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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

COMPUCREDIT CORPORATION

a Georgia Corporation
IRS Employer Identification No. 58-2336689
SEC File Number 0-25751

245 Perimeter Center Parkway, Suite 600
Atlanta, Georgia 30346
(770) 206-6200

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

        The registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).

        46,853,183 shares of the issuer's Common Stock, no par value were outstanding as of October 31, 2003.

COMPUCREDIT CORPORATION

FORM 10-Q

TABLE OF CONTENTS

September 30, 2003

CompuCredit Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

See accompanying notes.

1

CompuCredit Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)

See accompanying notes.

2

CompuCredit Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
For the Nine Months Ended September 30, 2003

See accompanying notes.

3

CompuCredit Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes.

4

CompuCredit Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2003

1.     Organization and Basis of Presentation

        The condensed consolidated financial statements include the accounts of CompuCredit Corporation and its subsidiary investees that meet the requirements for consolidation under accounting principles generally accepted in the United States of America (collectively, the "Company"). The Company was formed for the purpose of offering unsecured credit and fee-based products and services to a segment of the consumer credit market. The Company sources the accounts to which it offers these products and services through direct mail, telemarketing, television, the internet and acquisition from other credit card issuers. Because the Company is not a financial institution and because only financial institutions can issue general purpose credit cards, the Company has a contractual arrangement with a third-party financial institution pursuant to which that financial institution issues general purpose Visa and MasterCard credit cards, and the Company purchases the receivables relating to the underlying credit card accounts on a daily basis. Additionally, the Company purchases the receivables relating to accounts generated by other credit card issuers as a further source for growth in its business. The Company markets to its cardholders other fee-based products including card registration, memberships in preferred buying clubs, travel services and credit life, disability and unemployment insurance.

        The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission ("SEC") Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all normal recurring adjustments considered necessary to fairly state the results for the interim periods presented have been included. The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain estimates, such as credit losses, payments, discount rates and the yield earned on securitized receivables, have a significant impact on the gains and losses recorded on securitizations and the value of retained interests in credit card receivables securitized. Operating results for the three and nine months ended September 30, 2003 are not necessarily indicative of the results for the year ending December 31, 2003. These condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements for the year ended December 31, 2002 contained in the Company's Annual Report on Form 10-K/A filed with the SEC.

        Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. All significant intercompany balances and transactions have been eliminated for financial reporting purposes.

2.     Significant Accounting Policies

        The following is a summary of significant accounting policies followed in the preparation of the condensed consolidated financial statements.

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Cash and Cash Equivalents

        Cash and cash equivalents consist of cash, money market investments and overnight deposits. The Company considers all other highly liquid cash investments with low interest rate risk and maturities of three months or less to be cash equivalents. Cash equivalents are valued at cost, which approximates market.

Restricted Cash

        The Company provides an irrevocable standby letter of credit agreement for $10.0 million to the financial institution that issues the credit cards marketed by the Company. The purpose of the letter of credit is to protect the financial institution from non-payment by the Company of its obligation to purchase receivables arising in the credit card accounts on a daily basis. The Company is required to maintain a minimum cash balance of $10.0 million with the bank that has issued the letter of credit. Such cash, and certain interest earnings thereon, have been disclosed as restricted cash on the face of the consolidated balance sheet. Additionally, a portion of the servicing fee associated with the Embarcadero Trust (see Note 5, "Embarcadero Acquisition") is contingent on the Company achieving certain milestones, and these contingent servicing fee proceeds ($0.5 million at September 30, 2003) are also reflected as restricted cash. If these milestones are achieved, the Company will earn these proceeds in July 2004. If not, these funds will then revert to the Embarcadero Trust to pay down the Series A bonds issued by the trust.

Asset Securitization

        Substantially all of the Company's credit card receivables are securitized. When the Company sells receivables in securitizations, it retains certain undivided ownership interests, interest-only ("I/O") strips and servicing rights. Although the Company continues to service the underlying credit card accounts and maintains the customer relationships, these securitizations are treated as sales, and the securitized receivables are not reflected on the consolidated balance sheet. The retained ownership interests and the interest-only strips are included in retained interests in credit card receivables securitized on the face of the consolidated balance sheet.

        Under Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("Statement No. 140"), gains and losses are recognized at the time of each sale. These gains or losses on sales of receivables depend in part on the previous carrying amount of the financial assets sold, as well as the fair value of the assets and cash proceeds received. The cash flows used in measuring the gains and losses represent estimates of finance charges and late fees, servicing fees, costs of funds paid to investors, payment rates, credit losses, and required amortization payments to investors. The Company initially records a servicing liability within a securitization structure when the servicing fees the Company expects to receive do not provide adequate compensation for servicing the receivables. The initial servicing liability is recorded at estimated fair market value. The servicing liability is then evaluated each quarter and carried at its estimated fair value. Changes in fair value are included as a component of the Company's income (loss) from retained interests in credit card receivables securitized, with actual expenses being recorded into operations as incurred. Because quoted market prices are generally not available, the Company estimates fair value based on the estimated present value of future cash flows using management's best estimates of key assumptions as outlined in Note 6, "Off Balance Sheet Arrangements." The servicing liability is netted against the value of the I/O strip and included in retained interests in credit card receivables securitized on the Company's consolidated balance sheet. In accordance with Statement No. 140, the Company does not consolidate any of the qualified special purpose entities ("QSPEs") in its securitizations.

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        The retained interests for portfolios securitized by the Company are accounted for as trading securities and reported at estimated fair market value, with changes in fair value included in operations in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("Statement No. 115"). The estimates used to determine the gains and losses and the related fair values of I/O strips and retained ownership interests are influenced by factors outside of the Company's control, and such estimates could materially change from quarter to quarter.

        Retained interests purchased by the Company during 2002 are carried at the lower of amortized cost or fair market value, net of a servicing liability. In accordance with Emerging Issues Task Force Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" ("EITF 99-20"), expected cash flows in excess of the costs of the purchased retained interests are being amortized into income (loss) from retained interests in credit card receivables securitized using the effective interest method.

        Amounts due from securitization include payments recently received on the securitized receivables that are still held by the securitization structure but are due and payable to the Company within the next 30 days.

Accrued Interest and Fees

        Accrued interest and fees represent the estimated collectable portion of fees earned on Company-securitized portfolios but not billed to the cardholder at any period end. Prior to the second quarter of 2002, the Company estimated accrued interest and fees using its estimates of total accrued interest and fees earned but not yet billed. The Company's current estimates, however, better reflect the Company's expectations of the collectible portion of these interest and fees and are in response to evolving regulatory guidance within the industry.

Retained Interests in Finance Charge Receivables

        Included within the Company's retained interests in credit card receivables securitized on its consolidated balance sheet at each period end is the estimated collectible portion of finance charges and fees billed to cardholders within Company-securitized portfolios but not collected (the Company's "retained interests in finance charge receivables"). Prior to the second quarter of 2002, the Company estimated its retained interests in finance charge receivables using its estimates of total finance charges and fees billed but not collected. The Company's current estimates, however, better reflect the Company's expectations of the collectible portion of these finance charges and fees and are in response to evolving regulatory guidance within the industry.

Investment in Previously Charged Off Receivables

        In late 2002, the Company formed a new debt collections subsidiary and began the process of obtaining the appropriate state licenses and meeting the applicable regulatory requirements necessary for the Company to hold itself out as a debt collector and a buyer of defaulted credit card accounts. Through this new subsidiary, the Company now pursues, competitively bids for and acquires previously charged off credit card receivables. All but one of the Company's acquisitions of previously charged off credit card receivables during the first three quarters of 2003 were from the securitization trusts underlying the Company's retained interests investments ($28.6 million in purchase price). The Company is continually evaluating acquisition opportunities, but only at appropriate pricing. Further, the sales of the receivables serviced by the Company are subject to a strict competitive bid process involving other potential portfolio purchasers to ensure that all acquisitions have been at fair market prices.

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        Static pools consisting of homogenous accounts and receivables are established for each acquisition. Once a static pool is established, the receivables within the pool are not changed. Each static pool is recorded at cost, and is accounted for as a single unit for payment application and income recognition purposes. The Company accounts for its investment in previously charged off receivables by applying the cost recovery method on a portfolio-by-portfolio basis under the guidance of Practice Bulletin 6, "Amortization of Discounts on Certain Acquired Loans" ("PB 6"). Under the cost recovery method, income associated with a particular portfolio is not recognized until cash collections have exceeded the investment. Additionally, until such time that cash collected for a particular portfolio exceeds the Company's investment in the portfolio, the Company will incur commission costs and other servicing costs associated with the cash collections on the portfolio investment that will be charged as an operating expense without any offsetting income amounts.

        The Company will use the cost recovery method for each particular static pool until such time that its experience with that pool is sufficient to justify use of the PB 6 interest method (such method being one by which income associated with each static pool is accrued monthly based on each static pool's effective interest rate) based on the criteria communicated by the Staff of the SEC to the Company during the quarter ended September 30, 2003. The Company does not anticipate meeting these criteria for use of the interest method for any particular acquired pool for the foreseeable future.

        For the three and nine months ended September 30, 2003, the following table shows a roll-forward of the Company's new investment in previously charged off receivables activities:

        At the time of acquisition, the life of each pool generally is estimated to be between 24 and 36 months based upon the proprietary models of the Company. The Company anticipates collecting approximately 66% of the ERC over the next twelve months, with the balance to be collected thereafter.

Investment in Debt Securities and Notes Payable

        In addition to the CSG Trust bonds held by the Company discussed in its Annual Report on Form 10-K/A for the year ended December 31, 2002, during the second quarter of 2003, the Company acquired $10.0 million in Class C bonds issued by the Fingerhut Trust in the open market for a total purchase price of approximately $8.7 million and has included this amount in investment in debt securities. Although the maturity date for these bonds is February 2007, the Company expects the bonds to be fully paid off during the fourth quarter of 2003. The Company is accreting the acquisition discount into interest income over the estimated life of the bonds. The bonds earn interest at LIBOR plus 95 basis points (2.1% at September 30, 2003). The Company financed the purchase of these bonds with $6.09 million in borrowed funds that accrue interest at the average money call rate for the month plus 0.75% (3.5% at September 30, 2003). These borrowed funds are included in notes payable along with borrowings associated with certain vendor-financed acquisitions of software and equipment.

        In accordance with Statement No. 115, and based on the Company's intention and ability to hold bonds to maturity, the Company has classified all of its bonds as held-to-maturity. Given the absence of

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an active market for these bonds and the gradual repayment of the bonds combined with the Company's lack of a requirement for additional liquidity, management is of the opinion that held-to-maturity is the appropriate classification.

Preferred Stock

        During the second quarter of 2003, Paladin Capital Partners Fund, L.P. converted 4,808 shares of Series A Preferred Stock into 608,684 shares of common stock.

Treasury Stock

        During the third quarter of 2002, the Company's Board of Directors authorized a program under which the Company can repurchase up to 5 million shares (approximately 11 percent of the outstanding total) of its outstanding common stock. Under the repurchase plan, the Company repurchases shares of its common stock from time to time either on the open market or through privately negotiated transactions in compliance with SEC guidelines. These shares are carried at cost in the accompanying condensed consolidated balance sheet. During the first quarter of 2003, the Company repurchased 40,000 shares on the open market for $247,800. No shares were repurchased during the second or third quarters of 2003.

Note Issued to Purchase Stock

        During the second quarter of 2003, the Company settled with the obligor on a note issued to the Company for the purchase of common stock for cash proceeds of approximately $398,000. The Company recorded the difference between the carrying value of the note and the cash proceeds received (approximately $102,000) as a charge to other operating expense during the quarter ended June 30, 2003.

Stock Options

        The Company has two stock-based employee compensation plans. As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement No. 123"), the Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and its related interpretations. Because all options granted under the Company's plans had an exercise price equal to the market value of the underlying common stock on the date of grant, no stock-based compensation cost is reflected in net income under the Company's application of APB 25. Additionally, the Company did not issue any options to non-employees who were not directors for the three and nine months ended September 30, 2003 and 2002, respectively. During the three and nine months ended September 30, 2003, options to purchase 47,680 and 306,633 common shares were exercised for total proceeds to the Company of approximately $0.4 million and $2.5 million, respectively. There were no exercises during the nine months ended September 30, 2002.

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

        The pro forma results may not be indicative of the future effect on the results of operations due to a variety of factors including the timing and number of awards. The following table summarizes the Black-Scholes value of the Company's outstanding stock options on a per share basis, as well as the key assumptions used in the Black-Scholes model.

Recent Accounting Pronouncements

        In January 2003, the FASB issued FASB interpretation No. 46, "Consolidated Financial Statements" ("Interpretation No. 46"), which addresses consolidation by business enterprises of variable interest entities that have certain characteristics. In general, Interpretation No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. An entity that meets this definition is considered the "primary beneficiary." Interpretation No. 46 requires disclosures about variable interest entities by the primary beneficiary and an enterprise that holds significant variable interests in a variable interest entity but is not the primary beneficiary. Interpretation No. 46 provides for exceptions to the scope of this interpretation including transfers to qualifying special purpose entities subject to the reporting of Statement No. 140, which would not be consolidated. Interpretation No. 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after January 31, 2003. Interpretation No. 46 applies in the first fiscal year, or interim period, beginning after December 15, 2003 to variable interests entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. This statement is not expected to have a material impact on the Company's consolidated financial statements.

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        In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("Statement No. 150"). Statement No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments previously were classified in financial statements as equity. Statement No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of Statement No. 150 did not have a material impact on the Company's consolidated financial statements.

3.     Equity Method Investment in CSG, LLC

        CSG, LLC ("CSG") was formed during the second quarter of 2002 by affiliates of Goldman, Sachs & Co., Salomon Smith Barney and a wholly owned subsidiary of the Company to acquire notes and a subordinated, certificated interest issued by a trust ("CSG Trust") that owns a portfolio of credit card receivables, which were initially purchased by the trust from Providian National Bank. The Company accounts for its interest in CSG using the equity method of accounting. The Company has a 50% interest in CSG and funded its initial $34.9 million investment in CSG with cash of $3.5 million and by borrowing $31.4 million, which was repaid during the fourth quarter of 2002. During the three and nine months ended September 30, 2003, the Company received $0.0 million and $36.7 million, respectively, in cash distributions from CSG. During the second quarter of 2003, and as expected at the time of CSG's acquisition of its interests in the CSG Trust, a principal balance trigger occurred, and hence an early amortization began. While CSG made distributions to the Company through June 2003, the occurrence of this trigger event caused CSG to cease its cash distributions to the Company, and it will not resume these distributions until approximately the middle of 2006. Accordingly, all significant income from the Company's equity-method investment will cease until distributions resume in 2006.

        The following represents a condensed balance sheet for CSG as of September 30, 2003 and condensed results of operations of CSG as of and for the three and nine months ended September 30, 2003:

        In exchange for servicing 100% of the receivables owned by the CSG Trust, the Company receives a servicing fee from the securitization structure, which the Company considers adequate compensation for servicing. The occurrence of the trigger event in June 2003 should not impact the Company's expected future cash flows associated with its servicing of the CSG Trust receivables or the Company's expected cash flows associated with repayments on its investment in CSG Trust notes.

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4.     Purchase of Assets

        In July 2002, the Company completed a transaction with Federated Department Stores, Inc. in which the Company purchased the retained interests in a trust (the "Original Fingerhut Trust") that owned approximately $1.0 billion in face amount of receivables for $75.2 million plus the assumption of a $95.8 million servicing liability associated with the Original Fingerhut Trust. The receivables included in the trust were those generated by private label revolving credit cards used to purchase items from the Fingerhut catalog. This portfolio will decrease over time because payments and charge-offs from cardholders are expected to be significantly greater than purchases and interest charges. In accordance with EITF 99-20, the Company has accounted for the retained interests it purchased at the lower of amortized cost or fair market value, and the Company has amortized remaining expected cash flows in excess of the costs of the purchased retained interests into income from retained interests in credit card receivables securitized using the effective interest method. Also, pursuant to EITF 99-20, the Company has updated its EITF 99-20 model when there has been a change in its estimate of projected future cash flows. These updates can result in the Company either (1) adjusting the prospective yield that it will realize over future periods, or (2) reducing the carrying value of the Company's investment to fair value if a significant adverse change occurs. To date, none of these updates has resulted in a reduction in the carrying value of the Company's investment.

        During the third quarter of 2003, a third party acquired the Company's retained interest in the Original Fingerhut Trust in exchange for $27.3 million and a retained interest in a new trust ("Fingerhut Trust"), which owns a collateral security interest in the Original Fingerhut Trust. For further discussion of this transaction and the Company's accounting for its investment in the Fingerhut retained interests, see Note 6, "Off Balance Sheet Arrangements."

5.     Embarcadero Acquisition

        On August 1, 2003, the Company purchased a 62.5% interest in Embarcadero Holdings, LLC ("Embarcadero") for $26.5 million. Embarcadero was formed by an affiliate of Merrill Lynch and one of the Company's wholly owned subsidiaries in connection with the acquisition of approximately $824 million (face amount) in credit card receivables from Providian Bank. These receivables were then transferred to a trust pursuant to a Statement No. 140 transfer in exchange for notes and a subordinated, certificated interest issued by the trust ("Embarcadero Trust") which resulted in securitization income of $31.4 million. (See Note 6, "Off Balance Sheet Arrangements," for further discussion.) Embarcadero retains the subordinated, certificated interest issued by the Embarcadero Trust. The assets and liabilities of Embarcadero, and its associated earnings from operations, are presented as part of the Company's consolidated financial statements with a minority interest being shown to reflect the Merrill Lynch affiliate's portion of the operations. The minority interest on the statements of operations is not shown net of tax as Embarcadero is a pass-through entity for income tax purposes. For a fee that represents adequate compensation for servicing, the Company has agreed to service the entire portfolio of credit card receivables underlying the Embarcadero Trust. In addition, Embarcadero is obligated to provide for the purchase of receivables in the unlikely event that the Embarcadero Trust is unable to fund such receivables. To date, there have been no, and management does not expect any, borrowings related to this obligation.

6.     Off Balance Sheet Arrangements

        The Company securitizes substantially all of its credit card receivables originated on a daily basis under its primary third-party financial institution relationship (the "originated portfolio") through a master trust. Credit card receivables are transferred to the master trust, which issues notes representing undivided ownership interests in the assets of the master trust. Additionally, during the third quarter of 2002, the Company acquired retained interests in a credit card receivables trust. (See Note 4,

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"Purchase of Assets.") Further, during the third quarter of 2003, the Company acquired receivables from a third-party and subsequently securitized them. (See Note 5, "Embarcadero Acquisition.")

        In accordance with the above, substantially all of the Company's credit card receivables are held by securitization trusts, and the exclusive interest of the Company in these receivables is in the form of retained interests. Generally accepted accounting principles require the Company to treat its transfers to the securitization trusts as sales, and the receivables are removed from the Company's consolidated balance sheet. Under Statement No. 140, an entity recognizes the assets it controls and liabilities it has incurred, and derecognizes the financial assets for which control has been surrendered and all liabilities that have been extinguished. An entity is considered to have surrendered control over the transferred assets and, therefore, to have sold the assets if the following conditions are met:

1.

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



2.

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



3.

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

        The securitization transactions do not affect the relationship the Company has with its customers, and the Company continues to service the credit card receivables.

        The table below summarizes the Company's securitization activity for the periods presented. It does not include any of the receivables managed by or the securitization facility of CSG, the Company's 50%-owned equity-method investee:

(1)

Excludes CSG receivables of $618 million (or $309 million attributable to the Company's 50% CSG ownership percentage) and $1,039 million (or $519 million attributable to the Company's 50% CSG ownership percentage) at September 30, 2003 and 2002, respectively, because such amounts are included in the Company's equity method investment and are therefore not reflected in the consolidated statement of operations or balance sheet items included herein.

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

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        All collections received from the cardholders underlying each securitization are included in the securitization cash flows. This includes collections from the cardholders for interest, fees and other charges on the accounts and collections from the cardholders repaying the principal portion of their account balances. The cash flows are then distributed to the Company as servicer for its servicing fee, to the investors as interest on their outstanding notes, to the investors to repay any portion of their outstanding notes that become due and payable, and to the Company as the seller to fund new purchases. Any collections from cardholders remaining each month after making the various payments noted above are paid to the Company on its retained interests.

        The measurements of retained interests associated with Company-arranged securitizations are dependent upon management's estimates of future cash flows using the cash-out method. Under the cash-out method, the future cash flows (including the release of any cash related to credit enhancements) are recorded at a discounted value. The cash flows are discounted based on the timing of when the Company expects to receive the cash flows. The discount rates are based on management's estimates of returns that would be required by investors in an investment with similar terms and credit quality. Interest rates received on the credit card receivables are estimated based on the stated annual percentage rates in the credit card agreements. Estimated default and payment rates are based on historical results, adjusted for expected changes based on the Company's credit risk models. Credit card receivables are typically charged off when the receivable becomes 180 days past due, although earlier charge offs may occur specifically related to accounts of bankrupt or deceased customers. Bankrupt and deceased customers' accounts are typically charged off within 30 days of verification.

        The retained interests associated with the credit card receivables that the Company has securitized are carried at estimated fair market value, and because they are classified as trading securities, any changes in fair value are included in income. Because quoted market prices for the Company's retained interests are generally not available, the Company estimates fair value based on the estimated present value of future cash flows using management's best estimates of key assumptions.

        The Company's retained interests in credit card receivables securitized include the following:

        The I/O strip reflects the fair value of the Company's rights to future income from Company-arranged securitizations and includes certain credit enhancements. The I/O strip and accrued interest and fees have increased in 2003 principally due to the Embarcadero acquisition and securitization. The servicing liability reflects, for those securitization structures for which servicing compensation is not adequate, the fair value of the costs to service the receivables above and beyond the servicing income the Company expects to receive from the securitizations. A portion of the reduction in the servicing liability is associated with the Original Fingerhut Trust is due to (1) amortization of the servicing liability ($5.5 million and $31.7 million in the three and nine months ended September 30, 2003, respectively) which is included as a component of servicing income and (2) the third quarter transaction involving the Fingerhut retained interests, which is addressed below. The fair value of seller's interest includes those interests in Company-arranged securitizations, as well as the Company's purchased interests in securitizations. The fair value of seller's interest increased from December 31, 2002, principally due to (1) the Embarcadero acquisition; (2) increased credit enhancement requirements and levels associated with certain of the series within the Company's originated portfolio securitization

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facility; and (3) approximately $91.3 million retained at the master trust underlying the Company's originated portfolio (a) as one of the term series within the Company's originated master trust approached its accumulation period, and (b) toward the October 2003 repayment of the Class B notes in the other term securitization series within the master trust; offset, however, by the effects of the third quarter transaction involving the Fingerhut retained interests discussed below and the effects of collections associated with the Fingerhut retained interests throughout the first three quarters of 2003.

        During the third quarter of 2003, a third party acquired the Company's retained interest in the Original Fingerhut Trust in exchange for $27.3 million and a retained interest in a new Fingerhut Trust, which owns a collateral security interest in the Original Fingerhut Trust representing an undivided interest in the receivables held by the Original Fingerhut Trust. For accounting purposes, this transaction had no accounting ramifications other than its effect on the timing of income recognition based on revised cash flow timing. As a result of this transaction with the exception of servicing fees, the Company will not receive any further cash flows from the Fingerhut Trust until the holders of all senior notes issued by the Fingerhut Trust are repaid (currently estimated to be the third quarter of 2004). The estimated remaining excess cash flows from securitization will be amortized and recovered over approximately the next 39 months (with relatively little income anticipated until the third quarter of 2004) using the effective interest method of EITF 99-20. The Company will receive adequate compensation for servicing the portfolio of credit card receivables underlying the Fingerhut Trust (currently estimated to be $44.9 million more than was anticipated under the Original Fingerhut Trust). As such, the Company no longer has the servicing liability associated with the Original Fingerhut Trust, but rather, a deferred gain associated with the exchange of the Fingerhut retained interests as of the close of the third quarter of 2003 which will be amortized into income using the effective interest method. Including the $27.3 million received in the Fingerhut retained interests exchange, the gross excess cash from the securitization structures associated with the Fingerhut trusts retained interests was $49.5 million during the three months ended September 30, 2003. Moreover, $49.5 million and $125.8 million of pre-tax income was amortized into income from retained interests in credit card receivables securitized during the three and nine months ended September 30, 2003, respectively.

        Fingerhut cash flow estimates used in the Company's EITF 99-20 model are made using the Company's best estimates of the expected performance of the Fingerhut portfolio, including the timing of payments derived from such performance. The Company's estimate of the cash flows from the trusts underlying Fingerhut portfolio has not materially changed since June 30, 2003. As of September 30, 2003, the Company anticipates receiving another $125.6 million in cash flows from the Fingerhut Trust over approximately the next 39 months, as mentioned above.

        Changes in any of the assumptions used to value the Company's retained interests could impact the fair value estimates. The weighted average key assumptions used to estimate the fair value of the Company's retained interests in the receivables it has securitized are presented below:

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        At September 30, 2003 and with respect to Company-arranged securitizations, the following illustrates the hypothetical effect of an adverse 5 and 10 percent change in key economic assumptions on the retained interests in credit card receivables securitized (dollars in thousands):

        These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 5% and a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumptions; in reality, changes in one assumption may result in changes in another. For example, increases in market interest rates may result in lower prepayments and increased credit losses, which could magnify or counteract the sensitivities.

        As noted above, the Fingerhut Trust retained interests are carried at the lower of amortized cost or fair market value, net of any applicable servicing liability. In accordance with EITF 99-20, expected cash flows in excess of the cost of the purchased retained interests are being amortized into income from retained interests using the effective interest method.

        The Company's managed receivables portfolio underlying its securitizations (including its 50% and 62.5% ownership shares in the CSG and Embarcadero managed receivables, respectively) is comprised of retained interests in the credit card receivables securitized and the investors' shares of these securitized receivables. The investors' shares of securitized credit card receivables are not assets of the Company. The following table summarizes the balances included in the Company's managed receivables portfolio underlying its retained interests in the securitizations.

7.     Commitments and Contingencies

        In the normal course of business through the origination of unsecured credit card receivables, the Company incurs off balance sheet risks. These financial instruments consist of commitments to extend

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credit totaling approximately $2.5 billion and $3.7 billion at September 30, 2003 and December 31, 2002, respectively. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts securitized. The principal amount of these instruments reflects the maximum exposure the Company has in the instruments. The Company has not experienced and does not anticipate that all of its customers will exercise their entire available line of credit at any given point in time. The Company has the right to reduce or cancel these available lines of credit at any one time.

        The Company is an equity member of CSG. (See Note 3, "Equity Method Investment in CSG, LLC.") During the second quarter of 2002, CSG entered into a note purchase agreement whereby it agreed to buy additional interests in a portfolio of credit card receivables owned by CSG Trust should there be net new growth in the receivables or should collections not be available to fund new cardholder purchases. As of September 30, 2003, CSG would be obligated to purchase up to approximately $91.5 million of new notes from the CSG Trust should this contingency arise. In general, this contingency amount will decline as the amount of credit available to cardholders for future purchases declines. The portfolio has declined and is expected to continue to decline during the life of the CSG Trust as payments are expected to exceed new purchases each month. As a member of CSG, the Company has agreed to guarantee the payment of the purchase price of the aforementioned new notes if the events giving rise to this contingency arise, but only if CSG itself should fail to purchase the new notes under the note purchase agreement. As of September 30, 2003, CSG had not purchased and was not required to purchase any additional notes under the note purchase agreement. The Company's guarantee is limited to its ownership percentage in CSG (which at September 30, 2003 was 50%) times the total amount of the notes that CSG would be required to purchase. Therefore, as of September 30, 2003, the maximum amount of the Company's guarantee was approximately $45.8 million. The Company currently does not have any liability recorded with respect to this guarantee, but it will record one if events occur that make payment probable under the guarantee. The fair value of this guarantee is not material.

        The Company's agreement with its principal third-party originating financial institution requires the Company to purchase on a daily basis the credit card receivables that are originated in the accounts maintained for the Company's benefit. To secure this obligation, the Company provides the financial institution a $10.0 million cash-collateralized letter of credit and has pledged retained interests carried at approximately $128.0 million. These arrangements prevent the Company from using the $10.0 million of cash for any other purpose, although the Company can substitute other collateral for the pledged retained interests. The Company's arrangements with the financial institution expire in March 2006. If the Company were to terminate its service agreement with this institution, there would be penalties of approximately $3.0 million as of September 30, 2003. The Company currently does not have any liability recorded with respect to the guarantees discussed in this paragraph, but it will record one if events occur that make payment probable under the guarantees. The fair value of these guarantees is not material.

        The Company's most significant source of liquidity is the securitization of credit card receivables. The maturity terms of the Company's securitizations vary. The Company has a three-year term securitization that it completed in July 2001, several one-year securitizations, and, through the Fingerhut Trust, an amortizing term securitization. Once repayment begins within any particular securitization facility, payments from customers on credit card receivables generally are accumulated to repay the investors and are no longer reinvested in new credit card receivables. At such time, the Company's funding requirements for new credit card receivables will increase accordingly. The occurrence of adverse events may also cause the securitization transactions to amortize earlier than scheduled or may require additional enhancements. These events may include a decline in the portfolio's annualized net yield or a decline in the payment rate, in each case, below set rates, or an increase in delinquencies or charge offs, in each case, above set rates. The portfolio's annualized net yield typically includes monthly finance charges and past due fees collected on the receivables less

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monthly servicing fees, credit losses and cost of funds. If they ever occurred, the aforementioned events would accelerate the need to utilize alternative funding sources. If the Company's securitization facilities were to begin to trap cash flows or otherwise increase their required credit enhancements and the Company were unable to obtain needed additional sources of liquidity (such as other securitization facilities structurally subordinate to those facilities that were trapping cash or were in their amortization period, other debt or additional equity), the Company would begin to close the credit card accounts that are open to new purchases and thus significantly reduce the Company's need for any additional cash.

        For each portfolio of credit card receivables securitized by the Company, there has never been an early amortization period. The Company has experienced, however, early amortization events associated with each of the securitization structures represented by the retained interests that the Company and CSG acquired in 2002—both of which were contemplated in connection with the Company's establishment of purchase prices for the respective acquisitions. In March 2003, the credit card receivables underlying the Original Fingerhut Trust dropped below a minimum receivables balance threshold, thereby causing the series issued by the Original Fingerhut Trust to begin an early amortization period. Also, due to a reduction in the principal balance of the receivables within the CSG Trust (the retained interests in which are owned by the Company's equity-method investee, CSG), a principal balance trigger occurred, and hence early amortization began, during the second quarter of 2003. The occurrence of this event caused CSG to cease its cash distributions to the Company in June 2003, although the Company expects that the CSG Trust will continue to provide adequate compensation to the Company in cash for servicing the portfolio of receivables underlying the CSG Trust and will continue to make payments to the Company in respect of the Company's investment in CSG Trust bonds.

        Finally, while the Company has never triggered an early amortization within any of the series underlying Company-arranged securitization facilities, and while the Company does not believe that the Company will, it is conceivable that, even with close management, the Company may trigger an early amortization of one or more of the outstanding series within its securitization trusts as it focuses further on reducing the managed receivables balances within its portfolios.

        As each securitization facility expires or comes up for renewal, there can be no assurance that the facility will be renewed, or if renewed, there can be no assurance that the terms will be as favorable as the terms that currently exist. Either of these events could significantly increase the Company's need for additional liquidity.

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8.     Income (Loss) Per Share

        The following table sets forth the computation of basic and diluted income (loss) per share:

        The Company's preferred shares, plus dividends that have accreted, are convertible into approximately 4.6 million shares of common stock at $9.14 per share as of September 30, 2003 and are included in the weighted average shares outstanding as of September 30, 2003. These shares were not included in the computation of basic or diluted EPS for the nine months ended September 30, 2002 because including these shares would have been anti-dilutive.

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

        The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes included therein.

        This Management's Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We have based these forward-looking statements on our current plans, expectations and beliefs about future events. In light of the risks, uncertainties and assumptions discussed under the caption "Risk Factors" in "Item 1. Business" of our Annual Report on Form 10-K/A for the year ended December 31, 2002 filed with the Securities and Exchange Commission ("SEC") and other factors discussed in that section, our actual results may differ materially from the expectations and beliefs reflected in the forward-looking statements in this section.

General

        CompuCredit is a credit card company that originates and purchases receivables and markets products and services to its customers for which it earns commissions and, to a limited extent, certain fee payments. We market unsecured Visa and MasterCard credit cards through direct mail and telemarketing and, to a limited degree, television and the internet.

        Our revenues primarily consist of (1) securitization income (loss), (2) income from retained interests in credit card receivables securitized, (3) servicing income, (4) other credit card fees and other income, (5) interchange fees, (6) ancillary product revenue and (7) equity in the income of our equity-method investee.

        Securitization income (loss) is the gain or loss we recognize at the time of each sale of our credit card receivables to Company-arranged securitization structures. Income (loss) from retained interests in credit card receivables securitized is the income or loss we recognize from credit card receivables that have been securitized. See the "Off Balance Sheet Arrangements" and "Results of Operations" sections for additional information. Servicing income consists of the gross fees we receive for servicing the various portfolios of securitized credit card receivables. Other credit card fees and other income includes annual fees, over-limit fees, cash advance fees, other fees assessed to our cardholders and recovery revenue. Interchange fees are the portions of the merchant fees assessed by Visa and MasterCard that are passed on to us and are a function of the purchase volume of our cardholders. Ancillary product revenue consists of the commissions we earn from our sales on behalf of various providers of products and services of certain fee-based products and, to a limited extent, certain fees that we receive directly from customers associated with the sale of various fee-based products. These fee-based products include various memberships, insurance, subscription and other products. (Interchange fees and ancillary product revenues are combined with and included within other credit card fees and other income on the face of the unaudited condensed consolidated statement of operations for the applicable period ends.) Equity in the income of our equity-method investee is our portion of our equity-method investment in CSG discussed below.

        Our primary operating costs expenses include employee compensation, account solicitation and marketing expenses, data processing, servicing expenses, minority interest and income taxes.

        We originate the receivables in our originated portfolio through the use of our target marketing system and direct mail, telemarketing and, to a limited extent, internet and television campaigns. We also add accounts by purchasing—either by ourselves or with entities formed through our partnership with others—both credit card receivables portfolios and retained interests in credit card receivables portfolios that have been previously securitized by others. With the exception of receivables purchased or originated through accounts added in portfolio acquisitions, the size of our receivables depend in part on the timing, size and success of our marketing campaigns. During periods of reduced marketing,

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which we experienced in 2002 and so far in 2003 and expect to continue to experience throughout 2003 and until we see more favorable advance rates for our securitizations in the asset backed securities markets, our originated receivables portfolio may not grow and may decline. As a result, our originated receivables portfolio has declined thus far during 2003 and is expected to continue its decline throughout the remainder of 2003. We continue to evaluate opportunities to purchase portfolios because we believe they may provide an attractive return on our investment and because we believe we may be able to obtain liquidity to fund these activities under favorable terms.

        During the second quarter of 2002, we purchased a 50% interest in CSG, LLC ("CSG"). CSG was formed during the second quarter of 2002 by affiliates of Goldman, Sachs & Co. and Salomon Smith Barney and one of our wholly owned subsidiaries. CSG was formed to acquire notes and a subordinate, certificated interest issued by a trust ("CSG Trust") that had acquired credit card receivables from Providian National Bank. Equity in the income of our equity-method investee is 50% of CSG's income or loss, before income taxes. See the "Results of Operations" and "Equity Method Investment in CSG" sections for additional information concerning this income item. For a fee that represents adequate compensation for servicing, we have agreed to service the entire portfolio of credit card receivables underlying the CSG Trust.

        In July 2002, we acquired from Federated Department Stores, Inc. ("Federated") the retained interests in a trust (the "Original Fingerhut Trust") that then owned approximately $1.0 billion in face amount of receivables, such receivables being associated with private label revolving credit cards which were used to purchase items from the Fingerhut catalog. This portfolio has decreased and will continue to decrease in size over time because payments from cardholders are expected to be significantly greater than purchases being made by the cardholders. We also hired approximately 830 employees from Federated to service the receivables in the Original Fingerhut Trust. We assumed a servicing liability in the Federated transaction because the contractual servicing fee we received from the Original Fingerhut Trust represented less than adequate compensation for servicing the receivables. During the third quarter of 2003, a third party acquired our retained interest in the Original Fingerhut Trust in exchange for $27.3 million and a retained interest in a new trust ("Fingerhut Trust"), which owns a collateral security interest in the Original Fingerhut Trust representing an undivided interest in the receivables held by the Original Fingerhut Trust. Because of this transaction, we no longer have a servicing liability associated with the Fingerhut receivables since we will now be receiving adequate compensation for servicing the portfolio of credit card receivables underlying the Fingerhut Trust. See Note 6, "Off Balance Sheet Arrangements," to our unaudited condensed consolidated financial statements for further discussion of the accounting for this third quarter 2003 Fingerhut transaction.

        In late 2002, we formed a new subsidiary, Jefferson Capital Systems, LLC, to take advantage of what we consider to be an opportunity within the defaulted receivables recovery area. Based on our belief that many charged off credit card receivables currently are undervalued and given the excess servicing capacity we have as a result of declines in the receivables that we manage within the originated and purchased portfolios, we believe it is advantageous to develop limited recovery operations that may allow us to achieve returns on equity within this area greater than those that we currently can derive within our credit card receivables origination business. Jefferson Capital purchases defaulted accounts from third parties (either similar unrelated companies or the securitization trusts underlying our retained interests investments). Although we are expanding our business development and marketing resources toward our sourcing of portfolio acquisition opportunities from unrelated third parties, all but one of our acquisitions of previously charged off credit card receivables during the first three quarters of 2003 were from the securitization trusts. We are continually evaluating acquisition opportunities, but only at appropriate pricing and only pursuant to a strict competitive bid process involving other potential portfolio purchasers to ensure that all acquisitions are at fair market prices. Through Jefferson Capital, we acquired defaulted accounts with an aggregate face value amount of approximately $126 million at a cost of $4.6 million during the three months ended September 30,

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2003. For the nine months ended September 30, 2003, we acquired defaulted accounts with an aggregate face value amount of $1.9 billion at a cost of $29.0 million. See Note 2, "Significant Accounting Policies," to our unaudited condensed consolidated financial statements for further discussion of the accounting for these purchases.

        On August 1, 2003, we purchased a 62.5% interest in Embarcadero Holdings, LLC ("Embarcadero"). Embarcadero was formed by an affiliate of Merrill Lynch and one of our wholly owned subsidiaries in connection with the acquisition of approximately $824 million (face amount) in credit card receivables from Providian Bank. These receivables were then transferred to a trust pursuant to a Statement No. 140 transfer in exchange for notes and a subordinated, certificated interest issued by the trust ("Embarcadero Trust"). For a fee that represents adequate compensation for servicing, we have agreed to service the entire portfolio of credit card receivables underlying the Embarcadero Trust.

        Our income is largely dependent upon the size and the quality of the credit card receivables underlying each of our securitizations. Our principal growth in 2002 was associated with the acquisition of the retained interests from Federated and our investment in CSG. If we do not increase the growth of or maintain the current level of our managed receivables base, by either originating more accounts or acquiring additional portfolios (such as the portfolio underlying the new Embarcadero Trust or the portfolios of defaulted accounts being purchased by Jefferson Capital), our income in future quarters will likely decrease relative to that experienced in 2002 and thus far in 2003.

        Depending on relative competitive, market and liquidity environments for portfolio acquisition versus origination, we may use either or both of these methods of account and receivables growth to varying degrees. We believe that the current competitive, market and liquidity environments favor growth through acquisition, rather than origination, for our entire underserved customer base, except for those consumers at the lower end of the FICO scoring system. As such, we plan to grow during the remainder of 2003 through acquisition rather than origination for all of those segments of our underserved market except for a segment of consumers at the lower end of the FICO scoring system to which are offering a largely fee-based card product.

Off Balance Sheet Arrangements

        We refer the reader to Items I and VII of our Annual Report on Form 10-K/A for the year ended December 31, 2002 filed with the SEC for a detailed discussion of our securitization facilities and the mechanics of their operation.

        Various references within this report are to the managed credit card receivables underlying our off balance sheet securitization facilities. Performance metrics and data based on these managed receivables are key to any evaluation of our performance in managing (including underwriting, valuing purchased receivables, servicing and collecting) the portfolios of receivables underlying our off balance sheet securitization facilities. Indeed, we allocate resources within our Company and manage our Company using financial data and results prepared on a so-called "managed basis." It is also important to analysts, investors and others that we provide selected metrics and data on a managed basis because it is through our reporting on this basis that they are able to compare our Company to others within the specialty finance industry. Moreover, our Company's management, analysts, investors and others believe it is critical that they understand the credit performance of our entire portfolio of managed credit card receivables because it reveals information concerning the quality of loan originations and the related credit risks inherent within the securitized portfolios and our retained interests in the respective securitization facilities.

        Managed receivables data assumes that none of the credit card receivables underlying our off balance sheet securitization facilities were ever transferred to securitization facilities and presents the net credit losses and delinquent balances on the receivables as if we still owned the receivables.

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Reconciliation of the managed receivables data to our GAAP financial statements requires recognition that substantially all of our credit card receivables had been sold in securitization transactions as of September 30, 2003 (i.e., all but $7.1 million of our originated credit card receivables, which are included at their net book value in other assets); this reconciliation requires the removal of all but the $7.1 million of the managed receivables data from our books and records to yield only the $7.1 million of originated credit card receivables and associated statistics under GAAP, coupled with the recording under GAAP of retained interests in various securitization structures as explained herein.

        The table below summarizes our securitization activity for the periods presented and does not include any of the receivables managed by CSG, our 50%-owned equity-method investee:

(1)

Excludes CSG receivables of $618 million (or $309 million attributable to our 50% CSG ownership percentage) and $1,039 million (or $519 million attributable to our 50% CSG ownership percentage) at September 30, 2003 and 2002, respectively, because such amounts are included in our equity method investment and are therefore not reflected in the statement of operations or balance sheet items included herein.

        The gross amount of receivables securitized decreased from September 30, 2002 to September 30, 2003 due a decline in the managed receivables associated with our originated portfolio combined with the anticipated decline in the managed receivables underlying the Fingerhut Trust, partially offset, however, by the addition of the managed receivables underlying the Embarcadero Trust. Proceeds from collections reinvested in revolving-period securitizations decreased during that same time period due (1) to reductions in receivables levels within our originated portfolio, (2) the fact that the Embarcadero Trust receivables were only recently acquired and consist of accounts with, on average, lower purchase levels than accounts within the originated portfolio, and (3) the fact that there is a very low level of purchases within the accounts represented by the Fingerhut Trust receivables. The relatively moderate level of excess cash flows received on retained interests for the nine months ending September 30, 2003 and September 30, 2002 reflects the offset of substantial cash flows that we have received from the Fingerhut securitization facilities (see Note 6, "Off Balance Sheet Arrangements," to our unaudited condensed consolidated financial statements) against cash flow reductions that we have experienced within our originated portfolio securitization facility given the accumulation requirements and declining advance rates that we have experienced within that securitization facility. This latter factor also accounts for the decline in excess cash flows received on retained interests for the three months ended September 30, 2003 as compared with the three months ended September 30, 2002, particularly given that third quarter 2003 excess cash flows generated from the Fingerhut securitization facilities we considerably lower than those excess cash flows generated by the Fingerhut facilities during the first two quarters of 2003. The increase in the pretax securitization income (loss) is attributable to our purchase and subsequent securitization of the receivables underlying the Embarcadero Trust. Also, for the three and the nine months ending September 30, 2003, relative to comparable periods ending

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September 30, 2002, we have experienced higher income from retained interests in credit card receivables securitized due to the strong performance of the managed receivables underlying our retained interests in the Fingerhut Trust and the Embarcadero Trust, as well as the improved performance of the managed receivables underlying our originated portfolio.

        The trusts in our securitization structures purchase receivables from us by raising proceeds from investors. The proceeds raised are included within the series of notes issued by the trusts. The proceeds from the investors are then remitted to us as part of the trusts' purchase price of the receivables. See the "Securitization Facilities" section below for more detail. We try to structure our securitization funding sources by having commitments in excess of our current growth plans so that we have investors who will purchase notes from the trusts, which in turn allows the trusts to purchase receivables from us. We believe we have structured our securitization program to reduce our reliance on any one series of notes by staggering the maturity dates of the notes (assuming, of course, that prior to the maturity of any one series of notes that such series can be replaced with a series structurally subordinate to the series that is nearing maturity).

        The payment terms of each securitization structure are negotiated with investors. Some facilities enter into accumulation periods at pre-determined dates prior to their maturity. During an accumulation period, a portion of cash collected from the cardholders is required to be accumulated in an account for the benefit of the facility and is not available to us to fund new purchases.

        Once the investors in each of our securitization structures are repaid, all cash collected on any remaining receivables is payable to us. We detail the maturity dates and describe our facilities and amounts being used to repay investors in the "Securitization Facilities" section below.

        We include in our consolidated financial statements all of our wholly owned subsidiaries. However, in accordance with Statement No. 140, we do not consolidate any of the trusts, all of which are QSPEs. We are required to service the receivables that have been sold. We also perform the administrative functions for the trusts, including preparing daily and monthly reports relating to the receivables. We do this pursuant to an administration agreement between the trustees of the trusts and us.

        Our securitization documents require us, as servicer of the receivables, to covenant that we will (1) maintain either acceptable tangible net worth levels or an acceptable ratio of tangible net worth to total managed receivables and (2) not default in the payment of material indebtedness or reduce the periodic finance charges assessed on the receivables below agreed-upon levels. We have also agreed to service the receivables in accordance with our servicing policies and procedures. In addition to the above, there are events described in our agreements that may trigger an early redemption, which would cause substantially all collections on the receivables to go to the investors to pay the principal on the notes. This would largely delay the payment of cash to us with respect to our seller's interests until the investors' notes were paid in full. These events include our failure as servicer to remit the collections that we receive from cardholders to the appropriate securitization accounts within the required time frames, our failure to provide reports regarding the activity in the accounts within required time frames or a breach of our representations and warranties. These events also include financial performance measures on the underlying receivables. As servicer of the accounts, we do not covenant or make any representation or warranty regarding the collectibility of the receivables in the accounts.

        Our securitization documents require us, as the seller of the receivables, to make representations and warranties relating to the validity and enforceability of the agreements pursuant to which the receivables were created. We also make other standard representations and warranties, including our ability to enter into the agreements and the accuracy of the information provided by us to investors. If we breach any of these representations, we may not be able to sell additional receivables into our securitization structures, and we may cause an early redemption event. As seller of the receivables, we again do not make any representation or warranty regarding the collectibility of the receivables in the accounts.

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        As of September 30, 2003, we had not breached any representations or warranties or otherwise caused an early redemption event, and the underlying performance of the receivables had not caused an early redemption event, in any of our Company-arranged securitizations. In line, however, with our expectations at the time of our acquisition of and projections upon which we and CSG based our respective purchase prices for the Original Fingerhut Trust and CSG Trust retained interests, early amortizations have been triggered within each respective trust as a result of the minimum principal balance of receivables in the trusts falling below the minimum balance required by the applicable securitizations. For reasons addressed further in the "Securitization Facilities" section below and in Note 6, "Off Balance Sheet Arrangements," to our unaudited condensed consolidated financial statements, neither of these early amortization events has had any material adverse effect on our liquidity.

Selected Credit Card Data

        As noted above, our securitizations are treated as sales under GAAP. As such, we remove the securitized receivables from our consolidated balance sheet. The performance of the underlying credit card receivables will nevertheless affect the future cash flows we actually receive.

        The information in the following tables are presented to reflect the credit card receivables, or portions thereof, in which we have an economic interest—that is, the receivables underlying our interest in Company-arranged securitizations (e.g., 100% of the credit card receivables of our originated portfolio and 62.5% of the credit card receivables underlying the Embarcadero Trust, which reflects our ownership percentage in Embarcadero Holdings LLC), the credit card receivables associated with retained interests that we have acquired (e.g., from Federated in 2002) and 50% of the credit card receivables underlying the CSG Trust (which reflects our ownership percentage in CSG)—together, our "managed receivables" as discussed above. For example, we have included 50% of the managed receivables underlying the CSG Trust because we have a 50% economic interest in CSG, which owns the retained interest in the CSG Trust. CSG's cash flows and income are dependent on how the receivables in the CSG Trust perform, and therefore, our cash flows and income (other than with respect to our servicing fee, which we earn with respect to 100% of the receivables underlying the CSG Trust) are dependent upon 50% of the managed receivables.

        We provide the selected credit card data included within this section so that readers can evaluate our performance as a servicer with respect to the portfolios of credit card receivables that we manage. As noted in our "Off Balance Sheet Arrangements" section, performance metrics and data based on these managed receivables are key to any evaluation of our performance in managing (including underwriting, valuing purchased receivables, servicing and collecting) the portfolios of receivables underlying our off-balance sheet securitization facilities, as well as to any comparison of our Company to others within the specialty finance industry.

        As discussed in significant detail within our Annual Report on Form 10-K/A for the year ended December 31, 2002, the portfolios of receivables that we acquired in 1998, as well as the retained interests in the CSG Trust and the Federated Trust acquired in 2002, were acquired at substantial discounts. Further, the Embarcadero Trust receivables were also acquired in the third quarter of 2003 at a significant discount. In all of these cases, our acquisition prices were discounted, in part, because we attributed either little or no value to certain receivables that were at a late stage of delinquency in the hands of the sellers. Because such receivables were either near or in the process of being charged off by the sellers and because we ascribed no or low values to these receivables, including these receivables within our managed receivables data would distort the performance measurements of our Company as a servicer (and effectively would attribute the performance results of the sellers to us). As such, the period end and average managed receivables data (as well as delinquency and charge-off statistics) that follow within this section exclude the receivables associated with all accounts in late delinquency status in the sellers' hands as of the dates of our acquisitions of the receivables or interests

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therein. Pursuant to this treatment, the only activity within the following statistical data associated with these excluded accounts are recoveries, which we include within the numerator of the other credit card income ratio computation, as well as the costs of pursuing these recoveries, which we include within the numerator of the operating ratio computation.

        A similar rationale to that described above underlies our treatment of the face amount of the charged off credit card receivables that our subsidiary, Jefferson Capital, acquired during 2003. Because the acquisition prices for these defaulted receivables range from less than a penny to just a few pennies to the dollar of the face amount of defaulted receivables, including the face amount of these defaulted receivables within our average managed receivables denominator used within our various performance ratio statistics (e.g., net interest margin and charge-off ratios) would significantly understate and distort such ratios and would effectively preclude any meaningful comparison of our credit card receivables servicing performance metrics against others within the specialty finance industry. The recovery income from the Jefferson Capital recovery operations (like that of our excluded late-delinquency-stage receivables at acquisition) has been included within the numerator of the other credit card income ratio computation. Likewise, the costs associated with pursuing these recoveries are included within the numerator of the operating ratio computation.

        The numerator of the net interest margin calculation includes all accrued finance charge and late fee income billed on all outstanding receivables, plus amortization of the accretable yield component of our acquisition discounts for portfolio purchases (discussed further in our Annual Report on Form 10-K/A for the year ended December 31, 2002), less interest expense as well as accrued finance charge and fee charge offs. The numerator of our other credit card income ratio includes other credit card fees billed, such as over-limit fees, cash advance fees, maintenance fees, miscellaneous fees, interchange income, ancillary product income and recoveries of acquired defaulted receivables. Our operating ratio numerator includes all expenses associated with our business, net of any servicing income we receive as servicer for the CSG Trust and the Embarcadero Trust, other than marketing and solicitation and ancillary product expenses. Each of the aforementioned ratios is expressed as a percentage of average managed receivables.

        Our net interest margins are influenced by a number of factors, including the level of accrued finance charges and late fees billed, the weighted average cost of funds, amortization of the accretable yield component of our acquisition discounts for portfolio purchases and the level of our accrued finance charge and fee charge offs. Our net interest margin for the three months ended September 30, 2003 was 20.9%, as compared to 16.4% for the three months ended June 30, 2003. The factors contributing to this increase include: (1) improved managed receivables performance in general, thereby resulting in lower accrued finance charge and fee charge offs; (2) the favorable effects of the Embarcadero receivables acquisition (to be described further below); and (3) performance on our acquired receivables that has significantly exceeded the performance that we expected at acquisition date thereby resulting in higher levels of the accretable yield portion of our acquisition discounts being

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amortized into our net interest margin. The favorable effects of the Embarcadero receivables acquisition on our net interest margin reflect a trend that we experience after every sizable portfolio acquisition. Certain accounts in late delinquency status and those at or near charge-off at the time of acquisition are excluded from our selected credit card data. As such, for the first six to nine months or so following a portfolio acquisition date, the exclusion of these accounts will yield diminished charge offs of accrued finance charges and fees. As we saw beginning with the fourth quarter of 2002 (i.e., in the months that followed our Fingerhut acquisition and the CSG portfolio acquisition), the level of accrued finance charge and fee charge-offs normalize with the seasoning of the acquired portfolios. That is, the accounts that were not at excluded at the time of acquisition have aged into later delinquency buckets and have begun to charge off. This explains the reduction of our net interest margin beginning with the fourth quarter of 2002 and continuing through the first quarter of 2003 at which point this phenomenon stabilized.

        On a routine basis generally no less frequently than quarterly, we re-underwrite our portfolio to price our products to appropriately reflect the level of each customer's credit risk. As part of this underwriting process, existing customers may be offered increased or decreased pricing depending on their credit risk, as well as their supply of and demand for credit. Increases in pricing may increase our net interest margin, while decreases in pricing may reduce our net interest margin.

        Our other credit card income ratio and our operating ratio have both increased during 2003, principally due to the income related to and the expenses associated with our new recovery operations. While there is income and expense associated with these new recovery operations during 2003, there is not (and in the future will not be) a commensurate level of average managed receivables in the denominator of the respective ratio computations. While our average managed receivables balances generally reflect the face amount of the receivables that we manage, we believe it would be inappropriate to include, and thus we have chosen not to include, the face amount of our acquired charged off credit card receivables within our average managed receivables balances. Other credit card income decreased during the third quarter of 2003 due to a decrease in ancillary product revenue and lower income from our charged off paper recovery operations, partially offset, however, by the favorable effects of Embarcadero's performance and higher fee income associated with our credit card product offering targeted at the lower end of the FICO scores. As explained in our "General" section above, throughout 2003, we have been originating receivables under a largely fee-based card product to a segment of consumers at the lower end of the FICO scoring system.

Asset Quality

        Our delinquency and charge off data at any point in time reflects the credit performance of our managed receivables. The average age of our credit card accounts, the timing of portfolio purchases, the success of our collection and recovery efforts and general economic conditions all affect our delinquency and charge off rates. The average age of our credit card account portfolio also affects the stability of our delinquency and loss rates.

        Our strategy for managing delinquency and receivables losses consists of active account management throughout the customer relationship. This strategy includes credit line management and pricing based on the risk of the credit card accounts. See "Collection Strategies" below for further discussion.

        See Item VII of our Annual Report on Form 10-K/A for the year ended December 31, 2002 and Item II of our Quarterly Reports on Form 10-Q/A for the three months ended June 30, 2003 and March 31, 2003 for a discussion of trends through June 30, 2003. The discussion below focuses on the change in this information as of and for the three months ended September 30, 2003.

        Delinquencies.    Delinquencies have the potential to impact net income in the form of net credit losses. Delinquencies are also costly in terms of the personnel and resources dedicated to resolving

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them. A credit card account is contractually delinquent if the cardholder's minimum payment is not received by the specified date on the cardholder's statement. It is our policy to continue to accrue interest and fee income on all credit card accounts, except in limited circumstances, until the account and all related receivables, interest and other fees are charged off. See the "Charge offs" discussion as well.

        The account management strategies that we use on our portfolio are intended to manage and to the extent possible reduce the higher delinquency rates that can be expected in a more mature managed portfolio such as ours. These account management strategies include conservative credit line management, purging of inactive accounts and collection strategies (see "Collections Strategies" below) intended to optimize the effective account-to-collector ratio across delinquency buckets. We measure the success of these efforts by measuring delinquency rates. These rates exclude accounts that have been charged off.

        The following table presents the delinquency trends of our credit card receivables on a managed receivables portfolio basis: