##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, DC 20549
      FORM 10-K
  ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934
  For the
    fiscal year ended December 31,
    2005
    Commission
    file number
    000-50552     Asset Acceptance Capital
    Corp.
 (Exact name of registrant as
    specified in its charter)
  Delaware

80-0076779(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)   28405 Van
    Dyke Avenue
    Warren, Michigan 48093 (Address
    of principal executive offices)
  Registrants
    telephone number, including area code:(586) 939-9600
  Securities registered pursuant to Section 12(b) of the
    Act: None
  Securities registered pursuant to Section 12(g) of the
    Act:
   Title of each class

Name of each exchange on which
    registeredCommon Stock, $0.01 par value

The Nasdaq National Market    o þ
   o þ
   þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o þ o
  Rule 12b-2
 o þ
      37,205,115 shares
    of Common Stock, $0.01 par value.
  DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 



ASSET
    ACCEPTANCE CAPITAL CORP.
  Annual
    Report on
    Form 10-K
  TABLE OF
    CONTENTS
  
  PagePART IItem 1.

Business


3Item 1A.

Risk Factors


17Item 1B.

Unresolved Staff
    Comments


24Item 2.

Properties


25Item 3.

Legal
    Proceedings


25Item 4.

Submission of
    Matters to a Vote of Security Holders


26Supplemental
    Item.

Executive Officers
    of the Company


26PART IIItem 5.

Market for the
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


27Item 6.

Selected Financial
    Data


30Item 7.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


33Item 7A.

Quantitative and
    Qualitative Disclosures about Market Risk


48Item 8.

Financial
    Statements and Supplementary Data


48Item 9.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


48Item 9A.

Controls and
    Procedures


48Item 9B.

Other
    Information


49PART IIIItem 10.

Directors and
    Executive Officers of the Registrant


49Item 11.

Executive
    Compensation


49Item 12.

Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


49Item 13.

Certain
    Relationships and Related Transactions


49Item 14.

Principal
    Accounting Fees and Services


49PART IVItem 15.

Exhibits and
    Consolidated Financial Statements


49Signatures


53Index to
    Consolidated Financial Statements


F-1Second Amendment to Employment Agreement, Rufus H. Reitzel, Jr.Second Amendment to Employment Agreement, Nathaniel F. Bradley IVSecond Amendment to Employment Agreement, Mark A. RedmanSecond Amendment to Employment Agreement, Heather K. ReitzelLease Agreement dated April 25, 2005Second Amendment to Lease AgreementCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of CEO and CFO to 18 U.S.C. Section 1350    Annual
    Report on
    Form 10-K
  Form 10-K www.assetacceptance.com
 2




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##### Table of Contents



PART I  Item 1.
    Business  General
       3




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##### Table of Contents



History
    and Reorganization
  Initial
    Operations  Pre-January 2000
        January
    2000  September 2002
    
    (1)
    
    Mr. Redman acquired his ownership interest in January 2002.  September
    2002  Reorganization
   4




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##### Table of Contents



(1)
    
    Consumer Credit Corp. contributed its ownership interest in
    Consumer Credit, LLC to Asset Acceptance Holdings LLC effective
    September 30, 2002, in exchange for 1.0% of the equity
    interest in Asset Acceptance Holdings LLC, plus $250,000.
    Effective January 2003, Consumer Credit Corp. merged with and
    into RBR Holding Corp., with RBR Holding Corp. as the
    surviving entity acquiring, by operation of law, Consumer Credit
    Corp.s 1.0% equity interest in Asset Acceptance Holdings
    LLC.(2)
    
    Asset Acceptance Corp. merged with and into Asset Acceptance,
    LLC effective September 30, 2002, with Asset Acceptance,
    LLC as the surviving entity. In addition, effective as of
    September 30, 2002, Asset Acceptance, LLC purchased the
    charged-off receivables owned by Lee Acceptance Corp.(3)
    
    Financial Credit Corp. merged with and into Financial Credit,
    LLC effective September 30, 2002, with Financial Credit,
    LLC as the surviving entity.(4)
    
    CFC Financial Corp. merged with and into CFC Financial, LLC
    effective September 30, 2002, with CFC Financial, LLC
    as the surviving entity.(5)
    
    Med-Fi Acceptance, LLC, which changed its name to Rx
    Acquisitions, LLC on June 4, 2004, was formed as a
    wholly-owned subsidiary of Asset Acceptance Holdings LLC on
    April 4, 2003 for the purpose of purchasing and collecting
    portfolios of charged-off consumer receivables in the healthcare
    industry. 5




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Reorganization
      
   6




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##### Table of Contents



Current
    Structure; Subsidiary Merger
        
    
    after the Reorganization, Asset Acceptance Capital Corp., a
    Delaware corporation (referred to in our financial statements as
    the Company);
    from October 1, 2002 to the Reorganization, AAC Investors,
    Inc., including its subsidiary, Asset Acceptance Holdings LLC
    (referred to collectively in our financial statements as the
    Company); and
    from January 1, 2000 through September 30, 2002, our
    predecessors, RBR Holding Corp., Consumer Credit Corp. and Lee
    Acceptance Corp. (referred to collectively in our financial
    statements as the predecessor). 7




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Purchasing
  e-mail
         8




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##### Table of Contents



Face Value ofCharged-off





No. ofAsset Type

Receivables(3)


%


Accounts


%Visa®/MasterCard®/Discover®

$
9,962,353,796



43.5
%


4,304,317



19.4
%Private Label Credit Cards


3,201,047,024



14.0



4,696,711



21.2Telecommunications/Utility/Gas(1)


2,005,893,955



8.8



4,730,842



21.4Auto Deficiency


1,388,803,405



6.1



248,808



1.1Health Club


1,378,135,889



6.0



1,410,417



6.4Wireless Telecommunications


727,678,691



3.2



1,711,900



7.7Installment Loans


651,081,701



2.8



209,392



1.0Other(2)


3,559,786,715



15.6



4,831,388



21.8Total

$
22,874,781,176



100.0
%


22,143,775



100.0
%     (1)
    
    This excludes the wireless telecommunication purchased
    receivable portfolios.(2)
    
    Other includes charged-off receivables of several
    debt types, including student loan, mobile home deficiency and
    retail mail order. This includes the purchase of a single
    portfolio in June 2002 with a face value of $1.2 billion at
    a cost of $1.2 million (or 0.1% of face value) consisting
    of approximately 3.8 million accounts.(3)
    
    Face value of charged-off receivables represents the cumulative
    amount of purchases net of buybacks. The amount is not adjusted
    for payments received, settlements or additional accrued
    interest on any accounts in such portfolios after the date we
    purchased the applicable portfolio.    
    Fresh accounts are typically 120 to 270 days past due, have
    been charged-off by the credit originator and are either being
    sold prior to any post charged-off collection activity or are
    placed with a third party collector for the first time. These
    accounts typically sell for the highest purchase price.
    Primary accounts are typically 270 to 360 days past due,
    have been previously placed with one third party collector and
    typically receive a lower purchase price.
    Secondary and tertiary accounts are typically more than
    360 days past due, have been placed with two or three third
    party collectors and receive even lower purchase prices.   9




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##### Table of Contents



Face Value ofCharged-off





No. ofAccount Type

Receivables(2)


%


Accounts


%Fresh

$
1,075,702,836



4.7
%


454,273



2.1
%Primary


3,923,334,829



17.1



2,627,858



11.9Secondary


4,002,709,199



17.5



4,168,878



18.8Tertiary(1)


12,597,705,058



55.1



14,226,580



64.2Other


1,275,329,254



5.6



666,186



3.0Total

$
22,874,781,176



100.0
%


22,143,775



100.0
%     (1)
    
    This includes the purchase of a single portfolio in June 2002
    with a face value of $1.2 billion at a cost of
    $1.2 million (or 0.1% of face value) and consisting of
    approximately 3.8 million accounts.(2)
    
    Face value of charged-off receivables represents the cumulative
    amount of purchases net of buybacks. The amount is not adjusted
    for payments received, settlements or additional accrued
    interest on any accounts in such portfolios after the date we
    purchased the applicable portfolio.    Face Value ofCharged-off





No. ofGeographic Location

Receivables(3)


%


Accounts


%Texas(1)

$
3,181,150,467



13.9
%


2,732,989



12.3
%California


2,580,201,864



11.3



2,770,337



12.5Florida(1)


2,187,151,428



9.6



1,559,584



7.1Michigan(1)


1,775,195,162



7.8



2,235,160



10.1New York


1,371,925,233



6.0



1,169,626



5.3Ohio(1)


1,259,291,274



5.5



1,461,188



6.6Illinois(1)


1,056,668,900



4.6



1,357,510



6.1Pennsylvania


691,720,868



3.0



594,952



2.7North Carolina


664,125,017



2.9



527,259



2.4Georgia


581,323,535



2.5



514,555



2.3Other(2)


7,526,027,428



32.9



7,220,615



32.6Total

$
22,874,781,176



100.0
%


22,143,775



100.0
%     (1)
    
    Collection site located in this state.(2)
    
    Each state included in Other represents under 2.0%
    individually of the face value of total charged-off consumer
    receivables.(3)
    
    Face value of charged-off receivables represents the cumulative
    amount of purchases net of buybacks. The amount is not adjusted
    for payments received, settlements or additional accrued
    interest on any accounts in such portfolios after the date we
    purchased the applicable portfolio.  Collection
    Operations
   10




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Collection
    Department
             11




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Legal
    Collection Department
          Bankruptcy
    and Probate Recovery Department
    Competition
       12




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##### Table of Contents



Technology
    Platform
      
    automate the loading of accounts in order to begin collecting
    accounts soon after purchase;
    segment the accounts into dispositions for collection
    prioritization;
    access over 25 approved service partners including third party
    letter production and mailing vendors, credit reporting services
    and information service providers;
    interface with an automated dialer to increase the number of
    contacts with our debtors;
    connect to a document imaging system to allow our employees,
    with appropriate security clearance, to view scanned documents
    on accounts from their workstations while working on an account;
    limit an employees ability to work outside of company
    guidelines;
    query the entire database for any purpose which may be used for
    collection, reporting or other business matters; and
    establish parameters to comply with federal and state laws.  ®
  ® ® ® tm
    
    a diesel generator sufficient in size to power our entire Warren
    headquarters building which houses our primary server;
    a back-up
    server located in our Wixom, Michigan office sufficient in size
    to handle our database;
    an ability to have inbound phone calls rerouted to other offices;
    fire suppression systems in our primary and
    back-up data
    centers;
    redundant data paths to each of our call center offices;
    daily
    back-up of
    all of our critical applications with the tapes transported
    offsite to a secure data storage facility by a third party
    service provider; and
    data replication in our primary server to preserve data in the
    event of a failure of a storage drive. 13




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Regulation
    and Legal Compliance  Collection
    Activities
      
    Fair Debt Collection Practices Act
    (FDCPA).  This act imposes obligations
    and restrictions on the practices of consumer debt collectors,
    including specific restrictions regarding communications with
    debtors, including the time, place and manner of the
    communications. This act also gives consumers certain rights,
    including the right to dispute the validity of their obligations.
    Fair Credit Reporting Act/ Fair and Accurate Credit
    Transaction Act of 2003.  The Fair Credit
    Reporting Act and its amendment entitled the Fair and Accurate
    Credit Transaction Act of 2003 (FACT Act) places
    requirements on credit information providers regarding
    verification of the accuracy of information provided to credit
    reporting agencies and requires such information providers to
    investigate consumer disputes concerning the accuracy of such
    information. The FACT Act also requires certain conduct in the
    cases of identity theft and direct disputes to the creditor. We
    provide information concerning our accounts to the three major
    credit-reporting agencies, and it is our practice to correctly
    report this information and to investigate credit-reporting
    disputes in a timely fashion.
    The Financial Privacy Rule.  Promulgated under
    the Gramm-Leach-Bliley Act, this rule requires that financial
    institutions, including collection agencies, develop policies to
    protect the privacy of consumers private financial
    information and provide notices to consumers advising them of
    their privacy policies. It also requires that if private
    personal information concerning a consumer is shared with
    another unrelated institution, the consumer must be given an
    opportunity to opt out of having such information shared. Since
    we do not share consumer information with non-related entities,
    except as required by law, or except as allowed in connection
    with our collection efforts, our consumers are not entitled to
    any opt-out rights under this act. Both this rule and the
    Safeguards Rule described below are enforced by the Federal
    Trade Commission, which has retained exclusive jurisdiction over
    its enforcement, and does not afford a private cause of action
    to consumers who may wish to pursue legal action against a
    financial institution for violations of this act.
    The Safeguards Rule.  Also promulgated under
    the Gramm-Leach-Bliley Act, this rule specifies that we must
    safeguard financial information of consumers and have a written
    security plan setting forth information technology safeguards
    and the ongoing monitoring of the storage and safeguarding of
    electronic information.
    Electronic Funds Transfer Act.  This act
    regulates the use of the Automated Clearing House
    (ACH) system to make electronic funds transfers. All
    ACH transactions must comply with the rules of the National
    Automated Check Clearing House Association (NACHA)
    and Uniform Commercial Code § 3-402. This act, the NACHA
    regulations and the Uniform Commercial Code give the consumer,
    among other things, certain privacy rights with respect to the
    transactions, the right to stop payments on a pre-approved fund
    transfer, and the right to receive certain documentation of the
    transaction.
    Telephone Consumer Protection Act.  In the
    process of collecting accounts, we use automated dialers to
    place calls to consumers. This act and similar state laws place
    certain restrictions on telemarketers and users of automated
    dialing equipment who place telephone calls to consumers. 14




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
    Health Insurance Portability and Accountability Act
    (HIPAA).  This act requires that
    healthcare institutions provide safeguards to protect the
    privacy of consumers healthcare information. As a debt
    buyer collecting on medical debt we are considered a business
    associate to the healthcare institutions and are required to
    abide by HIPAA. We have a dedicated subsidiary called Rx
    Acquisitions, LLC which directly holds and collects all of our
    healthcare receivables.
    U.S. Bankruptcy Code.  In order to prevent
    any collection activity with bankrupt debtors by creditors and
    collection agencies, the U.S. Bankruptcy Code provides for an
    automatic stay, which prohibits certain contacts with consumers
    after the filing of bankruptcy petitions.      
    Truth in Lending Act;
    Fair Credit Billing Act;
    Equal Credit Opportunity Act; and
    Retail Installment Sales Act.       15




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Form 1099-C Section 1.6050P-2
    Employees
    Training
  e-mail
       16




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##### Table of Contents



Item 1A.
    Risk
    Factors      If we are
    not able to purchase charged-off consumer receivables at
    appropriate prices, the resulting decrease in our inventory of
    purchased portfolios of receivables could adversely affect our
    ability to generate revenue and our ability to continue our
    growth.
    
    continued growth in the levels of consumer obligations;
    continued growth in the number of industries selling charged-off
    consumer receivable portfolios;
    continued sales of charged-off consumer receivable portfolios by
    credit originators;
    competitive factors affecting potential purchasers and credit
    originators of charged-off receivables, including the number of
    firms engaged in the collection business and the capitalization
    of those firms, that may cause an increase in the price we are
    willing to pay for portfolios of charged-off consumer
    receivables or cause us to overpay for portfolios of charged-off
    consumer receivables;
    our ability to purchase portfolios in industries in which we
    have little or no experience with the resulting risk of lower
    returns if we do not successfully purchase and collect these
    receivables; and
    continued growth in the levels of credit being extended by
    credit originators.   17




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Our
    ability to collect on our purchased receivables may suffer if
    the economy suffers a material and adverse downturn for a
    prolonged period.
    We
    generally account for purchased receivable revenues using the
    interest method of accounting in accordance with
    U.S. Generally Accepted Accounting Principles, which
    requires making reasonable estimates of the timing and amount of
    future cash collections. If the timing and actual amount
    recovered by us is materially lower than our estimates, it would
    cause us to recognize impairments and negatively impact our
    earnings.
  (SOP 03-3),
  SOP 03-3 SOP 03-3
   18




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##### Table of Contents



SOP 03-3
  We are
    required to maintain compliance with Section 404 of
    Sarbanes Oxley for the year ended December 31, 2005 and
    thereafter. If we are unable to maintain compliance with
    Section 404 or if the costs related to maintaining
    compliance are significant, our profitability and our stock
    price could be negatively affected.
  day-to-day
  We may
    not be able to continue to acquire charged-off consumer
    receivables in sufficient amounts to operate efficiently and
    profitably.
    
    low employee morale;
    fewer experienced employees;
    higher training costs;
    disruptions in our operations;
    loss of efficiency; and
    excess costs associated with unused space in our facilities.  We may
    not be able to collect sufficient amounts on our charged-off
    consumer receivables, which would adversely affect our results
    of operations.
   19




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We
    experience high turnover rates for our account representatives
    and we may not be able to hire and retain enough sufficiently
    trained account representatives to support our
    operations.
    We face
    intense competition that could impair our ability to grow and
    achieve our goals.
       20




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Our
    performance may be adversely affected by Internal Revenue Code
    Section 6050P and the underlying Treasury Regulations and
    the costs related to compliance therewith.
  Form 1099-C Section 1.6050P-2
    Our
    growth strategy includes acquiring charged-off receivable
    portfolios in industries in which we have little or no
    experience. If we do not successfully acquire and collect on
    these portfolios, revenue growth may slow and our results of
    operations may be materially and adversely affected.
    Our
    strategy may include the opening of new call centers in selected
    locations through the acquisition of assets of businesses and
    the training and integration of existing account representatives
    into our business. If we open new call centers and do not
    successfully acquire assets of businesses and train and
    integrate new account representatives into our business, our
    results of operations would be negatively affected.
   21




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Historical
    operating results and quarterly cash collections may not be
    indicative of future performance.
      Our
    collections may decrease if bankruptcy filings increase or if
    bankruptcy laws or other debt collection laws change.
    Failure
    to effectively manage our growth could adversely affect our
    business and operating results.
    
    expand and enhance our administrative infrastructure;
    improve our management, regulatory compliance and financial and
    information systems and controls;
    open new call centers in select locations through the
    acquisition of selected assets of businesses and the development
    of new sites; and
    recruit, train, manage and retain our employees effectively.   22




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We are
    dependent on our management team for the adoption and
    implementation of our strategies and the loss of their services
    could have a material adverse effect on our business.
    Our
    ability to recover on our charged-off consumer receivables may
    be limited under federal and state laws.
        Our
    growth strategy may, to a limited extent, include the
    acquisition of portfolios in selected countries located outside
    of the United States. If we expand our operations outside of the
    United States, our international acquisitions could subject us
    to risks that could have a material adverse effect on our
    business.
    
    a greater difficulty in managing collection operations globally;
    compliance with multiple and potentially conflicting regulatory
    requirements;
    fluctuations in foreign currency exchange rates; 23




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##### Table of Contents




    changes in a specific countrys or regions political
    or economic conditions; and
    changes in tax laws.    Our
    operations could suffer from telecommunications or technology
    downtime or from not responding to changes in
    technology.
    Our
    access to capital through our line of credit may be critical to
    our ability to continue to grow. If our line of credit is
    materially reduced or terminated and if we are unable to replace
    it on favorable terms, our revenue growth may slow and our
    results of operations may be materially and adversely
    affected.
    Item 1B.
    Unresolved
    Staff Comments   24




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##### Table of Contents



Item 2.
    Properties    ApproximateLocation

Square Footage


Lease Expiration Date

UsePhoenix, Arizona


71,550


April 1, 2010

Call center, with collections and
    legal collectionsPlantation, Florida


2,555


January 31, 2008

Legal collectionsRiverview, Florida


52,280


April 30, 2009

Call center, with collections and
    legal collectionsChicago, Illinois


20,905


November 20, 2012

Call center, with collections and
    legal collectionsWhite Marsh, Maryland


22,800


September 30, 2007

Call center, with collections and
    legal collectionsWarren, Michigan


200,000


November 30, 2014

Principal executive offices and
    call center, with collections and legal collectionsWixom, Michigan


48,000


May 31, 2008

Call center, with collectionsWoodbury, New Jersey(1)


288


December 31, 2006

Legal collectionsBrooklyn Heights, Ohio(2)


22,640


October 31, 2011

Call center, with collections and
    legal collectionsRichmond, Virginia


1,374


July 31, 2008

Legal collectionsSan Antonio, Texas


27,265


June 30, 2008

Call center, with collections and
    legal collections     (1)
    
    Upon expiration of this lease on December 31, 2006, we
    anticipate extending the lease for one additional year.(2)
    
    In January 2006, we entered into an amendment, with respect to
    the lease, for the Brooklyn Heights, Ohio facility. The
    amendment will increase our square footage from 22,640 to 30,443
    on or before November 1, 2006. In addition, the amendment
    extended the expiration of our lease agreement from
    September 30, 2006 to October 31, 2011.    Item 3.
    Legal
    Proceedings     25




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##### Table of Contents



Item 4.
    Submission
    of Matters to a Vote of Securities Holders   Supplemental
    Item.  Executive Officers of the
    Company    Name

Age

PositionRufus H. Reitzel, Jr.


71


Chairman; DirectorNathaniel F. Bradley IV


49


President and Chief Executive
    Officer; DirectorMark A. Redman


44


Vice President-Finance, Chief
    Financial Officer, Secretary and TreasurerPhillip L. Allen


47


Vice President-OperationsDiane Kondrat


47


Vice President-Legal CollectionsDeborah Everly


33


Vice
    President-Marketing & AcquisitionsPatrick Dangel


45


Vice President-CollectionsRubert Chapman III


40


Vice President-CollectionsMichael T. Homant


41


Vice President-Information
    TechnologyDeanna Hatmaker


41


Vice President-Human ResourcesThomas Good


46


General Counsel   Rufus H. Reitzel, Jr., Chairman;
    Director father-in-law
  Nathaniel F. Bradley, IV, President and Chief Executive
    Officer; Director son-in-law
  Mark A. Redman, Vice President-Finance, Chief Financial
    Officer, Secretary and
    Treasurer
  Phillip L. Allen, Vice
    President-Operations
  Diane Kondrat, Vice President-Legal
    Collections
 26




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##### Table of Contents



Deborah Everly, Vice President-Marketing &
    Acquisitions
  Patrick Dangel, Vice
    President-Collections
  Rubert Chapman III, Vice
    President-Collections
  Michael T. Homant, Vice President-Information
    Technology
  Deanna Hatmaker, Vice President-Human
    Resources
  Thomas Good, General
    Counsel
 PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities    2005


2004High


Low


High


LowFourth Quarter

$
32.05


$
18.03


$
21.84


$
16.95Third Quarter


31.20



23.12



18.63



15.19Second Quarter


26.55



18.11



21.50



13.13First Quarter


23.60



17.90



19.12
(1)


16.10
(1)  27




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(1)
    
    The initial public offering price was $15.00 per share.        Number of SecuritiesRemaining AvailableNumber of





For Future IssuanceSecurities to be





Under EquityIssued upon





Compensation PlansExercise of


Weighted Average


(ExcludingOutstanding


Exercise Price of


Outstanding Options,Options, Warrants


Outstanding Options,


Warrants AndPlan Category

and Rights


Warrants and Rights


Rights)Equity compensation plans approved
    by stockholders


251,009


$
19.38



3,448,991Equity compensation plans and
    agreements not approved by stockholders










   Form 10-K,
  
    On February 4, 2004, pursuant to a Share Exchange Agreement
    entered into on October 24, 2003, all of the shares of
    capital stock of AAC Investors, Inc. and RBR Holding Corp.,
    which held 60% and 40% ownership interests in Asset Acceptance
    Holdings LLC, respectively, were contributed to Asset Acceptance
    Capital Corp. in exchange for all of the shares of common stock
    of Asset Acceptance Capital Corp. A total of
    28,448,449 shares were issued to the stockholders of AAC
    Investors, Inc. and RBR Holding Corp., with
    16,004,017 shares and 12,444,432 shares issued to the
    stockholders of AAC Investors, Inc. and the stockholders of RBR
    Holding Corp., respectively. The issuance was effected pursuant
    to the registration exemption afforded by Regulation D
    and/or
    Section 4(2) of the Securities Act.
    The non-management directors of Asset Acceptance Capital Corp.
    have the right to receive a quarterly fee in the amount of
    $5,000. In lieu of the cash fee, the non-management directors
    have the right to receive immediately vested options to purchase
    shares of the common stock of Asset Acceptance Capital Corp. in
    an amount equal to three times the quarterly fee. In addition,
    each non-management director is entitled to receive 7,500
    options as of the date of the annual stockholders meeting. This
    set of options vest 50% on the first anniversary of the granting
    of the option and 50% on the second anniversary of the granting
    of the options. The options issued on May 16, 2005 reflect
    the issuance of the annual options for the timeframe beginning
    on the later date of the Companys IPO or the date of the
    directors election to the board of directors and ending on
    May 16, 2004. 28




---



##### Table of Contents



Option Expiration

Number of


ExerciseDirector

Option Grant Date

Date

Options


PriceJennifer L. Adams

April 20, 2005

April 20, 2015


755


$
19.87May 16, 2005

May 16, 2015


1,562


$
19.48May 17, 2005

May 17, 2015


7,500


$
23.42May 17, 2005

May 17, 2015


640


$
23.42August 17, 2005

August 17, 2015


543


$
27.61November 17, 2005

November 17, 2015


758


$
19.8011,758Terrence D. Daniels

April 20, 2005

April 20, 2015


755


$
19.87May 16, 2005

May 16, 2015


2,187


$
19.48May 17, 2005

May 17, 2015


7,500


$
23.42May 17, 2005

May 17, 2015


640


$
23.42August 17, 2005

August 17, 2015


543


$
27.61November 17, 2005

November 17, 2015


758


$
19.8012,383Donald Haider

April 20, 2005

April 20, 2015


755


$
19.87May 16, 2005

May 16, 2015


1,562


$
19.48May 17, 2005

May 17, 2015


7,500


$
23.42May 17, 2005

May 17, 2015


640


$
23.42August 17, 2005

August 17, 2015


543


$
27.61November 17, 2005

November 17, 2015


758


$
19.8011,758Anthony Ignaczak

April 20, 2005

April 20, 2015


755


$
19.87May 16, 2005

May 16, 2015


2,187


$
19.48May 17, 2005

May 17, 2015


7,500


$
23.42May 17, 2005

May 17, 2015


640


$
23.42August 17, 2005

August 17, 2015


543


$
27.61November 17, 2005

November 17, 2015


758


$
19.8012,383H. Eugene Lockhart

April 20, 2005

April 20, 2015


755


$
19.87May 16, 2005

May 16, 2015


2,187


$
19.48May 17, 2005

May 17, 2015


7,500


$
23.42May 17, 2005

May 17, 2015


640


$
23.42August 17, 2005

August 17, 2015


543


$
27.61November 17, 2005

November 17, 2015


758


$
19.8012,383William I. Jacobs

May 17, 2005

May 17, 2015


4,062


$
23.42William F. Pickard

May 17, 2005

May 17, 2015


4,062


$
23.42  29




---



##### Table of Contents



Number of


ExerciseEmployee

Option Grant Date


Option Expiration Date


Options


PriceRufus H. Reitzel, Jr.


April 21, 2005



April 21, 2015



15,000


$
18.89Nathaniel F. Bradley IV


April 21, 2005



April 21, 2015



15,000


$
18.89Thomas Good


April 21, 2005



April 21, 2015



25,000


$
18.89Darren Bradshaw


July 29, 2005



July 29, 2015



10,000


$
27.34     Item 6.
    Selected
    Financial Data    
    From January 1, 2001 through September 30, 2002, AAC
    Holding Corp. and its subsidiaries, Consumer Credit Corp. and
    Lee Acceptance Corp., with each of these corporations treated as
    an S corporation for income tax purposes (except for Lee
    Acceptance Corp. which was treated as a C corporation for income
    tax purposes).
    From October 1, 2002 to the Reorganization effected on
    February 4, 2004, AAC Investors, Inc., including its
    subsidiary, Asset Acceptance Holdings LLC (referred to
    collectively in the following selected financial statements as
    the successor).
    From February 5, 2004 through December 31, 2005, Asset
    Acceptance Capital Corp., including its wholly-owned
    subsidiaries, AAC Investors, Inc. and RBR Holding Corp., and its
    indirect wholly-owned subsidiary, Asset Acceptance Holdings LLC
    and its subsidiaries, with these companies also referred to
    collectively in our financial statements and in the following
    selected consolidated financial data as the
    successor.      30




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##### Table of Contents



Predecessor


Combined


SuccessorYears Ended
    December 31,2001


2002(1)


2003


2004


2005(in thousands, except per share
    data)STATEMENT OF INCOME
    DATA:RevenuesPurchased receivable revenues

$
61,412


$
100,004


$
159,628


$
213,723


$
252,196Gain (loss) on sale of purchased
    receivables


250



326







468



(26
)Finance contract revenues


354



411



565



562



514Total revenues


62,016



100,741



160,193



214,753



252,684ExpensesSalaries and benefits


20,485



33,438



51,296



111,034
(2)


76,107Collections expense


16,372



26,051



43,656



56,949



73,975Occupancy


1,590



3,064



4,633



6,109



8,352Administrative


1,511



2,682



3,259



5,677



8,582Depreciation and amortization


923



1,910



2,572



2,881



3,339Loss on disposal of equipment


12



198



4



98



32Total operating expenses


40,893



67,343



105,420



182,748



170,387Income from operations


21,123



33,398



54,773



32,005



82,297Other income (expense)Interest income


54



28



4



28



1,143Interest expense


(2,283
)


(3,455
)


(7,199
)


(1,737
)


(567
)Other


11



(423
)


448



84



51Income before income taxes


18,905



29,548



48,026



30,380



82,924Income taxes(3)






1,624



10,283



29,634



31,657Net income

$
18,905


$
27,924


$
37,743


$
746
(4)

$
51,267Net income per share basic

$



$



$
1.33


$
0.02


$
1.38Net income per share diluted

$



$



$
1.33


$
0.02


$
1.38Pro forma income taxes(5)

$
6,745


$
11,038


$
17,914


$
11,301


$
Pro forma net income(5)

$
12,160


$
18,510


$
30,112


$
19,079
(6)

$
Pro forma net income per share
    basic(7)

$
0.43


$
0.65


$
1.06


$
0.52
(6)

$
Pro forma net income per share
    diluted(7)

$
0.43


$
0.65


$
1.06


$
0.52
(6)

$
Weighted average shares basic










28,448



36,386



37,225Weighted average shares diluted










28,448



36,394



37,270Pro forma weighted average shares
    (basic and diluted)(7)


28,448



28,448











 Predecessor


SuccessorAs of
    December 31,2001


2002


2003


2004


2005(in thousands)FINANCIAL POSITION
    DATA:Cash and cash equivalents

$
1,576


$
2,281


$
5,499


$
14,205


$
50,519Purchased receivables


81,726



133,337



183,720



216,480



248,991Total assets


88,520



151,277



207,110



252,506



323,942Deferred tax liability, net






1,623



11,906



41,247



58,584Total debt, including capital lease
    obligations


39,015



103,192



112,729



254



187Total stockholders equity


47,453



41,644



74,383



197,180



249,460 Predecessor


Combined


SuccessorYears Ended
    December 31,2001


2002


2003


2004


2005(in thousands, except
    percentages)OPERATING AND OTHER FINANCIAL
    DATA:Cash collections for period

$
71,068


$
120,540


$
197,819


$
267,928


$
319,910Operating expenses to cash
    collections


57.5
%


55.9
%


53.3
%


68.2
%(8)


53.3
%Acquisitions of purchased
    receivables at cost(9)

$
43,132


$
72,287


$
87,311


$
87,364


$
102,262Acquisitions of purchased
    receivables at face value

$
2,621,561


$
5,087,732


$
4,120,194


$
4,362,812


$
4,171,011Acquisitions of purchased
    receivables cost as a percentage of face value


1.65
%


1.42
%


2.12
%


2.00
%


2.45
%  31




---



##### Table of Contents



(1)
    
    AAC Investors, Inc. and RBR Holding Corp. became wholly-owned
    subsidiaries of Asset Acceptance Capital Corp. through a
    reorganization that was effective February 4, 2004. As a
    result of the Reorganization, Asset Acceptance Holdings LLC and
    its subsidiaries became indirect wholly-owned subsidiaries of
    Asset Acceptance Capital Corp. The operations data for the year
    ended December 31, 2002 include our predecessor for the
    nine month period ended September 30, 2002 and our
    successor for the three month period ended December 31,
    2002.(2)
    
    Excluding the $45.7 million compensation and related
    payroll tax charge resulting from the vesting of the outstanding
    share appreciation rights upon our initial public offering,
    salaries and benefits would have been $65.3 million for the
    year ended December 31, 2004. See discussion in
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations  Year Ended
    December 31, 2005 Compared to Year Ended December 31,
    2004 and Year Ended December 31, 2004 Compared to Year
    Ended December 31, 2003  Operating
    Expenses.(3)
    
    Asset Acceptance Capital Corp. included income tax expense on
    only 60% of pretax income until February 4, 2004, as RBR
    Holding Corp. (40% owner of Asset Acceptance Holdings
    LLC) was taxed as an S corporation under the Internal
    Revenue Code and therefore taxable income was included on the
    shareholders individual tax returns. Prior to
    October 1, 2002, no income tax expense was incurred as our
    predecessor was taxed as an S corporation under the
    Internal Revenue Code and therefore taxable income was included
    on the shareholders individual tax returns. Income tax
    expense in 2004 includes a deferred tax charge of
    $19.3 million resulting from RBR Holding Corp. losing its
    S corporation tax status after becoming a wholly-owned
    subsidiary of Asset Acceptance Capital Corp. during the first
    quarter of 2004.(4)
    
    Our net income for 2004 included the following one-time events:  
    The negative effect of a deferred tax charge of
    $19.3 million, or $0.53 per share, resulting from RBR
    Holding Corp. losing its S corporation status after
    becoming a wholly-owned subsidiary of Asset Acceptance Capital
    Corp. during the first quarter of 2004. See discussion in note
    (3) above.
    The negative effect of a $45.7 million compensation and
    related payroll tax charge ($28.7 million net of taxes, or
    $0.79 per share) resulting from the vesting of the
    outstanding share appreciation rights upon our initial public
    offering during the first quarter of 2004. See
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations  Year Ended
    December 31, 2005 Compared to Year Ended 2004 and Year
    Ended December 31, 2004 Compared to Year Ended
    December 31, 2003  Operating Expenses.
    The positive effect related to our incurring income tax on only
    60% of pretax income for the period January 1, 2004 through
    February 4, 2004, as RBR Holding Corp. (40% owner of Asset
    Acceptance Holdings LLC) was taxed as an
    S corporation. Income taxes during the period
    February 5, 2004 through December 31, 2004 reflected
    income tax expense on 100% of pretax income as RBR Holding Corp.
    became a wholly-owned subsidiary of Asset Acceptance Capital
    Corp. The impact of the lower tax expense was approximately
    $0.9 million, or $0.03 per share.  (5)
    
    For comparison purposes, we have presented pro forma net income,
    which is net income adjusted for pro forma income taxes assuming
    all entities had been a C corporation for all periods presented.(6)
    
    Includes the $45.7 million compensation and related payroll
    tax charge ($28.7 million net of taxes, or $0.79 per
    share) resulting from the vesting of the outstanding share
    appreciation rights upon our initial public offering.(7)
    
    Pro forma net income per share and pro forma weighted average
    shares assumed the Reorganization had occurred at the beginning
    of the periods presented.(8)
    
    Excluding the $45.7 million compensation and related
    payroll tax charge resulting from the vesting of the outstanding
    share appreciation rights upon our initial public offering,
    operating expenses decreased to 51.2% of cash collections for
    the year ended December 31, 2004. See discussion in
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations  Year Ended
    December 31, 2005 Compared to Year Ended December 31,
    2004 and Year Ended December 31, 2004 Compared to Year
    Ended December 31, 2003  Operating
    Expenses.(9)
    
    Amount of purchased receivables at cost refer to the cash paid
    to a seller to acquire a portfolio less the purchase price
    refunded by a seller due to the return of non-compliant accounts
    (also defined as buybacks) less the purchase price for accounts
    that were sold at the time of purchase to another debt purchaser. 32




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  You should read the following discussion and analysis in
    conjunction with our consolidated financial statements and the
    related notes included elsewhere in this Annual Report. This
    discussion contains forward-looking statements that involve
    risks, uncertainties and assumptions, such as statements of our
    plans, objectives, expectations and intentions. Our actual
    results may differ materially from those discussed here. Factors
    that could cause or contribute to the differences include those
    discussed in Item 1A. Risk Factors, as well as
    those discussed elsewhere in this Annual Report. The references
    in this Annual Report to the U.S. Federal Reserve Board are
    to the Federal Reserve Statistical Release, dated
    January 9, 2006 and the Federal Reserve Consumer Credit
    Historical Data website
    (www.federalreserve.gov/releases/g19/hist/) and the references
    to The Nilson Report (www.nilsonreport.com) are to The Nilson
    Report, issue 792, dated July 2003, and issue 835, dated June
    2005.
  Company
    Overview
             33




---



##### Table of Contents



Industry
    Overview
    
    Increasing levels of consumer debt
    obligations  According to the
    U.S. Federal Reserve Board, the consumer credit industry
    increased from $133.7 billion of consumer debt obligations
    in 1970 to $2.2 trillion of consumer debt obligations in
    November 2005, a compound annual growth rate of 8.3%. The Nilson
    Report projects that this market will increase to $2.8 trillion
    by 2010.
    Increasing charge-offs of the underlying
    receivables  According to The Nilson Report,
    net charge-offs of credit card debt have increased from
    $8.2 billion in 1990 to $48.2 billion in 2004, a
    compound annual growth rate of 13.5%. The Nilson Report is
    forecasting an increase in the net charge-offs of credit card
    debt to $86.7 billion in 2010.
    Increasing types of credit originators accessing the debt
    sale market  According to The Nilson Report,
    the cost for all types of purchased debt sold has increased from
    $6.0 billion in 1993 to $77.2 billion in 2004, a
    compound annual growth rate of 26.1%. Sellers of charged-off
    portfolios have expanded to include healthcare, utility and
    telecommunications providers, commercial banks, consumer finance
    companies, retail merchants and mortgage and auto finance
    companies.      
    competitive bids for specified portfolios through a sealed bid
    or, in some cases, an on-line process;
    privately-negotiated transactions between the credit originator
    or other holder of consumer debt and a purchaser; and 34




---



##### Table of Contents




    forward flow contracts, which commit a debt seller to sell, and
    a purchaser to acquire, a steady flow of charged-off consumer
    receivables periodically over a specified period of time,
    usually no less than three months, for a fixed percentage of the
    face value of the receivables.    
    pursue collections over multi-year periods;
    tailor repayment plans based on a consumers ability to
    pay; and
    utilize experience and resources, including litigation.  History
    and Reorganization      
    On January 1, 2000, Asset Acceptance Corp. and certain of
    its affiliates were joined as wholly owned subsidiaries of AAC
    Holding Corp. for tax planning purposes.
    On September 20, 2002, we formed Asset Acceptance Holdings
    LLC, a Delaware limited liability company, for the purpose of
    consummating an equity recapitalization. Effective
    September 30, 2002, AAC Investors, Inc. acquired a 60%
    equity interest in Asset Acceptance Holdings LLC. After
    September 30, 2002, the business of purchasing and
    collecting charged-off debt previously conducted by AAC Holding
    Corp. and its subsidiaries and the business of financing sales
    of consumer product retailers previously conducted by Consumer
    Credit Corp. were effected through this newly formed company and
    its subsidiaries.     35




---



##### Table of Contents



Results
    of Operations
    Percent of Total
    Revenues


Percent of Cash
    CollectionsYears Ended
    December 31,


Years Ended
    December 31,2005


2004


2003


2005


2004


2003RevenuesPurchased receivable revenues


99.8
%


99.5
%


99.6
%


78.8
%


79.7
%


80.7
%Gain (loss) on sale of purchased
    receivables


(0.0
)


0.2



0.0



(0.0
)


0.2



0.0Finance contract revenues


0.2



0.3



0.4



0.2



0.2



0.3Total revenues


100.0



100.0



100.0



79.0



80.1



81.0ExpensesSalaries and benefits


30.1



51.7
(1)


32.0



23.8



41.4
(1)


25.9Collections expense


29.3



26.5



27.3



23.1



21.3



22.1Occupancy


3.3



2.9



2.9



2.6



2.3



2.3Administrative


3.4



2.6



2.0



2.7



2.1



1.7Depreciation and amortization


1.3



1.3



1.6



1.1



1.1



1.3Loss on disposal of equipment


0.0



0.1



0.0



0.0



0.0



0.0Total operating expense


67.4



85.1
(1)


65.8



53.3



68.2
(1)


53.3Income from operations


32.6



14.9



34.2



25.7



11.9



27.7Other income
    (expense)Interest income


0.4



0.0



0.0



0.4



0.0



0.0Interest expense


(0.2
)


(0.8
)


(4.5
)


(0.2
)


(0.6
)


(3.6
)Other


0.0



0.0



0.3



0.0



0.0



0.2Income before income taxes


32.8



14.1



30.0



25.9



11.3



24.3Income taxes


12.5



13.8



6.4



9.9



11.0



5.2Net income


20.3
%


0.3
%


23.6
%


16.0
%


0.3
%


19.1
%Pro forma income taxes






5.3
%


11.2
%






4.2
%


9.1
%Pro forma net income






8.8
%


18.8
%






7.1
%


15.2
%     (1)
    
    Excluding the $45.7 million compensation and related
    payroll tax charge, salaries and benefits were 30.4% and 24.4%
    of revenues and collections, respectively, and total operating
    expenses were 63.8% and 51.2% of revenue and collections,
    respectively, for the year ended December 31, 2004. See
    discussion in Managements Discussion and Analysis of
    Financial Condition and Results of
    Operations  Year Ended December 31, 2005
    Compared to Year Ended December 31, 2004 and Year Ended
    December 31, 2004 Compared to Year Ended December 31,
    2003  Operating Expenses.  Year
    Ended December 31, 2005 Compared To Year Ended
    December 31, 2004
  Revenue
   36




---



##### Table of Contents



SOP 03-3,
    Operating
    Expenses
    period-to-period
    Salaries and Benefits.
 37




---



##### Table of Contents



Collections Expense.
  Occupancy.
  Administrative.
  Depreciation and Amortization.
  Interest Income.
  Interest Expense.
 38




---



##### Table of Contents



Income Taxes.
  Year
    Ended December 31, 2004 Compared To Year Ended
    December 31, 2003
  Revenue
      Operating
    Expenses
     39




---



##### Table of Contents



period-to-period
  Salaries and Benefits.
    Collections Expense.
  Occupancy.
  Administrative.
  Depreciation.
  Interest Income.
  Interest Expense.
 40




---



##### Table of Contents



Income Taxes.
   41




---



##### Table of Contents



Supplemental
    Performance Data
  Portfolio
    Performance
    Total EstimatedCash Collections


Estimated


Total


Collections as aNumber of


Purchase


Including Cash


Remaining


Estimated


Percentage ofPurchase Period

Portfolios


Price(1)


Sales(2)


Collections


Collections


Purchase Price(2)(dollars in thousands)1990


9


$
638


$
3,133


$



$
3,133



491
%1991


12



280



1,482







1,482



5291992


29



309



2,929







2,929



9481993


30



790



7,884







7,884



9981994


36



1,427



6,916







6,916



4851995


53



1,519



7,873







7,873



5181996


46



3,844



17,197



306



17,503



4551997


45



4,345



28,198



1,217



29,415



6771998


61



16,411



77,884



6,705



84,589



5151999


51



12,925



55,927



8,568



64,495



4992000


49



20,595



106,951



25,807



132,758



6452001


62



43,132



205,575



74,209



279,784



6492002


94



72,287



233,323



152,917



386,240



5342003


76



87,311



225,031



273,809



498,840



5712004


106



87,364



91,719



267,044



358,763



4112005


104



102,262



23,459



286,954



310,413



304Total


863


$
455,439


$
1,095,481


$
1,097,536


$
2,193,017



482
%     (1)
    
    Purchase price refers to the cash paid to a seller to acquire a
    portfolio less the purchase price refunded by a seller due to
    the return of non-compliant accounts (also defined as buybacks)
    less the purchase price for accounts that were sold at the time
    of purchase to another debt purchaser.(2)
    
    For purposes of this table, cash collections include selected
    cash sales, which were entered into subsequent to purchase. Cash
    sales, however, exclude the sales of portfolios, which occurred
    at the time of purchase.    Unamortized


UnamortizedUnamortized





Balance as a


Balance as aBalance as of


Purchase


Percentage of


Percentage ofPurchase Period

December 31, 2005


Price(1)


Purchase Price(2)


Total(dollars in thousands)2000

$
61


$
20,595



0.30
%


0.02
%2001


5,210



43,132



12.08



2.092002


27,935



72,287



38.64



11.232003


52,322



87,311



59.93



21.012004


67,501



87,364



77.26



27.112005


95,962



102,262



93.84



38.54Total

$
248,991


$
412,951



60.30
%


100.00
%     (1)
    
    Purchase price refers to the cash paid to a seller to acquire a
    portfolio less the purchase price refunded by a seller due to
    the return of non-compliant accounts (also defined as buybacks)
    less the purchase price for accounts that were sold at the time
    of purchase to another debt purchaser.(2)
    
    For purposes of this table, cash collections include selected
    cash sales, which were entered into subsequent to purchase. Cash
    sales, however, exclude the sales of portfolios, which occurred
    at the time of purchase. 42




---



##### Table of Contents



Account
    Representative Productivity and Turnover
    Account
    Representatives by Experience
  For the Year EndedDecember 31,2005


2004


2003Number of account
    representatives:One year or more(1)


510



471



322Less than one year(2)


540



437



478Total


1,050



908



800     (1)
    
    Based on number of average traditional call center Full Time
    Equivalent (FTE) account representatives with one or
    more years of service.(2)
    
    Based on number of average traditional call center FTE account
    representatives with less than one year of service, including
    new employees in training.  Collection
    Averages by Experience
  For the Year EndedDecember 31,2005


2004


2003Collection averages:One year or more(1)

$
199,734


$
195,426


$
171,506Less than one year(2)


117,859



139,891



135,792Overall average


157,661



168,708



150,178     (1)
    
    Based on number of traditional call center FTE account
    representatives with one or more years of service.(2)
    
    Based on number of traditional call center FTE account
    representatives with less than one year of service, including
    new employees in training.    Turnover
    by Experience
  For the Year EndedDecember 31,2005


2004


2003Account representatives
    turnover:One year or more(1)


39.3
%


38.4
%


28.1
%Less than one year(2)


117.8



103.3



96.1Total turnover


78.8



69.0



71.3     (1)
    
    Based on number of traditional call center account
    representatives with one or more years of service.(2)
    
    Based on number of traditional call center account
    representatives with less than one year of service, including
    new employees in training. 43




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##### Table of Contents



Cash
    Collections
    Historical
    Collections(1)
  Purchase

Purchase


Year Ended
    December 31,Period

Price(2)


1994


1995


1996


1997


1998


1999


2000


2001


2002


2003


2004


2005(dollars in thousands)Pre-1994

$
3,067


$
2,540


$
1,788


$
1,285


$
834


$
649


$
555


$
437


$
302


$
324


$
243


$
2451994

$
1,427



345



1,763



1,430



1,005



647



457



357



258



176



188



126



1301995


1,519







388



1,566



1,659



1,118



786



708



472



343



278



227



2121996


3,844











827



3,764



3,085



2,601



2,098



1,440



1,041



816



687



6831997


4,345















1,682



4,919



5,573



5,017



3,563



2,681



1,784



1,526



1,3421998


16,411



















4,835



15,220



15,045



12,962



11,021



7,987



5,582



4,6531999


12,925























3,761



11,331



10,862



9,750



8,278



6,675



5,0222000


20,595



























8,895



23,444



22,559



20,318



17,196



14,0622001


43,132































17,630



50,327



50,967



45,713



39,8652002


72,287



































22,340



70,813



72,024



67,6492003


87,311







































36,067



94,564



94,2342004


87,364











































23,365



68,3542005


102,262















































23,459Total

$
3,412


$
4,691


$
5,611


$
9,395


$
15,438


$
29,047


$
44,006


$
71,068


$
120,540


$
197,820


$
267,928


$
319,910   Cumulative
    Collections(1)
  Purchase

Purchase


Total Through
    December 31,Period

Price(2)


1994


1995


1996


1997


1998


1999


2000


2001


2002


2003


2004


2005(dollars in thousands)1994

$
1,427


$
345


$
2,108


$
3,538


$
4,543


$
5,190


$
5,647


$
6,004


$
6,262


$
6,438


$
6,626


$
6,752


$
6,8821995


1,519







388



1,954



3,613



4,731



5,517



6,225



6,697



7,040



7,318



7,545



7,7571996


3,844











827



4,591



7,676



10,277



12,375



13,815



14,856



15,672



16,359



17,0421997


4,345















1,682



6,601



12,174



17,191



20,754



23,435



25,219



26,745



28,0871998


16,411



















4,835



20,055



35,100



48,062



59,083



67,070



72,652



77,3051999


12,925























3,761



15,092



25,954



35,704



43,982



50,657



55,6792000


20,595



























8,895



32,339



54,898



75,216



92,412



106,4742001


43,132































17,630



67,957



118,924



164,637



204,5022002


72,287



































22,340



93,153



165,177



232,8252003


87,311







































36,067



130,631



224,8662004


87,364











































23,365



91,7192005


102,262















































23,459   Cumulative
    Collections as Percentage of Purchase Price(1)
  Purchase

Purchase


Total Through
    December 31,Period

Price(2)


1994


1995


1996


1997


1998


1999


2000


2001


2002


2003


2004


20051994

$
1,427



24
%


148
%


248
%


318
%


364
%


396
%


421
%


439
%


451
%


464
%


473
%


482
%1995


1,519







26



129



238



311



363



410



441



463



482



497



5111996


3,844











22



119



200



267



322



359



386



408



426



4431997


4,345















39



152



280



396



478



539



580



616



6461998


16,411



















29



122



214



293



360



409



443



4711999


12,925























29



117



201



276



340



392



4312000


20,595



























43



157



267



365



449



5172001


43,132































41



158



276



382



4742002


72,287



































31



129



229



3222003


87,311







































41



150



2582004


87,364











































27



1052005


102,262















































23     (1)
    
    Does not include proceeds from sales of any receivables.(2)
    
    Purchase price refers to the cash paid to a seller to acquire a
    portfolio less the purchase price refunded by a seller due to
    the return of non-compliant accounts (also defined as buybacks)
    less the purchase price for accounts that were sold at the time
    of purchase to another debt purchaser. 44




---



##### Table of Contents



Seasonality
      
  Cash
    Collections
  Quarter

2001

2002

2003

2004

2005First

$
15,592,577


$
27,297,721


$
44,017,730


$
65,196,055


$
80,397,640Second


17,661,537



30,475,078



51,190,533



67,566,031



84,862,856Third


17,766,800



29,337,914



48,622,829



66,825,822



78,159,364Fourth


20,046,733



33,429,419



53,988,333



68,339,797



76,490,350Total cash collections

$
71,067,647


$
120,540,132


$
197,819,425


$
267,927,705


$
319,910,210     Year Ending
    December 31,2002


2003


2004


2005Traditional collections


66.57
%


60.67
%


57.20
%


51.77
%Legal collections


24.17



28.52



30.98



35.85Other collections


9.26



10.81



11.82



12.38Total cash collections


100.00
%


100.00
%


100.00
%


100.00
%   Liquidity
    and Capital Resources
   45




---



##### Table of Contents



Borrowings
  90-day
  
    funds borrowed can be used to purchase portfolios of charged-off
    receivables and for general corporate purposes;
    leverage ratio (as defined in the line of credit agreement)
    cannot exceed 1.5 to 1.0;
    debt to total capitalization ratio (as defined in the line of
    credit agreement) cannot exceed 1.25 to 1.0; and
    tangible net worth must exceed $145.0 million plus 50% of
    net income after September 30, 2004, which required a
    balance of $176.9 million as of December 31, 2005.      Cash
    Flows
           46




---



##### Table of Contents



Future
    Contractual Cash Obligations
    Year Ending
    December 31,2006


2007


2008(3)


2009


2010


ThereafterCapital lease obligations(1)

$
129,173


$
54,682


$
9,514


$



$



$
Operating lease obligations


6,114,629



5,894,124



4,959,037



4,130,472



3,363,355



11,964,109Purchased receivables(2)






















Line of credit(3)






















Employment agreements(4)


976,250



















Total

$
7,220,052


$
5,948,806


$
4,968,551


$
4,130,472


$
3,363,355


$
11,964,109     (1)
    
    In January 2006, we entered into an amendment with respect to
    the lease for the Brooklyn Heights, Ohio facility. The amendment
    will increase our square footage from 22,640 to 30,443 on or
    before November 1, 2006. In addition, the amendment
    extended the expiration of our lease agreement from
    September 30, 2006 to October 31, 2011 with an
    increase in the future minimum contractual obligation from
    $256,267 in 2006 to approximately $322,200, $395,700, $395,700,
    $395,800, 395,800 and $329,800 in 2006, 2007, 2008, 2009, 2010
    and thereafter, respectively.(2)
    
    During 2004, we entered into five forward flow contracts that
    commit us to purchase receivables for a fixed percentage of the
    face value of the receivables. Three of the five forward flow
    contracts were renewed during 2005 with only one of these
    forward flow contracts having terms beyond December 2005 and
    expiring in February 2006. The remainder of the one contract
    calls for monthly purchases of approximately $171,000, depending
    upon circumstances. There were no new contracts entered into
    during 2005.(3)
    
    To the extent that a balance is outstanding on our line of
    credit, it would be due in May 2008. There was no outstanding
    balance on our line of credit as of December 31, 2005.(4)
    
    On February 14, 2006, Mr. Reitzel announced his
    retirement from his position as Chairman of the Board and as
    director. Mr. Reitzels intentions of retirement,
    which will become effective on February 28, 2006 and will
    reduce the Companys future contractual cash obligations by
    $335,417.  Off-Balance
    Sheet Arrangements
    Critical
    Accounting Policies
  (SOP 03-3),
  SOP 03-3 SOP 03-3
 47




---



##### Table of Contents



SOP 03-3,
    New
    Accounting Pronouncements
  SFAS No. 123(R),
    Share-Based Payment
    Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk    Item 8.
    Financial
    Statements and Supplementary Data  page F-1
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures   48




---



##### Table of Contents



Rule 13a-15
   Item 9B.
    Other
    Information    PART III   Item 10.
    Directors
    And Executive Officers Of The Registrant      Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership Of Certain Beneficial Owners And Management And
    Related Stockholder Matters    Item 13.
    Certain
    Relationships And Related Transactions    Item 14.
    Principal
    Accounting Fees And Services    PART IV  Item 15.
    Exhibits
    and Consolidated Financial Statements  page F-1
   49




---



##### Table of Contents



ExhibitNumber

Description2
.1

Asset Contribution and Securities
    Purchase Agreement among Asset Acceptance Holdings LLC, AAC
    Holding Corp., Consumer Credit Corp., their respective
    shareholders and AAC Investors, Inc. dated September 30,
    2002. (Incorporated by reference to Exhibit 2.1 filed with
    Asset Acceptance Capital Corp. Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))2
.2

Share Exchange Agreement dated
    October 24, 2003, among Asset Acceptance Capital Corp., AAC
    Investors, Inc., RBR Holding Corp. and the other parties
    thereto. (Incorporated by reference to Exhibit 2.2 filed
    with Asset Acceptance Capital Corp. Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))3
.1

Amended and Restated Certificate
    of Incorporation of Asset Acceptance Capital Corp. (Incorporated
    by reference to Exhibit 3.1 filed with Asset Acceptance
    Capital Corp. Annual Report on
    Form 10-K
    originally filed on March 25, 2004)3
.2

Amended and Restated Bylaws of
    Asset Acceptance Capital Corp. (Incorporated by reference to
    Exhibit 3.2 filed with Asset Acceptance Capital Corp.
    Annual Report on
    Form 10-K
    originally filed on March 25, 2004)4
.1

Form of Common Stock Certificate.
    (Incorporated by reference to Exhibit 4.1 filed with Asset
    Acceptance Capital Corp. Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.1

Credit Agreement dated
    September 30, 2002, between Asset Acceptance, LLC,
    Financial Credit, LLC, CFC Financial, LLC, Consumer Credit, LLC,
    Bank One, N.A., Standard Federal Bank, N.A., National City Bank
    of Michigan/ Illinois, Fifth Third Bank, Eastern Michigan,
    Comerica Bank and Bank One, N.A., as Agent, as amended.
    (Incorporated by reference to Exhibit 10.1 filed with Asset
    Acceptance Capital Corp. Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.2

CC Option Agreement dated
    September 30, 2002 between Asset Acceptance Holdings LLC
    and Rufus H. Reitzel, Jr. (Incorporated by reference to
    Exhibit 10.2 filed with Asset Acceptance Capital Corp.
    Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.3

Form of Amended and Restated
    Registration Rights Agreement among Asset Acceptance Capital
    Corp. and its stockholders. (Incorporated by reference to
    Exhibit 10.3 filed with Asset Acceptance Capital Corp.
    Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.4

Asset Acceptance Holdings LLC Year
    2002 Share Appreciation Rights Plan effective as of
    September 30, 2002. (Incorporated by reference to
    Exhibit 10.4 filed with Asset Acceptance Capital Corp.
    Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.5

Form of Share Appreciation Rights
    Agreement used in connection with grants under the Asset
    Acceptance Holdings LLC Year 2002 Share Appreciation Rights
    Plan. (Incorporated by reference to Exhibit 10.5 filed with
    Asset Acceptance Capital Corp. Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.6

Form of 2004 Stock Incentive Plan.
    (Incorporated by reference to Exhibit 10.6 filed with Asset
    Acceptance Capital Corp. Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.7

Lease dated November 17, 2000
    between Brooklyn Heights Business Park Limited and Asset
    Acceptance Corp. for the property located at 600 Safeguard
    Plaza, Brooklyn Heights, Ohio, as amended. (Incorporated by
    reference to Exhibit 10.10 filed with Asset Acceptance
    Capital Corp. Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.8

Industrial Gross Lease Agreement
    dated June 28, 2000 between Nottingham Village, Inc. and
    Asset Acceptance Corp, as successor to Alegis Group, L.P. and
    Sherman Financial Group, LLC, for the property located at 9940
    Franklin Square Drive, Baltimore, Maryland, as amended.
    (Incorporated by reference to Exhibit 10.12 filed with
    Asset Acceptance Capital Corp. Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.9

Lease dated February 15, 2002
    between Alpha Drive Development Associates, L.L.C. and Asset
    Acceptance Corp. for the property located at 48325 Alpha Drive,
    Wixom, Michigan. (Incorporated by reference to
    Exhibit 10.13 filed with Asset Acceptance Capital Corp.
    Registration Statement on
    Form S-1
    (Registration No.
    333-109987)) 50




---



##### Table of Contents



ExhibitNumber

Description10
.10

Lease Agreement dated
    April 25, 2003 between Northpoint Atrium Limited
    Partnership and Asset Acceptance, LLC for the property located
    at 10500 Heritage Street, San Antonio, Texas. (Incorporated
    by reference to Exhibit 10.14 filed with Asset Acceptance
    Capital Corp. Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.11

Lease Agreement dated
    July 25, 2003 between Orsett/ Piedmont Limited Liability
    Company and Asset Acceptance, LLC for the property located at
    9801 South 51st Street, Phoenix, Arizona. (Incorporated by
    reference to Exhibit 10.15 filed with Asset Acceptance
    Capital Corp. Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.12

Business Lease dated
    August 25, 2003 between First Industrial Development
    Services, Inc. and Asset Acceptance, LLC for the property
    located in Hilsborough County, Florida, as amended by First
    Amendment to Lease dated December 29, 2003. (Incorporated
    by reference to Exhibit 10.16 filed with Asset Acceptance
    Capital Corp. Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.13

Lease Agreement dated
    October 31, 2003 by and between Van Dyke Office LLC and
    Asset Acceptance, LLC for the property located at 28405 Van Dyke
    Avenue, Warren, Michigan. (Incorporated by reference to
    Exhibit 10.17 filed with Asset Acceptance Capital Corp.
    Registration Statement on
    Form S-1
    (Registration No.
    333-109987))10
.14

Employment Agreement dated
    September 30, 2002, between Rufus H. Reitzel, Jr. and
    Asset Acceptance Holdings LLC and the form of Amendment
    No. 1 thereto. (Incorporated by reference to
    Exhibit 10.18 filed with Asset Acceptance Capital Corp.
    Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.15

Employment Agreement dated
    September 30, 2002, between Nathaniel F. Bradley IV
    and Asset Acceptance Holdings LLC and the form of Amendment
    No. 1 thereto. (Incorporated by reference to
    Exhibit 10.19 filed with Asset Acceptance Capital Corp.
    Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.16

Employment Agreement dated
    September 30, 2002, between Mark A. Redman and Asset
    Acceptance Holdings LLC and the form of Amendment No. 1
    thereto. (Incorporated by reference to Exhibit 10.20 filed
    with Asset Acceptance Capital Corp. Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.17

Employment Agreement dated
    September 30, 2002, between Heather K. Reitzel and Asset
    Acceptance Holdings LLC and the form of Amendment No. 1
    thereto. (Incorporated by reference to Exhibit 10.21 filed
    with Asset Acceptance Capital Corp. Registration Statement on
    Form S-1
    (Registration
    No. 333-109987))10
.18

Agreement between Ontario Systems
    Corporation and Lee Acceptance Corp. dated June 26, 1992,
    as amended. (Incorporated by reference to Exhibit 10.22
    filed with Asset Acceptance Capital Corp. Registration Statement
    on
    Form S-1
    (Registration
    No. 333-109987))10
.19

Third Amendment To Credit
    Agreement, dated as of January 30, 2004 by and among Asset
    Acceptance, LLC, Financial Credit, LLC, CFC Financial, LLC, and
    Consumer Credit, LLC, and Med-Fi Acceptance, LLC, Bank One, NA,
    Standard Federal Bank, NA, National City Bank Of Michigan/
    Illinois, Fifth Third Bank, Eastern Michigan, and Comerica Bank
    (Incorporated by reference to Exhibit 3.1 filed with Asset
    Acceptance Capital Corp. Annual Report on
    Form 10-K
    originally filed on March 25, 2004)10
.20

Guaranty Agreement, dated as of
    January 30, 2004 by Asset Acceptance Capital Corp.
    (Incorporated by reference to Exhibit 3.1 filed with Asset
    Acceptance Capital Corp. Annual Report on
    Form 10-K
    originally filed on March 25, 2004)10
.21

Guaranty Agreement, dated as of
    January 30, 2004 by Asset Acceptance Holdings LLC
    (Incorporated by reference to Exhibit 3.1 filed with Asset
    Acceptance Capital Corp. Annual Report on
    Form 10-K
    originally filed on March 25, 2004)10
.22

Guaranty Agreement, dated as of
    January 30, 2004 by RBR Holding Corp. (Incorporated by
    reference to Exhibit 3.1 filed with Asset Acceptance
    Capital Corp. Annual Report on
    Form 10-K
    originally filed on March 25, 2004)10
.23

Guaranty Agreement, dated as of
    January 30, 2004 by AAC Investors, Inc. (Incorporated by
    reference to Exhibit 3.1 filed with Asset Acceptance
    Capital Corp. Annual Report on
    Form 10-K
    originally filed on March 25, 2004) 51




---



##### Table of Contents



ExhibitNumber

Description10
.24

Fourth Amendment to Credit
    Agreement (Incorporated by reference to Exhibit 10.23
    previously filed with our Current Report on
    Form 8-K,
    originally filed on December 30, 2004)10
.25

First Amendment to Lease Agreement
    and Second Amendment to Lease Agreement (for property located at
    28405 Van Dyke Avenue, Warren, Michigan). (Incorporated by
    reference to Exhibit 10.29 filed with Asset Acceptance
    Capital Corp. Amendment No. 1 to Registration Statement on
    Form S-1
    (Registration
    No. 333-123178))10
.26*

Second Amendment To Employment
    Agreement, dated December 23, 2005, between Rufus H.
    Reitzel, Jr. and Asset Acceptance Holdings LLC.10
.27*

Second Amendment To Employment
    Agreement, dated December 23, 2005, between Nathaniel F.
    Bradley IV and Asset Acceptance Holdings LLC.10
.28*

Second Amendment To Employment
    Agreement, dated December 23, 2005, between Mark A. Redman
    and Asset Acceptance Holdings LLC.10
.29*

Second Amendment To Employment
    Agreement, dated December 23, 2005, between Heather K.
    Reitzel and Asset Acceptance Holdings LLC.10
.30*

Lease Agreement dated
    April 25, 2005 between 55 E. Jackson LLC and
    Asset Acceptance, LLC for the property located at
    55 E. Jackson Boulevard, Chicago, Illinois 60604.10
.31*

Second Amendment to Lease
    Agreement (for property located at 600 Safeguard Plaza, Brooklyn
    Heights, Ohio).21
.1

Subsidiaries of Asset Acceptance
    Capital Corp. (Incorporated by reference to Exhibit 21.1
    filed with Asset Acceptance Capital Corp. Registration Statement
    on
    Form S-1
    (Registration
    No. 333-123178))31
.1*

Certification of Chief Executive
    Officer dated February 24, 2006 relating to the
    Registrants Annual Report on
    Form 10-K
    for the year ended December 31, 200531
.2*

Certification of Chief Financial
    Officer dated February 24, 2006, relating to the
    Registrants Annual Report on
    Form 10-K
    for the year ended December 31, 200532
.1*

Certification of Chief Executive
    Officer and Chief Financial Officer of Registrant, dated
    February 24, 2006, pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002, relating to the Registrants
    Annual Report on
    Form 10-K
    for the year ended December 31, 2005     *
    
    Filed herewith 52




---



##### Table of Contents



SIGNATURES    ASSET ACCEPTANCE CAPITAL CORP.
  By:
    /s/  NATHANIEL F. BRADLEY IV    President and Chief Executive Officer
    Signature

Title/s/  NATHANIEL F.
    BRADLEY IVNathaniel
    F. Bradley IV

President, Chief Executive Officer
    and Director
    (principal executive officer)/s/  MARK A. REDMANMark
    A. Redman

Vice President-Finance and Chief
    Financial Officer
    (principal financial officer and
    principal accounting officer)/s/  JENNIFER ADAMSJennifer
    Adams

Director/s/  TERRENCE D.
    DANIELSTerrence
    D. Daniels

Director/s/  DONALD HAIDERDonald
    Haider

Director/s/  ANTHONY R.
    IGNACZAKAnthony
    R. Ignaczak

Director/s/  WILLIAM I.
    JACOBSWilliam
    I. Jacobs

Director/s/  H. EUGENE
    LOCKHARTH.
    Eugene Lockhart

Director/s/  WILLIAM F.
    PICKARDWilliam
    F. Pickard

Director/s/  RUFUS H.
    REITZEL, JR.Rufus
    H. Reitzel, Jr.

Director  53




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  Consolidated
    Financial Statements
  PageReport of
    Management on Internal Control over Financial Reporting


F-2Report of
    Independent Registered Public Accounting
    Firm  Internal Control


F-3Report of
    Independent Registered Public Accounting Firm


F-4Consolidated
    Statements of Financial Position as of December 31, 2005
    and 2004


F-5Consolidated
    Statements of Income for the years ended December 31, 2005,
    2004 and 2003


F-6Consolidated
    Statements of Equity for the years ended December 31, 2005,
    2004 and 2003


F-7Consolidated
    Statements of Cash Flows for the years ended December 31,
    2005, 2004 and 2003


F-8Notes to
    Consolidated Financial Statements


F-9  F-1




---



##### Table of Contents



REPORT OF
    MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL
    REPORTING     Rules 13a-15(f).
      Asset
    Acceptance Capital Corp.
         F-2




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING
    FIRM  INTERNAL CONTROL                     F-3




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM           Accounting for Certain Loans of
    Debt Securities Acquired in a Transfer.
        F-4




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  Consolidated Statements of Financial
    Position
  December 31,


December 31,2005


2004ASSETSCash

$
50,518,934


$
14,204,579Purchased receivables


248,990,772



216,479,676Finance contract receivables, net


3,925,581



688,497Property and equipment, net


10,747,627



11,165,103Goodwill


6,339,574



6,339,574Other assets


3,419,367



3,628,291Total assets

$
323,941,855


$
252,505,720LIABILITIES AND
    STOCKHOLDERS EQUITYLiabilities:Deferred tax liability, net

$
58,583,604


$
41,246,766Accounts payable and other
    liabilities


15,710,953



13,824,600Capital lease obligations


186,944



254,185Total liabilities


74,481,501



55,325,551Stockholders
    equity:Preferred stock, $0.01 par
    value, 10,000,000 shares authorized, no shares issued and
    outstanding






Common stock, $0.01 par
    value, 100,000,000 shares authorized; issued and
    outstanding shares  37,225,275 at
    December 31, 2005 and 2004


372,253



372,253Additional paid in capital


160,361,599



159,348,233Retained earnings


88,726,502



37,459,683Total stockholders equity


249,460,354



197,180,169Total liabilities and
    stockholders equity

$
323,941,855


$
252,505,720     F-5




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  Consolidated Statements of Income
  For the Years Ended
    December 31,2005


2004


2003RevenuesPurchased receivable revenues

$
252,195,740


$
213,723,161


$
159,628,308Gain (loss) on sale of purchased
    receivables


(25,982
)


467,670



Finance contract revenues


514,109



562,299



564,965Total revenues


252,683,867



214,753,130



160,193,273ExpensesSalaries and benefits


76,107,311



111,034,466



51,295,872Collections expense


73,974,369



56,948,596



43,655,871Occupancy


8,352,320



6,108,996



4,632,958Administrative


8,581,389



5,677,445



3,259,574Depreciation and amortization


3,339,146



2,880,857



2,572,053Loss on disposal of equipment


32,088



97,652



4,151Total operating expenses


170,386,623



182,748,012



105,420,479Income from operations


82,297,244



32,005,118



54,772,794Other income
    (expense)Interest income


1,142,888



28,191



3,534Interest expense


(567,377
)


(1,737,263
)


(7,198,914
)Other


51,085



83,762



448,793Income before income taxes


82,923,840



30,379,808



48,026,207Income taxes


31,657,021



29,633,330



10,283,362Net income

$
51,266,819


$
746,478


$
37,742,845Pro forma income taxes

$



$
11,301,289


$
17,913,775Pro forma net income

$



$
19,078,519


$
30,112,432Weighted average number of shares:Basic


37,225,275



36,385,961



28,448,449Diluted


37,270,297



36,393,705



28,448,449Earnings per common share
    outstanding:Basic

$
1.38


$
0.02


$
1.33Diluted

$
1.38


$
0.02


$
1.33Pro forma earnings per common
    share outstanding:Basic

$



$
0.52


$
1.06Diluted

$



$
0.52


$
1.06     F-6




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  Consolidated Statements of Equity
  Additional





TotalNumber of


Common


Paid in


Retained


StockholdersShares


Stock


Capital


Earnings


EquityBalance at December 31, 2002


28,448,449


$
284,484


$
36,385,000


$
4,974,018


$
41,643,502Distributions














(5,003,658
)


(5,003,658
)Net income














37,742,845



37,742,845Balance at December 31, 2003


28,448,449



284,484



36,385,000



37,713,205



74,382,689Issuance of common stock


7,000,000



70,000



96,007,000







96,077,000Contribution of assets










50,406







50,406Issuance of common stock under
    employee stock plan


1,776,826



17,769



26,634,629







26,652,398Grant of options under share-based
    compensation plan










271,198







271,198Distributions














(1,000,000
)


(1,000,000
)Net income














746,478



746,478Balance at December 31, 2004


37,225,275



372,253



159,348,233



37,459,683



197,180,169Grant of options under share-based
    compensation plan










1,013,366







1,013,366Net income














51,266,819



51,266,819Balance at December 31, 2005


37,225,275


$
372,253


$
160,361,599


$
88,726,502


$
249,460,354    F-7




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  Consolidated Statements of Cash Flows
  For the Years Ended
    December 31,2005


2004


2003Cash flows from operating
    activitiesNet income

$
51,266,819


$
746,478


$
37,742,845Adjustments to reconcile net income
    to net cash provided by operating activities:Depreciation and amortization


3,339,146



2,880,857



2,572,053Deferred income taxes


17,336,838



29,340,997



10,282,450Share-based compensation expense


1,013,366



26,923,596



Net impairment of purchased
    receivables


22,285,355







Non-cash revenue


(6,745,221
)


(2,316,091
)


(5,290,857
)Loss on disposal of equipment


32,088



97,652



4,151Charge-offs of finance contracts


238,538



182,970



203,595Changes in assets and liabilities:Decrease (increase) in other assets


10,918



(931,525
)


(938,300
)Increase in accounts payable and
    other liabilities


1,886,353



5,731,758



3,274,632Net cash provided by operating
    activities


90,664,200



62,656,692



47,850,569Cash flows from investing
    activitiesInvestment in purchased
    receivables, net of buybacks


(100,221,771
)


(86,980,198
)


(88,574,201
)Principal collected on purchased
    receivables


52,170,541



56,536,280



43,481,973Investment in finance contracts


(4,093,425
)


(772,372
)


(817,910
)Principal collected on finance
    contracts


617,803



543,435



532,951Proceeds from sale of property and
    equipment










1,956Purchase of property and equipment


(2,662,269
)


(5,753,169
)


(3,598,624
)Net cash used in investing
    activities


(54,189,121
)


(36,426,024
)


(48,973,855
)Cash flows from financing
    activitiesBorrowings under line of credit


13,500,000



45,420,000



65,150,000Repayment of line of credit


(13,500,000
)


(118,370,000
)


(59,400,000
)Borrowings  related
    party










3,677,919Repayment  related
    party






(39,560,110
)


Repayment of capital lease
    obligations


(160,724
)


(142,221
)


(83,000
)Distributions paid






(1,000,000
)


(5,003,658
)Additional assets contributed






50,406



Proceeds from initial public
    offering, net of costs






96,077,000



Net cash provided by (used in)
    financing activities


(160,724
)


(17,524,925
)


4,341,261Net increase in cash


36,314,355



8,705,743



3,217,975Cash at beginning of period


14,204,579



5,498,836



2,280,861Cash at end of period

$
50,518,934


$
14,204,579


$
5,498,836Supplemental disclosure of cash
    flow informationCash paid for interest

$
344,267


$
1,480,520


$
3,174,887Cash paid for income taxes


11,801,891



1,858,720



Non-cash investing and financing
    activities:Capital lease obligations incurred


93,483



177,641



191,881    F-8




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS
  1.
    Summary
    of Significant Accounting Policies  Nature
    of Operations
      Reporting
    Entity
        Cash
    Purchased
    Receivables Portfolios and Revenue Recognition
    (SOP 03-3), SOP 03-3
 F-9




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  SOP 03-3
  SOP 03-3,
  SOP 03-3
     F-10




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended
    December 31,2005


2004Beginning balance

$
216,479,676


$
183,719,667Investment in purchased
    receivables, net of buybacks


100,221,771



86,980,198Cost of sale of purchased
    receivables, net of returns


3,795



(15,645
)Cash collections


(319,910,210
)


(267,927,705
)Purchased receivable revenues


252,195,740



213,723,161Ending balance

$
248,990,772


$
216,479,676     Year Ended
    December 31,2005


2004Beginning balance

$
792,755,605


$
665,791,369Revenue recognized on purchased
    receivables


(252,195,740
)


(213,723,161
)Additions due to purchases during
    the period


232,860,789



228,704,533Reclassifications from
    nonaccretable yield


75,124,804



111,982,864Ending balance

$
848,545,458


$
792,755,605     Year Ended
    December 31,2005


2004


2003Revenue from fully amortized
    pools:Pools that amortized before
    60 months

$
28,801,081


$
17,050,322


$
2,577,377Pools that are 60 months or
    older


22,906,015



11,264,181



8,192,947Pools under full cost recovery


4,384,993



2,862,737



771,694Total revenue from fully amortized
    pools

$
56,092,089


$
31,177,240


$
11,542,018  F-11




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2005First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter


TotalNet impairments
    recorded:Impairments

$
700,000


$
1,698,000


$
5,112,000


$
16,367,355


$
23,877,355Reversal of impairments(1)










(516,000
)


(1,076,000
)


(1,592,000
)Total

$
700,000


$
1,698,000


$
4,596,000


$
15,291,355


$
22,285,355     (1)
    
    During 2005, impairment reversals of $813,000 relate to second
    quarter impairment charges and $779,000 impairment reversals
    relate to third quarter impairment charges.  Finance
    Contract Receivables
    Collections
    from Third Parties
    Property
    and Equipment
    Commitments
    and Contingencies
   F-12




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Concentrations
    of Risk
  e-mail
    Interest
    Expense
    Use of
    Estimates
    SOP 03-3
  Initial
    Public Offering
     F-13




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Share
    Appreciation Rights Compensation Charge
    Stock-Based
    Compensation
    Earnings
    Per Share and Pro Forma Earnings Per Share
    Goodwill
    and Other Intangible Assets
      Year

Expense2006

$
188,0052007


136,9552008


8,5682009


6,450
   Income
    Taxes and Deferred Tax Charge
   F-14




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Reclassifications
    Recently
    Issued Accounting Pronouncements
  SFAS No. 123(R)
    2.
    Related-Party
    Transactions        3.
    Line of
    Credit   F-15




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    
    funds borrowed can be used to purchase portfolios of charged-off
    receivables and for general corporate purposes,
    leverage ratio (as defined in the line of credit agreement)
    cannot exceed 1.5 to 1.0,
    debt to total capitalization ratio (as defined in the line of
    credit agreement) cannot exceed 1.25 to 1.0; and
    tangible net worth must exceed $145.0 million plus 50% of
    net income after September 30, 2004 which required a
    balance of $176.9 million as of December 31, 2005.      4.
    Property
    and Equipment    December 31,


December 31,2005


2004Computers and software

$
8,984,055


$
7,562,797Furniture and fixtures


9,158,973



8,259,527Leasehold improvements


2,017,496



1,810,998Equipment under capital lease


485,299



483,421Automobiles


136,525



136,525Total property and equipment, cost


20,782,348



18,253,268Less accumulated depreciation


(10,034,721
)


(7,088,165
)Net property and equipment

$
10,747,627


$
11,165,103  F-16




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   5.
    Employee
    Benefits      6.
    Stock-Based
    Compensation      Stock
    Options
   F-17




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Options


Weighted-AverageOutstanding


Exercise PriceJanuary 1, 2004






Granted


117,220


$
17.01Cancelled






December 31, 2004


117,220


$
17.01Granted


133,789


$
21.45Cancelled






December 31, 2005


251,009


$
19.38     Fair Value





Weighted-Average








Exercisableof Option


Number


Remaining


Weighted-Average


Number


Weighted-AverageExercise Price

Granted


Outstanding


Contractual Life


Exercise Price


Exercisable


Exercise Price$15.00

$
4.84



45,000



8.09


$
15.00



22,500


$
15.00$18.50

$
5.90



30,000



8.16


$
18.50



15,000


$
18.50$19.48

$
6.57



3,850



8.38


$
19.48



3,850


$
19.48$17.85

$
5.84



4,200



8.63


$
17.85



4,200


$
17.85$17.97

$
8.48



30,000



8.84


$
17.97



15,000


$
17.97$17.99

$
8.47



4,170



8.88


$
17.99



4,170


$
17.99$19.87

$
8.97



3,775



9.30


$
19.87



3,775


$
19.87$18.89

$
8.56



30,000



9.30


$
18.89






$
18.89$18.89

$
8.56



25,000



9.30


$
18.89






$
18.89$19.48

$
11.68



9,685



9.37


$
19.48



4,843


$
19.48$23.42

$
10.56



45,624



9.38


$
23.42






$
23.42$23.42

$
10.56



3,200



9.38


$
23.42



3,200


$
23.42$27.34

$
12.45



10,000



9.58


$
27.34






$
27.34$27.61

$
12.58



2,715



9.63


$
27.61



2,715


$
27.61$19.80

$
9.10



3,790



9.88


$
19.80



3,790


$
19.80Total






251,009



8.90


$
19.38



83,043


$
18.11    F-18




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Options issue year:

2005

2004Weighted-average fair value of
    options granted

$9.91

$6.26Expected volatility

46.00%

30.00%Risk-free interest rate

3.82%-4.39%

2.98%-3.93%Expected dividend yield

0.00%

0.00%Expected life

5 Years

5 Years   Share
    Appreciation Rights
      7.
    Litigation
    Contingencies    8.
    Long-Term
    Commitments  Leases
      December 31,


December 31,2005


2004Office equipment

$
485,299


$
483,421Less accumulated depreciation


(303,516
)


(225,578
)Net leased property under capital
    leases

$
181,783


$
257,843  F-19




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Operating


CapitalLeases


LeasesYears ending December 31:2006

$
6,114,629


$
129,1732007


5,894,124



54,6822008


4,959,037



9,5142009


4,130,472



2010


3,363,355



2011 and thereafter


11,964,109



Total minimum lease payments

$
36,425,726



193,369Less amount representing interest






(6,425
)Present value of net minimum lease
    payments





$
186,944   Employment
    Agreements
    Registration
    Rights Agreement
    9.
    Estimated
    Fair Value of Financial Instruments   F-20




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Purchased
    Receivables
    10.
    Income
    Taxes        Year Ended
    December 31,2005


2004


2003Income taxes consist of:Federal actual

$
12,538,136


$
160,000


$
State actual


1,782,047



132,333



912Federal
    deferred  net


16,557,716



27,770,065



9,663,687State deferred  net


779,122



1,570,932



618,763Total

$
31,657,021


$
29,633,330


$
10,283,362     Year Ended
    December 31,2005


2004


2003Federal taxes at statutory rate

$
29,027,349


$
10,639,104


$
16,925,262Other adjustments


339,362







S corporation
    benefit  federal






(825,193
)


(7,261,575
)S corporation
    benefit  state






(51,869
)


(477,189
)Deferred tax
    charge  federal






18,116,154



Deferred tax
    charge  state






1,190,490



State income taxes, net of federal
    tax benefit


2,290,310



564,644



1,096,864Effective income taxes

$
31,657,021


$
29,633,330


$
10,283,362  F-21




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       December 31,2005


2004Deferred tax asset:Accrued expenses

$
1,393,107


$
1,616,078Stock options


480,427



100,885Intangible assets


200,032



137,743Operating loss carryforward


47,321



13,291,135Alternative minimum tax credit






160,000Other


101,103



82,307Total


2,221,990



15,388,148Deferred tax liability:Purchased receivables revenue
    recognition


58,079,410



54,102,880Property and equipment


1,580,525



1,764,710Transaction costs


538,175



357,379Special tax basis adjustment


335,182



184,425Prepaid expenses


150,804



182,394Other


121,498



43,126Total


60,805,594



56,634,914Net deferred tax liability

$
58,583,604


$
41,246,766  F-22




---



##### Table of Contents



ASSET
    ACCEPTANCE CAPITAL CORP.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   11.
    Selected
    Quarterly Operating Results (unaudited)    Quarterly
    Financial Data
  QuarterFirst


Second


Third


Fourth(in thousands except per share
    data)2005Total revenues

$
66,035


$
68,803


$
64,017


$
53,830Total operating expenses


41,812



42,520



42,225



43,830Income from operations


24,223



26,283



21,792



10,000Net income


15,145



16,317



13,707



6,098Weighted average shares:Basic


37,225



37,225



37,225



37,225Diluted


37,245



37,264



37,306



37,267Earnings per common share
    outstanding:Basic

$
0.41


$
0.44


$
0.37


$
0.16Diluted

$
0.41


$
0.44


$
0.37


$
0.16   QuarterFirst(1)


Second


Third


Fourth(in thousands except per share
    data)2004Total revenues

$
49,748


$
51,507


$
55,999


$
57,499Total operating expenses


77,155



32,774



35,434



37,385Income (loss) from operations


(27,407
)


18,733



20,565



20,114Net income (loss)(2)


(36,159
)


11,577



12,761



12,567Pro forma net income (loss)(3)


(17,821
)










Weighted average shares:Basic


33,850



37,225



37,225



37,225Diluted


33,850



37,235



37,231



37,237Earnings (loss) per common share
    outstanding:Basic

$
(1.07
)

$
0.31


$
0.34


$
0.34Diluted

$
(1.07
)

$
0.31


$
0.34


$
0.34Pro forma earnings (loss) per
    common share outstanding:Basic

$
(0.53
)










Diluted

$
(0.53
)










     (1)
    
    Includes the $45.7 million compensation and related payroll
    tax charge resulting from the vesting of the outstanding share
    appreciation rights upon the Companys initial public
    offering.(2)
    
    The first quarter of 2004 includes a deferred tax charge of
    $19.3 million.(3)
    
    For comparison purposes the Company has presented pro forma net
    income, which is net income adjusted for pro forma income taxes
    assuming all entities had been a C corporation for all periods
    presented. F-23