SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


___________________________




FORM
10-Q


___________________________




For
the quarterly period ended September 30, 2008




of










COMPUCREDIT CORPORATION


a
Georgia Corporation


___________________________




IRS
Employer Identification No. 58-2336689




SEC
File Number 0-25751




Five
Concourse Parkway, Suite 400


Atlanta,
Georgia 30328


(770) 828-2000







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




CompuCredit
is an accelerated filer and is not a shell company.




As of
November 3, 2008, 47,998,215 shares of Common Stock, no par value, of
CompuCredit were outstanding. (This excludes 3,651,069 loaned shares to be
returned.)








COMPUCREDIT
CORPORATION


FORM 10-Q


TABLE OF CONTENTS


PagePART I.
      FINANCIAL INFORMATIONItem 1.
            Financial
      Statements (Unaudited)Condensed Consolidated Balance Sheets
            1Condensed Consolidated Statements of
    Operations
            2Condensed Consolidated Statement of Shareholders’
      Equity
            3Condensed Consolidated Statements of Comprehensive
      Loss
            4Condensed Consolidated Statements of Cash
      Flows
            5Notes to Condensed Consolidated Financial
      Statements
            6Item
      2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            22Item
      3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            41Item
      4.
            Controls and Procedures
            42PART II. OTHER INFORMATIONItem
      1.
            Legal Proceedings
            43Item 1A.
            Risk Factors
            44Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            53Item
      3.
            Defaults Upon Senior Securities
            53Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            53Item
      5.
            Other Information
            53Item
      6.
            Exhibits
            53Signatures
            54


Table of Contents


CompuCredit
Corporation and Subsidiaries


Condensed Consolidated Balance Sheets


(Dollars
in thousands)




September 30,
              2008
            
            
            December 31,
              2007(Unaudited)AssetsCash
      and cash equivalents (including restricted cash of $20,423 at
      September 30, 2008 and $29,128 at December 31,
    2007)
            
            $
            119,364
            
            
            $
            137,526Securitized
      earning assets
            
            
            924,832
            
            
            
            1,015,579Non-securitized
      earning assets, net:Loans and fees receivable, net (of $27,991 and $27,199 in deferred revenue
      and $53,142 and
              $51,489 in allowances for uncollectible loans and feesreceivable
      at September 30, 2008 and
              December 31, 2007, respectively)
            
            
            360,631
            
            
            
            357,027Investments in previously charged-off receivables
            
            
            34,459
            
            
            
            14,523Investments in securities
            
            
            5,158
            
            
            
            27,714Deferred
      costs, net
            
            
            11,391
            
            
            
            14,923Property
      at cost, net of depreciation
            
            
            52,857
            
            
            
            84,466Investments
      in equity-method investees
            
            
            53,537
            
            
            
            63,023Intangibles,
      net
            
            
            6,408
            
            
            
            8,248Goodwill
            
            
            64,896
            
            
            
            97,169Prepaid
      expenses and other assets
            
            
            68,318
            
            
            
            45,247Assets
      held for sale
            
            
            —
            
            
            
            8,735Total
      assets
            
            $
            1,701,851
            
            
            $
            1,874,180LiabilitiesAccounts
      payable and accrued expenses
            
            $
            105,658
            
            
            $
            159,396Notes
      payable and other borrowings
            
            
            215,178
            
            
            
            235,591Convertible
      senior notes
            
            
            500,000
            
            
            
            550,000Deferred
      revenue primarily from forward flow agreement
            
            
            23,608
            
            
            
            33,277Current
      and deferred income tax liabilities
            
            
            116,119
            
            
            
            70,232Liabilities
      related to assets held for sale
            
            
            —
            
            
            
            373Total
      liabilities
            
            
            960,563
            
            
            
            1,048,869Minority
      interests
            
            
            29,323
            
            
            
            32,732Commitments
      and contingencies (Note 11)Shareholders’
      equityCommon
      stock, no par value, 150,000,000 shares authorized: 60,427,561 shares
      issued and 51,681,360 shares outstanding at September 30, 2008
      (including 3,651,069 loaned shares to be returned); and 61,938,533 shares
      issued and 53,055,505 shares outstanding at December 31, 2007
      (including 5,677,950 loaned shares, 2,026,881 of which were returned
      subsequent to December 31, 2007 and the remainder of which are to be
      returned in the future)
            
            
            —
            
            
            
            —Additional
      paid-in capital
            
            
            411,928
            
            
            
            409,964Treasury
      stock, at cost, 8,746,201 and 8,883,028 shares at September 30, 2008
      and December 31, 2007, respectively
            
            
            (222,533
            )
            
            
            (225,457
            )Accumulated
      other comprehensive (loss) income
            
            
            (10,037
            )
            
            
            1,637Retained
      earnings
            
            
            532,607
            
            
            
            606,435Total
      shareholders’ equity
            
            
            711,965
            
            
            
            792,579Total
      liabilities and shareholders’ equity
            
            $
            1,701,851
            
            
            $
            1,874,180




See
accompanying notes.




1
 Table of Contents


CompuCredit
Corporation and Subsidiaries


Condensed Consolidated Statements of Operations
(Unaudited)


(In
thousands, except per share data)




For the Three Months Ended
              September 30,
            
            
            For the Nine Months Ended
              September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Interest
      income:Consumer
      loans, including past due fees
            
            $
            23,556
            
            
            $
            123,934
            
            
            $
            71,338
            
            
            $
            298,443Other
            
            
            971
            
            
            
            4,697
            
            
            
            4,444
            
            
            
            17,041Total
      interest income
            
            
            24,527
            
            
            
            128,631
            
            
            
            75,782
            
            
            
            315,484Interest
      expense
            
            
            (10,140
            )
            
            
            (22,459
            )
            
            
            (31,989
            )
            
            
            (55,322
            )Net
      interest income before fees and related income on non-securitized earning
      assets and
              provision for loan losses
            
            
            14,387
            
            
            
            106,172
            
            
            
            43,793
            
            
            
            260,162Fees
      and related income on non-securitized earning assets
            
            
            44,119
            
            
            
            211,301
            
            
            
            151,841
            
            
            
            539,938Provision
      for loan losses
            
            
            (17,283
            )
            
            
            (296,623
            )
            
            
            (53,792
            )
            
            
            (627,937
            )Net
      interest income, fees and related income on non-securitized earning
      assets
            
            
            41,223
            
            
            
            20,850
            
            
            
            141,842
            
            
            
            172,163Other
      operating income:Fees
      and related income on securitized earning assets
            
            
            4,143
            
            
            
            29,642
            
            
            
            (14,481
            )
            
            
            121,332Servicing
      income
            
            
            44,537
            
            
            
            26,273
            
            
            
            137,691
            
            
            
            72,359Ancillary
      and interchange revenues
            
            
            14,401
            
            
            
            19,197
            
            
            
            45,532
            
            
            
            49,521Gain
      on repurchase of convertible senior notes
            
            
            —
            
            
            
            —
            
            
            
            28,424
            
            
            
            —Equity
      in income of equity-method investees
            
            
            1,674
            
            
            
            7,648
            
            
            
            17,130
            
            
            
            26,947Total
      other operating income
            
            
            64,755
            
            
            
            82,760
            
            
            
            214,296
            
            
            
            270,159Other
      operating expense:Salaries
      and benefits
            
            
            16,407
            
            
            
            20,168
            
            
            
            53,094
            
            
            
            56,097Card
      and loan servicing
            
            
            65,716
            
            
            
            76,792
            
            
            
            213,896
            
            
            
            219,264Marketing
      and solicitation
            
            
            8,787
            
            
            
            38,990
            
            
            
            41,727
            
            
            
            124,652Depreciation
            
            
            8,397
            
            
            
            8,680
            
            
            
            25,756
            
            
            
            28,367Goodwill
      impairment
            
            
            29,164
            
            
            
            —
            
            
            
            29,164
            
            
            
            —Other
            
            
            28,293
            
            
            
            32,887
            
            
            
            93,731
            
            
            
            93,545Total
      other operating expense
            
            
            156,764
            
            
            
            177,517
            
            
            
            457,368
            
            
            
            521,925Loss
      from continuing operations before minority interests and income
      taxes
            
            
            (50,786
            )
            
            
            (73,907
            )
            
            
            (101,230
            )
            
            
            (79,603
            )Minority
      interests
            
            
            30
            
            
            
            (1,257
            )
            
            
            (1,471
            )
            
            
            (2,763
            )Loss
      from continuing operations before income taxes
            
            
            (50,756
            )
            
            
            (75,164
            )
            
            
            (102,701
            )
            
            
            (82,366
            )Income
      tax benefit
            
            
            19,728
            
            
            
            27,138
            
            
            
            34,411
            
            
            
            29,871Loss
      from continuing operations
            
            
            (31,028
            )
            
            
            (48,026
            )
            
            
            (68,290
            )
            
            
            (52,495
            )Discontinued
      operations:Loss
      from discontinued operations before income tax benefit
            
            
            (1,883
            )
            
            
            (7,993
            )
            
            
            (9,868
            )
            
            
            (21,935
            )Income
      tax benefit
            
            
            659
            
            
            
            2,798
            
            
            
            3,454
            
            
            
            7,677Loss
      from discontinued operations
            
            
            (1,224
            )
            
            
            (5,195
            )
            
            
            (6,414
            )
            
            
            (14,258
            )Net
      loss
            
            $
            (32,252
            )
            
            $
            (53,221
            )
            
            $
            (74,704
            )
            
            $
            (66,753
            )Loss
      from continuing operations per common share—basic
            
            $
            (0.66
            )
            
            $
            (0.99
            )
            
            $
            (1.46
            )
            
            $
            (1.07
            )Loss
      from continuing operations per common share—diluted
            
            $
            (0.66
            )
            
            $
            (0.99
            )
            
            $
            (1.46
            )
            
            $
            (1.07
            )Loss
      from discontinued operations per common share—basic
            
            $
            (0.03
            )
            
            $
            (0.11
            )
            
            $
            (0.14
            )
            
            $
            (0.29
            )Loss
      from discontinued operations per common share—diluted
            
            $
            (0.03
            )
            
            $
            (0.11
            )
            
            $
            (0.14
            )
            
            $
            (0.29
            )Net
      loss per common share—basic
            
            $
            (0.69
            )
            
            $
            (1.10
            )
            
            $
            (1.60
            )
            
            $
            (1.36
            )Net
      loss per common share—diluted
            
            $
            (0.69
            )
            
            $
            (1.10
            )
            
            $
            (1.60
            )
            
            $
            (1.36
            )




See
accompanying notes.




2
 Table of Contents





CompuCredit
Corporation and Subsidiaries


Condensed Consolidated Statement of Shareholders’ Equity
(Unaudited)


For
the Nine Months Ended September 30, 2008


(Dollars in
thousands)




Common
      Stock
            
            
            Additional
              Paid-In
              Capital
            
            
            Treasury
              Stock
            
            
            Accumulated
              Other
              Comprehensive
              Income
            
            
            Retained
              Earnings
            
            
            Total
              Shareholders’
              EquityShares
              Issued
            
            
            AmountBalance
      at December 31, 2007
            
            
            61,938,533
            
            
            $
            —
            
            
            $
            409,964
            
            
            $
            (225,457
            )
            
            $
            1,637
            
            
            $
            606,435
            
            
            $
            792,579Stock
      options exercises and proceeds related thereto
            
            
            29,334
            
            
            
            —
            
            
            
            74
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            74Use
      of treasury stock for stock-based compensation plans
            
            
            (194,621
            )
            
            
            —
            
            
            
            (4,364
            )
            
            
            3,488
            
            
            
            —
            
            
            
            876
            
            
            
            —Issuance
      of restricted stock
            
            
            681,196
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Amortization
      of deferred stock-based compensation costs
            
            
            —
            
            
            
            —
            
            
            
            7,499
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            7,499Purchase
      of treasury stock
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (564
            )
            
            
            —
            
            
            
            —
            
            
            
            (564
            )Tax
      effects of stock-based compensation plans
            
            
            —
            
            
            
            —
            
            
            
            (1,245
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,245
            )Foreign
      currency translation adjustment, net of tax
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (11,674
            )
            
            
            —
            
            
            
            (11,674
            )Retired
      shares
            
            
            (2,026,881
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (74,704
            )
            
            
            (74,704
            )Balance
      at September 30, 2008
            
            
            60,427,561
            
            
            $
            —
            
            
            $
            411,928
            
            
            $
            (222,533
            )
            
            $
            (10,037
            )
            
            $
            532,607
            
            
            $
            711,965








See
accompanying notes.


3
 Table of Contents


CompuCredit
Corporation and Subsidiaries


Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)


(Dollars
in thousands)




For the Three Months Ended
              September 30,
            
            
            For the Nine Months Ended
              September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      loss
            
            $
            (32,252
            )
            
            $
            (53,221
            )
            
            $
            (74,704
            )
            
            $
            (66,753
            )Other
      comprehensive (loss) income:Foreign
      currency translation adjustment
            
            
            (15,993
            )
            
            
            4,083
            
            
            
            (16,272
            )
            
            
            6,651Income
      tax benefit (expense) related to other comprehensive
income
            
            
            4,502
            
            
            
            (1,171
            )
            
            
            4,598
            
            
            
            (1,767
            )Comprehensive
      loss
            
            $
            (43,743
            )
            
            $
            (50,309
            )
            
            $
            (86,378
            )
            
            $
            (61,869
            )




See
accompanying notes.




4
 Table of Contents


CompuCredit
Corporation and Subsidiaries


Condensed Consolidated Statements of Cash Flows
(Unaudited)


(Dollars in
thousands)




For the Nine Months Ended
              September 30,2008
            
            
            2007Operating
      activitiesNet
      loss
            
            $
            (74,704
            )
            
            $
            (66,753
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      expense
            
            
            25,756
            
            
            
            29,981Impairment
      of goodwill
            
            
            30,296
            
            
            
            —Provision
      for loan losses
            
            
            53,792
            
            
            
            639,892Amortization
      of intangibles
            
            
            1,840
            
            
            
            3,221Accretion
      of deferred revenue
            
            
            (11,583
            )
            
            
            (20,580
            )Stock-based
      compensation expense
            
            
            7,499
            
            
            
            8,204Minority
      interests
            
            
            1,471
            
            
            
            2,763Retained
      interests adjustments, net
            
            
            451,264
            
            
            
            260,959Unrealized
      loss on investment securities classified as trading
    securities
            
            
            1,950
            
            
            
            17,109Income
      in excess of distributions from equity-method investments
            
            
            (20
            )
            
            
            —Gain
      on repurchase of convertible senior notes
            
            
            (28,424
            )
            
            
            —Changes
      in assets and liabilities, exclusive of business
    acquisitions:Net
      decrease in investment securities classified as trading
      securities
            
            
            18,217
            
            
            
            136,176Decrease
      (increase) in uncollected fees on non-securitized earning
      assets
            
            
            11,411
            
            
            
            (424,491
            )Decrease
      (increase) in deferred costs
            
            
            2,450
            
            
            
            (835
            )Increase
      in prepaid expenses
            
            
            (25,972
            )
            
            
            (5,048
            )Increase
      (decrease) in current and deferred tax liability
            
            
            49,305
            
            
            
            (62,101
            )Increase
      in deferred revenue
            
            
            1,914
            
            
            
            7,070(Decrease)
      increase in accounts payable and accrued expenses
            
            
            (39,667
            )
            
            
            15,828Other
            
            
            (10,247
            )
            
            
            (3,375
            )Net
      cash provided by operating activities
            
            
            466,548
            
            
            
            538,020Investing
      activitiesProceeds
      from equity-method investees
            
            
            9,506
            
            
            
            17,101Investments
      in securitized earning assets
            
            
            (1,358,460
            )
            
            
            (993,937
            )Proceeds
      from securitized earning assets
            
            
            1,023,686
            
            
            
            920,713Investments
      in non-securitized earning assets
            
            
            (925,405
            )
            
            
            (1,790,125
            )Proceeds
      from non-securitized earning assets
            
            
            820,963
            
            
            
            1,345,614Increase
      in notes receivable
            
            
            —
            
            
            
            2,183Acquisitions
      of assets
            
            
            —
            
            
            
            (191,850
            )Purchases
      of and development of software, furniture, fixtures and equipment, net of
      disposals
            
            
            (6,865
            )
            
            
            (57,202
            )Net
      cash used in investing activities
            
            
            (436,575
            )
            
            
            (747,503
            )Financing
      activitiesMinority
      interests distribution, net
            
            
            (4,880
            )
            
            
            (8,480
            )Proceeds
      from exercise of stock options
            
            
            74
            
            
            
            1,216Proceeds
      from the exercise of warrants
            
            
            —
            
            
            
            53,880Purchase
      of treasury stock
            
            
            (564
            )
            
            
            (87,816
            )Proceeds
      from borrowings
            
            
            88,376
            
            
            
            704,352Repayment
      of borrowings
            
            
            (129,402
            )
            
            
            (203,685
            )Net
      cash (used in) provided by financing activities
            
            
            (46,396
            )
            
            
            459,467Effect
      of exchange rate changes on cash
            
            
            (1,739
            )
            
            
            1,904Net
      (decrease) increase in cash
            
            
            (18,162
            )
            
            
            251,888Cash
      and cash equivalents at beginning of period
            
            
            137,526
            
            
            
            110,412Cash
      and cash equivalents at end of period
            
            $
            119,364
            
            
            $
            362,300Supplemental
      cash flow informationCash
      paid for interest
            
            $
            34,262
            
            
            $
            54,841Net
      cash (refunded) paid for income taxes
            
            $
            (87,088
            )
            
            $
            24,104Supplemental
      non-cash informationNotes
      payable associated with capital leases
            
            $
            5,175
            
            
            $
            13,932Issuance
      of restricted stock and stock options
            
            $
            7,291
            
            
            $
            6,264




See
accompanying notes.




5
 Table of Contents


CompuCredit
Corporation and Subsidiaries


Notes to Condensed Consolidated Financial Statements
(Unaudited)


September 30,
2008




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 our condensed consolidated 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, costs of funds, 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 related income on
securitized earning assets on our condensed consolidated statements of
operations) and the 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
effect 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 nine months ended
September 30, 2008 are not necessarily indicative of what our results will
be for the year ending December 31, 2008. Our condensed consolidated
financial statements should be read in conjunction with our consolidated
financial statements and notes to our consolidated financial statements for the
year ended December 31, 2007 contained in our Annual Report on
Form 10-K filed with the SEC.




We have
reclassified certain amounts in our prior period condensed consolidated
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




We
summarize below significant accounting policies we follow in preparing our
condensed consolidated financial statements, and we describe below significant
components of our condensed consolidated financial statements.




Restricted
Cash




Restricted
cash includes $8.7 million of escrowed gross proceeds (including interest earned
thereon) associated with a forward flow contract between one of our subsidiaries
and a subsidiary of Encore Capital Group, Inc (collectively with all other
subsidiaries or affiliates of Encore Capital Group, Inc. to which this Report
refers, “Encore”), certain collections on receivables within our Auto Finance
segment, the cash balances of which are required to be distributed to note
holders under our debt facilities, and cash collateral balances underlying
standby letters of credit that have been issued in favor of certain regulators
in connection with our retail micro-loan activities. On July 10, 2008,
Encore did not purchase certain accounts as contemplated by the forward flow
contract, alleging that the accounts it was required to purchase failed to meet
the standards set forth in the contract (based upon the allegations made by the
Federal Trade Commission (“FTC”)). Subsequently both our subsidiary and Encore
advised one another that they were in default of various obligations under the
contract and various related agreements among them, and the parties currently
are endeavoring to resolve these disputes through arbitration. Because of the
ongoing disputes and concerns as to their ultimate resolution, we have not
recognized in the third quarter of 2008 any income representing escrowed funds
that we believed we earned in that three-month period but that Encore has not
released from the escrowed funds.




Non-Securitized
Earning Assets, Net




We
include loans and fees receivable, net, investments in previously charged-off
receivables, investments in securities within non-securitized earning assets,
net, on our consolidated balance sheets.




Loans and Fees Receivable,
Net. Loans and fees receivable, net, currently consist principally of
receivables associated with our retail and Internet micro-loan activities and
our auto finance business. While we have never securitized (i.e., in
off-balance-sheet securitizations) any of the receivables associated with our
retail and Internet micro-loan activities or our auto finance business, we
securitize substantially all of our credit card receivables in off-balance-sheet
securitizations.




As
applicable, we show our unsecuritized loans and fees receivables net of an
allowance for uncollectible loans and fees receivable and 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.”




We
account for the loans and fees receivable associated with our acquisition of ACC
Consumer Finance (“ACC”) under the guidance of Statement of Position 03-3,
“Accounting for Certain Loans
or Debt Securities Acquired in a Transfer” (“SOP 03-3”), which limits the
yield that may be accreted (accretable yield) to the excess of our estimate of
undiscounted expected principal, interest, and other cash flows (including the
effects of prepayments) expected to be collected on the date of acquisition over
our initial investment in the loans and fees receivable. The excess of
contractual cash flows over cash flows expected to be collected (nonaccretable
difference) is not recognized as an adjustment of yield, loss accrual or
valuation allowance. The following tables show (in thousands) a roll-forward of
accretable yield for our loans for which we apply SOP 03-3, as well as the
carrying amounts of and gross loans and fees receivable balances for our loans
for which we apply SOP 03-3:




6
 Table of Contents




For the Three Months Ended
              September 30,
            
            
            For the Nine Months Ended
              September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Roll-forward
      of accretable yield:Balance
      at beginning of period
            
            $
            (20,363
            )
            
            $
            (55,095
            )
            
            $
            (28,737
            )
            
            $
            —Accretable
      yield at acquisition date
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (66,868
            )Impairment
      of accretable yield
            
            
            —
            
            
            
            12,697
            
            
            
            —
            
            
            
            12,697Accretion
      of yield
            
            
            3,506
            
            
            
            6,053
            
            
            
            11,880
            
            
            
            17,826Balance
      at September 30
            
            $
            (16,857
            )
            
            $
            (36,345
            )
            
            $
            (16,857
            )
            
            $
            (36,345
            )




SOP
      03-3 loans and fees receivable:Carrying
      amount of loans and fees receivable at acquisition date
            
            $
            160,592Carrying
      amount of loans and fees receivable at September 30,
    2008
            
            $
            68,303Gross
      loans and fees receivable balance at acquisition date
            
            $
            191,976Gross
      loans and fees receivable balance at September 30,
    2008
            
            $
            84,402




In
December 2007, we securitized a significant portfolio of lower-tier credit card
receivables in an off-balance-sheet securitization. In reporting periods prior
to this securitization transaction, the receivables associated with these
lower-tier credit card offerings as shown on our condensed consolidated balance
sheets included finance charges and fees (both billed and accrued) and principal
balances. The fees associated with these product offerings include activation
and annual fees (which we recognize as income over the twelve-month period to
which they apply), as well as monthly maintenance, late-payment, over-limit,
cash-advance and returned-check fees (which we recognize as income when they are
assessed to cardholders). Similar charges and fees apply for our balance
transfer program credit card receivables, which we previously held on our
balance sheet within loans and fees receivable, net. Loans and fees receivable
associated with our micro-loan activities primarily include principal balances
and associated fees due from customers (such fees being recognized as
earned—generally over a two-week period in the case of our retail operations and
over a one-month period in the case of our Internet operations). Loans and fees
receivable associated with our auto finance business include principal balances
and associated fees and interest due from customers, net of the unearned portion
of loan discounts which we recognize over the life of each loan.




We
provide an allowance for uncollectible loans and fees receivable for those loans
and fees receivable we believe we ultimately will not collect. We determine the
necessary allowance for uncollectible loans and fees receivable by analyzing
some or all of the following:  historical loss rates; current
delinquency and roll-rate trends; vintage analyses based on the number of months
an account is open; the effects of changes in the economy on our customers;
changes in underwriting criteria; and estimated recoveries. A considerable
amount of judgment is required to assess the ultimate amount of uncollectible
loans and fees receivable, and we continuously evaluate and update our
methodologies to determine the most appropriate allowance
necessary.




The
components of loans and fees receivable, net (in millions) are as
follows:




Balance
      at
              December 31, 2007
            
            
            Additions
            
            
            Subtractions
            
            
            Balance at
              September 30, 2008Loans
      and fees receivable, gross
            
            $
            435.7
            
            
            $
            965.0
            
            
            $
            (959.0
            )
            
            $
            441.7Deferred
      revenue
            
            
            (27.2
            )
            
            
            (69.6
            )
            
            
            68.8
            
            
            
            (28.0
            )Allowance
      for uncollectible loans and fees receivable
            
            
            (51.5
            )
            
            
            (53.8
            )
            
            
            52.2
            
            
            
            (53.1
            )Loans
      and fees receivable, net
            
            $
            357.0
            
            
            $
            841.6
            
            
            $
            (838.0
            )
            
            $
            360.6




As of
September 30, 2008, the weighted average remaining accretion period for the
$28.0 million of deferred revenue reflected in the above table was 31.43
months.




Our
roll-forward of the allowance for uncollectible loans and fees receivable (in
millions) is as follows:




For the Three Months Ended
              September 30,
            
            
            For the Nine Months Ended
              September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Balance
      at beginning of period
            
            $
            (56.3
            )
            
            $
            (291.2
            )
            
            $
            (51.5
            )
            
            $
            (225.3
            )Provision
      for loan losses
            
            
            (17.3
            )
            
            
            (302.2
            )
            
            
            (53.8
            )
            
            
            (639.9
            )Charge
      offs
            
            
            22.0
            
            
            
            174.7
            
            
            
            58.7
            
            
            
            455.2Recoveries
            
            
            (1.5
            )
            
            
            (3.6
            )
            
            
            (6.5
            )
            
            
            (12.3
            )Balance
      at end of period
            
            $
            (53.1
            )
            
            $
            (422.3
            )
            
            $
            (53.1
            )
            
            $
            (422.3
            )






7
 Table of Contents


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




For the Three Months
              Ended
              September 30,
      2008
            
            
            For the Nine Months
              Ended
              September 30,
      2008Unrecovered
      balance at beginning of period
            
            $
            25,122
            
            
            $
            14,523Acquisitions
      of defaulted accounts
            
            
            15,005
            
            
            
            59,047Cash
      collections
            
            
            (10,560
            )
            
            
            (62,508
            )Accretion
      of deferred revenue associated with Encore forward flow
      contract
            
            
            —
            
            
            
            (11,321
            )Cost-recovery
      method income recognized on defaulted accounts (included in fees and
      related income on non-securitized earning assets on our condensed
      consolidated statements of operations)
            
            
            4,892
            
            
            
            34,718Balance
      at September 30, 2008
            
            $
            34,459
            
            
            $
            34,459Estimated
      remaining collections (“ERC”)
            
            $
            84,173
            
            
            $
            84,173




While
Jefferson Capital, our debt collections subsidiary, holds some pools of normal
delinquency charged-off accounts, its previously charged-off receivables
principally consist of amounts associated with accounts for which 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 prior to such time as
credit cards are issued relating to such accounts.




We
estimate the life of each pool of previously charged-off receivables acquired by
us generally to be between twenty-four and thirty-six months for normal
delinquency charged-off accounts (including balance transfer program accounts)
and approximately sixty months for Chapter 13 Bankruptcies. We anticipate
collecting approximately 44.1% of the ERC of the existing accounts over the next
twelve months, with the balance to be collected thereafter.




Investments in
Securities. We periodically have invested in debt and equity securities.
We have purchased these debt and equity securities either outright for cash or
through a combination of cash and borrowings; see Note 9, “Convertible
Senior Notes, Notes Payable and Other Borrowings.” We generally have classified
our purchased debt and equity securities as trading securities and included
realized and unrealized gains and losses in earnings in accordance with
Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments
in Debt and Equity 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. The
carrying values (in thousands) of our investments in debt and equity securities
are as follows:




As of
              September 30,
              2008
            
            
            As of
              December 31,
              2007Held
      to maturity:Investments
      in debt securities of equity-method investees
            
            $
            4,769
            
            
            $
            6,819Trading:Investments
      in equity securities
            
            
            389
            
            
            
            2,956Investments
      in asset-backed securities
            
            
            —
            
            
            
            17,939Total
      investments in debt and equity securities
            
            $
            5,158
            
            
            $
            27,714




For the
three and nine months ended September 30, 2008, we incurred losses totaling
$0.2 million and $6.5 million, respectively associated with our investments in
equity and asset-backed securities in the above table.




Our
investments in asset-backed securities from the above table historically have
included a mix of investment grade, non-investment grade, subordinated and
distressed asset-backed securities, including CDOs (Collateralized Debt
Obligations), CMBS (Collateralized Mortgage Backed Securities), CMOs
(Collateralized Mortgage Obligations) and repurchase agreements with respect to
the foregoing. The market for these securities became extremely volatile in
2007, and the values ascribed to these securities declined significantly during
2007, giving rise to significant 2007 realized and unrealized losses on this
category of securities. At the close of the second quarter of 2008, we valued
our remaining investments in asset-backed securities (and associated debt) at
zero as the remaining assets were liquidated in response to margin calls.
Because margin loans underlying these investments were non-recourse, we do not
expect to realize any further losses in connection with these
investments.




Prepaid
Expenses and Other Assets




Prepaid
expenses and other assets include amounts paid to third parties for marketing
and other services. We expense these amounts once services have been performed
or marketing efforts have been undertaken. Also included are (1) various
deposits totaling $38.4 million required to be maintained with our third-party
issuing bank partners and retail electronic payment network providers (including
$8.9 million as of September 30, 2008 associated with our ongoing
origination and servicing efforts in the U.K.) and (2) vehicle inventory
held by our “buy-here, pay-here” auto dealerships which we expense as we earn
the associated sales revenues.




Income
Taxes




Our
overall effective tax rate (computed considering both continuing and
discontinued operations in the aggregate) was approximately 38.7% and 33.6% for
the three and nine months ended September 30, 2008, respectively, versus
36.0% for the comparable periods in 2007. Variations in the effective tax rates
between periods are substantially related to differing expectations in different
periods as to the ratio of our permanent differences to pre-tax GAAP income or
loss levels and to the closing of the statutes of limitations for tax years
prior to 2005 in the three months ended September 30, 2008. We have experienced
no material changes in effective tax rates associated with differences in filing
jurisdictions and changes in law between the comparison periods.





8
 Table of Contents


We
conduct business internationally, and as a result, file tax returns in several
different federal, state and foreign jurisdictions. In the normal course of
business we are subject to examination by domestic and international taxing
authorities. With a few exceptions, we are no longer subject to U.S. federal,
state, local, or foreign income tax examinations for years prior to 2005.
Currently, we are under audit by various jurisdictions. Although the audits have
not been concluded, we do not expect any material changes to the tax liabilities
reported in those years.





We
recognize potential accrued interest and penalties related to unrecognized tax
benefits in income tax expense. We recognized $0.7 million and $2.1 million
in potential interest and penalties associated with uncertain tax positions
during the three and nine months ended September 30, 2008, respectively,
compared to our recognition of $0.5 million and $1.7 million of such
potential interest and penalties during the three and nine months ended
September 30, 2007, respectively. To the extent such interest and penalties
are not assessed as a result of a resolution of the underlying tax position,
amounts accrued will be reduced and reflected as a reduction of income tax
expense.  We recognized such a reduction in the amount of $2.5 million
in the three months ended September 30, 2008, related to the closing of the
statute of limitations for the 2004 U.S. federal tax year.




Lease
Impairments




During
the second quarter of 2008, we subleased 183,461 square feet of office space at
our corporate headquarters. As a result of inadequate rental payments associated
with these subleases as compared to our obligations, we recognized a second
quarter 2008 impairment charge of $5.5 million, which is included within the
other category as a component of other operating expense on our condensed
consolidated statements of operations for the nine months ended September 30,
2008. We are recognizing the rental income associated with these subleases on a
straight-line basis as an offset to rental expense also recorded within the
other category of expenses as a component of other operating
expense.




Fees
and Related Income on Non-Securitized Earning Assets




Fees and
related income on non-securitized earning assets primarily include:
(1) lending fees associated with our retail and Internet micro-loan
activities; (2) fees associated with credit card receivables during periods
in which we have held them on balance sheet; (3) income associated
with our investments in previously charged-off receivables; (4) gains and
losses associated with our investments in securities; and (5) gross profits
from auto sales within our Auto Finance segment. The components (in thousands)
of our fees and related income on non-securitized earning assets are as
follows:




For
      the Three Months
              Ended
      September 30,
            
            
            For
      the Nine Months
              Ended
      September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Retail
      micro-loan fees
            
            $
            17,818
            
            
            $
            25,220
            
            
            $
            56,596
            
            
            $
            70,927Fees
      on lower-tier credit card receivables while held on balance
      sheet
            
            
            960
            
            
            
            199,527
            
            
            
            6,363
            
            
            
            470,605Income
      on investments in previously charged-off receivables
            
            
            4,892
            
            
            
            13,684
            
            
            
            34,718
            
            
            
            43,332Losses
      on investments in securities
            
            
            (276
            )
            
            
            (37,408
            )
            
            
            (6,527
            )
            
            
            (63,132
            )Internet
      micro-loan fees
            
            
            12,362
            
            
            
            3,342
            
            
            
            30,132
            
            
            
            5,703Gross
      profit on auto sales
            
            
            7,355
            
            
            
            4,380
            
            
            
            25,362
            
            
            
            7,824Other
            
            
            1,008
            
            
            
            2,556
            
            
            
            5,197
            
            
            
            4,679Total
      fees and related income on non-securitized earning assets
            
            $
            44,119
            
            
            $
            211,301
            
            
            $
            151,841
            
            
            $
            539,938





Fees
and Related Income on Securitized Earning Assets




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




For the Three Months
              Ended
      September 30,
            
            
            For the Nine Months
              Ended September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Securitization
      gains
            
            $
            —
            
            
            $
            2,089
            
            
            $
            —
            
            
            $
            103,046Income
      from retained interests in credit card receivables
    securitized
            
            
            (3,666
            )
            
            
            21,773
            
            
            
            (38,060
            )
            
            
            3,794Fees
      on securitized receivables
            
            
            7,809
            
            
            
            5,780
            
            
            
            23,579
            
            
            
            14,492Total
      fees and related income on securitized earning assets
            
            $
            4,143
            
            
            $
            29,642
            
            
            $
            (14,481
            )
            
            $
            121,332




We assess
fees on credit card accounts underlying our securitized receivables according to
the terms of the related cardholder agreements and, except for activation and
annual membership fees, we recognize these fees as contributing to income from
retained interests in credit card receivables securitized or as fees on
securitized receivables when they are charged to the cardholders’ accounts. We
accrete activation and annual membership fees associated with our securitized
credit card receivables as a contribution to our income from retained interests
in credit card receivables securitized on a straight-line basis over the
twelve-month cardholder privilege period. We amortize direct receivables
origination costs against fees on securitized receivables. See Note 7,
“Off-Balance-Sheet Arrangements,” for further discussion on securitization gains
and income from retained interests in credit card receivables securitized
(including the effects of changes in retained interest valuations).




9
 Table of Contents


Recent
Accounting Pronouncements




In May
2008, the FASB issued FASB Staff Position APB 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion,” (“FSP APB
14-1”), addressing convertible instruments that may be settled in cash upon
conversion (including partial cash settlement). FSP APB 14-1 addresses
instruments commonly referred to as Instrument C from EITF Issue No. 90-19,
“Convertible Bonds with Issuer
Option to Settle for Cash upon Conversion.” Those instruments essentially
require the issuer to settle the principal amount in cash and the conversion
spread in cash or net shares at the issuer’s option. FSP APB 14-1 is effective
for fiscal periods beginning after December 15, 2008, does not permit early
application, and is to be applied retrospectively to all periods presented
(retroactive restatement) pursuant to the guidance in FASB Statement
No. 154, “Accounting
Changes and Error Corrections.” We have not yet fully evaluated and
computed the effects of FSP APB 14-1 on our net income and net income per common
share. Based on our initial review, however, FSP APB 14-1 would change the
accounting treatment of our outstanding convertible senior notes and
would:  (1) shift a material portion of our convertible senior
notes balances to additional paid-in capital on our consolidated balance sheets;
(2) create a discount on the convertible senior notes that would be
amortized as higher interest expense over the life of the convertible senior
notes; (3) cause us to show lower net income on our consolidated statements
of operations; and (4) reduce our basic and diluted net income per common
share as disclosed on our consolidated statements of operations.




In
September 2008, the FASB issued for exposure a Proposed Statement of Financial
Accounting Standards, “Accounting for Transfers of
Financial Assets, an Amendment to FASB Statement No. 140,” that among
other things would eliminate Qualifying Special Purpose Entities (QSPEs) from
the guidance in Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities—A Replacement
of FASB Statement 125,” (“Statement No. 140”). Also in September
2008, the FASB issued for exposure a Proposed Statement of Financial Accounting
Standards, “Amendments to FASB
Interpretation No. 46(R),” that among other things would change the
criteria for determining whether to consolidate variable interest entities under
FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest
Entities—An Interpretation of ARB No. 51,” (“FIN 46R”). If
ultimately finalized as proposed, these proposed statements would be effective
for us at the beginning of our 2010 calendar year financial reporting period,
with earlier application prohibited. While the ultimate changes remain
uncertain, our preliminary assessment is that we could be required to change our
accounting for our securitized credit card receivables and consolidate some or
all of the QSPEs and variable interest entities associated with our
securitizations. We currently treat our transfers to the securitization trusts
as sales, remove the receivables from our consolidated balance sheets, and
reflect only our retained interests in the securitization trusts on our
consolidated balance sheets. The changes exposed by the FASB in the proposed
statements may require us to reflect the gross amount of the transferred
receivables as well as the liabilities of the securitization trusts on our
consolidated balance sheets. We are unable to determine the ultimate potential
effects on our consolidated financial statements until the FASB issues the
proposed statements as final statements. The FASB also issued a Proposed FASB
Staff Position, “Disclosures
about Transfers of Financial Assets and Interest in Variable Interest
Entities,” No. FAS 140-e and FIN 46(R)-e in September 2008. This proposed
FSP would require us to provide additional disclosures in our interim and annual
financial statements prior to the 2010 effective date of the proposed statements
with respect to both our QSPEs and the variable interest entities associated
with structured finance transactions that we treat as on-balance-sheet debt
financings; the proposed FSP could require these additional disclosures as early
as the end of the reporting period in which the final FSP is issued (potentially
as early as December 31, 2008).




3.
Discontinued Operations




In the
fourth quarter of 2007, we adopted a formal plan to discontinue (through sale or
otherwise) 105 Retail Micro-Loans segment branches located within Florida,
Oklahoma, Colorado, Arizona, Louisiana and Michigan, and we classified the net
assets of these operations as then held for sale and wrote them down to their
estimated fair value. Subsequently, in the third quarter of 2008, we decided to
retain a limited number of retail storefronts in Oklahoma and Colorado for which
we now expect to be able to earn our desired returns. Our continuing operations
and discontinued operations results within our condensed consolidated statements
of operations for the three and nine month periods ended September 30, 2007 and
2008 reflect our decision to continue operating the limited number of
storefronts in Oklahoma and Colorado. All other discontinued storefronts within
the affected states have either been sold or closed as of September 30,
2008.




Also
during the fourth quarter of 2007, we shut down several business operations
within our Other segment, including our stored value card operations, our
U.S.-based Internet installment loan operations and operations under which we
purchased and serviced motorcycle, all-terrain vehicle and personal watercraft
loans through and for pre-qualified networks of dealers.  The results
for these operations are reflected as discontinued operating results on our
condensed consolidated statements of operations for the three and nine month
periods ended September 30, 2007 and 2008.




In the
first quarter of 2008, we adopted a formal plan to sell 81 Retail Micro-Loans
segment branches located within Texas—a sale that was completed in April 2008.
Consequently, the results for those Texas operations (including a $1.1 million
goodwill impairment charge) are reflected as discontinued operating results on
our condensed consolidated statements of operations for the three and nine month
periods ended September 30, 2007 and 2008.




The
components (in thousands) of our discontinued operations are as
follows:




For the Three Months Ended September 30,
            
            
            For the Nine Months Ended September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      interest income, fees and related income on non-securitized earning
      assets
            
            $
            2,828
            
            
            $
            3,803
            
            
            $
            11,036
            
            
            $
            11,233Total
      operating expense
            
            
            4,711
            
            
            
            11,796
            
            
            
            20,904
            
            
            
            33,168Loss
      before income taxes
            
            
            (1,883
            )
            
            
            (7,993
            )
            
            
            (9,868
            )
            
            
            (21,935
            )Income
      tax benefit
            
            
            659
            
            
            
            2,798
            
            
            
            3,454
            
            
            
            7,677Net
      loss
            
            $
            (1,224
            )
            
            $
            (5,195
            )
            
            $
            (6,414
            )
            
            $
            (14,258
            )




Table of Contents


The table
below presents the components (in thousands) of our consolidated balance sheet
accounts classified as assets and liabilities related to assets held for
sale:




As of
      September 30, 2008
            
            
            As of
      December 31, 2007Assets
      held for sale:Loans
      and fees receivable, net
            
            $
            —
            
            
            $
            7,304Property
      at cost, net of depreciation
            
            
            —
            
            
            
            1,010Prepaid
      expenses and other assets
            
            
            —
            
            
            
            421Total
      assets held for sale
            
            $
            —
            
            
            $
            8,735Liabilities
      related to assets held for sale:Accounts
      payable and accrued expenses
            
            $
            —
            
            
            $
            373Total
      liabilities related to assets held for sale
            
            $
            —
            
            
            $
            373




4.
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.




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 September 30, 2008
            
            Credit Cards
            
            
            Investments in
              Previously
              Charged-Off
              Receivables
            
            
            Retail
              Micro-Loans
            
            
            Auto Finance
            
            
            Other
            
            
            TotalNet
      interest income, fees and related income (loss) on non-securitized earning
      assets
            
            $
            (4,067
            )
            
            $
            4,927
            
            
            $
            13,793
            
            
            $
            18,054
            
            
            $
            8,516
            
            
            $
            41,223Total
      other operating income
            
            $
            64,591
            
            
            $
            64
            
            
            $
            —
            
            
            $
            100
            
            
            $
            —
            
            
            $
            64,755(Loss)
      income from continuing operations before income taxes
            
            $
            (20,666
            )
            
            $
            (717
            )
            
            $
            (33
            )
            
            $
            (30,529
            )
            
            $
            1,189
            
            
            $
            (50,756
            )Loss
      from discontinued operations before income taxes
            
            $
            —
            
            
            $
            —
            
            
            $
            (1,586
            )
            
            $
            —
            
            
            $
            (297
            )
            
            $
            (1,883
            )Loans
      and fees receivable, gross
            
            $
            4,189
            
            
            $
            —
            
            
            $
            35,858
            
            
            $
            380,920
            
            
            $
            20,797
            
            
            $
            441,764Loans
      and fees receivable, net
            
            $
            4,022
            
            
            $
            —
            
            
            $
            29,809
            
            
            $
            311,843
            
            
            $
            14,957
            
            
            $
            360,631Total
      assets
            
            $
            1,127,813
            
            
            $
            46,705
            
            
            $
            97,507
            
            
            $
            359,762
            
            
            $
            70,064
            
            
            $
            1,701,851






Three Months
      Ended September 30, 2007
              
              Credit Cards
              
              
              Investments in
                Previously
                Charged-Off
                Receivables
              
              
              Retail
                Micro-Loans
              
              
              Auto Finance
              
              
              Other
              
              
              TotalNet
      interest income, fees and related income (loss) on non-securitized earning
      assets
              
              $
              (17,165
              )
              
              $
              13,889
              
              
              $
              16,359
              
              
              $
              4,879
              
              
              $
              2,888
              
              
              $
              20,850Total
      other operating income
              
              $
              81,806
              
              
              $
              251
              
              
              $
              —
              
              
              $
              703
              
              
              $
              —
              
              
              $
              82,760(Loss)
      income from continuing operations before income taxes
              
              $
              (77,348
              )
              
              $
              9,038
              
              
              $
              5,245
              
              
              $
              (11,710
              )
              
              $
              (389
              )
              
              $
              (75,164
              )Loss
      from discontinued operations before income taxes
              
              $
              —
              
              
              $
              —
              
              
              $
              (4,357
              )
              
              $
              —
              
              
              $
              (3,636
              )
              
              $
              (7,993
              )Loans
      and fees receivable, gross
              
              $
              1,245,885
              
              
              $
              —
              
              
              $
              93,734
              
              
              $
              309,596
              
              
              $
              14,556
              
              
              $
              1,663,771Loans
      and fees receivable, net
              
              $
              684,039
              
              
              $
              —
              
              
              $
              82,592
              
              
              $
              276,173
              
              
              $
              11,055
              
              
              $
              1,053,859Total
      assets
              
              $
              1,790,362
              
              
              $
              31,534
              
              
              $
              208,959
              
              
              $
              370,191
              
              
              $
              77,520
              
              
              $
              2,478,566





Nine Months
      Ended September 30, 2008
            
            Credit Cards
            
            
            Investments in
              Previously
              Charged-Off
              Receivables
            
            
            Retail
              Micro-Loans
            
            
            Auto Finance
            
            
            Other
            
            
            TotalNet
      interest income, fees and related income (loss) on non-securitized earning
      assets
            
            $
            (12,233
            )
            
            $
            34,958
            
            
            $
            47,665
            
            
            $
            53,723
            
            
            $
            17,729
            
            
            $
            141,842Total
      other operating income
            
            $
            213,498
            
            
            $
            502
            
            
            $
            —
            
            
            $
            296
            
            
            $
            —
            
            
            $
            214,296(Loss)
      income from continuing operations before income taxes
            
            $
            (91,336
            )
            
            $
            18,890
            
            
            $
            7,184
            
            
            $
            (35,051
            )
            
            $
            (2,388
            )
            
            $
            (102,701
            )Loss
      from discontinued operations before income taxes
            
            $
            —
            
            
            $
            —
            
            
            $
            (8,622
            )
            
            $
            —
            
            
            $
            (1,246
            )
            
            $
            (9,868
            )Loans
      and fees receivable, gross
            
            $
            4,189
            
            
            $
            —
            
            
            $
            35,858
            
            
            $
            380,920
            
            
            $
            20,797
            
            
            $
            441,764Loans
      and fees receivable, net
            
            $
            4,022
            
            
            $
            —
            
            
            $
            29,809
            
            
            $
            311,843
            
            
            $
            14,957
            
            
            $
            360,631Total
      assets
            
            $
            1,127,813
            
            
            $
            46,705
            
            
            $
            97,507
            
            
            $
            359,762
            
            
            $
            70,064
            
            
            $
            1,701,851


11
 Table of Contents


Nine Months
      Ended September 30, 2007
            
            Credit Cards
            
            
            Investments in
              Previously
              Charged-Off
              Receivables
            
            
            Retail
              Micro-Loans
            
            
            Auto Finance
            
            
            Other
            
            
            TotalNet
      interest income, fees and related income on non-securitized earning
      assets
            
            $
            39,730
            
            
            $
            43,893
            
            
            $
            56,291
            
            
            $
            27,372
            
            
            $
            4,877
            
            
            $
            172,163Total
      other operating income
            
            $
            267,490
            
            
            $
            834
            
            
            $
            —
            
            
            $
            1,835
            
            
            $
            —
            
            
            $
            270,159(Loss)
      income from continuing operations before income taxes
            
            $
            (112,343
            )
            
            $
            29,321
            
            
            $
            16,015
            
            
            $
            (15,366
            )
            
            $
            7
            
            
            $
            (82,366
            )Loss
      from discontinued operations before income taxes
            
            $
            —
            
            
            $
            —
            
            
            $
            (11,447
            )
            
            $
            —
            
            
            $
            (10,488
            )
            
            $
            (21,935
            )Loans
      and fees receivable, gross
            
            $
            1,245,885
            
            
            $
            —
            
            
            $
            93,734
            
            
            $
            309,596
            
            
            $
            14,556
            
            
            $
            1,663,771Loans
      and fees receivable, net
            
            $
            684,039
            
            
            $
            —
            
            
            $
            82,592
            
            
            $
            276,173
            
            
            $
            11,055
            
            
            $
            1,053,859Total
      assets
            
            $
            1,790,362
            
            
            $
            31,534
            
            
            $
            208,959
            
            
            $
            370,191
            
            
            $
            77,520
            
            
            $
            2,478,566




5.
Treasury and Other Stock Transactions




At our
discretion, we use treasury shares to satisfy option exercises and restricted
stock vesting, and we use the cost approach when accounting for the repurchase
and reissuance of our treasury stock. During the three and nine months ended
September 30, 2008, we reissued 21,675 and 194,621 treasury shares at an
approximate gross cost of $0.4 million and $3.5 million, respectively, in
satisfaction of option exercises and restricted share vestings. Also during the
three and nine months ended September 30, 2008, we effectively purchased
7,732 and 57,794 shares at a cost of $0.05 million and $0.6 million,
respectively, by having employees who were exercising options or vesting in
their restricted stock grants exchange a portion of their stock for our payment
of required minimum tax withholdings. We repurchased no other shares of our
common stock during the three or nine months ended September 30,
2008.




Also
during the nine months ended September 30, 2008, 2,026,881 shares
previously lent by us were returned to us. These shares were retired upon
receipt. As of September 30, 2008, we had outstanding 3,651,069 loaned
shares.




6.
Investments in Equity-Method Investees




As of
September 30, 2008, we held a 61.25% interest in CSG, LLC (“CSG”). Because
of specific voting and veto rights held by each investor in CSG, we do not
control (as defined by FASB Statement of Financial Accounting Standards
No. 94, “Consolidation of
All Majority-Owned Subsidiaries”) this entity. We account for our
CSG investment using the equity method of accounting. As of September 30,
2008, we also held a 47.5% interest in a joint venture in which we invested in
2005 and 33.3% interests in each of Transistor Holdings, LLC (“Transistor”) and
Capacitor Holdings, LLC (“Capacitor”) in which we invested in 2004. We account
for our investment interests 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 September 30,
              2008
            
            
            As of December 31,
              2007Securitized
      earning assets
            
            $
            115,568
            
            
            $
            127,514Total
      assets
            
            $
            118,531
            
            
            $
            134,621Total
      liabilities
            
            $
            2,143
            
            
            $
            2,929Members’
      capital
            
            $
            116,388
            
            
            $
            131,692







For the Three Months
              Ended September 30,
            
            
            For the Nine Months
              Ended September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      interest income, fees and related income on non-securitized earning
      assets
            
            $
            —
            
            
            $
            2
            
            
            $
            1
            
            
            $
            6Fees
      and related income on securitized earning assets
            
            $
            835
            
            
            $
            13,729
            
            
            $
            34,066
            
            
            $
            51,403Total
      other operating income
            
            $
            2,973
            
            
            $
            16,572
            
            
            $
            40,839
            
            
            $
            60,543Net
      income
            
            $
            2,418
            
            
            $
            15,296
            
            
            $
            38,067
            
            
            $
            56,521




7.
Off-Balance-Sheet Arrangements




Currently,
we securitize substantially all of the credit card receivables that we purchase
on a daily basis through our third-party financial institution relationships.
Prior to December 2007, however, we had not previously securitized our
lower-tier credit card receivables. In connection with our securitization
transactions, we transfer receivables associated with credit card accounts
originated by our third-party financial institution relationships to two
separate trusts (an “upper-tier originated portfolio” master trust and a
“lower-tier originated portfolio” master trust), which issue notes representing
undivided ownership interests in the assets of the respective master trusts.
Additionally, in various transactions, we have acquired portfolios of
receivables from third parties and subsequently securitized them; the latest of
these transactions was our second quarter 2007 acquisition of our U.K. Portfolio
and our securitization of its approximately £490 million ($970 million) of
gross face amount of underlying credit card receivables.




12
 Table of Contents


Our only
interest in the credit card receivables we securitize is in the form of retained
interests in the securitization trusts. GAAP requires us to treat our transfers
to the securitization trusts as sales and to remove the receivables from our
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 activities for the periods
presented. As with other tables included within the notes to our condensed
consolidated financial statements, it does not include the securitization
activities of our equity-method investees:




For the Three Months
              Ended September 30,
            
            
            For the Nine Months
              Ended September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Gross
      amount of receivables securitized at period end
            
            $
            2,912,102
            
            
            $
            2,315,285
            
            
            $
            2,912,102
            
            
            $
            2,315,285Proceeds
      from collections reinvested in revolving-period
      securitizations
            
            $
            341,817
            
            
            $
            303,141
            
            
            $
            1,131,716
            
            
            $
            876,313Excess
      cash flows received on retained interests
            
            $
            49,951
            
            
            $
            43,884
            
            
            $
            139,785
            
            
            $
            135,249Securitization
      gains
            
            $
            —
            
            
            $
            2,089
            
            
            $
            —
            
            
            $
            103,046Income
      from retained interests in credit card receivables
    securitized
            
            
            (3,666
            )
            
            
            21,773
            
            
            
            (38,060
            )
            
            
            3,794Fees
      on securitized receivables
            
            
            7,809
            
            
            
            5,780
            
            
            
            23,579
            
            
            
            14,492Total
      fees and related income on securitized earning assets
            
            $
            4,143
            
            
            $
            29,642
            
            
            $
            (14,481
            )
            
            $
            121,332




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 our securitization cash flows. This includes collections from
the cardholders for interest, fees and other charges on the accounts and
collections from those 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 becomes 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 our consolidated balance sheets, and because we classify them as
trading securities and have elected fair value accounting for them under
Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial
Assets and Liabilities,” (“Statement No. 159”), 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 based on Level 3 significant unobservable inputs as defined by
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,”
(“Statement No. 157”). (See Note 8, “Fair Values of Assets”.)




The Level
3 fair value measurements of retained interests associated with our
securitizations are dependent upon our estimate of future cash flows using the
cash-out method. Under the cash-out method, we record future cash flows at a
discounted value. We discount cash flows based on the timing of when we expect
to receive the cash flows. We base 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 stated
annual percentage rates and applicable terms and conditions governing fees as
set forth 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
thirty days of verification.




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




As
      of September 30,
              2008
            
            
            As
      of December 31,
              2007Interest
      only (“I/O”) strip
            
            $
            133,380
            
            
            $
            96,313Accrued
      interest and fees
            
            
            27,218
            
            
            
            32,768Servicing
      liability
            
            
            (6,457
            )
            
            
            (23,821
            )Amounts
      due from securitization
            
            
            27,932
            
            
            
            24,104Fair
      value of residual interests
            
            
            744,659
            
            
            
            887,215Issuing
      bank partner continuing interests
            
            
            (1,900
            )
            
            
            (1,000
            )Securitized
      earning assets
            
            $
            924,832
            
            
            $
            1,015,579




13
 Table of Contents


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 thirty days from the close of each respective month. The fair
value of residual interests category represents the net present value of cash
flows that will be returned to us associated with our funded interests
(generally for cardholder purchases) in our securitization trusts. Lastly,
certain of our issuing bank partners and their affiliates have contractual
rights entitling them to maintain continuing economic interests in our
securitized earning assets; these issuing bank partners’ continuing interests
are netted against the value of our securitized earning assets in the above
table.




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




As
      of September 30,
              2008
            
            
            As
      of December 31,
              2007
            
            
            As
      of September 30,
              2007Net
      collected yield (annualized)
            
            
            33.8
            %
            
            
            33.5
            %
            
            
            28.6
            %Principal
      payment rate (monthly)
            
            
            4.9
            
            
            
            5.4
            
            
            
            5.4Expected
      principal credit loss rate (annualized)
            
            
            15.9
            
            
            
            18.8
            
            
            
            13.9Residual
      cash flows discount rate
            
            
            22.6
            
            
            
            24.6
            
            
            
            21.0Servicing
      liability discount rate
            
            
            14.0
            
            
            
            14.0
            
            
            
            14.0




The 2007
net collected yield, principal payment rate and expected principal credit loss
rate in the above table were all significantly affected by the weightings
associated with our December 2007 securitization of our lower-tier credit card
receivables, which have higher yields and charge offs and lower payment rates
than our more traditionally securitized upper-tier credit card receivables. The
increase in residual cash flows discount rates relative to the
September 30, 2007 rate reflects both our securitization of our
lower-tier credit card receivables in December 2007 and a general widening of
market spreads above the one-month LIBOR interest rate index applicable in most
of our securitizations given turbulence in the global liquidity markets, with
offsetting effects over the past year of significant central bank interest rate
reductions, which  (notwithstanding temporary dislocations in late
September and early October 2008) have caused a general downward trend in the
base one-month LIBOR interest rate index applicable in most of our
securitizations. A decline in securitization facility advance rates thus far in
2008 has resulted in greater collateral enhancement levels at September 30,
2008, relative to December 31, 2007 and hence a lower residual cash flows
discount rate at September 30, 2008.  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; specifically,
with lower levels of collateral enhancement (and hence greater investment risk),
investors in securitization structure residual interests will require higher
investment returns and with higher levels of collateral enhancement (and hence
lower investment risk), investors in securitization structure residual interests
will require lower investment returns.




The
following table illustrates the hypothetical effect on the September 30,
2008 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:




As
      of
              September
      30, 2008Net
      collected yield (annualized)
            
            
            33.8
            %Impact on fair value of 10%
      adverse change
            
            $
            (59,280
            )Impact
      on fair value of 20% adverse change
            
            $
            (117,993
            )Principal
      payment rate (monthly)
            
            
            4.9
            %Impact
      on fair value of 10% adverse change
            
            $
            (6,212
            )Impact
      on fair value of 20% adverse change
            
            $
            (13,000
            )Expected
      principal credit loss rate (annualized)
            
            
            15.9
            %Impact
      on fair value of 10% adverse change
            
            $
            (28,742
            )Impact
      on fair value of 20% adverse change
            
            $
            (56,710
            )Residual
      cash flows discount rate
            
            
            22.6
            %Impact
      on fair value of 10% adverse change
            
            $
            (13,616
            )Impact
      on fair value of 20% adverse change
            
            $
            (26,790
            )Servicing
      liability discount rate
            
            
            14.0
            %Impact
      on fair value of 10% adverse change
            
            $
            (255
            )Impact
      on fair value of 20% adverse change
            
            $
            (468
            )




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 interests 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 our assets. 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 our credit card receivables
securitizations. Although we did not securitize our lower-tier credit card
receivables until December 2007, for comparative purposes, our 2007 net charge
offs disclosure in the table below includes all fourth quarter 2007 net charge
offs on these receivables.




14
 Table of Contents


As
      of September 30,
              2008
            
            
            As
      of December 31,
              2007Total
      managed principal balance
            
            $
            2,448,383
            
            
            $
            2,855,762Total
      managed finance charge balance
            
            
            463,719
            
            
            
            681,916Total
      managed receivables
            
            $
            2,912,102
            
            
            $
            3,537,678Receivables
      delinquent — sixty or more days
            
            $
            407,406
            
            
            $
            711,146Net
      charge offs for the three months ended
            
            $
            113,076
            
            
            $
            141,088




8.
Fair Values of Assets




In
February 2007, the FASB issued Statement No. 159, which allows companies to
carry the vast majority of financial assets and liabilities at fair value, with
changes in fair value recorded into earnings. Statement No. 159 is
effective for fiscal years beginning after November 15, 2007, and we
adopted this statement with respect to our securitized earning assets effective
January 1, 2008.




In
January 2008, we adopted Statement No. 157, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, except accounting
pronouncements that address share-based payment transactions and their related
interpretive accounting pronouncements, and does not eliminate the
practicability exceptions to fair value measurements in accounting
pronouncements within the scope of the Statement. In general, fair values
determined by Level 1 inputs use quoted prices (unadjusted) in active markets
for identical assets or liabilities that we have the ability to access. Fair
values determined by Level 2 inputs use inputs other than quoted prices included
in Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for similar assets and
liabilities in active markets, and inputs other than quoted prices that are
observable for the asset or liability, such as interest rates and yield curves
that are observable at commonly quoted intervals. Level 3 inputs are
unobservable inputs for the asset or liability, and include situations where
there is little, if any, market activity for the asset or liability. Where
inputs used to measure fair value may fall into different levels of the fair
value hierarchy, the level in the fair value hierarchy within which the fair
value measurement in its entirety has been determined is based on the lowest
level input that is significant to the fair value measurement in its
entirety.




Valuations
and Techniques for Assets Measured at Fair Value on a Recurring
Basis




Our
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers factors specific to
the asset or liability. For our assets measured on a recurring basis at fair
value, the table below summarizes (in thousands) fair values as of
September 30, 2008 by fair value hierarchy:




Assets
            
            Quoted Prices in Active
              Markets
      for Identical
              Assets (Level
      1)
            
            
            Significant Other
              Observable Inputs
              (Level 2)
            
            
            Significant
              Unobservable
              Inputs (Level 3)
            
            
            Total
      Assets
              Measured at Fair
              ValueInvestment
      securities—trading
            
            $
            389
            
            
            $
            —
            
            
            $
            —
            
            
            $
            389Securitized
      earning assets
            
            $
            —
            
            
            $
            —
            
            
            $
            924,832
            
            
            $
            924,832





For Level
3 assets measured at fair value on a recurring basis using significant
unobservable inputs, the following table presents (in thousands) a
reconciliation of the beginning and ending balances for the three and nine
months ended September 30, 2008:






For the Three
      Months Ended September 30, 2008
            
            
            For the Nine
      Months Ended September 30, 2008Investment
              Securities—Trading
            
            
            Securitized
              Earning Assets
            
            
            Total
            
            
            Investment
              Securities—Trading
            
            
            Securitized
              Earning Assets
            
            
            TotalBeginning
      balance
            
            $
            —
            
            
            $
            936,799
            
            
            $
            936,799
            
            
            $
            17,939
            
            
            $
            1,015,579
            
            
            $
            1,033,518Total
      gains (losses)—realized/unrealized:Net
      revaluations of/additions to retained interests
            
            
            —
            
            
            
            34,458
            
            
            
            34,458
            
            
            
            —
            
            
            
            334,325
            
            
            
            334,325Total
      realized and unrealized losses
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (17,939
            )
            
            
            —
            
            
            
            (17,939
            )Purchases,
      issuances, and settlements, net
            
            
            —
            
            
            
            (46,425
            )
            
            
            (46,425
            )
            
            
            —
            
            
            
            (425,072
            )
            
            
            (425,072
            )Net
      transfers in and/or out of Level 3
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Ending
      balance
            
            $
            —
            
            
            $
            924,832
            
            
            $
            924,832
            
            
            $
            —
            
            
            $
            924,832
            
            
            $
            924,832






15
 Table of Contents


For the Three
      Months Ended September 30, 2008
            
            
            For the Nine
      Months Ended September 30, 2008Investment
              Securities—Trading
            
            
            Securitized
              Earning Assets
            
            
            Total
            
            
            Investment
              Securities—Trading
            
            
            Securitized
              Earning Assets
            
            
            TotalTotal
      gains for the period included in earnings attributable to the change in
      unrealized gains or losses relating to assets still held at
      September 30, 2008
            
            $
            —
            
            
            $
            34,458
            
            
            $
            34,458
            
            
            $
            —
            
            
            $
            334,325
            
            
            $
            334,325




The
unrealized gains and losses for assets and liabilities within the Level 3
category presented in the tables above include changes in fair value that are
attributable to both observable and unobservable inputs. We provide below a
brief description of the valuation techniques used for Level 3 assets and
liabilities.





Net Revaluation
of Retained Interests.We record the net revaluation of retained
interests in the fees and related income from securitized earning assets
category in our consolidated statements of operations, specifically as income
from retained interests in credit card receivables securitized. The net
revaluation of retained interests includes revaluations of our I/O strip,
accrued interest and fees, servicing liabilities associated with our residual
interests, amounts due from securitization, residual interests and issuing bank
partner continuing interests. We estimate the present value of future cash flows
using a valuation model consisting of internally developed estimates of
assumptions third-party participants would use in determining fair value,
including estimates of net collected yield, principal payment rates, expected
principal credit loss rates, costs of funds and discount rates.




Total Realized
and Unrealized Losses.We record total realized and unrealized losses
within the fees and related income from non-securitized earning assets category
in our consolidated statements of operations. We formerly held certain
securities available for sale that we classified as Level 3, indicating that
significant valuation assumptions are not readily observable in the market due
to limited trading activity. For those securities, the last of which we disposed
of in the second quarter of 2008, we measured fair value using the best
available data, in the form of quotes provided directly by various dealers
associated with the securities and third-party valuations.




Valuations
and Techniques for Assets Measured at Fair Value on a Non-Recurring
Basis




We also
have assets that under certain conditions are subject to measurement at fair
value on a non-recurring basis. These assets include those associated with
acquired businesses, including goodwill and other intangible assets. For these
assets, measurement at fair value in periods subsequent to their initial
recognition is applicable if one or more of these assets is determined to be
impaired.




We were
required to make a determination of the fair value of goodwill and intangible
assets associated with our Retail Micro-Loans segment in the first quarter of
2008 by reason of our decision to discontinue and sell that segment’s Texas
operations. We estimated the fair value of these assets using Level 3 inputs,
specifically discounted cash flow projections reflecting our best estimate of
what third-party participants would use in determining fair value, including
estimates of yield, default rates, same store growth rates and payment rates. We
recorded within loss from discontinued operations a non-cash goodwill impairment
charge of $1.1 million in the first quarter of 2008—a charge that leaves the
goodwill of our continuing Retail Micro-Loans segment operations at its
estimated fair value. While fair value measurements of Retail Micro-Loans
segments assets held for sale were required in the second and third quarters of
2008, no fair value measurements of goodwill and intangible assets were required
of us within the Retail Micro-Loans segment during the second and third quarters
of 2008.





Similarly,
we were required to make a determination of the fair value of goodwill and
intangible assets associated with one of the reporting units within our Auto
Finance segment in the third quarter of 2008 because our refinancing of certain
debt facilities within the reporting unit in September 2008 under higher pricing
and reduced leverage (i.e., advance rates against underlying asset values) is
expected to cause both lower profit margins and higher capital requirements for
us (and hence diminished profit and growth potential relative to our acquisition
date expectations). We estimated the fair value of these assets using Level 3
inputs, specifically discounted cash flow projections reflecting our best
estimate of what third-party participants would use in determining fair value,
including estimates of yield, default rates, growth rates and payment rates. We
concluded that this Auto Finance segment reporting unit’s goodwill had no
continuing value as of September 30, 2008, and we recorded a non-cash goodwill
impairment charge of $29.2 million in the third quarter of 2008.




For our
assets measured on a non-recurring basis at fair value, the table below
summarizes (in thousands) fair values as of September 30, 2008 by fair
value hierarchy:




Quoted Prices in
              Active
      Markets
              for
      Identical
              Assets (Level
      1)
            
            
            Significant
              Other
              Observable
              Inputs (Level 2)
            
            
            Significant
              Unobservable Inputs
              (Level
      3)
            
            
            Total Assets
              Measured at
              Fair
      ValueAssets:Goodwill
            
            $
            —
            
            
            $
            —
            
            
            $
            64,896
            
            
            $
            64,896Intangibles,
      net
            
            $
            —
            
            
            $
            —
            
            
            $
            6,408
            
            
            $
            6,408Assets
      held for sale (net of liabilities related thereto)
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —




9.
Convertible Senior Notes, Notes Payable and Other Borrowings




Convertible
Senior Notes




In
June 2008, we repurchased $13.3 million in face amount of our $250.0
million aggregate principal amount of 3.625% convertible senior notes due 2025
and $36.7 million in face amount of our $300.0 million aggregate principal
amount of 5.875% convertible senior notes due 2035. The purchase price for these
notes totaled $21.4 million (including accrued interest) and resulted in an
aggregate gain of $28.4 million (net of their applicable share of deferred
costs, which were written off in connection with the purchases). The aggregate
$50.0 million of repurchased convertible senior notes are held in treasury and
have been netted against the aggregate $550.0 million face amount of the
originally issued convertible senior notes on our condensed consolidated balance
sheet.




16
 Table of Contents


Notes
Payable and Other Borrowings




Notes
payable and other borrowings consist of the following (in millions) as of
September 30, 2008:




As
      of September 30,
              2008Structured
      financings within our Auto Finance segment, average rate 7.4%, payable to
      2009 through 2013 ($116.1 payable in September 2009 and $53.5 amortizing
      with liquidation of underlying purchased auto finance receivables pool
      2009 through 2013)
            
            $
            169.6Third-party
      financing of Auto Finance segment receivables, rate of 9.5%, due January
      2010
            
            
            23.9Third-party
      financing of Auto Finance segment inventory, rate of 13.3%,
      month-to-month
            
            
            1.9Vendor-financed
      software and equipment acquisitions, rates from 2% to 7%, payable 2008
      through 2011
            
            
            5.2Month-End
      Money (“MEM”) U.K. Internet micro-loan operations secured debt facilities,
      variable rates between 6 and 7%, payable on demand
            
            
            14.2MEM
      subordinated debt, rate of 9.0%, payable through 2009
            
            
            0.4Total
      notes payable and other borrowings
            
            $
            215.2




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




10.
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.




Changes
in the carrying amount (in thousands) of goodwill by reportable segment for the
nine months ended September 30, 2007 and 2008 are as follows:




Retail Micro-
              Loans
            
            
            Auto
              Finance
            
            
            Other
            
            
            ConsolidatedBalance
      as of December 31, 2006
            
            $
            97,955
            
            
            $
            22,160
            
            
            $
            —
            
            
            $
            120,115Goodwill
      acquired during the period
            
            
            —
            
            
            
            8,435
            
            
            
            22,868
            
            
            
            31,303Purchase
      price adjustment
            
            
            —
            
            
            
            273
            
            
            
            —
            
            
            
            273Foreign
      currency translation
            
            
            —
            
            
            
            —
            
            
            
            813
            
            
            
            813Balance
      as of September 30, 2007
            
            $
            97,955
            
            
            $
            30,868
            
            
            $
            23,681
            
            
            $
            152,504Balance
      as of December 31, 2007
            
            $
            44,346
            
            
            $
            30,868
            
            
            $
            21,955
            
            
            $
            97,169Foreign
      currency translation
            
            
            —
            
            
            
            —
            
            
            
            (1,977
            )
            
            
            (1,977
            )Impairment
      loss
            
            
            (1,132
            )
            
            
            (29,164
            )
            
            
            —
            
            
            
            (30,296
            )Balance
      as of September 30, 2008
            
            $
            43,214
            
            
            $
            1,704
            
            
            $
            19,978
            
            
            $
            64,896




In
connection with our first quarter 2008 decision to sell our Texas retail
micro-loans operations and hold those operations for sale, we allocated goodwill
between our retained Retail Micro-Loans segment operations and our discontinued
Texas operations, thereby resulting in a $1.1 million impairment loss that is
reported within loss from discontinued operations for the nine months ended
September 30, 2008.  Additionally, based on September 2008
amendments to financing facilities within one of our Auto Finance segment’s
reporting units, we determined that the carrying amount of this reporting unit
more likely than not exceeded its fair value, we reassessed the carrying value
of the reporting unit’s goodwill and determined that the current fair value
would not support the stated goodwill balance, and we recorded a third quarter
2008 goodwill impairment loss of $29.2 million. These valuation analyses were
based on current internal projections and existing market data supporting
valuation prices of similar companies.




Intangible
Assets




We had
$2.3 million of intangible assets that we determined had an indefinite benefit
period as of both September 30, 2008 and December 31, 2007. The net
unamortized carrying amount of intangible assets subject to amortization was
$4.1 million as of September 30, 2008 and $5.9 million as of
December 31, 2007. Intangible asset-related amortization expense was $0.6
million and $0.7 million for the three months ended September 30, 2008 and
2007, respectively and $1.8 million and $3.2 million for the nine months ended
September 30, 2008 and 2007, respectively.




11.
Commitments and Contingencies




General




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 $1.4 billion at September 30, 2008 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 a 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 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.




17
 Table of Contents


For
various credit card receivables portfolio investments we have made through our
subsidiaries and equity-method investees, we have entered into guarantee
agreements and/or note purchase agreements whereby we have agreed to guarantee
the purchase of or purchase directly additional interests in portfolios of
credit card receivables owned by trusts, the retained interests in which are
owned by our 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 September 30, 2008, neither we nor any of our
subsidiaries or equity-method investees had purchased or been required to
purchase any additional notes under the note purchase agreements. Our guarantee
is limited to our respective ownership percentages in the various subsidiaries
and equity-method investees multiplied by the total amount of the notes that
each of the subsidiaries and equity-method investees could be required to
purchase. As of September 30, 2008, the maximum aggregate amount of our
collective guarantees and direct purchase obligations related to all of our
subsidiaries and equity-method investees was $229.6 million—a decrease from the
$369.3 million level at December 31, 2007 as a result of the continued
liquidation of our purchased portfolios. In general, this aggregate contingency
amount will decline in the absence of portfolio acquisitions as the aggregate
amount of credit available to cardholders for future purchases declines along
with our liquidation of the purchased portfolios and a corresponding reduction
in the number of open cardholder accounts. The acquired credit card receivables
portfolios of all of our affected subsidiaries and equity-method investees have
declined with each passing quarter since acquisition and we expect them to
continue to decline because we expect payments and charge offs combined to
exceed new purchases each month. We currently do not have any liability recorded
with respect to these guarantees or direct purchase obligations, but we will
record one if events occur that make payment probable under the guarantees or
direct purchase obligations. The fair value of these guarantees and direct
purchase obligations 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 one of our
third-party originating financial institutions, Columbus Bank and Trust Company,
we have provided the financial institution a $10.0 million standby letter
of credit and have pledged retained interests carried at $90.1 million at
September 30, 2008. Our arrangements with this financial institution expire
in March 2009.




Our other
third-party originating financial institution relationships require security for
our daily purchases of their credit card receivables, and we have pledged $31.1
million in collateral as such security as of September 30, 2008. In
addition, in connection with our April 2007 U.K. Portfolio acquisition, we
guarantee certain obligations of our subsidiaries and our third-party
originating financial institution to one of the European payment systems ($7.3
million as of September 30, 2008). Those obligations include, among other
things, compliance with one of the European payment system’s operating
regulations and by-laws. We also guarantee certain performance obligations of
our servicer subsidiary to the indenture trustee and the trust created under the
securitization relating to our U.K. Portfolio.




Also,
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.




Total
System Services, Inc. provides certain services to us as a system of record
provider. Were we to terminate our U.S. relationship with Total System Service,
Inc. prior to the contractual termination period, we would incur significant
penalties ($34.2 million as of September 30, 2008); we have no
intention, however, of terminating this agreement, which in May 2008 was
renegotiated and extended through May 2015.




One of
our most significant sources of liquidity is the securitization of our credit
card receivables. The maturity terms of our securitizations vary. As of
September 30, 2008, securitization facilities underlying our securitization
trusts included:  a six-year term securitization facility (expiring
October 2010), a two-year variable funding securitization facility with renewal
options (expiring January 2010), and a five-year term securitization facility
(expiring October 2009) issued out of our upper-tier originated portfolio master
trust; a two-year variable funding securitization facility (expiring October
2010) and a two-year amortizing securitization facility (expiring December 2009)
issued out of our lower-tier originated portfolio master trust; a multi-year
variable funding securitization facility (expiring September 2014) issued out of
the trust associated with our securitization of $92.0 million and $72.1
million (face amount) in credit card receivables acquired in 2004 and 2005,
respectively; an amortizing term securitization facility (denominated and
referenced in U.K. sterling and expiring April 2014) issued out of the trust
underlying our U.K. Portfolio securitization; and a ten-year amortizing term
securitization facility issued out of our Embarcadero Trust (expiring January
2014).




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.




Litigation




We are
involved in various legal proceedings that are incidental to the conduct of our
business. The material proceedings are described below.




We 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 we are the alter ego of
our subsidiaries and are 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.




18
 Table of Contents


Commencing
in June 2006, the FDIC began investigating the policies, practices and
procedures used in connection with our credit card originating financial
institution relationships. In December 2006, the FTC commenced a related
investigation. In general, the investigations focused upon whether marketing and
other materials contained misrepresentations regarding, among other things, fees
and credit limits and whether servicing and collection practices were conducted
in accordance with applicable law. We provided substantial information to both
the FDIC and FTC, and held settlement discussions with the FDIC and FTC. In
April 2008, we entered into an agreement in principle with the FTC and FDIC
in order to resolve the investigations. The agreement contemplated formal
settlement agreements with both the FTC and FDIC and was conditioned on the
FDIC’s entering into settlement agreements with three of our issuing banks.
Under the agreement in principle, and under the contemplated settlement
agreements, we would have issued approximately $80 million in credits, the cash
cost and pre-tax earnings effects of which would have been approximately $7.5
million—an amount we have had accrued as a reserve on our condensed consolidated
balance sheets since March 31, 2008. Even though we reached agreement with
the FTC and FDIC on the terms of our settlement agreements, two of the three
issuing banks were unable to reach agreement with the FDIC at that time. As a
result, on June 10, 2008, the FTC commenced an action against us and one of
our subsidiaries in the United States District Court for the Northern District
of Georgia entitled Federal
Trade Commission vs. CompuCredit et al., Case
No. 1:08ev01976-BBM-RGV, and the FDIC commenced three administrative
proceedings against us (each of which is assigned dual case numbers), Nos.
FDIC-08-139b, FDIC-08-140k, FDIC-07-256b, FDIC-07-257k, FDIC 07-228b and
FDIC-07-260k, two of which also were against the issuing banks that did not
reach agreement with the FDIC.  One of these two issuing banks has
settled its dispute with the FDIC.  In general, the actions allege
that we and our bank partners overstated the amount of available credit and
inadequately disclosed up-front fees and that one of our subsidiaries
misrepresented when certain accounts would be treated as “paid in full” and
utilized prohibited telephone collection practices. We are vigorously contesting
these actions and settlement discussions are ongoing. We continue to believe,
however, that our marketing and other materials and servicing and collection
practices previously complied with, and continue to comply with, applicable law.
Although it is premature to determine the ultimate outcome of these actions, we
do not believe that the outcome will be material to our financial condition.
These actions currently are the subject of answers or motions to
dismiss.




On
May 23, 2008, CompuCredit and one of our subsidiaries filed a complaint
against Columbus Bank and Trust Company and Synovus Financial Corporation
(collectively, “CB&T”) in the United States District Court for the Northern
District of Georgia in an action entitled CompuCredit Corporation et al. vs.
CB&T et al., Civil Action No. 08-EV-004730-F. Among other
things, the complaint as now amended alleges that CB&T, in violation of its
contractual obligations, failed to provide CompuCredit rebates, marketing fees,
revenues or other fees or discounts that were paid or granted by Visa®,
MasterCard®, or
other card associations with respect to or apportionable to accounts covered by
CB&T’s agreements with us and other consideration due to us. The complaint
also alleges that CB&T refused to approve changes requested by us to the
terms of the credit card accounts and refused to transfer credit card accounts
to our third-party designees, all in violation of the agreements among the
parties.




On
June 11, 2008, CB&T filed a complaint against us and one of our
subsidiaries in the United States District Court for the Middle District of
Georgia, CB&T vs.
CompuCredit Corporation et al., Civil Action no. 4:08cv78. In general,
the complaint requested that the court order us to implement certain changes to
the terms of the CB&T-issued credit cards. Our motion to dismiss this
complaint was granted.




On
July 14, 2008, CompuCredit and four of our officers, David G. Hanna,
Richard R. House, Jr., Richard W. Gilbert and J.Paul Whitehead III, were named
as defendants in a purported class action securities case filed in the United
States District Court for the Northern District of Georgia entitled Waterford Township General Employees
Retirement System vs. CompuCredit Corporation, et al., Civil Action
No. 08-CV-2270. On August 22, 2008, a virtually identical case was filed
entitled Steinke vs.
CompuCredit Corporation et al., Civil Action No.
08-CV-2687.In general, the complaints alleged that we made
false and misleading statements (or concealed information) regarding the nature
of our assets, accounting for loan losses, marketing and collection practices,
exposure to sub-prime losses, ability to lend funds, and expected future
performance. The complaints recently were consolidated, but a consolidated
complaint has not yet been filed. We are vigorously contesting this complaint,
and the defendants intend to file a motion to dismiss.




The
Company received a demand dated August 25, 2008, from Sue An that the Company
take action against all of its directors and two of its officers for alleged
breaches of fiduciary duty. In general, the alleged breaches are the same as the
actions that are the subject of the class action securities case. The Company’s
Board of Directors has appointed a special litigation committee to investigate
the allegations and to determine how to proceed.




Our debt
collections subsidiary, Jefferson Capital, is a party to a series of agreements
with Encore. In general, Encore is obligated to purchase from Jefferson Capital
certain defaulted credit card receivables. The agreements also require Encore to
sell certain charged off receivables to Jefferson Capital under its balance
transfer program and chapter 13 bankruptcy agreements. On July 10, 2008,
Encore did not purchase certain accounts as contemplated by the agreements,
alleging that the accounts that it was required to purchase failed to meet
certain representations and warranties set forth in the agreements, generally as
a result of the allegations made by the FTC as described above. In connection
with its failure, Encore alleged that CompuCredit and Jefferson Capital were in
breach of certain representations and warranties within the agreements.
CompuCredit was dismissed from the proceeding. We are vigorously contesting this
dispute. This dispute has been submitted to the American Arbitration Association
for resolution.




19
 Table of Contents


12.
Net Loss Per Common Share




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




For
      the Three Months
              Ended
      September 30,
            
            
            For
      the Nine Months
              Ended
      September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Numerator:Loss
      from continuing operations
            
            $
            (31,028
            )
            
            $
            (48,026
            )
            
            $
            (68,290
            )
            
            $
            (52,495
            )Loss
      from discontinued operations
            
            $
            (1,224
            )
            
            $
            (5,195
            )
            
            $
            (6,414
            )
            
            $
            (14,258
            )Net
      loss
            
            $
            (32,252
            )
            
            $
            (53,221
            )
            
            $
            (74,704
            )
            
            $
            (66,753
            )Denominator:Basic
      weighted-average shares outstanding
            
            
            46,794
            
            
            
            48,506
            
            
            
            46,773
            
            
            
            49,078Effect
      of dilutive stock options, warrants and restricted shares
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Diluted
      adjusted weighted-average shares outstanding
            
            
            46,794
            
            
            
            48,506
            
            
            
            46,773
            
            
            
            49,078Loss
      from continuing operations per common share—basic
            
            $
            (0.66
            )
            
            $
            (0.99
            )
            
            $
            (1.46
            )
            
            $
            (1.07
            )Loss
      from continuing operations per common share—diluted
            
            $
            (0.66
            )
            
            $
            (0.99
            )
            
            $
            (1.46
            )
            
            $
            (1.07
            )Loss
      from discontinued operations per common share—basic
            
            $
            (0.03
            )
            
            $
            (0.11
            )
            
            $
            (0.14
            )
            
            $
            (0.29
            )Loss
      from discontinued operations per common share—diluted
            
            $
            (0.03
            )
            
            $
            (0.11
            )
            
            $
            (0.14
            )
            
            $
            (0.29
            )Net
      loss per common share—basic
            
            $
            (0.69
            )
            
            $
            (1.10
            )
            
            $
            (1.60
            )
            
            $
            (1.36
            )Net
      loss per common share—diluted
            
            $
            (0.69
            )
            
            $
            (1.10
            )
            
            $
            (1.60
            )
            
            $
            (1.36
            )




As their
effects were anti-dilutive due to our net losses for the three and nine month
periods ending on both September 30, 2008 and September 30, 2007, we
excluded all of our stock options and unvested restricted shares from our net
loss per common share calculations in all of these periods.




13.
Stock-Based Compensation




As of
September 30, 2008, we had two stock-based employee compensation plans (our
Employee Stock Purchase Plan and our 2008 Equity Incentive Plan). The 2008
Equity Incentive Plan provides for grants of stock options, stock
appreciation rights, restricted stock awards, restricted stock units and
incentive awards. The maximum aggregate number of shares of common stock
that may be issued under this plan and to which awards may relate is 2,000,000
shares, and as of September 30, 2008, 1,562,293 shares remained
available for grant under this plan. Upon shareholder approval of the 2008
Equity Incentive Plan in May 2008, all remaining shares available for grant
under our previous stock option and restricted stock plans were terminated. In
the three months ended September 30, 2008, we recognized income tax-related
charge of $0.2 million within additional paid-in capital related to our
stock-based compensation plans, while for the nine months ended
September 30, 2008, we recognized an income tax-related charge to paid-in
capital associated with our stock-based compensation plans of $1.2
million.




Stock
Options




For the
three and nine months ended September 30, 2008, respectively, we expensed
compensation costs of $0.5 million and $1.5 million, respectively, related to
our stock option plans compared to $0.5 and $1.6 million for the same periods in
the prior year, respectively. 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.




A summary
of the status of our stock options as of September 30, 2008 and changes for
the nine months then ended is presented below:




Number of
              Shares
            
            
            Weighted-
              Average
              Exercise Price
            
            
            Weighted
              Average of
              Remaining
              Contractual
              Life
            
            
            Aggregate
              Intrinsic valueOutstanding
      at January 1, 2008
            
            
            666,264
            
            
            $
            36.99Granted
            
            
            200,000
            
            
            
            8.66Exercised
            
            
            (11,000
            )
            
            
            6.72Cancelled/Forfeited
            
            
            (9,350
            )
            
            
            12.24Outstanding
      at September 30, 2008
            
            
            845,914
            
            
            $
            30.96
            
            
            
            4.16
            
            
            $
            —Exercisable
      at September 30, 2008
            
            
            95,914
            
            
            $
            23.22
            
            
            
            1.37
            
            
            $
            —




As of
September 30, 2008, our unamortized deferred compensation costs associated
with unvested stock options were $4.8 million, which we are amortizing over a
weighted-average remaining amortization period of 2.4 years. We received $0.07
million in cash proceeds from stock option exercises during the nine months
ended September 30, 2008.




20
 Table of Contents


Restricted
Stock and Restricted Stock Unit Awards




During
the three and nine months ended September 30, 2008, we granted an aggregate
of 46,000 and 712,545 shares, respectively, of restricted stock and restricted
stock units with an aggregate grant date fair value of $0.1 million and $6.1
million, respectively. Our restricted stock and restricted stock unit 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 September 30, 2008, our unamortized deferred
compensation costs associated with unvested restricted stock and restricted
stock unit awards were $14.2 million with a weighted-average remaining
amortization period of 2.4 years.




Occasionally,
we issue or sell stock in our subsidiaries to certain members of the
subsidiaries’ management teams. The terms of these awards vary but generally
include vesting periods comparable to those of stock issued under our restricted
stock and restricted stock unit grants. Generally, these shares can be converted
to cash or our stock at our discretion after the specified vesting period and
holding period in unrestricted form or the occurrence of other contractual
events. Ownership in these shares constitutes minority interests in the
subsidiaries. We are amortizing this compensation cost commensurate with the
applicable vesting period. The weighted average remaining vesting period for
stock still subject to restrictions was 2.5 years as of September 30,
2008.




21
 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 herein and our
Annual Report on Form 10-K for the year ended December 31, 2007, where
certain terms (including trust, subsidiary and other entity names and financial,
operating and statistical 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 are a
provider of various credit and related financial services and products to or
associated with the financially underserved consumer credit market—a market
represented by credit risks that regulators classify as “sub-prime.” We serve
these markets through our marketing and solicitation of credit card accounts and
our servicing of various credit card receivables underlying both originated and
acquired accounts. We contract with third-party financial institutions pursuant
to which the financial institutions issue general purpose consumer credit cards,
and we purchase the receivables relating to such accounts on a daily basis. We
market to cardholders other ancillary products, including credit and identity
theft monitoring, health discount programs, shopping discount programs, debt
waivers and life insurance. Our product and service offerings also include
small-balance, short-term cash advance loans—generally less than $1,000 (or the
equivalent thereof in the British Pound for pound-denominated loans) for
thirty days or less and to which we refer as “micro-loans”; these loans are
marketed through various channels, including retail branch locations and the
Internet. We also originate auto loans through franchised auto dealers, purchase
and/or service auto loans from or for a pre-qualified network of dealers in the
buy-here, pay-here used car business and sell used automobiles through our own
buy-here, pay-here lots. Lastly, our licensed debt collections subsidiary
purchases and collects previously charged-off receivables from us, the trusts
that we service and third parties.




The most
significant business changes or events during the nine months ended
September 30, 2008 were (1) the sale of our Texas retail micro-loan
operations, (2) ongoing difficulties in the liquidity markets to raise new funds
in order to originate loans, thereby causing us to reduce credit card marketing
levels to test levels only, to close some accounts, and to continue with our
expense paring efforts, (3) decreases in our advance rates and increased pricing
for debt facilities within our Auto Finance segment, thereby causing us to
recognize a goodwill impairment charge of $29.2 million in the third quarter of
2008, (4) September 2008 amendments to one of our lower-tier originated
portfolio master trust facilities to decrease capacity and advance rates within
the facility, increase pricing under the facility, and extend the maturity date
of the facility through October 2010, (5) the occurrence of significant adverse
third quarter 2008 foreign currency transaction and translation adjustments due
to the rise in the U.S. dollar against the British Pound in that quarter, (6)
the commencement of litigation against us by the FDIC and FTC that is discussed
below, and (7) the commencement of other litigation both by and against us that
is discussed in detail elsewhere in this Report.




Our
credit card and other operations are heavily regulated, and over time we change
how we conduct our operations either in response to regulation or in keeping
with our goals of continuing to lead the industry in the application of
consumer-friendly credit card practices. For example, during the third and
fourth quarters of 2006 we discontinued billing finance charges and fees on
credit card accounts that become over ninety days delinquent. This change had
significant adverse effects on our fourth quarter 2006 and first quarter 2007
managed receivables net interest margins and other income ratios. We also made
certain changes to our collections programs and practices throughout 2007, and
these changes have had the effect of increasing our delinquencies and expected
future charge off levels and ratios. Moreover, we made further changes in the
fourth quarter of 2007 that adversely affected fee income and will continue to
negatively affect our future other income ratios and/or delinquency and charge
off levels and ratios. We foresee making further changes to our account
management practices in the future and are unable to predict the effects of
these changes at this time.




Commencing
in June 2006, the FDIC began investigating the policies, practices and
procedures used in connection with our credit card originating financial
institution relationships. In December 2006, the FTC commenced a related
investigation. In general, the investigations focused upon whether marketing and
other materials contained misrepresentations regarding, among other things, fees
and credit limits and whether servicing and collection practices were conducted
in accordance with applicable law. We provided substantial information to both
the FDIC and FTC, and held settlement discussions with the FDIC and FTC. In
April 2008, we entered into an agreement in principle with the FTC and FDIC
in order to resolve the investigations. The agreement contemplated formal
settlement agreements with both the FTC and FDIC and was conditioned on the
FDIC’s entering into settlement agreements with three of our issuing banks.
Under the agreement in principle, and under the contemplated settlement
agreements, we would have issued approximately $80 million in credits, the cash
cost and pre-tax earnings effects of which would have been approximately $7.5
million—an amount we have had accrued as a reserve on our condensed consolidated
balance sheets since March 31, 2008. Even though we reached agreement with
the FTC and FDIC on the terms of our settlement agreements, two of the three
issuing banks were unable to reach agreement with the FDIC at that time. As a
result, on June 10, 2008, the FTC commenced an action against us and one of
our subsidiaries in the United States District Court for the Northern District
of Georgia entitled Federal
Trade Commission vs. CompuCredit et al., Case
No. 1:08ev01976-BBM-RGV, and the FDIC commenced three administrative
proceedings against us (each of which is assigned dual case numbers), Nos.
FDIC-08-139b, FDIC-08-140k, FDIC-07-256b, FDIC-07-257k, FDIC 07-228b and
FDIC-07-260k, two of which also were against the issuing banks that did not
reach agreement with the FDIC. One of these two issuing banks has settled its
dispute with the FDIC.  In general, the actions allege that we and our
bank partners overstated the amount of available credit and inadequately
disclosed up-front fees and that one of our subsidiaries misrepresented when
certain accounts would be treated as “paid in full” and utilized prohibited
telephone collection practices. We are vigorously contesting these actions and
settlement discussions are ongoing. We continue to believe, however, that our
marketing and other materials and servicing and collection practices previously
complied with, and continue to comply with, applicable law. Although it is
premature to determine the ultimate outcome of these actions, we do not believe
that the outcome will be material to our financial condition. These actions
currently are the subject of answers or motions to dismiss.




Subject
to the availability of liquidity to us at attractive terms and pricing, which is
difficult if not impossible to obtain in the current market, our shareholders
should expect us to continue to evaluate and pursue for acquisition additional
credit card receivables portfolios, and potentially other financial assets that
are complementary to our financially underserved credit card business. Our focus
is on making good economic decisions that will result in high returns on equity
to our shareholders over a long-term horizon, even if these decisions may result
in volatile earnings under GAAP—such as in the case of incurring significant
marketing expenses in one particular quarter to facilitate expected future
long-term growth and profitability or in the case of the accounting requirements
for securitizations under Statement No. 140. To the extent we grow our
overall portfolio of credit card receivables (through origination, acquisition
or other new channels) and then securitize these assets, for example, we will
have securitization gains or losses, which may be material; this happened during
the fourth quarter of 2007 with our securitization of our lower-tier credit card
receivables—a transaction that generated $211.1 million of pre-tax income in
that quarter. 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 included
herein.




22
 Table of Contents


CONSOLIDATED
RESULTS OF OPERATIONS




Below is
a comparison of continuous operations results for the three and nine month
periods ending September 30, 2007 and 2008, respectively:




For the Three
      Months Ended September 30,(In
      thousands)
            
            2008
            
            
            2007
            
            
            2008 vs. 2007Total
      interest income
            
            $
            24,527
            
            
            $
            128,631
            
            
            $
            (104,104
            )Interest
      expense
            
            
            (10,140
            )
            
            
            (22,459
            )
            
            
            12,319Fees
      and related income on non-securitized earning assets:Retail
      micro-loan fees
            
            
            17,818
            
            
            
            25,220
            
            
            
            (7,402
            )Fees
      on lower-tier credit card receivables while held on balance
      sheet
            
            
            960
            
            
            
            199,527
            
            
            
            (198,567
            )Income
      on investments in previously charged-off receivables
            
            
            4,892
            
            
            
            13,684
            
            
            
            (8,792
            )Losses
      on investments in securities
            
            
            (276
            )
            
            
            (37,408
            )
            
            
            37,132Internet
      micro-loan fees
            
            
            12,362
            
            
            
            3,342
            
            
            
            9,020Gross
      profit on auto sales
            
            
            7,355
            
            
            
            4,380
            
            
            
            2,975Other
            
            
            1,008
            
            
            
            2,556
            
            
            
            (1,548
            )Other
      operating income:Securitization
      gains
            
            
            —
            
            
            
            2,089
            
            
            
            (2,089
            )Income
      from retained interests in credit card receivables
    securitized
            
            
            (3,666
            )
            
            
            21,773
            
            
            
            (25,439
            )Fees
      on securitized receivables
            
            
            7,809
            
            
            
            5,780
            
            
            
            2,029Servicing
      income
            
            
            44,537
            
            
            
            26,273
            
            
            
            18,264Ancillary
      and interchange revenue
            
            
            14,401
            
            
            
            19,197
            
            
            
            (4,796
            )Gain
      on repurchase of convertible senior notes
            
            
            —
            
            
            
            —
            
            
            
            —Equity
      in income of equity-method investees
            
            
            1,674
            
            
            
            7,648
            
            
            
            (5,974
            )Total
      Revenue
            
            $
            123,261
            
            
            $
            400,233
            
            
            $
            (276,972
            )Provision
      for loan losses
            
            
            17,283
            
            
            
            296,623
            
            
            
            (279,340
            )Other
      operating expense:Salaries
      and benefits
            
            
            16,407
            
            
            
            20,168
            
            
            
            (3,761
            )Card
      and loan servicing
            
            
            65,716
            
            
            
            76,792
            
            
            
            (11,076
            )Marketing
      and solicitation
            
            
            8,787
            
            
            
            38,990
            
            
            
            (30,203
            )Depreciation
            
            
            8,397
            
            
            
            8,680
            
            
            
            (283
            )Goodwill
      impairment
            
            
            29,164
            
            
            
            —
            
            
            
            29,164Other
            
            
            28,293
            
            
            
            32,887
            
            
            
            (4,594
            )Minority
      interests
            
            
            (30
            )
            
            
            1,257
            
            
            
            (1,287
            )







For the Nine
      Months Ended September 30,(In
      thousands)
            
            2008
            
            
            2007
            
            
            2008 vs. 2007Total
      interest income
            
            $
            75,782
            
            
            $
            315,484
            
            
            $
            (239,702
            )Interest
      expense
            
            
            (31,989
            )
            
            
            (55,322
            )
            
            
            23,333Fees
      and related income on non-securitized earning assets:Retail
      micro-loan fees
            
            
            56,596
            
            
            
            70,927
            
            
            
            (14,331
            )Fees
      on lower-tier credit card receivables while held on balance
      sheet
            
            
            6,363
            
            
            
            470,605
            
            
            
            (464,242
            )Income
      on investments in previously charged-off receivables
            
            
            34,718
            
            
            
            43,332
            
            
            
            (8,614
            )Losses
      on investments in securities
            
            
            (6,527
            )
            
            
            (63,132
            )
            
            
            56,605Internet
      micro-loan fees
            
            
            30,132
            
            
            
            5,703
            
            
            
            24,429Gross
      profit on auto sales
            
            
            25,362
            
            
            
            7,824
            
            
            
            17,538Other
            
            
            5,197
            
            
            
            4,679
            
            
            
            518Other
      operating income:Securitization
      gains
            
            
            —
            
            
            
            103,046
            
            
            
            (103,046
            )Income
      from retained interests in credit card receivables
    securitized
            
            
            (38,060
            )
            
            
            3,794
            
            
            
            (41,854
            )Fees
      on securitized receivables
            
            
            23,579
            
            
            
            14,492
            
            
            
            9,087Servicing
      income
            
            
            137,691
            
            
            
            72,359
            
            
            
            65,332Ancillary
      and interchange revenue
            
            
            45,532
            
            
            
            49,521
            
            
            
            (3,989
            )Gain
      on repurchase of convertible senior notes
            
            
            28,424
            
            
            
            —
            
            
            
            28,424Equity
      in income of equity-method investees
            
            
            17,130
            
            
            
            26,947
            
            
            
            (9,817
            )Total
      Revenue
            
            $
            409,930
            
            
            $
            1,070,259
            
            
            $
            (660,329
            )Provision
      for loan losses
            
            
            53,792
            
            
            
            627,937
            
            
            
            (574,145
            )Other
      operating expense:Salaries
      and benefits
            
            
            53,094
            
            
            
            56,097
            
            
            
            (3,003
            )Card
      and loan servicing
            
            
            213,896
            
            
            
            219,264
            
            
            
            (5,368
            )Marketing
      and solicitation
            
            
            41,727
            
            
            
            124,652
            
            
            
            (82,925
            )Depreciation
            
            
            25,756
            
            
            
            28,367
            
            
            
            (2,611
            )Goodwill
      impairment
            
            
            29,164
            
            
            
            —
            
            
            
            29,164Other
            
            
            93,731
            
            
            
            93,545
            
            
            
            186Minority
      interests
            
            
            1,471
            
            
            
            2,763
            
            
            
            (1,292
            )




23
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Three
and Nine Months Ended September 30, 2008, Compared to the Three and Nine
Months Ended September 30, 2007




Total interest
income. Total interest income consists primarily of finance charges and
late fees earned on loans and fees receivable we have not securitized in
off-balance-sheet securitization transactions—principally from our lower-tier
credit card receivables until our securitization of them in December 2007 and
from our Auto Finance segment. The decreases are primarily due to our December
2007 securitization of our lower-tier credit card receivables. We reported
$103.3 million and $240.3 million of total interest income on these receivables
during the three and nine months ended September 30, 2007, respectively,
while income associated with our retained interest in the securitization trust
underlying these receivables now is reported exclusively within fees and related
income on securitized earning assets on our consolidated statements of
operations.




Also
included within total interest income (under the other category on our condensed
consolidated statements of operations) is interest income we 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 caused a
reduction in interest income levels associated with some of our bonds and the
Embarcadero Trust interest. Moreover, our reduced holdings of bonds issued by
other third-party asset-backed securitizations contributed further to our
reduced other interest income levels compared to those experienced in 2007.
Subsequent to the end of our second quarter of 2008, we liquidated our remaining
investments in third-party asset-backed securities in response to margin calls;
as such, we do not have any continuing interest income associated with these
investments.




For the
above-noted reasons, our total interest income in the fourth quarter of this
year will be lower than last year’s.




Excluding
the effects of the above-noted items, total interest income for the three and
nine months ended September 30, 2008 would have grown $1.9 million and $12.7
million, respectively, relative to the same periods of last year. This is
consistent with receivables growth we experienced within our Auto Finance
segment.  However, due to tightening liquidity, we significantly
restricted growth within this segment during the third quarter of 2008, and
absent our obtaining additional financing at attractive terms and pricing, we
expect interest income within our Auto Finance segment to decline with net
liquidations in its receivables levels for the foreseeable future.




Interest
expense. The decreases are primarily due to our December 2007
securitization of our lower-tier credit card receivables. Interest expense
associated with these receivables was $10.8 million and $18.2 million in the
three and nine months ended September 30, 2007, respectively; whereas, all
interest costs associated with these receivables now are borne by our lower-tier
originated portfolio master trust. Income associated with our retained interest
in this securitization trust (net of interest costs) is reported exclusively
within fees and related income on securitized earning assets on our consolidated
statements of operations. Another significant contributor to our declining
interest expense levels is the reduced levels of collateralized financing
associated with our investments in third-party asset-backed securitizations.
With our now completed disposition of these investments, we will not incur any
further interest costs associated with the financing of these
investments.




We did,
however, experience higher interests costs within our MEM U.K. Internet-based
micro-loan operations, reflecting our acquisition of these operations in the
second quarter of 2007 and its subsequent funding of receivables growth by
drawing on its available credit lines. Based on the current debt financing
capacity within MEM’s operations and absent an increase in its borrowing
capacity, we expect only modest growth and increases in its interest costs for
the next several quarters.




Notwithstanding
increases in pricing on debt facilities within our Auto Finance segment in the
third quarter of 2008, we expect a gradual reduction in interest costs within
this segment over time, reflecting both lower advance rates, and hence lower
relative outstanding debt balances, and expected contractions in this segment’s
receivables as we have significantly curtailed marketing within this
segment.




Fees and related
income on non-securitized earning assets. The factors affecting our
levels of fees and related income on non-securitized earning assets
include:




•
            the
      securitization of our lower-tier credit card receivables in December 2007,
      which caused a decrease of $198.6 million and $464.2 million,
      respectively, in the three and nine months ended September 30,
      2008;




•
            lower
      2008 retail micro-loan fees due to (1) our substantial termination in
      late 2007 of a loan program in which we were the lender for micro-loans
      arranged by three different U.S. credit service organizations,
      (2) temporarily diminished consumer demand for retail micro-loans in
      the second quarter of 2008 possibly as a result of tax stimulus payments
      received by consumers , and (3) our conservative second quarter 2008
      approach to loan generation in Ohio while we awaited regulatory approvals
      (obtained in August 2008)  for alternative loan products in that
      state due to legislative changes enacted in that state during the second
      quarter—factors that also are expected to contribute to lower fourth
      quarter of 2008 retail micro-loan revenues relative to the fourth quarter
      of 2007;




•
            decreases
      in income on investments in previously charged-off receivables of
      $8.8 million and $8.6 million, respectively, in the three and nine months
      ended September 30, 2008 principally reflecting (1) the dispute
      with Encore based on its failure to continue purchases of previously
      charged-off receivables under our forward flow contract with them as
      discussed in detail within the Investment in Previously
      Charged-Off Receivables Segment section below and
      (2) increased pricing paid by this segment upon the expiration of one
      of its more favorably priced forward flow agreements for previously
      charged-off paper purchases—offset somewhat by (1) growth in the
      segment’s balance transfer program and Chapter 13 bankruptcy activities
      and (2) heightened levels of previously charged-off receivables sales
      under our forward flow contract with Encore with correspondingly greater
      accretion of deferred revenue (in part due to the release of a portion of
      $10.0 million in escrowed Encore monies to us prior to our dispute with
      Encore based on its failure to continue purchases of previously
      charged-off receivables under our forward flow contract with them as
      discussed in detail within the Investment in Previously
      Charged-Off Receivables Segment section
  below);




•
            increases
      of $37.1 million and $56.6 million in the three and nine months ended
      September 30, 2008, respectively, representing lower levels of losses
      on our portfolio of investments in debt and equity securities as compared
      to the same periods of 2007;




•
            increases
      of $9.0 million and $24.4 million in Internet micro-loan fees in the three
      and nine months ended September 30, 2008, respectively, reflecting
      our acquisition of MEM in the second quarter of 2007 and subsequent growth
      in its operations; and




•
            $3.0
      million and $17.5 million of higher gross profits on automotive vehicle
      sales in the three and nine months ended September 30, 2008,
      respectively, relating to our Just Right Auto Sales (“JRAS”) operations,
      which we acquired during the first quarter of 2007 and subsequently have
      expanded.




24
 Table of Contents


As we
have now disposed of all of our investments in third-party asset-backed
securities, we expect no further losses on these investments.




Prospects
for near-term profits and revenue growth within our Investments in Previously
Charged-off Receivables segment are uncertain due to each of the factors cited
above (and discussed further in the Investment in Previously Charged-Off
Receivables Segment section below), as well as an anticipated reduction
in the volume of charge offs that the segment is expected to purchase from our
lower-tier originated portfolio master trust relative to recent quarters. In the
first and second quarters of 2008, the Investments in Previously Charged-off
Receivables segment acquired substantial volumes from the large vintages of
second and third quarter 2007 lower-tier credit card receivables originations
that reached peak charge-off levels in the first and second quarters of
2008.




Lastly,
we currently expect continued, but limited, growth in gross profits from our
JRAS operations and fees from our U.K.-based Internet micro-loan operations
within MEM as both of these entities continue to execute on their modest growth
plans.




Fees and related
income on securitized earning assets. Fees and related income on
securitized earning assets include (1) securitization gains,
(2) income from retained interests in credit card receivables securitized
and (3) returned-check, cash advance and other fees associated with our
securitized credit card receivables.




In the
three months ended September 30, 2007, we acquired our U.K. Portfolio of
approximately £490 million ($970 million) of gross face amount of credit
card receivables and immediately securitized the portfolio, generating a $100.4
million securitization gain in that period. Given the current net liquidating
status of each of our credit card receivables portfolios within their respective
securitization trusts, we have not recognized any securitization gains in the
three and nine months ended September 30, 2008.




We
experienced losses on retained interests in credit card receivables securitized
in both the three and nine month periods ended September 30, 2008 and for
the nine months ended September 30, 2007. The U.K. Portfolio acquisition
and its subsequent securitization in the second quarter of 2007 resulted in the
large securitization gain noted above, but also generated $48.6 million of
losses on our retained interests in that same period. Our other securitized
portfolios generated income in the 2007 periods partially offsetting the losses
in the U.K. Portfolio. In contrast, the 2008 periods reflect much lower losses
on our retained interests in the U.K. Portfolio, but large losses resulting
principally from charge offs associated with our lower-tier credit card
receivables that we securitized in December 2007. This portfolio generated high
levels of charge offs associated with the record number of new accounts
originated in the second and third quarters of 2007, which negatively impacted
our income from retained interests principally during the first and second
quarters of 2008. Our second and third quarter 2008 losses on retained interests
in credit card receivables securitized also reflect our inability to re-price
accounts owned by CB&T at market-appropriate pricing (a matter that is the
subject of litigation between us and CB&T), the continued effects on fee
billings of the fourth quarter 2007 changes made to our billing practices in
response to regulatory guidance and comments regarding negative amortization and
certain adverse changes to our retained interest valuation assumptions given
current trends in the U.S. economy.




Fees on
securitized receivables increased in the 2008 periods due to our December 2007
securitization of our lower-tier credit card receivables.




In the
Credit Cards Segment
section below, 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.




Servicing income.Servicing income increased relative to 2007 levels due to the December
2007 securitization of our lower-tier credit card portfolio and the April 2007
acquisition and securitization of our U.K. Portfolio for which we have been
engaged as servicer, partially offset, however, by the effects on our servicing
compensation of liquidations in our other purchased credit card receivables
portfolios and those of our equity-method investees for which we have been
engaged as servicer. Relative to the servicing income we generated in the three
and nine months ended September 30, 2008, in the absence of portfolio
acquisitions and given currently planned originations at only test levels, we
anticipate decreases in our servicing income levels in future quarters due to
our currently liquidating portfolios.




Ancillary and
interchange revenues. Ancillary and interchange revenues decreased in the
three and nine months ended September 30, 2008, when compared to the same
periods in 2007. These decreases result from fewer new credit card account
additions thus far in 2008 and net liquidations that we have experienced thus
far in 2008 in all of our credit card receivables portfolios. These decreases
were partially offset in the nine-month period ended September 30, 2008 due to
our April 2007 U.K. Portfolio acquisition, as we earned revenues from this
portfolio for nine months as of September 30,  2008 but for only six
months as of September 30, 2007. Absent portfolio acquisitions, we expect
further reductions in our ancillary and interchange revenues in the fourth
quarter of 2008 and into 2009 principally because we currently are originating
only de minimis numbers of new credit card accounts, thereby resulting in a
gradual liquidation of our portfolios.




Gain on
repurchase of convertible senior notes. In June 2008, we repurchased
$13.3 million in face amount of our $250.0 million aggregate principal amount of
3.625% convertible senior notes due 2025 and $36.7 million in face amount of our
$300.0 million aggregate principal amount of 5.875% convertible senior notes due
2035. The purchase price for these notes totaled $21.4 million (including
accrued interest) and resulted in a gain of $28.4 million (net of their
applicable portion of deferred costs that we wrote off upon their
repurchase).




Equity in income
of equity-method investees. Equity in income of equity-method investees
decreased primarily due to diminished earnings over time as we continue to
liquidate the receivables balances associated with these equity-method
investees.




Provision for
loan losses. 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. Our December 2007
securitization of our lower-tier credit card receivables is the principal reason
for the reductions in our provision for loan losses; credit losses underlying
our retained interests in our securitized lower-tier credit card receivables now
are reflected exclusively within fees and related income on securitized earning
assets on our consolidated statements of operations. Partially offsetting the
reduction in our provision for loan losses are provisions made associated with
receivables growth within our Auto Finance segment relating to the additions of
ACC and JRAS in 2007 and subsequent growth in these operations, as well as
receivables growth within our MEM U.K. Internet micro-loan operations, tempered,
however, by slower receivables growth within our Retail Micro-Loans
segment.




Total other
operating expense. Total other operating expense decreased $20.8 million
and $64.6 million in the three and nine months ended September 30, 2008,
respectively, reflecting the following:




•
            decreases
      of $30.2 million and $82.9 million in marketing and solicitation costs in
      the three and nine-month periods, respectively, due to our desire to
      preserve capital given the current dislocation of the liquidity markets
      and our corresponding scale back in our credit card marketing efforts
      (whereby, for example, we grossed approximately 423,000 new credit card
      accounts during the first nine months of 2008 compared to approximately
      1.9 million in new credit card accounts during the first nine months of
      2007);




25
 Table of Contents


•
            diminished
      salaries and benefits costs of $3.8 million and $3.0 million for the three
      and nine-month periods, respectively, resulting from our ongoing
      cost-cutting efforts and our fourth quarter 2007 decision to discontinue
      several businesses and initiatives, partially offset however by slight
      increases within salaries and benefits primarily due to personnel
      additions in connection with our first quarter 2007 Auto Finance segment
      acquisitions of JRAS and ACC and our second quarter 2007 acquisition of
      the U.K. Portfolio;




•
            decreases
      within card and loan servicing expenses of $11.1 million and $5.4 million
      for the three and nine-month periods, respectively, primarily as a result
      of credit card portfolio liquidations—such decreases being partially
      offset by (1) an increase from servicing costs associated with the
      second quarter 2007 acquisition of our U.K. Portfolio, (2) an
      increase from servicing costs associated with our first quarter 2007 JRAS
      and ACC acquisitions within our Auto Finance segment, and
      (3) additional costs incurred related to the conversion of servicing
      relationships from BarclayCard to us in the first quarter of 2008—costs
      that are not expected to be continued in future periods;
    and




•
            decreases
      in depreciation expense and other expenses due to cost containment
      measures and diminished costs resulting from our fourth quarter 2007
      decision to discontinue several businesses and initiatives and natural
      liquidations and corresponding cost declines in our existing
      portfolios;




partially
offset by:




•
            a
      third quarter of 2008 goodwill impairment charge of $29.2 million
      ;




•
            a
      $5.5 million second quarter 2008 impairment charge associated with
      sub-leases executed in the second quarter for 183,461 square feet of
      office space at our corporate headquarters;
and




•
            various
      litigation and other settlement-related accruals and costs. (As discussed
      elsewhere, we are engaged in several significant, and somewhat
      interrelated disputes. In the first quarter of 2008, we accrued $2.5
      million in addition to $5.0 million that we had accrued in 2007 for the
      expected cash and earnings settlement cost of FTC and FDIC disputes based
      upon negotiations between us and the FTC and FDIC that ultimately resulted
      in an agreement in principle to settle those disputes. That settlement did
      not occur and litigation ensued. Litigation also commenced with respect to
      our disputes with Encore and CB&T, and a purported class action
      securities case was filed against us and several of our officers as well.
      We are contesting each of these matters vigorously, although settlement
      discussions with the FTC and FDIC are ongoing.  Any settlement
      could provide for us to make restitution or other payments. We expect to
      incur increased litigation and related expense over the next several
      quarters as well.)





While we
incur certain base levels of fixed costs, the majority of our operating costs
are highly variable based on the levels of accounts we market and receivables 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 have substantially reduced our exploration of new products and
services and research and development efforts pending improvements in the
liquidity markets. In addition, we have terminated various operations that were
start-up in nature and were not individually meeting our current capital
allocation requirements. Given our current focus on cost-cutting and capital
preservation in light of the continuing dislocation in the liquidity markets and
significant uncertainties as to when these markets will improve, we expect
further reductions in marketing efforts and expense levels and in most other
cost categories discussed above over the next several quarters. We continue to
perform extensive reviews of all areas of our businesses for cost savings
opportunities so as to align our costs with our currently liquidating portfolio
of managed receivables.




Minority
interests. We reflect the ownership interests of minority holders of
equity in our majority-owned subsidiaries (including management team holders of
shares in our subsidiary entities; see Note 13, “Stock-Based Compensation”) as
minority interests in our consolidated statements of operations. Generally, this
expense is declining, which is consistent with (1) liquidations of acquired
credit card portfolios within securitization trusts, the retained interests of
which are owned by our majority-owned subsidiaries and (2) the resulting
relative decline in contributions of our majority-owned subsidiaries (as
discussed in “Fees and related
income on securitized earning assets,” above) to income from retained
interests in credit card receivables securitized as noted above. However, this
general trend reversed in the second and third quarters of 2008 and we recorded
income from our minority interests in these periods given net losses incurred by
our majority-owned subsidiaries during these periods—such losses stemming from
reduced income on our retained interests in securitized credit card receivables
within these subsidiaries in part associated with more conservative valuation
assumptions used with respect to their retained interest valuations, second
quarter 2008 losses associated with our  MEM U.K. Internet micro-loan
operations prior to its attaining scale and modest profitability in the third
quarter of 2008, and reduced income contributions during the second quarter of
2008 and losses incurred during the third quarter of 2008 within the
majority-owned subsidiary that is a holding company within our Investments in
Previously Charged-off Receivables segment for reasons explained throughout this
Report.




Income
taxes. Our overall effective tax rate (computed considering both
continuing and discontinued operations in the aggregate) was approximately 38.7%
and 33.6% for the three and nine months ended September 30, 2008,
respectively, versus 36.0% for comparable 2007 periods. Variations in the
effective tax rates between all periods are substantially related to differing
expectations in different periods as to the ratio of our permanent differences
to pre-tax GAAP income or loss levels. We have experienced no material changes
in effective tax rates associated with differences in filing jurisdictions and
changes in law between the comparison periods.




Credit
Cards Segment




Our
Credit Cards segment includes our activities relating to investments in and
servicing of our various credit card portfolios as well as the performance
associated with various investments in asset-backed debt and equity securities.
The revenues we earn from credit card activities primarily include finance
charges, late fees, over-limit fees, annual fees, activation fees, monthly
maintenance fees, returned-check fees and cash advance and other fees. We also
sell ancillary products such as memberships, insurance products, subscription
services and debt waiver. Additionally, we earn interchange fees, which
represent a portion of the merchant fee assessed by card
associations based on cardholder purchase volumes underlying credit card
receivables.




26
 Table of Contents


The way
we record these receivables in our consolidated balance sheets and consolidated
statements of operations depends on the form of our ownership. While the
underlying activities are similar between each of our portfolios, how we reflect
these activities in our financial statements differs dramatically depending on
our ownership form. These forms include:




•
            originated
      or purchased;




•
            securitized
      or non-securitized; and




•
            consolidated
      or non-consolidated.




Our
originated portfolios include the credit card receivables of customers obtained
through our own marketing efforts; whereas, our purchased portfolios include the
credit card receivables of customer accounts that were originated by others
prior to our acquisitions of the portfolios at varying but generally significant
purchase discounts. We historically have spent a substantial amount on marketing
to originate new cardholder accounts, although the level of our marketing
efforts depends upon the state of the economy and our available liquidity and
has declined significantly in recent periods. We expense the majority of
marketing costs when we incur them. New cardholders also require greater
servicing efforts than established accounts. Originated accounts generally do
not charge off until after the account is open for at least six months. During
periods of rapid growth in originated cardholder accounts, we likely will
reflect high relative servicing and marketing expenses but low relative charge
offs of delinquent accounts. On the other hand, when we purchase credit card
portfolios from others, we historically have purchased them at substantial
discounts. We generally earn fees from the cardholders immediately after the
purchase and do not have to bear the high marketing costs associated with
originated accounts. The receivables we purchase are in various stages of
delinquency, and some will charge off, for example, in the first month after we
purchase them. In computing our managed receivables statistics (see discussion
below), we apply a portion of our purchase discount to offset the face amount of
charge offs of all receivables in existence on the date of our acquisitions,
and, therefore, we generally do not incur any negative and non-economic effects
associated with these charge offs.




With our
December 2007 securitization of our lower-tier credit card receivables, we now
have securitized substantially all of our credit card receivables through
off-balance-sheet securitizations. In these securitizations, we sell the
receivables to a trust, and generally recognize a gain on this sale that we
refer to as a securitization gain. Because we have sold these receivables in
accordance with Statement No. 140, we remove them from our consolidated
balance sheets. We record the operating activities associated with our
securitized credit card receivables in the fees and related income on
securitized earning assets category in our consolidated statements of
operations. The sub-categories of income on these securitized receivables
include: (1) the securitization gains noted above; (2) income from
retained interests in credit card receivables securitized, which generally
includes finance charges, late fees, over-limit fees, annual fees, and monthly
maintenance fees; and (3) fees on securitized receivables, which includes
activation fees, returned- check fees and cash advance and other fees. We record
fee charge offs for securitized receivables as an offset to their related
revenues, and we account for net principal charge offs as an offset in
determining income from retained interests in credit card receivables
securitized.




During
any periods in which we hold credit card receivables on our balance sheet (e.g.,
prior to our securitization or after our de-securitization of them), we record
finance charges and late fees in the consumer loans, including past due fees
category on our consolidated statements of operations, and we include the
over-limit fees, annual fees, activation fees, monthly maintenance fees,
returned-check fees and cash advance and other fees in the fees and other income
on non-securitized earning assets category on our consolidated statements of
operations. We reflect the charge offs of non-securitized receivables within our
provision for loan losses.




We
routinely originate or purchase our credit card portfolios through subsidiary
entities. Generally, if we control through direct ownership or exert a
controlling interest in the entity, we consolidate it and reflect its operations
as noted above. If we exert significant influence but do not control the entity,
we record our share of its net operating results in the equity in income of
equity-method investees category on our consolidated statements of
operations.




We also
earn servicing income from the trusts underlying our securitizations and the
securitizations of our equity-method investees. For both the securitized and
non-securitized credit card receivables of our consolidated entities, we record
the ancillary and interchange revenues in a separate line in our consolidated
statements of operations.




Background




We make
various references within our discussion of the Credit Card segment to our
managed receivables. In calculating managed receivables data, we assume that
none of the credit card receivables underlying our off-balance-sheet
securitization facilities was ever transferred to a securitization trust and we
present our credit card receivables as if we still owned them. We reflect the
portion of the receivables that we own within our managed receivables data,
whether or not we consolidate the entity in which the receivables are held.
Therefore, managed receivables data include both our securitized and
non-securitized credit card receivables. They include the receivables we manage
for our consolidated subsidiaries, except for the minority interest holders’
shares of the receivables, and they also include only our share of the
receivables that we manage for our equity method investees.




Financial,
operating and statistical data based on these aggregate managed receivables are
vital to any evaluation of our performance in managing our credit card
portfolios, including our underwriting, servicing and collecting activities and
our valuing of purchased receivables. In allocating our resources and managing
our business, management relies heavily upon financial data and results prepared
on this “managed basis.” Analysts, investors and others also consider it
important 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 their
underlying securitization trusts.




Reconciliation
of the managed receivables data to our GAAP financial statements requires:
(1) recognition that, with our securitization of our lower-tier credit card
receivables in December 2007, we now sell substantially all of our credit card
receivables in securitization transactions; (2) an understanding that our
managed receivables data are based on billings and actual charge offs as they
occur, without regard to any changes in our allowance for uncollectible loans
and fees receivable; (3) inclusion of our economic share of (or equity
interest in) the receivables that we manage for our equity-method investees; and
(4) removal of our minority interest holders’ shares of the managed
receivables underlying our GAAP consolidated results.




27
 Table of Contents


We
typically have purchased credit card receivables portfolios at substantial
discounts. A portion of these discounts is applied against receivables acquired
for which charge off is considered likely, including accounts in late stages of
delinquency at the date of acquisition; this portion is measured based on our
acquisition date estimate of the shortfall of cash flows expected to be
collected on the acquired portfolios relative to the face amount of receivables
represented within the acquired portfolios. 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.




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 the credit card
accounts underlying our receivables, 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 the accounts
underlying our credit card receivables portfolio also affects the stability of
our delinquency and loss rates. We consider this delinquency and charge off data
in determining our allowance for uncollectible loans and fees receivable with
respect to our non-securitized earning assets, net on our 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 consolidated balance sheets.




Late in
the third quarter and continuing into the fourth quarter of 2006, we
discontinued our practice of billing finance charges and fees on credit card
accounts that become over ninety days delinquent (our “2006 late-stage billing
change”). Prior to this change, our policy was to bill finance charges and fees
on all credit card accounts, except in limited circumstances, until we charged
off the account and all related receivables, finance charges and other fees. In
such prior periods, however, we excluded from our GAAP income and managed
receivables data, the finance charge and fee income on all significantly
delinquent then-non-securitized credit card receivables (i.e., lower-tier credit
card receivables) for which we believed that collectibility was significantly in
doubt on the date of billing. As such, our 2006 change in billing practices did
not affect managed receivables charge off data associated with our
then-non-securitized lower-tier credit card receivables, but it did negatively
impact managed receivables data associated with our then-securitized
off-balance-sheet managed receivables (which included receivables underlying our
upper-tier originated portfolio master trust and our acquired
portfolios).




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. See
also our discussion of collection strategies 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, 2007.




The
following table presents the delinquency trends of the credit card receivables
we manage, as well as charge off data and other managed receivables statistics
(in thousands; percentages of total):




At or For the
      Three Months Ended2008
            
            
            2007
            
            
            2006Sep. 30
            
            
            Jun. 30
            
            
            Mar. 31
            
            
            Dec. 31
            
            
            Sep. 30
            
            
            Jun. 30
            
            
            Mar. 31
            
            
            Dec. 31Period-end managed
      receivables
            
            $
            3,041,877
            
            
            $
            3,126,936
            
            
            $
            3,378,827
            
            
            $
            3,717,050
            
            
            $
            3,722,373
            
            
            $
            3,501,468
            
            
            $
            2,512,566
            
            
            $
            2,599,667Period-end
              managedaccounts
            
            
            4,171
            
            
            
            4,358
            
            
            
            4,775
            
            
            
            5,105
            
            
            
            5,268
            
            
            
            4,756
            
            
            
            3,755
            
            
            
            3,700Percent
      30 or more days
              past
      due
            
            
            18.8
            %
            
            
            18.0
            %
            
            
            21.4
            %
            
            
            24.9
            %
            
            
            21.0
            %
            
            
            18.6
            %
            
            
            18.0
            %
            
            
            19.3
            %Percent
      60 ormore
      days
              past
      due
            
            
            13.9
            %
            
            
            13.4
            %
            
            
            17.8
            %
            
            
            19.6
            %
            
            
            15.5
            %
            
            
            14.0
            %
            
            
            13.9
            %
            
            
            14.6
            %Percent
      90 ormore
      days
              past
      due
            
            
            9.8
            %
            
            
            9.7
            %
            
            
            14.3
            %
            
            
            14.2
            %
            
            
            11.0
            %
            
            
            9.6
            %
            
            
            10.3
            %
            
            
            10.7
            %Averagemanaged
      receivables
            
            $
            3,079,867
            
            
            $
            3,227,006
            
            
            $
            3,558,518
            
            
            $
            3,731,286
            
            
            $
            3,613,924
            
            
            $
            3,419,306
            
            
            $
            2,563,581
            
            
            $
            2,558,100Combined
      grosscharge
      offratio
            
            
            33.0
            %
            
            
            50.6
            %
            
            
            50.2
            %
            
            
            37.4
            %
            
            
            29.8
            %
            
            
            34.6
            %
            
            
            34.6
            %
            
            
            35.6
            %Net
      charge offratio
            
            
            15.4
            %
            
            
            21.5
            %
            
            
            20.6
            %
            
            
            15.8
            %
            
            
            13.9
            %
            
            
            16.9
            %
            
            
            13.4
            %
            
            
            11.9
            %Adjusted
      chargeoff
      ratio
            
            
            14.5
            %
            
            
            20.3
            %
            
            
            19.1
            %
            
            
            13.9
            %
            
            
            10.5
            %
            
            
            9.6
            %
            
            
            13.1
            %
            
            
            10.7
            %Total
      yield ratio
            
            
            44.4
            %
            
            
            47.1
            %
            
            
            47.4
            %
            
            
            56.1
            %
            
            
            53.0
            %
            
            
            49.3
            %
            
            
            53.0
            %
            
            
            61.4
            %Gross
      yield ratio
            
            
            24.8
            %
            
            
            23.1
            %
            
            
            24.3
            %
            
            
            29.2
            %
            
            
            29.2
            %
            
            
            28.6
            %
            
            
            28.8
            %
            
            
            32.9
            %Net
      interestmargin
            
            
            14.8
            %
            
            
            12.3
            %
            
            
            13.2
            %
            
            
            18.0
            %
            
            
            19.1
            %
            
            
            19.0
            %
            
            
            17.9
            %
            
            
            22.6
            %Other
      incomeratio
            
            
            7.7
            %
            
            
            1.0
            %
            
            
            (0.8
            )%
            
            
            11.9
            %
            
            
            13.1
            %
            
            
            8.4
            %
            
            
            10.8
            %
            
            
            11.2
            %Operating
      ratio
            
            
            9.1
            %
            
            
            9.8
            %
            
            
            9.4
            %
            
            
            11.9
            %
            
            
            10.5
            %
            
            
            10.6
            %
            
            
            12.1
            %
            
            
            13.9
            %




Managed receivables.Our
individual purchased portfolios are always in a state of liquidation due to the
absence of new cardholders to replace those who either pay off their balances or
become delinquent and charge off. As a result, to maintain or increase our
managed receivables, we generally must either add new accounts in our originated
portfolios or acquire additional portfolios. The general trend-line increase in
our managed receivables through the third quarter of 2007 principally was due to
growth in our lower-tier credit card receivables. We experienced growth in these
receivables of 110.9% in 2006 and 78.8% in 2007. The general trend-line decrease
beginning in the fourth quarter of 2007 principally was due to reductions in
originations midway through the third quarter of 2007 in response to tightened
liquidity markets, combined with significant charge-offs, primarily of accounts
originated in the second and third quarters of 2007. Additionally, like other
credit card issuers, we experienced lower than expected cardholder purchases
beginning in the fourth quarter of 2007, which also contributed to the
trend-line decrease in our managed receivables.




Our U.K.
Portfolio acquisition in the second quarter of 2007 also added a significant
number of accounts, thereby contributing to our significant overall growth in
receivables in that quarter; this acquisition is the only credit card portfolio
that we have acquired over the past eight quarters.




Absent
portfolio acquisitions, we expect continuing reductions in our managed
receivables levels for the foreseeable future as we have substantially curtailed
our credit card marketing efforts in light of dislocation
in the liquidity markets and our uncertainty as to when these markets will
rebound sufficiently to facilitate organic growth in our credit card receivables
operations.




28
 Table of Contents


Delinquencies. Delinquencies
have the potential to impact net income in the form of net credit losses.
Delinquencies also are costly in terms of the personnel and resources dedicated
to resolving them. We intend for the account management strategies 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 intended to optimize the
effective account-to-collector ratio across delinquency categories. We further
describe these collection strategies under the heading “How Do We Collect from
Our Customers?” in Item 1, “Business,” in our Annual Report on Form 10-K
for the year ended December 31, 2007. We measure the success of these
efforts by measuring delinquency rates. These rates exclude accounts that have
been charged off.




We
experienced an increasing trend in our 30-plus, 60-plus and 90-plus day
delinquencies through December 31, 2007, excluding slight seasonal declines
in the first and second quarters of 2007. These increases predominantly are
attributable to a mix change reflecting disproportionate receivables growth
rates in our lower-tier credit card portfolios relative to those of our other
credit card receivables. Our lower-tier credit card receivables typically
experience substantially higher delinquency rates and charge off levels than
those of our other originated and purchased portfolios. Since December 31, 2007,
however, our delinquency statistics have improved in part due to a mix change in
the other direction whereby disproportionate charge off levels for our
lower-tier credit card portfolios relative to those of our other credit card
receivables have caused a decline in lower-tier credit card receivables as a
percentage of our aggregate managed credit card receivables.




The
accounts underlying our lower-tier credit card receivables generally have a
shorter life cycle than our other accounts, with peak charge offs occurring
approximately eight to nine months after activation. Our lower-tier credit card
receivables growth has fluctuated significantly in the past three years, with
higher than average growth in the third and fourth quarters of 2005 and the
first quarter of 2006, followed by lower growth from the second quarter of 2006
to the first quarter of 2007, record growth in the second and third quarters of
2007, moderate growth in the fourth quarter of 2007 and low growth throughout
2008. This “marketing volume-based volatility” results in increasing
delinquencies in the months immediately subsequent to periods of high growth,
followed by high charge offs generally in the third quarter following
activation. Despite these fluctuations, we believe that the heightened
delinquency and charge off levels and greater volatility in our delinquency
statistics associated with our lower-tier credit card offerings are reasonable
based on the relative returns offered.




The 2007
mix change toward a greater percentage of our receivables being comprised of
lower-tier credit card receivables would have resulted in even greater 2007
delinquencies (as a percentage of managed receivables) but for our U.K.
Portfolio acquisition in the second quarter of 2007; our U.K. Portfolio’s
delinquencies are significantly below those of our lower-tier credit card
receivables.




In the
first quarter of 2008, we experienced the initial charge-offs from the record
1.5 million aggregate originations of the second and third quarters of
2007. A portion of these accounts underlying our lower-tier credit card
offerings was significantly delinquent at the end of the fourth quarter of 2007,
and many accounts charged off in the first two quarters of 2008. Compounding the
impacts on delinquency rates is the fact that we had significantly reduced new
originations in the fourth quarter of 2007 and thereafter and as such did not
receive any benefit of adding new current (i.e., non-delinquent) receivables,
which would serve to suppress delinquency rates somewhat (“denominator effect”).
Completely offsetting the so-called denominator effect in recent quarters,
however, is the relative maturity of all of our credit card receivables
portfolios. Given our significantly reduced marketing and origination
activities, most of our credit card accounts have now passed through peak
delinquency and charge off stages of their vintage cycles.  Supporting
this observation is the fact that substantially all of our individual credit
card receivables portfolios have a lower percentage of 60-plus day delinquencies
at September 30, 2008 than they did at September 30, 2007.




Assuming
a stable economic and employment environment and a continuing ability of our
customers to repay their debts at roughly comparable levels to those recently
experienced by us, we would expect stable to improving delinquency statistics
over the next several quarters relative to same period prior year statistics.
While we have seen some reduction over the past year in payment rates, our early
stage (30-plus day) delinquency rates at the September 30, 2008 are roughly in
line with September 30 of last year at the individual portfolio level—with some
portfolios experiencing improvements and some seeing slight degradation relative
to last year’s levels. Regardless, there is growing unemployment, general
economic concern and uncertainty and increasing indications of a recession in
both of our U.S. and U.K. credit card receivables markets. This erosion could
adversely affect our delinquency levels over the coming quarters.




Charge offs. We generally
charge off credit card receivables when they become contractually 180 days
past due or within thirty 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.




Our
combined gross charge off ratio and our net charge off ratio trended upwards
through the second quarter of 2007, principally due to the effects of growth in
our lower-tier credit card offerings, which have higher charge offs relative to
their average managed receivables balances, than do our other portfolios. The
growth in these receivables changed the mix of our receivables by weighting the
lower-tier credit card portfolio more heavily than in prior years. Based on this
mix change, we generally would expect our charge off ratios to increase during
periods of disproportionate growth in our lower-tier credit card receivables. We
saw the same mix change effect given our record lower-tier credit card
originations through the third quarter of 2007 which adversely impacted our
combined gross charge off ratio and our net charge off ratio through the second
quarter of 2008. All things being equal, we would expect reduced charge off
ratios in future quarters due to a mix change in the other direction whereby
recent disproportionate charge-off levels for our lower-tier credit card
portfolios relative to those of our other credit card receivables have caused a
decline in lower-tier credit card receivables as a percentage of our aggregate
managed credit card receivables.




29
 Table of Contents


In
addition to the generally increasing trend in charge offs through the end of the
second quarter of this year, we also generally experience seasonal trends in
which the first and fourth quarters incur higher levels of charge offs than do
the second and third quarters. This tendency results from the cash flow patterns
impacting our cardholders. Typically, we experience greater remittances by
cardholders late in the first quarter of each year, improving their delinquency
status and reducing charge offs in the second and third quarters. This trend was
muted somewhat by the effects of our U.K. portfolio acquisition in the second
quarter of 2007 and is not evident at all in the second quarter of 2008 due to
the peak vintage charge off effects of our third quarter 2007 lower-tier credit
card originations. We anticipate that the trend will resume, however, in future
periods. Additionally, all things being equal, we would expect reduced charge
off ratios in future quarters due to the relative maturity of all of our credit
card receivables portfolios. Given our significantly reduced marketing and
origination activities, most of our credit card accounts have now passed through
the peak charge off stages of their vintage cycles.




In
general, notwithstanding the year-over-year delinquency improvements that we
noted above within substantially all of our individual managed credit card
receivables portfolios, we generally have seen higher third quarter 2008 than
third quarter 2007 charge off levels at the individual managed portfolio level
due in part to higher delinquencies in the quarters leading into the third
quarter of 2008 than in 2007 and to greater levels of bankruptcy-related charge
offs. We have seen a trend of higher bankruptcies over the last several
quarters, which could continue in future quarters given the economic trends
discussed above.




Combined gross charge off ratio.Seasonal fluctuations contributed to the increase in the combined charge
off ratio in the fourth quarter of 2006, the first quarter of 2007, and the
fourth quarter of 2007. In the second quarter of 2007, the combined charge off
ratio was consistent with the first quarter, which is contrary to the
seasonality trend we would anticipate. This variation resulted partially from
growth in our lower-tier credit card receivables, which partially offset the
effects of our normal seasonality trends. In addition and most significantly, we
acquired our U.K. Portfolio in April 2007. A significant number of receivables
within the U.K. Portfolio were in a late stage of delinquency at the time of our
acquisition and charged off in the months following the close of our
acquisition. These higher charge offs increased our combined charge off ratio in
the second quarter. Since that time, the U.K. Portfolio addition has had a
positive impact on our overall combined gross charge off ratio as this portfolio
has a lower average charge off rate than our other portfolios.




Our
combined gross charge off ratio increased in the fourth quarter of 2007 due
primarily to marketing volume-based fluctuations caused by greater volumes of
our lower-tier credit card accounts originated in prior quarters that reached
their peak charge off levels in the fourth quarter. In addition, we experienced
seasonal increases that were amplified somewhat by the broader economic
pressures felt by our cardholders. These two factors carried over into the first
two quarters of 2008, with the marketing volume-based fluctuations having a far
greater impact than in the fourth quarter of 2007. Because we now have incurred
the peak charge offs associated with our record lower-tier credit card account
originations of the second and third quarters of 2007, the third quarter 2008
combined gross charge off ratio dropped dramatically from the first half of 2008
to below the average combined charge off rate we experienced in 2007. Adjusting
for normal seasonality patterns, we currently expect this trend to continue with
further modest reductions in our combined gross charge off rate into
2009.




Net charge off ratio.The net
charge off ratio measures principal charge offs, net of recoveries. The seasonal
trends discussed above apply to this ratio in a manner similar to their effects
on the combined gross charge off ratio. The increasing trend due to the shift in
our mix toward a greater percentage of our receivables being comprised of
lower-tier credit card receivables also affected our net charge off ratio over
the past several quarters, but to a lesser degree than it affected our combined
gross charge off ratio. Our lower-tier credit card portfolio has a significantly
lower principal to total receivables ratio than do our other portfolios, so
growth in this portfolio has less of an effect on our net charge off ratio than
it does on our combined gross charge off ratio.




The net
charge off ratio increased in the second quarter of 2007 in excess of the
typical trend line. This change is due to our U.K. Portfolio acquisition in that
quarter. As noted above, this portfolio had a significant number of receivables
that were in a late stage of delinquency and that charged off in the months
following our acquisition. Without this U.K. Portfolio acquisition, our net
charge off ratio would have fallen to 13.1% in the second quarter of 2007, in
line with our seasonal trend. The ratio also would have fallen in the third
quarter of 2007, but to a lesser degree than it did, as the incremental charge
offs from the U.K. Portfolio were much greater in the second quarter than in the
third. In the fourth quarter of 2007, our net charge off ratio was lower than it
otherwise would have been without the U.K. Portfolio acquisition, as the U.K.
Portfolio’s receivables have a lower ongoing net charge off ratio than the
receivables of our other portfolios. In the first quarter of 2008, the net
charge off ratio increased at a slightly lesser rate than our combined gross
charge off ratio, which is consistent with our expectations that our lower-tier
credit card portfolio will influence net charge offs less than it will affect
combined gross charge offs due to the relative mix of a cardholder’s balance
between principal and fee receivables. However, the net charge off ratio
increased at a greater rate than the gross charge off ratio in the second
quarter of 2008 because peak vintage charge offs of our lower-tier credit card
receivables reversed recently experienced trending changes in mix toward a
greater percentage of our portfolio being comprised of lower-tier credit card
receivables. As the peak vintage charge-offs have now been fully incurred, we
expect the net charge off ratio to continue its general declining trend into
2009, adjusting however for seasonality effects.




Adjusted charge off ratio.This ratio reflects our net charge offs, less credit quality discount
accretion with respect to our acquired portfolios. Therefore, its trend line
should follow that of our net charge off ratio, adjusted for the diminishing
impact of past portfolio acquisitions and for the additional impact of new
portfolio acquisitions. Prior to our second quarter 2007 U.K. Portfolio
acquisition, our most recent credit card receivables portfolio acquisition was
in the first quarter of 2005. Generally, we saw an expected decline in the gap
between the net charge off ratio and the adjusted charge off ratio with each
passing quarter subsequent to that first quarter 2005 acquisition and into the
first quarter of 2007. Our U.K. Portfolio acquisition in the second quarter of
2007 caused this gap to widen in that quarter, with consistent declines in the
gap throughout the remainder of 2007 and into 2008. We expect the gap between
the net charge off ratio and the adjusted charge off ratio to continue to
decline absent the purchase of another portfolio at a discount to the face
amount of its receivables.




Total yield ratio and gross yield
ratio. As noted previously, the mix of our managed receivables generally
has shifted over time toward those receivables of our lower-tier credit card
offerings. These receivables have higher delinquency rates and late and
over-limit assessments than do our other portfolios, and thus have higher total
yield and gross yield ratios as well. We generally would expect these ratios to
increase with disproportionate growth in our lower-tier credit card receivables
and we generally saw such increases leading into the end of 2006, after which
time several factors adversely affected this expected trend.




The most
significant of these factors was our 2006 late-stage billing change described
above. We implemented this change during the fourth quarter of 2006 and into the
first quarter of 2007, and it reduced our ongoing total yield and gross yield
ratios as we discontinued billing finance charges and fees on any accounts over
ninety days delinquent. This change was the primary reason for the decrease in
our total yield and gross yield ratios from 61.4% and 32.9%, respectively, in
the fourth quarter of 2006 to 53.0% and 28.8%, respectively, in the first
quarter of 2007.




Investigations
by the FDIC and FTC also have affected these ratios in the first quarter of 2007
and subsequent quarters. Throughout the course of these investigations, we have
made changes in our account management practices in deference to our
relationships with our issuing bank partners. For example, in the first quarter
of 2007, we systematically issued certain late fee and over-limit fee billing
credits to 85,000 customer accounts related to the potential for customer
confusion over a change we made to their minimum payment requirements. These
credits negatively impacted our total yield and gross yield ratios in the first
quarter of 2007.




30
 Table of Contents


These
ratios declined again in the second quarter due to the addition of our acquired
U.K. Portfolio. Its total yield and gross yield are below average as compared to
our other portfolios, and the addition of the U.K. Portfolio negatively impacted
our total yield and gross yield ratios by 4.8% and 1.7%, respectively, in the
second quarter of 2007 and by approximately 8.0% and 3.0%, respectively, in the
second half of 2007.




Our gross
yield ratio was flat in the final two quarters of 2007 due to further changes we
made to our billing practices in keeping with our goals of ensuring that our
practices continue to be among the most consumer-friendly practices in the
credit card industry and to address evolving negative amortization industry
guidance. As an example of these changes, in November 2007, we began to reverse
fees and finance charges on the accounts of cardholders who made their 3% or 4%
(depending upon the product offering) contractual payments to us so that those
accounts would not be in negative amortization. These changes reduced our gross
yield ratio in the fourth quarter, and because only two months of the effects of
these changes are reflected in the fourth quarter, they had a greater impact on
the first and second quarters of 2008—an impact that we expect to continue in
subsequent quarters.




Further
significant declines in our total yield and gross yield ratios in the first and
second quarters of 2008 primarily relate to the relative delinquency status of
our lower-tier credit card receivables portfolio. As noted above, we no longer
bill finance charges and fees on accounts more than ninety days delinquent. Late
in the fourth quarter of 2007, the initial wave of accounts from our record
1.5 million of predominantly lower-tier credit card originations in the
second and third quarters of 2007 became more than ninety days delinquent, and
we stopped charging finance charges and fees to these accounts. In the first and
second quarters of 2008, we did not bill finance charges and fees to a
significant portion of the accounts within our lower-tier credit card
receivables portfolio as the accounts remained more than ninety days delinquent.
We included these accounts in our average managed receivables, but generated no
yield from them, and our yield ratios declined as a result. Many of these
accounts charged off during these quarters, meaning that the effects of this
phenomenon should be much less significant for the foreseeable
future.




Partially
offsetting the beneficial effects in the third quarter of 2008 of reduced levels
of accounts in the late stages of delinquency (for which we do not bill finance
charges and fees) were the reduced early stage delinquency rates we began to
experience at the end of the second quarter of 2008 which resulted in lower
finance charge and late fee billings in the third quarter of 2008. Based on many
of the factors mentioned above, along with the fact that we expect significantly
reduced marketing activities and volumes of account originations (in particular
high yielding lower-tier credit card receivables originations) for the
foreseeable future, we do not expect our total and gross yield ratios to return
anywhere near late-2006 levels for the foreseeable future.




Net interest margin. We
generally expect our net interest margin to increase as our lower-tier credit
card receivables become a greater percentage of our overall managed receivables.
This trend is not evident over the past two years due to several factors, which
vary among quarters.




Our 2006
late-stage billing change (under which we stopped billing finance changes and
fees on all accounts that become over 90 days delinquent) had a particularly
large adverse effect on our first quarter 2007 net interest margin. A large
percentage of finance charge and late fee billings on late-stage delinquent
accounts ultimately charge off. Because we net such finance charge and late fee
charge offs against our net interest margin, we generally would expect that most
finance charges and fees billed to late-stage delinquency accounts will charge
off, and the net of the billing and the charge off of these finance charges and
fees would cause a slight increase in the net interest margin in periods of
growth. We believe this assumption is correct for the second quarter of 2007 and
subsequent periods. Particularly in the first quarter of 2007, however, the 2006
late-stage billing change significantly diminished our net interest margin
because of the lag effect of the change. In the first quarter of 2007, we did
not bill fees to the late-stage accounts, thereby reducing our revenues. The
related reduction in charge offs did not occur until the following quarters,
when the affected accounts, which were lower than they otherwise would have
been, ultimately charged off. As a result, we had lower revenues without a
corresponding decrease in charge offs in these two quarters, and the result was
a decline in our net interest margin.




Also
impacting the first quarter of 2007 were better than expected early delinquency
bucket roll rates and lower than expected delinquencies. These factors
significantly reduced our expected late fee assessments, thereby resulting in a
lower net interest margin. Further, the changes we made to our account
management practices relating to the FDIC and FTC investigations also depressed
our net interest margin, most heavily in the first quarter of 2007 and to a
lesser degree in the second and third quarters of 2007.




Our net
interest margin increased in the second and third quarters of 2007. These
increases primarily resulted from the diminishing lag effect of our 2006
late-stage billing change and the continued growth of our lower-tier credit card
receivables. The addition of our acquired U.K. Portfolio in the second quarter
of 2007 partially offset these improvements because the net interest margin for
this portfolio is below the weighted average rate of our other portfolios. This
U.K. Portfolio offset had only a slight impact on the second quarter of 2007,
but had a much greater impact on the third and fourth quarters of
2007.




Our net
interest margin declined in the fourth quarter of 2007 due in part to higher
charge offs, which resulted from seasonal increases that were amplified somewhat
by economic pressures felt by our cardholders stemming from the tightened
liquidity markets.




Our
fourth quarter of 2007 and subsequent quarters’ net interest margins have been
adversely affected by the November 2007 negative-amortization-related changes to
our billing practices—whereby to ensure against negative amortization, we now
reverse certain fees and finance charges on the accounts of cardholders who make
only their 3% or 4% (depending upon the product offering) contractual payments
to us. Moreover, we expect continuing adverse effects to our net interest
margins associated with these fee reversals to address negative
amortization.




Our
net interest margins in the first and second quarters of 2008 were depressed due
to changes within our lower-tier credit card receivables portfolio. This
portfolio generated lower finance charge and late fee billings in the first two
quarters of 2008 due to the significant portion of the accounts within that
portfolio that were in late stages of delinquency—stages for which we do not
bill finance charges or late fees. Further, many accounts within that portfolio
reached peak charge off vintage levels and charged off during those quarters,
resulting in higher finance charge and late fee charge offs netting against
yields in the determination of our net interest margin for the quarters. Because
the large volumes of second and third quarter of 2007 lower-tier credit card
receivables now have rolled through their peak charge off vintage levels, the
net interest margin increased for the third quarter and, giving effect to
seasonality, we expect a slight general trending increase in our net interest
margins into 2009. However, for reasons addressed above and due to a reversing
mix change whereby recent disproportionate charge-off levels for our lower-tier
credit card portfolios relative to those of our other credit card receivables
have caused a decline in lower-tier credit card receivables as a percentage of
our aggregate managed credit card receivables, we do not anticipate a return of
our net interest margins to the average level experienced in 2007 for the
foreseeable future.




Other income ratio.We
generally expect our other income ratio to increase as our lower-tier
receivables become a greater percentage of our overall managed receivables, as
these receivables generate higher membership, over-limit, monthly maintenance
and other fees than do our other portfolios. Several factors prevented this
trend from occurring in the past eight quarters.




31
 Table of Contents


Just as
it adversely affected our net interest margin discussed above, our 2006
late-stage billing change negatively impacted our other income ratio in the
fourth quarter of 2006 and the first quarter of 2007, and then the lag effect of
the change passed and its impact on the remainder of 2007 was
minimal.




Also
adversely affecting our other income ratio principally beginning in the second
quarter of 2007 was the performance of our then-held portfolio of investments in
debt and equity securities, which principally consisted of investments in CDOs
and CMOs backed by mortgages as well as trading positions in an ABX index and
the activities of which are reflected within our Credit Cards segment’s other
income ratio. We generated income from these investments of $6.5 million in the
fourth quarter of 2006 and $2.8 million in the first quarter of 2007, but then
incurred losses of $28.5 million, $37.4 million, $6.9 million, $5.2 million and
$1.1 million in the second, third and fourth quarters of 2007 and the first and
second quarters of 2008, respectively. Excluding these investment activities,
our other income ratio would have increased from 10.2% in the fourth quarter of
2006 to 10.3%, 11.8% and 17.2% in the first, second and third quarters of 2007,
respectively, before declining again to 12.7% in the fourth quarter of 2007 and
-0.2% and 1.2% in the first and  second quarters of 2008,
respectively. Because these investment activities were completely discontinued
by the end of the second quarter of 2008, we do not expect any further affects
from these activities in future periods.




The
addition of our acquired U.K. Portfolio in the second quarter of 2007 negatively
impacted our other income ratios for the last three quarters of 2007. The other
income ratio for this portfolio is well below the typical performance of our
lower-tier credit card offerings, and is slightly below that of our traditional
upper-tier originated portfolio. Adding the performance of these receivables to
the overall mix of our managed receivables resulted in a decrease of
approximately 200 basis points in the other income ratio in 2007. In the first
and second quarters of 2008, however, the U.K. Portfolio was accretive in
comparison to our lower-tier credit card receivables as they experienced
negative other income ratios on those quarters as the record 1.5 million of
predominantly lower-tier credit card originations in the second and third
quarters of 2007 reached peak charge off vintage levels.




Excluding
investment activities, our other income ratio increased quarter over quarter in
2007 before declining in the fourth quarter of 2007 and declining significantly
the first and second quarters of 2008. The declines are due primarily to higher
charge offs in those quarters resulting from the marketing volume-based
volatility in our lower-tier credit card receivables portfolios and from
seasonal increases in charge offs that were amplified somewhat by economic
pressures felt by our cardholders. Our aforementioned November 2007
negative-amortization-related finance charge and fee reversal changes to our
billing practices also negatively impacted our other income ratio in these
quarters and in the third quarter of 2008.




In the
first two quarter of 2008, our lower-tier credit card receivables’ fee charge
offs within the other income ratio exceeded the fee income from these
receivables, resulting in a negative other income ratio for this portfolio. The
same lower-tier credit card receivables-related factors mentioned in our
discussion of our first and second quarter 2008 net interest margins are at play
in the determination of our first and second quarter 2008 other income
ratios—such factors including the effects of significantly higher late
stage delinquency levels for which we do not bill over-limit and other fees and
the large proportion of lower-tier credit card accounts that reached peak charge
off vintage levels and charged off during the quarter, resulting in higher fee
charge offs netting against billed fees in the determination of our other income
ratio. The increase in the other income ratio in the second quarter of 2008
relative to the first quarter of 2008 is due to the $28.4 million gain on early
extinguishment of debt. Excluding this gain, the ratio declined to -2.5%,
consistent with the trend from the first quarter of 2008.




Because
the large volumes of second and third quarter of 2007 lower-tier credit card
receivables originations have rolled through their peak charge off vintage
levels, we experienced a significant increase in our other income ratio in the
third quarter of this year; however, we do not expect it to rise to the average
level experienced in 2007 for the foreseeable future.




Operating ratio.Our 2006 and
2007 operating ratios are higher than they have been in prior years, principally
associated with the mix change in our receivables toward our lower-tier credit
card receivables, which are comprised of accounts with smaller receivables
balances than those accounts underlying our upper-tier originated portfolio
master trust and acquired portfolios. Smaller receivable balance accounts
require many more customer service interactions (relative to our upper-tier
originated portfolio and acquired portfolios), and hence result in higher costs
as a percentage of average managed receivables than we historically have
experienced with our upper-tier originated portfolio master trust and acquired
portfolios’ receivables. Also beginning in 2006, we have experienced heightened
legal, regulatory and compliance efforts and costs associated with the New York
Attorney General, FDIC and FTC investigations and our establishment of an
expanded number of issuing bank relationships.




Our
fourth quarter 2006 operating ratio reflects the effects of a $15.0 million
charitable contribution we made in that quarter. Our operating ratio remained
high in the first quarter of 2007 due to a variety of smaller increases in
salaries, rent and legal fees. The levels in the second and third quarters of
2007 declined due to our U.K. Portfolio acquisition. This portfolio is comprised
of accounts with relatively large receivables balances, and therefore, it bears
a lower operating ratio than that of our lower-tier credit card receivables
portfolio. The fourth quarter of 2007 operating ratio increased due to our $6.0
million charitable contribution in that quarter in addition to our incurrence of
higher legal and related costs associated with the FDIC and FTC investigations.
In the first, second and third quarters of 2008, we had lower operating
expenses, primarily due to our slow-down in originations (customer interactions
and related costs are higher in the first few months after card activation than
they are for more mature credit card accounts) and to the specific expense
reduction initiatives we undertook in the latter half of 2007 in response to the
tightened liquidity markets. But for a $5.5 million impairment charge in the
second quarter of 2008 associated with a sublease of 183,461 square feet of
office space at our corporate headquarters, we would have experienced a slight
reduction in our second quarter 2008 operating ratio relative to its first
quarter 2008 level. The operating ratio in the third quarter was further reduced
below that of the second quarter (as adjusted for the lease impairment charge
mentioned above) primarily due to continued expense reductions. We expect to
continue to cut costs as we experience net liquidations of our managed
receivables for the foreseeable future, and we expect to be able to keep our
operating ratio roughly consistent with our third quarter 2008 ratio into
2009.




Future
Expectations




Because
the record levels of lower-tier credit card accounts originated in the second
and third quarters of 2007 have passed through their peak charge off period, we
are experiencing improvement in substantially all of our managed receivables
statistics. However, with our reduced levels of marketing spend and expected
liquidations within each of our credit card receivables portfolios, we generally
do not expect our yield-oriented managed receivables statistics to return to
levels experienced in 2006 and 2007 for the foreseeable future. There are
significant economic factors that could adversely affect our future Credit Cards
segment performance, including potential slow-downs in the U.S. and U.K.
economies and the prospect for rising unemployment rates within both countries
as the ability of our customers to make timely required payments on their credit
cards is significantly affected by their employment levels. Unemployment rates
in the U.S. have been rising over the past year, and we have seen somewhat lower
payment rates—the effects of which could include yield compression, higher
charge offs, reductions in receivables levels and reductions in the cash flows
we receive from our portfolios. It is also possible that heightened levels of
litigation as noted throughout this Report may result in higher legal expenses
for us that could offset other cost-cutting measures that we currently expect to
experience within our now stabilized operating ratios.




32
 Table of Contents


Investments
in Previously Charged-off Receivables Segment




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




For
      the Three
              Months Ended
              September 30,
      2008
            
            
            For
      the Nine
              Months Ended
              September 30,
      2008Unrecovered
      balance at beginning of period
            
            $
            25,122
            
            
            $
            14,523Acquisitions
      of defaulted accounts
            
            
            15,005
            
            
            
            59,047Cash
      collections
            
            
            (10,560
            )
            
            
            (62,508
            )Accretion
      of deferred revenue associated with Encore forward flow
      contract
            
            
            —
            
            
            
            (11,321
            )Cost-recovery
      method income recognized on defaulted accounts (included as a component of
      fees and related income on non-securitized earning assets on our condensed
      consolidated statements of operations)
            
            
            4,892
            
            
            
            34,718Balance
      at September 30, 2008
            
            $
            34,459
            
            
            $
            34,459Estimated
      remaining collections (“ERC”)
            
            $
            84,173
            
            
            $
            84,173




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.




Previously
charged-off receivables held as of September 30, 2008 are principally
comprised of normal delinquency charged-off accounts purchased from the
securitization trusts that we service, accounts associated with Chapter 13
Bankruptcies and accounts acquired through this segment’s balance transfer
program prior to such time as credit cards are issued relating to the program’s
underlying accounts.




We
generally estimate the life of each pool of charged-off receivables that we
typically acquire to be between twenty-four and thirty-six months for normal
delinquency charged-off accounts (including balance transfer program accounts)
and approximately sixty months for Chapter 13 Bankruptcies. We anticipate
collecting approximately 44.1% of the ERC of the existing accounts over the next
twelve months, with the balance to be collected thereafter. Our acquisition of
charged-off accounts through our balance transfer program results in receivables
with a higher than typical expected collectible balance. At times when the
composition of our defaulted accounts includes more of this type of receivable,
the resulting estimated remaining collectible portion per dollar invested is
expected to increase. We saw this trend until our dispute with Encore arose this
year, the result of which is our having to now hold significant investments in
normal delinquency charged-off accounts purchased from the securitization trusts
that we service—investments which prior to the dispute were purchased and sold
contemporaneously under the Encore forward flow contract. Compounding this trend
reversal is the fact that our Investments in Previously Charged-Off Receivables
segment’s balance transfer program has experienced lower overall placement
volume primarily due to Encore Capital’s decision to discontinue future
placements as discussed earlier. It is unknown at this time if and when
placement volumes will return to the record volume placed in the first half of
2008.  Separately, we have agreed to changes with the balance transfer
program issuing bank that will result in a future discontinuation of new
solicitations with this issuing bank, and we currently are in discussions with
another potential issuing bank partner for the program.  Until these
disruptions are resolved, we expect significantly slower growth under the
balance transfer program.




Most of
our Investments in Previously Charged-Off Receivables segment’s acquisitions of
normal delinquency charge offs recently have been comprised of previously
charged-off receivables from the securitization trusts that we service. Until a
dispute arose with Encore this year, the segment had, almost simultaneously with
each of its purchases from these securitization trusts, sold these charge offs
for a fixed sales price under its five-year forward flow contract with Encore
rather than retained them on its balance sheet. With these essentially
simultaneous pass-through transactions, the segment had not previously
experienced any substantial mismatch between the timing of its collections
expenses and the production of revenues under its cost recovery method of
accounting. This changed in the third quarter, however, as a result of our
ongoing disputes with Encore and its refusal to purchase receivables under the
forward flow contract. Pending the resolution of these disputes, our Investment
in Previously Charged-Off receivables segment will either have to find another
buyer for its purchased charge offs or retain its purchased charge offs on its
balance sheet and undertake collection activities to maximize its return on
these purchases. The retention of these receivables will cause significant
reductions in its earnings given the mismatching of cost recovery method
collection expenses with their associated revenues as collection expenses will
be incurred up front, while revenue recognition will be delayed until complete
recovery of the acquired portfolio’s investment as noted above. Once the
investments are completely recovered, the segment will begin to recognize the
profitability associated with these purchases. The expected time to recover
investments in portfolios varies by portfolio but generally is estimated to
occur within 12 to 18 months after purchase.  Alternatively, if the
segment sells these receivables, we do not expect another buyer to pay as much
as Encore was paying under its fixed-price commitment—a price that was
reflective of the high valuations being place on charged-off paper in the market
generally in 2005, rather than in today’s environment in which the relative
supply of charged off paper is greater.  The increasing supply of
charged off paper is likely to result in increased opportunities to acquire
charged off portfolios at prices under which the segment can generate
significant returns, and we expect to increase our purchases of charged off
portfolios in the coming year.




Our
Investments in Previously Charged-off Receivables segment’s pre-tax results for
the three and nine months ended September 30, 2008 were appreciably lower than
in the same respective periods in 2007. This primarily reflects (1)
the effects of Encore’s refusal to purchase receivables, which has resulted in a
longer earnings recognition period for purchased charged off paper and the
commensurate expense and revenues mismatch mentioned above and our inability to
recognize as income the remaining escrowed funds owed to us under the Encore
forward flow agreement;  and 2) increased pricing paid by this segment
upon the expiration of one of its more favorably priced forward flow agreements
for previously charged-off paper purchases. Results for the nine months ended
September 30, 2008 when compared to the same period in the prior year were
positively impacted by a significant increase in the volume of charge offs that
the segment purchased from our lower-tier originated portfolio master trust and
then sold under its forward flow agreement with Encore prior to Encore’s refusal
to purchase these charge offs; this volume increase relates to the large
vintages of second and third quarter 2007 lower-tier credit card receivables
originations that realized peak charge off levels in the first and second
quarters of 2008.  Also positively affecting 2008 results relative to
2007 are the continued growth and profitability of our Chapter 13 bankruptcy and
balance transfer programs; the success of these programs is masked, however, by
the cost-recovery-method expense and revenue mismatches associated with
charged-off receivables that we must now purchase and hold given Encore’s
refusal to purchase them as required under its forward flow
contract.




33
 Table of Contents


In the
current quarter, we reclassified results associated with credit cards issued
under our balance transfer program into our Credit Cards segment for all periods
presented. This reclassification caused a reduction in the Investments in
Previously Charged-off Receivables segment’s revenues and expenses for all
periods presented. In the second quarter of 2008, we began exploring a balance
transfer program in the U.K., and we anticipate that this program will launch in
the fourth quarter with revenues commencing in early 2009.




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: (1) small-denomination, short-term, unsecured cash advances that
are typically due on the customer’s next payday; (2) installment loan and
other credit products; and (3) money transfer and other financial services.
The assets associated with our retail micro-loan operations were principally
acquired during 2004 and early 2005. As of September 30, 2008, our Retail
Micro-Loans segment subsidiaries operated 354 storefront locations in ten states
as well as the U.K.




The
micro-loan market emerged in the early 1990s in response to a shortage of
available short-term consumer credit alternatives from traditional banking
institutions. We believe customers seek cash advance micro-loans as a simple,
quick and confidential way to meet short-term cash needs between paydays while
avoiding the potentially higher costs and negative credit consequences of other
financing alternatives, which include overdraft privileges or bounced-check
protection, late bill payments, checks returned for insufficient funds and
short-term collateralized loans.




From the
inception of our retail micro-loan operations through mid-2007, we embarked on a
strategy of converting our mono-line micro-loan storefronts into neighborhood
financial centers offering a wide array of financial products and services,
including auto insurance, stored-value cards, check cashing, money transfer,
money order, bill payment, auto title loans and tax preparation service
assistance. These new products had some success in improving foot traffic within
our storefronts and increasing our revenues on a per store basis. In certain
states, however, we saw increasingly stringent lending regulations (which in
many cases precluded the execution of our multi-product line strategy) and
possible evidence of market saturation, both of which resulted in revenue growth
that did not meet our expectations. At the same time, we saw rising
delinquencies and charge offs in almost all of the states where we had retail
micro-loan operations. After evaluating the operations of our Retail Micro-Loans
segment on a state-by-state basis, it became evident during 2007 that the
potential risk-adjusted returns expected in certain states did not justify the
ongoing required investment in the operations of those states. As a result,
during the fourth quarter of 2007, we decided to pursue a sale of our Retail
Micro-Loans segment’s operations in six states:  Florida; Oklahoma;
Colorado; Arizona; Louisiana; and Michigan. Through a series of staged closings
with a single buyer, the first of which was completed July 31, 2008, we
completed the sale of operations in three states (Florida, Louisiana, and
Arizona) in the third quarter of 2008.  By September 30, 2008, we had
closed all remaining storefronts in Michigan and our unprofitable storefronts in
Colorado and Oklahoma.  For a limited number of profitable storefronts
in Colorado and Oklahoma, however, we elected to continue operations, and we
have removed these storefronts from discontinued operations in our consolidated
statement of operations for all periods presented. Our various discontinued
operations within these six states were classified as assets held for sale on
our December 31, 2007, March 31, 2008 and June 30, 2008 consolidated
balance sheet and are included in the discontinued operations category in our
consolidated statements of operations for all periods presented.




Additionally,
during the first quarter of 2008, after reevaluating the capital required for
sustaining start-up losses associated with our 81 store locations in Texas, we
decided to pursue a sale of our Texas store locations—a sale that was completed
in April 2008. We have included our Texas results in the discontinued operations
category in our consolidated statements of operations for all periods
presented.




During
the nine months ended September 30, 2008, we closed 6 locations (other than
those closed as part of our discontinued operations) and did not open any new
locations. For the remainder of 2008, we are not planning to expand the current
number of locations in any new or existing markets; instead, we likely will
continue to look at closing individual locations that do not meet our
profitability thresholds. In addition, we will continue to evaluate our
risk-adjusted returns in the states comprising the continuing operations of our
Retail Micro-Loans segment.




The
operations and associated overhead related to our remaining 354 retail
micro-loans storefront locations in ten states (plus the U.K.) are included as
continuing operations within our consolidated financial statements.




Financial,
operating and statistical metrics for our Retail Micro-Loans segment (including
both U.S. and U.K. locations) are detailed (dollars in thousands) in the
following tables.




For the Nine Months
                Ended September
      30,2008
              
              
              2007Beginning
      total number of locations (excluding locations discontinued and held for
      sale as of December 31, 2007)
              
              
              410
              
              
              
              475Opened
      locations
              
              
              —
              
              
              
              10Locations
      reclassified from discontinued operations
              
              
              31
              
              
              
              —Closed
      locations (excluding those related to our discontinued
      operations)
              
              
              (6
              )
              
              
              (16
              )Locations
      discontinued and sold during the period
              
              
              (81
              )
              
              
              —Ending
      locations
              
              
              354
              
              
              
              469


For the Three Months
              Ended September
      30,
            
            
            For the Nine Months
              Ended September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Gross
      retail micro-loan fees (for continuing operations)
            
            $
            17,818
            
            
            $
            25,220
            
            
            $
            56,596
            
            
            $
            70,927(Loss)
      income from continuing operations before income taxes
            
            $
            (33
            )
            
            $
            5,245
            
            
            $
            7,184
            
            
            $
            16,015Loss
      from discontinued operations before income taxes
            
            $
            (1,586
            )
            
            $
            (4,357
            )
            
            $
            (8,622
            )
            
            $
            (11,447
            )Period
      end loans and fees receivable, gross
            
            $
            35,858
            
            
            $
            93,734
            
            
            $
            35,858
            
            
            $
            93,734




Our
pre-tax loss from discontinued operations for the nine months ended
September 30, 2008 includes a goodwill impairment charge of $1.1 million
related to our decision to sell the Texas retail micro-loan
operations.




34
 Table of Contents


The
significant reductions in period end loans and fees receivable, gross and income
from continuing operations before income taxes in the above table reflect
repayments that we received on a unique category of profitable loans and fees
receivable throughout 2007—loans under which we were the lender but that were
arranged by three different U.S. credit services organizations. We had
substantially terminated these particular lending activities prior the beginning
of the 2008 year. The reductions also principally reflect temporarily diminished
consumer demand for retail micro-loans due, we believe, to tax stimulus payments
received by consumers in the second quarter of 2008 and our conservative second
quarter 2008 approach to loan generation in Ohio while we awaited now-obtained
(in August 2008) regulatory approval for alternative loan products in that state
due to legislative changes enacted in that state during the second quarter. All
of these factors also are expected to contribute to lower fourth quarter of 2008
retail micro-loan revenues relative to comparable 2007 periods. We do, however,
expect our retail micro-loan operations to return to profitability in the fourth
quarter and to grow in both revenues and profitability into 2009.




Although we
have received regulatory approvals in of Ohio that permit our continuing
operations in Ohio using alternative lending products, we are still operating
using existing cash advance lending models pending resolution of outstanding
ballot initiatives in that state to overturn legislation limiting such models.
Should we need to switch to an alternate lending product in Ohio, our
profitability in that state would not be materially affected.




Auto
Finance Segment




Background




Our Auto
Finance segment now includes a variety of auto sales and lending
activities.




Our
original platform, CAR Financial Services (“CAR”), acquired in April 2005,
consists of a nationwide network of pre-qualified auto dealers in the buy-here,
pay-here used car business, from which our Auto Finance segment purchases auto
loans at a discount or for which we service auto loans for a fee. We generate
revenues on purchased loans through interest earned on the face value of the
installment agreements combined with discounts on loans purchased. We earn
discount income over the life of the applicable loan. Additionally, we generate
revenues from servicing loans on behalf of dealers for a portion of actual
collections and by providing back-up servicing for similar quality securitized
assets. We offer a number of other products to our network of buy-here, pay-here
dealers (including a product under which we lend directly to the dealers), but
the vast majority of our activities are represented by our purchases of auto
loans at discounts and our servicing of auto loans for a fee.




In
January 2007, we acquired a 75% ownership interest in JRAS, a buy-here, pay-here
dealer, for $3.3 million, and our ownership interest in JRAS has increased to
90% since acquisition through our capital contributions to its operations.
Through the JRAS platform, we sell vehicles to consumers and provide the
underlying financing associated with the vehicle sales. Customer purchases are
financed for periods of time between twenty-four and forty-two months and credit
is approved and payments are received in each storefront. We currently retain
all loans and the servicing rights and obligations for all contracts. At the
time of acquisition, our JRAS platform operated four retail locations in
Georgia. As of September 30, 2008, JRAS had twelve retail locations in four
states. Assuming the continued availability of liquidity at attractive pricing
and terms, we intend to expand sales within our twelve retail locations at a
modest pace during the remainder of 2008 and throughout 2009.  During
the third quarter we completed an extension and expansion of JRAS’s
receivables-based lending arrangement. As extended and renewed, the facility
allows for increased borrowing capacity (up to $30.0 million), an expanded
borrowing base definition, and an extended term through January 2010.
Notwithstanding our completion of this facility in the third quarter, bringing
the level of JRAS’s sales for its twelve locations to a level necessary to
completely cover fixed overhead costs and consistently generate profits will
require relatively significant additional equity capital contributions from us.
Given this reality combined with dislocations in the current liquidity
environment, we do not intend to expand JRAS’s operations beyond its twelve
retail locations for the foreseeable future.




In
February 2007, we acquired the assets of San Diego, California-based ACC. In
conjunction with this purchase, we also acquired a $189.0 million auto loan
portfolio from Patelco Credit Union (“Patelco”). These assets were originated
and serviced by ACC on behalf of Patelco. The total purchase price paid for the
two acquisitions was $168.5 million. ACC purchases retail installment contracts
from franchised car dealers. From a credit quality perspective, the ACC borrower
base is slightly above the niche historically served by our Auto Finance
segment.




Collectively,
we serve 1,358 dealers through our Auto Finance segment in forty-three states.
Selected financial, operating and statistical data (in thousands except for
percentages) for our Auto Finance segment are provided in the following two
tables; where terms used within these tables are identical to the terms used
within our Credit Card segment discussion, the definitions of those terms are
analogous to those definitions as set forth in our Annual Report on Form 10-K
for the year ended December 31, 2007 (albeit with appropriate substitution
of Auto Finance receivables and activities for the Credit Card receivables and
activities described within those definitions).




We were
required to make a determination of the fair value of goodwill and intangible
assets associated with one of the reporting units within our Auto Finance
segment in the third quarter of 2008 because our refinancing of certain debt
facilities within the reporting unit in September 2008 under higher pricing and
reduced leverage (i.e., advance rates against underlying asset values)
is  expected to cause both lower profit margins and higher capital
requirements for us (and hence diminished profit and growth potential relative
to our acquisition date expectations). We concluded that this Auto Finance
segment reporting unit’s goodwill had no continuing value as of September 30,
2008, and we recorded a non-cash goodwill impairment charge of $29.2 million in
the third quarter of 2008. Additionally, based on current expectations, this
reporting unit (consisting of our CAR and ACC operations) is expected to
continue to decline in total receivables as we do not anticipate significant
acquisitions or originations of new receivables absent additional financing that
would allow for growth at return levels we would find attractive.




35
 Table of Contents


Analysis
of statistical data




Managed Receivables-Related Data at or for the Three Months Ended2008
            
            
            2007Sep. 30
            
            
            Jun. 30
            
            
            Mar. 31
            
            
            Dec. 31
            
            
            Sep. 30Period-end
      managed receivables
            
            $
            372,313
            
            
            $
            382,168
            
            
            $
            367,228
            
            
            $
            347,585
            
            
            $
            324,986Period-end
      managed accounts
            
            
            47
            
            
            
            49
            
            
            
            48
            
            
            
            47
            
            
            
            47Receivables
      delinquent as % of period-end loans:30
      to 59 days past due
            
            
            10.6
            %
            
            
            9.0
            %
            
            
            8.1
            %
            
            
            10.4
            %
            
            
            10.2
            %60
      to 89 days past due
            
            
            4.5
            %
            
            
            4.3
            %
            
            
            3.1
            %
            
            
            4.5
            %
            
            
            4.3
            %90
      or more days past due
            
            
            4.4
            %
            
            
            3.7
            %
            
            
            3.5
            %
            
            
            4.9
            %
            
            
            4.1
            %Total
      30 or more days past due
            
            
            19.5
            %
            
            
            17.0
            %
            
            
            14.7
            %
            
            
            19.8
            %
            
            
            18.6
            %Total
      60 or more days past due
            
            
            8.9
            %
            
            
            8.0
            %
            
            
            6.6
            %
            
            
            9.4
            %
            
            
            8.4
            %Average
      managed receivables
            
            $
            378,178
            
            
            $
            376,767
            
            
            $
            358,823
            
            
            $
            336,289
            
            
            $
            309,313Gross
      yield ratio
            
            
            25.2
            %
            
            
            25.7
            %
            
            
            25.0
            %
            
            
            25.6
            %
            
            
            28.1
            %Combined
      gross charge off ratio
            
            
            13.3
            %
            
            
            12.1
            %
            
            
            13.9
            %
            
            
            12.2
            %
            
            
            14.0
            %Net
      charge off ratio
            
            
            11.7
            %
            
            
            10.5
            %
            
            
            12.3
            %
            
            
            10.7
            %
            
            
            11.1
            %Adjusted
      charge off ratio
            
            
            9.5
            %
            
            
            7.8
            %
            
            
            8.7
            %
            
            
            4.5
            %
            
            
            3.4
            %Recoveries
      as % of average managed receivables
            
            
            1.3
            %
            
            
            1.4
            %
            
            
            1.2
            %
            
            
            1.3
            %
            
            
            1.4
            %Net
      interest margin
            
            
            19.3
            %
            
            
            20.3
            %
            
            
            18.9
            %
            
            
            18.4
            %
            
            
            20.2
            %Other
      income ratio
            
            
            7.5
            %
            
            
            9.2
            %
            
            
            10.0
            %
            
            
            5.0
            %
            
            
            5.9
            %Operating
      ratio
            
            
            50.2
            %
            
            
            20.4
            %
            
            
            20.6
            %
            
            
            23.2
            %
            
            
            22.7
            %




Retail
      Sales Data at or for the Three Months Ended2008
                
                
                2007Sep.
      30
                
                
                Jun.
      30
                
                
                Mar.
      31
                
                
                Dec.
      31
                
                
                Sep.
      30Retail
      sales
                
                $
                15,930
                
                
                $
                19,333
                
                
                $
                19,577
                
                
                $
                11,872
                
                
                $
                9,039Gross
      profit
                
                $
                7,355
                
                
                $
                8,909
                
                
                $
                9,098
                
                
                $
                5,465
                
                
                $
                4,380Retail
      units sold
                
                
                1,383
                
                
                
                1,908
                
                
                
                1,844
                
                
                
                1,253
                
                
                
                963Average
      stores in operation
                
                
                12
                
                
                
                12
                
                
                
                12
                
                
                
                10
                
                
                
                8Period-end
      stores in operation
                
                
                12
                
                
                
                12
                
                
                
                12
                
                
                
                10
                
                
                
                10




Managed
receivables.Period end managed receivables have steadily increased over
the past year, with balances up 14.6% at September 30, 2008 when compared
to the same date in 2007 and up 7.1% from December 31, 2007, driven by
newly purchased and originated loans primarily within ACC and JRAS.




Delinquencies.Delinquency rates at September 30, 2008 are slightly above those
experienced during the same period of the prior year and reflect generally
worsening economic conditions.  However, given the segments improved
underwriting, better use of technology and improved collections, management
believes that this slight degradation in delinquencies is also meaningful when
contrasted with a substantially weaker economy and significant industry-wide
delinquency increases.




Gross yield
ratio, net interest margin and other income ratio.Variations in our
gross yield ratio and net interest margins reflect the effects of the timing and
magnitude of our various Auto Finance segment acquisitions and subsequent growth
patterns for our acquired operations. The Patelco portfolio acquisition, for
example, has caused the gross yield ratio and net interest margins to fall since
our acquisition of ACC because the gross yields on its existing loans are not as
high as those of our two buy-here, pay-here-oriented operations within CAR and
JRAS. This decline has been offset somewhat by increased margins realized in our
CAR operations as newly acquired and originated loans are being underwritten
with higher interest rates and fees. As these newer CAR loans become a larger
part of the Auto Finance segment portfolio and as ACC experiences net
contractions in its receivables levels as expected beginning in the fourth
quarter of this year, we expect for our margins to grow, albeit at a moderate
pace.




The
principal component of our other income ratio is the gross income that our JRAS
buy-here, pay-here operations have generated from their auto sales. The general
trend-line of improvements in our other income ratio generally corresponds with
growth in the number of autos sold as set forth in the above table. We note,
however, that we experienced a modest reduction in gross profit on auto sales
between the first, second and third quarters of 2008 as (1) seasonal demand
for autos on JRAS’s lots is typically the highest when its consumers receive
their tax refunds during the first quarter and (2) we temporarily reduced
inventory purchases within JRAS for a few weeks late in the second quarter in
connection with our evaluation of its liquidity position and borrowing base
under its lending facilities, leaving JRAS with a mix of autos available for
sale on its lots that typically attract lower gross margins. Future growth in
our Auto Finance segment’s other income ratio will depend upon relative growth
rates for JRAS versus CAR and ACC. As previously mentioned, we currently
anticipate contractions in ACC’s operations until such time that additional
liquidity is available to us at rates that would allow for acceptable returns.
Notwithstanding the foregoing however, we currently expect the other income
ratio to increase over the next few quarters.




36
 Table of Contents


Net charge off
ratio, adjusted charge off ratio and recoveries.We generally charge off
auto receivables when they are between 120 and 180 days past due, unless the
collateral is repossessed and sold before that point, in which case we will
record a charge off when the proceeds are received. The adjusted charge off
ratio in the third quarter of 2008 was 9.5% compared to 8.7% and 7.8% in the
first and second quarters of 2008, and 11.1% in the third quarter of 2007. The
adjusted charge off ratio reflects our net charge offs, less credit quality
discount accretion with respect to our acquired portfolios. Therefore, its trend
line should follow that of our net charge off ratio, adjusted for the
diminishing impact of past portfolio acquisitions and for the additional impact
of new portfolio acquisitions. The adjusted charge off ratio was only 3.4% in
the third quarter of 2007 because of our acquisition of the Patelco portfolio
(and its corresponding
purchase discounts). We acquired this portfolio at a significant purchase price
discount to the face amount of the acquired receivables and a significant
portion of this purchase price discount (which related entirely to credit
quality) was absorbed in the first and second quarters of 2007 as accounts that
were severely delinquent at acquisition date charged off immediately after our
purchase. As expected, we saw the gap between the net charge off ratio and the
adjusted charge off ratio narrow with each passing quarter subsequent to the
first quarter of 2007. With each such passing quarter, the percentage of our
portfolio (and hence charge offs within the portfolio) that is comprised of new
loans that we fund dollar for dollar increases relative to the size of our total
auto finance receivables portfolio and the percentage of our charge offs that
are comprised of accounts purchased at a discount in the Patelco acquisition
decreases. We expect the gap between the net charge off ratio and the adjusted
charge off ratio to continue to decline absent the purchase of another portfolio
at a discount to the face amount of its receivables. Evident within our net
charge off ratio statistics are the adverse macro-economic effects being seen
throughout the auto finance industry. We believe we are fortunate, however, as
our underwriting and pricing efforts have kept our increases in our charge offs
lower than throughout the industry generally.




Operating ratio.The operating ratio was 50.2% in the third quarter of 2008, largely due
to the impairment of goodwill associated with these
operations.  Excluding the impacts of the goodwill impairment, the
operating ratio in the third quarter would have been 19.4% compared to 20.4% in
the second quarter of 2008 and 22.7% in the third quarter of
2007.  The operating ratio in the Auto Finance segment continues to
improve from the first and second quarter of 2008 primarily due to higher
average receivables supporting a fixed cost base and continued cost-cutting
initiatives to better reflect existing portfolio balances primarily within our
CAR operations.




Future
Expectations




The more
significant of the contributions to our Auto Finance segment’s $30.5 million and
$35.1 million GAAP loss for the three and nine months ended September 30,
2008, respectively are:  (1) the $29.2 million goodwill impairment
charge associated with our ACC and CAR operations as recent amendments to our
existing auto finance debt facilities indicated that the carrying amount of the
reporting unit comprising these operations exceeded the reporting unit’s fair
value; (2) fixed costs that we now are incurring within our franchised
dealer lending operations and buy-here, pay-here auto dealerships as we ramp up
these early-stage business activities; and (3) high provisions for loan
losses given the buildup of allowances for uncollectible loans and fees
receivables associated with our growth in auto loan originations, offset by
cost-cutting initiatives commenced during the first quarter of 2008 for which we
realized benefits in the second and third quarters of 2008. As determined
exclusive of our goodwill impairment charge, we experienced a relatively modest
loss during the third quarter of 2008. Given our expectation of modest
contractions in our auto finance receivables over the coming quarters, we should
see reductions in our allowance for uncollectible loans and fees receivable
under GAAP. However, we expect to also experience higher costs of funds under
our renegotiated auto finance facilities which will put pressure on our Auto
Finance segment’s GAAP profitability. Moreover, despite the improved pricing
power that we now possess as a result of the reduction in lending by our auto
finance competitors, which allows us to price all new acquisitions and
originations for higher risks of defaults, we could experience further erosion
in our delinquencies and higher charge offs against earnings. Considering all of
these factors, we expect our Auto Finance segment to perform at approximately
break-even GAAP earnings levels over the next few quarters.




Other
Segment




Our Other
segment recently has encompassed various operations that were start-up in nature
and did not individually meet separate reportable operating segment disclosure
criteria. In the fourth quarter of 2007, we discontinued most of these
operations. Our discontinued operations include our stored-value card
operations, our U.S.-based installment loan and cash advance micro-loan
offerings marketed through the Internet and our investment and servicing
activities with respect to consumer finance receivables secured by motorcycles,
all-terrain vehicles, personal watercraft and the like. The operations of MEM,
our U.K.-based on-line micro-loans provider, represent the only significant
continuing operations within the Other segment, and its operations are not yet
material to our consolidated results of operations. We have, however,
experienced positive impacts from our MEM operations thus far and we expect to
continue to grow this business at a modest pace in future quarters. As of
September 30, 2008, we had $15.0 million in net receivables associated with
our MEM operations, and for the three months ended September 30, 2008, our
MEM operations generated a small GAAP profit. Similar to our auto finance
operations, we provide an allowance for uncollectible loans and fees receivable
under GAAP on all new extensions of credit. Consequently, as we grow our
U.K.-based on-line micro-loan originations, we expect that our current and
planned pace of modest loan originations and growth will not allow us to earn
material GAAP profits from our MEM operations for the next few
quarters.




Liquidity,
Funding and Capital Resources




During
2007, primarily toward the end of the second quarter and the beginning of the
third quarter, broad investor interest in providing liquidity to originators of
sub-prime loans, including credit card receivables, declined
substantially. This decline in interest was precipitated by the
well-publicized problems in the sub-prime mortgage lending business and the
related secondary markets and the global liquidity dislocation that resulted
from these problems. Since that time, the global credit markets have
experienced significant disruptions, requiring intervention from central banks
and governments throughout the world. All of these adverse developments have
resulted in significant reluctance—the duration of which is not known—by many
investors to invest in sub-prime asset classes, at least at the levels at which,
or with the terms under which, they previously invested. This, in turn, has
resulted in a decline in liquidity available to sub-prime market participants,
including CompuCredit, a widening of the spreads above the underlying interest
indices (typically LIBOR for our borrowings) for the loans that lenders are
willing to make, and a decrease in advance rates for those loans as
well.




Although
we believe the liquidity markets ultimately will return to more traditional
levels, we are not able to predict when that will occur, and we are managing our
business with the assumption that the liquidity markets will not return to more
traditional levels at any time in the foreseeable future. Specifically, we
have curtailed or limited growth in many parts of our business and are managing
our receivables portfolios with a view toward ensuring that, as a whole over the
next several quarters, they are generating positive cash flows for us to use in
de-leveraging our business—which we believe to be prudent in this environment.
Our efforts are necessary to protect us from the potential that our lenders may
be willing to renew or replace existing financing and securitization facilities
only at reduced advance rates, if at all. We saw this in the third quarter of
2008 as we were able to renew our Auto Finance segment financing facilities only
at reduced advance rates, reduced lending capacity, and higher pricing. We also
experienced a decline in advance rates for one of the securitization facilities
within our lower-tier credit card portfolio master trust in connection with our
extension of that facility (albeit at increased pricing and lower capacity)
through October 2010. Fortunately, our cost control efforts and other
self-imposed constraints on growth and investment have provided the necessary
capital to meet these reductions in our debt financing and securitization
advance rates. Moreover, under the assumption that our portfolios continue to
perform as they have in a manner that does not result in covenant or trigger
violations that would cause early amortization of our financing or
securitization facilities, we expect to operate under all of our financing and
securitization facilities without the need for renewals of any material
facilities until September 2009 (when our Auto Finance segment facilities come
up for renewal or replacement).




37
 Table of Contents


Our
emphasis on de-leveraging our business in the current environment will result in
growth and profitability trade-offs. For example, as noted throughout this
Report, we have substantially reduced credit card receivables marketing and plan
to aggressively manage our credit card receivables portfolio to generate
positive cash flows. Consequently, each of our managed credit card receivables
portfolios is expected to show net liquidations in balances for the foreseeable
future. Similarly, the reduction in debt facility advance rates within our Auto
Finance segment has caused us to limit capital deployment to this business,
which will cause contraction in its receivables and revenues over the coming
months. Furthermore, in our MEM U.K.-based Internet micro-loan operations, where
we currently are continuing to selectively deploy capital specifically aimed at
growing the business, the levels of capital that we plan to deploy are expected
to allow for modest growth. More aggressive growth would, over time, require
additional liquidity beyond what is available under our current
facilities. Once enhanced liquidity is again available to us on attractive
terms, we expect to increase our marketing efforts across our businesses and
thereby our growth and profitability.




At
September 30, 2008, we had $98.9 million in unrestricted cash across our
various businesses and subsidiaries. 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 first nine months of 2008, we generated $466.5 million in cash flows
      from operations, compared to $538.0 million of cash flows from
      operations generated during the first nine months of 2007. The $71.5
      million decrease principally reflects: (1) lower collections of
      credit card finance charge receivables in the first nine months of 2008
      relative to the first nine months of 2007 given the record level of
      mid-2007 lower-tier credit card originations that experienced their peak
      charge off period during the first nine months of 2008;
      (2) diminished originations and the effects on our margins of changes
      we have made in response to ongoing discussions with regulators;
      (3) generally lower payment rates, and consequently lower collections
      of credit card finance charge receivables, across our credit card
      portfolios in the first nine months of 2008 relative to the first nine
      months of 2007, which reflect the economic stress we believe some of our
      customers are experiencing; (4) the inclusion of a full nine months
      of expenses in 2008 associated with acquisitions  made at
      various points in time during the first nine months of 2007, which have
      not yet reached the scale necessary to achieve profitability;
      (5) higher cash flows associated with our investments in trading
      securities during the first nine months of 2007 relative to the first nine
      months of 2008; (6) growth in the first nine months of 2008 in
      deposits required to be maintained with our third-party issuing bank
      partners and retail electronic payment network providers associated with
      our ongoing origination and servicing efforts in the U.K.; (7) growth
      in the first nine months of 2008 in inventory balances associated with our
      JRAS subsidiary; and (8) greater use of cash to reduce accounts
      payable and accrued expenses in the first nine months of 2008 than in the
      same period of 2007; offset by (1) the receipt of $87.1 million in
      tax refunds during the first nine months of 2008, versus our payment of
      $24.1 million in taxes during the first nine months of 2007; and
      (2) lower marketing expenses in the first nine months of 2008 than in
      the first nine months of 2007.




•
            During
      the first nine months of 2008, we used $436.6 million of cash in
      investing activities, compared to using $747.5 million of cash in
      investing activities for the first nine months of 2007. This $310.9
      million decrease in cash used in investing activities reflects
      (1) the fact that we had no acquisitions of assets in the first nine
      months of 2008, versus our acquisitions of ACC, JRAS and MEM for an
      aggregate $191.9 million during the first nine months of 2007 and
      (2) lower net investments in our securitized and non-securitized
      earning assets in the first nine months of 2008 relative to the first nine
      months of 2007, which is consistent with liquidations of our purchased
      portfolios and a decline in originations over the past year. We expect
      further declines in net cash used in investing activities as we currently
      do not anticipate meaningful originations of new card accounts, thus
      reducing the amount of cash used to fund
  purchases.




•
            During
      the first nine months of 2008, our financing activities used $46.4 million
      of cash, compared to providing $459.5 million of cash in the first
      nine months of 2007. We experienced a number of financing-related
      transactions in the first nine months of 2007 that were not repeated in
      the first nine months of 2008, including our receipt of proceeds ($53.9
      million) from the exercise of warrants, draws ($500.0 million) on our two
      structured financing facilities underlying our lower-tier credit card
      receivables while we were growing at a significant pace in the first
      through third quarters of 2007 and prior to our securitization of these
      receivables in December 2007 and borrowings ($146.0 million) related to
      our acquisition of ACC offset by our purchase of treasury stock.
      Additionally offsetting the net effects of these 2007 financing activities
      is our use of $21.4 million in cash to repurchase of $50.0 million (face
      amount) of convertible senior notes during the first nine months of
      2008.






After
giving effect to the advance rate reductions mentioned above and the
implications of those reductions to our cash position, we had approximately $170
million in aggregate unrestricted cash and available liquidity under our debt
and securitization facilities at the end of the third quarter of
2008—approximately $56.0 million of which, however, we have agreed not to draw
upon until after December 31, 2008. Our available liquidity under our debt and
securitization facilities is represented by draw potential against our
collateral base both within our securitization trusts and supporting our
structured financing facilities. We continue to aggressively pursue a number of
new financing facilities and liquidity sources that, if ultimately available to
us at attractive pricing and terms, will support investment opportunities that
could include repurchases of our convertible senior securities and stock,
portfolio acquisitions, and marketing and originations within our various
businesses. However, the liquidity environment continues to be particularly
challenging in general and more specifically for sub-prime asset classes such as
ours. While substantially all of our asset-based financing and securitization
facilities are non-recourse to assets beyond those specific pools of assets
backing each respective facility, our failure to renew or replace a maturing
financing or securitization facility (except where the facility may represent
excess and unneeded capacity) could potentially result in (1) asset
seizures by our lenders or investors, which in turn could result in rather swift
impairments to the book value of our equity, and/or (2) accelerated
repayment amortization schedules, which over time could impair the profitability
of the assets underlying the facility and limit cash flows to us that we could
use to fund other parts of our operations.




Beyond
our immediate financing efforts mentioned throughout this Report, shareholders
should expect us to evaluate debt and equity issuances on a consistent and
constant basis over time as a means to fund our investment opportunities. We
expect to avail ourselves of any opportunities to raise additional capital if
terms and pricing are attractive to us. We also may use cash flows generated
from the net liquidations in our credit card portfolios and other cost
control measures to fund both (1) further repurchases of our convertible senior
securities and stock, which at current prices we believe provide returns that on
a risk-adjusted basis are far superior to our potential returns from organic
growth in the current environment, and (2) potential portfolio acquisitions,
which may represent attractive opportunities for us in the current liquidity
environment. As of September 30, 2008, we are authorized to repurchase
10,000,000 common shares under our share repurchase program that our board of
directors authorized in May 2008, and this authorization extends through June,
30, 2010.




38
 Table of Contents


Securitization
Facilities




Our most
significant source of liquidity is the securitization of our credit card
receivables. At September 30, 2008, we had committed total securitization
facilities of $2.4 billion, of which we had drawn $1.9 billion. The
weighted-average borrowing rate on our securitization facilities was
approximately 5.4% at September 30, 2008, and the maturity terms of our
securitizations vary.




In the
table below, we have noted the securitization facilities (in millions) with
respect to which substantially all of our managed credit card receivables serve
as collateral as of September 30, 2008. Following the table are further
details concerning each of the facilities.




Maturity
      date
            
            Facility Limit(1)October 2009(2)
            
            $
            299.5December 2009(3)
            
            
            175.0January 2010(4)
            
            
            750.0October 2010(2)
            
            
            299.5October
      2010 (5)
            
            
            400.0January 2014(6)
            
            
            91.4September 2014(7)
            
            
            17.4April
      2014(8)
            
            
            413.2Total
            
            $
            2,446.0





(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 consolidated statements of operations or consolidated
      balance sheet items included herein.


(2)
            In
      October 2004, we completed two term securitization facilities that we
      issued out of our upper-tier 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. We expect to begin
      accumulating the principal necessary to repay these facilities within
      twelve months of their respective expected principal repayment
      dates.


(3)
            Represents
      the anticipated final scheduled monthly payment date for a $300.0 million
      facility issued out of our lower-tier originated portfolio master trust;
      through September 30, 2008, amortization payments aggregating $125.0
      million had been made against the outstanding balance of this
      facility.


(4)
            This
      two-year variable funding note facility issued out of our upper-tier
      originated portfolio master trust provides for continued funding of all
      cardholder purchases on all accounts in existence upon expiration of the
      facility with any remaining cash flows after funding all such purchases,
      servicing costs and debt service costs to be applied toward repayment of
      the investor.


(5)
            Represents
      the end of the revolving period for a $400.0 million conduit facility
      issued out of our lower-tier originated portfolio master
      trust.


(6)
            Represents
      a ten-year amortizing term series issued out of the Embarcadero
      Trust.


(7)
            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 it acquired in the third quarter of 2004 and the $72.1
      million (face amount) of receivables it acquired in the first quarter of
      2005.


(8)
            In
      April 2007, we closed an amortizing securitization facility in connection
      with our U.K. Portfolio acquisition; this facility is denominated in U.K.
      sterling.




Dates
within the above table for our securitization facilities and our overall
commentary within this section are predicated on our ability to operate
successfully without triggering early amortization of our securitization
facilities or our debt facilities and on the ability and willingness of our
investors and lenders to meet their funding commitments to us. We never have
triggered an early amortization within any of the facilities underlying our
originated portfolio master trusts’ securitizations or our on-balance-sheet
structured financing facilities, and we do not believe that we will. Still, it
is conceivable that, even with careful management, we may trigger an early
amortization of one or more of these outstanding facilities. While each of our
securitization facilities and structured financing facilities is recourse only
to the specific financial assets underlying each respective securitization or
structured financing trust, early amortization for any of our outstanding
securitization or structured financing facilities would have adverse effects on
our liquidity during the early amortization period, as well as adverse effects
on the book value of our equity to the extent of our net equity investment in
each particular securitization or structured financing trust. Moreover, an early
amortization event could have potential long-term adverse effects on our
liquidity beyond the repayment period of any particular facility that is subject
to early amortization because potential investors could elect to abstain from
future CompuCredit-backed facility issuances.




Contractual
Obligations, Commitments and Off-Balance-Sheet Arrangements




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, 2007.




Commitments
and Contingencies




We also
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 11, “Commitments and
Contingencies,” to our condensed consolidated financial statements included
herein for further discussion of these matters.




Recent
Accounting Pronouncements




See
Note 2, “Summary of Significant Accounting Policies and Consolidated
Financial Statements Components,” to our condensed consolidated financial
statements included herein for a discussion of recent accounting
pronouncements.




39
 Table of Contents


Critical
Accounting Estimates




We have
prepared our financial statements in accordance with GAAP. These principles are
numerous and complex. We have summarized our significant accounting policies in
the notes to our condensed consolidated financial statements. In many instances,
theapplication 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 our
application. Nevertheless, in our Annual Report on Form 10-K for the year
ended December 31, 2007, we discuss the six areas (valuation of retained
interests, investments in previously charged-off receivables, non-consolidation
of qualifying special purpose entities, allowance for uncollectible loans and
fees, goodwill and identifiable intangible assets and impairment analyses, and
investments in securities) 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 review
that discussion. In addition, in Note 7, “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




In June
2007, we signed a sublease for 1,000 square feet of excess office space at our
new Atlanta headquarters office location, to HBR Capital, Ltd., a corporation
co-owned by David G. Hanna (Chairman of our Board of Directors and our Chief
Executive Officer) and Frank J. Hanna, III (David G. Hanna’s brother and a
member of our Board of Directors). The sublease rate of $22.00 per square foot
is the same as the rate that we pay on the prime lease. This sublease expires in
May of 2022.




In June,
2007, a partnership formed by Richard W. Gilbert (our Chief Operating Officer
and Vice Chairman of our Board of Directors), Richard R. House, Jr. (our
President and a member of our Board of Directors), J.Paul Whitehead III (our
Chief Financial Officer), Krishnakumar Srinivasan (President of our Credit Cards
segment), and other individual investors (including an unrelated third-party
individual investor), acquired £4.7 million ($9.2 million) of class “B”
notes originally issued to another investor out of our U.K. Portfolio
securitization trust. The acquisition price of the notes was the same price at
which the original investor had sold $60.0 million of notes to another unrelated
third party. As of September 30, 2008, the outstanding balance of the notes
held by the partnership was £1.3 million ($2.3 million). The notes held by
the partnership comprise approximately 0.6% of the $395.3 million in total notes
within the trust on that date and are subordinate to the senior tranches within
the trust. The “B” tranche bears interest at U.K. LIBOR plus
9%.




In
December 2006, we established a contractual relationship with Urban Trust
Bank, a federally chartered savings bank (“Urban Trust”), pursuant to which we
purchase credit card receivables underlying specified Urban Trust credit card
accounts. Under this arrangement, in general, an Urban Trust affiliate has the
contractual right to receive 5% of all payments received from its cardholder
accounts and is obligated to pay 5% of all net costs incurred by us in
connection with managing the program, including the costs of purchasing,
marketing, servicing and collecting the receivables. The fair value of Urban
Trust’s contractual rights are netted against the value of our securitized
earning assets in the issuing bank partner continuing interests category within
our detail of securitized earning assets components in Note 7,
“Off-Balance-Sheet Arrangements;” the fair value of these contractual rights was
$0.9 million at September 30, 2008. Also, at September 30, 2008, we
had deposits with Urban Trust of $5.9 million to cover the growth in purchases
by Urban Trust cardholders. Frank J. Hanna, Jr. (who is the father of David G.
Hanna and Frank J. Hanna, III) owns a substantial minority interest in
Urban Trust and serves on its Board of Directors.




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, 2007
for a discussion of the investments in previously charged-off receivables by one
of our subsidiaries from trusts serviced by us.




Forward-Looking
Information




We make
forward-looking statements throughout this report including statements with
respect to our expected revenue, income, receivables, income ratios, net
interest margins, marketing-based volatility and peak charge-off vintages,
acquisitions and other growth opportunities, location openings and closings,
loss exposure and loss provisions, delinquency and charge off rates, changes in
collection programs and practices, securitizations and gains from
securitizations, changes in the credit quality of our on-balance sheet loans and
fees receivable, account growth, the performance of investments that we have
made, operating expenses, marketing plans and expenses, the profitability of and
expansion and growth within our Auto Finance segment, the integration of our
Auto Finance platforms, the growth and performance of receivables originated
over the Internet, our plans in the U.K., the impact of the acquisition of our
U.K. Portfolio of credit card receivables on our financial performance,
performance of the U.K. portfolio, sufficiency of available liquidity, the
prospect for improvements in the liquidity markets, future interest costs,
sources of funding operations and acquisitions, our ability to raise funds and
renew or replace securitization and financing facilities, our income in
equity-method investees, the levels of our ancillary and interchange revenues,
our servicing income levels, gains and losses from investments in securities
(including asset-backed securities) and other statements of our plans, beliefs
or expectations are forward-looking statements. In some cases these statements
are identifiable through the use of words such as “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,”
“may,” “should,” “will,” “would” and similar expressions.




You are
cautioned not to place undue reliance on these forward-looking statements. The
forward-looking statements we make are not guarantees of future performance and
are subject to various assumptions, risks and other factors that could cause
actual results to differ materially from those suggested by these
forward-looking statements. 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.








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ITEM 3.
            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK




Interest
Rate Sensitivity and Market Risk




In the
ordinary course of business, we are exposed to various interest rate risks
particularly in our Credit Cards and Auto Finance segments. Our 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 or rates 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 because interest rates may impact
the payment performance of our customers. To date, we have chosen not to hedge
these various interest rate risks because we believe our exposure to these risks
is not likely to have a materially adverse effect on our business and because we
believe that our business model creates a natural hedge to certain of these
risks.




Credit Cards
Segment. In our Credit Cards segment, we incur basis risk because we fund
managed assets at a spread over commercial paper rates or LIBOR, while the rates
underlying our U.S. managed assets generally 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 these
indices tend to move together and that the costs of hedging this risk are
greater than the benefits we would get from the elimination of this risk. Recent
liquidity market duress has caused the base LIBOR rate to fluctuate
significantly.  While these fluctuations did not move in tandem with
the prime rate as anticipated, we believe that the dislocation is temporary and
have already seen signs of LIBOR rates moving back in line with those
experienced in more normal liquidity environments.




We incur
gap risk within our Credit Cards segment because the debt underlying our
securitization trust facilities reprices monthly; whereas, some of our
receivables do not adjust automatically (as in the case of our U.K. Portfolio)
unless we specifically adjust them with appropriate notification. Under ordinary
circumstances, this gap risk is relatively minor, however, because we generally
can reprice the substantial majority of our credit card receivables in response
to a rate change. We note that our breach of contract dispute with CB&T has
created a period during which our gap risk is much more significant than normal
as CB&T has refused to re-price a substantial number of credit card accounts
in violation of our agreements with them.




As to the
issue of market risk within our Credit Cards segment, 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 prevailing interest rates, payment
trends on our interest-earning assets and payment requirements on our
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
September 30, 2008, a substantial majority of our managed credit card
receivables, including those related to our equity-method investees, and other
interest-earning assets had variable rate pricing, with substantially all U.S.
credit card receivables carrying annual percentage rates at a spread over the
prime rate, subject to interest rate floors. At September 30, 2008,
$945.0 million of our total managed credit card receivables were priced at
their floor rate, of which, $136.2 million of these receivables were closed
and therefore ineligible to be repriced and the remaining $808.8 million were
open and eligible to be repriced. Although not keenly relevant to the current
accommodative interest rate environment, if we experience a long-term increase
in LIBOR, our earnings and cash flows will be adversely affected until the
variable rate pricing on the $136.2 million in closed account receivables
(as hypothetically determined under the assumption that there was no floor rate)
rises to the level of their floor rate. To the extent we choose to reprice any
of the $808.8 million of receivables underlying the open accounts for which
variable rate pricing (assuming that there was no floor rate) is below their
floor rate, however, we can mitigate against any possible adverse effects of
these open accounts on our earnings and cash flows.




Auto Finance
Segment.At September 30, 2008, all of our Auto Finance segment’s
loans receivable were fixed rate amortizing loans and typically are not eligible
to be repriced. As such, we incur interest rate risks within our Auto Finance
segment because funding under our structured financing facilities is priced at a
spread over floating commercial paper rates; whereas, our Auto Finance receivables
are fixed-rate amortizing loans. In a rising rate environment, our net interest
margin between a floating cost of funds and a fixed rate interest income stream
may become compressed. Our various debt facilities in the auto segment contain
requirements to fix our floating rate exposure should floating rate indexes
reach certain prescribed levels (generally 6.25%). Given the current
accommodative rate environment, we may choose to effectively fix our floating
rate exposure at current lower levels. This may be accomplished via derivative
instruments such as interest swaps or interest rate caps, and we may elect to
enter into these arrangements even if, by their nature or structure they are not
perfect hedges from an accounting perspective.




Foreign
Currency Risk




Our
Sterling-denominated investments in the United Kingdom (£82.5 million as of
September 30, 2008) have created balance sheet exposure to currency
exchange rates. Specifically, the translation of the balance sheets of our U.K.
operations from their local currencies into U.S. dollars is sensitive to changes
in U.S. dollar/ U.K. sterling currency exchange rates. These translation gains
and losses are recorded as foreign currency translation adjustments on our
consolidated statements of comprehensive (loss) income and as a component of
accumulated other comprehensive income within shareholders’ equity on our
consolidated balance sheets. We also will have transactional gains and losses
that are caused by changes in foreign currency exchange rates. These transaction
gains and losses flow through our consolidated statement of operations. We have
not hedged our foreign currency risk; however, with the recent rise in the U.S.
dollar against the U.K. sterling, we currently are weighing the benefits versus
costs of hedging this risk.




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Mark-to-Market
Risk




In the
past, we have purchased debt and equity securities of others, principally those
issued by asset-backed securitization trusts (e.g., notes secured or “backed” by
pools of assets). These securities in many cases were junior, including
below investment grade, tranches of securities issued by the trusts. The
assets underlying these securities were not originated by us and, accordingly,
may not have met the underwriting standards that we follow in originating
receivables. Further, we did not have direct 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
invested may have carried 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. Such higher risks could have caused 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; such was the case during 2007 during
which we experienced material realized and unrealized losses on our portfolio of
these previously acquired securities. At September 30, 2008, we had valued
our remaining investments in asset-backed securities (and associated debt) at
zero as the remaining assets were liquidated in response to margin calls.
Because the margin loans underlying these investments were non-recourse, we do
not expect to realize any further losses in connection with these
investments.






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. The material proceedings are described below.




We 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 we are the alter ego of
our subsidiaries and are 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.




Commencing
in June 2006, the FDIC began investigating the policies, practices and
procedures used in connection with our credit card originating financial
institution relationships. In December 2006, the FTC commenced a related
investigation. In general, the investigations focused upon whether marketing and
other materials contained misrepresentations regarding, among other things, fees
and credit limits and whether servicing and collection practices were conducted
in accordance with applicable law. We provided substantial information to both
the FDIC and FTC, and held settlement discussions with the FDIC and FTC. In
April 2008, we entered into an agreement in principle with the FTC and FDIC
in order to resolve the investigations. The agreement contemplated formal
settlement agreements with both the FTC and FDIC and was conditioned on the
FDIC’s entering into settlement agreements with three of our issuing banks.
Under the agreement in principle, and under the contemplated settlement
agreements, we would have issued approximately $80 million in credits, the cash
cost and pre-tax earnings effects of which would have been approximately $7.5
million—an amount we have had accrued as a reserve on our condensed consolidated
balance sheets since March 31, 2008. Even though we reached agreement with
the FTC and FDIC on the terms of our settlement agreements, two of the three
issuing banks were unable to reach agreement with the FDIC. As a result, on
June 10, 2008, the FTC commenced an action against us and one of our
subsidiaries in the United States District Court for the Northern District of
Georgia entitled Federal Trade
Commission vs. CompuCredit et al., Case No. 1:08ev01976-BBM-RGV, and
the FDIC commenced three administrative proceedings against us (each of which is
assigned dual case numbers), Nos. FDIC-08-139b, FDIC-08-140k, FDIC-07-256b,
FDIC-07-257k, FDIC 07-228b and FDIC-07-260k, two of which also were against the
issuing banks that did not reach agreement with the FDIC.  One of
these two issuing banks has settled its dispute with the FDIC.  In
general, the actions allege that we and our bank partners overstated the amount
of available credit and inadequately disclosed up-front fees and that one of our
subsidiaries misrepresented when certain accounts would be treated as “paid in
full” and utilized prohibited telephone collection practices. We are vigorously
contesting these actions and settlement discussions are ongoing. We continue to
believe, however, that our marketing and other materials and servicing and
collection practices previously complied with, and continue to comply with,
applicable law. Although it is premature to determine the ultimate outcome of
these actions, we do not believe that the outcome will be material to our
financial condition. These actions currently are the subject of answers or
motions to dismiss.




On
May 23, 2008, CompuCredit and one of our subsidiaries filed a complaint
against CB&T in the State Court of Fulton County, Georgia, in an action
entitled CompuCredit
Corporation et al. vs. CB&T et al., Civil Action
No. 08-EV-004730-F. Among other things, the complaint as now amended
alleges that CB&T, in violation of its contractual obligations, failed to
provide CompuCredit rebates, marketing fees, revenues or other fees or discounts
that were paid or granted by Visa®,
MasterCard®, or
other card associations with respect to or apportionable to accounts covered by
CB&T’s agreements with us and other consideration due to us. The complaint
also alleges that CB&T refused to approve changes requested by us to the
terms of the credit card accounts and refused to transfer credit card accounts
to our third-party designees, all in violation of the agreements among the
parties.




On
June 11, 2008, CB&T filed a complaint against us and one of our
subsidiaries in the United States District Court for the Middle District of
Georgia, CB&T vs.
CompuCredit Corporation et al., Civil Action no. 4:08cv78. In general,
the complaint requested that the court order us to implement certain changes to
the terms of the CB&T-issued credit cards. Our motion to dismiss this
complaint was granted.




On
July 14, 2008, CompuCredit and four of our officers, David G. Hanna,
Richard R. House, Jr., Richard W. Gilbert and J.Paul Whitehead III, were named
as defendants in a purported class action securities case filed in the United
States District Court for the Northern District of Georgia entitled Waterford Township General Employees
Retirement System vs. CompuCredit Corporation, et al., Civil Action
No. 08-CV-2270. On August 22, 2008, a virtually identical case was filed
entitled Steinke vs.
CompuCredit Corporation et al., Civil Action No. 08-CV-2687.In general,
the complaints alleged that we made false and misleading statements (or
concealed information) regarding the nature of our assets, accounting for loan
losses, marketing and collection practices, exposure to sub-prime losses,
ability to lend funds, and expected future performance. The complaints recently
were consolidated, but a consolidated complaint has not yet been filed. We are
vigorously contesting this complaint. The defendants intend to file a motion to
dismiss.




The
Company received a demand dated August 25, 2008, from Sue An that the Company
take action against all of its directors and two of its officers for alleged
breaches of fiduciary duty. In general, the alleged breaches are the same as the
actions that are the subject of the class action securities case. The Company’s
Board of Directors has appointed a special litigation committee to investigate
the allegations and to determine how to proceed.





Our debt
collections subsidiary, Jefferson Capital, is a party to a series of agreements
with Encore. In general, Encore is obligated to purchase from Jefferson Capital
certain defaulted credit card receivables. The agreements also require Encore to
sell certain charged off receivables to Jefferson Capital under its balance
transfer program and chapter 13 bankruptcy agreements. On July 10, 2008,
Encore did not purchase certain accounts as contemplated by the agreements,
alleging that the accounts that it was required to purchase failed to meet
certain representations and warranties set forth in the agreements, generally as
a result of the allegations made by the FTC as described above. In connection
with its failure, Encore alleged that CompuCredit and Jefferson Capital were in
breach of certain representations and warranties within the agreements.
CompuCredit was dismissed from the proceeding. We are vigorously contesting this
dispute. This dispute has been submitted to arbitration for
resolution.




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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 and Net Income Are Dependent Upon Payments 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 customers use their cards or otherwise borrow funds from us. 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 risks 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 customers.
If our estimates are incorrect, customer default rates will be higher, we will
receive less cash from the receivables, the value of our retained interests and
our loans and fees receivable will decline, and we will experience reduced
levels of net income if not losses.




An economic
slowdown could increase credit losses and/or decrease our growth. Because
our business is directly related to consumer spending, during periods of
economic slowdown or recession it is more difficult for us to add or retain
accounts and receivables (we recently have almost entirely stopped opening new
accounts), and receivables may decline if consumers restrain spending. In
addition, during periods of economic slowdown or recession, we 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 comparatively higher during periods of economic slowdown or recession
than those experienced by more traditional providers of consumer credit because
of our focus on the financially underserved consumer market, which may be
disproportionately impacted. Other economic and social factors, including, 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, also can impact credit use and account performance.
Moreover, adverse changes in economic conditions in states where customers are
located, including as a result of severe weather, can have a direct impact on
the timing and amount of payments of receivables. Recent trends in the U.S.
economy suggest that we are entering a period of economic downturn or recession,
and although to date the impact on the performance of our receivables has not
been significant, it may be in the future.




We recently
purchased a substantial portfolio of receivables in the U.K. and now will have
greater exposure to the U.K. economy and currency exchange rates.In
April 2007, we purchased a portfolio of credit card receivables having a face
value of £490 million ($970 million) as of the date of purchase. Although
we have had minor operations in the U.K. previously, this is our first
significant investment there, and we now will have substantially greater
exposure to fluctuations in the U.K. economy. As a result of this investment, we
also have greater exposure to fluctuations in the relative values of the U.S.
dollar and the British pound.




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 receivables 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. Significant portions of this income are based on management’s
estimates of cash flows we expect to receive from the interests that we retain
when we securitize receivables. The expected cash flows are based on
management’s estimates of interest rates, default rates, payment rates,
cardholder 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. Substantial differences between actual and expected performance of the
receivables will occur and will cause fluctuations in our net income. For
instance, higher than expected rates of delinquency and loss could cause our net
income to be lower than expected. Similarly with respect to financing agreements
secured by our on-balance-sheet receivables, levels of loss and delinquency
could result in our being required to repay our lenders earlier than expected,
thereby 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 and retain on our balance sheet in one of two ways—we either
originate the receivables or purchase pools of receivables from other issuers.
In either case, substantially all of our receivables are from financially
underserved borrowers—borrowers represented by credit risks that regulators
classify as “sub-prime.” Our reliance on sub-prime receivables has in the past
(and may in the future) negatively impacted our performance. For example, in
2001, we suffered a substantial loss after we increased the discount rate that
we used in valuing our retained interests to reflect the higher rate of return
required by securitization investors in sub-prime markets. These losses might
have been mitigated had our portfolios consisted of higher-grade receivables in
addition to our sub-prime receivables. We have no immediate plans to issue or
acquire significant higher-grade receivables.




Seasonal factors
may result in fluctuations in our net income. Our quarterly income may
fluctuate substantially as a result of seasonal consumer spending. In
particular, our credit card 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 or finance during those
periods.




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The timing and
volume of originations with respect to our lower-tier credit card offerings
causes significant fluctuations in quarterly income. Fluctuations in the
timing or the volume of receivables will cause fluctuations in our quarterly
income. Factors that affect the timing or volume include marketing efforts, the
general economy and the other factors discussed in this section. For example,
given the significant and variable growth rates that we have experienced for our
lower-tier credit card offerings and given the appreciably shorter vintage life
cycles for these offerings relative to our more traditional credit card
offerings, we have experienced, and in the future expect to experience,
significant volatility of quarterly earnings from these offerings based on the
varying levels of marketing and receivables origination in the quarters
preceding peak vintage charge off periods. Our lower-tier credit card
receivables tend to follow similar patterns of delinquency and write off, with
the peak period of write offs occurring approximately eight to nine months
following account origination. During periods of sustained growth, the negative
impact of these peak periods generally is offset by the impact of new
receivables. During periods of no or more limited growth, it is not. We
substantially reduced our credit card marketing efforts beginning in August 2007
and more recently have almost entirely stopped issuing new cards, thereby
reducing our growth. This followed a period of substantial marketing efforts and
growth. One impact of this has been an increase in write offs during the first,
second and third quarters of 2008 that were not offset by growth.




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. We recently have experienced higher interest rates. 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 target
successfully 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 target and evaluate successfully 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 to
Fund the Receivables That We Originate or Purchase.




All of
our securitization and financing facilities are of finite duration (and
ultimately will need to be extended or replaced) and contain financial covenants
and other conditions that must be fulfilled in order for funding to be
available. Assuming that we meet applicable financial covenants and other
conditions (which cannot be assured), our primary credit card receivables
securitization facility with Merrill Lynch alleviates for the foreseeable future
our principal exposure to advance rate fluctuations within our upper-tier
originated portfolio master trust. However, we have significant Auto Finance
segment financing facilities that matured in September 2008 and a lower-tier
originated portfolio master trust securitization facility that matures in March
2009, and the lender/investor under those respective facilities has advised us
that it is unwilling to extend those facilities under the current terms. In the
event that future advance rates (i.e., the percentage on a dollar of receivables
that lenders will lend us) for securitizations or financing facilities are
reduced, investors in securitizations or financing facilities lenders require a
greater rate of return, we fail to meet the requirements for continued funding
or securitizations, or financing arrangements 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, so-called
“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 at times equity and borrowed funds have 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 and financing
facilities. We finance our receivables through securitizations and
financing facilities. Beginning in 2007, largely as a result of difficulties in
the sub-prime mortgage market, new financing generally has been unavailable to
sub-prime lenders, and the financing that has been available has been on
significantly less favorable terms. As a result, beginning in the third quarter
of 2007, we significantly curtailed our marketing for new credit cards in order
to preserve our cash and access to financing for our most critical needs and
currently are not issuing a significant number of new cards. If additional
securitization and financing facilities are not available in the future on terms
we consider acceptable, or if existing securitization and financing facilities
are not renewed on terms as favorable as we have now or are not renewed at all,
we will not be able to grow our business and it will continue to contract in
size.




As our
securitization and financing facilities mature, the proceeds from the underlying
receivables will not be available to us for reinvestment or other
purposes. 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 the underlying receivables are
accumulated to repay the investors and no longer are reinvested in new
receivables. When a securitization facility matures, the underlying trust
continues to own the receivables, and the maturing facility retains its priority
in payments 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 we
are obligated to repay a securitization facility and we also are unable to
obtain alternative sources of liquidity, such as debt, equity or new
securitization facilities that are structurally subordinate to the facility
being repaid, 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 governing our securitization facilities provide that, upon the
occurrence of certain adverse events known as “early redemption events,”
investors can accelerate payments. Early redemption events include portfolio
performance triggers, the termination of our affinity agreements with
third-party financial institutions to originate credit cards, breach of certain
representations, warranties and covenants, insolvency or receivership, and
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. Similar
triggers exist with respect to the financing facilities for our loans and fees
receivable retained on our balance sheet, the refunding of which could be made
more difficult or impossible at terms acceptable to us if we hit such
triggers.




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We may be unable
to obtain capital from third parties needed to fund our existing securitizations
and loans and fees receivable 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 and the difference between our loans and fees receivable and
the amount that lenders will advance or lend to us against those receivables.
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 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.
Similarly, beginning in 2007 we have not been able to obtain financing on terms
as favorable as those that we previously were able to obtain, and we
significantly curtailed our marketing efforts and the issuance of new cards. 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, particularly sub-prime
mortgages, and the general economy.




Increases in
expected losses and delinquencies may prevent us from securitizing future
receivables on terms similar to those that currently are available or from
obtaining favorable financing for non-securitized receivables. Greater
than expected delinquencies and losses also could impact our ability to complete
other securitization or financing 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 and financing facilities or curtail credit
lines. Our existing commitments to extend credit to cardholders exceed
our available securitization and financing 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 and financing facilities. For instance, we recently closed a
significant number of accounts in order to prevent growth in the receivables
from those customers. This would subject us to several of the other risks that
we have described in this section.




The performance
of our competitors impact the costs of our securitizations and financing
facilities. Generally speaking, investors in our securitizations also
invest in our competitors’ securitizations, and lenders against our receivables
also lend against our competitors’ receivables. When these investors and lenders
evaluate their investments and lending arrangements, they typically do so on the
basis of overall industry performance. Thus, independent of our own performance,
when our competitors perform poorly, we typically experience negative investor
and lender sentiment, and the investors in our securitizations and lenders
against our receivables require greater returns, particularly with respect to
subordinated interests in our securitizations. In 2001, for instance, investors
demanded unprecedented returns. More recently, largely because of difficulties
in the sub-prime mortgage market, investors have been substantially more
reluctant, if even willing, to invest and those that have been willing to invest
have sought greater returns.




In the
event that investors require higher returns and we sell our retained interests
in securitizations at that time, the total return to the buyer may be greater
than the discount rate we are using to value the retained interests for purposes
of 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 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 potentially would
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 regarding
those receivables are inaccurate. The representations and warranties made
to us by sellers of receivables we purchase may be inaccurate. In securitization
transactions, in reliance on the representations and warranties that we have
received, we make similar representations and warranties to investors and,
generally speaking, if there is a breach of our representations and warranties,
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, the timing and extent of our
marketing efforts and the success of our marketing efforts. To the extent that
we have over-estimated the size or growth of our receivables or underestimated
contraction 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 ability to maintain and grow our
business depends largely upon the success of our marketing efforts. Our credit
card business competes with national, regional and local bank and other credit
card issuers. 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.




Our business
currently is contracting. Growth is a product of a combination of
factors, many of which are not in our control. Factors include:




•
            the
      level of our marketing efforts;




•
            the
      success of our marketing efforts;




•
            the
      degree to which we lose business to
competitors;




•
            the
      level of usage of our credit products by our
  customers;




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•
            the
      availability of portfolios for purchase on attractive
    terms;




•
            levels
      of delinquencies and charge offs;




•
            the
      availability of funding, including securitizations, on favorable
      terms;




•
            our
      ability to sell retained interests on favorable
  terms;




•
            the
      level of costs of soliciting new
customers;




•
            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.




We may
experience fluctuations in net income or sustain net losses if we are not able
to sustain or effectively manage our growth.




Our decisions
regarding marketing 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 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 through 2006 because of our improved
access to capital. Similarly, we significantly curtailed our marketing in August
2007 because of uncertainty regarding future access to capital as a result of
difficulties in the sub-prime mortgage market and currently are not issuing a
significant number of new cards.




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. Some of our servicing and vendor agreements require us to make
additional payments if we overestimate the size or growth of our business. These
additional payments compensate the servicers and vendors for increased staffing
expenses and other costs they incur 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, and our 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 changes in, and, interpretation of, 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 FDIC, the Office of the Comptroller of the Currency, the
FTC, U.K. banking authorities, state regulators having jurisdiction over
financial institutions and debt origination and 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 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, under certain circumstances we are responsible for
the remedies as a result of our indemnification obligations with those banks. We
also may elect to change practices or products that we believe are compliant
with law in order to respond to regulatory concerns. Furthermore, negative
publicity relating to any specific inquiry or investigation could hurt our
ability to conduct business with various industry participants or to attract new
accounts and could negatively affect our stock price, which would adversely
affect our ability to raise additional capital and would 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 also in 2006, we terminated our
processing and servicing of micro-loans for third-party banks in three other
states in response to a position taken in February 2006 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 resulted in cash payments of under $2.0 million
and a charge against a $5.0 million liability that we 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.




Also,
commencing in June 2006, the FDIC began investigating the policies, practices
and procedures used in connection with our credit card originating financial
institution relationships. In December 2006, the FTC commenced a related
investigation. In June 2008, both of the regulators commenced actions against us
and three of the banks that historically have issued cards on our behalf. See
Part II, Item 1, “Legal Proceedings” of this report for a description of
these actions.




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If any
additional deficiencies or violations of law or regulations are identified by us
or asserted by any regulator, or if the FDIC, FTC or any other regulator
requires us to change any of our practices, 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. 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
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 equal to the
greater of 3% or 4% (depending upon the credit card product) of their
outstanding balance or an amount that is sufficient to cover over-limit, late
and other fees—a minimum payment level that is designed to prevent negative
amortization. However, we have historically 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, 3.8% of our U.S. accounts and 5.9% of our U.S. credit card receivables
were experiencing negative amortization at December 31, 2006. In response
to comments about minimum payments and negative amortization received from the
FDIC in the course of its routine examinations of the banks that issue credit
cards on our behalf, during the second quarter of 2006 we began a review of our
practices in this area. As a result of this review and in keeping with our goals
of maintaining our consumer-friendly practices in this area, commencing during
the third and fourth quarters of 2006, we discontinued billing finance charges
and fees on credit card accounts once they become over ninety days delinquent.
We made several additional consumer-friendly changes in 2007 that have the
effect of preventing negative amortization, including a change in the fourth
quarter of 2007 whereby we began to reverse fees and finance charges on the
accounts of cardholders who made payments so that those accounts would not be in
negative amortization. Based on our various 2007 changes to our practices in
this area, U.S. accounts representing only approximately 0.06% of our U.S.
credit card receivables were experiencing negative amortization at
September 30, 2008. The changes that we have made are likely to adversely
impact the amounts ultimately collected from cardholders and therefore our
delinquency and charge off statistics. Additionally, based on on-going
discussions with the FDIC, evolving minimum payment practices in the credit card
industry, and our desire to continue to lead the industry in the application of
consumer-friendly credit card practices, we may make further payment and
fee-related changes in the next six to twelve months, and while it is possible
that some of these changes may even be beneficial to our financial position and
future results of operations, we do not yet know how these changes would affect
our customers’ payment patterns and therefore us.




Adverse
regulatory actions with respect to issuing banks have adversely impacted our
business and could continue to do so in the future. 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 provided services in four states
stopped making new loans. Similarly, two of the banks through which we
traditionally have opened accounts currently are not opening new accounts,
principally because of the pendency of the FDIC and FTC investigations and
litigation discussed elsewhere, although we expect one or more of these banks to
resume opening new accounts once these matters are substantially complete. (A
third bank, CB&T, has not been originating any new accounts on our behalf
for over two years and has notified us that it is terminating its affinity
agreement with us in 2009.) In addition, Encore has refused to purchase certain
receivables from one of our subsidiaries, claiming that the allegations
underlying our disputes with the FTC relieve it from its obligations. 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 higher priced lower-tier products), the manner
in which we market them or our servicing and collection practices. We are
entirely dependent on 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. Many of these laws (and the
related regulations) are focused on sub-prime lenders and are intended to
prohibit or curtail industry-standard practices as well as non-standard
practices. For instance, Congress recently enacted legislation that regulates
loans to military personnel through imposing interest rate and other limitations
and requiring new disclosures, all as regulated by the Department of
Defense. Similarly, legislation currently is pending in Congress that would
require changes to a variety of marketing, billing and collection practices, and
the Federal Reserve recently has proposed significant changes to a number of
practices. While our practices are in compliance with many of these proposed
changes, some (e.g., limitations on the ability to assess up-front fees) could
significantly impact our lower-tier products. 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 credit or refund previously collected
      amounts;




•
            certain
      fees could be prohibited or restricted, which would reduce the
      profitability of certain accounts;




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




•
            limitations
      on the content of marketing materials could be imposed that would result
      in reduced success for our marketing
efforts;




•
            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 finance charges could require us to reduce our
      fees and charges;




•
            some
      of our products and services could be banned in certain states or at the
      federal level;




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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;
    and




•
            a
      reduction in our ability or willingness to lend to certain individuals,
      such as military personnel.




Material
regulatory developments are likely to impact our business and results from
operations and we are unable to predict the nature or magnitude of that
impact.




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 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 by limiting the amount of the advance and or
reducing the allowable fees. 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. Ohio currently has legislation
pending that would, in effect, severely curtail if not eliminate micro-loans.
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 twelve-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 agreed with the Attorney General of the State of North Carolina in
March 2006 to stop servicing micro-loans for third-party banks, a practice that
we also terminated in three other affected states based on the February 2006
FDIC action cited above. 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 particular 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
Recently Entered Into and Have Subsequently Expanded Our Automobile Lending
Activities, and These Activities Involve Risks in Addition to Those We
Historically Have Faced.




In 2005,
we acquired Wells Fargo Financial’s CAR business unit. We are operating these
assets in forty-three states through eleven branches, three regional operating
centers and one national collection center based in Lake Mary, Florida
under the name CAR Financial Services, Inc. In February 2007, we acquired
the business of ACC, also an automobile lender. 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 not only to most of the
risks described above but also 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 repossession and
liquidation value as collateral. In addition, the CAR Financial Services
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.




Our automobile
lending business is dependent upon referrals from dealers. Currently we
provide automobile loans only to or through new and used car dealers (including
JRAS, our own captive buy-here, pay-here dealer acquired in January 2007).
Providers of automobile financing have traditionally competed based on the
interest rate charged, the quality of credit accepted and the flexibility of
loan terms offered. In order to be successful, we not only will need to be
competitive in these areas, but also will need to establish and maintain good
relations with dealers and provide them with a level of service greater than
what they can obtain from our competitors. This is particularly true with our
ACC business, which stopped originating loans in November 2006 and began
reestablishing its relationships with dealers only following the
acquisition.




Funding for
automobile lending is difficult to obtain and expensive. In large part
due to market concerns regarding sub-prime lending, it is extremely difficult to
find lenders willing to fund our automobile lending activities. To the extent
that our Auto Finance segment’s renewal or replacement facilities carry higher
interest rates and lower advance rates than the funding that we historically
have obtained, our growth rates will be adversely affected, we may be face
periods of liquidations in our Auto Finance segment receivables, and our
profitability and returns on equity may be reduced.




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The financial
performance of our automobile loan portfolio is in part dependent upon the
liquidation of repossessed automobiles. Our ACC business regularly
repossesses automobiles and sells repossessed automobiles at wholesale auction
markets located throughout the U.S. Auction proceeds from these sales and other
recoveries rarely are sufficient to cover the outstanding balances of the
contracts; where we experience these shortfalls, we will experience credit
losses. Decreased auction proceeds resulting from depressed prices at which used
automobiles may be sold in periods of economic slowdown or recession will result
in higher credit losses for us. Furthermore, depressed prices for automobiles
also may result from significant liquidations of rental fleet inventories and
from increased volumes of trade-ins due to promotional programs offered by new
vehicle manufacturers. Additionally, higher gasoline prices decreased the
auction value of certain types of vehicles, such as SUVs.




Repossession of
automobiles entails the risk of litigation and other claims. Although we
contract with reputable repossession firms to repossess automobiles on defaulted
loans, it is not uncommon for consumers to assert that we were not entitled to
repossess an automobile or that the repossession was not conducted in accordance
with applicable law. These claims increase the cost of our collection efforts
and, if correct, can result in awards against us.




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
integrate successfully 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.




Portfolio
purchases may cause fluctuations in reported credit card managed receivables
data, which may reduce the usefulness of historical credit card managed loan
data in evaluating our business. Our reported managed credit card receivables
data may fluctuate substantially from quarter to quarter as a result of recent
and future credit card portfolio acquisitions. In April 2007 we purchased a
portfolio in the U.K. having a face amount of approximately £490 million
($970 million) as of the date of purchase, and as of September 30, 2008,
credit card portfolio acquisitions accounted for 25.2% of our total credit card
managed receivables portfolio based on our ownership percentages.




Receivables
included in purchased portfolios are likely to have been originated using credit
criteria different from the criteria of issuing bank partners that originate
accounts on our behalf. As a result, some of these receivables have a different
credit quality than receivables of accounts originated on our behalf.
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, 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 integrate and operate successfully 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.




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 various issuing bank agreements have scheduled
expirations dates. If we are unable to extend or execute new agreements with our
issuing banks at the expirations of our current agreements with them, or if our
existing or new agreements with our issuing banks were terminated or otherwise
disrupted, there is a risk that we would not be able to enter into agreements
with an alternate provider on terms that we consider favorable or in a timely
manner without disruption of our business.




Historically,
a substantial portion of our receivables have been generated through accounts
owned by CB&T. CB&T has not been originating any new accounts on our
behalf for over two years, and CB&T has notified us that it is terminating
its relationship with us in 2009. In addition, CB&T has refused to provide
us the portion of the proceeds that it received in connection with the Visa® and
MasterCard® initial
public offerings that are attributable to the accounts that CB&T originated
on our behalf. For a more complete discussion of the litigation pending between
CB&T and us, please see Part II, Item 1, “Legal
Proceedings.”




One of
our other bank partners is subject to actions brought by the FDIC, at least
in part as a result of the programs that it operates for our benefit
and is not currently issuing cards on our behalf.  For a more
complete discussion of these actions, please see Part II, Item 1, “Legal
Proceedings.”




We are party to
substantial litigation. As more fully discussed in Part II, Item 1,
“Legal Proceedings,’ we are defendants in a significant number of legal
proceedings. This includes litigation brought by the FDIC and FTC, litigation
relating to our relationship with CB&T, arbitration with Encore, securities
class action litigation resulting from the decline in our stock price,
litigation relating to our payday lending operations and other litigation
customary for a business of our nature. In each case we believe that we have
meritorious defenses or that the positions that we are asserting otherwise are
correct. However, adverse outcomes are possible in each of these matters, and we
could decide to settle one or more of these matters in order to avoid the cost
of litigation or to obtain certainty of outcome. Adverse outcomes or settlements
of these matters could require us to pay damages, make restitution, change our
business practices or take other actions at a level, or in a manner, that would
adversely impact our business.




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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, 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 only if
it expects projected collections or prices received for sales of such
charged-off receivables to exceed its acquisition and servicing costs.
Accordingly, factors causing the acquisition price of targeted portfolios to
increase could reduce the ratio of collections (or sales prices 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.




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 financially 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, and in 2007, we
paid Total System Services, Inc. $50.9 million for these services. If these
agreements were not renewed or were terminated or the services provided to us
were otherwise disrupted, we would have to obtain these services from an
alternative provider, such as First Data Resources, Inc., which currently
provides only limited account and payment processing for us. 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.




If we obtain a
bank charter, any changes in applicable state or federal laws could adversely
affect our business. From time-to-time we have explored the possibility
of acquiring a bank or credit card bank. 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 and subject to periodic review. 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.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 have purchased debt and
securities of others, principally those issued by asset-backed securitization
trusts (e.g., notes secured or “backed” by pools of assets). These
securities in many cases are junior, including below investment grade, tranches
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 direct 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. Most recently, we have made
these investments through a subsidiary that was advised by United Capital Asset
Management LLC. These investments experienced realized losses (net of interest
income) of $41.4 million and unrealized losses of $20.1 million during 2007 and
experienced realized losses (net of interest income) of $0.5 million and
unrealized losses of $2.6 million during the first quarter of 2008. These losses
were the result of what we believe to be a significant dislocation in the market
for mortgage-related and other asset-backed securities caused, in part, by
leverage and liquidity constraints facing many market participants. Subsequent
to the end of our second quarter of 2008, we liquidated our remaining
investments in third-party asset-backed securities in response to margin calls;
as such, we will not have any continuing interest income associated with these
investments.




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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 and other sub-prime
      lenders;




•
            the
      overall financing environment, which investors may find critical to our
      value;




•
            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 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 our convertible notes, will have on the trading
price of our common stock.




We have the
ability to issue preferred shares, warrants, convertible debt and other
securities 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. We have similar abilities
to issue convertible debt, warrants and other equity securities.




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.




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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




None.




ITEM 5.
            OTHER
      INFORMATION




None.




ITEM 6.
            EXHIBITS




Exhibit
      Number
            Description of
      Exhibit
            Incorporated byReference
              from CompuCredit’s SECFilings
              Unless Otherwise Indicated:10.1
            Supplement
      No. 4 to Series 2006-One Supplement to Master Indenture,
              datedas
      of September 10, 2008
            September
      16, 2008,
              Form
      8-K,exhibit
      10.1110.2
            Supplement
      No. 5 to Series 2006-One Supplement to Master Indenture,
              dated
      as of  September 10, 2008
            Filed
      herewith31.1
            Certification
      per Section 302 of the Sarbanes-Oxley Act of 2002 for David G.
      Hanna
            Filed
      herewith31.2
            Certification
      per Section 302 of the Sarbanes-Oxley Act of 2002 for J.Paul Whitehead,
      III
            Filed
      herewith32.1
            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
      CORPORATIONNovember
      5, 2008
            
            By
            /s/
      J.PAUL WHITEHEAD, IIIJ.Paul
      Whitehead, IIIChief
      Financial Officer(duly
      authorized officer and principal financial
  officer)