his investigation into our marketing and other materials and our servicing and collection practices. Pursuant
to this agreement, we agreed to pay a $0.5 million civil penalty to the State of New York and to refund certain fees to New York cardholders in recognition that New York has a unique statute (New York Personal Property Law Section 413) relating
to, among other things, the opening of credit card accounts. These refunds generally will be provided through credits to the affected consumers accounts. Some of these credits relate to revenues that were deferred on our consolidated
balance sheet, some of these credits relate to credit card receivables that were charged off in amounts in excess of the credits to be provided, and some of these credits will be charged against our allowance for doubtful accounts. In the
fourth quarter of 2005, we accrued a $3.2 million liability, which reflected our estimate at that time of the probable remaining liability after the offsets described above. Additionally, we accrued during the second quarter of 2006 another $1.8
million, thereby bringing our total accrued liability to $5.0 million as of June 30, 2006a liability that we expect to relieve during the third quarter of 2006 as we provide the agreed upon credits to our customers.

In light of the nature of our businessproviding credit to underserved and un-banked consumersregulatory reviews by state and federal
authorities are common. For instance, the FDIC currently is conducting an investigation of the policies, practices and procedures that we use in connection with our principal third-party credit card originating financial institution; we are
cooperating with the FDIC in the investigation. Because this FDIC investigation is at an early stage, it is premature for us to determine the effects of this investigation on our financial condition, results of operations or business position and
financial statements.



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While we believe we have the most comprehensive legal and other diligence processes within the industry
to ensure the compliance of our marketing materials, servicing and collection practices and other program features with applicable law, the standards imposed on our business by applicable law and the regulators are at times subjective. As such, it
is likely that, as part of any review by regulators from time-to-time, they will object to our marketing, servicing and collection practices, and there can be no assurance that the changes required to address concerns raised in the course of these
reviews will not have a material adverse effect on our financial condition, results of operations or business.

Certain of our subsidiaries
had agreements with third-party financial institutions pursuant to which the applicable subsidiaries serviced loans on behalf of the financial institutions in exchange for servicing fees; these servicing activities ceased in May 2006 as a result of
the FDICs decision effectively asking FDIC-insured financial institutions to cease loan origination activities through these types of servicing arrangements. As a result of this guidance, the originating bank for which we previously serviced
loans in four states exited that business and liquidated its existing loans through a loan participation relationship with Maverick Management Company LLC (Maverick). To facilitate that transaction and our orderly exit from these
servicing operations, we agreed to indemnify Maverick for up to $2.8 million in losses that it may incur as a result of its being a successor to the banks interest in the loans and their liquidation. Richard W. Gilbert, a member of our Board
of Directors and our Chief Operating Officer, has a 20% economic interest in Maverick, and Mr. Gilberts son is its manager. In July 2006, we received notification from Maverick that it was exercising its indemnification rights with
respect to approximately $386,000 of the loans that it purchased from the originating banks North Carolina operations.

One of our
most significant sources of liquidity is the securitization of credit card receivables. The maturity terms of our securitizations vary. As of June 30, 2006, securitization facilities underlying our securitization trusts included: a six-year
term securitization facility (expiring October 2010), a five-year term securitization facility (expiring October 2009), a two-year variable funding securitization facility with renewal options (initial term expiring January 2008) and a one-year
conduit securitization facility with renewal options (initial term expiring September 2006) issued out of our originated portfolio master trust; a ten-year amortizing term securitization facility issued out of the Embarcadero Trust (expiring January
2014); a two-year amortizing term securitization facility issued out of the Fingerhut Trust (expiring September 2007); and a one-year variable funding securitization facility issued out of the trust associated with our securitization of
$92.0 million and $72.1 million (face amount) in credit card receivables acquired during 2004 and in the first quarter of 2005, respectively (expiring January 2007). While we have never triggered an early amortization within any of the series
underlying our arranged securitization facilities, and do not believe that we will, we may trigger an early amortization of one or more of the outstanding series within our securitization trusts. As each securitization facility expires or comes up
for renewal, there can be no assurance that the facility will be renewed, or if renewed, there can be no assurance that the terms will be as favorable as the terms that currently exist. Either of these events could significantly increase our need
for additional liquidity.

We are subject to various legal proceedings and claims that arise in the ordinary course of business. In one of
these legal proceedings, CompuCredit Corporation and five of our subsidiaries are defendants in a purported class action lawsuit entitled Knox, et al. vs. First Southern Cash Advance, et al, No 5 CV 0445, filed in the Superior Court
of New Hanover County, North Carolina, on February 8, 2005. The plaintiffs allege that in conducting a so-called payday lending business, certain of our Retail Micro-Loans segment subsidiaries violated various laws governing
consumer finance, lending, check cashing, trade practices and loan brokering. The plaintiffs further allege that CompuCredit is the alter ego of its subsidiaries and is liable for their actions. The plaintiffs are seeking damages of up to $75,000
per class member. We intend to vigorously defend this lawsuit. These claims are similar to those that have been asserted against several other market participants in transactions involving small balance, short-term loans made to consumers in North
Carolina. There are no other material pending legal proceedings to which we are a party. We do not believe the pending legal proceedings will have a material impact on our financial position.



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10. Net Income Per Common Share

The following table sets forth the computation (in thousands, except per share data) of net income per common share:



|                                                       |  |                                     |        |                                   |   |        |  |      |        |  |   |        
|------------------------------------------------------ |  | ----------------------------------- | ------ | --------------------------------- | - | ------ |  | ---- | ------ |  | - | -------
|                                                       |  | For the three months ended June 30, |        | For the six months ended June 30,
|                                                       |  | 2006                                |        | 2005                              |   | 2006   |  | 2005
|Numerator:                                             |  |                                     |        |                                   |   |        |  |      |        |  |   |        
|Net income                                             |  | $                                   | 28,302 |                                   | $ | 66,532 |  | $    | 58,960 |  | $ | 115,712
|                                                       |  |                                     |        |                                   |   |        |  |      |        |  |   |        
|Denominator:                                           |  |                                     |        |                                   |   |        |  |      |        |  |   |        
|Basic (weighted-average shares outstanding)            |  |                                     | 48,651 |                                   |   | 50,125 |  |      | 48,642 |  |   | 50,685 
|Effect of dilutive stock options and warrants          |  |                                     | 1,660  |                                   |   | 1,416  |  |      | 1,692  |  |   | 1,313  
|                                                       |  |                                     |        |                                   |   |        |  |      |        |  |   |        
|Diluted (adjusted weighted-average shares outstanding) |  |                                     | 50,311 |                                   |   | 51,541 |  |      | 50,334 |  |   | 51,998 
|                                                       |  |                                     |        |                                   |   |        |  |      |        |  |   |        
|Net income per common share  basic                    |  | $                                   | 0.58   |                                   | $ | 1.33   |  | $    | 1.21   |  | $ | 2.28   
|                                                       |  |                                     |        |                                   |   |        |  |      |        |  |   |        
|Net income per common share  diluted                  |  | $                                   | 0.56   |                                   | $ | 1.29   |  | $    | 1.17   |  | $ | 2.23   
|                                                       |  |                                     |        |                                   |   |        |  |      |        |  |   |        

As their effects were anti-dilutive, we excluded 520,000 stock options (including the 500,000
stock options issued in May 2006 discussed below) from the three and six months ended June 30, 2006 net income per common share calculations and 32,500 stock options from the three and six months ended June 30, 2005 net income per common
share calculations. The above year-over-year comparison of net income per common share is affected by our 2006 adoption of the modified prospective application of stock option expensing under Statement No. 123(R). See Note 11, Stock-Based
Compensation, however, for a proforma presentation of net income per share for the three and six months ended June 30, 2005.

11.
Stock-Based Compensation

As of June 30, 2006, we had five stock-based employee compensation plans (an employee stock purchase
plan, three stock option plans and a restricted stock plan).

Stock Options

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), Accounting for Stock-Based
Compensation, (Statement No. 123(R)) using modified prospective application. For the three and six months ended June 30, 2006, respectively, we expensed compensation costs of $438,000 and $605,000 related to our stock
option plans, and we recognized income tax benefits of $68,000 and $152,000 related to our stock option plans. We recognize stock-option-related compensation expense for any awards with graded vesting on a straight-line basis over the vesting period
for the entire award.

The following table presents the effects on net income (in thousands) and net income per common share if we had
recognized compensation expense under the fair value recognition provisions of Statement No. 123:



|                                                                                        |  |                                          |        |   |                                        |   |         |  
|--------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | -------------------------------------- | - | ------- | -
|                                                                                        |  | For the three months ended June 30, 2005 |        |   | For the six months ended June 30, 2005 |  
|Net income as reported                                                                  |  | $                                        | 66,532 |   |                                        | $ | 115,712 |  
|Stock-based employee compensation expense determined under fair value basis, net of tax |  |                                          | (189   | ) |                                        |   | (378    | )
|                                                                                        |  |                                          |        |   |                                        |   |         |  
|Pro-forma net income                                                                    |  | $                                        | 66,343 |   |                                        | $ | 115,334 |  
|                                                                                        |  |                                          |        |   |                                        |   |         |  
|Net income per common share:                                                            |  |                                          |        |   |                                        |   |         |  
|Basicas reported                                                                       |  | $                                        | 1.33   |   |                                        | $ | 2.28    |  
|                                                                                        |  |                                          |        |   |                                        |   |         |  
|Basicpro-forma                                                                         |  | $                                        | 1.32   |   |                                        | $ | 2.28    |  
|                                                                                        |  |                                          |        |   |                                        |   |         |  
|Dilutedas reported                                                                     |  | $                                        | 1.29   |   |                                        | $ | 2.23    |  
|                                                                                        |  |                                          |        |   |                                        |   |         |  
|Dilutedpro-forma                                                                       |  | $                                        | 1.29   |   |                                        | $ | 2.22    |  
|                                                                                        |  |                                          |        |   |                                        |   |         |  

Due to a variety of factors, including the timing and number of awards, the above pro-forma
results may not be indicative of the future effect of stock option expensing on our results of operations.



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The following table provides the reserved common shares and common shares available for future issuance
for each of our stock option plans as of June 30, 2006:



|                       |  |                 |  |                        |  |            
|---------------------- |  | --------------- |  | ---------------------- |  | -----------
|                       |  | Shares Reserved |  | Available for Issuance |  | Outstanding
|1998 Stock Option Plan |  | 1,200,000       |  | 317,281                |  | 346,434    
|2000 Stock Option Plan |  | 1,200,000       |  | 94,911                 |  | 191,026    
|2003 Stock Option Plan |  | 1,200,000       |  | 616,832                |  | 574,497    

A summary of the status of our stock options as of June 30, 2006 and changes for the six
months then ended is presented below:



|                               |  |                  |   |  |                                  |       |                                                |     |                          |   |           
|------------------------------ |  | ---------------- | - |  | -------------------------------- | ----- | ---------------------------------------------- | --- | ------------------------ | - | ----------
|                               |  | Number of Shares |   |  | Weighted- Average Exercise Price |       | Weighted- Average of RemainingContractual Life |     | AggregateIntrinsic value
|Outstanding at January 1, 2006 |  | 655,388          |   |  | $                                | 9.44  |                                                |     |                          |   |           
|Granted                        |  | 500,000          |   |  |                                  | 40.99 |                                                |     |                          |   |           
|Exercised                      |  | (36,565          | ) |  |                                  | 9.85  |                                                |     |                          |   |           
|Cancelled/Forfeited            |  | (866             | ) |  |                                  | 10.76 |                                                |     |                          |   |           
|                               |  |                  |   |  |                                  |       |                                                |     |                          |   |           
|Outstanding at June 30, 2006   |  | 1,117,957        |   |  | $                                | 23.53 |                                                | 4.0 |                          | $ | 16,663,439
|                               |  |                  |   |  |                                  |       |                                                |     |                          |   |           
|Exercisable at June 30, 2006   |  | 586,129          |   |  | $                                | 8.96  |                                                | 1.7 |                          | $ | 17,279,199

As of June 30, 2006, our deferred compensation costs associated with non-vested stock options
were $8.6 million. We received approximately $360,000 in cash proceeds from stock option exercises during the six months ended June 30, 2006.

During the six months ended June 30, 2006, we estimated the fair value of granted options at the date of grant using a Black-Scholes option-pricing model with the assumptions described below. We did not grant any options during the six
months ended June 30, 2005.



|                                                        |  |                                      |       |  
|------------------------------------------------------- |  | ------------------------------------ | ----- | -
|Assumptions                                             |  | For the SixMonths EndedJune 30, 2006 |      
|Fair value per share                                    |  | $                                    | 16.34 |  
|Dividend yield                                          |  |                                      |      |  
|Volatility factors of expected market price of stock(1) |  |                                      | 30    | %
|Risk-free interest rate                                 |  |                                      | 5.00  | %
|Expected option term (in years)                         |  |                                      | 6.0   |  

---

|(1) | In 2006, we began using the implied volatility evidenced within our publicly traded convertible bonds, warrants and over-the-counter stock options as a basis for the expected
volatility assumption. Previously, we based expected volatility on historical stock price observations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Restricted Share Awards

During the three and six months ended June 30, 2006, we granted 260,373 and 362,811 shares, respectively, of restricted stock
under our 2004 Restricted Stock Plan with a fair value of $10.7 million and $ 14.9 million, respectively. Included within these grant amounts are 250,000 shares with a fair value of $10.2 million that we issued to our president. Our restricted
share grants generally vest over a range of 24 to 60 months, and we are amortizing associated deferred compensation amounts to compensation expense ratably over the vesting period. As of June 30, 2006, our deferred compensation costs
associated with non-vested restricted stock awards were $17.6 million with a weighted average remaining amortization period of 3.5 years.

12. Pending
CardWorks, Inc. Acquisition

In September 2005, we entered into a Stock Purchase Agreement (the Agreement) with CardWorks,
L.P., pursuant to which we would acquire CardWorks, Inc., a privately held issuer and third-party servicer of consumer credit cards through its subsidiaries Merrick Bank Corporation, a Utah industrial loan bank, and Cardholder Management Services,
LLC. Pursuant to an agreement subsequently reached with an affiliate of Merrill Lynch in December 2005, the affiliate of Merrill Lynch acquired a 20% interest in the CompuCredit subsidiary that agreed to purchase CardWorks, Inc.

Under the Agreement with CardWorks, L.P. (as amended), the purchase price to be paid for the shares of CardWorks, Inc. is (a) $300.0 million if the
closing occurs on or prior to September 1, 2006 or (b) $302.5 million if the closing occurs after September 1, 2006 but prior to October 2, 2006 (at which point the Agreement is subject to termination). The



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CardWorks, Inc. acquisition is subject to customary closing conditions, including the receipt of regulatory approvals. On
July 28, 2006, the FDIC announced a moratorium until January 31, 2007 on approving acquisitions of industrial loan banks that will make it unlikely that the necessary approvals will be obtained prior to October 2, 2006. We could be subject
to a fee of $27.0 million if the Agreement is breached by us prior to closing; for this purpose, denial of approval for the acquisition by regulators will not be considered a breach of the agreement.



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes included therein and our Annual Report on Form 10-K for the year ended December 31, 2005 where certain terms
(including trust, subsidiary and other entity names and financial, statistical and operating measures) have been defined.

This
Managements Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We have based these forward-looking statements on our current plans, expectations and beliefs about future events. Actual
results could differ materially because of factors discussed in Risk Factors in Part II, Item 1A and elsewhere in this report.

OVERVIEW

We provide various credit and related financial services and products to or associated with the underserved, or
sub-prime, consumer credit market, as well as to un-banked consumers. Our most significant and long-standing activity within this market has been our marketing and solicitation of credit card accounts and our servicing of various credit
card receivables underlying both our originated accounts and our portfolio acquisitions. Our expanded operations now include: the purchase and recovery of previously charged-off receivables; the origination of micro-loans through various channels,
including our own retail branch locations, direct marketing, telemarketing and the Internet; the purchase and servicing of consumer receivables secured by automobiles through our Auto Finance segments nationwide network of pre-qualified
dealers in the Buy Here/Pay Here used car business; and the issuance of merchant credit products, installment loans, consumer loans secured by motorcycles, personal watercraft and all-terrain vehicles, and other credit products; the
issuance of stored-value cards; and the provision of money-transfer services.

In September 2005, in furtherance of our diversification
strategy, we agreed to acquire CardWorks, Inc., a privately held issuer and third-party servicer of consumer credit cards through its subsidiaries Merrick Bank Corporation, a Utah industrial loan bank, and Cardholder Management Services, LLC. An
affiliate of Merrill Lynch subsequently acquired a 20% interest in the CompuCredit subsidiary that agreed to purchase CardWorks, Inc. The CardWorks, Inc. acquisition is subject to customary closing conditions, including regulatory approvals. On
July 28, 2006, the FDIC announced a moratorium until January 31, 2007 on approving acquisitions of industrial loan banks that will make it unlikely that the necessary approvals will be obtained prior to October 2, 2006.

Throughout the remainder of 2006 and beyond, we expect to continue to evaluate and pursue additional credit card receivables portfolios and other
business activities and asset classes that are complementary to our historic sub-prime credit card business, including further acquisitions of sub-prime lenders.

We remain focused on making good economic decisions that are intended to result in high returns on equity to our shareholders over a long-term horizon. While our decisions are expected to be economically sound, they
may result in volatile earnings under GAAP as a result of the accounting requirements for securitizations under Statement No. 140. To the extent that we grow our overall portfolio of credit card receivables (through origination, acquisition or
other new channels) and then securitize these assets, we may have securitization gains, which can be material. For further discussion of our historic results and the impact of securitization accounting on our results, see the Results of
Operations and Liquidity, Funding and Capital Resources sections below, as well as our condensed consolidated financial statements and the notes thereto.

The underserved and un-banked consumer markets that we serve are heavily regulated and subject to a wide range of consumer protection laws. As such, each
of our business lines is susceptible to adverse actions by regulators and adverse developments in these laws. For instance, greater restrictions on the interest rates, fees and other terms of our productswhether as a result of changes in laws,
regulatory interpretations or otherwisewould adversely impact the performance of our business. Similarly, the imposition of more onerous disclosure requirements in our marketing materials might discourage potential customers from applying for
new credit cards or other credit products. State regulators routinely review our practices, and the FDIC and other regulators routinely review each of the banks that issues credit cards on our behalf. It is common that the reviews of the banks
include reviews of the credit card issuing and related practices of these banks (including the terms of our products), and regulators routinely make comments on our products, in response to which we adjust our marketing, servicing, collection, fee
and other practices.

For example, we began a review of our minimum payment practices during the second quarter of this year in response to
comments received from the FDIC, and we will be changing some of these practices over the next several quarters. Additionally, in June 2006, we entered into an assurance agreement with the New York Attorney General in order to resolve



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his investigation into our marketing and other materials and our servicing and collection practices. Pursuant to this
agreement, we agreed to pay a $0.5 million civil penalty to the State of New York and to refund certain fees to New York cardholders primarily in recognition that New York has a unique statute (New York Personal Property Law Section 413)
relating to, among other things, the opening of credit card accounts. Moreover, the FDIC currently is conducting an investigation of the policies, practices and procedures that we use in connection with our principal third-party credit card
originating financial institution; we are cooperating with the FDIC in the investigation.

While we believe we have the most comprehensive
legal and other diligence processes within the industry to ensure the compliance of our marketing materials, servicing and collection practices and other program features with applicable law, the standards imposed on our business by applicable law
and the regulators are at times subjective. As such, it is likely that, as part of any review by regulators from time-to-time, they will object to our marketing, servicing and collection practices, and there can be no assurance that the changes
required to address concerns raised in the course of these reviews will not have a material adverse effect on our financial condition, results of operations or business. Moreover, adverse regulatory actions with respect to our credit card products
could affect the ability or willingness of the banks that issue our products to continue or expand further their issuances of products on our behalf, thereby causing our goals to be unachievable. For additional information, please see Part II,
Item 1A, Risk Factors.

RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2006, Compared to the Three and Six Months Ended June 30, 2005

Total
interest income. Total interest income consists primarily of finance charges and late fees earned on loans and fees receivable that we have not securitized in off-balance-sheet securitization transactionsprincipally receivables
associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range and our Auto Finance segment. The $38.5 million and $82.8 million increase when comparing the three and six months ended
June 30, 2006 to the same periods during 2005, respectively, primarily is due to growth in credit card receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range, as well as
the fact that we did not complete our Auto Finance segment acquisition until after the close of the first quarter of 2005. This new business line contributed $12.9 million and $24.4 million for the three and six months ended June 30, 2006,
respectively, compared to $12.6 million and $12.6 million, respectively, during the same periods of 2005. Also included within total interest income (under the other category) is the interest income that we have earned on our various investments in
debt securities, including interest earned on bonds distributed to us from our equity-method investees, and on our subordinated, certificated interest in the Embarcadero Trust. Principal amortization has caused reductions in interest income levels
associated with some of our bonds and the Embarcadero Trust subordinated, certificated interest. Nevertheless, our other interest income levels have remained relatively consistent between 2005 and 2006 due to other bond investments (typically in
bonds issued by other third-party asset backed securitizations) that we have made throughout 2005 and the first half of 2006.

We expect
continued growth in receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range and within our new Auto Finance segment. Unless we securitize these receivables in off-balance-sheet
arrangements, this expected growth should translate into continued growth in our total interest income.

Interest Expense.
Interest expense decreased $3.5 million for the three months ended June 30, 2006 compared to the same period in the prior year due to a $11.0 million second quarter of 2005 final settlement of an obligation to a lender that financed our
original equity investment in CSG, an equity-method investee. This decline was partially offset by interest expense associated with our issuance of an aggregate $550.0 million in Convertible Senior Notes in May and November of 2005 and interest
expense related to our March 2006 structured financing associated with our credit card offering to consumers at the lower end of the FICO scoring range. The $5.6 million increase in interest expense for the six months ended June 30, 2006
compared to the same period in the prior year principally was due to interest expense on the Convertible Senior Notes and structured financing discussed above and to interest costs during the first quarter of 2006 associated with our April 2005 Auto
Finance segment acquisition and its working capital-related debt.



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##### Table of Contents

Fees and other income on non-securitized earning assets. The following table details (in
thousands) the components of fees and other income on non-securitized earning assets:



|                                                        |  |                                     |         |                                   |      |   |         |  |      |         |  |   |        
|------------------------------------------------------- |  | ----------------------------------- | ------- | --------------------------------- | ---- | - | ------- |  | ---- | ------- |  | - | -------
|                                                        |  | For the three months ended June 30, |         | For the six months ended June 30,
|                                                        |  | 2006                                |         |                                   | 2005 |   | 2006    |  | 2005
|Retail micro-loan fees                                  |  | $                                   | 21,504  |                                   |      | $ | 18,327  |  | $    | 42,443  |  | $ | 36,204 
|Fees on non-securitized credit card receivables         |  |                                     | 113,772 |                                   |      |   | 36,613  |  |      | 201,123 |  |   | 64,917 
|Fingerhut receivables while on balance sheet            |  |                                     |        |                                   |      |   | 23,412  |  |      |        |  |   | 56,144 
|Investments in previously charged-off receivables       |  |                                     | 11,061  |                                   |      |   | 17,484  |  |      | 20,358  |  |   | 34,992 
|Gain on bulk sale of previously charged-off receivables |  |                                     |        |                                   |      |   | 69,559  |  |      |        |  |   | 69,559 
|Other                                                   |  |                                     | (1,968  | )                                 |      |   | 4,709   |  |      | 215     |  |   | 7,630  
|                                                        |  |                                     |         |                                   |      |   |         |  |      |         |  |   |        
|Total                                                   |  | $                                   | 144,369 |                                   |      | $ | 170,104 |  | $    | 264,139 |  | $ | 269,446
|                                                        |  |                                     |         |                                   |      |   |         |  |      |         |  |   |        

The decreases of $25.7 million and $5.3 million in fees and other income on non-securitized
earning assets for the three and six months ended June 30, 2006, respectively, were largely attributable to:



| | (1) | the second quarter 2005 gain of $ 69.6 million from the bulk sale of previously charged-off receivables;
| | --- | --------------------------------------------------------------------------------------------------------



| | (2) | elimination of income in 2006 associated with our Fingerhut receivables (including the amortization of the associated deferred gain) of $23.4 million and $56.1 million for the
three and six months ended June 30, 2005, respectively, as we securitized these receivables during the third quarter of 2005;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | the decline in income within our Investments In Previously Charged-off Receivables segment of $6.4 million and $14.6 million due to the bulk sale of receivables which occurred
during the second quarter of 2005; and
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | a decline in the market value of our investments in securities during the second quarter resulting in realized and unrealized losses of $3.1 million, offsetting realized and
unrealized gains during the first quarter of $2.7 million. We generally classify our purchased debt and equity securities as trading securities that could result in future realized and unrealized gains and losses based on market conditions.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These decreases were partially offset by:



| | (1) | growth in fees on our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range, which increased $77.2 million and $136.2 million for the
three and six months ended June 30, 2006, respectively, compared to the same periods in the prior year;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | growth throughout 2006 in our Retail Micro-Loans segment, in which fees increased $3.2 million and $6.2 million for the three and six months ended June 30, 2006,
respectively, compared to the same periods in the prior year; and
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | recognition of deferred revenue associated with our bulk sale of previously charged-off receivables which contributed $2.6 million and $4.5 million for the three and six months
ended June 30, 2006 with no corresponding recognition in the prior year periods.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because of the September 2005
securitization of the Fingerhut receivables, income for the foreseeable future associated with the Fingerhut receivables will be represented exclusively within fees and other income on securitized earning assets (as income from retained interests in
credit card receivables) and as part of servicing income on our consolidated statements of operations. Because the portfolio of Fingerhut receivables is liquidating at a rapid rate, the income generated from this portfolio will be much lower in 2006
than it has been in prior years.

The other category above includes 2005 gains on put options that we wrote on our stock in 2005,
unrealized gains and losses associated with our investments in debt and equity securities that we classify as trading securities and fees associated with our stored-value card, merchant credit, on-line micro-loan, and third-party consumer finance
receivable operations, none of which currently represent significant activities for us. We expect to see continued income growth within the other category, as well as within our retail micro-loans fees and fees on non-securitized credit card
categories throughout 2006 and beyond.

Provision for loan losses. Our provision for loan losses increased $93.5 million
and $157.2 million for the three and six months ended June 30, 2006, respectively, when compared to the same periods of 2005. These increases correspond with our significant year-over-year growth in on-balance-sheet loans and fees receivable
principally related to our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range and our second quarter 2005 Auto Finance acquisition.



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Our provision for loan losses covers aggregate loss exposures on (1) principal receivable balances,
(2) finance charges and late fees receivable underlying income amounts included within our total interest income category, and (3) other fees receivable. Although we do not expect to see any significant degradation in the credit quality of
our on-balance-sheet loans and fees receivable in 2006, and while current delinquency and credit loss trends for these receivables generally look favorable on a vintage basis and with reference to our expectations, we do expect our provision for
loan losses to increase throughout 2006 based on the loans and fees receivable growth that we are planning throughout the year.

The
percentage of our allowance for uncollectible loans and fees receivable to gross period-end loans and fees receivable at June 30, 2006 (21.0%) is higher than it was at both March 31, 2006 (15.4%) and June 30, 2005 (9.6%).
Additionally, our provision for loan losses as a percentage of average gross loans and fees receivable in the second quarter of 2006 (18.4%) is higher than it was in both the first quarter of 2006 (13.4%) and the second quarter of 2005
(13.4%). These trends are explained principally by the following:



| |  |  | With the significant growth that we have experienced for receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring
range, we continue to experience a mix change in the receivables comprising our gross loans and fees receivable, such that an increasing percentage of the overall balance is comprised of these receivables. The loss rates for these receivables are
higher than for the remaining receivables within our gross loans and fees receivable balance, which consist primarily of receivables within our Auto Finance segment and our Retail Micro-Loans segment. Based on our expectations for continued higher
growth rates for these receivables, we expect some continued trending growth in these percentages over the next several quarters; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Through our Other segment, we recently have begun to invest in loans and fees receivable that are secured by sports vehicles, including motorcycles, all-terrain vehicles, personal
watercrafts and the like. Because this is a new asset class for us for which we do not have any direct historical loan loss experiences, and because the risk-profile of this particular asset class is different from those of our other previous
underwriting endeavors, we have provided loan loss allowances associated with this new asset class that are more significant on a relative basis than the allowances that we have provided on some of our other receivables.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following factors offset the trends noted within the above percentages:



| |  |  | Through our Auto Finance segment, which we purchased in April 2005, we acquire loans and fees receivable from auto dealers with recourse back to the dealers to the extent of
negotiated reserves that we carry as a liability ($29.0 million at June 30, 2006) within accounts payable and accrued expenses on our balance sheet. Because of the level of recourse that we have back to the dealers, our credit loss rates for
the Auto Finance segment are (and are expected in the future to be) lower than average loss rates experienced (and expected to be experienced) for our credit card and micro-loan activities; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We added a new category of receivables during the third quarter of 2005 within our retail micro-loan operations for which we have low loss expectations given underlying credit
enhancements in the form of corporate guarantees and bank-issued standby letters of credit; we have not provided an allowance for these loans receivable ($33.0 million at June 30, 2006) because we do not expect to incur charge offs of these
receivables in excess of the underlying credit enhancements.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Fees and other income on securitized earning assets. Fees and other income on securitized
earning assets include (1) annual membership, over-limit, cash advance, returned check and other fees associated with our credit card products, (2) securitization gains, and (3) income from retained interests in credit card
receivables securitized, each of which we detail (in thousands) in the following table.



|                                                                      |  |                                     |        |                                   |   |        |  |      |        |  |   |       
|--------------------------------------------------------------------- |  | ----------------------------------- | ------ | --------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                                      |  | For the three months ended June 30, |        | For the six months ended June 30,
|                                                                      |  | 2006                                |        | 2005                              |   | 2006   |  | 2005
|Securitization gains                                                  |  | $                                   | 3,541  |                                   | $ | 1,192  |  | $    | 4,404  |  | $ | 2,779 
|Income from retained interests in credit card receivables securitized |  |                                     | 23,103 |                                   |   | 6,276  |  |      | 56,307 |  |   | 26,145
|Fees on securitized receivables                                       |  |                                     | 18,496 |                                   |   | 15,021 |  |      | 34,898 |  |   | 31,057
|                                                                      |  |                                     |        |                                   |   |        |  |      |        |  |   |       
|Total fees and other income on securitized earning assets             |  | $                                   | 45,140 |                                   | $ | 22,489 |  | $    | 95,609 |  | $ | 59,981
|                                                                      |  |                                     |        |                                   |   |        |  |      |        |  |   |       

The $22.7 million and $35.6 million increases in total fees and other income on securitized
earning assets for the three and six months ended June 30, 2006, respectively, when compared to the same periods of 2005 reflects the following positive trends:



| |  |  | higher securitization gains principally due to net growth in the receivables we have securitized into our originated portfolio master trust, a trend that we expect to continue
throughout 2006 as we expect to continue to grow the receivables within our originated portfolio;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased income from retained interests in credit card receivables securitized of $16.8 million and $30.2 million for the three and six month ended June 30, 2006,
respectively, relative to comparable prior year periods, principally due to (a) growth and continued improvements in the credit quality and performance of our retained interests in our originated portfolio master trust and purchased portfolio
trusts, (b) income from retained interests associated with the September 2005 securitization of the Fingerhut receivables and (c) the benefits of reduced charge offs associated with personal bankruptcies that were accelerated into the
fourth quarter of 2005 prior to the effective date of newly enacted bankruptcy legislation and have not yet returned to levels experienced prior to this legislation; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | modest increases in fees on securitized receivables in 2006 relative to 2005 levels;
| | - |  | ------------------------------------------------------------------------------------

partially offset, however, by:



| |  |  | contraction in income from retained interests in our Embarcadero Trust securitized credit card receivables due to (a) continued reductions in managed receivables levels within
the Embarcadero Trust between June 30, 2005 and June 30, 2006, and (b) the favorable first quarter of 2005 effects of purchase discounts underlying our retained interests in the Embarcadero Trust. (The benefits of purchase discounts
associated with the managed receivables underlying our retained interests in the Embarcadero Trust abated significantly between June 30, 2005 and June 30, 2006; we anticipated this change as the mix of managed receivables within the
Embarcadero Trust has continued to shift over time (i.e., from receivables to which purchase discounts applied at the date of acquisition to new receivables generated from post-acquisition cardholder purchases for which there are no purchase
discounts). Related to these mix changes are higher finance charge, late fee and principal charge offs being netted against our income from retained interests in credit card receivables securitized, as well as lower inclusions of accretable yield as
a component of our income from retained interests in credit card receivables securitized.)
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We provide further details
concerning delinquency and credit quality trends, which affect the level of our income from retained interests in credit card receivables securitized and fees on securitized receivables, in our Credit Cards segment discussion below.

Servicing income. Servicing income decreased $14.1 million and $22.7 million for the three and six months ended June 30, 2006,
respectively, due to receivables liquidations within our securitized purchased portfolios. Absent one or more significant credit card portfolio acquisitions in the remainder of 2006, it is likely that servicing income in 2006 will be lower than in
2005 as net growth of the serviced receivables within our originated portfolio master trust is unlikely to exceed net liquidations of the securitized acquired portfolios for which we have been engaged as servicer.

Moreover, in February 2006, the FDIC effectively asked FDIC-insured financial institutions to cease cash advance and installment micro-loan activities
conducted through processing and servicing agents such as our Retail Micro-Loans segment subsidiaries. We were conducting these retail micro-loan activities in four states, and earned $1.8 million and $5.5 million in servicing income from them
during the three and six months ended June 30, 2006, respectively, compared to $6.9 million and $12.4 million, respectively, for the same periods in 2005. Because we have ceased these servicing operations, we expect no



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further servicing income associated with our Retail Micro-Loans segment throughout the remainder of 2006 and beyond. As
we have converted the Retail Micro-Loans segments operations in one of the four affected states to a direct lending model and as we expect to convert its operations in another one of the affected states to a direct lending model in the third
quarter of 2006, we expect some of this lost servicing incomealbeit at substantially diminished amountsto be replaced by lending fees, which will be reported within fees and other income on non-securitized earning assets in future
quarters.

Ancillary and interchange revenues. Ancillary and interchange revenues increased $4.6 million and $12.5 million
for the three and six months ended June 30, 2006, respectively, compared to the same 2005 periods primarily due to growth in both categories as a result of our origination of new credit card accounts, including those receivables which have been
sold to our originated portfolio master trust and those associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range. We typically experience higher ancillary revenues and higher purchasing
volumes and associated interchange fees for newer cardholders than for more mature cardholders within our managed receivables portfolios. As such, we expect further growth in our ancillary and interchange revenue principally from our emphasis during
2006 on new account additions to replace older more stagnant accounts.

Equity in income of equity-method investees. Equity
in income of equity-method investees increased $18.5 million and $25.4 million for the three and six months ended June 30, 2006, respectively, primarily due to (1) improvements in the performance of receivables associated with our
investments in our Transistor and Capacitor (33.3% each) equity-method investees, and (2) the late 2005 resumption of income within our 50%-owned equity-method investee, CSG, which resulted from resumed cash flows from its underlying
securitization trust after an extended several month blackout period offset by a slight decline in our 47.5%-owned equity-method investee due to an overall decline in receivables. We expect our equity-method investees to continue to contribute
significantly to our equity in income of equity-method investees throughout 2006, albeit at levels that will diminish over time as we liquidate the receivables balances associated with these equity-method investees.

Total other operating expense. Total other operating expense increased by $15.6 million and $56.7 million for the three and six months
ended June 30, 2006, respectively, when compared to the same periods of 2005 due to:



| | (1) | $3.5 million and $8.0 million respective increases in salaries and benefits primarily due to (a) growth in receivables within our originated portfolio master trust and
receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range, (b) personnel additions in connection with the acquisition of our Auto Finance segment in April 2005 and
(c) additional information technology and other management personnel that we have hired associated with several new product and systems launches within our Other segment;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | $4.0 million net increase in card and loan servicing expense for the six months ended June 30, 2006 due to (a) servicing costs related to growth in receivables associated
with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range, (b) net growth in our originated portfolio master trust receivables and (c) $5.8 million of new expenses related to our Auto Finance
segment, which we acquired in April 2005, all such increases being offset partially by (i) a $5.6 million decrease in servicing costs associated with our Investments in Previously Charged-Off Receivables segment as it now sells previously
charged-off receivables under a 5-year forward flow contract covering up to $3.25 billion of its acquisitions of previously charged-off receivables, thereby defraying the servicing costs normally associated with collection efforts on those
receivables, and (ii) diminished servicing costs associated with our acquired credit card portfolios given their continuing liquidations during 2006; (The slight decrease in card and loan servicing expense for the three months ended
June 30, 2006 compared to the same period in the prior year is due primarily to a $4.3 million decrease in servicing costs associated with our Investments in Previously Charged-off Receivables segment as described above, as well as decreases in
servicing costs for our acquired credit card portfolios as we continue to liquidate the related receivables; these decreases were offset partially by increased servicing costs for our originated portfolios, for which we continue to grow the related
receivables balances.)
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | $4.5 million and $12.5 million respective increases in marketing and solicitation costs principally associated with increased marketing efforts aimed at growing account
originations (a) within our originated portfolio master trust, (b) with respect to our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range, and (c) within our Retail Micro-Loans segment;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | $1.6 million and $17.1 million, respectively, of impairment charges (including $10.5 million for goodwill impairment recorded during the first quarter 2006) within our Retail
Micro-Loans segment associated primarily with the February 2006 FDIC decision effectively asking FDIC-insured financial institutions to cease cash advance and installment micro-loan activities conducted through processing and servicing agents such
as our Retail Micro-Loans segment subsidiaries; and
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | (5) | overall increases of $6.3 million and $15.1 million, respectively, in other expenses, including occupancy and related expenses, due primarily to increased costs associated with
infrastructure build-out to handle (a) growth within our originated portfolio and our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range (along with associated customer service enhancements),
(b) the April 2005 addition of our Auto Finance segment, and (c) several new product and systems launches within our Other segment.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

While we incur certain base levels of fixed costs associated with the infrastructure that we have built to support our growth and diversification into new products and services for our under-served and un-banked
customers, the vast majority of our operating costs are highly variable based on the levels of receivables that we service (both for our own account and for others) and the pace and breadth of our search for, acquisition of and introduction of new
business lines, products and services. We expect to continue growing and diversifying our business in the remainder of 2006, and while certain unique expenses undertaken in 2005 and the first six months of 2006 may not be repeated and while we
continue to derive cost reductions through our outsourcing and other cost-control efforts, we do expect to see continued growth in our total other operating expense levels (on a year-over-year and quarter-over-quarter comparative basis relative to
2005) based on growth that we plan to undertake.

Minority interests. We reflect the ownership interests of minority holders
of equity in our majority-owned subsidiaries as minority interests in our condensed consolidated statements of operations. The minority interests expense associated with these subsidiaries totaled $2.1 million, $5.5 million, $2.8 million and $12.0
million for the three and six months ended June 30, 2006 and 2005, respectively. These trends are consistent with liquidations of acquired credit card portfolios within securitization trusts, the retained interests of which are owned by our
majority-owned subsidiaries, and the resulting relative contributions of our majority-owned subsidiaries (as discussed in Fees and other income on securitized earning assets, above) to income from retained interests in credit card
receivables securitized as noted above.

Income taxes. Our effective tax rate was 36.0% for the three and six months ended
June 30, 2006, compared to 36.5% for the three and six months ended June 30, 2005. The decrease of 0.5% in our effective tax rate between 2006 and 2005 is principally due to the favorable state income tax effects of several of our recent
expansion and diversification initiatives.

Credit Cards Segment

Our Credit Cards segment consists of our credit card investment and servicing activities, as conducted with respect to receivables underlying accounts originated and portfolios purchased by us. This segment represents
aggregate activities associated with substantially all of our credit card products, including our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range. Because we have not securitized the receivables
associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range, revenues associated with this offering include interest income (along with late fees), fees and other income. With respect to our
securitized credit card receivables (which represent a substantial majority of our receivables), our fees and other income on securitized earning assets within the Credit Cards segment include (1) securitization gains, (2) income from
retained interests in credit card receivables securitized and (3) fees and other income. Also within our Credit Cards segment are equity in the income of equity-method investees and servicing income revenue sources. We earn servicing income
from the trusts underlying our securitizations and the receivables of and securitizations of our equity-method investees. Our revenue categories most affected by delinquency and credit loss trends are the net interest income, the fees and other
income on non-securitized earnings assets (which are net of a provision for loan losses) and the income from retained interests in credit card receivables securitized categories.

Background

For our credit card securitizations that qualify for sale treatment under GAAP, we
remove the securitized receivables from our condensed consolidated balance sheet. The performance of the underlying credit card receivables will nevertheless affect the future cash flows we actually receive. Various references within this section
are to our managed receivables, which include our non-securitized credit card receivables and the credit card receivables underlying our off-balance-sheet securitization facilities. Managed receivables data also include our equity interest in the
receivables that we manage for our equity-method investees and exclude minority interest holders shares of the receivables we manage for our majority-owned subsidiaries.

Financial, operating and statistical data based on these aggregate managed receivables are key to any evaluation of our performance in managing
(including underwriting, valuing purchased receivables, servicing and collecting) the aggregate of the portfolios of credit card receivables reflected on our balance sheet and underlying our securitization facilities. In allocating our resources and
managing our business, management relies heavily upon financial data and results prepared on a so-called managed basis. It is also important to analysts, investors and others that we provide selected financial, operating and statistical
data on a managed basis because this allows a comparison of us to others within the specialty finance industry. Moreover, our management, analysts, investors and others believe it is critical that they understand the credit performance of the entire
portfolio of our managed receivables because it reveals information concerning the quality of loan originations and the related credit risks inherent within the securitized portfolios and our retained interests in our securitization facilities.



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Managed receivables data assume that none of the credit card receivables underlying our off-balance-sheet
securitization facilities was ever transferred to securitization facilities and present the net credit losses and delinquent balances on the receivables as if we still owned the receivables. Reconciliation of the managed receivables data to our GAAP
financial statements requires: (1) recognition that a significant majority of our loans and fees receivable (i.e., all but $532.2 million of GAAP credit card loans and fees receivable at gross face value) had been sold in securitization
transactions as of June 30, 2006; (2) an understanding that our managed receivables data are based on billings and actual charge-offs as reported to us through underlying systems of record (i.e., without regard to an allowance for
uncollectible receivables); (3) a look-through to our economic share of (or equity interest in) the receivables that we manage for our equity-method investees; (4) removal of our minority interest holders interests in the managed
receivables underlying our GAAP consolidated results; and (5) recognition that our Fingerhut managed receivables were recorded at a $0.0 basis in our GAAP financial statements prior to our re-securitization of these receivables in September
2005.

The period-end and average managed receivables data (as well as delinquency and charge off statistics) that follow within this
section exclude receivables associated with accounts in late delinquency status in sellers hands as of the dates of our acquisitions of the receivables or interests therein. Pursuant to this treatment, the only activity within the following
statistical data associated with these excluded accounts are recoveries, which we include within the numerator of the other income ratio computation, as well as the costs of pursuing these recoveries, which we include within the numerator of the
operating ratio computation.

We have typically purchased credit card receivables portfolios at substantial discounts. A portion of each
acquisition discount is related to the excluded receivables and accounts described above. Another portion of each discount relates to the credit quality of the remaining acquired receivables, which we calculate as the difference between the face
amounts of the receivables purchased (less the excluded receivables described above) and the future cash flows we expect to collect from the receivables. We refer to the balance of the discount for each purchase not needed for credit quality as
accretable yield, which we accrete into net interest margin using the interest method over the estimated life of each acquired portfolio. As of the close of each financial reporting period, we evaluate the appropriateness of the credit quality
discount component of our acquisition discount and the accretable yield component of our acquisition discount based on actual and projected future results.

We did not acquire any credit card receivables portfolios during the six months ended June 30, 2006.

Asset
Quality

Our delinquency and charge off data at any point in time reflect the credit performance of our managed receivables. The
average age of our credit card accounts, the timing of portfolio purchases, the success of our collection and recovery efforts and general economic conditions all affect our delinquency and charge off rates. The average age of our credit card
receivables portfolio also affects the stability of our delinquency and loss rates. We consider the delinquency and charge off data reflected herein in determining our allowance for uncollectible loans and fees with respect to our non-securitized
earning assets, net on our condensed consolidated balance sheets, as well as the valuation of our retained interests in credit card receivables securitized which is a component of securitized earning assets on our condensed consolidated balance
sheets. As we charge off receivables, we reflect the charge offs of non-securitized receivables within our provision for loan losses, and we reflect the charge offs of securitized receivables as an offset in determining income from retained
interests in credit card receivables securitized (within fees and other income on securitized earning assets) on our condensed consolidated statements of operations.

Our strategy for managing delinquency and receivables losses consists of account management throughout the customer relationship. This strategy includes credit line management and pricing based on the risks of the
credit card accounts.

Delinquencies. Delinquencies have the potential to impact net income in the form of net credit losses.
Delinquencies are also costly in terms of the personnel and resources dedicated to resolving them. We intend for the account management strategies that we use on our portfolio to manage and, to the extent possible, reduce the higher delinquency
rates that can be expected in a more mature managed portfolio such as ours. These account management strategies include conservative credit line management, purging of inactive accounts and collection strategies (as described under the heading
How Do We Collect from Our Customers? in Item 1. Business of our Annual Report on Form 10-K for the year ended December 31, 2005) intended to optimize the effective account-to-collector ratio across delinquency
buckets. We measure the success of these efforts by measuring delinquency rates. These rates exclude accounts that have been charged off. It is our policy to continue to bill interest and fee income on all credit card accounts, except in limited
circumstances, until the account and all related receivables, interest and other fees are charged off; while we continue these billings as noted herein, we exclude from



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our GAAP income and managed receivables data the interest and fee income on significantly delinquent loans and fees
receivable for which we believe that collectibility is significantly in doubt on the date of billing. See the Charge offs discussion as well.

The following table presents the delinquency trends of the credit card receivables that we manage (dollars and accounts in thousands; % of total):



|                                                 |  |                                  |           |   |         |   |           |         |  |   |           |   |  |         |           |   |         |   |           |         |  |   |           |   |  |   |           |   |  |   |           |  
|------------------------------------------------ |  | -------------------------------- | --------- | - | ------- | - | --------- | ------- |  | - | --------- | - |  | ------- | --------- | - | ------- | - | --------- | ------- |  | - | --------- | - |  | - | --------- | - |  | - | --------- | -
|                                                 |  | At or for the Three Months Ended |          
|                                                 |  | 2006                             |           |   | 2005    |   |           | 2004    | 
|                                                 |  | Jun. 30                          |           |   | Mar. 31 |   |           | Dec. 31 |  |   | Sep. 30   |   |  | Jun. 30 |           |   | Mar. 31 |   |           | Dec. 31 |  |   | Sep. 30   |  
|Period-end managed receivables                   |  | $                                | 2,472,122 |   |         | $ | 2,351,667 |         |  | $ | 2,317,751 |   |  | $       | 2,230,108 |   |         | $ | 2,198,703 |         |  | $ | 2,246,256 |   |  | $ | 2,166,489 |   |  | $ | 1,931,514 |  
|Period-end managed accounts                      |  |                                  | 3,832     |   |         |   | 3,647     |         |  |   | 3,428     |   |  |         | 3,169     |   |         |   | 2,973     |         |  |   | 2,943     |   |  |   | 2,888     |   |  |   | 2,317     |  
|Receivables delinquent:                          |  |                                  |           |   |         |   |           |         |  |   |           |   |  |         |           |   |         |   |           |         |  |   |           |   |  |   |           |   |  |   |           |  
|30 to 59 days past due                           |  | $                                | 115,441   |   |         | $ | 84,081    |         |  | $ | 93,583    |   |  | $       | 82,070    |   |         | $ | 83,175    |         |  | $ | 70,558    |   |  | $ | 80,419    |   |  | $ | 76,028    |  
|60 to 89 days past due                           |  |                                  | 89,164    |   |         |   | 71,213    |         |  |   | 68,531    |   |  |         | 66,287    |   |         |   | 61,882    |         |  |   | 54,505    |   |  |   | 61,408    |   |  |   | 61,144    |  
|90 or more days past due                         |  |                                  | 206,234   |   |         |   | 184,693   |         |  |   | 156,414   |   |  |         | 158,161   |   |         |   | 128,351   |         |  |   | 143,416   |   |  |   | 167,863   |   |  |   | 148,132   |  
|                                                 |  |                                  |           |   |         |   |           |         |  |   |           |   |  |         |           |   |         |   |           |         |  |   |           |   |  |   |           |   |  |   |           |  
|Total 30 or more days past due                   |  | $                                | 410,839   |   |         | $ | 339,987   |         |  | $ | 318,528   |   |  | $       | 306,518   |   |         | $ | 273,408   |         |  | $ | 268,479   |   |  | $ | 309,690   |   |  | $ | 285,304   |  
|                                                 |  |                                  |           |   |         |   |           |         |  |   |           |   |  |         |           |   |         |   |           |         |  |   |           |   |  |   |           |   |  |   |           |  
|Total 60 or more days past due                   |  | $                                | 295,398   |   |         | $ | 255,906   |         |  | $ | 224,945   |   |  | $       | 224,448   |   |         | $ | 190,233   |         |  | $ | 197,921   |   |  | $ | 229,271   |   |  | $ | 209,276   |  
|                                                 |  |                                  |           |   |         |   |           |         |  |   |           |   |  |         |           |   |         |   |           |         |  |   |           |   |  |   |           |   |  |   |           |  
|Receivables delinquent as % of period-end loans: |  |                                  |           |   |         |   |           |         |  |   |           |   |  |         |           |   |         |   |           |         |  |   |           |   |  |   |           |   |  |   |           |  
|30 to 59 days past due                           |  |                                  | 4.7       | % |         |   | 3.6       | %       |  |   | 4.0       | % |  |         | 3.7       | % |         |   | 3.8       | %       |  |   | 3.1       | % |  |   | 3.7       | % |  |   | 3.9       | %
|60 to 89 days past due                           |  |                                  | 3.6       |   |         |   | 3.0       |         |  |   | 3.0       |   |  |         | 3.0       |   |         |   | 2.8       |         |  |   | 2.4       |   |  |   | 2.8       |   |  |   | 3.2       |  
|90 or more days past due                         |  |                                  | 8.3       |   |         |   | 7.9       |         |  |   | 6.7       |   |  |         | 7.1       |   |         |   | 5.8       |         |  |   | 6.4       |   |  |   | 7.7       |   |  |   | 7.7       |  
|                                                 |  |                                  |           |   |         |   |           |         |  |   |           |   |  |         |           |   |         |   |           |         |  |   |           |   |  |   |           |   |  |   |           |  
|Total 30 or more days past due                   |  |                                  | 16.6      | % |         |   | 14.5      | %       |  |   | 13.7      | % |  |         | 13.8      | % |         |   | 12.4      | %       |  |   | 11.9      | % |  |   | 14.2      | % |  |   | 14.8      | %
|                                                 |  |                                  |           |   |         |   |           |         |  |   |           |   |  |         |           |   |         |   |           |         |  |   |           |   |  |   |           |   |  |   |           |  
|Total 60 or more days past due                   |  |                                  | 11.9      | % |         |   | 10.9      | %       |  |   | 9.7       | % |  |         | 10.1      | % |         |   | 8.6       | %       |  |   | 8.8       | % |  |   | 10.5      | % |  |   | 10.9      | %
|                                                 |  |                                  |           |   |         |   |           |         |  |   |           |   |  |         |           |   |         |   |           |         |  |   |           |   |  |   |           |   |  |   |           |  

The increases in our 30-plus day delinquencies and 60-plus day delinquencies between June 30,
2005 and June 30, 2006 are largely attributable to (1) the growth in our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range, the receivables of which experience greater delinquency and charge-off
levels than we experience with respect to our other credit card receivables, and to a much lesser extent (2) the beneficial denominator effects at June 30, 2005 of first quarter 2005 portfolio purchases (and the associated exclusion from
our managed receivables data of receivables associated with accounts in late delinquency status in sellers hands as of the dates of our acquisitions of the receivables as described above). As receivables underlying our largely fee-based credit
card offering to consumers at the lower end of the FICO scoring range become a larger component of our overall managed receivables balance, we expect this mix change to cause further increases in our overall delinquency and charge-off levels.
Additionally, given the shorter life cycle of many of the accounts underlying the receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range, we can also expect some volatility in
our delinquency statistics based on the timing and relative volumes of quarterly account growth underlying these receivables. Based on our analyses of vintage data, however, we are pleased with the overall credit quality of our managed receivables,
including those underlying our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range, and we believe that the heightened delinquency and charge-off levels associated with our largely fee-based credit card
offering to consumers at the lower end of the FICO scoring range are reasonable based on the relative returns offered.

The increase in our
30-plus day delinquencies and 60-plus day delinquencies between December 31, 2005 and March 31, 2006 reflects the favorable effects that the October 17, 2005 bankruptcy law change had on December 31, 2005 delinquency levels. We
support this conclusion by comparing December 31, 2005 delinquency levels with December 31, 2004 delinquency levels; notwithstanding the favorable effects of a large fourth quarter 2004 portfolio acquisition on December 31, 2004
delinquency levels, the December 31, 2005 delinquency levels are even lower than they were at December 31, 2004. Because of the October 17, 2005 bankruptcy law change, many consumers that otherwise would have been delinquent at
December 31, 2005 rushed to file for bankruptcy prior to the October 17, 2005 effective date of the new bankruptcy laws; this caused these consumers receivables to charge off in the fourth quarter of 2005 prematurely relative to the
timing of their charge off through the normal delinquency process.

Charge offs. We generally charge off credit card receivables
when they become contractually 180 days past due or within 30 days of notification and confirmation of a customers bankruptcy or death. However, if a cardholder makes a payment greater than or equal to two minimum payments within a
month of the charge off date, we may reconsider whether charge off status remains appropriate. Additionally, in some cases of death, receivables are not charged off if, with respect to the deceased customers account, there is a surviving,
contractually liable individual or an estate large enough to pay the debt in full.



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The following table presents the charge off data (dollars in thousands; percentages annualized) for:
(1) all of the credit card receivables underlying the securitizations of our consolidated subsidiaries (adjusted to exclude the receivables associated with minority interest holders equity in our majority-owned consolidated subsidiaries);
(2) our respective 50.0%, 33.3% and 47.5% shares of the receivables that we manage on behalf of our equity-method investees; and (3) all non-securitized credit card receivables, including the Fingerhut receivables while they were held on
balance sheet and the receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range ($532.2 million face amount of receivables at June 30, 2006).



|                                |  |                            |           |   |         |   |           |         |  |   |           |   |  |         |           |   |         |   |           |         |  |   |           |   |  |   |           |   |  |   |           |  
|------------------------------- |  | -------------------------- | --------- | - | ------- | - | --------- | ------- |  | - | --------- | - |  | ------- | --------- | - | ------- | - | --------- | ------- |  | - | --------- | - |  | - | --------- | - |  | - | --------- | -
|                                |  | For the Three Months Ended |          
|                                |  | 2006                       |           |   | 2005    |   |           | 2004    | 
|                                |  | Jun. 30                    |           |   | Mar. 31 |   |           | Dec. 31 |  |   | Sep. 30   |   |  | Jun. 30 |           |   | Mar. 31 |   |           | Dec. 31 |  |   | Sep. 30   |  
|Average managed receivables     |  | $                          | 2,420,272 |   |         | $ | 2,341,712 |         |  | $ | 2,256,994 |   |  | $       | 2,211,547 |   |         | $ | 2,212,378 |         |  | $ | 2,307,471 |   |  | $ | 2,039,235 |   |  | $ | 1,924,520 |  
|Gross yield ratio               |  |                            | 34.3      | % |         |   | 32.9      | %       |  |   | 31.1      | % |  |         | 30.2      | % |         |   | 29.1      | %       |  |   | 28.2      | % |  |   | 29.3      | % |  |   | 29.8      | %
|Combined gross charge offs      |  | $                          | 173,709   |   |         | $ | 129,111   |         |  | $ | 162,917   |   |  | $       | 120,989   |   |         | $ | 129,921   |         |  | $ | 117,924   |   |  | $ | 131,061   |   |  | $ | 121,498   |  
|Net charge offs                 |  | $                          | 57,572    |   |         | $ | 47,571    |         |  | $ | 75,708    |   |  | $       | 58,473    |   |         | $ | 67,602    |         |  | $ | 54,432    |   |  | $ | 58,270    |   |  | $ | 61,255    |  
|Adjusted charge offs            |  | $                          | 51,225    |   |         | $ | 39,344    |         |  | $ | 62,078    |   |  | $       | 42,463    |   |         | $ | 44,900    |         |  | $ | 39,053    |   |  | $ | 39,899    |   |  | $ | 38,343    |  
|Combined gross charge off ratio |  |                            | 28.7      | % |         |   | 22.1      | %       |  |   | 28.9      | % |  |         | 21.9      | % |         |   | 23.5      | %       |  |   | 20.4      | % |  |   | 25.7      | % |  |   | 25.3      | %
|Net charge off ratio            |  |                            | 9.5       | % |         |   | 8.1       | %       |  |   | 13.4      | % |  |         | 10.6      | % |         |   | 12.2      | %       |  |   | 9.1       | % |  |   | 11.4      | % |  |   | 12.7      | %
|Adjusted charge off ratio       |  |                            | 8.5       | % |         |   | 6.7       | %       |  |   | 11.0      | % |  |         | 7.7       | % |         |   | 8.1       | %       |  |   | 6.8       | % |  |   | 7.8       | % |  |   | 8.0       | %
|Net interest margin             |  |                            | 23.7      | % |         |   | 25.2      | %       |  |   | 22.6      | % |  |         | 23.3      | % |         |   | 22.5      | %       |  |   | 21.1      | % |  |   | 20.4      | % |  |   | 22.4      | %
|Other income ratio              |  |                            | 12.4      | % |         |   | 14.9      | %       |  |   | 12.4      | % |  |         | 10.4      | % |         |   | 8.6       | %       |  |   | 6.8       | % |  |   | 5.4       | % |  |   | 7.4       | %
|Operating ratio                 |  |                            | 10.0      | % |         |   | 10.7      | %       |  |   | 12.9      | % |  |         | 9.0       | % |         |   | 8.9       | %       |  |   | 8.6       | % |  |   | 10.3      | % |  |   | 8.2       | %

The higher gross yield ratios experienced during the three months ended June 30, 2006 and
March 31, 2006 reflect interest rate increases associated with cardholder accounts. Interest rates on our credit card receivables are indexed to prime rates, which have increased along with Federal Reserve Board rate increases over the past
several quarters. Factors relevant to the remaining categories in the above table include:



| |  |  | While all of our charge off levels and ratios benefit from our marketing of new accounts underlying our originated portfolio master trust, the favorable effects of these new
accounts are offset by the growth in our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range, the receivables of which experience (a) greater gross charge off levels than we experience within our
originated portfolio master trust and with respect to any of our acquired receivables portfolios, and (b) adjusted net charge off rates roughly in line with those we experience within our originated portfolio master trust and with respect to
our acquired receivables portfolios.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The rush of consumers to file for bankruptcy prior to the October 2005 effective date of the new bankruptcy laws caused unusually high fourth quarter 2005 charge offs that exceeded
our expectations coming into the fourth quarter. This rush of bankruptcy filings served to accelerate certain charge offs that we otherwise would have experienced in 2006; as such, we experienced significantly lower bankruptcy and other delinquency
charge offs than normal during the first quarter of 2006. Charge offs during the second quarter of 2006 were somewhat lower than normal as well due to the October 2005 bankruptcy law changes, but the effects of these lower charge offs were offset by
increased charge offs associated with our larger fee-based credit card offering to consumers at the lower end of the FICO scoring range. We expect diminished benefits associated with the October 2005 bankruptcy law changes throughout the remainder
of this year as the pace of bankruptcy filings under the new bankruptcy laws has been increasing steadily during the second quarter of 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | While our net interest margin benefits from lower finance charge and late fee charge off levels within newly added accounts underlying our originated portfolio master trust, the
favorable effects of the new accounts are offset partially by the growth in our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range, the receivables of which have lower APRs and have greater finance charge
and late fee charge offs than we experience within our originated portfolio master trust and with respect to acquired receivables portfolios.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our net interest margin declined between the first and second quarter of 2006 principally due to (a) diminished second quarter 2006 beneficial effects of the October 2005
bankruptcy law changes on finance charge and late fee charge offs, and (2) interest costs on $150.0 million of draws that we made in the second quarter of 2006 on the structured financing facility secured by those receivables associated with
our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Our general trend line of improving net interest margins correlates with the generally favorable effects of lower finance charge and late fee charge offs associated with absolute
improvements we have seen year over year in the credit quality of our securitized portfolios. This improvement in our net interest margin throughout 2005 and into 2006 also corresponds with improved gross yield ratios experienced in recent quarters,
as well as higher accretable yield inclusions within the net interest margin based on the continued strength of the Fingerhut portfolio. Additionally, the October 2005 bankruptcy law changes discussed above resulted in significantly diminished first
quarter 2006 and somewhat lower second quarter 2006 bankruptcy charge offsthereby favorably influencing our net interest margin during those quarters.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Growth in our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range also accounts for the increase in the combined gross charge off ratio in
the second quarter of 2006 relative to the second quarter of 2005, notwithstanding that the net charge off ratio actually declined slightly in the second quarter of 2006 relative to the second quarter of 2005. While a mix change in our receivables
based on disproportionately larger growth in our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range can be expected to increase our combined gross charge off ratios, the fact that the ratio of principal
receivables to total receivables for this category of receivables is much smaller than for our other originated and purchased credit card receivables means that our net charge off and adjusted charge off ratios are not likely to be adversely
affected by the higher gross charge offs that we experience within the receivables underlying our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Credit quality improvements within our portfolios and the pull-through effects of the October 2005 bankruptcy law changes discussed above have contributed to trending lower net
charge off ratios when comparing the second quarter of 2006 to the second quarter of 2005.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our second quarter of 2006 adjusted charge off ratio increased in comparison to the second quarter of 2005 ratio. While the credit quality improvements and lower bankruptcies noted
above helped to keep the ratio low in the second quarter of 2006, the second quarter of 2005 benefited materially from the effects of the three acquisitions that occurred late in the fourth quarter of 2004 and early in the first quarter of 2005. As
these acquisitions began to age through their delinquency buckets in the second quarter of 2005, we began to experience charge offs for these acquisitions for the first time, and the net charge offs associated with these acquisitions were offset by
credit quality discounts in arriving at our adjusted charge offs. This caused the proportion of net charge offs to which credit quality discounts relate to actually increase (thus widening the spread between the net charge off ratio and the adjusted
charge off ratio) in the second quarter of 2005. By the second quarter of 2006, the amount of the credit quality discounts that we were able to recognize had diminished, and the discounts had a much lower beneficial impact on the adjusted charge off
ratio.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | While our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range has contributed significantly to the general trend line of significantly
improved other income ratios over the past several quarters, we can expect increased volatility in gross charge offs, and hence fee charge offs offsetting our other income ratio, based on the growth of this particular product offering. Such was the
case between the first and second quarters of 2006. Given the shorter life cycle of many of the accounts underlying the receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range,
charge off volatility can result based on the timing and relative volumes of quarterly account growth underlying these receivables. Based on our analyses of vintage data, however, we are pleased with the overall credit quality of these receivables,
and we believe that the heightened charge-off levels associated with these receivables are reasonable based on the relative returns offered.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | While the settlement of the assurance agreement with the New York Attorney General contributed to the increase in our operating ratio in the second quarter of 2006 relative to the
second quarter of 2005, the increase is principally associated with a mix change in our receivables toward lower balance receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range.
This disproportionately growing category of receivables is comprised of accounts with smaller receivables balances than those accounts underlying our originated portfolio master trust and acquired portfolios. The addition of these many new accounts
with small receivables balances means many more customer service interactions, and hence higher costs as a percentage of average managed receivables, than we have historically experienced with our originated portfolio master trust and acquired
portfolios receivables.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Investments in Previously Charged-off Receivables Segment

The following table shows a roll-forward of our investments in previously charged-off receivables activities (in thousands) for the three and six months
ended June 30, 2006:



|                                                                                                                                                                                                         |  |                                 |         |   |                               |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ----------------------------- | - | ------- | -
|                                                                                                                                                                                                         |  | Three MonthsEnded
June 30, 2006 |         |   | Six MonthsEnded June 30, 2006 |  
|                                                                                                                                                                                                         | 
|Unrecovered balance at beginning of period                                                                                                                                                               |  | $                               | 14,120  |   |                               | $ | 16,993  |  
|Acquisitions of defaulted accounts                                                                                                                                                                       |  |                                 | 7,979   |   |                               |   | 15,376  |  
|Cash collections                                                                                                                                                                                         |  |                                 | (17,346 | ) |                               |   | (35,018 | )
|Accretion of deferred revenue associated with forward flow contract                                                                                                                                      |  |                                 | (2,572  | ) |                               |   | (4,467  | )
|Cost-recovery method income recognized on defaulted accounts (included as a component of fees and other income on non-securitized earning
assets on our condensed consolidated statements of operations) |  |                                 | 11,061  |   |                               |   | 20,358  |  
|                                                                                                                                                                                                         |  |                                 |         |   |                               |   |         |  
|Balance at the end of the period                                                                                                                                                                         |  | $                               | 13,242  |   |                               | $ | 13,242  |  
|                                                                                                                                                                                                         |  |                                 |         |   |                               |   |         |  
|Estimated remaining collections (ERC)                                                                                                                                                                  |  | $                               | 59,307  |   |                               | $ | 59,307  |  
|                                                                                                                                                                                                         |  |                                 |         |   |                               |   |         |  

The above table reflects our use of the cost recovery method of accounting for our investments in
previously charged-off receivables. Under this method, we establish static pools consisting of homogenous accounts and receivables for each portfolio acquisition. Once we establish a static pool, we do not change the receivables within the pool. We
record each static pool at cost and account for it as a single unit for payment application and income recognition purposes. Under the cost recovery method, we do not recognize income associated with a particular portfolio until cash collections
have exceeded the investment. Additionally, until such time as cash collected for a particular portfolio exceeds our investment in the portfolio, we will incur commission costs and other internal and external servicing costs associated with the cash
collections on the portfolio investment that we will charge as an operating expense without any offsetting income amounts.

Remaining after
the Encore Capital transaction are our pools of previously charged-off receivables associated with Chapter 13 Bankruptcies and our balance transfer program, which we expect to continue to service and grow through future acquisitions. We expect our
Investments in Previously Charged-Off Receivables segment to continue its acquisition and collection of Chapter 13 Bankruptcies, its balance transfer program and other previously charged-off receivables activities throughout the remainder of 2006
and beyond. Such activities will include the acquisition of previously charged-off receivables and the sale of these charge offs for a fixed sales price under its five-year forward flow contract with Encore Capital.

We generally estimate the life of each pool of charged-off receivables that we typically acquire to be between 24 and 36 months for normal
delinquency charged-off accounts and approximately 60 months for Chapter 13 Bankruptcies. We anticipate collecting approximately 40.3% of the ERC of the existing accounts over the next twelve months, with the balance to be collected thereafter.

We expect our Investments in Previously Charged-off Receivables segment to continue its revenue and income growth throughout 2006 relative
to those levels experienced subsequent to a bulk sale of $2.9 billion (face amount) of previously charged-off receivables to Encore Capital in the second quarter of 2005.

Retail Micro-Loans Segment

The Retail Micro-Loans segment consists of a network of storefront
locations that, depending on the location, provide some or all of the following products or services: (a) small-denomination, short-term, unsecured cash advances that are typically due on the customers next payday; (b) installment
loan and other credit products; and (c) money transfer and other financial services. As of June 30, 2006, our Retail Micro-Loan segment subsidiaries operated a total of 512 storefront locations in 18 states, and we are in the process of
transitioning the storefronts from a mono-line deferred presentment cash advance business model to a multi-product line business model.

In
most of the states in which they have historically operated, our retail micro-lending subsidiaries made cash advance and other micro-loans directly to customers. However, in four states (Arkansas, Florida, North Carolina and West Virginia), they
previously acted only as a processing and servicing agent for a state-chartered, FDIC-insured bank that issued loans to the customers pursuant to the authority of the laws of the state in which the bank was located and federal interstate banking
laws, regulations and guidelines. During February 2006, we learned from our bank partner that the FDIC had effectively asked insured financial institutions to cease deferred presentment and installment micro-loan activities conducted through
processing and servicing agents. In response to the FDICs actions, our subsidiaries began evaluating strategic alternatives within theses states, including the possibility of switching to a direct lending model in compliance with the
regulatory



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##### Table of Contents

frameworks within each of the four states, or, alternatively, closing certain branch locations within the four affected
states. In addition, effective March 11, 2006, our North Carolina retail micro-loan subsidiary agreed with the Attorney General of the State of North Carolina to cease its traditional marketing and servicing of deferred-presentment and
installment micro-loans in North Carolina. As a result of this agreement, our North Carolina retail micro-loan subsidiary began pursuing a direct lending model in North Carolina in compliance with existing regulatory frameworks, as well as closing
several North Carolina locations. Subsequently, during the second quarter of 2006, our subsidiaries decided to abandon the pursuit of these alternative lending models in both North Carolina and West Virginia, as they could not see the alternative
lending products as providing acceptable long-term returns for the business. As a result, our subsidiaries began the process of exiting both of these states entirely. As of June 30, 2006, our North Carolina subsidiary had closed 14 of its
original 52 branch locations and our West Virginia subsidiary had closed 2 of its original 11 branch locations. During the third quarter of 2006, our subsidiaries expect to close the remaining North Carolina and West Virginia locations and to
continue to assess the profitability of alternative lending models in Arkansas and Florida, the two other states in which they previously processed and serviced micro-loans on behalf of our bank partner.

As a result of the recent changes in regulatory positions by the FDIC, the originating bank for which we serviced micro-loans in the four affected states
was required to exit that business prior to May 31, 2006. Because the originating bank planned to liquidate any loans existing as of that date through a loan participation relationship that it had with Maverick Management Company LLC
(Maverick), we agreed to indemnify Maverick for up to $2.8 million in losses that it may incur as a result of its being a successor to the banks interest in the loans and their liquidation and recorded a reserve for this amount in
the first quarter of 2006. Richard W. Gilbert, a member of our Board of Directors and our Chief Operating Officer, has a 20% economic interest in Maverick, and Mr. Gilberts son is its manager. During July 2006, Maverick submitted an
initial claim of $380,000 against this accrued indemnification liability, leaving approximately $2.4 million as an accrued liability, which we believe to be appropriate to cover additional indemnification claims expected over the next two quarters.

During the second quarter of 2006, our Retail Micro-Loans segment completed the process of converting our entire network of branches to a
common information technology platform capable of supporting multiple products. We began testing this new platform in our stores during the latter half of 2005 and into 2006. Reflecting our strategy to convert our mono-line retail
micro-loan branches into full service neighborhood financial centers, we expect our suite of products to include auto insurance, debit cards, credit cards, check cashing, money transfer, money order, amortizing installment loans and auto loans. In
connection with the system conversion required to support these multiple products, our Retail Micro-Loans segment incurred additional travel, training and other operating expenses during both the first and second quarters of 2006.

During the three months ended June 30, 2006, we opened 26 branch locations, including 19 locations in the state of Texas and one store in Nevada.
Including store closings in North Carolina and West Virginia, we closed 8 locations during the three months ended June 30, 2006 and 23 stores during the six months ended June 30, 2006. Our Texas micro-lending subsidiary offers and provides
credit services under a credit services organization (CSO) program to customers who apply for micro-loans offered by NCP Finance Limited Partnership, an independent third-party lender. In addition to assisting customers with loan
applications, if the customer is approved for and accepts the loan, our Texas subsidiary provides a letter of credit to the third party lender to secure the customers payment obligations in the event of a customer default. The customer is
charged a fee under the CSO program (CSO fees) for the provision of these credit services.



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##### Table of Contents

Statistical and financial metrics for our Retail Micro-Loans segment are detailed (dollars in thousands)
in the following tables.



|                              |  |                               |   |  |                             |  
|----------------------------- |  | ----------------------------- | - |  | --------------------------- | -
|                              |  | Six Months EndedJune 30, 2006 |   |  | Year EndedDecember 31, 2005 |  
|Beginning number of locations |  | 509                           |   |  | 482                         |  
|Acquired locations            |  |                              |   |  | 40                          |  
|Opened locations              |  | 26                            |   |  | 16                          |  
|Closed locations              |  | (23                           | ) |  | (29                         | )
|                              |  |                               |   |  |                             |  
|Ending locations              |  | 512                           |   |  | 509                         |  
|                              |  |                               |   |  |                             |  



|                                                                                                        |  |                                     |        |                                   |      |   |         |  |   |         |   |  |   |        
|------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | --------------------------------- | ---- | - | ------- |  | - | ------- | - |  | - | -------
|                                                                                                        |  | For the three months ended June 30, |        | For the six months ended June 30,
|                                                                                                        |  | 2006                                |        |                                   | 2005 |   | 2006    |  |   | 2005   
|Gross retail micro-loans fees (exclusive of processing and servicing revenues from FDIC-chartered bank) |  | $                                   | 21,504 |                                   |      | $ | 18,327  |  | $ | 42,443  |   |  | $ | 36,204 
|Processing and servicing revenues from FDIC-chartered bank                                              |  |                                     | 1,780  |                                   |      |   | 6,928   |  |   | 5,515   |   |  |   | 12,363 
|                                                                                                        |  |                                     |        |                                   |      |   |         |  |   |         |   |  |   |        
|Total gross revenues                                                                                    |  | $                                   | 23,284 |                                   |      | $ | 25,255  |  | $ | 47,958  |   |  | $ | 48,567 
|                                                                                                        |  |                                     |        |                                   |      |   |         |  |   |         |   |  |   |        
|Income (loss) before income taxes                                                                       |  | $                                   | (725   | )                                 |      | $ | 2,717   |  | $ | (17,764 | ) |  | $ | 3,607  
|                                                                                                        |  |                                     |        |                                   |      |   |         |  |   |         |   |  |   |        
|Period end loans and fees receivable, gross                                                             |  | $                                   | 59,553 |                                   |      | $ | 26,596  |  | $ | 59,553  |   |  | $ | 26,596 
|                                                                                                        |  |                                     |        |                                   |      |   |         |  |   |         |   |  |   |        
|Period end number of accounts                                                                           |  |                                     | 88,596 |                                   |      |   | 105,311 |  |   | 88,596  |   |  |   | 105,311
|                                                                                                        |  |                                     |        |                                   |      |   |         |  |   |         |   |  |   |        

The loss before income taxes within our Retail Micro-Loans segment for the second quarter of 2006
reflects certain operating losses sustained through the continuation of unprofitable operations in North Carolina, West Virginia, Arkansas and Florida, as well as the write-off of certain intangible assets and impairment charges related to these
operations ($1.6 million) and the incurrence of prepayment penalties and deferred loan cost write-offs in connection with early repayment of the Retail Mirco-Loans segments debt facilities in the second quarter of 2006. The loss before income
taxes for the six months ended June 30, 2006 reflects certain impairment, indemnification, loan loss, and other charges of $17.1 million (including $10.5 million of associated goodwill impairment) primarily related to operating changes
resulting from the FDICs actions in February 2006.

While the FDICs February 2006 actions have resulted in the losses cited
above for the first two quarters of 2006, we are pleased with the revenue growth evident in our core direct storefront micro-lending operations. Excluding fees we have earned in the second quarter of 2006 associated with our lending operations
pursuant to certain CSO programs initiated by other micro-loan providers during the third quarter of 2005, fees from our direct storefront operations increased from $36.2 million during the first six months of 2005 to $40.1 million during the first
six months of 2006, an increase of 10.8%. We believe this growth demonstrates positive momentum and favorable operating trends in the core ongoing business of our Retail Micro-Loans segment. For the remainder of 2006, we expect the new products that
we are rolling out under our multi-product line strategy to contribute to revenue growth within our Retail Micro-Loans segment, and we expect to see improved profitability, both overall and on a per store basis. Given our recent decision to exit
North Carolina and West Virginia, an expected return to profitability in other states affected by the FDICs actions and an expected seasonal improvement during the latter half of the calendar year, we expect our Retail Micro-Loans segment to
return to profitability during the second half of 2006.

Auto Finance Segment

On April 1, 2005, we acquired Wells Fargo Financials CAR business unit. This acquisition included all of CARs assets, business operations
and employees for $121.5 million including transaction costs. Upon acquisition, the business unit had approximately 300 employees and $128.9 million of auto-finance-related receivables (at face, net of unearned discounts) and operated in 38 states
through its 12 branches, 3 regional processing centers and a national collection center at its Lake Mary, FL headquarters.

CAR consists of
a nationwide network of pre-qualified auto dealers in the Buy Here/Pay Here used car business, from which it purchases auto loans at a discount or services them for a fee. CAR generates revenues on purchased loans through interest earned
on the face value of the installment agreements combined with discounts on loans purchased. CAR generally earns discount income over the life of the applicable loan. Additionally, CAR generates revenues from servicing loans on behalf of dealers for
a portion of actual collections and by providing back-up servicing for similar quality securitized



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assets. In the second quarter of 2006, CAR launched a new product, Dealer Equity Advance Loan (DEAL), whereby
CAR earns interest income on a loan made directly to the dealer. In the DEAL program, the dealer retains the responsibility for servicing the customer accounts securing our loan to the dealer. Also during the second quarter of 2006, CAR launched a
contract custodial program to service smaller line of credit loan providers in the markets it services.

The number of active dealers is a
function of new dealer enrollments offset by dealer attrition within the states in which CAR is licensed. CAR certifies dealers upon their recruitment by a sales force of approximately 60 resources located strategically throughout approved
territories. As of June 30, 2006, CAR operated in 45 states, and had approximately 1,300 active dealers.

During the first quarter of
2006, CAR completed a conversion from a system of record that it licensed from Wells Fargo Financial to a more robust system of record. Management expects the new system of record to support future growth through efficiencies created in the
processing of new dealer relationships, new product offerings and potential portfolio acquisitions. Due to CARs unique product offerings and the customization required to accommodate these offerings, the system of record conversion required a
significant amount of effort on the part of resources traditionally assigned to operations and sales. Most of these resources have now transitioned from work on the conversion and related post-conversion activities to efforts aimed at gaining
operational efficiencies and additional market share. As such, we have seen some modest growth in gross receivables levels at June 30, 2006, relative to December 31, 2005 levels, and we expect further and more rapid growth in receivables
and associated revenues throughout the remainder of 2006.

CAR also is now in the process of developing and releasing new financing
products designed to complement its current product offerings. These new products could not be accommodated during the period prior to conversion while CAR was licensing the Wells Fargo Financial system of record. CAR launched the first of these new
products DEAL (discussed above), in the second quarter of 2006. CAR anticipates launching a second product supported by the new system of record during the third quarter of 2006. In addition to these initiatives, the business is in the process of
forming strategic alliances with aftermarket product and service providers in an effort to cross-sell to their existing customer base. CAR also is testing the ability to cross sell other Company subsidiaries products to its existing customer
base.

Other Segment

Our Other segment
encompasses various activities that are start-up in nature. As reflected in the financial data for the Other segment within our segment data (see Note 3, Segment Reporting, to our condensed consolidated financial statements included
herein), we have invested significantly in a variety of start-up businesses in keeping with our diversification strategy. Moreover, as with any start-up effort, there is testing that needs to occur as we work to refine our product offerings and
businesses within our Other segment. For example, we have experimented in recent months with different underwriting processes and thresholds for a variety of Internet-based micro-loan productsthis all in an effort to determine the right mix of
marketing costs and systems costs versus first-pay defaults. These tests and the associated charge offs of receivables generated through these tests have contributed to higher fourth quarter 2005 and first half of 2006 loan loss provisions within
the Other segment.

Additionally, our overall direction has shifted significantly over the past few years with respect to our stored-value
card offering. Our customer responses to this product offering support our belief that un-banked consumers want the convenience and flexibility of a stored-value card. Nevertheless, the financial investments associated with our initial
strategy of tying our technologies together with third-party retail partners have proven too great relative to the revenue potential of this product offering. As such, we recently retooled our stored-value card offering to expand the utility of the
product and to focus on distribution of this product as an adjunct to certain of our credit card offerings or as an offer to consumers who come to us through Internet and other marketing channels and who may not be in a situation that currently
warrants our extending credit to them through one of our lending products. Our expectations are that we can learn about the income and spending patterns of these particular stored-value card customers so that we can gradually graduate them into our
credit products. We are also looking at potential out-sourcing partnerships relative to this card offering to better align ourselves within the market and to further reduce costs within this area.

Beyond our shift in focus for our stored-value card offerings, we also have turned our attention to developing an underwriting, servicing and collections
platform that utilizes non-traditional processes to offer credit products directly to consumers. These techniques include the utilization of external data bases other than the traditional credit bureaus, the application of proprietary scoring models
built off of internal and external data attributes, proprietary application processing and approval methods, and payment processing tools that are currently unique in the marketplace. We generally refer to these collective methods, models, and
processes as our Market Expansion Platform (MEP), and we consider them proprietary in nature. To date, we have launched the Purpose Advantage charge-card program through the Discover®Network and the Imagine MasterCard credit card product utilizing the MEP, both of which are included in our Credit Card segment. We
have



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found that the MEP has expanded the scope of consumers that we can profitably approve for these credit card products
beyond what we could traditionally approve using our credit bureau-oriented underwriting models. Customers acquired to-date have lower average FICO scores than we see in our other credit card products, a very limited credit bureau history or no
credit bureau history at all. The MEP has also allowed us to market our products on the Internet and through retail distribution at the point-of-sale, channels that until now have proven to be unsuccessful in generating large amounts of profitable
credit card customers for us. We intend to further utilize the MEP to enter additional product lines, including installment lending, retailer financing, auto lending and consumer receivables factoring in the third and fourth quarters of this year.
We also plan to utilize the MEP in the radio and television marketing channels for all of the aforementioned products.

Our Other segment
also is currently building technologies to enable us to underwrite, service and collect a wide variety of third-party consumer finance receivables. With customers that we already have in place, we have begun to make some principal investments of our
own in asset-secured consumer finance receivables such as loans secured by motorcycles, all terrain vehicles, personal watercraft and the like. A significant portion of our Other segments provision for loan losses relates to the loans and fees
receivable underlying this new category of asset-secured consumer finance receivable for us. For the time being, however, we have suspended loan originations within this asset class so that we can study the performance of these assets and our
underwriting models for a few quarters to determine our further growth plans within this asset class.

Another activity currently underway
within our Other segment is the development of systems, marketing materials and the infrastructure necessary to attract currently underserved or under-banked consumers to us so that we can use a centralized decision engine to determine which of our
various credit products is appropriate for each consumer. Through this effort, we intend to engage in broad television and Internet advertising campaigns aimed at attracting consumers who may need credit or debit products; we also plan to partner
with other providers of financial services and products and expect to earn fees through our referral of customers to these other providers.

In summary, through our Other segment activities and by employing our credit and underwriting knowledge and leveraging and improving upon an established technology infrastructure, we can continue to develop and test new credit delivery
programs. We see tremendous opportunity to grow our lending businesses through the use of Internet lead generators and search engines, and we expect many of the activities supported by the Other segment to be profitable for us in 2006. As an
example, our Other segment has been instrumental in our effort to marry MEP underwriting technologies with credit card product offerings. These product offerings are already generating profits for us within our Credit Cards segment, and in
subsequent quarters, one can expect us to reclassify costs incurred in the latter quarters of 2005 from our Other segment to our Credit Cards segment so as to reflect a consistent matching of costs and revenues for these new products within the
Credit Cards segment. The following table details (in thousands) the pre-tax losses that we have incurred for our major initiatives within the Other segment:



|                                                                                 |  |                                     |        |   |                                   |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | --------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                 |  | For the three months ended June 30, |        |   | For the six months ended June 30, |  
|                                                                                 |  | 2006                                |        |   | 2005                              |   |        | 2006 |  |   | 2005    |  
|Stored-value card                                                                |  | $                                   | (2,536 | ) |                                   | $ | (5,030 | )    |  | $ | (6,496  | ) |  | $ | (9,156  | )
|Internet micro-loans                                                             |  |                                     | (2,919 | ) |                                   |   | (1,736 | )    |  |   | (6,206  | ) |  |   | (2,956  | )
|Centralized decision engine                                                      |  |                                     | (1,273 | ) |                                   |   |       |      |  |   | (1,470  | ) |  |   |        |  
|Third-party receivables servicing and asset-secured consumer finance receivables |  |                                     | (1,932 | ) |                                   |   | (766   | )    |  |   | (4,675  | ) |  |   | (1,196  | )
|Other                                                                            |  |                                     | (301   | ) |                                   |   |       |      |  |   | (973    | ) |  |   |        |  
|                                                                                 |  |                                     |        |   |                                   |   |        |      |  |   |         |   |  |   |         |  
|Total                                                                            |  | $                                   | (8,961 | ) |                                   | $ | (7,532 | )    |  | $ | (19,820 | ) |  | $ | (13,308 | )
|                                                                                 |  |                                     |        |   |                                   |   |        |      |  |   |         |   |  |   |         |  

Liquidity, Funding and Capital Resources

At June 30, 2006, we had $128.1 million in unrestricted cash. Because the characteristics of our assets and liabilities change, liquidity management
is a dynamic process affected by the pricing and maturity of our assets and liabilities. We finance our business through cash flows from operations, asset backed securitizations and the issuance of debt and equity:



| |  |  | During the six months ended June 30, 2006, we generated $205.0 million in cash flow from operations, compared to $153.7 million during the six months ended
June 30, 2005. The $51.3 million increase is due in part to improved cash flows associated with favorable delinquency, charge off and payment rate trends that we have seen for our credit product offerings. Additionally, the returns and cash
flows that we experience with respect to our growing portfolio of receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range have also contributed significantly to our improved cash
flow from operations. These increases were partially offset by: (1) the $56.1 million 2005 cash flows associated with our zero-basis de-securitized Fingerhut receivables, all of which are reflected in our net income for the six months
ended June 30, 2006; (2) higher 2005 income associated with our Investment in Previously Charged-Off Receivables segments collections; and (3) the receipt of $67.0 million in cash in the second quarter of 2005 under our Encore Forward
Flow Contract, such cash being classified as deferred revenue on our condensed consolidated balance sheet at June 30, 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the six months ended June 30, 2006, we used $377.7 million of cash in investing activities, compared to using $196.5 million of cash for the six months ended
June 30, 2005. This $181.2 million increase in cash used in investing activities is consistent with the significant higher investments that we are now making in receivables associated with our largely fee-based credit card offering to consumers
at the lower end of the FICO scoring range and to a lesser extent receivables within our originated portfolio master trust. This overall increase was offset somewhat by the purchase of our Auto Finance segment during the second quarter of 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | During the six months ended June 30, 2006, we generated $78.0 million in cash from financing, compared to $191.0 million during the same period in 2005. The $113.0
million decrease in cash flow provided is primarily due to our $250.0 million Convertible Senior Notes issuance during the second quarter of 2005 offset by the purchase of treasury stock during that same period as well as the debt incurred during
the acquisition of our Auto Finance segment and the subsequent funding of receivables thereon, both of which occurred during the second quarter of 2005. This decrease was partially offset by $150.0 million we generated related to a structured
financing within our Credit Cards segment that is secured by substantially all of the credit card receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range and is recourse only to
the underlying credit card receivables that serve as security for the facility.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In April 2006, our Retail Micro-Loans
segment paid off its $40 million of term loans and its $10 million revolving credit facility. In conjunction with this transaction, we recorded a second quarter 2006 pretax charge of $791,000 for prepayment fees and to write off deferred debt
issuance costs.

In March 2006, we completed a structured financing transaction that is secured by substantially all of the credit card
receivables associated with our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range. This $150.0 million debt facility is recourse only to the underlying credit card receivables which serve as security for
the facility. As of June 30, 2006, $150.0 million was outstanding under this debt facility.

As of June 30, 2006, our collateral
base within our originated portfolio master trust was sufficient to allow for additional cash draws of $529.0 million against our existing securitization facilities.

Considering all of the above factors, along with our unrestricted cash balances of $128.1 million at June 30, 2006, we now have over $650.0 million of available liquidity for use in our growth, acquisition and
diversification efforts. While this level of liquidity is more than adequate to meet our operating needs throughout 2006, we have an acquisition pending (CardWorks) and expect to explore several new acquisition opportunities throughout 2006 and
beyond through our efforts to acquire other credit card receivables portfolios and our expansion into product and service offerings complementary to our sub-prime consumer market. We continue to explore new sources of capital to facilitate our
acquisition goals, and if market conditions are right for us, we may leverage other assets through structured finance or securitization transactions or issue other debt instruments or equity.

In May 2006, our Board of Directors authorized a new program to repurchase up to an additional 10 million shares of our outstanding common stock.
Under the plan, we can repurchase shares of our common stock from time to time, through June 30, 2008, either on the open market or through privately negotiated transactions in compliance with SEC guidelines. As of June 30, 2006, we are
authorized to purchase 4,736,105 more shares under a pre-existing plan, which expires in August 2006, and 10 million more shares under the new plan. At our discretion, we may use acquired shares in treasury to satisfy option exercises and
restricted stock grants. We will continue to evaluate our stock price relative to other investment opportunities and, to the extent we believe that the repurchase of our stock represents an appropriate return of capital, we will repurchase
additional shares of our stock.

Securitization Facilities

Our most significant source of liquidity is the securitization of credit card receivables. As of June 30, 2006, we had committed total securitization facilities of $2.1 billion, of which $791.6 million had been
drawn for our use outside of our securitization trusts. At June 30, 2006, the weighted-average borrowing rate on our securitization facilities was approximately 6.60%. The maturity terms of our securitizations vary.

In the table below, we have noted the securitization facilities (in millions) with respect to which a substantial majority of our managed credit card
receivables served as collateral as of June 30, 2006. Following the table are further details concerning each of the facilities.



|                  |  |                   |        
|----------------- |  | ----------------- | -------
|Maturity date     |  | Facility Limit(1)
|September 2006(2) |  | $                 | 306.0  
|January 2007(3)   |  |                   | 38.1   
|September 2007(4) |  |                   | 8.4    
|January 2008(5)   |  |                   | 1,000.0
|October 2009(6)   |  |                   | 299.5  
|October 2010(6)   |  |                   | 299.5  
|January 2014(7)   |  |                   | 194.5  
|                  |  |                   |        
|Total             |  | $                 | 2,146.0
|                  |  |                   |        

---

|(1) | Excludes securitization facilities related to receivables managed by our equity-method investees because such receivables and their related securitization facilities are
appropriately excluded from direct presentation in our condensed consolidated statements of operations or condensed consolidated balance sheet items included herein.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Represents the end of the revolving period for a $306.0 million conduit facility.
|--- | ---------------------------------------------------------------------------------

|(3) | Represents the conduit notes associated with our 75.1% membership interest in our majority-owned subsidiary that securitized the $92.0 million (face amount) of receivables acquired
in the third quarter of 2004 and the $72.1 million (face amount) of receivables acquired in the first quarter of 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In September 2005, we securitized the Fingerhut receivables in a two-year amortizing structure.
|--- | -----------------------------------------------------------------------------------------------

|(5) | This two-year variable funding note facility also contains one-year renewal periods (subject to certain conditions precedent) at the expiration of the recently renewed two-year term
and an orderly amortization of the facility at expiration.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | In October 2004, we completed two new, term securitization facilities that were issued out of our originated portfolio master trust: a 5-year facility represented by $299.5
million aggregate principal notes and a 6-year facility also represented by $299.5 million aggregate principal notes. To date, we have elected to sell only $287.0 million of the principal notes underlying the 5-year facility and $264.0 million of
the principal notes underlying the 6-year facility. However, assuming the continuation of current market conditions and performance within our original portfolio master trust, we believe we can sell the remaining principal notes under terms
advantageous to us should we need additional liquidity from the sale of the notes during the life of the facilities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Represents a ten-year amortizing term series issued out of the Embarcadero Trust.
|--- | ---------------------------------------------------------------------------------

While we have never triggered an early amortization within any of the series underlying our originated portfolio master trust securitizations and while we do not believe that we will, it is conceivable that, even with
close management, we may trigger an early amortization of one or more of the outstanding series within these trusts. Early amortization for any of the originated portfolio master trust securitization series would have adverse effects on our
liquidity, certainly during the early amortization period and potentially beyond repayment of any such series as potential investors could elect to abstain from future CompuCredit-backed issuances.

Contractual Obligations, Commitments and Off-Balance-Sheet Arrangements

In March 2006, we completed a structured financing transaction that is secured by substantially all of the credit card receivables associated with our largely fee-based credit card offering to consumers at the lower
end of the FICO scoring range. This $150.0 million debt facility is recourse only to the underlying credit card receivables that serve as security for the facility. As of June 30, 2006, $150.0 million was outstanding under this debt facility.
There have been no other material commitments entered into since December 31, 2005.

See Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2005.

Commitments and Contingencies

We have certain contractual arrangements that would require us to make payments or
provide funding if certain circumstances occur (contingent commitments). We do not currently expect that these contingent commitments will result in any material amounts being paid by us. See Note 9, Commitments and
Contingencies, to our condensed consolidated financial statements for further discussion of these matters.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies and Condensed Consolidated Financial Statement Components, to
our condensed consolidated financial statements for a discussion of recent accounting pronouncements.

Critical Accounting Estimates

In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances.
A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. It is impracticable for us to summarize every accounting principle that requires us to use judgment or
estimates in its application. In our Annual Report on Form 10-K for the year ended December 31, 2005, we discuss the five areas (valuation of retained interests, investments in previously charged-off receivables, non-consolidation of
qualifying special purpose entities, allowance for uncollectible loans and fees and goodwill and identifiable assets and impairment analyses) where we believe that the estimations, judgments or interpretations that we have made, if different, would
have yielded the most significant differences in our financial statements, and we urge you to



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review that discussion. In addition, in Note 6, Off-Balance-Sheet Arrangements, to the condensed
consolidated financial statements included in this report, we have updated a portion of our sensitivity analysis with respect to retained interest valuations.

Related Party Transactions

Since 2001, we have been subleasing 7,316 square feet of excess office space to Frank J.
Hanna, Jr., for $24.19 per square foot. Frank J. Hanna, Jr. is the father of our Chairman and Chief Executive Officer, David G. Hanna, and one of our directors, Frank J. Hanna, III. The sublease rate is the same as the rate that we
pay on the prime lease. Total rent for the three and six months ended June 30, 2006 for the sublease was approximately $43,000 and $86,000, respectively.

See Note 2, Summary of Significant Accounting Policies and Consolidated Financial Statements Components, to the consolidated financial statements included within our Annual Report on Form 10-K for the
year ended December 31, 2005 for a discussion of the investments in previously charged-off receivables by one of our subsidiaries from trusts serviced by us.

See Note 9, Commitments and Contingencies, to the condensed consolidated financial statements included in this report for discussion of an indemnity agreement into which we have entered with Maverick
associated with its participation in loans originated by a financial institution for which we have provided micro-loan servicing and processing services. Richard W. Gilbert, a Director on our Board of Directors and our Chief Operating Officer, has a
20% economic interest in Maverick, and Mr. Gilberts son is its manager.

Forward-Looking Information

We make numerous forward-looking statements throughout this report including statements with respect to our expected income, acquisitions and other growth
opportunities, location openings and closings, loss exposure and loss provisions, delinquency and charge off rates, securitizations and gains and losses from securitizations, the impact of actions by the FDIC and other regulators on both us and the
banks that issue credit cards on our behalf, account growth, performance of investments that we have made, operating expenses, the impact of the recent bankruptcy law changes, marketing plans, the profitability of our Retail Micro-Loans segment, our
ability to raise funds, our income in equity-method investees, growth in our ancillary and interchange revenues, our servicing income levels, gains and losses from investments in securities and our experimentation with new products. Frequently these
statements are introduced with words such as expect, likely, will, believe, estimate, project, anticipate, or predict. Actual results may differ
materially from those suggested by the forward-looking statements that we make for a number of reasons including those described in Part II, Item 1A, Risk Factors of this report.

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or
otherwise, except as required by law.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity and Market Risk

Interest rate sensitivity is comprised of basis risk, gap risk and market risk. Basis risk is caused by the difference in the interest
rate indices used to price assets and liabilities. Gap risk is caused by the difference in repricing intervals between assets and liabilities. Market risk is the risk of loss from adverse changes in market prices and rates. Our principal market risk
is related to changes in interest rates. This affects us directly in our lending and borrowing activities, as well as indirectly as interest rates may impact the payment performance of our customers.

We incur basis risk because we fund managed assets at a spread over commercial paper rates or LIBOR, while the rates on the underlying managed assets are
indexed to the prime rate. This basis risk results from the potential variability over time in the spread between the prime rate on the one hand, and commercial paper rates and LIBOR on the other hand. We have not hedged our basis risk because we
believe that the cost of hedging this risk is greater than the benefits we would get from elimination of this risk. We incur gap risk because the debt underlying our securitization trust facilities reprices monthly; whereas, our receivables do not
adjust unless we specifically adjust them with appropriate notification. This gap risk, however, is relatively minor as we can reprice the substantial majority of our receivables very quickly in response to a rate change.

As to the issue of market risk, we attempt to minimize the impact of interest rate fluctuations on net income by regularly evaluating the risk inherent
within our asset and liability structure, especially our off-balance-sheet assets (such as securitized receivables) and their corresponding liabilities. The impact of interest rate fluctuations on our securitized receivables is reflected in the
valuation of our retained interests in credit card receivables securitized. This risk arises from continuous changes in our asset and liability mix, changes in market interest rates (including such changes that are caused by fluctuations in
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interest-bearing liabilities) and the general timing of all other cash flows. To manage our direct risk to interest
rates, management actively monitors interest rates and the interest sensitive components of our securitization structures. Management seeks to minimize the impact of changes in interest rates on the fair value of assets, net income and cash flows
primarily by matching asset and liability repricings. There can be no assurance, however, that we will be successful in our attempts to manage such risks.

At June 30, 2006, a substantial portion of our managed credit card receivables, including those related to our equity-method investees, and other interest-earning assets had variable rate pricing, with
receivables carrying annual percentage rates at a spread over the prime rate (8.25% at June 30, 2006), subject to interest rate floors. At June 30, 2006, $30.8 million of our total managed receivables were priced at their floor rate,
of which, $16.1 million of these receivables were closed and therefore ineligible to be repriced and the remaining $14.7 million were open and eligible to be repriced. Every 10% increase in LIBOR that we experience until the $16.1 million
in closed account receivables reach their floor rate would result in an approximate $59,000 after-tax negative impact on our annual cash flows. Nevertheless, to the extent we choose to reprice any of the $14.7 million of receivables underlying
the open accounts that are below their floor rate, we can mitigate against any possible adverse impact on our cash flows.

We believe we
are not exposed to any material foreign currency exchange rate risk or commodity price risk.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on
such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective at meeting their objectives.

(b) Internal control over financial reporting.

There were not any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in various legal proceedings that are incidental to the
conduct of our business. In one of these legal proceedings, CompuCredit Corporation and five of our subsidiaries are defendants in a purported class action lawsuit entitled Knox, et al. vs. First Southern Cash Advance, et al,
No 5 CV 0445, filed in the Superior Court of New Hanover county, North Carolina, on February 8, 2005. The plaintiffs allege that in conducting a so-called payday lending business, certain of our Retail Micro-Loans
segment subsidiaries violated various laws governing consumer finance, lending, check cashing, trade practices and loan brokering. The plaintiffs further allege that CompuCredit is the alter ego of our subsidiaries and is liable for their actions.
The plaintiffs are seeking damages of up to $75,000 per class member. We are vigorously defending this lawsuit. These claims are similar to those that have been asserted against several other market participants in transactions involving small
balance, short-term loans made to consumers in North Carolina.

ITEM 1A. RISK FACTORS

An investment in our common stock or other securities involves a number of risks.
You should carefully consider each of the risks described below before deciding to invest in our common stock. If any of the following risks develops into actual events, our business, financial condition or results of operations could be negatively
affected, the market price of our common stock or other securities could decline and you may lose all or part of your investment.

Our Cash Flows Are
Dependent Upon the Cash Flows Received on the Receivables Underlying Our Securitizations and From Our Other Credit Products.

The collectibility of the receivables underlying our securitizations and those that we hold and do not securitize is a function of many factors including the criteria used to select who is issued credit, the pricing of the credit products,
the lengths of the relationships, general economic conditions, the rate at which customers repay their accounts or become delinquent and the rate at which cardholders use their cards. To the extent we have over estimated collectibility, in all
likelihood we have over estimated our financial performance. Some of these concerns are discussed more fully below.

We may not
successfully evaluate the creditworthiness of our customers and may not price our credit products so as to remain profitable. The creditworthiness of our target market generally is considered sub-prime based on guidance issued by
the agencies that regulate the banking industry. Thus, our customers generally have a higher frequency of delinquencies, higher risk of nonpayment and, ultimately, higher credit losses than consumers who are served by more traditional providers of
consumer credit. Some of the consumers included in our target market are consumers who are dependent upon finance companies, consumers with only retail store credit cards and/or lacking general purpose credit cards, consumers who are establishing or
expanding their credit and consumers who may have had a delinquency, a default or, in some instances, a bankruptcy in their credit histories, but have, in our view, demonstrated recovery. We price our credit products taking into account the
perceived risk level of our target customers. If our estimates are incorrect, customer default rates will be higher, we will receive less cash from our securitizations and other credit products, which will result in a decrease in the value of our
retained interests (which are based on expected future cash flows) and our loans receivable, and we will experience reduced levels of net income.

An economic slowdown could increase credit losses and/or decrease our growth. Because our business is directly related to consumer spending, any period of economic slowdown or recession could make it more difficult for us to
add or retain accounts or account balances. In addition, during periods of economic slowdown or recession, we expect to experience an increase in rates of delinquencies and frequency and severity of credit losses. Our actual rates of delinquencies
and frequency and severity of credit losses may be higher under adverse economic conditions than those experienced in the consumer finance industry generally because of our focus on the sub-prime market. Changes in credit use, payment patterns and
the rate of defaults by account holders may result from a variety of unpredictable social, economic and geographic factors. Social factors include, among other things, changes in consumer confidence levels, the publics perception of the use of
credit and changing attitudes about incurring debt and the stigma of personal bankruptcy. Economic factors include, among other things, the rates of inflation, the unemployment rates and the relative interest rates offered for various types of
loans. Moreover, adverse changes in economic conditions in states where account holders are located, including as a result of severe weather, could have a direct impact on the timing and amount of payments on our credit card accounts.

Because a significant portion of our reported income is based on managements estimates of the future performance of securitized receivables,
differences between actual and expected performance of the receivables may cause fluctuations in net income. Income from the sale of credit card receivables and other credit products in securitization transactions and income from retained
interests in receivables securitized have constituted, and are likely to continue to constitute, a significant portion of our income. Portions of this income are based on managements estimates of cash flows we expect to



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receive from the interests that we retain when we securitize receivables. Differences between actual and expected
performance of the receivables will occur and may cause fluctuations in our net income. The expected cash flows are based on managements estimates of interest rates, default rates, payment rates, new purchases, costs of funds paid to investors
in the securitizations, servicing costs, discount rates and required amortization payments. These estimates are based on a variety of factors, many of which are not within our control. As a result, these estimates will differ from actual
performance.

Increases in expected losses and delinquencies may prevent us from continuing to securitize receivables in the future
on similar terms. Greater than expected delinquencies and losses also could impact our ability to complete other securitization transactions on acceptable terms or at all, thereby decreasing our liquidity and forcing us to either decrease or
stop our growth or rely on alternative, and potentially more expensive, funding sources if even available.

Increased utilization of
existing credit lines by cardholders would require us to establish additional securitization facilities or curtail credit lines. Our existing commitments to extend credit to cardholders exceed our available securitization facilities. If all
of our cardholders were to use their entire lines of credit at the same time, we would not have sufficient capacity to fund card use. However, in that event, we could either reduce our cardholders available credit lines or establish additional
securitization facilities. This would subject us to several of the other risks that we have described in this section.

Increases
beyond expected losses and delinquencies may cause us to incur losses on our retained interests. If the actual amounts of delinquencies and losses that occur in our securitized receivables are greater than our expectations, the value of our
retained interests in the securitization transactions will decrease. Since we derive a portion of our income from these retained interests, higher than expected rates of delinquency and loss could cause our net income to be lower than expected. In
addition, under the terms of our securitizations agreements, levels of loss and delinquency could result in us being required to repay our securitization investors earlier than expected, reducing funds available to us for future growth.

Our portfolio of receivables is not diversified and originates from customers whose creditworthiness is considered sub-prime. We obtain
the receivables that we securitize in one of two wayswe either originate receivables or purchase receivables from other credit card issuers. In either case, substantially all of our securitized receivables originate from sub-prime borrowers.
Our reliance on sub-prime receivables has in the past (and may in the future) negatively impacted our performance. For example, in the fourth quarter of 2001, we suffered a substantial loss after we increased our discount rate to reflect the higher
rate of return required by investors in sub-prime markets. Because our receivables portfolios are all of substantially the same character (i.e., sub-prime), the increased discount rate resulted in a decrease in the value of our retained
interests in our securitized receivables portfolios. These losses might have been mitigated had our portfolios consisted of higher-grade receivables in addition to our sub-prime receivables. Because our portfolios are undiversified, negative market
forces have the potential to cause a widespread adverse impact. We have no immediate plans to issue or acquire significant receivables of a higher quality.

Seasonal consumer spending may result in fluctuations in our net income. Our quarterly income may substantially fluctuate as a result of seasonal consumer spending. In particular, our customers may
charge more and carry higher balances during the year-end holiday season and during the late summer vacation and back-to-school period, resulting in corresponding increases in the receivables we manage and subsequently securitize during those
periods.

Increases in interest rates will increase our cost of funds and may reduce the payment performance of our
customers. Increases in interest rates will increase our cost of funds, which could significantly affect our results of operations and financial condition. Our credit card accounts have variable interest rates. Significant increases in these
variable interest rates may reduce the payment performance of our customers.

Due to the lack of historical experience with Internet
customers, we may not be able to successfully target these customers or evaluate their creditworthiness. There is less historical experience with respect to the credit risk and performance of customers acquired over the Internet. As part of
our growth strategy, we are expanding our origination of accounts over the Internet; however, we may not be able to successfully target and evaluate the creditworthiness of these potential customers. Therefore, we may encounter difficulties managing
the expected delinquencies and losses and appropriately pricing our products.

We Are Substantially Dependent Upon Securitizations and Other Borrowed
Funds in Order to Fund the Receivables That We Originate or Purchase.

All of our securitization facilities are of finite duration (and
ultimately will need to be extended or replaced) and contain conditions that must be fulfilled in order for funding to be available. Although our primary credit card receivables facility with Merrill Lynch alleviates for the foreseeable future our
principal exposure to advance rate fluctuations, in the event that future advance rates (i.e., the percentage on a dollar of receivables that lenders will lend us) for securitizations are reduced, investors in securitizations require a greater rate
of return, we fail to meet the requirements for continued funding or



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securitizations otherwise become unavailable to us, we may not be able to maintain or grow our base of receivables or it
may be more expensive for us to do so. In addition, because of advance rate limitations, we retain subordinate interests in our securitizations, the retained interests, that must be funded through profitable operations, equity raised
from third parties or funds borrowed elsewhere. The cost and availability of equity and borrowed funds is dependent upon our financial performance, the performance of our industry generally and general economic and market conditions, and has at
times been both expensive and difficult to obtain. Some of these concerns are discussed more fully below.

Our growth is dependent on
our ability to add new securitization facilities. We finance most of our receivables through securitizations. To the extent we grow our receivables significantly, our cash requirements are likely to exceed the amount of cash we generate from
operations, thus requiring us to add new securitization facilities. Our historic and projected performance impact whether, on what terms and at what cost we can sell interests in our securitizations. If additional securitization facilities are not
available on terms we consider acceptable, or if existing securitization facilities are not renewed on terms as favorable as we have now or are not renewed at all, we may not be able to grow.

As our securitization facilities mature, they will be required to accumulate cash that therefore will not be available for operations.
Repayment for our securitization facilities begins as early as one year prior to their maturity dates. Once repayment begins and until the facility is paid, payments from customers on receivables are accumulated to repay the investors and are no
longer reinvested in new receivables. When a securitization facility matures, the underlying trust continues to own the receivables and effectively the maturing facility maintains its priority in its right to payments following collections on the
underlying receivables until it is repaid in full. As a result, new purchases need to be funded using debt, equity or a replacement facility subordinate to the maturing facilitys interest in the underlying receivables. Although this
subordination historically has not made it more difficult to obtain replacement facilities, it may do so in the future. If our securitization facilities begin to accumulate cash and we also are unable to obtain additional sources of liquidity, such
as debt, equity or new securitization facilities that are structurally subordinate to the facilities accumulating cash, we may be forced to prohibit new purchases in some or all of our accounts in order to significantly reduce our need for any
additional cash.

The documents under which the securitization facilities are established provide that, upon the occurrence of certain
adverse events known as early redemption events, the timing of payments to the investors could be accelerated. Early redemption events include portfolio performance triggers, the termination of the affinity agreement with Columbus Bank and Trust
Company, which we refer to as CB&T, breach of certain representations, warranties and covenants, insolvency or receivership, servicer defaults, and may include the occurrence of an early redemption event with respect to another securitization
transaction. In the Merrill Lynch facility, an early redemption event also may be triggered based on a total consolidated equity test or a change of control in CompuCredit. If an early redemption event occurs, principal payments would be made to
investors to reduce their interests in our securitizations. As investors interests in our securitizations decrease, our liquidity would be negatively impacted and our financial results may suffer. We would need to obtain alternative sources of
funding, and there is no certainty that we would be able to do so.

We may be unable to obtain capital from third parties needed to
fund our existing securitizations or may be forced to rely on more expensive funding sources. We need equity or debt capital to fund our retained interests in our securitizations. Investors should be aware of our dependence on third parties
for funding and our exposure to increases in costs for that funding. External factors, including the general economy, impact our ability to obtain funds. For instance, in late 2001, we needed additional liquidity to fund our operations and the
growth in our retained interests, and we had a difficult time obtaining the needed cash. If in the future we need to raise cash by issuing additional debt or equity or by selling a portion of our retained interests, there is no certainty that we
will be able to do so or that we will be able to do so on favorable terms. Our ability to raise cash will depend on factors such as our performance and creditworthiness, the performance of our industry, the performance of issuers of other non-credit
card-based asset backed securities and the general economy.

The timing and volume of securitizations may cause fluctuations in
quarterly income. Fluctuations in the timing or the volume of receivables securitized will cause fluctuations in our quarterly income. Factors that affect the timing or volume of our securitizations include the growth in our receivables,
market conditions and the approval by all parties of the terms of the securitization.

The performance of our competitors may impact
the costs of our securitization. Investors in our securitizations compare us to other sub-prime credit card issuers and, to some degree, our performance is tied to many of the factors that impact their performance. Generally speaking, our
securitizations investors also invest in our competitors securitizations. These investors broadly invest in receivables, and when they evaluate their investments, they typically do so on the basis of overall industry performance. Thus, when
our competitors perform poorly, we typically experience negative investor sentiment, and the investors in our securitizations require greater returns, particularly with respect to subordinated interests. In the fourth quarter of 2001, for instance,
investors demanded unprecedented returns. In the event that investors require



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higher returns and we sell our retained interests at that time, the total return to the buyer may be greater than the
discount rate we are using to value the retained interests in our financial statements. This would result in a loss for us at the time of the sale as the total proceeds from the sale would be less than the carrying amount of the retained interests
in our financial statements. We also might increase the discount rate used to value all of our other retained interests, which also would result in further losses. Conversely, if we sold our retained interests for a total return to the investor that
was less than our current discount rate, we would record income from the sale, and we would potentially decrease the rate used to value all of our other retained interests, which would result in additional income.

We may be required to pay to investors in our securitizations an amount equal to the amount of securitized receivables if representations and
warranties made to us by sellers of the receivables are inaccurate. The representations and warranties made to us by sellers of receivables we purchased may be inaccurate. We rely on these representations and warranties when we securitize
these purchased receivables. In securitization transactions, we make representations and warranties to investors and, generally speaking, if there is a breach of our representations and warranties, then under the terms of the applicable investment
agreement we could be required to pay the investors the amount of the non-compliant receivables. Thus, our reliance on a representation or warranty of a receivables seller, which proves to be false and causes a breach of one of our representations
or warranties, could subject us to a potentially costly liability.

Our Financial Performance Is, in Part, a Function of the Aggregate Amount of
Receivables That Are Outstanding.

The aggregate amount of outstanding receivables is a function of many factors including purchase
rates, payment rates, interest rates, seasonality, general economic conditions, competition from other credit card issuers and other sources of consumer financing, access to funding as noted above and the success of our marketing efforts. To the
extent that we have over estimated the size or growth of our receivables, in all likelihood we have over estimated our future financial performance.

Intense competition for customers may cause us to lose receivables to competitors. We may lose receivables to competitors that offer lower interest rates and fees or other more attractive terms or
features. We believe that customers choose credit card issuers and other lenders largely on the basis of interest rates, fees, credit limits and other product features. For this reason, customer loyalty is often limited. Our future growth depends
largely upon the success of our marketing programs and strategies. Our credit card business competes with national, regional and local bank card issuers and with other general purpose credit card issuers, including American Express®, Discover®Network and issuers of Visa®and MasterCard®credit cards. Our other businesses have substantial competitors as well. Some of these competitors already may use or may begin using many of the programs and strategies that we have used to attract
new accounts. In addition, many of our competitors are substantially larger than we are and have greater financial resources. Further, the Gramm-Leach-Bliley Act of 1999, which permits the affiliation of commercial banks, insurance companies and
securities firms, may increase the level of competition in the financial services market, including the credit card business.

We may
be unable to sustain and manage our growth. We may experience fluctuations in net income or sustain net losses if we are not able to sustain or effectively manage our growth. Growth is a product of a combination of factors, many of which are
not in our control. Factors include:



| |  |  | growth in both existing and new receivables;
| | - |  | --------------------------------------------



| |  |  | the degree to which we lose receivables to competitors;
| | - |  | -------------------------------------------------------



| |  |  | levels of delinquencies and charge offs;
| | - |  | ----------------------------------------



| |  |  | the availability of funding, including securitizations, on favorable terms;
| | - |  | ---------------------------------------------------------------------------



| |  |  | our ability to sell retained interests on favorable terms;
| | - |  | ----------------------------------------------------------



| |  |  | our ability to attract new customers through originations or portfolio purchases;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the level of costs of soliciting new customers;
| | - |  | -----------------------------------------------



| |  |  | the level of response to our solicitations;
| | - |  | -------------------------------------------



| |  |  | our ability to employ and train new personnel;
| | - |  | ----------------------------------------------



| |  |  | our ability to maintain adequate management systems, collection procedures, internal controls and automated systems; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | general economic and other factors beyond our control.
| | - |  | ------------------------------------------------------

Our decisions regarding marketing can have a significant impact on our growth. We can increase or decrease the size of our outstanding receivables balances by increasing or decreasing our marketing efforts. Marketing is
expensive, and during periods when we have less liquidity than we like or when prospects for continued liquidity in the future do not look



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promising, we may decide to limit our marketing and thereby our growth. We decreased our marketing during 2003, although
we increased our marketing in 2004 and 2005 because of our improved access to capital attributable to our Merrill Lynch securitization facility.

Our operating expenses and our ability to effectively service our accounts are dependent on our ability to estimate the future size and general growth rate of the portfolio. One of our servicing agreements causes us to make
additional payments if we overestimate the size or growth of our business. These additional payments compensate the servicer for increased staffing expenses it incurs in anticipation of our growth. If we grow more slowly than anticipated, we still
may have higher servicing expenses than we actually need, thus reducing our net income.

We Operate in a Heavily Regulated Industry.

Changes in bankruptcy, privacy or other consumer protection laws, or to the prevailing interpretation thereof, may expose us to litigation, adversely
affect our ability to collect account balances in connection with our traditional credit card business, our debt collection subsidiarys charged-off receivables operations, auto finance and micro-loan activities, or otherwise adversely affect
our operations. Similarly, regulatory changes could adversely affect our ability or willingness to market credit cards and other products and services to our customers. The accounting rules that govern our business are exceedingly complex, difficult
to apply and in a state of flux. As a result, how we value our receivables and otherwise account for our business (including whether we consolidate our securitizations) is subject to change depending upon the interpretation of, and changes in, those
rules. Some of these issues are discussed more fully below.

Reviews and enforcement actions by regulatory authorities under banking
and consumer protection laws and regulations may result in changes to our business practices, may make collection of account balances more difficult or may expose us to the risk of fines, restitution and litigation.Our operations and the
operations of the issuing banks through which we originate credit products are subject to the jurisdiction of federal, state and local government authorities, including the SEC, the Federal Deposit Insurance Corporation (FDIC), the
Office of the Comptroller of the Currency, state regulators having jurisdiction over financial institutions and debt origination and debt collection and state attorneys general. Our business practices, including the terms of our products and our
marketing, servicing and collection practices, are subject to both periodic and special reviews by these regulatory and enforcement authorities. These reviews can range from the investigations of specific consumer complaints or concerns to broader
inquiries into our practices generally. If as part of these reviews the regulatory authorities conclude that we are not complying with applicable law, they could request or impose a wide range of remedies including requiring changes in advertising
and collection practices, changes in the terms of our products (such as decreases in interest rates or fees), the imposition of fines or penalties, or the paying of restitution or the taking of other remedial action with respect to affected
customers. They also could require us to stop offering some of our products, either nationally or in selected states. To the extent that these remedies are imposed on the issuing banks through which we originate credit products, we generally are
responsible for the remedies as a result of our indemnification obligations with those banks. Furthermore, negative publicity relating to the announcement of any specific inquiry or investigation could hurt our ability to conduct business with
various industry participants or attract new accounts and could negatively affect our stock price, which would adversely affect our ability to raise additional capital and raise our costs of doing business.

As discussed in more detail below, in March 2006, one of our subsidiaries stopped processing and servicing micro-loans in North Carolina in settlement of
a review by the North Carolina Attorney General, and we are terminating our processing and servicing of micro-loans for third-party banks in three other states in response to a position taken with respect to banks generally by the FDIC.

In June 2006, we entered into an assurance agreement with the New York Attorney General in order to resolve an inquiry into our marketing and other
materials and our servicing and collection practices, principally as a result of New York Personal Property Law Section 413. Pursuant to this agreement, we agreed to pay a $0.5 million civil penalty to the State of New York and to refund
certain fees to New York cardholders, which are expected to result in cash payments of no more than $2.0 million and a charge against the entire $3.2 million liability that we previously accrued for this purpose. In addition, we assured the New York
Attorney General that we would not engage in certain marketing, billing, servicing and collection practices, a number of which we previously had discontinued. We also are in the process of responding to an investigation by the FDIC into our
marketing and other materials and our servicing and collection practices. It is too early in the investigation to predict its outcome. If any additional deficiencies or violations of law or regulations are identified by us or asserted by any
regulator, or if the FDIC or any other regulator requires us to change any of our practices, as a result of this or other reviews or investigations, there can be no assurance that the correction of such deficiencies or violations, or the making of
such changes, would not have a material adverse effect on our financial condition, results of operations or business.



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In addition, whether or not we modify our practices when a regulatory or enforcement authority requests
or requires that we do so, there is a risk that we or other industry participants may be named as defendants in litigation involving alleged violations of federal and state laws and regulations, including consumer protection laws. Any failure to
comply with legal requirements by us or the issuing banks through which we originate credit products in connection with the issuance of those products, or by us or our agents as the servicer of our accounts, could significantly impair our ability to
collect the full amount of the account balances. The institution of any litigation of this nature, or any judgment against us or any other industry participant in any litigation of this nature, could adversely affect our business and financial
condition in a variety of ways.

Increases in required minimum payment levels could impact our business adversely. Recently,
regulators of credit card issuers have requested or required that the issuers increase their minimum monthly payment requirements to prevent so-called negative amortization, in which the monthly minimum payment is not sufficient to
reduce the outstanding balance even if new purchases are not made. This can be caused by, among other things, the imposition of over-limit, late and other fees. We request a minimum payment from our credit cardholders that is sufficient to cover
over-limit, late and other fees plus 3% or 4% (depending upon the credit card product) of their outstanding balancea minimum payment level that is designed to prevent negative amortization. However, we have followed a more consumer friendly
practice of not treating cardholders as delinquent (with commensurate adverse credit agency reporting) provided they make a minimum payment of only 3% or 4% (depending on the credit card product) of their outstanding balance (i.e., exclusive of the
requested over-limit, late and other fees). Because of this practice, as of June 30, 2006, approximately 1.6% of our accounts (representing approximately 2.9% of our receivables) were experiencing negative amortizations. In anticipation of a
request by regulators or any of our issuing banks that we modify our minimum payment practices, we have commenced the process of testing alternative minimum payment, fee and other credit terms designed to prevent negative amortization. This testing
will take one year or more to complete, and at the end of the testing we expect to change some of our practices. We have not, however, made any assessment of the impact of any changes on our business, although changes could adversely impact our
delinquency and charge off statistics and the amounts ultimately collected from cardholders.

Adverse regulatory action with respect
to issuing banks could adversely impact our business. It is possible that a regulatory position or action taken with respect to any of the issuing banks through which we originate credit products or for whom we service receivables, might
result in the banks inability or unwillingness to originate credit products on our behalf or in partnership with us. For instance, in February 2006 the FDIC effectively asked insured financial institutions not to issue cash advance and
installment micro-loans through third-party servicers. As a result of this request, the issuing bank for which we provide services in four states stopped making new loans. In the future, regulators may find other aspects of the products that we
originate or service objectionable, including, for instance, the terms of the credit offerings (particularly for our high fee products), the manner in which we market them or our servicing and collection practices. We are entirely dependent in our
issuing relationships with these institutions, and their regulators could at any time limit their ability to issue some or all products on our behalf, or that we service on their behalf, or to modify those products significantly. Any significant
interruption of those relationships would result in our being unable to originate new receivables and other credit products, which would have a materially adverse impact on our business.

Changes to consumer protection laws or changes in their interpretation may impede collection efforts or otherwise adversely impact our business
practices. Federal and state consumer protection laws regulate the creation and enforcement of consumer credit card receivables and other loans. As an originator and servicer of sub-prime receivables, we typically charge higher interest
rates and fees than lenders serving consumers with higher credit scores. Sub-prime lenders are commonly the target of legislation (and revised legislative interpretations) intended to prohibit or curtail these and other industry-standard practices
as well as non-standard practices. Among others, changes in the consumer protection laws could result in the following:



| |  |  | receivables not originated in compliance with law (or revised interpretations) could become unenforceable and uncollectible under their terms against the obligors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be required to refund previously collected amounts;
| | - |  | ----------------------------------------------------------



| |  |  | certain of our collection methods could be prohibited, forcing us to revise our practices or adopt more costly or less effective practices;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | federal and state laws may limit our ability to recover on charged-off receivables regardless of any act or omission on our part;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | reductions in statutory limits for fees and finance charges could cause us to reduce our fees and charges;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | some of our products and services could be banned in certain states or at the federal level; for example, in 2004 the State of Georgia made certain micro-loan practices illegal and
regulatory action and litigation has been brought in North Carolina alleging that certain micro-loan practices are prohibited in that state; and
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| |  |  | federal or state bankruptcy or debtor relief laws could offer additional protections to customers seeking bankruptcy protection, providing a court greater leeway to reduce or
discharge amounts owed to us.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Accordingly, our business is always subject to changes in the regulatory environment. Changes
or additions to the consumer protection laws and related regulations, or to the prevailing interpretations thereof, could invalidate or call into question a number of our existing products, services and business practices, including our credit card
origination, charged-off receivable collection, auto finance and micro-loan activities. Any material regulatory developments could adversely impact our results from operations.

Changes in bankruptcy laws may have an adverse impact on our performance. Effective October 17, 2005, the federal bankruptcy code
was amended in several respects. One of the changes made it substantially more difficult for individuals to obtain a complete release from their debts through a bankruptcy filing. As a result, immediately prior to the effective date of the
amendments there was a substantial increase in bankruptcy filings by individuals. While much of the impact of this particular law change appears to have been simply to accelerate the bankruptcy filings by individuals who otherwise would have filed
in due course and while this particular law may have ongoing future benefits to us through potential reductions in future bankruptcy filings, other future bankruptcy law changes could potentially have a materially adverse effect on our business.

The Retail Micro-Loans segment of our business operates in an increasingly hostile regulatory environment. Most states have
specific laws regulating micro-loan activities and practices (one form of these activities is sometimes referred to as payday lending). Moreover, during the last few years, legislation has been adopted in some states that prohibits or
severely restricts micro-loan cash advance services. For example, in May 2004, a new law became effective in Georgia that effectively prohibits certain micro-loan practices in the state. Several other state legislatures have introduced bills to
restrict or prohibit cash advance micro-loans. In addition, Mississippi and Arizona have sunset provisions in their laws permitting micro-loans that require renewal of the laws by the state legislatures at periodic intervals. Although
states provide the primary regulatory framework under which we conduct our micro-loan services, certain federal laws also impact our business. In March 2005 the FDIC issued guidance limiting the frequency of borrower usage of cash advance
micro-loans offered by FDIC-supervised institutions and the period a customer may have cash advance micro-loans outstanding from any lender to three months during the previous 12-month period. Subsequently, in February 2006, the FDIC effectively
asked FDIC-insured financial institutions to cease cash advance and installment micro-loan activities conducted through a processing and servicing agent such as us. Moreover, future laws or regulations (at the state, federal or local level)
prohibiting micro-loan services or making them unprofitable could be passed at any time or existing micro-loan laws could expire or be amended, any of which could have a material adverse effect on our business, results of operations and financial
condition.

Additionally, state attorneys general, banking regulators, and others continue to scrutinize the micro-loan industry and may
take actions that could require us to cease or suspend operations in their respective states. For example, one of our subsidiaries recently agreed with the Attorney General of the State of North Carolina to stop servicing micro-loans for third-party
banks. Also, a group of plaintiffs brought a series of putative class action lawsuits in North Carolina claiming, among other things, that the cash advance micro-loan activities of the defendants violate numerous North Carolina consumer protection
laws. The lawsuits seek various remedies including treble damages. One of these lawsuits is pending against CompuCredit and five of our subsidiaries. If these cases are determined adversely to us, there could be significant consequences to us,
including the payment of monetary damages. In the future, we also might voluntarily (or with the encouragement of a regulator) withdraw particular products from particulars states, which could have a similar effect.

Negative publicity may impair acceptance of our products. Critics of sub-prime credit and micro-loan providers have in the past focused on
marketing practices that they claim encourage consumers to borrow more money than they should, as well as on pricing practices that they claim are either confusing or result in prices that are too high. Consumer groups, Internet chat sites and media
reports frequently characterize sub-prime lenders as predatory or abusive toward consumers and may misinform consumers regarding their rights. If these negative characterizations and misinformation become widely accepted by consumers, demand for our
products and services could be adversely impacted. Increased criticism of the industry or criticism of us in the future could hurt customer acceptance of our products or lead to changes in the law or regulatory environment, either of which would
significantly harm our business.

We Routinely Explore Various Opportunities to Grow Our Business, to Make Investments and to Purchase and Sell Assets.

We routinely consider acquisitions of, or investments in, portfolios and other businesses as well as the sale of portfolios and
portions of our business. There are a number of risks attendant to any acquisition, including the possibility that we will overvalue the assets to be purchased, that we will not be able to successfully integrate the acquired business or assets and
that we will not be able to produce the expected level of profitability from the acquired business or assets. Similarly, there are a number of risks attendant to sales, including the possibility that we will undervalue the assets to be sold. As a
result, the impact of any acquisition or sale on our future performance may not be as favorable as expected and actually may be adverse.



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Portfolio purchases may cause fluctuations in reported managed receivables data, which may reduce the
usefulness of historical managed loan data in evaluating our business. Our reported managed receivables data may fluctuate substantially from quarter to quarter as a result of recent and future portfolio acquisitions. As of December 31, 2005,
portfolio acquisitions account for 30.4% of our total portfolio based on our ownership percentages.

Receivables included in purchased
portfolios are likely to have been originated using credit criteria different from our criteria. As a result, some of these receivables have a different credit quality than receivables we originated. Receivables included in any particular purchased
portfolio may have significantly different delinquency rates and charge off rates than the receivables previously originated and purchased by us. These receivables also may earn different interest rates and fees as compared to other similar
receivables in our receivables portfolio. These variables could cause our reported managed receivables data to fluctuate substantially in future periods making the evaluation of our business more difficult.

Any acquisition or investment that we make, including our recent acquisition of Wells Fargo Financials CAR business unit and our pending
acquisition of CardWorks, Inc., will involve risks different from and in addition to the risks to which our business is currently exposed. These include the risks that we will not be able to successfully integrate and operate new businesses,
that we will have to incur substantial indebtedness and increase our leverage in order to pay for the acquisitions, that we will be exposed to, and have to comply with, different regulatory regimes and that we will not be able to apply our
traditional analytical framework (which is what we expect to be able to do) in a successful and value-enhancing manner.

We recently
entered the automobile lending business.On April 1, 2005, we acquired Wells Fargo Financials CAR business unit. We are operating these assets in forty-five states through twelve branches, three regional processing centers and one
national collection center based in Lake Mary, Florida under the name CAR Financial Services, Inc. Automobile lending is a new business for us, and we expect to expand further in this business over time. As a new business, we may not be able to
integrate or manage the business effectively. In addition, automobile lending exposes us to a range of risks to which we previously have not been exposed, including the regulatory scheme that governs installment loans and those attendant to relying
upon automobiles and their liquidation value as collateral. In addition, this business acquires loans on a wholesale basis from used car dealers, for which we will be relying upon the legal compliance and credit determinations by those dealers.

Other Risks of Our Business

Unless we obtain a bank charter, we cannot issue credit cards other than through agreements with banks. Because we do not have a bank charter, we currently cannot issue credit cards other than through agreements with banks.
Previously we applied for permission to acquire a bank and our application was denied. Unless we obtain a bank or credit card bank charter, we will continue to rely upon banking relationships to provide for the issuance of credit cards to our
customers. Even if we obtain a bank charter, there may be restrictions on the types of credit that it may extend. Our primary issuing agreement is with CB&T and is scheduled to expire on March 31, 2009. If we are unable to execute a new
agreement with CB&T at the expiration of the current agreement, or if our existing or new agreement with CB&T were terminated or otherwise disrupted, there is a risk that we would not be able to enter into an agreement with an alternate
provider on terms that we consider favorable or in a timely manner without disruption of our business.

We may not be able to
purchase charged-off receivables at sufficiently favorable prices or terms for our debt collection operations to be successful. The charged-off receivables that are acquired and serviced by Jefferson Capital Systems, LLC, our debt collection
subsidiary, or sold to third parties pursuant to forward flow contracts have been deemed uncollectible and written off by the originators. Jefferson Capital seeks to purchase charged-off receivables portfolios where our projected collections or
purchase price received for the sale of such charged-off receivables will exceed our acquisition costs. Accordingly, factors causing the acquisition price of targeted portfolios to increase could reduce the ratio of collections (or purchase price
received) to acquisitions costs for a given portfolio, and thereby negatively affect Jefferson Capitals profitability. The availability of charged-off receivables portfolios at favorable prices and on favorable terms depends on a number of
factors, including the continuation of the current growth and charge off trends in consumer receivables, our ability to develop and maintain long-term relationships with key charged-off receivable sellers, our ability to obtain adequate data to
appropriately evaluate the collectibility of portfolios and competitive factors affecting potential purchasers and sellers of charged-off receivables, including pricing pressures, which may increase the cost to us of acquiring portfolios of
charged-off receivables and reduce our return on such portfolios.

Additionally, sellers of charged-off receivables generally make numerous
attempts to recover on their non-performing receivables, often using a combination of their in-house collection and legal departments as well as third-party collection agencies. Charged-off receivables are difficult to collect, and we may not be
successful in collecting amounts sufficient to cover the costs associated with purchasing the receivables and funding our Jefferson Capital operations.



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The analytical model we use to project credit quality may prove to be inaccurate. We assess
credit quality using an analytical model that we believe predicts the likelihood of payment more accurately than traditional credit scoring models. For instance, we have identified factors (such as delinquencies, defaults and bankruptcies) that
under some circumstances we weight differently than do other credit providers. We believe our analysis enables us to better identify consumers within the underserved market who are likely to be better credit risks than otherwise would be expected.
Similarly, we apply our analytical model to entire portfolios in order to identify those that may be more valuable than the seller or other potential purchasers might recognize. There can be no assurance, however, that we will be able to achieve the
collections forecasted by our analytical model. If any of our assumptions underlying our model proves materially inaccurate or changes unexpectedly, we may not be able to achieve our expected levels of collection, and our revenues will be reduced,
which would result in a reduction of our earnings.

Because we outsource account-processing functions that are integral to our
business, any disruption or termination of that outsourcing relationship could harm our business. We outsource account and payment processing pursuant to agreements with CB&T and its affiliates. In 2005, we paid CB&T and its
affiliates $32.0 million for these services. If these agreements were not renewed or were terminated or the services provided to us otherwise disrupted, we would have to obtain these services from an alternative provider. There is a risk that
we would not be able to enter into a similar agreement with an alternate provider on terms that we consider favorable or in a timely manner without disruption of our business.

We rely on Visionary Systems, Inc. for software design and support, and any disruption of our relationship with Visionary Systems could
negatively impact our business. During 2005, we paid Visionary Systems $6.1 million for software development, account origination and consulting services. In the event that Visionary Systems no longer provides us with software and
support, our business would be negatively impacted until we retained replacement vendors. We believe that a number of vendors are qualified to perform the services performed by Visionary Systems and believe that this impact would be only temporary.

If we obtain a bank charter, any changes in applicable state or federal laws could adversely affect our business.
CardWorks, Inc. owns a bank, and as part of our proposed acquisition of CardWorks, Inc. we have applied for permission to acquire that bank. We may or may not receive permission to acquire that bank, and in the future we may apply for
other charters as well. If we obtain a bank or credit card bank charter, we will be subject to the various state and federal regulations generally applicable to similar institutions, including restrictions on the ability of the banking subsidiary to
pay dividends to us. We are unable to predict the effect of any future changes of applicable state and federal laws or regulations, but such changes could adversely affect the banks business and operations.

If we ever consolidate the entities that hold our receivables, the changes to our financial statements are likely to be significant. When
we securitize receivables, they are owned by special purpose entities that are not consolidated with us for financial reporting purposes. The rules governing whether these entities are consolidated are complex and evolving. These rules at some point
could be changed or interpreted in a manner that requires us to consolidate these entities. In addition, we might at some point modify how we securitize receivables, or propose modifications to existing securitization facilities, such that the
consolidation of these entities could be required. If this occurred, we would include the receivables as assets on our balance sheet and also would include a loan loss reserve. Similarly, we no longer would include the corresponding retained
interests as assets. There also would be significant changes to our statements of operations and cash flows. The net effect of consolidation would be dependent upon the amount and nature of the receivables at the time they were consolidated, and
although it is difficult to predict the net effect of consolidation, it is likely to be material.

Internet security breaches could
damage our reputation and business.Internet security breaches could damage our reputation and business. As part of our growth strategy, we may expand our origination of credit card accounts over the Internet. The secure transmission of
confidential information over the Internet is essential to maintaining consumer confidence in our products and services offered online. Advances in computer capabilities, new discoveries or other developments could result in a compromise or breach
of the technology used by us to protect customer application and transaction data transmitted over the Internet. Security breaches could damage our reputation and expose us to a risk of loss or litigation. Moreover, consumers generally are concerned
with security and privacy on the Internet, and any publicized security problems could inhibit the growth of the Internet as a means of conducting commercial transactions. Our ability to solicit new account holders over the Internet would be severely
impeded if consumers become unwilling to transmit confidential information online.

Investments that we make in the securities of
others may be more risky and volatile than similar assets owned by us. From time-to-time we purchase debt and securities of others, principally those issued by asset-backed securitization trusts (e.g., notes secured or
backed by pools of assets) that represent sub-prime credit risks of individuals. These securities in



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many cases are junior, including below investment grade, traunches of securities issued by the trusts. The assets
underlying these securities are not originated by us and, accordingly, may not meet the underwriting standards that we follow in originating receivables. Further, we do not have control over the management of the underlying assets and,
similarly, they may not be managed as effectively as we would manage similar assets. As a result, the securities in which we invest may carry higher risks, including risks of higher delinquencies and charge offs, risks of covenant violations
and risks of value impairment due to the claims of more senior securities issued by the trusts, than similar assets originated and owned by us. These higher risks can cause much greater valuation volatility for these securities than we
typically have experienced and would expect to experience on our holdings of securities underlying the trusts that we service. And although these securities generally are traded in an active secondary market, valuation volatility also can be
expected to result from liquidity needs that we might have in the future, including any need that we may have for quick liquidity or to meet margin requirements related to our investments in these securities should their prices decline. In turn,
this could result in steep and immediate impairments in the values of the securities as presented within our financial statements and could cause our financial position and results of operations to deteriorate, possibly materially. At June 30,
2006, we had investments in the debt and similar securities of others of $60.5 million.

Risks Relating to an Investment in Our Common Stock

The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell your shares of our
common stock when you want or at prices you find attractive. The price of our common stock on the NASDAQ Global Market constantly changes. We expect that the market price of our common stock will continue to fluctuate. The market price
of our common stock may fluctuate in response to numerous factors, many of which are beyond our control. These factors include the following:



| |  |  | actual or anticipated fluctuations in our operating results;
| | - |  | ------------------------------------------------------------



| |  |  | changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the operating and stock performance of our competitors;
| | - |  | -------------------------------------------------------



| |  |  | announcements by us or our competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in interest rates;
| | - |  | --------------------------



| |  |  | the announcement of enforcement actions or investigations against us or our competitors or other negative publicity relating to us or our industry;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in accounting principles generally accepted in the United States of America (GAAP), laws, regulations or the interpretations thereof that affect our various
business activities and segments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general domestic or international economic, market and political conditions;
| | - |  | ----------------------------------------------------------------------------



| |  |  | additions or departures of key personnel; and
| | - |  | ---------------------------------------------



| |  |  | future sales of our common stock and the share lending agreement.
| | - |  | -----------------------------------------------------------------

In addition, the stock markets from time to time experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating performance.

Future sales of our common stock or equity-related
securities in the public market, including sales of our common stock pursuant to share lending agreements or in short sales transactions by purchasers of convertible notes securities, could adversely affect the trading price of our common stock and
our ability to raise funds in new stock offerings.Sales of significant amounts of our common stock or equity-related securities in the public market, including sales pursuant to share lending agreements, or the perception that such sales
will occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. No prediction can be made as to the effect, if any, that
future sales of shares of common stock or the availability of shares of common stock for future sale, including sales of our common stock in short sales transactions by purchasers of the notes, will have on the trading price of our common stock.

We have the ability to issue preferred shares without shareholder approval. Our common shares may be subordinate to
classes of preferred shares issued in the future in the payment of dividends and other distributions made with respect to common shares, including distributions upon liquidation or dissolution. Our articles of incorporation permit our board of
directors to issue preferred shares without first obtaining shareholder approval. If we issued preferred shares, these additional securities may have dividend or liquidation preferences senior to the common shares. If we issue convertible preferred
shares, a subsequent conversion may dilute the current common shareholders interest.



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Our executive officers, directors and parties related to them, in the aggregate, control a majority
of our voting stock and may have the ability to control matters requiring shareholder approval. Our executive officers, directors and parties related to them own a large enough stake in us to have an influence on, if not control of, the
matters presented to shareholders. As a result, these shareholders may have the ability to control matters requiring shareholder approval, including the election and removal of directors, the approval of significant corporate transactions, such as
any reclassification, reorganization, merger, consolidation or sale of all or substantially all of our assets, and the control of our management and affairs. Accordingly, this concentration of ownership may have the effect of delaying, deferring or
preventing a change of control of us, impede a merger, consolidation, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn
could have an adverse effect on the market price of our common stock.

Note Regarding Risk Factors

The risk factors presented above are all of the ones that we currently consider material. However, they are not the only ones facing our company.
Additional risks not presently known to us, or which we currently consider immaterial, may also adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that
we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make.
In such case, the trading price of our common stock could decline, and you could lose part or all of your investment. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our annual shareholders meeting
on May 9, 2006. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934, and there was no solicitation in opposition to the boards solicitation. The matters were submitted to a
vote and the results thereof are set forth below.



| | (1) | Proposal to elect nine directors to hold office for a term of one year and until their respective successors are duly elected and qualified.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------



|                       |  |            |  |          
|---------------------- |  | ---------- |  | ---------
|Nominee                |  | For        |  | Withheld 
|David G. Hanna         |  | 49,014,680 |  | 585,496  
|Richard W. Gilbert     |  | 49,185,997 |  | 414,179  
|Richard R. House, Jr.  |  | 41,376,000 |  | 8,224,176
|Gregory J. Corona      |  | 48,908,232 |  | 691,944  
|Frank J. Hanna, III    |  | 49,104,780 |  | 495,396  
|Deal W. Hudson         |  | 49,207,159 |  | 393,017  
|Mack F. Mattingly      |  | 49,427,404 |  | 172,772  
|Nicholas B. Paumgarten |  | 41,374,178 |  | 8,225,998
|Thomas G. Rosencrants  |  | 49,021,636 |  | 578,540  

ITEM 5. OTHER INFORMATION

None.



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ITEM 6. EXHIBITS



|              |  |                                                                                                                                                                                                                                                                               |  |                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                        |  | Incorporated by reference from CompuCredits SEC filings unless otherwise indicated:
|2.1           |  | Amendment No. 4 to Stock Purchase Agreement, dated as of May 18, 2006, by and between CardWorks, L.P. and Liberty Acquisition, Inc.                                                                                                                                           |  | May 22, 2006, Form 8-K, exhibit 2.1                                                 
|              |  |                                                                                                                                                                                                                                                                              
|2.2           |  | Amendment No. 5 to Stock Purchase Agreement, dated as of June 14, 2006, by and between CardWorks, L.P. and Liberty Acquisition, Inc.                                                                                                                                          |  | June 16, 2006, Form 8-K, exhibit 2.1                                                
|              |  |                                                                                                                                                                                                                                                                              
|2.3           |  | Amendment No. 6 to Stock Purchase Agreement, dated as of June 14, 2006, by and between CardWorks, L.P. and Liberty Acquisition, Inc.                                                                                                                                          |  | June 16, 2006, Form 8-K, exhibit 2.2                                                
|              |  |                                                                                                                                                                                                                                                                              
|2.4           |  | Amendment No. 7 to Stock Purchase Agreement, dated as of June 30, 2006, by and between CardWorks, L.P. and Liberty Acquisition, Inc.                                                                                                                                          |  | July 5, 2006, Form 8-K, exhibit 2.1                                                 
|              |  |                                                                                                                                                                                                                                                                              
|3.1           |  | Amended and Restated Bylaws of CompuCredit Corporation (As Amended Through May 9, 2006)                                                                                                                                                                                       |  | May 15, 2006, Form 8-K, exhibit 3.1                                                 
|              |  |                                                                                                                                                                                                                                                                              
|10.1          |  | Restricted Stock Agreement, dated May 9, 2006, between CompuCredit Corporation and Richard House                                                                                                                                                                              |  | May 15, 2006, Form 8-K, exhibit 10.1                                                
|              |  |                                                                                                                                                                                                                                                                              
|10.2          |  | Option Agreement, dated May 9, 2006, between CompuCredit Corporation and Richard House                                                                                                                                                                                        |  | May 15, 2006, Form 8-K, exhibit 10.2                                                
|              |  |                                                                                                                                                                                                                                                                              
|10.3          |  | Receivables Purchase Agreement for CompuCredit Credit Card Master Note Business Trust III, dated as of September 30, 2003, between Columbus Bank and Trust Company and CompuCredit
Corporation                                                                                |  | Filed herewith                                                                      
|              |  |                                                                                                                                                                                                                                                                              
|10.4          |  | First Amendment to the Receivables Purchase Agreement for CompuCredit Credit Card Master Note Business Trust III, dated as of March 10, 2006, between Columbus Bank and Trust Company and
CompuCredit Corporation                                                             |  | Filed herewith                                                                      
|              |  |                                                                                                                                                                                                                                                                              
|10.5          |  | Amended and Restated Receivables Purchase Agreement for CompuCredit Credit Card Master Note Business Trust III, dated as of January 3, 2005, as
amended and restated as of March 10, 2006, between CompuCredit Corporation and CompuCredit Funding Corp. III                  |  | Filed herewith                                                                      
|              |  |                                                                                                                                                                                                                                                                              
|10.6          |  | Master Indenture for CompuCredit Credit Card Master Note Business Trust III, dated as of March 10, 2006, among CompuCredit Credit Card Master Note Business Trust III, U.S. Bank National
Association and CompuCredit Corporation                                             |  | Filed herewith                                                                      
|              |  |                                                                                                                                                                                                                                                                              
|10.7          |  | Series 2006-One Supplement to Master Indenture for CompuCredit Credit Card Master Note Business Trust III, dated as of March 10, 2006, among CompuCredit Credit Card Master Note Business Trust
III, CompuCredit Corporation and U.S. Bank National Association               |  | Filed herewith                                                                      
|              |  |                                                                                                                                                                                                                                                                              
|10.8          |  | Transfer and Servicing Agreement for CompuCredit Credit Card Master Note Business Trust III, dated as March 10, 2006, among CompuCredit Funding Corp. III, CompuCredit Corporation, CompuCredit
Credit Card Master Note Business Trust III and U.S. Bank National Association |  | Filed herewith                                                                      
|              |  |                                                                                                                                                                                                                                                                              
|10.9          |  | Form of Note Purchase Agreement                                                                                                                                                                                                                                               |  | Filed herewith                                                                      
|              |  |                                                                                                                                                                                                                                                                              
|31.1          |  | Certification per Section 302 of the Sarbanes-Oxley Act of 2002 for David G. Hanna                                                                                                                                                                                            |  | Filed herewith                                                                      
|              |  |                                                                                                                                                                                                                                                                              
|31.2          |  | Certification per Section 302 of the Sarbanes-Oxley Act of 2002 for J.Paul Whitehead, III                                                                                                                                                                                     |  | Filed herewith                                                                      
|              |  |                                                                                                                                                                                                                                                                              
|32.1          |  | Certification per Section 906 of the Sarbanes-Oxley Act of 2002 for David G. Hanna and J.Paul Whitehead, III                                                                                                                                                                  |  | Filed herewith                                                                      



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|               |  |                         |  |                                                          
|-------------- |  | ----------------------- |  | ---------------------------------------------------------
|               |  | COMPUCREDIT CORPORATION
|               |  |                        
|August 2, 2006 |  | By                      |  | /s/ J.PAUL WHITEHEAD, III                                
|               |  |                         |  | J.Paul Whitehead, III                                    
|               |  |                         |  | Chief Financial Officer                                  
|               |  |                         |  | (duly authorized officer and principal financial officer)



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